As filed with the Securities and Exchange Commission on July 15, 2013

Registration Statement No. 333-188413



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549


Amendment No. 2 to


FORM S-1


REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933


RMG NETWORKS HOLDING CORPORATION

(Exact name of registrant as specified in its charter)


Delaware

7389

27-4452594

(State or other jurisdiction of

(Primary Standard Industrial

(IRS Employer

incorporation or organization)

Classification Code Number)

Identification Number)


500 North Central Expressway

Suite 175

Plano, TX 75074

(972) 543-9300

(Address, Including Zip Code and Telephone Number,

Including Area Code, of Registrant’s Principal Executive Offices)


Gregory H. Sachs
Executive Chairman
500 North Central Expressway

Suite 175

Plano, TX 75074

(972) 543-9300


(Name, Address, Including Zip Code and Telephone Number,

Including Area Code, of Agent for Service)


With copies to:

 

Ameer Ahmad, Esq.

Jason Simon, Esq.

Greenberg Traurig, LLP

77 West Wacker

Suite 2500

Chicago, IL 60601

(312) 456-8400

Steven M. Skolnick, Esq.

Lowenstein Sandler LLP

1251 Avenue of the Americas

New York, NY 10020

(212) 262-6700


Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer  

o

Accelerated filer

þ

Non-accelerated filer  

o

Smaller reporting company

o

(Do not check if a smaller reporting company)

 

 

 






CALCULATION OF REGISTRATION FEE


Title of Each Class of

Securities to be Registered

 

Proposed Maximum

Aggregate Offering Price(1)

 

Amount of

Registration Fee(2)

 

 

 

 

 

Common Stock, par value $.0001 per share

$

46,000,000

$

6,275


(1)

Estimated in accordance with Rule 457(o) of the Securities Act of 1933, as amended, solely for purposes of calculating the registration fee.  Includes shares of common stock that may be purchased by the underwriters to cover over-allotments, if any.

(2)

$3,922 of which has been previously paid.


The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.


SUBJECT TO COMPLETION DATED JULY 15, 2013


PRELIMINARY PROSPECTUS


[i12219001.jpg]


3,561,888 Shares of


Common Stock


This prospectus relates to the issuance by us of $40,000,000 of shares of our common stock, par value $0.0001 per share.


Our common stock is traded on the Nasdaq Capital Market under the symbol “RMGN”.  The closing sales price of our common stock on July 10, 2013, was $11.23 per share, as reported on the Nasdaq Capital Market.


Investing in our common stock involves risks. You should consider the risks that we have described in “Risk Factors” beginning on page 7 of this prospectus before buying our common stock.


 

 

Per Share

 

Total

Public offering price

$

 

$

 

Underwriting discounts and commissions (1)

$

 

$

 

Proceeds, before expenses, to us

$

 

$

 

 

                     

(1)

Does not include a non-accountable expense allowance equal to 1% of the gross proceeds, or $        per share. We have agreed to reimburse the representative of the underwriters for certain of its expenses as described under “Underwriting” on page 79 of this prospectus.


We have granted the underwriters a 45-day option to purchase up to 534,283 of additional shares of common stock from us at the public offering price, less underwriting discounts and commissions, to cover over-allotments, if any.


Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.


The underwriters expect to deliver the shares on or about                     , 2013.



 

 

 

 

 

 

Sole Book Running Manager

 

 

Roth Capital Partners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Co-Manager

 

 

Northland Capital Markets

 




The date of this prospectus is                 , 2013.





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TABLE OF CONTENTS


 

Page

Prospectus Summary

1

 

 

Risk Factors

7

 

 

Cautionary Notes Regarding Forward-Looking Statements

19

 

 

Use of Proceeds

20

 

 

Capitalization

21

 

 

Market for the Registrant’s Common Equity and Related Stockholder Matters

22

 

 

Selected Financial Data of Symon

23

 

 

Selected Financial Data of RMG

24

 

 

Selected Financial Data of SCG

25

 

 

Unaudited Condensed Combined Pro Forma Financial Information

26

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Symon

34

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations of SCG

52

 

 

Business

55

 

 

Management

64

 

 

Certain Relationships and Related Party Transactions

71

 

 

Principal Stockholders

73

 

 

Description of Securities

75

 

 

Underwriting

79

 

 

Notice to Investors

82

 

 

Legal Matters

83

 

 

Experts

83

 

 

Where You Can Find More Information

83

 

 

Indemnification for Securities Act Liabilities

83

 

 

Index to Consolidated Financial Statements

F-1


You should rely only on the information contained in this prospectus. Neither the underwriters nor we have authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither the underwriters nor we are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.





PROSPECTUS SUMMARY


This summary highlights selected information contained in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the risk factors, and the financial statements before making an investment decision. This prospectus contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.


Unless the context otherwise requires, when we use the words the “Company,” “RMG Networks,” “we,” “us,” or “our Company” in this prospectus, we are referring to RMG Networks Holding Corporation, a Delaware corporation f/k/a SCG Financial Acquisition Corp., and its subsidiaries, including Symon Holdings Corporation (“Symon”) and Reach Media Group Holdings, Inc. (“RMG”), unless it is clear from the context or expressly stated that these references are only to RMG Networks Holding Corporation. When we use the word “SCG”, we are referring to SCG Financial Acquisition Corp., prior to its acquisitions of Symon and RMG and the change of its corporate name to RMG Networks Holding Corporation. Unless otherwise indicated, all information contained in this prospectus assumes that the underwriters will not exercise their overallotment option and that no outstanding warrants will be exercised.


Our Company


RMG Networks Holding Corporation, or RMG Networks, is a global provider of enterprise-class digital signage solutions and media applications. Through our suite of products, including media services, proprietary software, software-embedded hardware, technical services and third-party displays, we are able to deliver complete end-to-end intelligent visual communication solutions to our clients. We believe that we are one of the largest integrated digital signage solution providers globally and conduct our operations through our RMG Enterprise Solutions and RMG Media Networks business units.


Our 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. We believe our solutions are relied upon by over 70% of the North American Fortune 100 companies and thousands of overall customers in locations worldwide. The installations of our Enterprise Solutions business deliver real-time intelligent visual content that enhances the ways in which organizations communicate with employees and customers. The solutions we provide are designed to integrate seamlessly with a customer’s IT infrastructure and data and security environments. These solutions are comprised of a suite of products that includes proprietary software, software-embedded hardware, maintenance and support services, content and creative services, installation services and third-party displays. We also provide cost-effective digital signage solutions to small and medium sized businesses through our cloud-based ChalkboxTV product, which allows businesses to communicate promotional messages to customers using their existing screen hardware.


Our 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 and the RMG Mall 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 all major commercial passenger airlines in the United States, delivers to advertisers an audience of affluent travelers and business decision makers in a captive and distraction-free video environment.  Based on information provided by our airline, airport, IFE and Wi-Fi partners, we estimate that the RMG Airline Media Network is comprised of over 120,000 IFE screens, nearly 3,000 aircraft, and 145 airline and private terminal lounges and can reach an audience of over 35 million passengers per month. As of January 1, 2013, we had partner relationships providing access to sell media inventory across 12 unique airlines.  In many cases we maintain multiple relationships with the same airline.  We work with six airlines to sell their IFE system assets.  We work with seven airlines to sell their media assets in their executive clubs.  We work with nine airlines to sell their onboard Wi-Fi media assets. All the partner relationships are exclusive with the exception of one airline partnership agreement to sell IFE system assets, providing us with what we believe will be a growing revenue opportunity as airlines continue to install additional digital media assets. The RMG Mall Media Network reaches over 62 million Nielsen measured monthly viewers in 161 shopping malls across the United States.


We believe that we power more than one million digital screens and end-points, and that the diversity of products that we offer and our technical expertise provide our partners and customers with digital signage solutions that differentiate us from our competitors. We are led by an experienced senior management team with a proven track record of building and successfully running technology and advertising businesses.



1





Our Industry


Digital Signage.  We believe the proliferation of digital signage in business and out-of-home environments allows advertisers and companies to engage consumers, employees and targeted audiences more effectively than traditional means. The digital signage industry is comprised of hardware, software and professional services that create solutions for advertising and business to business networks. The deployment of digital signage networks has continued to increase through the recent economic downturn. Frost & Sullivan, in its 2012 Digital Signage Systems Market report, estimates that the market for digital signage in 2013 will be approximately $1.5 billion and expects the market to grow from 2013 to 2017 at a compound annual growth rate of 14.0%.


As digital signage systems have evolved, they have become more cost effective and able to provide richer media content. The initial costs of planning and deploying digital signage infrastructure have dropped, reducing a significant barrier to growth. Today’s solutions support remote manageability, energy efficiency and the ability to process and blend rich media content. Customers are recognizing the flexibility and cost-effectiveness digital signage can provide compared to other forms of communication.


Digital Out-of-Home Advertising.  Digital out-of-home advertising is a relatively new form of advertising, but is becoming an effective way for advertisers to reach their target audience in captive locations for long periods of time. According to Magna Global, Global Advertising Revenue Forecast and Historical Data, December, 2012, the digital out-of-home advertising market accounted for a small but rapidly growing portion of the $146 billion U.S. advertising market in 2011. U.S. digital out-of-home advertising revenue grew to $1.3 billion in 2011, representing a 10-year compound annual growth rate of 20.9%, and is expected to grow to approximately $2.5 billion by 2017. We believe the increase in advertising spending in this medium is largely a result of better research and overall visibility of the medium and digital technology, which have enhanced the reach and the overall value proposition of digital out-of-home advertising for local, regional, national and international advertisers. PQ Media states that Digital Place-based Networks, or DPN, growth is being driven by a number of factors, including consumers spending more time consuming media outside the home, DPNs are close to the point of purchase, the media buying process and the corresponding audience metrics are continually improving, and DPNs are resistant to the ad-skipping technology that impacts the television market.


Our Competitive Strengths


We believe that the following factors differentiate us from our competitors and position us for continued growth:  


·

Complete and customizable end-to-end solutions.

·

Our technology solution is scalable, extensible and security certified to meet demanding requirements.

·

Our products can be easily adapted to satisfy a wide array of customer applications.

·

We are trusted by some of the largest organizations in the world.

·

We serve customers through a global footprint.

·

Targeted national advertising network.

·

Experienced management team.


Our Growth Strategy


Our growth strategy is to leverage and continue to build upon the advantages developed by us, including through the following:


·

Expanding our customer base or increasing revenue potential.

·

Pursuing targeted acquisitions.

·

Cross selling between our business units.


Our Products and Solutions


We deploy digital signage solutions in highly efficient global networks with both the features and functions required for rich media solutions.  Our RMG Enterprise Solutions and RMG Media Networks business units provide distinct but complementary products and solutions:


RMG Enterprise Solutions


Our proprietary software-based platform seamlessly integrates within our customers’ existing IT networks. We provide both a premises-based content management system for fixed in-building installations and a hosted system for content subscription services and mobility solutions. We incorporate state-of-the-art functionality and capabilities by working closely with leading global technology partners.  These relationships result in access to proprietary interfaces, and testing and lab environments.



2





Enterprise Software (“ES”) is a robust software engine used to collect content from various sources, re-purpose the content according to pre-defined business rule, and distribute the re-purposed content to visual solution end-points.  


Media Players/Smart Digital Appliances (“SDA”) are software-embedded media players that function as the intelligent interface between our ES content engine and the visual display end-points. SDAs “pull” content and content rules and parameters from ES and then display the content on the screens according to established rules and parameters.


Design Studio (“DS”) and Design Studio Lite (“DSL”) are two offerings that are either a full-function application installed on the client’s PC (DS) or web-based (DSL) software suites used to design the look, feel, function and timing of how content will appear and be used on end-point displays. The software features a set of pre-designed templates that can be combined with external content feeds that are provided by us or other external content providers.


InView Mobile-Data (Mobility Solutions) is a real-time on-demand technology that seamlessly integrates with the ES real-time data. InView Mobile-Data enables managers to use their iOS and Android mobile devices to access real-time dashboards containing key performance indicators and data alerts them to any issues that can affect customer service, operations, and product quality, thereby allowing them to quickly respond with appropriate actions to meet established company goals.


Subscription Content Services provides “business-appropriate” news and current information, created by our editors. In addition, weather, stock information, airport flight data, and 101 ticker feeds allow clients to customize the desired output in almost any manner they require. This service is hosted by us, and it complements customers’ messaging by keeping their audience engaged with fresh news and information throughout the day.  


Electronic Displays (“ED”) include a line of displays designed by us, such as SmartScreens, door displays, and LED wallboards that are architected to work seamlessly with our content management software. We also offer a large portfolio of third-party displays from some of the most recognizable brands in screen and electronic display technology.


RMG Media Networks


The RMG Airline Media Network. We help airline partners unlock economic value from their existing assets while providing advertisers access to targeted, high-value and captive audiences. We believe that the reach, scope and digital delivery capability of our network of digital place-based media provides an effective platform for advertisers to reach an affluent and engaged audience on a highly targeted and measurable basis.


RMG Mall Media. RMG Mall Media is a premier, mall-based digital video network engaging affluent audiences in premium shopping mall food courts across the US. Extended dwell-times coupled with full sight, sound and motion allow advertisers to cut through the retail clutter and deliver a relevant and engaging message. The network reaches over 62 million Nielsen estimated monthly viewers in 161 shopping malls in 61 top DMAs across the United States.


Proprietary Planning and Inventory System. Our proprietary planning and inventory system supports key advertising and partner management business processes such as customer acquisition, advertising inventory, customer management and revenue recognition


Corporate Information


We were incorporated in Delaware on January 5, 2011, under the name SCG Financial Acquisition Corp., as a blank check company for the purpose of effecting a business combination with one or more businesses.  On April 8, 2013, we consummated the acquisition of RMG, pursuant to a Merger Agreement, dated as of January 11, 2013, as amended, by and among us, SCG Financial Merger II Corp., RMG and Shareholder Representative Services LLC, as the Stockholder Representative, pursuant to which RMG became our subsidiary. On April 19, 2013, we consummated the acquisition of Symon, pursuant to a Merger Agreement, dated as of March 1, 2013, by and among us, SCG Financial Merger III Corp., Symon and the securityholders’ representative named therein, pursuant to which Symon became our subsidiary. On July 12, 2013, we changed the name of the company to RMG Networks Holding Corporation.


As a result of the RMG and Symon acquisitions, RMG and Symon became our subsidiaries, and the business and assets of RMG, Symon and their subsidiaries are our only operations. Symon is considered to be our predecessor for accounting purposes.


Our principal executive offices are located at 500 North Central Expressway, Suite 175, Plano, Texas 75074, and our telephone number is (972) 543-9300. Our website is www.rmgnetworks.com. The information contained in our website is not a part of this prospectus.



3





THE OFFERING


Common Stock Offered

 

3,561,8881 shares of our common stock

 

 

 

Common Stock outstanding prior to this offering

 

6,285,583 shares

 

 

 

Common Stock to be outstanding
after this offering

 

9,847,471 shares2

 

 

 

Use of Proceeds

 

We expect to use some or all of the net proceeds of this offering to repay a portion of our outstanding indebtedness and for general corporate purposes, which may include the funding of growth initiatives in sales and marketing, capital expenditures, working capital and/or strategic acquisitions. We have received a waiver from our senior lenders that requires us to use $10.0 million of the net proceeds of this offering (or 50% of the net proceeds, if less) to prepay a portion of our senior indebtedness, but allows us to use some or all of the remaining proceeds for general corporate purposes. See “Use of Proceeds.”

 

 

 

Nasdaq Symbol

 

RMGN

 

 

 

Risk Factors

 

See “Risk Factors” beginning on page 7 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.









                              

 

1

The assumed number of shares of our common stock that will be sold in this offering is based on the issuance and sale of $40,000,000 of shares of our common stock at an assumed offering price of $11.23 per share, which was the last reported sale price of our common stock on the Nasdaq Capital Market on July 10, 2013. Depending on the negotiated public offering price for our common stock, the number of shares that we may sell in this offering may change.

 

 

2

The number of shares of our common stock that will be outstanding immediately after this offering assumes the issuance and sale of 3,561,888 shares of our common stock in this offering and excludes (i) 13,066,667 shares of common stock issuable upon the exercise of all warrants outstanding as of July 10, 2013 and (ii) 2,500,000 shares of common stock that are issuable under our 2013 equity incentive plan. All information in this prospectus assumes no exercise by the underwriters of their right to purchase up to an additional 534,283 shares of common stock at the public offering price, less underwriting discounts and commissions, to cover over-allotments (calculated assuming that 3,561,888 shares are otherwise issued and sold in this offering, as calculated above).




4





Summary Consolidated Financial Data of Symon


The following table sets forth summary selected financial data on a historical basis for our predecessor, Symon. We have not presented summary financial data for SCG Financial Acquisition Corp. because it has not had any operating activity since its formation, other than consummating its initial public offering and the acquisitions of RMG and Symon.

 

You should read the following summary selected historical financial and operating data in conjunction with Symon’s historical financial statements and the related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Symon,” which are included elsewhere in this prospectus. The historical balance sheet data as of January 31, 2013, 2012 and 2011 of Symon and the statements of operations data for each of the three years in the period ended January 31, 2013 of Symon have been derived from the historical audited financial statements of Symon included elsewhere in this prospectus. The historical balance sheet data as of April 19, 2013 (the date of the consummation of the acquisition of Symon by SCG Financial Acquisition Corp.) of Symon and the statement of operations data for each of the interim periods ended April 19, 2013 and April 30, 2012 of Symon have been derived from the historical unaudited financial statements of Symon included elsewhere in this prospectus. Since the acquisition of Symon occurred prior to the end of Symon’s fiscal quarter, the results for the interim period in 2013 do not include the last eleven days of the month of April 2013, and, as a result, the period contains fewer days’ results when compared to the three months ended April 30, 2012. The results of operations for the interim period are not necessarily indicative of the results of operations which might be expected for the entire year.


 

 

For the Period

February 1, 2013

Through April 19,

 

For the Three

Months

Ended April 30,

 

For the Years

Ended

January 31,

 

 

2013

 

2012

 

2013

 

2012

 

2011

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

(In thousands)

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

Total Revenue

$

7,157

$

9,425

$

42,528

$

40,826

$

39,711

Operating income (loss)

 

(3,080)

 

1,011

 

5,418

 

6,052

 

3,022

Net income (loss)

 

(2,554)

 

645

 

3,491

 

3,926

 

1,765

 

 

 

 

 

 

 

 

 

 

 

 

 

As of April 19,

 

 

 

As of January 31,

 

 

2013

 

 

 

2013

 

2012

 

2011

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

(In thousands)

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

Total assets

$

31,085

 

 

$

37,944

$

32,545

$

33,213

Total liabilities

 

14,111

 

 

 

18,293

 

16,378

 

20,932

Total stockholders’ equity

 

16,974

 

 

 

19,651

 

16,167

 

12,281




5





Summary Consolidated Financial Data of RMG


The following table sets forth summary selected financial data on a historical basis for RMG. You should read the following summary selected historical financial and operating data in conjunction with RMG’s historical financial statements and the related notes which are included elsewhere in this prospectus. The historical balance sheet data as of December 31, 2012, 2011 and 2010 of RMG and the statement of operations data for each of the three years in the period ended December 31, 2012 of RMG have been derived from the historical audited financial statements of RMG included elsewhere in this prospectus. The historical balance sheet data as of March 31, 2013 and 2012 of RMG and the statement of operations data for each of the interim periods ended March 31, 2013 and 2012 of RMG have been derived from the historical unaudited financial statements of RMG included elsewhere in this prospectus. The results of operations for the interim period are not necessarily indicative of the results of operations which might be expected for the entire year.


 

 

As of and for the Three

Months Ended March 31,

 

 

As of and for the Years

Ended December 31,

 

 

2013

 

2012

 

 

2012

 

2011

 

2010

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

$

6,141

$

6,899

 

$

25,670

$

20,481

$

11,969

Loss from Operations

 

(2,770)

 

(1,279)

 

 

(5,596)

 

(10,896)

 

(11,594)

Net Loss

 

(4,285)

 

(2,686)

 

 

(11,536)

 

(14,916)

 

(11,810)

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

19,494

 

 

 

$

22,182

$

28,351

$

13,565

Total liabilities

 

37,458

 

 

 

 

35,962

 

30,996

 

7,852

Total stockholders’ equity (deficit)

 

(17,965)

 

 

 

 

(13,779)

 

(2,646)

 

5,713




6





RISK FACTORS

Investing in our common stock involves a high degree of risk.  You should carefully consider the following risk factors and the other information contained in this prospectus before making an investment decision.  The following discussion highlights some of the risks that may affect future operating results. These are the risks and uncertainties we believe are most important for you to consider. 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 operations. If any of the following risks or uncertainties actually occur, our business, financial condition and operating results would likely suffer.  Please see “Cautionary Notes Regarding Forward-Looking Statements.”

Risks Related to Our Company

The markets for digital signage and advertising are competitive and we may be unable to compete successfully.

The markets for digital signage and advertising are very competitive and we must compete with other established providers. We compete with larger companies in many of the markets we serve. We compete for advertising sales directly with all media platforms, including radio and television broadcasting, cable and satellite television services, various local print media, billboards and Internet portals and search engines and digital out-of-home advertising represents a small portion of this market. We expect existing competitors and new entrants into the markets where we do business to constantly revise and improve their business models in light of challenges from us or other companies in the industry. If we cannot respond effectively to advances by our competitors, our business may be adversely affected.

Increased competition may result in new products and services that fundamentally change our markets, reduce prices, reduce margins or decrease our market share. We may be unable to compete successfully against current or future competitors, some of whom may have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we do.

Our operations are subject to the strength or weakness of our customers’ businesses, and we may not be able to mitigate that risk.

A large percentage of our business is attributable to customers in industries which are sensitive to general economic conditions.  During periods of economic slowdown or during periods of weak business results, our customers often reduce their capital and advertising expenditures and defer or cancel pending projects, facilities upgrades or promotional activities. Such developments occur even among customers that are not experiencing financial difficulties.

For example, in 2008, a very large U.S.- based mortgage company, which was at the time one of our largest Enterprise Solutions customers, did not buy any of our products as a result of the economic downturn.  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 by advertisers 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 advertising spending. The global economic downturn that began in 2008 resulted in a decline in consumer spending in the United States, which resulted in a corresponding slowdown in advertising spending by businesses and advertisers.

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:


·

a decline in economic conditions in an industry we serve;

·

a decline in advertising or capital spending in general;

·

a decision to shift expenditures to competing products;

·

unfavorable local or regional economic conditions;  or

·

a downturn in an individual business sector or market.


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.



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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 have experienced extreme disruption since late 2008, and while there has been improvement in recent years, the worldwide economy remains fragile as uncertainty remains regarding when the economy will improve to historical growth levels. Any return to the conditions that existed during the recent 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 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:


·

increased competition for fewer industry dollars;

·

pricing pressure that may adversely affect revenue and gross margin;

·

reduced credit availability and/or access to capital markets;

·

difficulty forecasting, budgeting and planning due to limited visibility into the spending plans of current or prospective customers; or

·

customer financial difficulty and increased risk of doubtful accounts receivable.


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 and advertising buying patterns of our customers. Advertising cycles, 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 and profitability. In addition, slower selling cycles during the first and second quarters may adversely affect our stock price.

Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly in the future.

Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. These fluctuations may cause the market price of our common stock to decline. We base our planned operating expenses in part on expectations of future revenues, and our expenses are relatively fixed in the short term. If revenues for a particular quarter are lower than we expect, we may be unable to proportionately reduce our operating expenses for that quarter, which would harm our operating results for that quarter. In future periods, our revenue and operating results may be below the expectation of analysts and investors, which may cause the market price of our common stock to decline. Factors that are likely to cause our revenues and operating results to fluctuate include those discussed elsewhere in this section.

The nature of advertising sales cycles and shifting needs of advertisers makes it difficult for us to forecast revenues and increases the variability of quarterly fluctuations, which could cause us to improperly plan for our operations.  

A substantial amount of our advertising commitments are made months in advance of when the advertising airs on our media networks. Between the time at which advertising commitments are made and the advertising is aired, the needs of our advertisers can change. Advertisers may desire to change the timing, level of commitment and other aspects of their advertising placements. As a result, our future advertising commitment at any particular date is not necessarily indicative of actual revenues for any succeeding period, making it more difficult to predict our financial performance. These changes could also negatively impact our financial performance, including quarterly fluctuations.

Implementation and integration of new products, such as expanding our advertising assets, software, media player and services product portfolios, could harm our results of operations.

A key component of our growth strategy is to develop and market new products. We may be unable to produce new products and services that meet customers’ needs or specifications. If we fail to meet specific product specifications requested by a customer, the customer may have the right to seek an alternate source for a product or service or to terminate an underlying agreement. A failure to successfully meet the specifications of our potential customers could decrease demand or otherwise significantly hinder market adoption of our products and may have a material adverse effect on our business, financial condition or results of operations.



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The process of introducing a new product to the market is extremely complex, time consuming and expensive, and will become more complex as new platforms and technologies emerge. In the event we are not successful in developing a wide range of offerings or do not gain wide acceptance in the marketplace, we may not recoup our investment costs, and our business, financial condition and results of operations may be materially adversely affected.

Shortages of components or a loss of, or problems with, a supplier could result in a disruption in the installation or operation of our products or services.

From time to time, we have experienced delays in manufacturing our products for several reasons, including component delivery delays, component shortages and component quality deficiencies. Component shortages, delays in the delivery of components, and supplier product quality deficiencies may occur in the future. These delays or problems have in the past and could in the future result in delivery delays, reduced revenues, strained relations with customers and loss of business. Also, in an effort to avoid actual or perceived component shortages, we may purchase more components than we may otherwise require. Excess component inventory resulting from over-purchases, obsolescence, installation cancellations or a decline in the demand for our products could result in equipment impairment, which in the past has had and in the future would have a negative effect on our financial results.

We obtain several of the components used in our products from limited sources. We rarely have guaranteed supply arrangements with our suppliers, and cannot be sure that suppliers will be able to meet our current or future component requirements. If component manufacturers do not allocate a sufficient supply of components to meet our needs or if current suppliers do not provide components of adequate quality or compatibility, we may have to obtain these components at a higher cost from distributors or on the spot market. If we are forced to use alternative suppliers of components, we may have to alter our manufacturing process or installations to accommodate these components. Modification of our manufacturing process or our installations to use alternative components could cause significant delays and reduce our ability to generate revenues.

The failure of our service providers to provide, install and maintain our equipment could result in service interruptions and damage to our business.

We are and will continue to be significantly dependent upon third-party service providers to provide, install and maintain relevant video display and media player equipment at our installations. The failure of any third-party provider to continue to perform these services adequately and timely could interrupt our business and damage our relationship with our partners and their relationship with consumers. Any outage would also impact our ability to deliver on the contracted service levels, which would prevent us from recognizing revenues.

We rely on third parties for data transmission, and the interruption or unavailability of adequate bandwidth for transmission could prevent us from distributing our programming as planned.

We transmit the majority of the content that we provide to our partners and customers using Internet connectivity supplied by a variety of third-party network providers. We also rely on the networks of some of our partners to transmit content to individual screens. If we or our partners experience failures or limited network capacity, we may be unable to maintain programming and meet our advertising 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 partners or customers becomes unavailable, limited due to bandwidth constraints or is interrupted or delayed because of necessary equipment changes, our partner and customer relationships and our ability to obtain revenues from current and new partners and customers could suffer.

Computer viruses could cause significant downtime for our media network, decreasing our revenues and damaging our relationships with partners and customers.

We generate revenues from the sales of advertising and content that is aired in our partners’ and customers’ installations. Computer hackers infecting our network, or the networks of our partners or customers in which our network is integrated, with viruses could cause our network to be unavailable. Significant downtime could decrease our revenues and harm our relationships and reputation with partners, customers and consumers.

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.



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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 partners and customers may expose us to liability.

We provide or facilitate the distribution of content for our partners and customers. This content includes advertising-related content, as well as movie and television content and other media, much of which is obtained from third parties. As a distributor of content, we face potential liability for negligence, copyright, patent or trademark infringement, or other claims based on the content that we distribute. We or entities that we license content from may not be adequately insured or indemnified to cover claims of these types or liability that may be imposed on us.

The growth of our business is dependent in part on successfully implementing our international expansion strategy.

Our growth strategy includes expanding our geographic coverage in or into the Asia-Pacific region, Europe, the Middle East and Latin America. 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.

If we fail to manage our growth effectively, we may not be able to take advantage of market opportunities, execute on expansion strategies or meet the demands of advertisers.

We have expanded, and continue 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 place 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.

We may not realize the anticipated benefits of the acquisitions of Symon and RMG or of future acquisitions or investments.

We acquired our operating subsidiaries in two separate business combinations in April 2013, and our operating subsidiaries, in turn, have grown their 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. Likewise, RMG established its executive airline club business through the acquisition of the Executive Media Network and its wholly-owned subsidiaries in April 2011. As part of our business strategy, we intend to 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.

Our acquisitions of Symon and RMG, and any future acquisitions and investments we may undertake, subject us to various risks, including:


·

failure to transition key customer relationships and sustain or grow sales levels, particularly in the short-term;

·

loss of key employees related to acquisitions;

·

inability to successfully integrate acquired technologies or operations;

·

failure to realize anticipated synergies in sales, marketing and distribution;



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·

diversion of management’s attention;

·

adverse effects on our existing business relationships with its customers;

·

potentially dilutive issuances of equity securities or the incurrence of debt or contingent liabilities;

·

expenses related to amortization of intangible assets and potential write-offs of acquired assets; and

·

the inability to recover the costs of acquisitions.


If our acquisition strategy is not effective, we may not be able to expand our business as expected. In addition, our operating expenses may increase more than our revenues as a result of such expansion efforts, which could materially impact our operating results and our stock price.


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.

Our RMG subsidiary has a history of incurring significant net losses, and our future profitability is not assured.

For the years ended December 31, 2012 and 2011, RMG, which we acquired on April 8, 2013, incurred net losses of $11.5 million and $14.9 million, respectively. RMG’s operating results for future periods are subject to numerous uncertainties and there can be no assurances that it will be profitable in the foreseeable future, if at all. RMG has minimum payment commitments with four of its advertising partners. These commitments constitute a significant part of RMG’s cost of revenues. If RMG’s revenues decrease in a given period, it may be unable to reduce cost of revenues as a significant part of its cost of revenues is fixed, which could materially and adversely affect RMG’s business and, therefore, our results of operations and lead to a net loss for that period.

Our RMG subsidiary has a limited operating history, which may make it difficult to evaluate its business and prospects.

RMG began business operations in September 2005 as Danouv Inc., developing a digital signage technology platform for ad serving and content distribution. RMG launched an initial media network with 650 screens in coffee shops and eateries in August 2006. In September 2006, Danouv Inc. changed its name to Danoo Inc. In July 2009, Danoo purchased certain assets of IdeaCast Inc., which operated a digital signage network in gyms and fitness centers and in the airline in-flight entertainment space. In August 2009, Danoo was renamed RMG Networks, Inc.

RMG acquired certain assets and cash from Pharmacy TV Network, LLC in March 2010 in an all-stock transaction. Pharmacy TV was a retail point of sale network in pharmacies across the United States. RMG subsequently shut this network down during the fourth quarter of 2011 due to lack of scale and advertiser demand. RMG acquired Executive Media Network Worldwide and its wholly-owned subsidiaries Corporate Image Media, Inc. and Prophet Media, LLC (collectively the Executive Media Network) in April 2011 to extend its airline media offering from airport business lounges to in-flight media. The Executive Media Network acquisition introduced a proprietary booking, tracking and inventory system called Charlie into the RMG technology portfolio. The Executive Media Network was subsequently transitioned to the RMG technology platform for content delivery and network management. This acquisition also consolidated the number of companies in the United States working with airlines to sell media. During the first quarter of 2012, RMG divested the NYTimes.com Today network, and in July 2012 RMG sold the Fitness Network.

RMG took steps to align resources behind the airline media properties because RMG was a category leader in that space in 2012.  Accordingly, it has a limited operating history for operations upon which you can evaluate the viability and sustainability of its business and its acceptance by advertisers and consumers. It is also difficult to evaluate the viability of its use of audiovisual advertising displays in airline executive clubs, IFE displays, Wi-Fi advertising and other digital out-of-home commercial locations as a business model because it does not have sufficient experience to address the risks frequently encountered by early stage companies using new forms of advertising media and entering new and rapidly evolving markets. These circumstances may make it difficult to evaluate RMG’s business and prospects.



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The airline industry is highly competitive, and a substantial weakening of, or business failure by, any of our partner airlines could negatively affect our revenues and jeopardize any investment we make in deploying the RMG Airline Media Network in airline executive clubs.

The airline industry is highly competitive and has experienced substantial consolidation. Because our ability to generate revenues from advertising sales and services depends upon our ongoing relationships with a limited number of airlines, any substantial weakening or failure of the business of one or more of our existing airlines, or the consolidation of one or more of our airlines with a third party, could cause our revenues to decline, damaging our business and prospects.

We have in the past made, and plan in the future to make, significant investments in the equipment, installation and support of the RMG Airline Media Network within airline executive clubs. We intend to pursue opportunities where we may invest in new airline relationships and the deployment of new media inventory, and the weakening, failure or acquisition of any of our airline partners in the future could result in our loss of our investment and/or a negative return on our investment. In addition, we may incur additional expense recovering our equipment from airline executive clubs in the event any such clubs cease to operate or close for any reason.

If we are unable to retain or renew existing partnerships with airlines, IFE and Wi-Fi providers on commercially advantageous terms, we may be unable to maintain or expand RMG Airline Media Network coverage and our costs may increase significantly in the future.

Our ability to generate revenues from advertising sales depends largely upon our ability to provide a large air travel advertising network for the display of advertisements. However, there can be no assurances that we will be able retain or renew our existing partnerships with airlines, IFE and Wi-Fi providers, and any failure to maintain our network could damage our relationships with advertisers and materially and negatively affect our business.

We currently have ten partnership contracts that have terms ranging from one to five years. Four contracts renew automatically unless terminated prior to renewal while the rest have no automatic renewal provisions. Three partnership contracts were subject to renewal in 2013. We have renewed two of these contracts before expiration at terms comparable to the prior contracts. One contract expired and was not renewed. In addition, we have minimum revenue commitments to four of our partners, which comprise a significant portion of our total cost of revenues.  These commitments may increase over time and as partnership contracts terminate, we may experience a significant increase in our costs of revenues when we have to renew these contracts. If we cannot pass increased costs onto advertisers through rate increases, our earnings and results of operations could be materially and adversely affected. In addition, many of our partnership contracts contain provisions granting us certain exclusive advertising rights. We may not be able to retain these exclusivity provisions when we renew these contracts. If we were to lose exclusivity, our advertisers may decide to advertise with our competitors or otherwise reduce their spending on the RMG Airline Media Network and we may lose market share.

Our partners may terminate their contracts with us or may not enter into new contracts with us on terms that are commercially advantageous to us. If our partners seek to negotiate terms that are less favorable to us and we accept such terms, or if we seek to negotiate better terms, but are unable to do so, then our business, operating results and financial condition could be materially and adversely affected.

We have relied, and expect to continue to rely, on a limited number of advertisers for a significant portion of our advertising-related revenues, and such revenues could decline due to the delay of orders from, or the loss of, one or more significant advertisers.

We expect that a small number of advertisers will constitute a significant portion of our advertising-related revenues for the foreseeable future. Our relationships with these advertisers may not expand or may be disrupted. If a major advertiser purchases less advertising or defers orders in any particular period, or if a relationship with a major advertiser is terminated, our revenues could decline and our operating results may suffer. We are also obligated to provide minimum annual guarantees to certain airline and media partners, which we could have difficulty satisfying if our advertising revenues significantly decrease for any reason.

If advertisers or the viewing public do not accept, or lose interest in, our digital out-of-home advertising network, our revenues may be negatively affected and our business may not expand or be successful.

The market for digital out-of-home advertising networks worldwide is relatively new and its potential is uncertain. We compete for advertising spending with many forms of more established advertising media. Our success depends on the acceptance of digital out-of-home advertising networks by advertisers and their continuing interest in these media networks as components of their advertising strategies. Our success also depends on the viewing public continuing to be receptive towards



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its advertising network. Advertisers may elect not to use our services if they believe that consumers are not receptive to our networks or that our networks do not provide sufficient value as effective advertising media. Likewise, if consumers find some element of our networks, such as its in-flight Roadblock Unit, to be disruptive or intrusive, the airlines may decide not to place our digital displays in their properties or allow us to sell advertising on their IFE systems and advertisers may view our advertising network as a less attractive advertising medium compared to other alternatives. In that event, advertisers may decide to reduce their spending on the RMG Airline Media Network. If a substantial number of advertisers lose interest in advertising on the RMG Airline Media Network for these or other reasons, we will be unable to generate sufficient revenues and cash flow to operate our business, and our advertising service revenue, liquidity and results of operations could be negatively affected.

Advertisers may not accept our measurements of our networks audiences or the methodologies may change, which could negatively impact our ability to market and sell our advertising packages.

We engage third-party research firms to study the number of people viewing our networks, consumer viewing habits and brand recall. Because our digital out-of-home networks are different from at-home broadcast media, third-party research firms have developed measuring standards and methodologies that differ from those used to measure the amount and characteristics of viewers for other broadcast media. We market and sell advertising packages to advertisers based on these measurements. If third-party research firms were to change the way they measure viewers or their viewing habits, it could have an adverse effect on our ability to sell advertising. In addition, if advertisers do not accept or challenge the way third parties measure our viewers or their viewing habits, advertisers may be unwilling to purchase advertising at prices acceptable to us, if at all, and our revenues and operating results could be negatively impacted.

If consumers do not accept our ad-based networks as a part of their out-of-home experience, we may be unable to grow or maintain our Media Networks business.

The success of our Media Networks business depends, in part, upon the long-term acceptance of digital media in out-of-home settings by consumers. If consumer viewership of our networks or sentiment towards advertising in general, shifts such that consumers become less receptive, advertisers may reduce their spending and partners may decide not to carry our networks.

If people change the way they travel or reduce the amount that they travel, our revenues may decline and our business may suffer.

Our success in selling advertising depends, in part, on high traffic airlines and airline executive clubs, which increases the number of potential viewers for the RMG Airline Media Network. The price at which we sell advertising aired on the RMG Airline Media Network is a direct result of the number of viewers and the quality of those viewers. If the number of travelers visiting the airline clubs or flying on commercial airplanes decreases, advertisers may decide not to advertise on the RMG Airline Media Network, may purchase less advertising on the RMG Airline Media Network or may not be willing to pay for advertising at price points necessary for it to succeed. If alternative methods of communication such as the Internet and other forms of travel increase in popularity, fewer consumers may visit our travel media locations. If consumers change the way they travel, such as increasing travel by car, they may not be receptive to our programming. In either case, our ability to generate revenues from advertisers could decrease and our operating results could decline.

If a market for ChalkboxTV does not develop or if we are unable to successfully develop, introduce, market and sell ChalkboxTV, our results of operations could be harmed.

In April 2013, we launched ChalkboxTV, an easy-to-install in-store signage solution, through a network of dealers and resellers.  The success of ChalkboxTV depends upon market acceptance of the product. Digital signage is an emerging market, and we cannot be sure that potential customers will accept ChalkboxTV as an advertising solution. Demand and market acceptance of the product is subject to a high level of uncertainty and risk and it is difficult to predict the size of the market and its growth rate. If a sufficient market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred in the development of ChalkboxTV.

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 ChalkboxTV does not gain wide acceptance in the marketplace, we may not recoup our research and development costs, and our business, financial condition and results of operations may be materially adversely affected. We may experience unanticipated delays in introducing ChalkboxTV to the market and may be unable to introduce ChalkboxTV in time to capture market opportunities, satisfy the requirements and specifications of our customers or achieve significant or sustainable acceptance in the marketplace.  



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To market and sell ChalkboxTV, we will need to develop warranties, guarantees and other terms and conditions relating to the product that will be acceptable to the marketplace, and develop a service organization to aid in servicing the product. Failure to achieve any of these objectives may slow the development of a sufficient market for ChalkboxTV.  In addition, we will also need to develop and manage new sales channels and distribution arrangements. Because we have limited experience in developing and managing such channels, we may not be successful in reaching a sufficiently broad customer base. Failure to develop or manage sales channels effectively would limit our ability to succeed in this market and could adversely affect our ability to grow our customer base and revenue. Our inability to generate satisfactory revenues from ChalkboxTV to offset our development costs could harm our operating results.

We rely significantly on information systems and any failure, inadequacy, interruption or security failure of those systems could harm our ability to effectively operate our business, harm our net sales, increase our expenses and harm our reputation.

Our ability to effectively serve our customers on a timely basis depends significantly on our information systems. To manage the growth of our operations, we will need to continue to improve and expand our operational and financial systems, internal controls and business processes; in doing so, we could encounter implementation issues and incur substantial additional expenses. The failure of our information systems to operate effectively, problems with transitioning to upgraded or replacement systems or a breach in security of these systems could adversely impact financial accounting and reporting, efficiency of our operations and our ability to properly forecast earnings and cash requirements. We could be required to make significant additional expenditures to remediate any such failure, problem or breach. Such events may have a material adverse effect on us.

Our current or future internet-based operations may be affected by our reliance on third-party hardware and software providers, technology changes, risks related to the failure of computer systems that operate our internet business, telecommunications failures, electronic break-ins and similar disruptions. Furthermore, our ability to conduct business on the internet may be affected by liability for online content, patent infringement and state and federal privacy laws.

In addition, we may now and in the future implement new systems to increase efficiencies and profitability. To manage growth of our operations and personnel, we will need to continue to improve and expand our operational and financial systems, internal controls and business processes. When implementing new or changing existing processes, we may encounter transitional issues and incur substantial additional expenses.

Experienced computer programmers and hackers, or even internal users, may be able to penetrate our network security and misappropriate our confidential information or that of third parties, including our customers, create system disruptions or cause shutdowns. In addition, employee error, malfeasance or other errors in the storage, use or transmission of any such information could result in a disclosure to third parties outside of our network. As a result, we could incur significant expenses addressing problems created by any such inadvertent disclosure or any security breaches of its network. Any compromise of customer information could subject us to customer or government litigation and harm our reputation, which could adversely affect our business and growth.

We may not obtain sufficient patent protection for our systems, processes and technology, which could harm our competitive position and increase our expenses.

Our success and ability to compete depends to a significant degree upon the protection of our proprietary technology. As of December 31, 2012, we held three issued patents and four pending patent applications in the United States that we consider to be material to our business. 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. Any patent applications may not result in issued patents. 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, design code for our advertising network, documentation and other written materials under trade secret and copyright laws. We license our software under signed license agreements, which impose restrictions on the licensee’s ability to utilize the software. We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to its proprietary



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information to execute confidentiality 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:


·

laws and contractual restrictions may not prevent misappropriation of our technologies or deter others from developing similar technologies; and

·

policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of any unauthorized use.


The laws of certain foreign countries may not protect the use of unregistered trademarks or our proprietary technologies to the same extent as do the laws of the United States. As a result, international protection of our image may be limited and our right to use our trademarks and technologies outside the United States could be impaired. Other persons or entities may have rights to trademarks that contain portions of our marks or may have registered similar or competing marks for digital signage in foreign countries. There may also be other prior registrations of trademarks identical or similar to our trademarks in other foreign countries. Our inability to register our trademarks or technologies or purchase or license the right to use the relevant trademarks or technologies in these jurisdictions could limit our ability to penetrate new markets in jurisdictions outside the United States.

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, operating results or financial condition.

We depend on key executive management and other key personal, 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.  All 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 Plano, Texas. In addition, we manage our networks from our headquarters in Plano, and have significant operations in San Francisco, California. Plano is located in an area that experiences frequent severe weather, including tornadoes, and San Francisco exists on or near known earthquake fault zones. Should a tornado, earthquake or other catastrophe, such as fires, floods, power loss, communication failure, terrorist acts 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.



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Government regulation of the telecommunications and advertising industries 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. FCC licensing, program content and related regulations generally do not currently affect us. However, the FCC 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 regulations also affect many of our content providers and, therefore, these regulations may indirectly affect our business. In addition, the advertising industry is 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, including the National Advertising Division of the Council of Better Business Bureaus. New laws or regulations governing advertising could substantially harm our business.

We may also be required to obtain various regulatory approvals from local, state or federal 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, results of operations, or financial condition. 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 be able to generate sufficient cash to service our debt obligations.


We have $34.0 million in outstanding indebtedness, including $24.0 million senior indebtedness that is secured by a first-priority security interest in substantially all of our assets. 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. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, 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 lenders could foreclose on our assets, which would have a material adverse effect on our business, financial condition and results of operations.

Our ability to raise capital in the future may be limited and our failure to raise capital when needed could materially impact our business.

We believe that the net proceeds from this offering and our existing cash and equivalents will be sufficient to meet our anticipated organic cash needs for at least the next 12 months. The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including:


·

market acceptance of our products and services;

·

the need to adapt to changing advertiser, airline and consumer preferences, as well as changing technologies and customers’ technical requirements;

·

the existence of opportunities for expansion, including investing in technology infrastructure; and

·

access to and availability of sufficient management, technical, marketing and financial personnel.  




16





If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell equity securities or debt securities or obtain debt financing. The sale of equity securities or convertible debt securities could result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict its operations. We have not made arrangements to obtain additional financing and there is no assurance that financing, if required, will be available in amounts or on terms acceptable to it, if at all.

Risks Related to Our Common Stock

We are currently not in compliance with the minimum listing requirements of the Nasdaq Capital Market, and Nasdaq has notified us that it has determined to delist our common stock. Delisting could limit the liquidity and price of our common stock more than if our common stock were quoted or listed on Nasdaq Capital Market or another national exchange.


Our common stock is listed on the Nasdaq Capital Market, a national securities exchange. On May 3, 2013, we received notification from the Nasdaq that it intends to delist our common stock, due to our failure to satisfy the initial listing requirement that we have at least 300 “round lot” holders of our common stock. The Nasdaq hearings panel subsequently granted our request for continued listing, subject to our providing the panel, by July 31, 2013, information establishing that we have at least 300 “round lot” stockholders. We expect to satisfy this requirement by increasing our number of shareholders pursuant to this offering. If we are unable to satisfy the minimum stockholder requirements and the Nasdaq Capital Market delists our common stock, we could face significant material adverse consequences, including:


·

a limited availability of market quotations for our common stock;

·

a determination that our common stock is a “penny stock” which will require brokers trading in its common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our common stock;

·

a limited amount of news and analyst coverage; and

·

a decreased ability to issue additional securities or obtain additional financing in the future.


The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.

As of July 10, 2013, our Sponsor and affiliated persons (including Gregory H. Sachs, our Executive Chairman) and entities together beneficially owned over 80% of our outstanding common stock and we anticipate that these stockholders will together beneficially own approximately 64% of our outstanding common stock upon the consummation of this offering. 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.

Compliance with the Sarbanes-Oxley Act of 2002 will require substantial financial and management resources and may increase the time and costs of completing an acquisition.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and report on our system of internal controls and requires that we have such system of internal controls audited beginning with our Annual Report on Form 10-K for the year ending December 31, 2012.  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.  RMG and Symon may not currently be in compliance with the provisions of the Sarbanes-Oxley Act regarding adequacy of their internal controls.  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.

SCG Financial Acquisition Corp. is a holding company and relies on distributions, loans and other payments, advances and transfers of funds from RMG and Symon to pay dividends, pay expenses and meet our other obligations.

We have no direct operations and no significant assets other than our ownership interests in RMG and Symon. Because we conduct our operations through our operating subsidiaries, we depend on RMG and Symon for distributions, loans and other payments to generate the funds necessary to meet our financial obligations, including our expenses as a publicly traded company, and to pay any dividends with respect to our common stock. Legal and contractual restrictions in agreements governing future indebtedness of RMG and/or Symon, as well as the financial condition and operating requirements of RMG and/or Symon, may limit our ability to obtain cash from RMG and/or Symon. The earnings from, or other available assets of, RMG and/or Symon may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our common stock or satisfy our other financial obligations.



17





Our ability to request indemnification for damages arising out of claims pursuant to the RMG merger agreement is limited to 300,000 of the shares of our common stock issued in the transaction, which are being held in escrow. Consequently, we may not be able to be entirely compensated for indemnifiable damages that we may sustain.

The indemnification obligations of RMG’s prior shareholders against losses that we may sustain and that result from, arise out of or relate to any breach by RMG or the RMG shareholders of any of their representations, warranties, or the covenants or agreements contained in the RMG merger agreement is limited to 300,000 shares of our common stock held in escrow. Certain claims for indemnification may be asserted against these shares by us once our damages exceed a $100,000 deductible and will be reimbursable to the full extent of the damages in excess of such amount up to a maximum amount of the escrow shares. The escrow shares will no longer be subject to claims for indemnification after April 30, 2014. As a consequence of these limitations, we may not be able to be entirely compensated for indemnifiable damages that we may sustain.

Our ability to request indemnification for damages arising out of claims pursuant to the Symon merger agreement is limited. Consequently, we may not be able to be entirely compensated for indemnifiable damages that we may sustain.

The indemnification obligations of Symon against losses that we may sustain and that result from, arise out of or relate to any breach by Symon or its shareholders of for breaches of their representations and warranties contained in the Symon merger agreement is limited to certain specified fundamental representations. We are not entitled to indemnification for breaches of most representations and warranties regarding Symon’s business or operations. Accordingly, we may not be able to be compensated for indemnifiable damages that we may sustain.

If the benefits of the transactions with Symon and/or RMG do not meet the expectations of investors, the market price of our securities may decline.

The market price of our securities may decline as a result of the transactions with Symon and/or RMG  if we do not achieve the perceived benefits of the transactions as rapidly, or to the extent anticipated by investors.  Accordingly, investors may experience a loss as a result of a decline in the market price of our securities. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.

We may issue additional shares of our common stock, 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 have filed a registration statement to register the resale of an aggregate of 13,066,667 shares of common stock that are issuable upon the exercise of outstanding warrants. These warrants will be exercisable beginning when such registration statement is effective. These warrants would only be exercised if the $11.50 per share exercise price is below the market price of our common stock. To the extent they are exercised, additional shares of our common stock will be issued, which will result in dilution to our stockholders and increase the number of shares eligible for resale in the public market.

Our management will have broad discretion in the use of the net proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion over the use of our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment and we might not be able to yield a significant return, if any, on any investment of these net proceeds. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the development of our products and cause the price of our common stock to decline.

Provisions in our charter documents and Delaware law may discourage or delay an acquisition that stockholders may consider favorable, which could decrease the value of our common stock.

Our certificate of incorporation, our bylaws, and Delaware corporate law contain provisions that could make it harder for a third party to acquire us without the consent of our board of directors. These provisions include those that: authorize the issuance of up to 1,000,000 shares of preferred stock in one or more series without a stockholder vote; limit stockholders’ ability to call special meetings; establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and provide for staggered terms for our directors. In addition, in certain circumstances, Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.  

We have not paid cash dividends to our shareholders and currently have no plans to pay future cash dividends.

We plan to retain earnings to finance future growth and have no current plans to pay cash dividends to shareholders. In addition, our credit facility restricts our ability to pay dividends.  Because we have not paid cash dividends, holders of our securities will experience a gain on their investment in our securities only in the case of an appreciation of value of our securities. You should neither expect to receive dividend income from investing in our securities nor an appreciation in value.



18





CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS


We believe that some of the information contained in this prospectus constitutes forward-looking statements within the definition of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,” “estimate,” “intend,” “plan,” and “continue” or similar words. You should read statements that contain these words carefully because they:


·

discuss future expectations;

·

contain projections of future results of operations or financial condition; or

·

state other “forward-looking” information.


We believe it is important to communicate our expectations to our stockholders. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors and cautionary language discussed in this prospectus provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by us in our forward-looking statements, including among other things:


·

success in retaining or recruiting, or changes required in, our management and other key personnel;

·

The de-listing of our common stock from the Nasdaq Capital Market;

·

the potential liquidity and trading of our securities;

·

RMG’s history of incurring significant net losses and limited operating history;

·

the competitive environment in the advertising markets in which we operate;

·

the risk that the anticipated benefits of the combination of RMG or Symon, or of other acquisitions that we may complete, may not be fully realized;

·

the risk that any projections, including earnings, revenues, expenses, margins or any other financial items are not realized;

·

changing legislation and regulatory environments;

·

business development activities, including our ability to contract with, and retain, customers on attractive terms;

·

the general volatility of the market price of our common stock;

·

risks and costs associated with regulation of corporate governance and disclosure standards (including pursuant to Section 404 of the Sarbanes-Oxley Act); and

·

general economic conditions.


This prospectus contains statistical data that we obtained from various government and private publications.  We have not independently verified the data in these reports.  Statistical data in these publications also include projections based on a number of assumptions.  The air travel industry and the advertising industry, particularly the air travel media advertising sector and the broader digital out-of-home advertising sector, may not grow at the projected rates or at all.  The failure of the air travel industry and the advertising industry to grow at the projected rates may have a material adverse effect on our business and the market price of our securities.  Furthermore, if any one or more of the assumptions underlying the statistical data turns out to be incorrect, actual results may differ from the projections based on these assumptions.  You should not place undue reliance on these forward-looking statements. 

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual future results to differ materially from those projected or contemplated in the forward-looking statements.

All forward-looking statements included herein attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events. You should be aware that the occurrence of the events described in the “Risk Factors” section and elsewhere in this prospectus could have a material adverse effect on us.



19





USE OF PROCEEDS

We estimate that we will receive approximately $36.3 million in net proceeds from the sale of our common stock in this offering, or approximately $41.9 million if the underwriters’ over-allotment option is exercised in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We expect to use some or all of the net proceeds of this offering to repay a portion of our outstanding indebtedness and for general corporate purposes, which may include the funding of growth initiatives in sales and marketing, capital expenditures, working capital and/or strategic acquisitions. We have received a waiver from our senior lenders for these uses to the extent not otherwise permitted by the terms of our credit facilities, as discussed below. We have no current agreements or commitments with respect to any strategic acquisition.

Pursuant to the terms of our senior credit agreement with Kayne Anderson Credit Advisors, LLC, as administrative agent, and Comvest Capital II, L.P., as documentation agent, we are required to deposit any net proceeds of this offering which are not used to repay our senior indebtedness into a restricted deposit account, subject to a tri-party account control agreement in form and substance reasonably satisfactory to the administrative agent. Such proceeds would be available during the one year following the consummation of the offering for strategic acquisitions and/or capital expenditures, in each case to the extent permitted by the terms of the senior credit agreement. The senior credit agreement requires that any proceeds not used for such purposes within one year would be used to pay down the senior indebtedness. We have received a waiver from the senior lenders to permit us to use a portion of the proceeds of this offering other than to repay all or a portion of the senior indebtedness and/or as otherwise allowed by the terms of the senior credit agreement. The waiver requires that we use $10.0 million of the net proceeds of this offering (or 50% of the net proceeds, if less) to prepay a portion of our outstanding senior indebtedness (without the requirement to pay any prepayment penalty). We expect that we will use a significant portion of the remaining proceeds for general corporate purposes, including the prepayment of additional debt, in the manner described in the preceding paragraph. The senior credit facility accrues interest at the rate of 10% as of June 30, 2013, and will mature on April 19, 2018. The principal amount outstanding under the senior credit agreement was $24.0 million at June 1, 2013. Our junior credit facility accrues interest at a blended rate of 15% as of June 30, 2013, and will mature on October 19, 2018. The principal amount outstanding under our junior credit agreement was $10.0 million at June 30, 2013. This indebtedness was incurred to finance a portion of the purchase price of our acquisition of Symon in April 2013.

The amount and timing of what we actually spend for the purposes described above may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations and the other factors described in “Risk Factors.” Accordingly, our management will have discretion and flexibility in applying the net proceeds of this offering.

A $1.00 increase (decrease) in the assumed public offering price of $11.23 per share would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $3.6 million, assuming that the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discount and the estimated offering expenses we will pay. We may also increase or decrease the number of shares we are offering. A 100,000 increase (decrease) in the number of shares offered by us would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $1.1 million, based on an assumed offering price of $11.23 per share, after deducting the estimated underwriting discount and the estimated offering expenses we will pay. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual public offering price, number of shares offered and other terms of this offering determined at pricing.



20





CAPITALIZATION


The following table summarizes our capitalization as of the dates indicated:


·

on an actual basis;

·

on a pro forma basis, after giving effect to the acquisitions of RMG and Symon and related transactions, including the completion of our tender offer in connection with the RMG acquisition; and

·

on a pro forma as adjusted basis to reflect the estimated net proceeds of approximately $36.3 million we will receive from the sale of 3,561,888 shares of common stock offered by this prospectus at an assumed public offering price of $11.23 per share (which was the last reported sale price of our common stock on the Nasdaq Capital Market on July 10, 2013), after deducting the underwriting discount and the estimated offering expenses we will pay.


You should read this table in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.


 

 

As of

April 19,

2013

 

As of March 31, 2013

 

 

Symon Historical

 

RMG

Historical

 

SCG

Historical

 

Pro

Forma

 

Pro Forma

As Adjusted

 

 

(unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

5,666

$

739

$

100

$

8,828

$

45,128

Notes payable

 

--

 

--

 

--

 

34,000

 

34,000

Common stock

 

10

 

1

 

--

 

0.6

 

1

Additional paid-in capital

 

10,150

 

47,804

 

5,000

 

30,663

 

66,963

Retained earnings

 

7,183

 

 

 

--

 

4,561

 

4,561

Total stockholders’ equity (deficit)

 

16,974

 

(17,965)

 

5,000

 

35,875

 

72,175

 

 

 

 

 

 

 

 

 

 

 

Total capitalization

$

16,974

$

(17,965)

$

5,000

$

69,875

$

106,175


The number of shares to be outstanding after this offering is based on 6,285,583 shares outstanding on July 10, 2013, and excludes (i) 13,066,667 shares of common stock issuable upon the exercise of all warrants outstanding as of July 10, 2013, and (ii) 2,500,000 shares of common stock that are issuable under our 2013 equity incentive plan.

A $1.00 increase (decrease) in the assumed public offering price of $11.23 per share would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $3.6 million, assuming that the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discount and the estimated offering expenses we will pay. We may also increase or decrease the number of shares we are offering. A 100,000 increase (decrease) in the number of shares offered by us would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $1.1 million, based on an assumed offering price of $11.23 per share, after deducting the estimated underwriting discount and the estimated offering expenses we will pay. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual public offering price, number of shares offered and other terms of this offering determined at pricing.



21





MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Price for Equity Securities

Our common stock is quoted on the Nasdaq Capital Market, and our warrants and units are quoted on the OTC bulletin board, under the symbols “RMGN”, “SCGQW” and “SCGQU”, respectively. The Units commenced public trading on April 13, 2011 and unitholders may elect to separately trade the SCG Common Stock and Warrants underlying the Units. Our common stock was quoted on the OTC bulletin board until its listing on the Nasdaq Capital Market on May 2, 2012.

The following table sets forth the high and low bid prices as quoted on the Nasdaq Capital Market (with respect to our common stock) and OTCBB (with respect to our warrants and our units) for the period from April 18, 2011 through March 31, 2013.


 

RMGN

 

SCGQU

 

SCGQW

 

Common Shares

 

Units

 

Warrants

Quarter Ended

High

Low

 

High

Low

 

High

Low

 

 

 

 

 

 

 

 

 

06/30/13

$21.75

$9.44

 

$18.50

$10.20

 

$1.38

$0.36

03/31/13

$10.06

$9.30

 

$11.18

$9.92

 

$0.40

$0.19

12/31/12

$9.96

$9.81

 

$9.92

$9.92

 

$0.18

$0.11

09/30/12

$9.92

$9.63

 

$9.96

$9.75

 

$0.16

$0.15

06/30/12

$9.72

$9.65

 

$9.90

$9.74

 

$0.21

$0.21

03/31/12

$9.71

$9.54

 

$10.00

$9.90

 

$0.27

$0.22

12/31/11

$9.60

$9.46

 

$9.90

$9.82

 

$0.35

$0.30

09/30/11

$9.60

$9.44

 

$10.00

$9.75

 

$0.40

$0.35

06/30/11

$9.53

$9.53

 

$10.10

$9.90

 

N/A

N/A


As of July 10, 2013, the last reported closing prices of our common stock, units and warrants were $11.23, $16.00 and $0.75, respectively.  

Holders

As of July 10, 2013, there were 19 holders of record of our common stock, four holders of record of our warrants and one holder of record of our Units.

Dividends

To date, we have not paid any dividends on our common stock. The payment of any future cash dividend will be dependent upon revenue and earnings, if any, capital requirements and general financial condition. As a holding company without any direct operations, our ability to pay cash dividends may be limited to availability of cash provided to us by RMG or Symon through a distribution, loan or other transaction, and will be within the discretion of our board of directors. Our outstanding indebtedness also limits our ability to pay dividends. Investors should not purchase our common stock with the expectation of receiving cash dividends.



22





SELECTED FINANCIAL DATA OF SYMON


The following table sets forth selected financial data on a historical consolidated basis for our predecessor, Symon. You should read the following selected historical financial and operating data in conjunction with Symon’s historical financial statements and the related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Symon,” which are included elsewhere in this prospectus. The historical balance sheet data as of January 31, 2013, 2012 and 2011 of Symon and the statements of operations data for each of the three years in the period ended January 31, 2013 of Symon have been derived from the historical audited consolidated financial statements of Symon included elsewhere in this prospectus. The historical balance sheet data as of April 19, 2013 (the date of the consummation of the acquisition of Symon by SCG Financial Acquisition Corp.) of Symon and the statement of operations data for each of the interim periods ended April 19, 2013 and April 30, 2012 of Symon have been derived from the historical unaudited financial statements of Symon included elsewhere in this prospectus. Since the acquisition of Symon occurred prior to the end of Symon’s fiscal quarter, the results for the interim period in 2013 do not include the last eleven days of the month of April 2013, and, as a result, the period contains fewer days’ results when compared to the three months ended April 30, 2012. The results of operations for the interim period are not necessarily indicative of the results of operations which might be expected for the entire year. The selected consolidated historical financial information of Symon as of and for the years ended January 31, 2010 and 2009 was derived from unaudited consolidated financial statements of Symon not included in this prospectus.


 

 

For the

Period

February 1, 2013

Through

April 19,

 

For the

Three

Months

Ended

April 30,

 

For the Years Ended January 31,

 

 

2013

 

2012

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except per share data)

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

$

7,157

$

9,425

$

42,528

$

40,826

$

39,711

$

38,425

$

43,675

Operating income (loss)

 

(3,080)

 

1,011

 

5,418

 

6,052

 

3,022

 

1,978

 

1,774

Net income (loss)

 

(2,554)

 

645

 

3,491

 

3,926

 

1,765

 

960

 

(189)

Net income (loss) per share of Class L common stock

 

(2.67)

 

.65

 

3.49

 

3.93

 

1.77

 

0.96

 

(0.19)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of April 19,

 

 

 

As of January 31,

 

 

2013

 

 

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

31,085

 

 

$

37,944

$

32,545

$

33,213

$

36,632

$

37,636

Total liabilities

 

12,060

 

 

 

18,293

 

16,378

 

20,932

 

26,119

 

28,091

Total stockholders’ equity

 

16,974

 

 

 

19,651

 

16,167

 

12,281

 

10,513

 

9,545




23





SELECTED FINANCIAL DATA OF RMG


The following table sets forth selected financial data on a historical basis for RMG. You should read the following selected historical financial and operating data in conjunction with RMG’s historical financial statements and the related notes which are included elsewhere in this prospectus. The historical balance sheet data as of December 31, 2012, 2011 and 2010 of RMG and the statement of operations data for each of the three years in the period ended December 31, 2012 of RMG have been derived from the historical audited financial statements of RMG included elsewhere in this prospectus. The historical balance sheet data as of March 31, 2013 of RMG and the statement of operations data for each of the interim periods ended March 31, 2013 and 2012 of RMG have been derived from the historical unaudited financial statements of RMG included elsewhere in this prospectus. The results of operations for the interim period are not necessarily indicative of the results of operations which might be expected for the entire year.


 

 

As of and for the Three Months Ended March 31,

 

As of and for the

Years Ended December 31,

 

 

2013

 

2012

 

2012

 

2011

 

2010

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

Total Revenue

$

6,141

$

6,899

$

25,670

$

20,481

$

11,969

Loss from Operations

 

(2,725)

 

(1,279)

 

(5,596)

 

(10,896)

 

(11,594)

Net Loss

 

(4,241)

 

(2,686)

 

(11,536)

 

(14,916)

 

(11,810)

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

Total assets

$

19,538

 

 

$

22,182

$

28,351

$

13,565

Total liabilities

 

37,458

 

 

 

35,962

 

30,996

 

7,852

Total stockholders’ (deficit)

 

(17,920)

 

 

 

(13,779)

 

(2,646)

 

5,713




24





SELECTED FINANCIAL DATA OF SCG


The following table sets forth selected financial data on a historical basis for SCG. You should read the following selected historical financial and operating data in conjunction with SCG’s historical financial statements and the related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of SCG,” which are included elsewhere in this prospectus. The historical balance sheet data as of December 31, 2012 and 2011 of SCG and the statement of operations data for the year ended December 31, 2012 and for the period from January 5, 2011 (date of inception) to December 31, 2011 of SCG have been derived from the historical audited financial statements of SCG included elsewhere in this prospectus. The historical balance sheet data as of March 31, 2013 of SCG and the statement of operations data for each of the interim periods ended March 31, 2013 and 2012 of SCG have been derived from the historical unaudited financial statements of SCG included elsewhere in this prospectus. The results of operations for the interim period are not necessarily indicative of the results of operations which might be expected for the entire year.


 

 

As of and for the Three Months Ended March 31,

 

As of and for the

Year Ended

December 31,

 

As of and for the

Period from

January 5, 2011

to December 31,

 

 

2013

 

2012

 

2012

 

2011

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

(In thousands)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

Total Revenue

$

-

$

-

$

-

$

-

Loss from Operations

 

(1,928)

 

(238)

 

(1,862)

 

(400)

Net Income (Loss)

 

(3,358)

 

369

 

(1,208)

 

237

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

Total assets

$

80,464

 

 

$

80,415

$

80,405

Total liabilities

 

7,701

 

 

 

6,995

 

5,776

Total stockholders’ equity

 

5,000

 

 

 

5,000

 

5,000




25





UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL INFORMATION

The following unaudited condensed combined pro forma balance sheet as of March 31, 2013 and the unaudited condensed combined pro forma statement of operations for the three months ended March 31, 2013 and the year ended December 31, 2012 are based on the separate historical financial statements of SCG, Symon and RMG.

The unaudited condensed combined pro forma financial information is included for informational purposes only and does not purport to reflect the results of operations or financial position of SCG that would have occurred had it operated as a combined entity for the periods presented. The unaudited condensed combined pro forma financial information should not be relied upon as being indicative of SCG’s results of operations or financial position had the acquisitions of RMG and Symon occurred on the dates assumed. The unaudited condensed combined pro forma financial information also does not project its results of operations or financial position for any future period or date.

The unaudited condensed combined pro forma statements of operations give pro forma effect to the Transactions as if they had occurred on January 1, 2012.  The unaudited condensed combined pro forma balance sheet gives pro forma effect to the Transactions as if they had occurred on March 31, 2013.

On April 8, 2013, SCG consummated its acquisition of RMG pursuant to a merger agreement (the “RMG Merger Agreement”). Pursuant to the terms of the RMG Merger Agreement, RMG was merged with and into a subsidiary of SCG, with RMG continuing as the surviving corporation (the “RMG Merger”). As a result of the RMG Merger, RMG became a wholly-owned, indirect subsidiary of SCG. On April 19, 2013, SCG consummated its acquisition of Symon pursuant to a merger agreement (the “Symon Merger Agreement”). Pursuant to the terms of the Symon Merger Agreement, a subsidiary of SCG was merged with and into Symon, with Symon continuing as the surviving corporation (the “Symon Merger”). As a result of the Symon Merger, Symon became a wholly-owned subsidiary of SCG. SCG management has concluded, based on its evaluation of the facts and circumstances of the Transactions, that SCG was the acquirer of both RMG and Symon for accounting purposes.  SCG retained effective control of RMG and Symon. After the Transactions, a large percentage of the combined entity’s voting rights was held by existing SCG stockholders, primarily DRW and the Sponsor and its affiliates. Additionally, SCG elects all but one of the combined entity’s five board members. Although most of the senior management of RMG and Symon Holdings continue to serve as management of the combined entity, this was not considered determinative as all other relevant factors were not aligned with the management composition.  Each of the Transactions constitutes the acquisition of a business for purposes of Financial Accounting Standards Board’s Accounting Standard Codification 805, “Business Combinations,” or ASC 805.  As a result, the basis of the assets and liabilities of RMG and Symon Holdings will be adjusted to their fair values and the appropriate amount of goodwill will be recorded for the consideration given in excess of the fair values assigned to the net identifiable assets. All transaction costs should be expensed as incurred, except those costs associated with equity raising (which should be recorded to additional paid-in capital) and debt financing (which should be recorded as deferred financing costs).

The pro forma adjustments principally give effect to:


·

In connection with the RMG Merger, SCG paid to RMG’s stockholders an aggregate of (i) 400,001 shares of SCG common stock, 300,000 of which were deposited in an escrow account, (ii) $10,000 in cash and (iii) $10,000 deposited in an escrow account. Additionally, SCG paid, on behalf of RMG and its subsidiaries, all indebtedness of RMG and its subsidiaries under RMG’s credit agreement at a discounted amount equal to $23,500,000, paid with $21,000,000 of cash and $2,500,000 of shares of SCG common stock.

·

In connection with the Symon Merger, SCG paid to Symon’s stockholders $45,000,000 less (i) any indebtedness on Symon’s books on the closing date and (ii) the excess of Symon’s expenses incurred in association with the Symon Merger over $2,000,000.

·

The unaudited pro forma condensed combined financial statements reflect SCG purchasing the 4,551,228 shares of common stock validly tendered and not withdrawn pursuant to the tender offer consummated in connection with the RMG Merger (“the Tender Offer”), for an aggregate purchase price of approximately $45.5 million.


The following unaudited pro forma condensed combined financial information is based on, and should be read in conjunction with:


·

The audited financial statements of SCG for the year ended December 31, 2012 and the unaudited financial statements of SCG as of and for the three months ended March 31, 2013, which appear elsewhere in this prospectus.

·

The audited financial statements of RMG for the year ended December 31, 2012 and the unaudited financial statements of RMG as of and for the three months ended March 31, 2013, which appear elsewhere in this prospectus.

·

The audited financial statements of Symon for the year ended January 31, 2013 and the unaudited financial statements of Symon as of and for the period from February 1, 2013 to April 19, 2013, which appear elsewhere in this prospectus.



26





SCG Financial Acquisition Corp.

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2012


 

 

Reach

Media

Group

Holdings,

Inc.

(Historical)(A)

 

Symon

Holdings

Corporation

(Historical)(B)

 

SCG

Financial

Acquisition

Corp.

(Historical)(A)

 

Pro Forma

Adjustments

(with

4,551,228

Tenders

of Public

Shares)

 

Combined

Pro Forma

(with

4,551,228

Tenders

of Public

Shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

25,670,073

$

42,528,391

$

-

$

-

$

68,198,464

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

14,133,009

 

18,441,521

 

 

 

 

 

32,574,530

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin

 

11,537,064

 

24,086,870

 

-

 

-

 

35,623,934

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

17,132,795

 

18,669,163

 

1,861,689

 

(2,891,213)

(N)

39,706,698

 

 

 

 

 

 

 

 

 

3,225,357

(O)

 

 

 

 

 

 

 

 

 

 

(583,463)

(U)

 

 

 

 

 

 

 

 

 

 

2,680,900

(W)

 

 

 

 

 

 

 

 

 

 

(388,530)

(Z)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing

Operations

 

(5,595,731)

 

5,417,707

 

(1,861,689)

 

(2,043,051)

 

(4,082,764)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income:

 

 

 

 

 

 

 

 

 

 

 

Interest &

other income

 

 

 

 

 

53,586

 

(53,586)

(S)

0

 

Change in fair value of warrant liability

 

 

 

 

 

600,000

 

 

 

600,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest & Other

Expense

 

5,940,461

 

66,467

 

 

 

(5,940,461)

(T)

3,894,467

 

 

 

 

 

 

 

 

 

3,828,000

(BB)

 

 

Income Tax Expense

 

 

 

1,860,190

 

 

 

(1,860,190)

(X)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

$

(11,536,192)

$

3,491,050

$

(1,208,103)

$

1,876,014

$

(7,377,231)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

- basic and diluted

 

6,334,095

 

1,082,778

 

9,523,810

(Q)(FF)

 

 

6,285,583

(FF)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share

- basic and diluted

$

(1.82)

$

3.22

$

(0.13)

 

 

$

(1.17)

 




27





SCG Financial Acquisition Corp.

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Period Ended March 31, 2013


 

 

Reach

Media

Group

Holdings,

Inc.

(Historical)(A)

 

Symon

Holdings

Corporation

(Historical)(B)

 

SCG

Financial

Acquisition

Corp.

(Historical)(A)

 

Pro Forma

Adjustments

(with

4,551,228

Tenders

of Public

Shares)

 

Combined

Pro Forma

(with

4,551,228

Tenders

of Public

Shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

6,140,615

$

7,157,315

$

-

$

-

$

13,297,930

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

3,996,361

 

2,971,467

 

 

 

 

 

6,967,828

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin

 

2,144,254

 

4,185,848

 

-

 

-

 

6,330,102

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

4,913,757

 

7,265,748

 

1,927,548

 

(513,266)

(N)

15,873,676

 

 

 

 

 

 

 

 

 

806,339

(O)

 

 

 

 

 

 

 

 

 

 

(56,330)

(U)

 

 

 

 

 

 

 

 

 

 

572,904

(W)

 

 

 

 

 

 

 

 

 

 

(41,024)

(Z)

 

 

 

 

 

 

 

 

 

 

998,000

(HH)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Continuing

Operations

 

(2,769,503)

 

(3,079,900)

 

(1,927,548)

 

(1,766,623)

 

(9,543,574)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income:

 

 

 

 

 

 

 

 

 

 

 

Interest &

other income

 

64,791

 

 

 

9,993

 

(9,993)

(S)

64,791

 

Change in fair value of warrant liability

 

 

 

 

 

(1,440,000)

 

 

 

(1,440,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest & Other

Expense

 

1,580,642

 

14,553

 

 

 

(1,580,642)

(T)

941,553

 

 

 

 

 

 

 

 

 

927,000

(BB)

 

 

Income Tax Expense (Benefit)

 

 

 

(540,897)

 

 

 

 

 

(540,897)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

$

(4,285,354)

$

(2,553,556)

$

(3,357,555)

$

(1,122,974)

$

(11,319,439)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding

- basic and diluted

 

6,334,095

 

1,082,778

 

9,643,810

(Q)(FF)

 

 

6,285,583

(FF)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share

- basic and diluted

$

$(0.68)

$

(2.36)

$

(0.35)

 

 

$

(1.80)

 




28





SCG Financial Acquisition Corp and Subsidiaries

Unaudited Pro Forma Condensed Combined Balance Sheet

March 31, 2013


 

 

Reach

Media

Group

Holdings,

Inc.

(Historical)(A)

 

Symon

Holdings

Corporation

(Historical)(B)

 

SCG

Financial

Acquisition

Corp.

(Historical)(A)

 

Pro

Forma

Adjustments

(with

4,551,228

Tenders of

Public

Shares)

 

 

Combined

Pro

Forma

(with

4,551,228

Tenders of

Public

Shares)

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

739,052

$

5,666,273

$

100,155

$

80,010,531

(C)

$

8,828,067

 

 

 

 

 

 

 

 

(21,000,000)

(E)

 

 

 

 

 

 

 

 

 

 

(500,000)

(G)

 

 

 

 

 

 

 

 

 

 

(4,183,915)

(I)

 

 

 

 

 

 

 

 

 

 

(495,000)

(K)

 

 

 

 

 

 

 

 

 

 

(10,000)

(L)

 

 

 

 

 

 

 

 

 

 

(43,476,749)

(V)

 

 

 

 

 

 

 

 

 

 

(1,500,000)

(CC)

 

 

 

 

 

 

 

 

 

 

(10,000)

(D)

 

 

 

 

 

 

 

 

 

 

(45,512,280)

(J)

 

 

 

 

 

 

 

 

 

 

34,000,000

(BB)

 

 

 

 

 

 

 

 

 

 

5,000,000

(GG)

 

 

Cash equivalents held in

trust account

 

 

 

 

 

80,010,531

 

(80,010,531)

(C)

 

 

Inventory, net

 

 

 

3,477,488

 

 

 

 

 

 

3,477,488

Deferred tax assets

 

 

 

364,304

 

 

 

 

 

 

364,304

Accounts receivable

 

4,755,509

 

6,214,897

 

 

 

 

 

 

10,970,406

Prepaid expenses and other

 

163,729

 

840,628

 

353,755

 

 

 

 

1,358,112

Total current assets

$

5,658,290

$

16,563,590

$

80,464,441

$

(77,687,944)

 

$

24,998,377

Restricted Cash

 

80,000

 

 

 

 

 

 

 

 

80,000

Property and Equipment, net of depreciation

 

514,280

 

918,768

 

 

 

 

 

 

1,433,048

Other Assets

 

187,449

 

99,482

 

 

 

 

 

 

286,931

Intangible Assets, net of

amortization

 

7,579,269

 

2,528,113

 

 

 

(7,579,269)

(N)

 

39,801,000

 

 

 

 

 

 

 

 

18,475,000

(M)

 

 

 

 

 

 

 

 

 

 

(2,528,113)

(U)

 

 

 

 

 

 

 

 

 

 

21,326,000

(V)

 

 

Goodwill

 

5,474,351

 

10,975,355

 

 

 

(5,474,351)

(N)

 

31,718,737

 

 

 

 

 

 

 

 

(10,975,355)

(U)

 

 

 

 

 

 

 

 

 

 

9,826,403

(M)

 

 

 

 

 

 

 

 

 

 

14,722,703

(V)

 

 

 

 

 

 

 

 

 

 

6,519,291

(EE)

 

 

Total assets

$

19,493,639

$

31,085,308

$

80,464,441

$

(33,375,635)

 

$

97,667,753

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Notes payable, net of discount

 

30,228,877

 

 

 

 

 

(23,500,000)

(E)

 

 

 

 

 

 

 

 

 

 

(6,728,877)

(E)

 

 

Accounts payable

 

2,220,858

 

1,171,922

 

 

 

 

 

 

3,392,780

Accrued expenses and other

 

4,122,857

 

1,085,240

 

1,466,411

 

(2,016,045)

(I)

 

4,658,463

Notes payable

 

 

 

 

 

1,295,000

 

(800,000)

(K)

 

0

 

 

 

 

 

 

 

 

(495,000)

(K)

 

 

Deferred revenue

 

 

 

9,802,435

 

 

 

(3,422,433)

(V)

 

6,380,002

Deferred rent, current

 

2,718

 

 

 

 

 

 

 

 

2,718

Capital lease obligations,

Current

 

70,027

 

 

 

 

 

 

 

 

70,027

Total current liabilities

$

36,645,337

$

12,059,597

$

2,761,411

$

(36,962,355)

 

$

14,503,990

Notes Payable

 

 

 

 

 

 

 

34,000,000

(BB)

 

34,000,000

Capital Lease Obligations,

net of current

 

173,764

 

 

 

 

 

 

 

 

173,764

Deferred revenue - non current

 

 

 

1,336,696

 

 

 

(534,678)

(V)

 

802,018

Deferred Rent, net of current

 

227,504

 

 

 

 

 

 

 

 

227,504

Deferred offering cost

 

 

 

 

 

500,000

 

(500,000)

(G)

 

 

Warrant Liability

 

 

 

 

 

4,440,000

 

 

 

 

4,440,000

Deferred tax liabilities

 

 

 

714,612

 

 

 

6,519,291

(EE)

 

7,233,903

Other Non-Current Liabilities

 

411,684

 

 

 

 

 

 

 

 

411,684

Total liabilities

$

37,458,289

$

14,110,905

$

7,701,411

$

2,522,257

 

$

61,792,862




29





SCG Financial Acquisition Corp and Subsidiaries

Unaudited Pro Forma Condensed Combined Balance Sheet

March 31, 2013 (continued)


 

 

Reach

Media

Group

Holdings,

Inc.

(Historical)(A)

 

Symon

Holdings

Corporation

(Historical)(B)

 

SCG

Financial

Acquisition

Corp.

(Historical)(A)

 

Pro

Forma

Adjustments

(with

4,551,228

Tenders of

Public

Shares)

 

 

Combined

Pro

Forma

(with

4,551,228

Tenders of

Public

Shares)

Common Stock Subject to Possible Redemption

 

 

 

 

 

67,763,029

 

(67,763,029)

(F)

 

 

Stockholder's Equity (Deficit)

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

4,170

 

 

 

 

 

(4,170)

(D)

 

 

Common Stock

 

634

 

10,689

 

287

 

40

(D)

 

641

 

 

 

 

 

 

 

 

(634)

(D)

 

 

 

 

 

 

 

 

 

 

678

(F)

 

 

 

 

 

 

 

 

 

 

(10,689)

(Y)

 

 

 

 

 

 

 

 

 

 

6

(BB)

 

 

 

 

 

 

 

 

 

 

10

(HH)

 

 

 

 

 

 

 

 

 

 

25

(E)

 

 

 

 

 

 

 

 

 

 

(455)

(J)

 

 

 

 

 

 

 

 

 

 

50

(GG)

 

 

Additional paid-in capital

 

47,804,105

 

10,149,643

 

4,999,714

 

(40)

(D)

 

30,662,903

 

 

 

 

 

 

 

 

4,170

(D)

 

 

 

 

 

 

 

 

 

 

634

(D)

 

 

 

 

 

 

 

 

 

 

(10,000)

(D)

 

 

 

 

 

 

 

 

 

 

2,499,975

(E )

 

 

 

 

 

 

 

 

 

 

67,763,029

(F)

 

 

 

 

 

 

 

 

 

 

(678)

(F)

 

 

 

 

 

 

 

 

 

 

(65,773,559)

(H)

 

 

 

 

 

 

 

 

 

 

(45,511,825)

(J)

 

 

 

 

 

 

 

 

 

 

800,000

(K)

 

 

 

 

 

 

 

 

 

 

(10,000)

(L)

 

 

 

 

 

 

 

 

 

 

28,301,404

(M)

 

 

 

 

 

 

 

 

 

 

(13,053,620)

(N)

 

 

 

 

 

 

 

 

 

 

(13,503,468)

(U)

 

 

 

 

 

 

 

 

 

 

(149,395)

(Y)

 

 

 

 

 

 

 

 

 

 

(43,476,749)

(V)

 

 

 

 

 

 

 

 

 

 

(6)

(BB)

 

 

 

 

 

 

 

 

 

 

(1,500,000)

(CC)

 

 

 

 

 

 

 

 

 

 

6,532,894

(DD)

 

 

 

 

 

 

 

 

 

 

(10)

(HH)

 

 

 

 

 

 

 

 

 

 

40,005,814

(V)

 

 

 

 

 

 

 

 

 

 

4,999,950

(GG)

 

 

 

 

 

 

 

 

 

 

(209,079)

(AA)

 

 

Accumulated comprehensive income

 

 

 

(160,084)

 

 

 

160,084

(Y)

 

 

Notes receivable - restricted stock

 

 

 

(209,079)

 

 

 

209,079

(AA)

 

 

Retained Earnings/(Accumulated deficit)

 

(65,773,559)

 

7,183,234

 

 

 

65,773,559

(H)

 

4,561,007

 

 

 

 

 

 

 

 

6,728,877

(E)

 

 

 

 

 

 

 

 

 

 

(2,167,870)

(I)

 

 

 

 

 

 

 

 

 

 

(7,183,234)

(DD)

 

 

Total stockholder's equity

(deficit)

$

(17,964,650)

$

16,974,403

$

5,000,001

$

31,865,137

 

$

35,874,891

Total liabilities and stockholder's

Equity

$

19,493,639

$

31,085,308

$

80,464,441

$

(33,375,635)

 

$

97,667,753




30






(A)

These unaudited pro forma condensed combined financial statements assume that the Transactions occurred on March 31, 2013 for purposes of the balance sheet and on January 1, 2012 for purposes of the statement of operations.  The SCG and RMG financial statements are derived from the audited financial statements for the year ended December 31, 2012 and the unaudited financials for the period January 1, 2013 through March 31, 2013.

 

 

(B)

The Symon consolidated financial statements reflect audited amounts for the fiscal year ended January 31, 2013 and unaudited amounts for the period February 1, 2013 through April 19, 2013.  

 

 

(C)

Reflects the reclassification of $80,010,531 of cash and cash equivalents held in the trust account from SCG’s initial public offering that became available for transaction consideration, transaction expenses, redemption of shares of SCG common stock and the operating expenses of the combined company following the Transactions.

 

 

(D)

With respect to the RMG Merger, SCG has issued to the RMG shareholders 400,001 SCG shares of SCG common stock and $10,000 cash in exchange for all of the outstanding capital stock of RMG.  

 

 

(E)

There is a condition to closing the RMG Merger that a payment of $23,500,000 be made in complete satisfaction of RMG’s credit agreement. The $23,500,000 came from $21,000,000 cash remaining after redemption of shares of SCG common stock plus 250,000 of newly issued shares of SCG common stock.  The outstanding balance of the RMG credit agreement as of the balance sheet date was $30,228,877.  There is a $6,728,877 adjustment for the write-off of the debt that exceeds $23,500,000.

 

 

(F)

Reflects the reclassification of $67,763,029 of shares of SCG common stock subject to conversion to permanent equity.  An additional $678 adjustment is necessary to properly reflect the par amount of the SCG common stock subject to redemption.

 

 

(G)

On February 7, 2013, an amendment to the underwriting agreement by and between SCG and Lazard Capital Markets LLC was executed, whereby the deferred underwriting commission was reduced from $2,000,000 to $500,000.  The adjustment reflects the payment of $500,000 of the remaining deferred underwriter’s compensation from the initial public offering which was charged to capital at the time of SCG’s initial public offering, but not payable until the consummation of the Transactions.  The March 31, 2013 financial statements reflect the write-off of $1,500,000 of the commission.

 

 

(H)

Reflects the reclassification of RMG’s historical accumulated deficit as SCG is considered the “acquirer” for accounting purposes.

 

 

(I)

Total transaction costs were $8,800,826, of which $4,616,911 was paid prior to March 31, 2013 (April 19, 2013 with respect to Symon). This adjustment reflects the payment of $4,183,915 of costs related to the Transactions not paid as of March 31, 2013, $2,016,045 of which was accrued at March 31, 2013 (April 19, 2013 with respect to Symon). As this is a material nonrecurring charge which results directly from the Transactions, it is not included in the pro forma statement of operations.

 

 

(J)

Pursuant to an equity commitment letter and an assignment agreement, DRW purchased 2,354,450 shares of SCG common stock in privately negotiated transactions at a price per share that did not exceed $10.02 per share.  Pursuant to the equity commitment letter, the assignment agreement and related agreements, DRW agreed not to tender the DRW Shares in the tender offer and further waived its redemption rights in the event of SCG’s liquidation with respect to these shares.  This adjustment reflects the actual redemption of 4,551,228 shares for an aggregate amount equal to $45,512,280.  Based on the historical accounting for the shares and considering adjustment (F), the entire redemption price is allocated to SCG common stock and additional paid-in capital in the accompanying unaudited pro forma condensed combined balance sheet.

 

 

(K)

Reflects adjustment to convert $800,000 in outstanding Sponsor and affiliate loans that existed as of March 31, 2013 to warrants.  Adjustment also reflects payment of the remaining $495,000 in Sponsor and affiliate loans.

 

 

(L)

Reflects adjustment for the $10,000 deposited in the escrow account to be used to reimburse the RMG stockholder representative for any losses the stockholder representative should incur pursuant to the terms of the RMG Merger Agreement.

 

 

(M)

The RMG Merger constitutes the acquisition of a business for purposes of Financial Accounting Standards Board’s Accounting Standard Codification 805, “Business Combinations,” or ASC 805.  As a result, the basis of RMG’s assets and liabilities will be adjusted and the appropriate amount of intangible assets and goodwill will be recorded. The total purchase price for RMG is $27,512,010, which is comprised of 400,001 shares of SCG common stock valued at $9.98 per share on March 31, 2013 plus $23,500,000 for repayment in full under the RMG credit agreement ($21,000,000 paid in cash and $2,500,000 in shares of SCG common stock) plus $10,000 cash plus $10,000 deposited in the Escrow Account. 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


(N)

Reflects the removal of the RMG net intangible assets and goodwill existing on the balance sheet on March 31, 2013 and the previous amortization expense for the period ended March 31, 2013 and the year ended December 31, 2012.

 

 

(O)

Reflects the estimated amortization resulting from the intangible assets created upon consummation of the RMG Merger.  The amounts reported in the table below reflect total amortization on the intangibles:


 

 

Estimated

Fair Value

 

Estimated Life

 

2012

Amortization

 

1st Quarter 2013

Amortization

Partner/Vender Relationships

$

8,000,000

 

7 years

$

1,142,857

$

285,714

Customer Accounts/Relationships

 

3,000,000

 

6 years

 

500,000

 

125,000

Trademarks

 

750,000

 

5 years

 

150,000

 

37,500

Domain Names

 

25,000

 

2 years

 

12,500

 

3,125

Non-Compete Agreements

 

1,600,000

 

4 years

 

400,000

 

100,000

Technology

 

5,100,000

 

5 years

 

1,020,000

 

255,000

Total

$

18,475,000

 

 

$

3,225,357

$

806,339


(P)

Intentionally omitted.

 

 

(Q)

The presentation of weighted average shares outstanding includes all issued and outstanding shares of SCG common stock (including those shares subject to possible redemption).

 

 

(R)

Intentionally omitted.

 

 

(S)

Reflects the elimination of SCG’s trust income.

 

 

(T)

Reflects the elimination of RMG interest expense as all debt was repaid upon consummation of the Transactions.

 

 




31






(U)

Reflects the removal of the Symon’s net intangible assets and goodwill existing on its April 19, 2013 balance sheet and the related amortization expense for the year ended January 31, 2013 and the period from February 1, 2013 through April 19, 2013.

 

 

(V)

The Symon Merger constitutes the acquisition of a business for purposes of Financial Accounting Standards Board’s Accounting Standard Codification 805, “Business Combinations,” or ASC 805.  As a result, the basis of Symon’s assets and liabilities will be adjusted and the estimated fair value of intangible assets and the remainder to goodwill will be recorded.  The Deferred Revenue liability has been valued based on estimates of the cost of fulfilling the obligation plus a reasonable profit margin. This valuation resulted in a write-down of the current and non-current Deferred Revenue liability.  


Total goodwill attributable to the Symon Merger is $21,241,994 of which $14,722,703 is reported on the pro forma balance sheet as an adjustment to goodwill (noted as (V)).  The remaining $6,519,291 increase to goodwill results from the increase to the deferred tax liability referred to in (EE) below.  


The total purchase price for Symon is $43,476,749 ($45,000,000 less the $1,523,251 of transaction expenses that exceeded $2,000,000), which is comprised of $43,226,749 of cash to Symon’s shareholders and $250,000 to an expense fund and is reported as a $43,476,749 adjustment (V) to additional paid-in capital on the pro forma balance sheet. The sum of the $40,005,815 positive additional paid-in capital adjustment (V) and the $13,503,468 negative additional paid-in capital adjustment (U) on the pro forma balance sheet equals $26,502,347, which is the total increase to the net value of Symon’s asset and liabilities and is broken out as follows:


 

 

Additional Paid-In Capital Adjustment (V)

 

Additional Paid-In Capital

Adjustment (U)

Intangible Assets

$

21,326,000

$

 

Goodwill:

 

 

 

 

Initial Value

 

21,241,994

 

 

Deferred Tax Liability (EE)

 

(6,519,291)

 

 

Deferred Revenue:

 

 

 

 

Current

 

3,422,433

 

 

Non-Current

 

534,678

 

 

Historical Intangible Assets (U)

 

 

 

(2,528,113)

Historical Goodwill (U)

 

 

 

(10,975,355)

Total

$

40,005,814

$

(13,503,468)


 

Symon’s management has estimated the preliminary fair 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

 

(16,673,085)

Total Purchase Price

$

43,476,749


(W)

This adjustment reflects the estimated amortization resulting from the intangible assets created upon consummation of the Symon Merger.  The amounts reported in the table below reflect total amortization on the intangibles as if the acquisition occurred on February 1, 2012:


 

 

Estimated

Fair Value

 

Estimated Life

 

2012

Amortization

 

February 1 – April 19, 2013

Amortization

Software

$

4,482,000

 

5 years

$

896,400

$

191,559

Customer Relationships

 

14,276,000

 

8 years

 

1,784,500

 

381,345

Trademarks

 

2,568,000

 

indefinite

 

-

 

-

Total

$

21,326,000

 

 

$

2,680,900

$

572,904


(X)

Intentionally omitted.

 

 

(Y)

All of the outstanding capital stock of Symon will be exchanged for the consideration described in (V) above. This also reflects the elimination of the foreign currency translation adjustments in Accumulated Comprehensive Income.

 

 

(Z)

In connection with this offering, we will terminate a management services agreement. A pro forma adjustment has been made to eliminate the historical expense related to this agreement.

 

 

(AA)

Reflects the repayment of the notes by the Class A non-voting shareholders to Symon.  Pursuant to the Symon Merger Agreement, the repayment of these notes was netted out in determining the amount of proceeds to allocate to each shareholder.

 

 

(BB)

On April 19, 2013, SCG entered into 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 will bear 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.  The LIBOR Rate is subject to a floor of 1.5%.  The pro forma adjustment assumes a 10% rate of interest on the Senior Credit Facility.  On April 19, 2013, SCG entered into a five-year unsecured $2.5 million junior term loan (“Term Loan A”) and a five-year unsecured $7.5 million junior term loan (“Term Loan B”) (collectively, the “Junior Loans”).  The Term Loan A will bear interest at a fixed rate of 12% per annum and the Term Loan B will bear interest at a fixed rate equal to the greater of 16% per annum and the current rate of interest under the Senior Credit Facility plus 4%.  The pro forma adjustment assumes a 12% and 16% interest rate for the Term Loan A and Term Loan B, respectively.  In consideration for providing the credit, SCG issued the lenders 63,000 shares of SCG common stock.


Loan Description

 

2012 Interest Expense

 

1st Quarter 2013 Interest Expense

 

Outstanding Principal

As of March 31, 2013

Senior Credit Facility

$

2,310,000

$

540,000

$

21,000,000

Term Loan A

 

300,000

 

75,000

 

2,500,000

Term Loan B

 

1,218,000

 

312,000

 

7,883,000

Total

$

3,828,000

$

927,000

$

31,383,000


(CC)

Reflects the adjustment for payment of Lazard Freres & Co. LLC’s investment banking fee associated with the Transactions.

 

 

(DD)

Reflects the reclassification of Symon’s historical retained earnings as SCG is considered the “acquirer” for accounting purposes.

 

 

(EE)

Reflects the adjustment to appropriately report the Deferred Tax Liability account, resulting from the increased valuation of Symon’s intangible assets.




32






(FF)

The weighted average number of common shares outstanding (basic and diluted) are calculated as follows:


 

 

Historical SCG Common Shares

 

Post-Transactions Common Shares (after tender of 4,551,228 shares)

Sponsor Shares

 

1,523,810

 

1,523,810

Public Shares

 

8,000,000

 

3,448,772

Shares Issued to RMG Shareholders

 

 

 

400,001

Lender Shares from (E) above

 

 

 

250,000

Shares Issued Pursuant to Financing Commitment from (BB) above

 

 

 

100,000

Shares Issued to DOOH Investments Pursuant to Equity Commitment

 

**120,000

 

 

Shares Issued to DOOH Investments in Private Offering from (GG) below

 

 

 

500,000

Lenders from (BB) above

 

 

 

63,000

Total Number of Shares for Pro Forma Purposes

 

9,643,810

 

6,285,583

Number of Shares Subject to Possible Redemption

 

(6,776,303)

 

 

Total

 

2,867,507

 

 

 

 

 

 

 

** Shares were cancelled on April 29, 2013.

 

 

 

 


(GG)

On April 19, 2013, SCG entered into a Common Stock Purchase Agreement (the “DRW Purchase Agreement”) with DRW Commodities, LLC (“DRW”) pursuant to which DRW purchased 500,000 shares of the SCG’s common stock, at a purchase price of $10 per share.

 

 

(HH)

On March 1, 2013, SCG entered into a financing commitment for a standby credit facility, whereby SCG has issued the Trust 100,000 shares of SCG Common Shares in exchange for the commitment.  The issuance of the 100,000 shares results in an expense of $998,000, which is calculated based on a $9.98 closing price per share on March 31, 2013.  For purposes of the pro forma financial statements, it is assumed that the credit facility is not needed.  Although the 100,000 shares were not issued until April 29, 2013, the issuance of the shares has been recorded as an adjustment on these pro forma financial statements.




33





MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SYMON


The following discussion of the financial condition and results of operations of Symon should be read in conjunction with the sections of this prospectus entitled “Risk Factors — Risks Related to our Business”, “Forward-Looking Statements”, “Business” and the financial statements of Symon and the related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this prospectus.


Overview


Symon is a global provider of full-service digital signage solutions and enterprise-class media applications. Symon’s installations deliver real-time intelligent visual content that enhance the ways in which organizations communicate with their employees and customers. Through Symon’s suite of products, which includes proprietary software, software-embedded media players, LED displays, maintenance and support services, subscription-based and custom creative content services, installation and training services and third-party displays, Symon offers its clients complete one-stop digital signage solutions.


Symon serves the key cross-industry markets of contact center, employee communications, and supply chain. In addition, Symon also serves the hospitality and gaming markets.  Overall, Symon has large concentrations of customers in the financial services, telecommunications, manufacturing, healthcare, pharmaceuticals, utilities, transportation industries, and in federal, state and local governments.


Symon differentiates itself from its competitors by providing comprehensive end-to-end solutions that integrate seamlessly with its customers’ IT infrastructures and data and security environments. As a result, its solutions are relied upon by over 70% of North American Fortune 100 companies and thousands of overall customers in locations worldwide. Symon believes that it is one of the largest integrated digital signage full-solution providers globally.


Symon’s management team monitors its performance by comparing actual operating results (including revenue, gross margin, profitability and cash flows) to budgeted operating results.


Symon’s headquarters are in Plano, Texas from which it conducts business with its customers located in North America. Symon also has an office located in Hemel Hempstead, United Kingdom, which serves customers in the United Kingdom, Western Europe, India, and the Middle East, which we refer to as the “EMEA”. The office in Hemel Hempstead has a branch office in Dubai, United Arab Emirates.


Symon’s operating results may be affected by a variety of internal and external factors and trends described more fully in the section entitled “Risk Factors – Risks Related to our Business.”


Revenue


Symon derives its revenue as follows:


·

Product sales:


·

Licenses to use its proprietary software products;

·

Proprietary software-embedded media players;

·

Proprietary LED displays; and

·

Third-party flat screen displays and other third-party hardware.


·

Professional installation and training services


·

Customer support services:


·

Product maintenance services; and

·

Subscription-based and custom creative content services.




34





Revenue is recognized as outlined in “Critical Accounting Policies - Revenue Recognition” below.


Symon 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 Symon’s sales team, with 10% or less through resellers in 2013. In the United Kingdom, Western Europe, the Middle East and India, the situation is reversed, with around 85% of sales coming from the reseller channel. Overall, approximately 67% of Symon’s global revenues are derived from direct sales, with the remaining 33% generated through indirect partner channels.


Symon 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 Symon, generally with agreed-upon discounts, and resell the products and services to their customers, who are the end-users of the products and services. Symon does not offer contractual rights of return other than under standard product warranties and product returns from resellers have been insignificant to date. Symon therefore sells directly to its resellers and recognizes revenue on sales to resellers upon delivery, consistent with its recognition policies. Symon bills the resellers directly for the products and services they purchase. Software licenses and product warranties pass directly from Symon to the end-users.


Cost of Revenue


The cost of revenue associated with product sales consist primarily of the costs of media players, the costs of third-party flat screen displays, and the operating costs of Symon’s assembly and distribution center. The cost of revenue of professional services is the salary and related benefit costs of Symon’s employees and travel costs of Symon’s personnel providing installation and training services.  The cost of revenue of maintenance and content services consists of the salary and related benefit costs of personnel engaged in providing maintenance and content services and the annual costs associated with acquiring data from third-party content providers.


Operating Expenses


Symon’s operating expenses are comprised of the following components:


·

Research and development (“R&D”) costs consist of salaries and related benefit costs of R&D personnel and expenditures to outside third-party contractors. To date, all R&D expenses are expensed as incurred.

·

Sales and marketing expenses include salaries and related benefit costs of sales personnel, sales commissions, travel by sales and sales support personnel, and marketing and advertising costs.

·

General and administrative expenses consist primarily of salaries and related benefit costs of executives, accounting, finance, administrative, and IT personnel. Also included in this category are other corporate expenses such as rent, utilities, insurance, professional service fees, office expenses, travel by general and administrative personnel, and meeting expenses.

·

Depreciation and amortization costs include depreciation of Symon’s office furniture, fixtures, and equipment and amortization of intangible assets.


Sales and marketing expenses and general and administrative expenses comprise the majority of Symon’s Operating Expenses.  For the fiscal years ended January 31, 2013 and 2012, sales and marketing expenses comprised 41.5% and 42.5%, respectively, and general and administrative expenses comprised 41.2% and 38.3%, respectively, of total operating expenses. During the fiscal years ended January 31, 2013 and 2012, research and development expenses were 11.3% and 11.4%, respectively, of total operating expenses and depreciation and amortization expenses were 6.0% and 7.8%, respectively, of total operating expenses.


For the period ended April 19, 2013 and the three months ended April 30, 2012, sales and marketing expenses comprised 23.8% and 39.6%, respectively, and general and administrative expenses comprised 23.9% and 41.4%, respectively, of total operating expenses. During the period ended April 19, 2013 and the three months ended April 30, 2012, research and development expenses were 7.1% and 11.9%, respectively, of total operating expenses and depreciation and amortization expenses were 1.9% and 7.1%, respectively, of total operating expenses.


During the period ended April 19, 2013, Symon incurred costs of $3,143,251 associated with its acquisition by SCG. These acquisition costs represented 43.3% of total operating expenses for the period ended April 19, 2013.



35





Results of Operations


Comparison of the period ended April 19, 2013 and the three months ended April 30, 2012


The following table summarizes Symon’s operating results for the period ended April 19, 2013 and the three months ended April 30, 2012. Since the acquisition of Symon occurred prior to the end of Symon’s fiscal quarter, the results for the interim period in 2013 do not include the last eleven days of the month of April 2013, and, as a result, the period contains fewer days’ results when compared to the three months ended April 30, 2012.


 

 

April 19,

 

April 30,

 

 

 

 

 

 

2013

 

2012

 

Dollars

 

%

Revenue

$

7,157,315

$

9,424,646

$

(2,267,331)

 

-24.1%

Cost Of Revenue

 

2,971,467

 

3,887,982

 

(916,515)

 

-23.6%

Gross Profit

 

4,185,848

 

5,536,664

 

(1,350,816)

 

-24.4%

 

 

 

 

 

 

 

 

 

Operating Expenses -

 

 

 

 

 

 

 

 

Sales and marketing

 

1,729,871

 

1,789,860

 

(59,989)

 

-3.4%

General and administrative

 

1,739,348

 

1,875,596

 

(136,248)

 

-7.3%

Research and development

 

512,985

 

538,047

 

(25,062)

 

-4.7%

Acquisition expenses………………

 

3,143,251

 

0

 

3,143,251

 

 

Depreciation and amortization

 

140,293

 

321,879

 

(181,586)

 

-56.4%

    Total Operating Expenses

 

7,265,748

 

4,525,382

 

2,740,366

 

-60.6%

Operating Income (Loss)

 

(3,079,900)

 

1,011,282

 

(4,091,182)

 

-404.6%

Interest and Other - Net

 

(14,553)

 

(47,466)

 

32,913

 

-69.3%

Income Before Income Taxes

 

(3,094,453)

 

963,816

 

(4,058,269)

 

-421.1%

Income Tax Expense (Benefit)

 

(540,897)

 

318,696

 

(859,593)

 

-269.7%

Net Income

$

(2,553,556)

$

645,120

$

(3,198,676)

 

-495.8%


Revenue


Revenue was $7,157,315 and $9,424,646 for the period February 1 through April 19, 2013 (hereafter referred to as the period ended April 19, 2013) and the three months ended April 30, 2012, respectively. This comparison reflects that revenues were $2,267,331 or 24.1% less in the period ended April 19, 2013. A large part of this difference in revenues was due to the fact that Symon was purchased by SCG on April 19, 2013 and, as a result, the period ended April 19, 2013 does not include the last eleven days of the month of April 2013. As a result, the period ended April 19, 2013 contains fewer days’ results when compared to the three months ended April 30, 2012. The exclusion of sales for the last eleven days of the month of April 2013 had a negative effect because Symon traditionally receives the majority of customer orders towards the end of each month. The effect of this shorter accounting period is demonstrated when comparing revenues for the full three months ended April 30, 2013 with revenues for the three months ended April 30, 2012. This comparison reflects the fact that sales for the three months ended April 30, 2013 totaled $9,282,449 which was only $142,197, or 1.5%, less than for the three months ended April 30, 2012.


Symon experienced a $652,355 or 56.0% decrease in sales of its proprietary software in the period ended April 19, 2013. In addition, sales of software-embedded media players were $286,148 or 21.6% lower and sales of third-party products were $300,996 or 92.5% less in the period ended April 19, 2013.


Symon also recognized $581,767 or 13.9% less maintenance and content services revenues in the period ended April 19, 2013.  Symon continued to sell maintenance and content services with the majority of its new orders and renewed a large percentage of its customers’ maintenance and content services contracts.


During the period ended April 19, 2013 and the three months ended April 30, 2012, Symon’s revenues were derived as follows.


 

 

April 19,

 

April 30,

 

 

2013

 

2012

Revenue -

 

 

 

 

Products

 

31.3%

 

40.1%

Professional services

 

18.5%

 

15.6%

Maintenance and content

 

50.2%

 

44.3%

Total

 

100.0%

 

100.0%




36





The following table reflects Symon’s sales on a geographic basis.


 

 

April 19,

 

April 30,

 

 

2013

 

2012

North America

$

5,137,363

 

71.8%

$

6,900,814

 

73.2%

EMEA

 

2,019,952

 

28.2%

 

2,523,832

 

26.8%

Total

$

7,157,315

 

100.0%

$

9,424,646

 

100.0%


North America and EMEA sales were $1,763,451 and $503,880 less, respectively, in the period ended April 19, 2013 than in the three months ended April 30, 2012. Sales in both geographies were lower for the period ended April 19, 2013 because of the shorter accounting period. In addition, sales results in North America are behind last year’s performance.


Cost of Revenue


Cost of revenue totaled $2,971,467 and $3,887,982 for the period ended April 19, 2013 and the three months ended April 30, 2012, respectively. This decrease in the total cost of revenue was primarily attributable to the decrease in product sales for the period ended April 19, 2013. Symon’s overall gross margin on sales in the period ended April 19, 2013 decreased to 58.5% from 58.7%. This slightly lower gross margin on sales was primarily attributable to the fact that sales of proprietary software, on which Symon realizes its highest gross margin, comprised a lower percentage of Symon’s sales in the period ended April 19, 2013 than in the three months ended April 30, 2012.


The following table summarizes the composition of Symon’s revenue and cost of revenue for the period ended April 19, 2013 and the three months ended April 30, 2012.


 

 

April 19,

 

 

 

April 30,

 

 

 

 

 

 

 

 

2013

 

%

 

2012

 

%

 

Dollars

 

%

Revenue -

 

 

 

 

 

 

 

 

 

 

 

 

Products

$

2,239,236

 

31.3%

$

3,778,954

 

40.1%

$

(1,539,718)

 

-40.7%

Professional services

 

1,323,559

 

18.5%

 

1,469,405

 

15.6%

 

(145,846)

 

-9.9%

Maintenance and content

 

3,594,520

 

50.2%

 

4,176,287

 

44.3%

 

(581,767)

 

-13.9%

Total

$

7,157,315

 

100.0%

$

9,424,646

 

100.0%

$

(2,267,331)

 

-24.1%

Cost of Revenue -

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

1,498,135

 

50.4%

 

2,156,060

 

55.5%

 

(657,925)

 

-30.5%

Professional services

 

861,640

 

29.0%

 

1,078,972

 

27.7%

 

(217,332)

 

-20.1%

Maintenance and content

 

611,692

 

20.6%

 

652,950

 

16.8%

 

(41,258)

 

-6.3%

Total

$

2,971,467

 

100.0%

$

3,887,982

 

100.0%

$

(916,515)

 

-23.6%


The following table reflects Symon’s gross margins for the period ended April 19, 2013 and the three months ended April 30, 2012:


Products

$

741,101

$

1,622,894

 

 

33.1%

 

42.9%

Professional services

$

461,919

$

390,433

 

 

34.9%

 

26.6%

Maintenance and content

$

2,982,828

$

3,523,337

 

 

83.0%

 

84.4%


Operating Expenses


Operating expenses totaled $7,265,748 and $4,525,382 for the period ended April 19, 2013 and the three months ended April 30, 2012, respectively. This represents a $2,740,366 or 60.6% increase in operating expenses for the period ended April 19, 2013. The major fluctuations in operating expenses were as follows:


·

Symon incurred $3,143,251 of costs associated with its acquisition by SCG Financial Acquisition Corp.;

·

The period ended April 19, 2013 did not include the last eleven days of the month of April 2013, consequently less operating expenses were incurred in certain areas because of the shorter accounting period;

·

Although the period ended April 19, 2013 had fewer accounting days than the three months ended April 30, 2012, Symon added additional personnel over the last nine months and it is expected that both selling and marketing expenses and general and administrative expenses will be higher in 2013 than in 2012; and

·

Depreciation and amortization expense decreased because certain intangible assets became fully amortized in 2012.



37





Interest and other – Net

Interest expense was not material in the period ended April 19, 2013 or the three months ended April 30, 2012.


Comparison of the Fiscal Year ended January 31, 2013 to the Fiscal Year ended January 31, 2012


The following table summarizes Symon’s operating results for the fiscal year ended January 31, 2013 compared to the fiscal year ended January 31, 2012.


 

 

Fiscal Year Ended January 31,

 

Changes from Previous Year

 

 

2013

 

2012

 

Dollars

 

%

Revenue

$

42,528,391

$

40,826,490

$

1,701,901

 

4.2%

Cost Of Revenue

 

18,441,521

 

17,195,168

 

1,246,353

 

7.2%

Gross Profit

 

24,086,870

 

23,631,322

 

455,548

 

1.9%

 

 

 

 

 

 

 

 

 

Operating Expenses -

 

 

 

 

 

 

 

 

Research and development

 

2,103,078

 

1,994,581

 

108,497

 

5.4%

Sales and marketing

 

7,760,739

 

7,474,354

 

286,385

 

3.8%

General and administrative

 

7,693,398

 

6,740,205

 

953,193

 

14.1%

Depreciation and amortization

 

1,111,948

 

1,369,747

 

(257,799)

 

-18.8%

    Total Operating Expenses

 

18,669,163

 

17,578,887

 

1,090,276

 

6.2%

Operating Income

 

5,417,707

 

6,052,435

 

(634,728)

 

-10.5%

Interest and Other - Net

 

(66,467)

 

(212,262)

 

145,795

 

68.7%

Income Before Income Taxes

 

5,351,240

 

5,840,173

 

(488,933)

 

-8.4%

Income Tax Expense

 

1,860,190

 

1,913,881

 

(53,691)

 

-2.8%

Net Income

$

3,491,050

$

3,926,292

$

(435,242)

 

-11.1%


Revenue


Revenue was $42,528,391 and $40,826,490 for the fiscal year ended January 31, 2013 and 2012, respectively. This represents a $1,701,901 or 4.2% increase in revenues for the fiscal year ended January 31, 2013. This increase in sales was primarily due to increased sales by Symon’s office in Dubai, United Arab Emirates.


Symon experienced an $821,826 or 6.4% decrease in sales of its proprietary software, software-embedded media players and LED displays. Symon’s sales pipeline remained strong throughout the year; however, several large sales orders that were expected to be received by year-end were not received. Symon had an increase of $2,956,900 or 69.7% in sales of third-party products. This was primarily due to a major order from a customer in Saudi Arabia that was generated by the Dubai office. Symon also had a $710,764 or 10.2% decrease in professional services during the fiscal year ended January 31, 2013. This decrease was caused by customer delays in installation projects and the fact that Symon had less revenues associated with services provided by third-party contractors. Revenue from maintenance and content services increased $277,591 or 1.7% during the fiscal ended January 31, 2013. Symon continued to sell maintenance and content services with the majority of its new orders and renewed a large percentage of its customers’ maintenance and content services contracts.


During the fiscal years ended January 31, 2013 and 2012, Symon’s revenues were derived as follows.


 

 

Fiscal Year Ended January 31,

 

 

2013

 

2012

Revenue -

 

 

 

 

Products

 

45.1%

 

41.8%

Professional services

 

14.8%

 

17.1%

Maintenance and content

 

40.1%

 

41.1%

Total

 

100.0%

 

100.0%


The following table reflects Symon’s sales on a geographic basis.


 

 

Fiscal Year Ended January 31,

 

 

2013

 

2012

North America

$

29,750,058

 

70.0%

$

29,610,611

 

72.5%

EMEA

 

12,778,333

 

30.0%

 

11,215,879

 

27.5%

Total

$

42,528,391

 

100.0%

$

40,826,490

 

100.0%




38





North America and EMEA sales were $139,447 and $1,562,454 higher, respectively, in the fiscal year ended January 31, 2013 than in the fiscal year ended January 31, 2012. The primary reason for the increase in EMEA sales was the large increase in sales volume generated by the Dubai office.


Cost of Revenue


Cost of revenue totaled $18,441,521 and $17,195,168 for the fiscal years ended January 31, 2013 and 2012, respectively. This increase in the total cost of revenue is primarily attributable to the increase in product sales volume for the fiscal year ended January 31, 2013. Symon’s overall gross margin on sales in the fiscal year ended January 21, 2013 decreased to 56.6% from 57.9%. This lower gross margin on sales was primarily attributable to the fact that sales of third-party products, on which Symon realizes a lower gross margin, comprised a higher percentage of Symon’s sales than in the previous year.


The following table summarizes Symon’s gross margins for the fiscal years ended January 31, 2013 and 2012.


 

 

Fiscal Year Ended January 31,

 

Changes from Previous Year

 

 

2013

 

%

 

2012

 

%

 

Dollars

 

%

Revenue -

 

 

 

 

 

 

 

 

 

 

 

 

Products

$

19,185,359

 

45.1%

$

17,050,285

 

41.8%

$

2,135,074

 

12.5%

Professional services

 

6,277,549

 

14.8%

 

6,988,313

 

17.1%

 

(710,764)

 

-10.2%

Maintenance and content

 

17,065,483

 

40.1%

 

16,787,892

 

41.1%

 

277,591

 

1.7%

Total

$

42,528,391

 

100.0%

$

40,826,490

 

100.0%

$

1,701,901

 

4.2%

Cost of Revenue -

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

11,581,070

 

62.8%

 

10,034,866

 

58.4%

 

1,546,204

 

15.4%

Professional services

 

4,352,611

 

23.6%

 

4,729,414

 

27.5%

 

(376,803)

 

-8.0%

Maintenance and content

 

2,507,840

 

13.6%

 

2,430,888

 

14.1%

 

76,952

 

3.2%

Total

$

18,441,521

 

100.0%

$

17,195,168

 

100.0%

$

1,246,353

 

7.2%

Gross Margin -

 

 

 

 

 

 

 

 

 

 

 

 

Products

$

7,604,289

 

 

$

7,015,419

 

 

 

 

 

 

 

 

39.6%

 

 

 

41.1%

 

 

 

 

 

 

Professional services

$

1,924,938

 

 

$

2,258,899

 

 

 

 

 

 

 

 

30.7%

 

 

 

32.3%

 

 

 

 

 

 

Maintenance and content

$

14,557,643

 

 

$

14,357,004

 

 

 

 

 

 

 

 

85.3%

 

 

 

85.5%

 

 

 

 

 

 


Operating Expenses


Operating expenses totaled $18,669,163 and $17,578,887 for the fiscal years ended January 31, 2013 and 2012, respectively. This represents a $1,090,276 or 6.2% increase in operating expenses for the fiscal year ended January 31, 2013. The major fluctuations in operating expenses were as follows:


·

Research and development expenses were $108,497 higher primarily due to incentive compensation paid to software developers to complete a year-end project;

·

Sales and marketing expenses increased $286,385 due primarily to additional sales personnel;

·

General and administrative expenses increased $953,193 because of professional fees incurred in connection with the SCG transaction and because of additional personnel; and

·

Depreciation and amortization expense decreased $257,799 primarily because certain intangible assets became fully amortized.


Interest and other – Net


Interest expense decreased significantly because Symon had repaid the vast majority of its bank debt by October 31, 2011.




39





Comparison of the Fiscal Year Ended January 31, 2012 to the Fiscal Year Ended January 31, 2011


The following table summarizes Symon’s operating results for the fiscal year ended January 31, 2012 compared to the fiscal year ended January 31, 2011.


 

 

Fiscal Year Ended January 31,

 

Changes from Previous Year

 

 

2012

 

2011

 

Dollars

 

%

Revenue

$

40,826,490

$

39,710,521

$

1,115,969

 

2.8%

Cost Of Revenue

 

17,195,168

 

15,978,531

 

1,216,637

 

7.6%

Gross Profit

 

23,631,322

 

23,731,990

 

(100,668)

 

-.4%

 

 

 

 

 

 

 

 

 

Operating Expenses -

 

 

 

 

 

 

 

 

Research and development

 

1,994,581

 

2,489,844

 

(495,263)

 

-19.9%

Sales and marketing

 

7,474,354

 

8,212,914

 

(738,560)

 

-9.0%

General and administrative

 

6,740,205

 

7,728,410

 

(988,205)

 

-12.8%

Depreciation and amortization

 

1,369,747

 

2,279,096

 

(909,349)

 

-39.9%

Total Operating Expenses

 

17,578,887

 

20,710,264

 

(3,131,377)

 

-15.1%

Operating Income

 

6,052,435

 

3,021,726

 

3,030,709

 

100.3%

Interest and Other

 

(212,262)

 

(385,234)

 

172,972

 

44.9%

Income Before Income Taxes

 

5,840,173

 

2,636,492

 

3,203,681

 

121.5%

Income Tax Expense

 

1,913,881

 

871,061

 

1,042,820

 

119.7%

Net Income

$

3,926,292

$

1,765,431

$

2,160,861

 

122.4%


Revenue


Revenue was $40,826,490 and $39,710,521 for the fiscal years ended January 31, 2012 and 2011, respectively. This represents a $1,115,969 or 2.8% increase in revenue. A large portion of this increase was attributable to the sales generated by Symon’s office in Dubai, which opened in August 2009. This office sells products and services to customers in the Middle East.


Overall, Symon realized a $287,227 or 1.7% increase in product sales. This net sales increase in product sales was primarily attributable to a $646,885 or 18.0% increase in sales of third-party products by Symon’s office in Dubai. This increase was offset by a $359,658 or 2.7% decrease in sales of Symon’s proprietary software, software-embedded media players, and LED displays. In addition, Symon realized a $409,242 or 6.2% increase in professional services, and a $420,779 or 2.6% increase in maintenance and content services revenues.


During the fiscal years ended January 31, 2012 and 2011, Symon’s revenue was derived as follows.


 

 

Fiscal Year Ended January 31,

 

 

2012

 

2011

Revenue -

 

 

 

 

Products

 

41.8%

 

42.2%

Professional services

 

17.1%

 

16.6%

Maintenance and content

 

41.1%

 

41.2%

Total

 

100.0%

 

100.0%


The following table reflects Symon’s revenue on a geographic basis.


 

 

Fiscal Year Ended January 31,

 

 

2012

 

2011

North America

$

29,610,611

 

72.5%

$

30,430,458

 

76.6%

EMEA

 

11,215,879

 

27.5%

 

9,280,063

 

23.4%

Total

$

40,826,490

 

100.0%

$

39,710,521

 

100.0%


North American sales were $819,847 or 2.7% less and EMEA sales were $1,935,816 or 20.9% higher in the fiscal year ended January 31, 2012. The increase in EMEA sales was primarily attributable to sales generated by Symon’s office in Dubai, United Arab Emirates.




40





Cost of Revenue


Cost of revenue totaled $17,195,168 and 15,978,531 for the fiscal years ended January 31, 2012 and 2011, respectively. This increase in the total cost of revenue was due to the costs associated with increased product sales. Symon’s overall gross margin on sales decreased to 57.9% from 59.8%.


The following table summarizes Symon’s gross margins for the fiscal years ended January 31, 2012 and 2011.


 

 

Fiscal Year Ended January 31,

 

Changes from Previous Year

 

 

2012

 

%

 

2011

 

%

 

Dollars

 

%

Revenue -

 

 

 

 

 

 

 

 

 

 

 

 

Products

$

17,050,285

 

41.8%

$

16,763,058

 

42.2%

$

287,227

 

1.7%

Professional services

 

6,988,313

 

17.1%

 

6,580,350

 

16.6%

 

407,963

 

6.2%

Maintenance and content

 

16,787,892

 

41.1%

 

16,367,113

 

41.2%

 

420,779

 

2.6%

Total

$

40,826,490

 

100.0%

$

39,710,521

 

100.0%

$

1,115,969

 

2.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenue -

 

 

 

 

 

 

 

 

 

 

 

 

Products

$

10,034,866

 

58.4%

$

8,916,616

 

55.8%

$

1,118,250

 

12.5%

Professional services

 

4,729,414

 

27.5%

 

4,618,217

 

28.9%

 

111,197

 

2.4%

Maintenance and content

 

2,430,888

 

14.1%

 

2,443,698

 

15.3%

 

(12,810)

 

.1%

Total

$

17,195,168

 

100.0%

$

15,978,531

 

100.0%

$

1,216,637

 

7.6%

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin -

 

 

 

 

 

 

 

 

 

 

 

 

Products

$

7,015,419

 

 

$

7,846,442

 

 

 

 

 

 

 

 

41.1%

 

 

 

46.8%

 

 

 

 

 

 

Professional services

$

2,258,899

 

 

$

1,962,133

 

 

 

 

 

 

 

 

32.3%

 

 

 

29.8%

 

 

 

 

 

 

Maintenance and content

$

14,357,004

 

 

$

13,923,415

 

 

 

 

 

 

 

 

85.5%

 

 

 

85.1%

 

 

 

 

 

 


Operating Expenses


Operating expenses totaled $17,578,887 and $20,710,264 for the fiscal years ended January 31, 2012 and 2011, respectively. This represents a $3,131,377 decrease in operating expenses during the fiscal year ended January 31, 2012. The major fluctuations in operating expenses were as follows.


·

Research and development expenses were $495,263 or 19.9% less due to fewer R&D personnel and reduced use of outside contractors.

·

Sales and marketing expenses were $738,560 or 9.0% lower primarily due to a reduction in sales salaries and commissions of $563,276 or 8.4% and a reduction in advertising and marketing expenses of $201,128 or 29.5%.

·

General and administrative expenses were $988,205 or 12.8% lower due to a reduction in personnel.

·

Depreciation and amortization was $909,349 or 39.9% less primarily due to the fact that certain intangible assets became fully amortized.


Interest and other – Net


Interest expense decreased significantly in the fiscal year ended January 31, 2012 because Symon had repaid the vast majority of its bank debt by October 31, 2011.


Liquidity and Capital Resources


Historically, Symon’s primary source of liquidity has been cash generated from the sales of products and services to its global customers. Symon’s primary uses of cash has been payments of operating expenses, purchases of inventory, and capital expenditures.


We believe that the proceeds from this offering, together with cash generated from sales, will be sufficient to meet working capital requirements and anticipated capital expenditures of the combined business for at least the next twelve months.



41





At April 19, 2013, Symon’s cash and cash equivalents balance was $5,666,273. This represents a decrease of $4,536,896 from Symon’s cash and cash equivalents balance of $10,203,169 at January 31, 2013. This decrease was due primarily to the payments of costs incurred in connection with Symon’s acquisition by SCG.


Symon’s cash balance at April 19, 2013 and January 31, 2013 included cash and cash equivalents of $3,837,733 and $4,593,406, respectively, in bank accounts of its subsidiary located outside the United States. Symon currently plans to use this cash to fund its on-going foreign operations. If Symon were to repatriate the cash held by its subsidiary located outside the United States, Symon may incur tax liabilities.


At April 19, 2013 and January 31, 2013, Symon had no outstanding bank debt. Symon’s bank line of credit of $2,000,000 expired on April 4, 2013; on April 19, 2013, SCG entered into the credit arrangements described under “Recent Developments” below.


Symon has generated and used cash as follows:


 

 

February 1, 2013

to April 19,

 

Three Months

Ended April 30,

 

Fiscal Year Ended January 31,

 

 

2013

 

2012

 

2013

 

2012

 

2011

Operating cash flow

$

(4,329,282)

 

825,311

$

6,962,831

$

6,119,897

$

4,613,036

Investing cash flow

 

(86,470)

 

(139,015)

 

(575,106)

 

(616,581)

 

(560,550)

Financing cash flow

 

0

 

0

 

0

 

(5,000,000)

 

(6,550,000)


Operating Activities


The decrease in cash from operating activities for the period ended April 19, 2013 as compared to the three months ended April 30, 2012 was primarily due to the significant expenses incurred in connection with Symon’s acquisition by SCG and changes in the following operating assets and liabilities:


·

Accounts payable were reduced by $2,978,808 in the period ended April 19, 2013. The largest single payment was to a vendor that had supplied hardware products that were sold to a customer in the Middle East. Symon had received preferential payment terms from this vendor;

·

Deferred revenue decreased by $372,579 for the period ended April 19, 2013 as compared to an increase of $416,410 for the three months ended April 30, 2012. A portion of this was due to the shorter accounting period in 2013;

·

Accounts receivable decreased by $2,846,332 for the period ended April 19, 2013 due to more successful collection efforts; and

·

Inventory decreased by $488,722 for the period ended April 19, 2013 because Symon maintained inventory at a more optimum level. Inventory increased by $627,043 for the three months ended April 30, 2012 because Symon decided to increase inventory levels in order to assure adequate products were on hand for anticipated future sales.


The increase in cash from operating activities for the fiscal year ended January 31, 2013 as compared to the fiscal year ended January 31, 2012 was primarily due to changes in the following operating assets and liabilities:


·

Accounts payable increased by $1,684,425 primarily because Symon negotiated extended payment terms with a large manufacturer of hardware products;

·

Deferred revenue increased by $686,801 due to an increase in deferred revenue related to maintenance and content services contracts;

·

Accounts receivable increased by $442,329 due to the high level of sales in the fourth quarter; and

·

Inventory decreased by $607,540 because Symon closely controlled inventory levels.


The increase in cash from operating activities for the fiscal year ended January 31, 2012 as compared to the fiscal year ended January 31, 2011 was primarily due to higher sales and profitability.


Investing Activities


Symon used slightly less cash in investing activities in the period ended April 19, 2013 as compared to the three months ended April 30, 2013 because it acquired fewer capital assets during the period.




42





The decrease in cash used in the fiscal year ended January 31, 2013 as compared to the fiscal year ended January 31, 2012 was due to final payment made in connection with a previously completed business combination.


The increase in cash used in the fiscal year ended January 31, 2012 as compared to the fiscal year ended January 31, 2011 was due primarily to higher capital expenditures in the fiscal year ended January 31, 2012. Symon also made payments to a former stockholder in the fiscal years ended January 31, 2012 and 2011 in connection with a previous business combination.


Financing Activities


Cash used in financing activities were payments of Symon’s outstanding bank debt, which was incurred at the time of Symon’s being acquired by affiliates of Golden Gate Capital. The bank debt was paid off in advance of its maturity date.


Recent Developments


In connection with our acquisition of Symon on April 19, 2013, we entered into a Senior Credit Agreement and a Junior Credit Agreement.


Senior Credit Agreement


On April 19, 2013, we entered into a Credit Agreement by and among us and certain of our direct and indirect domestic subsidiaries party thereto from time to time (including Symon and RMG) as borrowers (the “Borrowers”), certain of our direct and indirect domestic subsidiaries party thereto from time to time as guarantors (the “Guarantors” and, together with the Borrowers, collectively, the “Loan Parties”), the financial institutions from time to time party thereto as lenders (the “Senior Lenders”), Kayne Anderson Credit Advisors, LLC, as administrative agent (the “Senior Administrative Agent”), and Comvest Capital II, L.P., as Documentation Agent (the “Senior Credit Agreement”). 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 will bear 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%.


We are 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, we may prepay the principal of the Senior Credit Facility in whole or in part. In addition, we are 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 us and our 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 us or any of the other Loan Parties; and (iii) 100% of any cash received by us 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.


In the case of a debt or equity issuance (including this offering), we are permitted to deposit the proceeds of the issuance into a restricted deposit account, subject to a tri-party account control agreement in form and substance reasonably satisfactory to the administrative agent. Such proceeds will be available during the one year following the sale of such securities for strategic acquisitions and/or capital expenditures, in each case to the extent permitted by the terms of the Senior Credit Agreement. The Senior Credit Agreement requires that any proceeds not used for such purposes within one year would be used to pay down the Senior Credit Facility.


We will not be 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, we will be required to pay the 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.




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The Senior Credit Agreement includes customary representations and warranties, restrictive covenants, including covenants limiting the ability of we 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.


Junior Credit Agreement


On April 19, 2013, we entered into a Junior Credit Agreement by and among the Borrowers, the Guarantors, the financial institutions from time to time party thereto as lenders (the “Junior Credit Agreement Lenders”), and Plexus Fund II, L.P., as administrative agent for the Junior Credit Agreement Lenders (the “Junior Credit Agreement Administrative Agent”) (the “Junior Credit Agreement”). The Junior Credit Agreement provides for a five-year unsecured $2.5 million junior Term Loan A (issued with an original issue discount of $315,000) and a five-year unsecured $7.5 million junior Term Loan B (the “Junior Loans”). Each of the Junior Loans was funded in full on April 19, 2013. The Junior Loans are guaranteed jointly and severally by the Guarantors.


The Term Loan A will bear interest at a fixed rate of 12% per annum and the Term Loan B will bear 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, April 19, 2018. Following the repayment in full of the Senior Credit Facility, we may voluntarily prepay the principal of the Junior Loans in whole or in part. In addition, we 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 Donald R. Wilson, Gregory Sachs and their respective controlled affiliates, of more than 45% of the outstanding shares of our common stock; (ii) subject to certain exceptions, the failure by us 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 Gregory Sachs’s service as our Executive Chairman (unless a successor reasonably acceptable to the Junior Credit Agreement Administrative Agent and the Junior Credit Agreement 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 April 19, 2018, we will be required to pay the Junior Credit Agreement 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 Credit Agreement 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 Credit Agreement Lenders Board of Director observation rights.



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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.


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 among the Senior Administrative Agent, the Junior Credit Agreement Lenders and the Loan Parties.


In consideration for the Term Loan A under the Junior Credit Agreement, we issued to the Junior Credit Agreement Lenders an aggregate of 31,500 shares of our common stock on April 19, 2013. In addition, on April 19, 2013, we also issued an aggregate of 31,500 shares of our common stock to certain affiliates of Kayne Anderson Mezzanine Partners in consideration for the assistance of Kayne Anderson Mezzanine Partners in arranging and structuring the financing provided under the Junior Credit Agreement.


Financial Guidance


Any estimates, forecasts or projections set forth below or elsewhere in this prospectus have been prepared by our management in good faith on a basis believed to be reasonable. Such estimates, forecasts and projections involve significant elements of subjective judgment and analysis as well as risks (many of which are beyond our control). As such, no representation can be made as to the attainability of our forecasts and projections. Investors are cautioned that such estimates, forecasts or projections have not been audited and have not been prepared in conformance with generally accepted accounting principles. For a listing of risks and other factors that could impact our ability to attain our projected results, please see “Risk Factors” and “Cautionary Notes Regarding Forward-Looking Statements.”


We intend to use the proceeds of this offering to grow our business as described in this prospectus. With the use of the net proceeds of this offering, we expect our consolidated revenue to be between $76 and $78 million and our adjusted EBITDA to be between $5 and $6 million for the year ending December 31, 2013, and we expect our consolidated revenue to be between $105 and $110 million and our adjusted EBITDA to be between $16 and $18 million for the year ending December 31, 2014. Our guidance for 2013 reflects our expectations regarding the financial performance of Symon and RMG on a combined pro-forma basis, as if we owned both companies for the full year 2013. We expect combined pro-forma adjusted EBITDA to be lower in fiscal year 2013 as a percentage of revenue than it will be in future years as a result of integrating the acquisitions of Symon and RMG and expenses that we have incurred or expect to incur during 2013 for sales and marketing initiatives that we believe will enhance our growth in fiscal year 2014 and beyond. We will seek a waiver, if necessary, from our lenders to include revisions to the financial and other covenants contained in our loan documents that will allow us to undertake the growth initiatives we intend to pursue with the proceeds of this offering.


Our expected GAAP net income/(loss) for 2013 and 2014 will be impacted by a number of factors, including transaction expenses incurred by RMG, Symon and SCG in association with our acquisitions of Symon and RMG. In addition, our expected GAAP net income/(loss) includes the interest, taxes, depreciation and amortization we expect to incur for the respective periods and includes certain adjustments related to purchase accounting items recorded as part of the acquisitions of RMG and Symon. Any one or more of these adjustments could materially affect our actual net income/(loss) for the periods presented. In addition, our expected interest expense assumes no repayment of our existing indebtedness.


Accordingly, we expect that our net loss for 2013 will be between $(19.0) million and $(23.0) million and that our net income for 2014 will be between $2.0 million and $6.0 million. Our expectation of consolidated net income/(loss) does not include, for the relative periods, the adjustments included in our adjusted EBITDA guidance, as described below, and accordingly includes an estimated $19.5 million and $6.5 million of such transaction costs and purchase accounting adjustments in 2013 and 2014, respectively. We have also not included for the purposes of our net income/(loss) guidance any adjustments to our warrant liabilities beyond the approximately $6.6 million adjustment, recognized as expense, through June 30, 2013. We believe that projecting future changes of our warrant liability requires a significant number of assumed variables and that we do not have a reasonable basis for determining whether such changes would result in a gain or a loss. We expect that our net loss as a percentage of revenues will be materially lower in 2013 due to recognized transaction expenses incurred and other items recognized in association with purchase accounting than may be expected in our future fiscal years. Accordingly, we believe our 2013 net loss expectations do not accurately reflect the underlying performance of our core business.




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The above projections reflect numerous estimates and assumptions with respect to, among other things, industry performance and competition, general business, economic, market and financial conditions and matters specific to our business, all of which are difficult to predict and many of which are beyond our control. The basis for, and what we believe to be the most material assumptions underlying, our projections is discussed below. In addition to the inherent uncertainties involved in providing projections, because we only began operating our current businesses following the acquisitions of Symon and RMG in April 2013, which until then had been separate, privately-held companies, we have no history of providing guidance, and investors are thus cautioned against attributing undue certainty to our assessment of likely future performance. As a result, there can be no assurance that the above forecasts will be realized or that actual results will not be significantly higher or lower than our estimates.


Our revenue guidance for 2013 reflects revenue already recognized as well as revenue yet to be recognized. Our projections of revenue yet to be recognized in 2013 include:


·

the recognition of revenue associated with certain services expected to be performed by our Enterprise Solutions business unit pursuant to existing contracts with customers, which revenue represents a portion of the deferred revenue account reflected on our balance sheet;

·

the recognition of revenue associated with certain services expected to be performed by our Media Networks business unit pursuant to existing agreements with clients to run advertising on our networks; and

·

the recognition of revenues associated with additional products and services that we anticipate to sell based off of our pipelines of new business, trends we see in our existing business lines, the historical spending patterns of our customers and new sales initiatives we expect to undertake.


Our adjusted EBITDA and net income/(loss) guidance for 2013 assumes our revenue guidance for the same period is achieved and reflects costs of sales and operating expenses already recognized as well as expenses yet to be incurred based on certain assumptions, including:


·

a product mix that will generate a gross margin percentage that is similar to our recent historical results; and

·

operating expenses that take into account our current run-rate operating expenses, additional public company-related costs, costs associated with integrating Symon and RMG and costs associated with sales and marketing initiative that we believe will enhance our growth during and beyond fiscal year 2014.


The assumptions underlying our financial guidance for 2014 include for our revenue guidance:


·

the anticipated continued growth of our existing business lines on a percentage basis that is in line with the growth expected during 2013 and based on our current view of business trends and our new business pipelines; and

·

the recognition of revenues from new sales initiatives that we expect to start in 2013.


The assumptions underlying our financial guidance for 2014 include for our adjusted EBITDA and net income/(loss) guidance:


·

the achievement of our revenue guidance for the same period;

·

a product mix that will generate a gross margin percentage that is similar to our recent historical results; and

·

monthly operating expenses in 2014 similar to those expected as of year-end 2013.


The above projections were prepared based on RMG Networks as a standalone company, reflecting the anticipated results of operations of Symon and RMG, but not of any acquisitions or other strategic transactions that we may consummate during the remainder of 2013 or in 2014.


We do not intend to update or otherwise revise the above financial guidance to reflect circumstances existing after the date of this prospectus or to reflect the occurrence of future events.


We have presented our projected adjusted EBITDA, which is a non-GAAP measure, because many of our investors use this non-GAAP measure to monitor our performance. This non-GAAP measure should not be considered as an alternative to GAAP measures as an indicator of our operating performance. We define adjusted EBITDA as net income before interest, taxes, depreciation and amortization, adjusted for acquisition-related and integration items; asset impairment charges; purchase price accounting items recorded as part of our acquisitions; and certain other items that we believe do not reflect our core operating performance.



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Critical Accounting Policies


The significant accounting policies of Symon are described in Note 1 of Symon’s consolidated financial statements included elsewhere in this prospectus. Symon’s financial statements are prepared in conformity with accounting principles generally accepted in the United States. Certain accounting policies involve significant judgments, assumptions, and estimates by management that could have a material impact on the carrying value of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.


Accounts Receivable


Accounts receivable are comprised of sales made primarily to entities located in the United States, EMEA and Asia. Accounts receivable are recorded at the invoiced amounts and do not bear interest. The allowance requires judgment and is reviewed monthly and Symon 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. Symon’s collection experience has been consistent with our estimates.


Inventory


Inventory consists primarily of software-embedded smart products, electronic components, computers and computer accessories. Inventories are stated at the lower of average cost or market. Slow moving and obsolete inventories are written off based on historical experience and estimated future usage.


Goodwill and Intangible Assets


Goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in a purchase business combination and is tested annually for impairment or tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying value exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, Symon determines the fair value of a reporting unit and compares it to its carrying value. Second, if the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. The fair values calculated in Symon’s impairment tests are determined using discounted cash flow models involving several assumptions. These assumptions include, but are not limited to, anticipated operating income growth rates, Symon’s long-term anticipated operating income growth rate and the discount rate. Symon’s cash flow forecasts are based on assumptions that are consistent with the plans and estimates Symon is using to manage the underlying businesses. The assumptions that are used are based upon what Symon believes a hypothetical marketplace participant would use in estimating fair value. Symon evaluates the reasonableness of the fair value calculations of its reporting units by comparing the total of the fair value of all of Symon’s reporting units to Symon’s total market capitalization. Symon bases its fair value estimates on assumptions it believes to be reasonable but that are unpredictable and inherently uncertain.


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.




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Symon’s 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.


Income Taxes


Symon 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. Symon 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. Symon recognizes in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date.


As a result of Symon’s operations outside of the United States, Symon’s global tax rate is derived from a combination of applicable tax rates in the various jurisdictions in which Symon operates. Symon bases its estimate of an annual effective tax rate at any given point in time on a calculated mix of the tax rates applicable to Symon and to estimates of the amount of income to be derived in any given jurisdiction.


Under ASC 740, Income Taxes (“ASC 740”), Symon recognizes the effect of uncertain tax positions, if any, only if those positions are more likely than not of being realized. It also requires Symon to accrue interest and penalties where there is an underpayment of taxes, based on management’s best estimate of the amount ultimately to be paid, in the same period that the interest would begin accruing or the penalties would first be assessed. Symon 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 Symon’s assessment of the appropriate accrual amount. U.S. income taxes have not been provided on $3.8 million of undistributed earnings of foreign subsidiaries as of January 31, 2013. Symon reinvests earnings of foreign subsidiaries in foreign operations and expects that future earnings will also be reinvested in foreign operations indefinitely. Significant judgment is required to evaluate uncertain tax positions. Symon files its tax returns based on its understanding of the appropriate tax rules and regulations. However, complexities in the tax rules and Symon’s operations, as well as positions taken publicly by the taxing authorities, may lead Symon to conclude that accruals for uncertain tax positions are required. Changes in facts and circumstances could have a material impact on Symon’s effective tax rate and results of operations.


Revenue Recognition


Symon recognizes revenue primarily from these sources:


·

Products;

·

Professional services; and

·

Maintenance and content services.


Symon 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. Symon assesses collectability based on a number of factors, including the customer’s past payment history and its current creditworthiness. If it is determined that collection of a fee is not reasonably assured, Symon 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.



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Multiple-element arrangements


Product consists of Symon’s proprietary software and hardware equipment. Symon considers the sale of its software more than incidental to the hardware as it is essential to the functionality of the product and is classified as part of Symon’s products. Symon 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, Symon 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 Symon 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 Symon’s historical experience of stand-alone sales of these elements to third parties. For maintenance and content services, Symon used renewal rates for continued support arrangements to determine fair value. In situations where Symon had fair value of all undelivered elements but not of a delivered element, Symon 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, Symon 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 Symon’s control. Revenue from arrangements for the sale of tangible products containing both software and non-software components that function together to deliver the product’s essential functionality requires allocation of the arrangement consideration to the separate deliverables using the relative selling price (“RSP”) method for each unit of accounting based first on 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 Symon’s various applicable tangible products containing essential software products and services. Symon establishes the pricing for Symon’s 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. Symon determines VSOE based on Symon’s 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 Symon cannot establish VSOE of selling price for a specific product or service included in a multiple-element arrangement, Symon uses third-party evidence of selling price. Symon 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 Symon 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, Symon 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.


Symon 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 the years ended January 31, 2013 and 2012.


Upon the adoption of the new revenue recognition rules Symon 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. Symon 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.




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Previously, Symon rarely sold its product without maintenance and therefore the residual value of the sales arrangement was allocated to the products. Symon 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 Symon’s last remaining obligation to perform is fulfilled. Consideration for elements that are deemed separable is allocated to the separate elements at the inception of the arrangement on the basis of their relative selling price and recognized based on meeting authoritative criteria.


Judgment is required in the determination of company-specific objective evidence of fair value, which may impact the timing and amount of revenue recognized depending on whether company-specific objective evidence of fair value can be demonstrated for the undelivered elements of an arrangement and the approaches used to demonstrate company-specific objective evidence of fair value.


Symon’s process for determining ESPs involves management’s judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable. If the facts and circumstances underlying the factors considered change, Symon’s ESPs and the future rate of related maintenance could change.


Symon 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 Symon’s sales team, with 10% or less through resellers in 2013. In the United Kingdom, Western Europe, the Middle East and India, the situation is reversed, with around 85% of sales coming from the reseller channel. Overall, approximately 67% of Symon’s global revenues are derived from direct sales, with the remaining 33% generated through indirect partner channels.


Symon 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 Symon, generally with agreed-upon discounts, and resell the products and services to their customers, who are the end-users of the products and services. Symon does not offer contractual rights of return other than under standard product warranties and product returns from resellers have been insignificant to date. Symon therefore sells directly to its resellers and recognizes revenue on sales to resellers upon delivery, consistent with its recognition policies as discussed above. Symon bills the resellers directly for the products and services they purchase. Software licenses and product warranties pass directly from Symon to the end-users.


Symon recognizes revenue on sales to resellers consistent with its recognition policies as discussed below.


Product revenue


Symon 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, Symon recognizes revenue as services are performed. For fixed-fee contracts, Symon 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 Symon performs the services.


Maintenance and content services revenue


Maintenance support consists of hardware maintenance and repair and software support and updates. Software updates provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period. Support includes access to technical support personnel for software and hardware issues. Content services consist of providing customers live and customized news feeds.


Maintenance and content services revenue is recognized ratably over the term of the contracts, which is typically one to three years. Maintenance and support is renewable by the customer annually. Rates, including subsequent renewal rates, are typically established based upon specified rates as set forth in the arrangement. Symon’s hosting support agreement fees are based on the level of service provided to its customers, which can range from monitoring the health of a customer’s network to supporting a sophisticated web-portal.




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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. Symon believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility and, accordingly, no software development costs have been capitalized to date.


Net Income 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 are no stock options, warrants, or other dilutive equity instruments outstanding.


Recently Issued Accounting Standards


On January 1, 2012, Symon 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. Symon 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 Symon’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. Symon adopted these changes in 2011 and applied retrospectively for all periods presented. Such adoption did not have material effect on Symons 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 Company’s consolidated financial position or results of operations.


On January 1, 2012, Symon 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 Symon’s consolidated financial statements.



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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SCG


The following discussion and of the financial condition and results of operations of SCG should be read in conjunction with the financial statements of SCG and the related notes thereto included elsewhere in this prospectus.


Overview



SCG was formed as a blank check company on January 5, 2011 for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction or other similar business transaction, one or more operating businesses or assets that SCG had not yet identified (an “Initial Business Combination”). SCG was not limited to a particular industry or geographic region for purposes of consummating an Initial Business Combination. The Nasdaq rules required that SCG’s Initial Business Combination be with one or more target businesses that together had a fair market value equal to at least 80% of the sum of the balance in the trust account established in connection with SCG’s initial public offering (less any deferred corporate finance fees and taxes payable on interest earned) at the time of our signing a definitive agreement in connection with the Initial Business Combination.


Recent Developments


On April 8, 2013, SCG consummated the acquisition of RMG, and on April 19, 2013, SCG consummated the acquisition of Symon. As a result of these transactions, SCG is no longer a blank check company. In connection with the acquisition of RMG, SCG 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 SCG 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. For a description of these and other material developments subsequent to March 31, 2013, please see Note J – Subsequent Events to the interim financial statements of SCG included in this prospectus.


Results of Operations


SCG had not engaged in any operations nor generated any revenues through March 31, 2013. SCG’s entire activity since inception up to the closing of its initial public offering had been in preparation of the offering. Since the completion and closing of the initial public offering through March 31, 2013, SCG’s activity was limited to evaluating and negotiating business transaction candidates.  SCG did not generate any operating revenues through March 31, 2013. Through March 31, 2013, SCG generated small amounts of non-operating income in the form of interest income on cash and cash equivalents. Interest income was not significant in view of current low interest rates on risk-free investments (i.e. United States Treasury Bills).


For the three months ended March 31, 2013 and March 31, 2012, SCG had net income/(losses) of $3,357,555 ($3,367,548 of expenses and $9,993 of accrued interest) and $369,140 ($361,777 of income and $7,363 of accrued interest), respectively.


For the year ended December 31, 2012, SCG had net loss of $1,208,103 ($1,861,689 of expenses, $600,000 of income attributable to change in fair value of warrant liability and $53,586 of accrued interest). For the period from January 5, 2011 (date of inception) through December 31, 2011, SCG had net income of $237,495 ($400,482 of expenses, $600,000 of income attributable to change in fair value of warrant liability and 37,977 of accrued interest), respectively.


Liquidity and Capital Resources


On April 18, 2011, SCG consummated its initial public offering and received net 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 included $3,000,000 received for the purchase of 4,000,000 warrants by SCG Financial Holdings LLC. Total offering costs (excluding $2,000,000 in underwriting fees) was $433,808. On April 12, 2011, SCG’s sponsor purchased 4,000,000 warrants from SCG for an aggregate purchase price of $3,000,000. Total gross proceeds to SCG from the 8,000,000 units sold in the initial public offering was $80,000,000. On April 27, 2011, $80,000,000 from the offering and Sponsor Warrants that was placed in a trust account was invested, as provided in the registration statement from SCG’s initial public offering. As of December 31, 2012 and 2011, the market value of the investment securities in the trust account consisted of $79,999,200 and $80,041,697, respectively, in United States Treasury Bills with a maturity of 180 days or less and $2,592 and $740, respectively, of cash equivalents.




52





As of March 31, 2013, SCG had $100,155 in a bank account which was available for use by management to cover the costs associated with identifying a target business and negotiating an acquisition or merger. Out of the proceeds of SCG’s initial public offering which remained available outside of the trust account, SCG obtained officers and directors insurance covering a 12 month period from April 12, 2011 through April 12, 2012 for a cost of $65,000, with a prepaid balance at December 31, 2011 of $18,236. The officers and directors insurance policy was renewed for nine months, providing coverage through January 12, 2013 and then for an additional three months, providing coverage through April 12, 2013. The premiums for coverage during the periods April 13, through January 12, 2013 and January 13, 2013 through April 12, 2013 are $48,839 and $15,984, respectively. The prepaid balance as of March 31, 2013 was $2,131.


The cash balance as of March 31, 2013 was $100,155, which includes (1) receipt of $81,025,000 from the public and private sale of securities, net of underwriter fees in the initial public offering, (2) payment of $433,808 of expenses associated with the initial public offering, (3) payment of $1,886,192 in operating expenditures, (4) investment of $80,000,000 in the trust account, and (5) loans from SCG’s sponsor of $1,295,000.



SCG Financial Holdings LLC loaned SCG funds from time to time, which were convertible into warrants of the post business transaction entity at a price of $0.75 per warrant at the option of the lender. The warrants would be identical to SCG’s Sponsor Warrants. The holders of a majority of such warrants (or underlying shares) will be entitled to demand that SCG register these securities pursuant to an agreement to be entered into at the time of the loan. The holders of a majority of these securities would have certain “piggy-back” registration rights with respect to registration statements filed subsequent to such date. SCG will bear the expense incurred with the filing of any such registration statements.


Restatement of Previously Issued Financial Statements


SCG has restated its financial statements as of December 31, 2011 to correct its accounting for an adjustment related to the warrants issued in connection with the initial public offering. SCG’s original accounting treatment did not recognize a derivative liability and did not recognize any changes in the fair value of that derivative liability in its statements of operations.


In March 2013, SCG concluded it should correct its accounting related to SCG’s outstanding warrants. SCG had initially accounted for the warrants as a component of equity but upon further evaluation of the terms of the warrant, concluded that the warrants should be accounted for as a derivative liability. The warrants issued contain a restructuring price adjustment provision in the event of any merger or consolidation of SCG with or into another corporation, subsequent to the initial business combination, where the surviving entity is not SCG 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 SCG’s own stock. As a result of this provision, SCG has restated its financial statements to reflect SCG’s warrants as a derivative liability with changes in the fair value recorded in the current period earnings.


The following tables summarize the adjustments made to the previously reported December 31, 2011 balance sheet, statement of operations and statement of cash flows:


December 31, 2011


Selected audited balance sheet information


 

 

(as previously

reported)

 

Effect of

Restatement

 

(as restated)

Warrant liability

$

-

$

3,600,000

$

3,600,000

Total Liabilities

 

2,176,285

 

3,600,000

 

5,776,285

 

 

 

 

 

 

 

Common Stock, subject to possible redemption

 

73,228,686

 

(3,600,000)

 

69,628,686

 

 

 

 

 

 

 

Common Stock

 

952

 

(696)

 

256

Additional Paid-in Capital

 

5,361,554

 

(361,809)

 

4,999,745

Deficit Accumulated during the Development Stage

 

(362,505)

 

362,505

 

-

Total Stockholders' Equity

 

5,000,001

 

-

 

5,000,001

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

$

80,404,972

$

-

$

80,404,972




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From the period from January 5, 2011 (date of inception) to December 31, 2011


Selected audited statement of operations


 

 

(as previously

reported)

 

Effect of

Restatement

 

(as restated)

Expenses:

 

 

 

 

 

 

Change in fair value of warrant liability

$

-

$

600,000

$

600,000

 

 

 

 

 

 

 

Income (Loss) Attributable to Common Stockholders

$

(362,505)

$

600,000

$

237,495

 

 

 

 

 

 

 

Basic and Diluted Net Loss per common share, excludes shares subject to possible redemption - basic and diluted

$

(0.05)

$

0.15

$

0.10


Critical Accounting Policies


The preparation of interim financial statements and related disclosures in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the interim financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. SCG has identified the following as its critical accounting policies:


Loss per common share


Loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding for the period.


Recent accounting pronouncements


SCG’s management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on SCG’s interim financial statements.



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BUSINESS

Overview


RMG Networks Holding Corporation, or RMG Networks, is a global provider of enterprise-class digital signage solutions and media applications. Through our suite of products, including media services, proprietary software, software-embedded hardware, technical services and third-party displays, we are able to deliver complete end-to-end intelligent visual communication solutions to our clients. We believe that we are one of the largest integrated digital signage solution providers globally and conduct our operations through our RMG Enterprise Solutions and RMG Media Networks business units.


Our 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. We believe our solutions are relied upon by over 70% of the North American Fortune 100 companies and thousands of overall customers in locations worldwide. The installations of our Enterprise Solutions business deliver real-time intelligent visual content that enhances the ways in which organizations communicate with employees and customers. The solutions we provide are designed to integrate seamlessly with a customer’s IT infrastructure and data and security environments. These solutions are comprised of a suite of products that includes proprietary software, software-embedded hardware, maintenance and support services, content and creative services, installation services and third-party displays. We also provide cost-effective digital signage solutions to small and medium sized businesses through our cloud-based ChalkboxTV product, which allows businesses to communicate promotional messages to customers using their existing screen hardware.    


Our 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 and the RMG Mall 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 all major commercial passenger airlines in the United States, delivers to advertisers an audience of affluent travelers and business decision makers in a captive and distraction-free video environment.  Based on information provided by our airline, airport, IFE and Wi-Fi partners, we estimate that the RMG Airline Media Network is comprised of over 120,000 IFE screens, nearly 3,000 aircraft, and 145 airline and private terminal lounges and can reach an audience of over 35 million passengers per month. As of January 1, 2013, we had partner relationships providing access to sell media inventory across 12 unique airlines.  In many cases we maintain multiple relationships with the same airline.  We work with six airlines to sell their IFE system assets.  We work with seven airlines to sell their media assets in their executive clubs.  We work with nine airlines to sell their onboard Wi-Fi media assets. All the partner relationships are exclusive with the exception of one airline partnership agreement to sell IFE system assets, providing us with what we believe will be a growing revenue opportunity as airlines continue to install additional digital media assets. The RMG Mall Media Network reaches over 62 million Nielsen measured monthly viewers in 161 shopping malls across the United States.


We believe that we power more than one million digital screens and end-points, and that the diversity of products that we offer and our technical expertise provide our partners and customers with digital signage solutions that differentiate us from our competitors. We are led by an experienced senior management team with a proven track record of building and successfully running technology and advertising businesses.


History


We were incorporated in Delaware on January 5, 2011 as a blank check company for the purpose of effecting a business combination with one or more businesses.  On April 8, 2013, we consummated the acquisition of RMG, pursuant to a Merger Agreement, dated as of January 11, 2013, as amended, by and among us, SCG Financial Merger II Corp., RMG and Shareholder Representative Services LLC, as the Stockholder Representative, pursuant to which RMG became our subsidiary. On April 19, 2013, we consummated the acquisition of Symon, pursuant to a Merger Agreement, dated as of March 1, 2013, by and among us, SCG Financial Merger III Corp., Symon and the securityholders’ representative named therein, pursuant to which Symon became our subsidiary.


At the closing of the RMG acquisition, the former holders of RMG’s outstanding capital stock became entitled to receive (i) 400,000 shares of our common stock, of which 300,000 shares were deposited in an escrow account with an escrow agent, (ii) $10,000 in cash, payable pro rata to the former holders of SCG’s Series C preferred stock, and (iii) $10,000 in cash, all of which was deposited in an escrow account to be used to reimburse RMG’s Stockholder Representative for any losses the Stockholder Representative might incur pursuant to the terms and conditions of the RMG Merger Agreement. Additionally, at the closing of the RMG acquisition, we paid, on behalf of RMG and its subsidiaries, all indebtedness of RMG Networks, Inc., a



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Delaware corporation and a wholly-owned subsidiary of RMG. The aggregate amount of indebtedness repaid was equal to $23.5 million (of which $21.0 million was paid in cash and the remaining $2.5 million was paid by the issuance of 250,000 shares of our common stock).


At the closing of the Symon acquisition, Symon’s stockholders received an aggregate of $45.0 million, minus (i) the amount of any indebtedness of Symon and its subsidiaries as of the date, which indebtedness was repaid in full by us at the closing, (ii) $1,523,251, representing the amount by which the expenses of Symon and its subsidiaries and securityholders in connection with the transactions contemplated by the Symon Merger Agreement exceeded the permitted transaction-related costs of $2 million, and (iii) $250,000, which amount was paid to the Symon Securityholders’ Representative to be held in trust as a source of reimbursement for Symon costs and expenses incurred by the Securityholders’ Representative in such capacity. At the closing, SCG also paid the expenses of Symon and its subsidiaries and securityholders incurred in connection with the transactions contemplated by the Symon Merger Agreement.


As a result of the RMG and Symon acquisitions, RMG and Symon became our subsidiaries, and the business and assets of RMG, Symon and their subsidiaries are our only operations. Symon is considered to be our predecessor for accounting purposes.


Founded in 2005 as Danouv Inc., RMG began its operations by developing a digital signage technology platform for ad serving and content distribution. RMG launched an initial media network with 650 screens in coffee shops and eateries in August 2006. In September 2006, Danouv Inc. changed its name to Danoo Inc. In July 2009, Danoo purchased certain assets of IdeaCast Inc., which operated a digital signage network in gyms and fitness centers and in the airline in-flight entertainment space. In August 2009, Danoo was renamed RMG Networks, Inc. In 2012, RMG restructured its business to focus on airline media because of its leading position in that market.


Symon is a Delaware corporation that was founded in 1980.


Industry


Digital Signage

We believe the proliferation of digital signage in business and out-of-home environments allows advertisers and companies to engage consumers, employees and targeted audiences more effectively than traditional means. The digital signage industry is comprised of hardware, software and professional services that create solutions for advertising and business to business networks. The deployment of digital signage networks has continued to increase through the recent economic downturn. Frost & Sullivan, in its 2012 Digital Signage Systems Market report, estimates that the market for digital signage in 2013 will be approximately $1.5 billion and expects the market to grow from 2013 to 2017 at a compound annual growth rate of 14.0%.

As digital signage systems have evolved, they have become more cost effective and able to provide richer media content. The initial costs of planning and deploying digital signage infrastructure have dropped, reducing a significant barrier to growth. Today’s solutions support remote manageability, energy efficiency and the ability to process and blend rich media content. Customers are recognizing the flexibility and cost-effectiveness digital signage can provide compared to other forms of communication.

There are several market drivers that are dramatically impacting the traditional digital signage industry and driving increased utilization of digital signage solutions:

Demand for real-time information—Because of increased technology enablement, both organizations and individual consumers expect information to be more available and timely. Digital signage solutions are increasingly providing organizations with multiple ways of distributing content and data instantly and can provide a richer experience if the operator’s screens include interactive touch-screen functionality.

Social/Local/Mobile or “SoLoMo”—Social media, the need for localized information, and the proliferation and capabilities of mobile smart phones and tablets are increasingly driving social and professional interactions and present an expanded opportunity for growth in the digital signage industry. Digital signage has the ability to leverage social media feeds and present them in an eye-catching manner, delivering a sense of immediacy and engaging viewers on a timely, highly focused basis through constantly refreshed content. When coupled with mobile and proximity technology, digital signage can deliver content to a relevant and specific location at moments of maximum influence and in a timely and personalized experience.

Big Data—Big Data is the collection and re-purposing of disparate data sources from enterprise systems and the cloud, enabling new, emerging capabilities around trend spotting, real-time decision making, performance management, sentiment analysis and customer service. Organizations around the world are making significant investments in Big Data to identify business, marketing, sales and service opportunities that will differentiate them competitively. Deploying digital signage projects using Big Data offers organizations to drive greater content relevance for its constituents.



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Digital Out-of-Home Advertising

Digital out-of-home advertising is a relatively new form of advertising, but is becoming an effective way for advertisers to reach their target audience in captive locations for long periods of time. According to Magna Global, Global Advertising Revenue Forecast and Historical Data, December, 2012, the digital out-of-home advertising market accounted for a small but rapidly growing portion of the $146 billion U.S. advertising market in 2011. U.S. digital out-of-home advertising revenue grew to $1.3 billion in 2011, representing a 10-year compound annual growth rate of 20.9%, and is expected to grow to approximately $2.5 billion by 2017. We believe the increase in advertising spending in this medium is largely a result of better research and overall visibility of the medium and digital technology, which have enhanced the reach and the overall value proposition of digital out-of-home advertising for local, regional, national and international advertisers. PQ Media states that Digital Place-based Networks, or DPN, growth is being driven by a number of factors, including consumers spending more time consuming media outside the home, DPNs are close to the point of purchase, the media buying process and the corresponding audience metrics are continually improving, and DPNs are resistant to the ad-skipping technology that impacts the television market.

We believe few other marketing media channels can match the value proposition that digital signage delivers: the ability to reach a mass audience with a high level of flexibility to distribute content, change messages and target specific audiences at a lower cost per impression than traditional media. To put industry growth into perspective, PQ Media predicts a 19.2% compound annual growth rate from 2011 to 2016 for Global Digital Place-based Networks. Forecasted annual industry revenues grow from $5.9 billion in 2012 to $6.9 billion in 2013 and $12.3 billion for 2016 according to PQ Media’s Global Digital Out-of-Home Media Forecast 2012-2016, 5th Edition, 2012.

Competitive Strengths


We believe that the following factors differentiate us from our competitors and position us for continued growth:  


Complete and customizable end-to-end solutions.  We craft end-to-end visual communication solutions for our customers. To accomplish this, we approach the market with a full complement of integrated ready-to-use technologies, including our proprietary software and software-embedded appliances, internally-designed LED display boards, and a wide variety of third-party flat screen displays, kiosks, and video walls.  We provide a wide range of professional services for ourselves and our customers and partners, including installation and training, software and hardware maintenance and support, creative content and advertising management.  We are typically the prime source globally for technical resources for implementations that feature our proprietary software and software-embedded appliances. We maintain strong customer support groups in the United States and internationally offering around-the-clock client support.  In addition, we have a full-time global team of creative artists, graphic designer, and editors who develop both original and subscription content as required by customers.  


Our technology solution is scalable, extensible and security certified to meet demanding requirements.  One key to our market leadership is our robust software suite that offers scalability for essentially any client application. This includes installations ranging from only one display to many hundreds or even thousands of end-points. Our enterprise software suite incorporates leading network security features and has the flexibility to handle millions of data points and gigabytes of managed content. Our Smart Digital Appliances, InView desktop application, and InView Mobile-Data applications for smart phones and tablets meet the requirements of many of the largest financial services and telecommunications companies in the United States. Our data-integration components ensure that any external source can be leveraged in a solution, including databases, telephony, POS, RSS, web content, and many more.


Our products can be easily adapted to satisfy a wide array of customer applications.  We believe our products add significant value for all types of enterprise business needs, such as real-time reporting and alerting for contact centers, supply chain warehousing, and manufacturing. Other enterprise uses include company news and information for employee or corporate communications. Our products are also commonly used in public-facing environments, such as hotels, convention centers, hospitals, universities, casinos, retail operations, and government facilities.


We are trusted by some of the largest organizations in the world.  Some of the largest and most demanding organizations, including over 70% of the North American Fortune 100 companies and a large percentage of the Fortune 500 companies, count on our solutions every day to inform, educate and motivate their employees and customers and to build their brands. Our solutions seamlessly interface with these organizations’ complex IT infrastructure in a secure manner, often as one of the few solution providers authorized “behind the firewall”, which means that our internal operations are sufficiently secure that these major customers permit us to operate inside their IT environment behind these customers’ security firewalls.  We have experienced considerable growth with these large customers because of our proven security capabilities inside the customer’s environment. We have found that add-on sales opportunities and customer longevity are very high when our hardware and software have been authorized by customers to work behind these customers’ firewalls.



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We serve customers through a global footprint.  We have offices and personnel focused on developing business or located in North America, Europe, South America, the Middle East and Asia. We service thousands of customers worldwide and estimate that millions of people globally view our content each day on our advertising networks and at our customers’ installations. Our global presence enables us to satisfy the worldwide requirements of our multi-national customers and to pursue market opportunities in high-growth geographies outside of North America. To facilitate our global footprint, we have well-established relationships with leading business partners and resellers around the world.


Targeted national advertising network. Our captive and engaged audience of business decision makers and affluent consumers is highly sought-after by advertisers because of their media consumption habits. According to the 2011 Fall GfK MRI weighted to Population, our IFE network audience has a median age of 47 and is more than twice as likely to have a household income of over $200,000 per year, 66% more likely to have a professional or related occupation and almost twice as likely to have an occupation in management, business or financial operations. Our ability to bring together ten U.S. commercial passenger airlines into a single network with broad scale and reach with similar in-flight media assets has made the RMG Airline Media Network attractive and in demand with advertisers. The RMG Mall Media Network engages active shoppers within the mall environment. With installations located in mall food courts, our network delivers a full sight, sound and motion media experience in a seated mall environment.


Experienced management team. Our management team has significant experience in launching emerging digital media platforms, advertising sales, and digital network design and operations.


Growth Strategy


Our growth strategy is to leverage and continue to build upon the advantages developed by us, including through the following:


Expanding our customer base or increasing revenue potential.  We have identified and are currently pursuing numerous paths to expand our existing base of business or increase our revenue potential, including in our RMG Enterprise Solutions business unit:


·

Growing our presence in segments that have shown a high propensity to deploy visual communications like employee transformation, higher education, healthcare and customer facing retail applications.

·

Building upon current successes in emerging geographic markets, such as the Middle East and India and expanding further into Southeast Asia to address the large and fast growing call center marketplace in the region.  We also believe there are strong growth opportunities in both Latin and South America for our core offerings, particularly in Mexico and Brazil, where known opportunities exist through resellers seeking partnerships with global solutions providers like us. We are also considering ways to leverage our presence in China and to build on our relationships there to offer technology products and professional services to companies in China.

·

Evolving and expanding our portfolio of offerings related to, among others, small and medium sized business solutions, mobile applications, cloud based content management platforms, interactive kiosks and linkages to social media.


and in our RMG Media Networks business unit:


·

Increasing the price points for our airline media network cost per thousand impressions, or CPM. In 2012, demand for many premium media assets offered by our RMG subsidiary outpaced supply, creating a shortage during prime advertising months. We believe that, based on the 2012 demand levels, our pricing does not yet fully reflect the highly targeted nature of our impressions, higher recall rates, ability to provide informative audience data to our advertising customers and, most importantly, the inability to turn off or skip our advertising messages. We believe that there is an opportunity for continued CPM growth, especially as our inventory utilization increases, providing a more favorable supply-demand dynamic.

·

Expanding geographic coverage and reach of the Airline Media Network. We intend to expand the reach and geographic coverage of our Airline Media Network to China and Europe by connecting additional airlines, airplanes and airline executive clubs to the network through additional partner agreements or the international operations of current airline partners. Our strategy for attracting new airline partners is to focus primarily on the largest international carriers by passenger count and the most trafficked international airports.



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·

Developing new out-of-home networks including our RMG Mall Media business.  We believe that our scalable infrastructure offers us a competitive advantage to expand into new digital out-of-home media networks. We are currently reviewing other captive digital place-based media networks that deliver valuable audience segments. We believe that targeted advertising will continue to grow in importance as a percentage of advertising spending and that networks in other retail environments will continue to develop. Importantly, we believe that our distribution technology, sales force, other existing operating infrastructure and client relationships could create growth opportunities for it in these other retail environments.

Pursuing targeted acquisitions.  We expect to continually evaluate companies with products and services that can help us expand our presence in our current markets and penetrate new industry segments, and believe that the relatively fragmented nature of the digital signage industry offers a significant number of such acquisition opportunities. These acquisition targets include:


·

Companies that utilize a premises-based solutions model and have a presence in industries that we currently serve and have targeted for growth. We expect to seek out companies that have an established customer base and revenue stream, a complementary technology platform, and a set of deep industry competencies that we do not currently possess.

·

Companies that utilize a hosted solutions model that targets industry segments with a higher propensity to utilize hosted visual solutions over premises-based solutions. These segments do not have an onsite IT staff, do not have skilled on-site content managers, are price sensitive, and prefer a subscription-based offering.

·

Complementary and captive place-based advertising networks.


Cross selling between our business units. We believe that the combined U.S. and international customer bases of our Enterprise Solutions and Media Networks business units offer us significant cross selling opportunities and expect to develop these opportunities through continued cooperation of our business units’ sales forces and coordinated technology development.

Products and Solutions


We deploy digital signage solutions in highly efficient global networks with both the features and functions required for rich media solutions. Our RMG Enterprise Solutions and RMG Media Networks business units provide distinct but complementary products and solutions:


RMG Enterprise Solutions:


Our proprietary software-based platform seamlessly integrates within our customers’ existing IT networks. We provide both a premises-based content management system for fixed in-building installations and a hosted system for content subscription services and mobility solutions. We incorporate state-of-the-art functionality and capabilities by working closely with leading global technology partners.  These relationships result in access to proprietary interfaces, and testing and lab environments.


Enterprise Software (“ES”) is a robust software engine used to collect content from various sources, re-purpose the content according to pre-defined business rule, and distribute the re-purposed content to visual solution end-points. Data Collector interfaces link ES with customers’ enterprise operations systems.  We have built and maintain standard and vendor proprietary data collectors for all major enterprise operations systems and believe that these data collectors give us a distinct advantage by being able to deliver solutions that are operational more quickly, less expensively and with higher quality than the competition.  


Media Players/Smart Digital Appliances (“SDA”) are software-embedded media players that function as the intelligent interface between our ES content engine and the visual display end-points. SDAs “pull” content and content rules and parameters from ES and then display the content on the screens according to established rules and parameters.


Design Studio (“DS”) and Design Studio Lite (“DSL”) are two offerings that are either a full-function application installed on the client’s PC (DS) or web-based (DSL) software suites used to design the look, feel, function and timing of how content will appear and be used on end-point displays. The software features a set of pre-designed templates that can be combined with external content feeds that are provided by us or other external content providers.


InView Mobile-Data (Mobility Solutions) is a real-time on-demand technology that seamlessly integrates with the ES real-time data. InView Mobile-Data enables managers to use their iOS and Android mobile devices to access real-time dashboards containing key performance indicators and data alerts them to any issues that can affect customer service, operations, and product quality, thereby allowing them to quickly respond with appropriate actions to meet established company goals.



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Subscription Content Services provides “business-appropriate” news and current information, created by our editors. In addition, weather, stock information, airport flight data, and 101 ticker feeds allow clients to customize the desired output in almost any manner they require. This service is hosted by us, and it complements customers’ messaging by keeping their audience engaged with fresh news and information throughout the day.  


Electronic Displays (“ED”) include a line of displays designed by us, such as SmartScreens, door displays, and LED wallboards that are architected to work seamlessly with our content management software. We also offer a large portfolio of third-party displays from some of the most recognizable brands in screen and electronic display technology.


RMG Media Networks:


The RMG Airline Media Network. We help airline partners unlock economic value from their existing assets while providing advertisers access to targeted, high-value and captive audiences. We believe that the reach, scope and digital delivery capability of our network of digital place-based media provides an effective platform for advertisers to reach an affluent and engaged audience on a highly targeted and measurable basis. We estimate that an airplane on which our media runs takes off every 20 seconds and that our media network can reach over 35 million people per month.  The RMG Airline Media Network is currently located in some of the busiest domestic airports and covers travelers to and from the top designated market areas in the United States. As of January 2013, we estimate that the RMG Airline Media Network includes over 120,000 IFE screens, 3,000 aircraft and 145 airline executive clubs and private airport terminals in the U.S.


RMG’s Airline Media Network advertising inventory includes digital signage in airline executive clubs displaying static and video messaging and also includes static and video IFE and Wi-Fi advertising units shown on commercial airlines in the United States. Short and long form IFE video content can be shown simultaneously on every digital media asset on a given aircraft, or inserted into or around other individual video programming. Static IFE banner units and static and animated online and interactive advertising units are also supported by the network. Our media technology platform powers the screens located inside airline executive clubs and we rely on airline partners and technology partners to supply content to in-aircraft IFE screens and Wi-Fi portals.


RMG Mall Media. RMG Mall Media is a premier, mall-based digital video network engaging affluent audiences in premium shopping mall food courts across the US. Extended dwell-times coupled with full sight, sound and motion allow advertisers to cut through the retail clutter and deliver a relevant and engaging message. The network reaches over 62 million Nielsen estimated monthly viewers in 161 shopping malls in 61 top DMAs across the United States.


Proprietary Planning and Inventory System. Our proprietary planning and inventory system supports key advertising and partner management business processes such as customer acquisition, advertising inventory, customer management and revenue recognition


Global Sales Model


RMG Enterprise Solutions


Our RMG Enterprise Solutions business unit sells products and services through a worldwide professional sales force, as well as through a select group of resellers and local partners. In North America, approximately 90% or more of Enterprise Solutions sales were generated solely by our sales team, with 10% or less through resellers in 2012. 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. We currently rely on a direct sales model to sell the professional services engagements in the China market. Overall, approximately 67% of RMG Enterprise Solutions’ recent historical global revenues have been derived from direct sales, with the remaining 33% generated through indirect partner channels.


Our RMG Enterprise Solutions global sales team includes six sales leaders and 36 sales representatives, as well as five subject matter experts (one each for large accounts, alliances and channels, supply chain, employee communications, and retail opportunities) to assist the global team. The sales team members each have at least five years of specific experience in selling complex enterprise technology solutions. The sales team is supported in the pre-sales process by a team of highly skilled sales engineers, who help to present solutions that meet each customer’s specific needs. In general, the sales compensation structure for the sales staff is approximately half base salary and half commissions. The amount of payment of commissions is dependent on representatives reaching their monthly and annual sales objectives. In addition, commissions are modified by the overall profitability of the mix of products that are sold. Our resellers globally are supported by one or more of our sales team members to assist them with proposing unique solutions for clients and prospects. RMG Enterprise Solutions is in the process of recruiting a channel sales force of third party dealers to resell the ChalkboxTV product to potential customers.




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RMG Media Networks


Our RMG Media Networks business unit sells and markets advertising through a direct sales and marketing group. Our sales staff of ten people (as of December 31, 2012) is located in sales offices in New York, Los Angeles, Chicago and Detroit. A significant percentage of the compensation for the sales staff is variable and commission-based, with a portion of commissions shared across the team in order to enhance coordination and teamwork.  The sales team meets directly with clients and advertising agencies to consult with them on the merits of digital out-of-home advertising. We also have a marketing department with public relations and research capabilities that has commissioned third-party market research on the effectiveness of digital out-of-home advertising. This research has provided customers with evidence of the strong performance of its product relative to other broadcast advertising based on metrics such as brand recognition, message recall and likeability.


Customers


RMG Enterprise Solutions


Customers around the world purchase our RMG Enterprise Solutions software, hardware and services primarily under our standard agreements; for larger customers, a master services agreement is individually negotiated when necessary. Upon approval of the customer’s or reseller’s credit, customers purchase a mix of licensed software, hardware, installation services, training services, maintenance services and/or content services. Maintenance and content services are sold on an annualized basis, creating an annuity income and a close business relationship for us. It is common that a down payment is required from hospitality customers and occasionally from other customers as needed. Our resellers purchase products and services from us to resell to their clients. In general, we assist resellers with installation, training services, and on-going support in partnership with our resellers.


During the calendar year 2012, RMG Enterprise Solutions’ largest end user clients included Abbott Labs, Allstate, American Express, AT&T, Carlson Wagonlit, Computer Sciences Corporation, Department of Veterans Affairs, Federal Reserve Banks, Hilton Properties, JPMorgan Chase, Kaiser Permanente, King Saud University, Marriott Properties, Mosaic Company, Prudential Insurance, Qatar University, Roche AG, State Farm Insurance, Thomson Reuters, United Utilities, and Verizon Wireless. Among our largest reseller business partners around the world in 2012 were Alpha Data, Altetia, Baud Telecom, BT, Cable & Wireless, Carousel, Dynamic Systems, Inc., iBAHN, NACR, Techno Q and Verizon Business.


RMG Media Networks


Airline Media Network Partners.  Our RMG Media Networks business unit partners with airlines, airports and aircraft IFE and Wi-Fi providers to sell advertising on digital media assets located in executive clubs, private airport terminals and on aircraft. As of January 1, 2013, RMG Media Networks had partner relationships with twelve unique airlines to sell their media assets.  In many cases RMG maintains multiple relationships with the same airline.  We work with six airlines to sell their IFE system assets.  We work with seven airlines to sell their media assets in their executive clubs.  We work with nine airlines to sell their onboard Wi-Fi media assets. All the partner relationships are exclusive with the exception of one airline partnership agreement to sell IFE system assets. We typically serve as the exclusive third-party agent for advertising sales for specified digital media assets in our partners’ air travel networks, but the scope of our exclusivity rights varies from contract to contract. For example, we have exclusive rights to sell advertising for digital assets that we provide and manage as part of Delta’s IFE systems and in its executive clubs. Other partners, however, grant us exclusivity over certain formats like video advertisements but not over other formats like print. We share advertising revenues with our partners. The portion of revenue that we share with our partners ranges from 25% to 80% depending on the partner and the media asset.  We make minimum annual payments to three partners and revenue sharing payments to all other partners (including payments in excess of minimum annual payments, if any). Our 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. Three partnership contracts were subject to renewal in 2013, two of which were renewed at comparable rates and terms. We have been given notice that one contract will not be renewed.


Advertising Customers. RMG Media Networks’ advertising business has a diverse customer base, consisting of more than 70 international, national and regional advertisers. The revenues obtained from advertisers varies greatly, from less than $100 to more than $4 million annually, with an average annual revenue per advertiser over $275,000. RMG has business relationships with many national advertisers across a wide variety of industries, such as automotive, computers, consumer products, credit card, financial services, insurance, tourism, and telecommunications.


Competition


Holding a strong, competitive position in the market for digital signage requires maintaining a diverse product portfolio that addresses a wide variety of customer needs.  We believe we have been a leading global provider of products and



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services to the contact center and employee communications markets for more than 30 years. Our customers include many of the largest organizations in the world and, as a result, our brand is well established in these markets. We have also developed a strong customer base in the supply chain, hospitality, gaming, higher education, and retail markets, both in North America and internationally.


The worldwide digital signage market is vast and diverse.  In addition to the scope of our product and service portfolio, we compete based upon commercial availability, price, visual performance, brand reputation, power usage and customer service.  Customer requirements vary as to products and services, and as to the size and geographic location of the solutions. We compete with a broad range of companies, including local, national and international organizations. In addition, competitors’ offerings differ widely. Some competitors offer a range of products and services; others offer only a single part of the overall digital signage solution.


Our digital out-of-home media assets compete with many other forms of marketing media, including television, radio, print media, Internet and outdoor display advertising. While digital out-of-home advertising represents a small portion of the advertising industry today, we believe we are well positioned to capitalize on what we believe will be an increasing shift of advertising spending away from mass media to more targeted forms of media, like digital out-of-home advertising. As the number of media platforms continues to increase, the ability to target narrow consumer demographics and to provide measurable third-party marketing information has become increasingly important. We believe that proliferation of digital technology enabling improved data collection and return on investment measurement will increase advertisers’ demand for digital advertising platforms and that the RMG Airline Media Network and RMG Mall Media Network are well positioned to address these trends.


We believe that we are able to generate economies of scale, operating efficiencies and enhanced opportunities for our advertising customers to access a national and regional audience, giving us a competitive advantage over many of our advertising competitors. Given the scale and technical capabilities of our digital network, we believe we are able to tailor our advertising programs with more flexibility and to a broader audience than other digital out-of-home advertising companies, providing a more entertaining consumer experience and a more effective platform for advertisers.


Our competitive strategy is built around our ability to provide end-to-end solutions; extensive software and hardware options; a consultative sales and partnership approach that delivers the optimum customer solution; a highly qualified staff of installation and integration professionals; seamless integration with customers’ IT infrastructure, data, and security environments; custom screen and content design; advertising management; and post-sale customer service and global technical support. We believe that our relative size and competitive strategy gives us an advantage in the markets we serve.


Though our direct competitors are numerous, diverse and vary greatly in size, we view the principal competitors to our RMG Enterprise Solutions business unit as Scala, Stratacache, Four Winds Interactive, Inova, Janus Displays, Cisco, Visix, X2O Media, ComQi, John Ryan & Associates, Broadsign International, Nanonation, Reflect Systems, and Navori, S.A. We view the principal competitors to our RMG Media Networks business unit as Captivate Network, IZ ON Media LLC, National CineMedia Inc., JCDecaux SA, Titan Outdoor LLC and Clear Channel Outdoor Holdings, Inc.


Employees


As of April 30, 2013, we had 248 global employees, with 182 in our North American operations, including 48 in sales, 45 in professional services, 27 in technical support/help desk and 62 in general and administration. Internationally we had, 66 employees supporting our global operations, including 13 in sales, 20 in professional services, 20 in technical support/help desk and 13 in general and administration. Our U.S. employees are not covered by any collective bargaining units and we have never experienced a work stoppage in the U.S. Our international employees are also not covered by any national union contracts.


Intellectual Property and Trademarks


We rely on a combination of trademark, copyright, patent, unfair competition and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish, maintain and protect our proprietary rights. These laws, procedures and contractual restrictions provide only limited protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology. We generally require employees, consultants, customers, suppliers and partners to execute confidentiality agreements with us that restrict the disclosure of our intellectual property. We also generally require our employees and consultants to execute invention assignment agreements with us that protect our intellectual property rights. Despite these precautions, third parties may obtain and use without our consent intellectual property that we own or license. Any unauthorized use of our intellectual property by third parties, and the expenses incurred in protecting our intellectual property rights, may adversely affect our business.



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As of March 31, 2013, we had four issued patents in the United States related to technology contained in LED displays, which each expire on February 10, 2019.  None of these patents are material to our business. In addition, we had three issued patents and four patent applications pending in the United States. These patents are material to our business because they relate to innovations embedded in the software that underlies our media networks.  These patents expire at various times between 2025 and 2027. We cannot ensure that any of our pending patent applications will be granted or that any of our issued patents will adequately protect our intellectual property. In addition, third parties could claim invalidity or co-inventorship, or make similar claims with respect to any of our currently issued patents or any patents that may be issued to us in the future. Any such claims, whether or not successful, could be extremely costly to defend, divert management’s time, attention, and resources, damage our reputation and brand and substantially harm our business.


We expect that we and others in the industry may be subject to third-party infringement claims as the number of competitors grows and the functionality of products and services overlaps. Our competitors could make a claim of infringement against us with respect to our products and underlying technology. Third parties may currently have, or may eventually be issued, patents upon which our current solution or future technology infringe. Any of these third parties might make a claim of infringement against us at any time.


Government Regulation


We are subject to varied federal, state and local government regulation in the jurisdictions in which we conduct business, including tax laws and regulations relating to our relationships with our employees, public health and safety, zoning, and fire codes. We operate each of our offices, and distribution and assembly facilities in accordance with standards and procedures designed to comply with applicable laws, codes and regulations.


We import and export products into and from the United States. These activities are subject to laws and regulations, including those issued and/or enforced by U.S. Customs and Border Protection. We work closely with our suppliers to ensure compliance with the applicable laws and regulations in these areas.


Properties


Our corporate headquarters is located in a 20,000 square foot facility in Plano, Texas. In the United States, we also lease approximately 4,000 square feet of office space in San Francisco, California, and lease sales and other secondary offices in New York City, Chicago, Detroit, Los Angeles, Las Vegas, St. Peters (Missouri) and Pittsford (New York).   


Our European and Middle Eastern operations are based in our leased office located in Hemel Hempstead, England, and a sub-office serving the Middle East is located in Dubai, United Arab Emirates. There are three employees located in India who support local resellers and customers. We also maintain a technology support office in Beijing, China.


Most of our office and manufacturing locations are subject to long-term leases, which expire between the second half of 2013 and 2016.  We expect to extend, or relocate to new facilities at the end of the expiring lease terms, our leases that are expiring in 2013. We believe our facilities are adequate to meet our current needs and intend to add or change facilities as our needs require.


Legal Proceedings


From time to time, we have been and may become involved in legal proceedings arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, we are not presently involved in any legal proceeding in which the outcome, if determined adversely to us, would be expected to have a material adverse effect on our business, operating results, or financial condition. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.




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MANAGEMENT

Directors and Executive Officers

Our directors and executive officers and their ages as of July 10, 2013, are as follows:


Name

 

Age

 

Title

Gregory H. Sachs

 

47

 

Executive Chairman

Garry K. McGuire, Jr.

 

42

 

Chief Executive Officer, Director

William Cole

 

66

 

Chief Financial Officer

Charles Ansley

 

67

 

President, RMG Enterprise Solutions*

Paul Shyposh

 

45

 

President, RMG Media Networks

Marvin Shrear

 

69

 

Director

Jonathan Trutter

 

56

 

Director

Alan Swimmer

 

52

 

Director

Jeffrey Hayzlett

 

52

 

Director

 

 

 

 

 

*   On June 21, 2013, Mr. Ansley announced his intention to retire, effective July 12, 2013.


Gregory H. Sachs served as our Chairman, Chief Executive Officer and President from inception until the consummation of the acquisition of RMG in April 2013, at which time he became our Executive Chairman. Since 2008, he has been Chairman and Chief Executive officer of Sachs Capital Group LP. From 1993 to 2008 he was Chairman and Chief Executive Officer of Deerfield Capital Management which he founded and oversaw its growth from a fixed income hedge fund with $15 million in assets under management to a global diversified fixed income investment manager with approximately $15 billion in assets under management. While at Deerfield, Mr. Sachs oversaw the management of Deerfield Capital Corp, a publicly traded (NYSE: DFR) specialty finance company that invested in various credit related asset classes. Deerfield Capital Corp. had gross assets in excess of $8 billion at the time Mr. Sachs sold his interest in Deerfield. Prior to founding Deerfield, Mr. Sachs was Vice President and Trading Manager for Harris Trust and Savings Bank’s Global Fixed Income Trading Division. Mr. Sachs graduated from the University of Wisconsin at Madison in 1988 with both an M.S. degree in Quantitative Analysis and Finance and a B.B.A. degree in Actuarial Science and Quantitative Analysis. He is a former board member of the Triarc Companies (NYSE: TRY) from 2004 to 2007, Deerfield Capital Corp. (NYSE: DFR) from 2005 to 2007 and the Futures Industry Association. Mr. Sachs also has extensive experience investing in real estate properties for his own account. Mr. Sachs’ designation as a director and Chairman of our board of directors was based upon his extensive background in the financial services industry, his substantial experience in growing businesses and his prior public company experience.  

Garry McGuire served as the Chief Executive Officer of RMG from June 2009 until the consummation of the acquisition of RMG in April 2013, at which time he was appointed our Chief Executive Officer. Prior to joining RMG, Mr. McGuire was the Founder and Chairman of Icon Internet Ventures from May 2007 to July 2009, which owns and publishes affinity websites that aggregate target audiences. From January 2004 to May 2007, Mr. McGuire served as President of Gyro HSR, a leading independent, London based, digital marketing agency. Mr. McGuire received a B.A. from The University of Dayton. Mr. McGuire is also on the board of directors of the Digital Place-Based Advertising Association. The Board believes that Mr. McGuire’s experience from serving as Chief Executive Officer of RMG and from other senior executive roles within the advertising, marketing and technology industries qualifies him to serve on the Board.

William Cole served as Symon’s Chief Financial Officer from 1997 until the consummation of our acquisition of Symon in April 2013, in connection with which he was appointed our Chief Financial Officer. Prior to joining Symon, Mr. Cole served as the Chief Financial Officer for two insurance brokerage firms specializing in the placement of insurance coverage for oil and gas exploration and services companies.  Prior to that, Mr. Cole spent 17 years with the international accounting firm of Deloitte & Touche LLP, including seven years as a partner. Mr. Cole is a Certified Public Accountant in Texas and Louisiana.  Mr. Cole earned a B.S. in Accounting from Mississippi State University and a Master of Business Administration degree from Louisiana State University.

Charles Ansley served as the Chief Executive Officer of Symon from 2002 until the consummation of our acquisition of Symon in April 2013, in connection with which he was appointed as President of our RMG Enterprise Solutions division. Mr. Ansley has announced his intention to retire, effective July 12, 2013. Mr. Ansley also served on Symon’s Board of Directors and as a member of Symon’s Compensation Committee from 1997 until April 2013. Prior to joining Symon, Mr. Ansley was President of U.S. Information Solutions for Electronic Data Systems (“EDS”) from 1999 until 2002.  Prior to that, Mr. Ansley served as Group Executive leading, EDS’s Communications Industry Group from 1997 until 1999.  Prior to joining EDS, Mr. Ansley served as Senior Vice President of Sales and Services for DSC Communications in 1996. Mr. Ansley was a corporate officer at AT&T from 1994 until 1995, serving as Vice President of Client Services and Marketing of the AT&T



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Solutions unit focused on the I/T integration and network outsourcing marketplace.  Prior to joining AT&T, Mr. Ansley had a 26 year career at IBM, where he held successive senior-level roles in general management, sales, marketing, and business development in both IBM and IBM Global Services.  Mr. Ansley served as Executive Vice President and on the Executive Committee of the Digital Screenmedia Association (the “DSA”) and remains a member of the DSA Advisory Board. Mr. Ansley also currently serves on the Board of the Metroplex Technology Business Council in the Dallas-Fort Worth area and on the Advisory Board of the School of Management at the University of Texas at Dallas.  Mr. Ansley earned a B.S. in Business Management and an M.B.A. in Computer Science from Texas A&M University.

Paul Shyposh served as the Executive Vice President, Head of Sales of RMG from October 2012 until the consummation of our acquisition of RMG in April 2013, in connection with which he was appointed as President of our RMG Media Networks division. Prior to joining RMG, Mr. Shyposh was the Vice President of Airport Sales in North America for JCDecaux SA, the largest outdoor advertising company in the world from February 2006 to October 2012. Mr. Shyposh began his sales career as an account manager at The New York Times Company from 2000 until 2006.  Prior to that he held media strategy and advertising management positions at AT&T from 1996 to 2000 and media planning and account service roles at Bates USA from 1993 to 1996 and McCann Erickson from 1990 to 1993. Mr. Shyposh holds a B.A. from Susquehanna University.

Marvin Shrear joined our board of directors in April 2011. Mr. Shrear was a Senior Managing Director at Deerfield Capital Management (a financial services company) from 1993 until his retirement in 2008 where he also served as Chief Financial Officer. Prior to joining Deerfield, Mr. Shrear was a partner in the Chicago office of Arthur Andersen & Co., Chief Financial Officer at GNP Commodities, Inc., and Vice President Finance for FCT Group, Inc. GNP and FCT were registered futures commission merchants. Mr. Shrear received a B.S.C. in Accountancy from DePaul University in 1965 and a J.D. from Stanford University in 1968. He is licensed as a Certified Public Accountant and attorney. Mr. Shrear’s designation as a director was based upon his senior-level management and a financial services industry experience.

Jonathan Trutter joined our board of directors in April 2013.  He previously served as the Chief Executive Officer of the Deerfield Capital Corp  (NYSE/NASDQ: DFR) from its founding in December 2004 until April 2011 and the Chief Executive Officer and Chief Investment Officer of Deerfield Capital Management LLC, an indirect wholly-owned subsidiary of Deerfield Capital Corp, from 2007 to 2011.  Upon the merger of CIFC Corp. and Deerfield Capital Corp in 2011, Mr. Trutter became Vice Chairman of the board of CIFC Corp.  Mr. Trutter left the board of CIFC Corp. in May 2012.   From 1989 to 2000 Mr. Trutter was a Managing Director of Scudder Kemper Investments, and served as a member of the firm’s  Fixed Income Management Committee. Mr. Trutter received a B.A. from the University of Southern California and M.M from the J.L. Kellogg Graduate School of Management at Northwestern University. He is a Certified Public Accountant. The Board believes that Mr. Trutter’s experience from serving as Chief Executive Officer of Deerfield Capital Corp. and from other senior executive roles he has held over the last 20 years qualifies him to serve on the Board.

Alan Swimmer joined our board of directors in April 2013.  He is President of Prescient Ridge Management, a Commodity Trading Advisor. Prior to PRM Mr. Swimmer spent over 26 years in the Futures and Options industry, building and running futures commission merchant businesses including from 2002 to 2008 as  Head of U.S. Futures at Bear Stearns and then as Head of North American Futures Sales at JP Morgan following its purchase of Bear Stearns. Prior to Bear Stearns, Mr. Swimmer was with Citigroup from 1990-2002 and was head of its Chicago futures office.   Mr. Swimmer received a B.A. in psychology from Washington University in St. Louis, where he is currently Vice Chair  of the  Alumni Board of Governors. Mr. Swimmer has been on the Board of Directors of the Minneapolis Grain Exchange since 2008. The Board believes that Mr. Swimmer’s experience from serving in various senior executive roles over the last 20 years and from his serving on the Board of Directors of the Minneapolis Grain Exchange qualifies him to serve on the Board.

Jeffrey Hayzlett joined our board of directors in April 2013.  He is the Chief Executive Officer of The Hayzlett Group, a provider of strategic business consulting services he founded in May 2010, and of TallGrass Public Relations, a public relations firm he founded in July 2010. From May 2006 to May 2010, Mr. Hayzlett served as Chief Marketing Officer at Eastman Kodak Company. Prior to that, he founded a private business development and public relations firm specializing in the technology and visual communications industries, and held senior management positions in strategic business development and marketing at several companies, including Cenveo, Webprint and Colorbus, Inc. He has also served in staff positions in the United States Senate and House of Representatives. Mr. Hayzlett serves on the boards of several private companies, including itracks and Vdopia. The Board believes that Mr. Hayzlett’s extensive sales and marketing-related experience and executive experience qualifies him to serve on the Board.

Classes of Directors

Our board of directors is divided into three classes, being divided as equally as possible with each class having a term of three years. Mr. Sachs and Mr. Trutter are the Class I directors, whose terms of office will continue until the annual meeting of stockholders in 2013 and until their respective successors are duly elected and qualified. Mr. Swimmer and Mr. Shrear are the Class II directors, whose terms of office will continue until the annual meeting of stockholders in 2014 and until their



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respective successors are duly elected and qualified. Mr. McGuire and Mr. Hayzlett are the Class III directors, whose terms of office will continue until the annual meeting of stockholders in 2015 and until their respective successors are duly elected and qualified.

Independence of Directors

As a result of our securities being listed on the Nasdaq Capital Market, we adhere to the rules of that exchange in determining whether a director is independent. The Nasdaq Capital Market requires that a majority of the board must be composed of “independent directors,” which is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which, in the opinion of the company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Consistent with these considerations, our board of directors has affirmatively determined that Mr. Shrear, Mr. Swimmer, Mr. Trutter and Mr. Hayzlett are independent directors.

Audit Committee

Our audit committee consists of Mr. Shrear, Mr. Swimmer and Mr. Trutter. Each is an independent director and, as required by Nasdaq rules, has not participated in the preparation of our financial statements at any time during the past three years and is able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement. In addition, we must certify to Nasdaq that the committee has, and will continue to have, at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in such member’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. Our board of directors has determined that Mr. Trutter satisfies the definition of financial sophistication and also qualifies as an “audit committee financial expert,” as defined under rules and regulations of the Securities and Exchange Commission.

The audit committee’s duties include, among other things:


·

reviewing and discussing with management and the independent registered public accountant our annual and quarterly financial statements;

·

discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of our financial statements;

·

discussing with management major risk assessment and risk management policies;

·

monitoring the independence of the independent auditor;

·

verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law;

·

reviewing and approving all transactions between us and related persons;

·

inquiring and discussing with management our compliance with applicable laws and regulations and our code of ethics;

·

pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and terms of the services to be performed;

·

appointing or replacing the independent auditor;

·

determining the compensation and oversight of the work of the independent auditor including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work; and

·

establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or reports which raise material issues regarding our financial statements or accounting policies.


Compensation Committee

Our compensation committee consists of Mr. Hayzlett, Mr. Swimmer and Mr. Trutter.  Each is a non-employee director who is independent in accordance with the Nasdaq Capital Market listing standards and the rules and regulations of the SEC and the Internal Revenue Service. Among other functions, the compensation committee will oversee the compensation of our chief executive officer and other executive officers and senior management, including plans and programs relating to cash compensation, incentive compensation, equity-based awards and other benefits and perquisites, and administer any such plans or programs as required by the terms thereof.



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Nominating and Corporate Governance Committee

Our nominating and corporate governance committee consists of Mr. Hayzlett, Mr. Shrear and Mr. Trutter, each of whom is an independent director. The principal duties and responsibilities of our nominating and corporate governance committee will be to identify qualified individuals to become board members, recommend to the board individuals to be designated as nominees for election as directors at the annual meetings of stockholders, and develop and recommend to the board our corporate governance guidelines.

Director Nominees

Our nominating and corporate governance committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors. Our nominating committee will considers persons identified by our stockholders, management, investment bankers and others. In general, the committee believes that persons to be nominated should be actively engaged in business, have an understanding of financial statements, corporate budgeting and capital structure, be familiar with the requirements of a publicly traded company, be familiar with industries relevant to our business, be willing to devote significant time to the oversight duties of the board of directors of a public company, and be able to promote a diversity of views based on the person’s education, experience and professional employment. The nominating and corporate governance committee will evaluate each individual in the context of the board as a whole, with the objective of recommending a group of persons that it believes can best implement our business plan, perpetuate our business and represent stockholder interests. The nominating and corporate governance committee may require certain skills or attributes, such as financial or accounting experience, to meet specific board needs that arise from time to time. The nominating and corporate governance committee will not distinguish among nominees recommended by stockholders and other persons.

Specifically, the guidelines for selecting nominees provide that our nominating committee expects to consider and evaluate candidates based on, among other factors, the following criteria:


·

Independence under the rules of the Nasdaq Capital Market;

·

Accomplishments and reputations, both personal and professional;

·

Relevant experience and expertise;

·

Knowledge of our company and issues affecting our company;

·

Moral and ethical character; and

·

Ability to commit the required time necessary to discharge the duties of board membership.


Code of Conduct and Ethics

We have adopted a code of conduct and ethics applicable to our executive officers, directors and employees, its subsidiaries and its controlled affiliates in accordance with applicable federal securities laws. A copy of the code of conduct and ethics will be provided by us without charge.

Communication with the Board of Directors

Our stockholders and other interested parties may send written communications directly to the board of directors or to specified individual directors, including the Executive Chairman or any non-management directors, by sending such communications to our corporate headquarters. Such communications will be reviewed by our legal counsel and, depending on the content, will be:


·

forwarded to the addressees or distributed at the next scheduled board meeting;

·

if they relate to financial or accounting matters, forwarded to the audit committee or distributed at the next scheduled audit committee meeting;

·

if they relate to executive officer compensation matters, forwarded to the compensation committee or discussed at the next scheduled compensation committee meeting;

·

if they relate to the recommendation of the nomination of an individual, forwarded to the nominating and corporate governance committee or discussed at the next scheduled nominating and corporate governance committee meeting; or

·

if they relate to our operations, forwarded to the appropriate officers of our company, and the response or other handling of such communications reported to the board of directors at the next scheduled board meeting.




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Director Compensation

Our board of directors has adopted a compensation plan for non-employee directors of the board, effective in 2013. Pursuant to the director compensation plan, our non-employee directors will be paid $25,000 annually, and the director serving as the chair of the audit committee will be paid an additional $25,000 annually. In addition, each non-employee director will be granted 5,000 shares of our common stock annually, subject to our adoption of an equity incentive plan. We will also reimburse directors for reasonable travel and other expenses in connection with attending meetings of the board. We did not compensate any of our directors for service on our board in 2012.

Compensation Discussion and Analysis

From SCG’s inception in January 2011 through the consummation of its initial business combination with RMG in April 2013, none of SCG’s executive officers or directors received any compensation (cash or non-cash) for services rendered. Commencing on the date that SCG’s securities were first quoted on the OTCBB and continuing through the consummation of the acquisition of RMG, SCG paid Sachs Capital Group LP, an entity beneficially owned and controlled by Mr. Sachs, a total of $7,500 per month for office space and administrative services, including secretarial support. This arrangement was agreed to by Sachs Capital Group LP for SCG’s benefit and was not intended to provide Sachs Capital Group LP (or Mr. Sachs) compensation in lieu of a salary. We believe that such fees were at least as favorable as SCG could have obtained from an unaffiliated third party for such services. Other than this $7,500 per month fee, no compensation of any kind, including finder’s and consulting fees, was paid to the Sponsor, SCG’s executive officers and directors, or any of their respective affiliates, for services rendered prior to or in connection with the consummation of the acquisition of RMG. However, these individuals were reimbursed for any out-of-pocket expenses incurred in connection with activities on SCG’s behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. SCG’s independent directors reviewed on a quarterly basis all payments that have been made to the Sponsor, SCG’s officers, directors or their affiliates.

On April 25, 2012, SCG Financial Merger I Corp. (“SCG Intermediate”), a wholly-owned subsidiary of SCG Financial Acquisition Corp. and the direct parent company of Symon and RMG, entered into an employment agreement with Garry K. McGuire. Mr. McGuire is expected to provide his services as our Chief Executive Officer through this employment agreement with SCG Intermediate. Pursuant to the employment agreement, Mr. McGuire has agreed to serve as Chief Executive Officer of SCG Intermediate for a three year term commencing on April 25, 2013. Pursuant to the employment agreement, Mr. McGuire will also serve as a member of the Board of Directors of SCG Intermediate. Under the employment agreement, Mr. McGuire is entitled to receive an annual salary of $450,000 per year, subject to annual increases at the discretion of the Board of Directors. Mr. McGuire will also be entitled to an annual bonus of up to $480,000 based on SCG Intermediate’s achievement of certain earnings before interest, taxes and depreciation (“EBITDA”) targets to be established by the Board of Directors on an annual basis (the “EBITDA Targets”). Bonus amounts payable to Mr. McGuire payable to Mr. McGuire under his employment agreement will be calculated on a quarterly basis, and Mr. McGuire will be paid a pro rata portion of the following the completion of each fiscal quarter. If Mr. McGuire receives quarterly bonus payments in excess of the amount actually earned through the end of the fiscal year, Mr. McGuire will be required to repay such excess bonus amounts to SCG Intermediate. Alternatively, SCG Intermediate may retain or forfeit other compensation, payments or awards payable to Mr. McGuire until such excess bonus payments are recovered.

The employment agreement will automatically terminate upon Mr. McGuire’s death and will be terminable at the option of SCG Intermediate for “cause” or if Mr. McGuire becomes “disabled” (each as defined in the employment agreement). If the SCG Intermediate terminates the employment agreement without “cause” or Mr. McGuire is deemed to have been “constructively terminated” (as defined in the employment agreement), SCG Intermediate will be obligated to pay to Mr. McGuire all accrued but unpaid salary and benefits and a pro-rated bonus for the year in which such termination occurs and will be required to continue to pay Mr. McGuire’s base salary until the later of the end of the then current term of Mr. McGuire’s employment or the twelve month anniversary of his termination date. In addition, all unvested equity awards (if any) granted to Mr. McGuire prior to the date of his termination will become fully vested as of the termination date. The payment of any severance benefits under the employment agreement will be subject to Mr. McGuire’s execution of a release of all claims against SCG Intermediate on or before the 21st day following his separation from service.

If SCG Intermediate terminates the employment agreement without “cause” or Mr. McGuire is deemed to have been “constructively terminated”, in either case within 12 months following a “change in control” of SCG Intermediate, then, in addition to the severance payments described in the foregoing paragraph, SCG Intermediate will be required to pay to Mr. McGuire a lump sum payment of $850,000 (subject to the execution by Mr. McGuire of a release of all claims against SCG Intermediate on or before the 21st day following his separation from service). As used in the employment agreement, the term “change in control” generally refers to the occurrence of (i) the acquisition by any person or group of persons of equity securities of SCG Intermediate that, together with equity securities held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the equity securities of SCG Intermediate or (ii) the acquisition by any person or group of persons of all or substantially all of the assets of SCG Intermediate.



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The employment agreement contains customary confidentiality provisions, which apply both during and after the term of the employment agreement, and customary non-competition and non-solicitation provisions, which apply during the term of the employment agreement and for one year thereafter.

William G. Cole is currently party to an employment agreement with Symon. Under the terms of this employment agreement, Mr. Cole is currently entitled to an annual base salary of $225,000, subject to review and adjustment. Mr. Cole is also eligible to participate in Symon’s short-term, performance-based cash incentive plan. Pursuant to this employment agreement, if Mr. Cole’s employment is terminated by Symon without cause or by Mr. Cole for good reason, Mr. Cole is entitled to receive severance payments equal to six months’ base salary. The employment agreement also contains customary covenants barring Mr. Cole from directly or indirectly competing with Symon, soliciting Symon’s customers and soliciting Symon’s employees.

Charles Ansley is currently party to an employment agreement with Symon. Under the terms of this employment agreement, Mr. Ansley is currently entitled to an annual base salary of $350,000. Mr. Ansley is also eligible to participate in Symon’s short-term, performance-based cash incentive plan. If Mr. Ansley’s employment is terminated without cause or in connection with a change of control of Symon, Mr. Ansley is entitled to receive severance equal to six months’ base salary. In addition, Symon, at its expense, will make commercially reasonable best efforts to maintain Mr. Ansley’s medical insurance plan in existence at the time of his termination for Mr. Ansley and his spouse for 18 months. If Mr. Ansley obtains subsequent full-time employment with another firm and he and his spouse qualify for that firm’s medical plan, Symon’s obligation terminates immediately. Mr. Ansley’s employment is contingent upon his agreeing to customary restrictions with respect to the use of Symon’s confidential information. Mr. Ansley has also agreed not to compete with Symon. Mr. Ansley has announced his intention to retire, effective July 12, 2013.

We are currently negotiating the terms of a new employment agreement with Mr. Cole (which may be entered into by us or one of our subsidiaries), which agreement is expected to terminate and replace Mr. Cole’s existing employment agreement with Symon.

Except as described above, we are not party to any agreements with our executive officers and directors that provide for benefits upon termination of employment.

Executive Compensation

The following table sets forth the total compensation earned in 2012 by Mr. McGuire based on his provision of services to RMG, and by Messrs. Cole and Ansley based on their provision of services to Symon. Mr. Sachs did not receive any compensation for his service to SCG in 2012, and Mr. Shyposh joined RMG in October 2012, and his compensation for 2012 is not required to be disclosed pursuant to applicable rules of the Securities and Exchange Commission.


Name and Position

 

Salary ($)

 

Non-Equity

Incentive Plan

Compensation ($)

 

Total ($)

Garry McGuire, Chief Executive Officer and Director(1)

 

420,000

 

314,167

 

734,167

William Cole, Chief Financial Officer(2)

 

225,000

 

-

 

225,000

Charles Ansley, President, RMG Enterprise Solutions(3)

 

350,000

 

-

 

350,000


(1)

Mr. McGuire served as RMG’s Chief Executive Officer and Chief Revenue Officer during 2012.

(2)

Mr. Cole served as Symon’s Chief Financial Officer during 2012.

(3)

Mr. Ansley served as Symon’s President and Chief Executive Officer during 2012. Mr. Ansley has announced his intention to retire, effective July 12, 2013.


None of our executive officers were granted any options or other equity securities of SCG as compensation during 2012, or held any such options or equity securities as of December 31, 2012.


Equity Incentive Plan


In June 2013 our board of directors approved, and in July 2013 our stockholders adopted, our 2013 Equity Incentive Plan. The Plan is intended to promote the interests of us and our stockholders by providing our employees, directors and consultants with incentives and rewards to encourage them to continue in our service and with a proprietary interest in pursuing our long-term growth, profitability and financial success.



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Administration


Our compensation committee will administer the Plan in accordance with its terms. The compensation committee has full discretionary authority to administer the Plan, including the authority to:  (1) designate the employees and consultants and members of the board of directors who shall be granted incentive awards under the Plan and the amount, type and other terms and conditions of such incentive awards; and (2) interpret and construe any and all provisions of the Plan and the terms of any incentive award (and any agreement evidencing the grant of an incentive award). The compensation committee may exercise all discretion granted to it under the Plan in a non-uniform manner among participants. The compensation committee may delegate to a subcommittee of one or more members of the board of directors or our employees the authority to grant incentive awards, subject to such limitations as the compensation committee shall specify and to the requirements of applicable law.


Eligibility


Any of our employees or consultants, any person who renders services directly or indirectly to us, and any member of our board of directors is eligible for selection by the compensation committee to receive an incentive award under the Plan.


Shares subject to the Plan


The maximum number of shares of our common stock that may be covered by incentive awards granted under the Plan may not exceed 2,500,000 shares in the aggregate. The maximum number of shares of stock that may be covered by incentive awards granted under the Plan that are intended be incentive stock options (ISOs) shall not exceed 2,500,000 shares in the aggregate. For purposes of these limitations, shares of stock shall only be counted as used to the extent that they are actually issued and delivered to a participant (or such participant’s permitted transferees as described in the Plan) pursuant to the Plan. Accordingly, if an incentive award is settled for cash or if shares of stock are withheld to pay the exercise price of a stock option or to satisfy any tax withholding requirement in connection with an incentive award, only the shares issued (if any), net of the shares withheld, will be deemed delivered for purposes of determining the number of shares of stock that are available for delivery under the Plan. In addition, shares of stock related to incentive awards that expire, are forfeited or cancelled or terminate for any reason without the issuance of shares shall not be treated as issued pursuant to the Plan. In addition, if shares of stock owned by a participant (or such participant’s permitted transferees as described in the Plan) are tendered (either actually or through attestation) to us in payment of any obligation in connection with an incentive award, the number of shares tendered shall be added to the number of shares of stock that are available for delivery under the Plan.


Award types


The Plan permits grants of the following types of incentive awards subject to such terms and conditions as the compensation committee shall determine, consistent with the terms of the Plan: (1) stock options, including stock options intended to qualify as ISOs; (2) other stock-based awards, including in the form of stock appreciation rights, phantom stock, restricted stock, restricted stock units, performance shares, deferred share units or share-denominated performance units; and (3) cash awards. Subject to the terms and conditions set forth in the Plan, incentive awards may be settled in cash or shares of stock and may be subject to performance-based and/or service-based conditions. Cash awards shall, and all other incentive awards may, be designed to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code (performance-based compensation).



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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Our audit committee, pursuant to our written charter, is responsible for reviewing and approving related-party transactions to the extent we enter into such transactions. The audit committee will consider all relevant factors when determining whether to approve a related party transaction, including whether the related party transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related party’s interest in the transaction. No director may participate in the approval of any transaction in which he or she is a related party, but that director is required to provide the audit committee with all material information concerning the transaction. Additionally, we require each of our directors and executive officers to complete a directors’ and officers’ questionnaire on an annual basis that elicits information about related party transactions. These procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part of a director, employee or officer.

We issued $75,000 and $100,000 unsecured promissory notes to the Sponsor on January 28, 2011 and February 9, 2011, respectively. The notes were non-interest bearing and were repaid from the proceeds of our initial public offering. We issued two $100,000 unsecured promissory notes to the Sponsor on August 15, 2012 and October 11, 2012. These promissory notes were non-interest bearing and were payable upon the consummation of our initial business combination or liquidation. Both of the $100,000 promissory notes were transferred to Gregory H. Sachs on November 18, 2012. We issued $100,000, $360,000, $150,000, $50,000 and $435,000 unsecured promissory notes to the Sponsor on December 5, 2012, December 21, 2012, January 11, 2013, March 13, 2013 and March 28, 2013, respectively. $400,000 in aggregate principal amount of these promissory notes was subsequently transferred to each of Mr. Sachs and Donald R. Wilson, Jr., a principal stockholder of the Company. These promissory notes were also non-interest bearing and were payable upon our initial business combination or liquidation. On April 8, 2013, we issued to each of Mr. Wilson and Mr. Sachs warrants exercisable for 533,333 shares of our Common Stock upon the conversion of $800,000 in aggregate principal amount of such promissory notes, at a conversion price of $0.75 per warrant, and we repaid the remaining outstanding principal amount of such promissory notes (totaling $295,000 to the Sponsor and $200,000 to Mr. Sachs).

In January 2011, we issued an aggregate of 2,190,477 shares of our common stock (the “Founder Shares”) to the Sponsor for an aggregate purchase price of $25,000 in cash. On April 12, 2011, we effected a 0.8 for one reverse split, the result of which left the Sponsor with 1,752,381 Founder Shares. These Founder Shares included 228,571 shares that were forfeited on June 2, 2011 (as a result of the underwriters not exercising any portion of the overallotment option). 285,714 of the Sponsor’s Founder Shares will be subject to forfeiture by the Sponsor in the event the last sales price of our common stock does not equal or exceed $12.00 per share for any 20 trading days within any 30 trading day period within 24 months following the closing of the RMG acquisition. The Sponsor, Gregory H. Sachs, DOOH and each other member of the Sponsor have agreed that they will not sell or transfer their shares of our common stock until one year following consummation of the RMG acquisition, subject to earlier release in certain circumstances.

The Sponsor purchased, in a private placement, the 4,000,000 Sponsor Warrants prior to our initial public offering at a price of $0.75 per Warrant (a purchase price of $3,000,000) from us. The Sponsor has agreed that the Sponsor Warrants will not be sold or transferred until 30 days following consummation of RMG acquisition, or May 8, 2013, subject to certain limited exceptions.

We entered into an Administrative Services Agreement, effective as of April 12, 2011, with Sachs Capital Group, LP, an affiliate of the Sponsor, for an estimated aggregate monthly fee of $7,500 for office space, secretarial, and administrative services, with up to an additional $7,500 for our other operating expenses incurred by the sponsor. This agreement expired upon the acquisition of RMG. During the term of the Agreement, the additional $7,500 per month was not paid to Sachs Capital Group LP, and the total amount paid to Sachs Capital Group LP was $179,032.

The Sponsor is entitled to registration rights pursuant to a registration rights agreement. The Sponsor will be entitled to demand registration rights and certain “piggy-back” registration rights with respect to its shares of SCG common stock, the Sponsor Warrants and the shares of our common stock underlying the Sponsor Warrants, commencing on the date such shares of common stock or Sponsor Warrants are eligible. We will bear the expenses incurred in connection with the filing of any such registration statements.

DRW, an entity ultimately controlled by Donald R. Wilson, Jr., purchased 2,354,450 shares of our common stock pursuant to the terms and conditions of an equity commitment letter and an assignment agreement, and was issued an additional 120,000 shares of our common stock by us as consideration for such purchases.  In May 2012, Mr. Wilson assigned these 120,000 shares to us for cancellation.



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On April 8, 2013, we issued to each of Donald R. Wilson, Jr. and Gregory H. Sachs warrants exercisable for 533,333 shares of the Company’s common stock (the “Note Conversion Warrants”). The Note Conversion Warrants were issued upon the conversion by each of Mr. Wilson and Mr. Sachs of a Promissory Note issued by us to the Sponsor in the aggregate principal amount of $800,000, which Promissory Note was subsequently assigned by the Sponsor to Mr. Wilson and Mr. Sachs in the aggregate principal amount of $400,000 each. The conversion price of the Promissory Notes was $0.75 per Note Conversion Warrant.

On April 19, 2013, we entered into a Common Stock Purchase Agreement with DRW pursuant to which DRW purchased 500,000 shares of the Company’s common stock, at a purchase price of $10 per share. 

In April 2013, we issued 100,000 shares of our common stock to the Donald R. Wilson, Jr. 2002 Trust (the “Trust”), pursuant to the terms of a financing commitment entered into between us and the Trust on March 1, 2013, whereby the Trust provided a standby credit facility up to the aggregate amount of (i) our obligations under the Symon Merger Agreement (ii) all out-of-pocket fees, expenses, and other amounts payable by the Company under or in connection with the Symon Merger Agreement with Symon. Such amount was reduced by the aggregate amount of cash available to the Company as of the closing date of the Symon Merger from cash on hand, cash from the sale of shares in the IPO, and net cash proceeds from any alternative debt financing. The fixed rate of interest for the first twelve months was 15% per annum, 5% of which was to be payment-in-kind and added each month to the principal balance. This commitment was not used by us.

All ongoing and future transactions between us and any member of our management team or his or her respective affiliates will be on terms believed by us at that time, based upon other similar arrangements known to us, to be no less favorable to us than are available from unaffiliated third parties. It is our intention to obtain estimates from unaffiliated third parties for similar goods or services to ascertain whether such transactions with affiliates are on terms that are no less favorable to us than are otherwise available from such unaffiliated third parties. If a transaction with an affiliated third party were found to be on terms less favorable to us than with an unaffiliated third party, we would not engage in such transaction.



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PRINCIPAL STOCKHOLDERS

The following table provides information concerning beneficial ownership of our common stock as of July 10, 2013, by:


·

each stockholder, or group of affiliated stockholders, that we know owns more than 5% of our outstanding common stock;

·

each of our executive officers;

·

each of our directors; and

·

all of our executive officers and directors as a group.


The following table lists the number of shares and percentage of shares beneficially owned based on 6,285,583 shares of common stock outstanding as of July 10, 2013. The percentage ownership information shown in the column labeled “After the Offering” is based upon 9,847,471 shares of common stock outstanding after completion of this offering, including 3,561,888 shares of our common stock that we are selling in this offering, assuming the issuance and sale of $40.0 million of shares of our common stock at an assumed public offering price of $11.23 per share, which was the last reported sale price of our common stock on July 10, 2013, and assuming no exercise of the underwriters’ overallotment option.

Beneficial ownership is determined in accordance with the rules of the SEC, and generally includes voting power and/or investment power with respect to the securities held. Shares of common stock subject to options and warrants currently exercisable or exercisable within 60 days of July 10, 2013, are deemed outstanding and beneficially owned by the person holding such options or warrants for purposes of computing the number of shares and percentage beneficially owned by such person, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as indicated in the footnotes to this table, the persons or entities named have sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by them.  Except as indicated in the footnotes to this table, the address for each beneficial owner is c/o SCG Financial Acquisition Corp., 500 North Central Expressway, Suite 175, Plano, Texas 75074.


 

 

Before the Offering

 

After the Offering

Name of Beneficial Owner

 

Number of

Shares

 

Approximate percentage of outstanding Shares

 

Approximate percentage of outstanding Shares

SCG Financial Holdings LLC (the “Sponsor”)(1)

 

5,523,810

 

53.7%

 

39.9%

Gregory H. Sachs(1) (2)

 

3,295,238

 

37.4%

 

26.6%

Donald R. Wilson, Jr.(1) (3)

 

6,249,688

 

70.9%

 

50.5%

PAR Investment Partners, L.P.(4)

 

1,898,344

 

26.4%

 

17.7%

Charles Ansley

 

0

 

--

 

--

Paul Shyposh

 

0

 

--

 

--

William Cole

 

0

 

--

 

--

Jeffrey Hayzlett

 

0

 

--

 

--

Garry K. McGuire, Jr.

 

0

 

--

 

--

Marvin Shrear

 

0

 

--

 

--

Alan Swimmer

 

700

 

*

 

*

Jonathan Trutter

 

0

 

--

 

--

All directors and executive officers as a group

(nine individuals)

 

3,295,938

 

37.4%

 

26.61%


                         

 

*

Less than 1%.

(1)

Includes 1,523,810 shares held by the Sponsor and 4,000,000 shares which the Sponsor has the right to acquire upon the exercise of warrants exercisable within 60 days.  The members of the Sponsor are Gregory H. Sachs Revocable Trust Dtd. April 24, 1998, the 2011 Sachs Family Trust, Kenneth Leonard, Michelle Sibley, Loren Buck, Michael Wallach and 2012 DOOH Investments LLC, an Illinois limited liability company (“DOOH”).  Mr. Sachs is the sole beneficiary of the Gregory H. Sachs Revocable Trust and the children of Mr. Sachs are the beneficiaries of the 2011 Sachs Family Trust.  Mr. Wilson is the manager of DOOH Investment Management LLC, the manager of DOOH.  Mr. Sachs and Mr. Wilson each have voting and dispositive control of 50% of the shares held by the Sponsor, such that each of Mr. Sachs and Mr. Wilson have voting and dispositive control over 761,905 shares and 2,000,000 warrants held by the Sponsor.  Each of Mr. Sachs and Mr. Wilson disclaims beneficial ownership of the other shares owned by the Sponsor.  285,714 of the shares held by the Sponsor will be subject to forfeiture by the Sponsor in the event the last sale price of SCG’s common stock does not equal or exceed $12.00 per share for any 20 trading days within any 30 trading day period within 24 months following the closing of SCG’s initial business combination.




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(2)

Includes, in addition to shares, warrants and shares underlying warrants described in footnote (1), 533,333 shares which Mr. Sachs has the right to acquire upon the exercise of warrants exercisable within 60 days.

(3)

Includes, in addition to shares, warrants and shares underlying warrants described in footnote (1), 533,333 shares which DOOH has the right to acquire upon the exercise of warrants exercisable within 60 days and 600,000 shares held by DOOH. The business address of Mr. Wilson and DOOH is 540 W. Madison Street, Suite 2500, Chicago, Illinois 60661.

(4)

Based on a Schedule 13G filed on April 12, 2013 on behalf of (i) PAR Investment Partners, L.P. (“PAR Investment Partners”), a Delaware limited partnership, (ii) PAR Group, L.P. (“PAR Group”), a Delaware limited partnership and (iii) PAR Capital Management, Inc. (“PAR Capital Management”), a Delaware corporation. The sole general partner of PAR Investment Partners is PAR Group. The sole general partner of PAR Group is PAR Capital Management. All shares listed in this footnote 4 are held by PAR Investment Partners.  Includes 898,344 shares which PAR Investment Partners, L.P. has the right to acquire upon the exercise of warrants exercisable within 60 days. The business address of each of PAR Investment Partners, PAR Group and PAR Capital Management is One International Place, Suite 2401, Boston, Massachusetts 02110.

 



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DESCRIPTION OF SECURITIES

General

Our certificate of authorization authorizes the issuance of up to 250,000,000 shares of common stock, par value $0.0001 per share, and 1,000,000 shares of preferred stock, par value $0.0001 per share. As of July 10, 2013, we had 6,285,583 outstanding shares of common stock and outstanding warrants to acquire 13,066,667 shares of common stock at an exercise price of $11.50 per share that are currently exercisable provided that there is an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available. No shares of our preferred stock are currently outstanding.

Units

We issued an aggregate of 8,000,000 Units in our initial public offering. Each Unit consisted of one share of our common stock and one Warrant. Each Warrant entitles its holder to purchase one share of our common stock. Any securityholder may elect to separate a Unit and trade the common stock and Warrant separately or as a Unit.

Common Stock

Stockholders of record are entitled to one vote for each share of common stock held on all matters to be voted on by our stockholders.  Stockholders are entitled to receive ratable dividends when, as and if declared by our board of directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of us stockholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is 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 our common stock.

Preferred Stock

Our certificate of incorporation authorizes the issuance of 1,000,000 shares of blank check preferred stock with such designation, rights and preferences as may be determined from time to time by the board. Accordingly, the board is able to, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of the common stock and could have anti-takeover effects. The ability of the board to issue preferred stock without stockholder approval could have the effect of delaying, deferring or preventing a change of control of us or the removal of existing management. No shares of SCG Preferred Stock are currently issued or outstanding.

Warrants

SCG 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 shares of common stock issuable upon exercise of the Warrants and a current prospectus relating to them is available.

The Warrants issued as part of the Units sold in our initial public offering (the “Public Warrants”) will expire five years after the completion of our initial business combination, or April 8, 2018, at 5:00 p.m., Eastern Time, or earlier upon redemption or liquidation.

Once the SCG Public Warrants become exercisable, we may call the Warrants for redemption:


·

in whole and not in part;

·

at a price of $0.01 per warrant;

·

upon not less than 30 days’ prior written notice of redemption, or the 30-day redemption period, to each Warrant holder; and

·

if, and only if, the last sale price of our common stock equals or exceeds $17.50 per share for any 20 trading days within a 30 trading day period ending on the third business day before we send the notice of redemption to the Warrant holders.




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If we call the Public Warrants for redemption as described above, our management 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 our management 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 our 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 our 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 our management 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 we call the Warrants for redemption and our management does not take advantage of this option, the Sponsor and its permitted transferees would still be entitled to exercise their Sponsor Warrants (as defined below) 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 our recapitalization, reorganization, merger or consolidation. However, the exercise price and number of SCG 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 Continental Stock Transfer & Trust Company, as warrant agent (the “Warrant Agent”), and us (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 us, 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 our common stock issuable upon exercise of the Warrants is current and available throughout the 30-day redemption period and our 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.

Under the terms of the Warrant Agreement, we agreed to use our best efforts to file a registration statement covering the shares of our common stock underlying the Warrants and to maintain a current prospectus relating to those shares of common stock until the expiration of the Warrants. We are registering the shares of our common stock issuable upon exercise of the Public Warrants pursuant to the registration statement of which this prospectus forms a part in order to satisfy this obligation. However, we cannot assure the holders of Warrants that we will be able to do so, and if we do not maintain a current prospectus related to the shares of common stock issuable upon exercise of the Public Warrants, holders will be unable to exercise their Warrants and SCG will not be required to settle any such Warrant exercise. If the prospectus relating to the shares of common stock issuable upon the exercise of the Public Warrants is not current or if those shares are not qualified or exempt from qualification in the jurisdictions in which the holders of the Warrants reside, we will not be required to net cash settle or cash settle the Warrant exercise, the Public Warrants may have no value, the market for the Public Warrants may be limited and the Public Warrants may expire worthless.

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, we 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 Warrants from us at a price of $0.75 per warrant in a private placement completed on April 12, 2011. In addition, on April 8, 2013, we issued to each of Donald R. Wilson, Jr. and Gregory H. Sachs (our Executive Chairman) Warrants exercisable for 533,333 shares of our common stock. These Warrants were issued upon the conversion by each of Mr. Wilson and Mr. Sachs of a Promissory Note issued by us to the Sponsor and in the aggregate principal amount of $800,000, which Promissory Note was subsequently assigned by the Sponsor to Mr. Wilson and



76





Mr. Sachs in the aggregate principal amount of $400,000 each. The conversion price of the Promissory Notes was $0.75 per Warrant. We refer to the Warrants issued to our Sponsor, Mr. Wilson and Mr. Sachs as the Sponsor Warrants. The Sponsor Warrants (including the shares of our common stock issuable upon exercise of the Sponsor Warrants) are not transferable, assignable or salable (other than to our officers and directors and other persons or entities affiliated with the Sponsor) until 30 days after the completion of SCG’s initial business combination, which is May 8, 2013, and they will not be redeemable by us 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 us and exercisable by the holders on the same basis as the Public Warrants.

Registration Rights


The holders of the founder shares and our Sponsor Warrants have registration rights to require us to register a sale of any of our securities held by them pursuant to a registration rights agreement dated April 12, 2011. These stockholders are entitled to make up to three demands, excluding short form registration demands, that we register such securities for sale under the Securities Act. In addition, these stockholders have “piggy-back” registration rights to include their securities in other registration statements filed by us. However, the registration rights agreement provides that we will not permit any registration statement filed under the Securities Act to become effective until termination of the applicable lock-up period, which occurs (i) in the case of the founder shares, upon the earlier of (A) one year after the completion of our initial business combination or earlier if, subsequent to our business combination, the last sales price of our common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after our initial business combination, or (B) the date on which when we consummate a liquidation, merger, stock exchange or other similar transaction after our initial business combination that results in all of our stockholders having the right to exchange their shares of common stock for cash, securities or other property, and (ii) in the case of the Sponsor Warrants and the common stock underlying such warrants, 30 days after the completion of our initial business combination. We will bear the costs and expenses of filing any such registration statements.


In connection with the consummation of our acquisition of RMG, SCG entered into registration rights agreements with (i) certain former shareholders of RMG and (ii) RMG’s lenders, with respect to the shares of our common stock issued to them in connection with the RMG acquisition. Pursuant to each such registration rights agreement, at any time following the one-year anniversary of the consummation of the RMG acquisition, the holders of a majority of the then-outstanding registrable securities subject to such agreement may request registration under the Securities Act of all or any portion of their registrable securities on Form S-3 or any successor form, or if such form is not then available to us, Form S-1.  The holders of a majority of the then-outstanding registrable securities shall be entitled to request (i) one such demand registration in which we shall pay all registration expenses and (ii) an unlimited number of demand registrations in which the holders of registrable securities shall pay their share of the registration expenses. In addition, these stockholders have “piggy-back” registration rights to include their securities in other registration statements filed by us. We will bear the costs and expenses of filing any such “piggy-back” registration statements.


Our lenders under the Junior Credit Agreement we entered into on April 19, 2013 have registration rights to require us to register a sale of any of our securities held by them pursuant to an investor rights agreement dated April 19, 2013. Pursuant to the investor rights agreement, the holders of a majority of the then-outstanding registrable securities shall be entitled to request (i) one such demand registration in which we shall pay all registration expenses and (ii) an unlimited number of demand registrations in which the holders of registrable securities shall pay their share of the registration expenses. In addition, these stockholders have “piggy-back” registration rights to include their securities in other registration statements filed by us. We will bear the costs and expenses of filing any such “piggy-back” registration statements.  


DRW Commodities, LLC (“DRW”) has registration rights to require us to register a sale of any of the shares of our common stock purchased by DRW on April 19, 2013, or any other shares of our common stock then held or subsequently acquired by DRW, pursuant to a registration rights agreement dated April 19, 2013. Pursuant to the registration rights agreement, DRW shall be entitled to request (i) three such demand registrations in which we shall pay all registration expenses and (ii) an unlimited number of demand registrations in which DRW shall pay its share of the registration expenses. In addition, DRW has “piggy-back” registration rights to include its securities in other registration statements filed by us. We will bear the costs and expenses of filing any such “piggy-back” registration statements.



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Delaware Anti-Takeover Law

We are subject to the provisions of Section 203 of the DGCL regulating corporate takeovers. This statute prevents certain Delaware corporations, under certain circumstances, from engaging in a “business combination” with:


·

a stockholder who owns 15% or more of our outstanding voting stock (otherwise known as an “interested stockholder”);

·

an affiliate of an interested stockholder; or

·

an associate of an interested stockholder, for three years following the date that the stockholder became an interested stockholder.


A “business combination” includes a merger or sale of more than 10% of our assets. However, the above provisions of Section 203 do not apply if:


·

the board approves the transaction that made the stockholder an “interested stockholder,” prior to the date of the transaction;

·

after the completion of the transaction that resulted in the stockholder becoming an interested stockholder, that stockholder owned at least 85% of voting stock outstanding at the time the transaction commenced, other than statutorily excluded shares of common stock; or

·

on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at a meeting of our stockholders, and not by written consent, by an affirmative vote of at least two-thirds of the outstanding voting stock not owned by the interested stockholder.


Transfer Agent

The transfer agent for our common stock and Units is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004.



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UNDERWRITING

We have entered into an underwriting agreement with Roth Capital Partners, LLC, as representative of the underwriters, with respect to the shares of common stock subject to this offering. Subject to certain conditions, we have agreed to sell to the underwriters, and the underwriters have agreed to purchase, the number of shares of common stock provided below opposite their name.


Underwriters

 

 

Number

of Shares

Roth Capital Partners, LLC

 

 

Northland Securities, Inc.

 

 

Total

 

 


The underwriters are offering the shares of common stock subject to their acceptance of the shares of common stock from us and subject to prior sale.  The underwriting agreement provides that the obligation of the underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus is subject to the approval of certain legal matters by their counsel and to certain other conditions.  The underwriters are obligated to take and pay for all of the shares of common stock if any such shares are taken.  However, the underwriters are not required to take or pay for the shares of common stock covered by the underwriters’ over-allotment option described below.

Northland Capital Markets is the trade name for certain capital markets and investment banking services of Northland Securities, Inc., member FINRA/SIPC.

Over-Allotment Option

We have granted the underwriters an option, exercisable for 45 days from the date of this prospectus, to purchase up to an aggregate of [] additional shares of common stock to cover over-allotments, if any, at the public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. If the underwriters exercise this option, the underwriters will be obligated, subject to certain conditions, to purchase the additional shares for which the option has been exercised.

Discounts, Commissions and Expenses

The underwriters have advised us that they propose to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $[] per share.  The underwriters may allow, and certain dealers may reallow, a discount from the concession not in excess of $[] per share to certain brokers and dealers. After this offering, the initial public offering price, concession and reallowance to dealers may be changed by the underwriters. No such change shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The shares of common stock are offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part.  The underwriters have informed us that they do not intend to confirm sales to any accounts over which they exercise discretionary authority.

The following table shows the underwriting discounts and commissions payable to the underwriters by us in connection with this offering.  Such amounts are shown assuming both no exercise and full exercise of the underwriters’ over-allotment option to purchase additional shares.


 

 

Per

share(1)

 

Total Without Exercise of Over-Allotment Option

 

Total With Exercise of Over-Allotment Option

Public offering price

$

 

$

 

$

 

Underwriting discounts and commissions payable by us

$

 

$

 

$

 

 

                          

(1)   Does not include a non-accountable expense allowance equal to 1% of the gross proceeds, or $____ per share, payable to the representative of the underwriters.




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We estimate that expenses payable by us in connection with this offering, other than the underwriting discounts and commissions and non-accountable expense allowance referred to above, will be approximately $500,000.  We have agreed to reimburse the representative of the underwriters for its actual accountable out-of-pocket expenses not to exceed $125,000 for all expenses, including the fees and expense of its counsel (which $125,000 is included in our estimated expenses of $500,000).

Indemnification

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or the Securities Act, and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.

Lock-up Agreements

We, our officers, directors and certain of our shareholders have agreed, subject to limited exceptions, for a period of 90 days after the date of the underwriting agreement, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of, directly or indirectly any shares of common stock or any securities convertible into or exchangeable for our common stock either owned as of the date of the underwriting agreement or thereafter acquired without the prior written consent of the representative of the underwriters.  This 90-day period may be extended if (1) during the last 17 days of the 90-day period, we issue an earnings release or material news or a material event regarding us occurs or (2) prior to the expiration of the 90-day period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 90-day period, then the period of such extension will be 18 days, beginning on the issuance of the earnings release or the occurrence of the material news or material event.  If after any announcement described in clause (2) of the preceding sentence, we announce that we will not release earnings results during the 16-day period, the lock-up period shall expire the later of the expiration of the 90-day period and the end of any extension of such period made pursuant to clause (1) of the preceding sentence.  The representative of the underwriters may, in its sole discretion and at any time or from time to time before the termination of the lock-up period, without notice, release all or any portion of the securities subject to lock-up agreements.

Price Stabilization, Short Positions and Penalty Bids

In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act:


·

Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

·

Over-allotment involves sales by an underwriter of shares in excess of the number of shares such underwriter is obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by such underwriter is not greater than the number of shares that it may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. An underwriter may close out any covered short position by either exercising its over-allotment option and/or purchasing shares in the open market.

·

Syndicate covering transactions involve purchases of shares of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, an underwriter will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which it may purchase shares through the over-allotment option. If an underwriter sells more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if such underwriter is concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

·

Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.


These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. Neither we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor the underwriters make any representations that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.



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Passive Market Making

In connection with this offering, the underwriters and any selling group members may engage in passive market making transactions in our common stock on The NASDAQ Stock Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act of 1934, as amended, during a period before the commencement of offers or sales of common stock and extending through the completion of the distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, that bid must then be lowered when specified purchase limits are exceeded.

Listing and Transfer Agent

Our common stock is listed on the Nasdaq Capital Market and trades under the symbol “RMGN.” The transfer agent of our common stock is Continental Stock Transfer & Trust Company.

Electronic Distribution

This prospectus in electronic format may be made available on websites or through other online services maintained by the underwriters, or by their affiliates.  Other than this prospectus in electronic format, the information on an underwriter’s website and any information contained in any other website maintained by an underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the underwriters in their capacity as underwriters, and should not be relied upon by investors.

Other

From time to time, the underwriters and/or their affiliates have provided, and may in the future provide, various investment banking and other financial services for us for which services it has received and, may in the future receive, customary fees.  Except for services provided in connection with this offering, the underwriters have not provided any investment banking or other financial services during the 180-day period preceding the date of this prospectus and we do not expect to retain the underwriters to perform any investment banking or other financial services for at least 90 days after the date of this prospectus.



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NOTICE TO INVESTORS

Notice to Investors in the United Kingdom

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any securities which are the subject of the offering contemplated by this prospectus may not be made in that Relevant Member State except that an offer to the public in that Relevant Member State of any such securities may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:


(a)

to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

(b)

to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts;

(c)

by the underwriters to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive); or

(d)

in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of these securities shall result in a requirement for the publication by the issuer or the underwriters of a prospectus pursuant to Article 3 of the Prospectus Directive.


For the purposes of this provision, the expression an “offer to the public” in relation to any of the securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any such securities to be offered so as to enable an investor to decide to purchase any such securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

The underwriters have represented, warranted and agreed that:


(a)

it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the FSMA)) received by it in connection with the issue or sale of any of the securities in circumstances in which section 21(1) of the FSMA does not apply to the issuer; and

(b)

it has complied with and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the securities in, from or otherwise involving the United Kingdom.


European Economic Area

In particular, this document does not constitute an approved prospectus in accordance with European Commission’s Regulation on Prospectuses no. 809/2004 and no such prospectus is to be prepared and approved in connection with this offering. Accordingly, in relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (being the Directive of the European Parliament and of the Council 2003/71/EC and including any relevant implementing measure in each Relevant Member State) (each, a Relevant Member State), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date) an offer of securities to the public may not be made in that Relevant Member State prior to the publication of a prospectus in relation to such securities which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of securities to the public in that Relevant Member State at any time:


·

to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

·

to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000; and (3) an annual net turnover of more than 50,000,000, as shown in the last annual or consolidated accounts; or

·

in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.



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For the purposes of this provision, the expression an “offer of securities to the public” in relation to any of the securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State. For these purposes the shares offered hereby are “securities.”


LEGAL MATTERS

Greenberg Traurig, LLP, Chicago, Illinois, will pass upon the validity of the shares of common stock offered hereby. Certain legal matters will be passed upon for the underwriters by Lowenstein Sandler LLP, New York, New York.

EXPERTS


The consolidated financial statements of Symon Holdings Corporation as of and for the years ended January 31, 2013, 2012 and 2011 appearing in this prospectus have been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in its report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing.


The consolidated financial statements of RMG as of and for the year ended December 31, 2012 appearing in this prospectus have been audited by Baker Tilly Virchow Krause, LLP, an independent registered public accounting firm, as stated in its report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing, and the consolidated financial statements of RMG as of and for the years ended December 31, 2011 and 2010 appearing in this prospectus have been audited by Frank, Rimerman + Co., LLP, an independent registered public accounting firm, as stated in its report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing.


The financial statements of SCG appearing in this prospectus have been audited by Rothstein Kass, an independent registered public accounting firm, as stated in its report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing.


WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus.  This prospectus does not contain all of the information included in the registration statement.  For further information pertaining to us and our common stock and warrants, you should refer to the registration statement and to its exhibits.  Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document.

We are subject to the informational requirements of the Securities Exchange Act of 1934 and file annual, quarterly and current reports, proxy statements and other information with the SEC.  You can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Washington, D.C. 20549.

You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facility.

INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

Section 145 of the Delaware General Corporation Law, as amended, authorizes us to indemnify any director or officer under certain prescribed circumstances and subject to certain limitations against certain costs and expenses, including attorney’s fees actually and reasonably incurred in connection with any action, suit or proceeding, whether civil, criminal, administrative or investigative, to which a person is a party by reason of being one of our directors or officers if it is determined that such person acted in accordance with the applicable standard of conduct set forth in such statutory provisions. Our restated certificate of incorporation contains provisions relating to the indemnification of director and officers and our by-laws extend such indemnities to the full extent permitted by Delaware law. We may also purchase and maintain insurance for the benefit of any director or officer, which may cover claims for which we could not indemnify such persons.


Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.



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INDEX TO FINANCIAL STATEMENTS


SYMON HOLDINGS CORPORATION


 

Page

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets as of January 31, 2013, 2012 and 2011

F-3

Consolidated Statements of Income and Comprehensive Income for the years ended January 31, 2013, 2012 and 2011

F-4

Consolidated Statements of Stockholders’ Equity for the years ended January 31, 2013, 2012 and 2011

F-5

Consolidated Statements of Cash Flows for the years ended January 31, 2013, 2012 and 2011

F-6

Notes to Consolidated Financial Statements

F-7

Consolidated Balance Sheets as of April 19, 2013 (Unaudited) and January 31, 2013

F-18

Consolidated Statements of Income and Comprehensive Income for the period from February 1, 2013 to April 19, 2013 and for the three month period ended April 30, 2012 (Unaudited)  

F-19

Consolidated Statements of Stockholders’ Equity for the period from January 31, 2013 to April 19, 2013 (Unaudited)

F-20

Consolidated Statements of Cash Flows for the period from February 1, 2013 to April 19, 2013 and for the three month period ended April 30, 2012 (Unaudited)  

F-21

Notes to Consolidated Financial Statements

F-22

 

 

REACH MEDIA GROUP HOLDINGS, INC.

Reports of Independent Registered Public Accounting Firms

F-33

Consolidated Balance Sheets as of December 31, 2012 and December 31, 2011

F-35

Consolidated Statements of Operations for the years ended December 31, 2012 and 2011

F-36

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2012 and 2011

F-37

Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011

F-38

Notes to the Consolidated Financial Statements

F-40

Report of Independent Registered Public Accounting Firm

F-59

Consolidated Balance Sheets as of December 31, 2011 and 2010

F-60

Consolidated Statements of Operations for the years ended December 31, 2011 and 2010

F-61

Consolidated Statement of Stockholders’ Equity for the years ended December 31, 2011 and 2010

F-62

Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010

F-63

Notes to the Consolidated Financial Statements

F-65

Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012

F-84

Consolidated Statements of Operations for the three month periods ended March 31, 2013 and 2012 (Unaudited)

F-85

Consolidated Statements of Stockholders’ Equity (Deficit) for the three month periods ended March 31, 2013 and 2012 (Unaudited)

F-86

Consolidated Statements of Cash Flows for the three month periods ended March 31, 2013 and 2012 (Unaudited)

F-87

Notes to Consolidated Financial Statements

F-89

 

 

SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

Report of Independent Registered Public Accounting Firm

F-106

Balance Sheets as of December 31, 2012 and 2011 (Audited)

F-108

Statements of Operations for the year ended December 31, 2012 and the period from January 5, 2011 (date of inception) to December 31, 2011 (Audited)  

F-109

Statements of Stockholders’ Equity for the year ended December 31, 2012 and the period from January 5, 2011 (date of inception) to December 31, 2011 (Audited)  

F-110

Statement of Cash Flows for the year ended December 31, 2012 and the period from January 5, 2011 (date of inception) to December 31, 2011 (Audited)  

F-111

Notes to Financial Statements

F-112

Interim Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012

F-125

Interim Statements of Operations for the Three Months Ended March 31, 2013 and 2012 and the period from January 5, 2011 (date of inception) to March 31, 2013 (Unaudited)  

F-126

Interim Statements of Changes in Stockholders’ Equity for the Period from January 5, 2011 (date of inception) to March 31, 2013 (Unaudited)  

F-127

Interim Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 and the period from January 5, 2011 (date of inception) to March 31, 2013 (Unaudited)  

F-128

Notes to Interim Financial Statements

F-129


F-1





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 Company’s 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 Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 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-2





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-3





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-4





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-5





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-6



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 Company’s 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 asset’s 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-7



Symon Holdings Corporation

Notes to Consolidated Financial Statements



unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Accounting Standards Codification (ASC) 805, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Completion of the Company’s 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 Company’s 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 management’s best estimate of the amount ultimately to be paid, in the same period that the interest would begin accruing or the penalties would first be assessed. The Company maintains accruals for uncertain tax positions until examination of the tax year is completed by the applicable taxing authority, available review periods expire or additional facts and circumstances cause 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-8



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 customer’s past payment history and its current creditworthiness. If it is determined that collection of a fee is not reasonably assured, the Company defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. Sales and use taxes are reported on a net basis, excluding them from revenue and cost of revenue.


Multiple-Element Arrangements


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 (MEA’s) 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 product’s essential functionality requires allocation of the arrangement consideration to the separate deliverables using the relative selling price (RSP) method for each unit of accounting based first on 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-9



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 Company’s sales team, with 10% or less through resellers in 2013. In the United Kingdom, Western Europe, the Middle East and India, the situation is reversed, with around 85% of sales coming from the reseller channel. Overall, approximately 67% of the Company’s global 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-10



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 Company’s hosting support agreement fees are based on the level of service provided to its customers, which can range from monitoring the health of a customer’s network to supporting a sophisticated web-portal.


Research and Development Costs


Research and development costs incurred prior to the establishment of technological feasibility of the related software product are expensed as incurred. After technological feasibility is established, any additional software development costs are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased, or Marketed. The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility and, accordingly, no software development costs have been capitalized to date.


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 debt’s 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 Company’s United Kingdom subsidiary is the British pound sterling. All assets and all liabilities of the subsidiary are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated to U.S. dollars at the weighted-average rate of exchange prevailing during the year. Resultant translation adjustments are recorded in accumulated other comprehensive income (loss), a separate component of stockholders’ equity.




F-11



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 Company’s 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 Company’s 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 Company’s 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-12



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 Company’s 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-13



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 Company’s 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 Company’s note had an interest rate equal to, at the Company’s 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-14



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 Company’s 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 Company’s 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-15



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 share’s 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 Company’s 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 Company’s 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-16



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 Company’s 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 Company’s 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-17





Symon Holdings Corporation

Consolidated Balance Sheets

(Unaudited)


 

 

April 19,

2013

 

January 31,

2013

Assets

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

$

5,666,273

 

10,203,169

Accounts receivable, net

 

6,214,897

 

9,061,229

Inventory, net

 

3,477,488

 

2,988,766

Deferred tax assets

 

364,304

 

372,618

Other current assets

 

840,628

 

686,099

Total current assets

 

16,563,590

 

23,311,881

Property and equipment, net

 

918,768

 

963,069

Intangible assets, net

 

2,528,113

 

2,584,443

Goodwill

 

10,975,355

 

10,972,547

Other assets

 

99,482

 

112,054

Total assets

$

31,085,308

 

37,943,994

 

 

 

 

 

Liabilities and Stockholders’ equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

$

1,171,922

 

4,150,730

Accrued liabilities

 

1,085,240

 

1,925,901

Deferred revenue

 

9,802,435

 

10,438,487

Total current liabilities

 

12,059,597

 

16,515,118

Deferred revenue – non current

 

1,336,696

 

1,073,223

Deferred tax liabilities

 

714,612

 

704,496

Total liabilities

 

14,110,905

 

18,292,837

 

 

 

 

 

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

Common stock – Class A Non-voting, $0.01 par value, (200,000 shares authorized, 68,889 shares issued and outstanding)

 

689

 

689

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

Accumulated comprehensive income (loss)

 

(160,084)

 

(38,940)

Notes receivable – restricted stock

 

(209,079)

 

(207,025)

Retained earnings

 

7,183,234

 

9,736,790

Total stockholders’ equity

 

16,974,403

 

19,651,157

Total liabilities and stockholders’ equity

$

31,085,308

 

37,943,994


See accompanying notes to consolidated financial statements.



F-18





Symon Holdings Corporation

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)


 

 

February 1

Through

April 19,

 

Three Months

Ended

April 30,

 

 

2013

 

2012

Revenue:

 

 

 

 

Products

$

2,239,236

$

3,778,954

Professional services

 

1,323,559

 

1,469,405

Maintenance and content services

 

3,594,520

 

4,176,287

Total Revenue

 

7,157,315

 

9,424,646

 

 

 

 

 

Cost of Revenue:

 

 

 

 

Products

 

1,498,135

 

2,156,060

Professional services

 

861,640

 

1,078,972

Maintenance and content services

 

611,692

 

652,950

Total Cost of Revenue

 

2,971,467

 

3,887,982

Gross Profit

 

4,185,848

 

5,536,664

 

 

 

 

 

Operating expenses:

 

 

 

 

Sales and marketing

 

1,729,871

 

1,789,860

General and administrative

 

1,739,348

 

1,875,596

Research and development

 

512,985

 

538,047

Acquisition expenses………………………………

 

3,143,251

 

0

Depreciation and amortization

 

140,293

 

321,879

Total operating expenses

 

7,265,748

 

4,525,382

Operating income (loss)

 

(3,079,900)

 

1,011,282

Interest and other expense

 

(14,553)

 

(47,466)

Income (loss) before income taxes

 

(3,094,453)

 

963,816

Income tax expense (benefit)

 

(540,897)

 

318,696

Net income (loss)

 

(2,553,556)

 

645,120

Other comprehensive income (loss):

 

 

 

 

Foreign currency translation adjustments

 

(121,144)

 

49,460

Total comprehensive income (loss)

$

(2,674,700)

$

694,580

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

Basic and dilutive net income per share of Class L Common Stock

$

(2.67)

$

.65

 

 

 

 

 

Basic and dilutive net income per share of Class A Non-Voting Common Stock

$

0

$

0

 

 

 

 

 

Weighted average shares used in computing basic and dilutive net income per share of Class L Common Stock

 

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


See accompanying notes to consolidated financial statements.



F-19





Symon Holdings Corporation

Consolidated Statements of Stockholders’ Equity

(Unaudited)


 

 

 

 

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, 2013

 

1,000,000

$

10,000

 

68,889

$

689

$

10,149,643

$

(207,025)

$

(38,940)

$

9,736,790

 

19,651,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued interest – stock notes receivable

 

-

 

-

 

-

 

-

 

-

 

(2,054)

 

 

 

 

 

(2,054)

Net income (loss)

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

(2,553,556)

 

(2,553,556)

Foreign currency translation adjustments

 

-

  

-

 

-

 

-

 

-

 

 

 

(121,144)

 

 

 

(121,144)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – April 19, 2013

 

1,000,000

$

10,000

 

68,889

$

689

$

10,149,643

$

(209,079)

$

(160,084)

$

7,183,234

$

16,974,403


See accompanying notes to consolidated financial statements.



F-20





Symon Holdings Corporation

Consolidated Statements of Cash Flows

(Unaudited)


 

 

February 1

Through

April 19,

 

Three Months

Ended

April 30,

 

 

2013

 

2012

Cash flows from operating activities

 

 

 

 

Net income (loss)

$

(2,553,556)

$

645,120

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

Depreciation and amortization

 

140,293

 

321,879

Deferred tax provision (benefit)

 

(12,294)

 

(44,485)

Other non-cash expense (income), net

 

(2,054)

 

(2,295)

Changes in operating assets and liabilities:

 

 

 

 

Accounts receivable

 

2,846,332

 

(220,627)

Inventory

 

(488,722)

 

627,053

Other current assets

 

(154,529)

 

3,033

Other assets, net

 

12,572

 

18,928

Accounts payable

 

(2,978,808)

 

(843,864)

Accrued liabilities  

 

(765,937)

 

(95,841)

Deferred revenue

 

(372,579)

 

416,410

 

 

 

 

 

Net cash provided by (used in) operating activities

 

(4,329,282)

 

825,311

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

Purchases of property and equipment

 

(86,470)

 

(139,015)

Net cash provided by (used in) investing activities

 

(86,470)

 

(139,015)

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

Repayments of bank borrowings

 

0

 

0

Net cash provided by (used in) financing activities

 

0

 

0

 

 

 

 

 

Effect of exchange rate changes on cash

 

(121,144)

 

49,460

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(4,536,896)

 

735,756

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

10,203,169

 

3,836,691

 

 

 

 

 

Cash and cash equivalents, end of period

$

5,666,273

$

4,572,447

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

Cash paid during the period for interest

$

2,053

$

533

Cash paid during the period for income taxes

$

150,000

$

234,000


See accompanying notes to consolidated financial statements.



F-21





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 Company’s 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.


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. 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 were derived from the audited consolidated financial statements, but do not include disclosures required by GAAP for annual periods. In the opinion of management, the unaudited condensed consolidated financial statements from February 1, 2013 to April 19, 2013 reflect all adjustments and disclosures necessary for a fair presentation of the results of the reported interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s annual audited consolidated financial statements and notes thereto included elsewhere in this prospectus. The results of operations from February 1, 2013 to April 19, 2013 are not necessarily indicative of the results to be expected for the full year.


There have been no changes to our significant accounting policies described in the Prospectus that have had a material impact on our condensed consolidated financial statements and related notes and therefore notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements included elsewhere in this prospectus have been omitted.


There are no recently issued accounting pronouncements that are expected to affect the Company’s financial reporting.


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 $211,455 and $223,458 as of April 19, 2013 and January 31, 2013, respectively. As of and for the periods presented, no single customer accounted for more than 10% of accounts receivable or revenues.


F-22





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 at year end for impairment or tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying value exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying value. Second, if the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Accounting Standards Codification (ASC) 805, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Completion of the Company’s most recent annual impairment test at April 19, 2013 and January 31, 2013 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 at April 19, 2013 or at January 31, 2013.


The Company’s 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 at April 19, 2013 or at January 31, 2013.


F-23




Income Taxes


The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those differences are expected to be recovered or settled. The Company recognizes in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date.


Under ASC 740,Income Taxes (“ASC 740”), the Company recognizes the effect of uncertain tax positions, if any, only if those positions are more likely than not of being realized. It also requires the Company to accrue interest and penalties where there is an underpayment of taxes, based on management’s best estimate of the amount ultimately to be paid, in the same period that the interest would begin accruing or the penalties would first be assessed. The Company maintains accruals for uncertain tax positions until examination of the tax year is completed by the applicable taxing authority, available review periods expire or additional facts and circumstances cause us to change our assessment of the appropriate accrual amount (see Note 5). U.S. income taxes have not been provided on $3.9 million of undistributed earnings of foreign subsidiaries as of April 19, 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:


·

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 reasonably assured. The Company assesses collectability based on a number of factors, including the customer’s past payment history and its current creditworthiness. If it is determined that collection of a fee is not reasonably assured, the Company defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. Sales and use taxes are reported on a net basis, excluding them from revenue and cost of revenue.


Multiple-Element Arrangements


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.


F-24




On February 1, 2011, the Company adopted an accounting update regarding revenue recognition for multiple arrangements, referred to as multiple element arrangements (MEA’s) 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 product’s essential functionality requires allocation of the arrangement consideration to the separate deliverables using the relative selling price (RSP) method for each unit of accounting based first on 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).

·

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 Company’s sales team, with 10% or less through resellers in 2013. In the United Kingdom, Western Europe, the Middle East and India, the situation is reversed, with around 85% of sales coming from the reseller channel. Overall, approximately 67% of the Company’s global 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.


F-25




The Company recognizes revenue on sales to resellers consistent with its recognition policies as discussed below.


Product revenue


The Company recognizes revenue on product sales generally upon delivery of the product or customer acceptance depending upon contractual arrangements with the customer. Shipping charges billed to customers are included in revenue and the related shipping costs are included in cost of revenue.


Professional services revenue


Professional services consist primarily of installation and training services. Installation fees are recognized either on a fixed-fee basis or on a time-and-materials basis. For time-and materials contracts, the Company recognizes revenue as services are performed. For fixed-fee contracts, the Company recognizes revenue upon completion of the installation which is typically completed within five business days. Such services are readily available from other vendors and are not considered essential to the functionality of the product. Training services are also not considered essential to the functionality of the product and have historically been insignificant; the fee allocable to training is recognized as revenue as the Company performs the services.


Maintenance and content services revenue


Maintenance support consists of hardware maintenance and repair and software support and updates. Software updates provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period. Support includes access to technical support personnel for software and hardware issues. Content services consist of providing customers live and customized news feeds.


Maintenance and content services revenue is recognized ratably over the term of the contracts, which is typically one to three years. Maintenance and support is renewable by the customer annually. Rates, including subsequent renewal rates, are typically established based upon specified rates as set forth in the arrangement. The Company’s hosting support agreement fees are based on the level of service provided to its customers, which can range from monitoring the health of a customer’s network to supporting a sophisticated web-portal.


Research and Development Costs


Research and development costs incurred prior to the establishment of technological feasibility of the related software product are expensed as incurred. After technological feasibility is established, any additional software development costs are capitalized in accordance with ASC 985-20, Costs of Software to be Sold, Leased, or Marketed . The Company believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility and, accordingly, no software development costs have been capitalized to date.


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 debt’s carrying value approximates its fair value due to the variable market interest rate of the debt.


F-26




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 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 dilutive equity instruments outstanding at April 19, 2013 or January 31, 2013. Note 6 provides for additional information regarding income (loss) per common share.


Foreign Currency Translation


The functional currency of the Company’s United Kingdom subsidiary is the British pound sterling. All assets and all liabilities of the subsidiary are translated to U.S. dollars at 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, including translation gains and losses and those on temporary intercompany advances were a net loss of $34,444 for the period ended April 19, 2013 and a net gain of $6,403 for the three months ended April 30, 2012. 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 Company’s 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 Company’s 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 Company’s consolidated financial position or results of operations.


F-27




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.


2. Property and Equipment


Property and equipment consist of the following at April 19, 2013 and January 31, 2013:


 

 

April 19,

 

January 31,

 

 

2013

 

2013

Machinery and equipment

$

2,486,727

$

2,424,874

Furniture and fixtures

 

646,643

 

646,643

Software

 

1,852,264

 

1,828,705

Leasehold improvements

 

270,148

 

269,087

 

 

5,255,778

 

5,169,309

Less accumulated depreciation and amortization

 

(4,337,010)

 

(4,206,240)

Property and equipment, net

$

918,768

$

963,069


Depreciation expense for the period ended April 19, 2013 and the three months ended April 30, 2012 was $130,771 and $135,384, respectively.


3. Goodwill and Intangible Assets


The changes in the carrying amount of goodwill for the period ended April 19, 2013 and the year ended January 31, 2013 were as follows:


Balance at January 31, 2012

 

10,969,148

Effects of foreign exchange

 

3,399

Balance at January 31, 2013

 

10,972,547

Effects of foreign exchange

 

2,808

Balance at April 19, 2013

$

10,975,355


The Company’s definite-lived intangible assets are as follows:


 

 

April 19, 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

 

(4,449,648)

 

471,556

Tradename

 

7

 

463,068

 

(306,511)

 

156,557

Covenant not-to-compete

 

5

 

270,952

 

(270,952)

 

-

Total

 

 

$

12,085,224

$

(11,457,111)

$

628,113


 

 

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


F-28




Amortization expense for the period ended April 19, 2013 and the three months ended April 30, 2012 was $56,330 and $186,495, 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 both April 19, 2013 and January 31, 2013 have been determined to have indefinite lives.


5. Income Taxes


The components of income taxes consist of the following for the period ended April 19, 2013 and the three months ended April 30, 2012:


 

 

April 19,

 

April 30,

 

 

2013

 

2012

Domestic

$

(575,026)

$

252,638

Foreign

 

34,129

 

66,058

 

$

(540,897)

$

318,696


The following table summarizes the provision (benefit) for U.S. federal, state and foreign taxes on income for the period ended April 19, 2013 and the three months ended April 30, 2012:


 

 

April 19,

 

April 30,

 

 

2013

 

2012

Current

 

 

 

 

Federal

$

(649,448)

$

227,138

State

 

92,852

 

0

Foreign

 

34,129

 

66,058

 

 

(522,467)

 

293,196

Deferred

 

 

 

 

Federal

 

(18,430)

 

25,500

State

 

0

 

0

Foreign

 

0

 

0

 

 

(18,430)

 

25,500

 

$

(540,897)

$

318,696


Income taxes differed from the amounts computed by applying the U.S. federal income tax rate of 34% to income (loss) before income taxes as follows:


 

 

April 19,

 

April 30,

 

 

2013

 

2012

Computed expected tax expense (benefit)

$

(1,052,114)

$

327,697

Non deductible expenses

 

427,580

 

5,272

International tax rate differences

 

(9,215)

 

(23,779)

State tax expense, net of federal benefit

 

92,852

 

0

Other

 

0

 

9,506

Total

$

(540,897)

$

318,696


F-29




The tax effects of temporary differences that give rise to significant portions of the deferred tax (assets) liabilities at April 19, 2013 and January 31, 2013 are as follows:


 

 

April 19,

 

January 31,

 

 

2013

 

2013

Deferred tax assets :

 

 

 

 

Deferred revenues

$

222,578

$

222,578

Deferred state sales tax

 

34,000

 

34,000

Bad debt reserve

 

46,588

 

46,588

Revaluation of short-term Intercompany loan

 

61,138

 

61,138

Net operating loss carryforwards

 

0

 

8,314

Total deferred tax assets – current

 

364,304

 

372,618

Deferred tax asset (liabilities)

 

 

 

 

Intangible assets

 

(731,549)

 

(721,433)

Depreciation

 

16,937

 

16,937

Net deferred tax asset (liabilities) – non current

 

(714,612)

 

(704,496)

Net deferred tax  liabilities

$

(350,308)

$

(331,878)


The Company’s net operating loss carryforward was fully utilized as of April 19, 2013. The IRS completed an examination of the Company’s 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 Company’s tax returns.  Subsequent to the examinations and as of April 19, 2013 and January 31, 2013, the Company has determined that there are no material 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.


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 share’s 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 April 19, 2013 and 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 Company’s 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 $11.0 million and $10.6 million of unaccrued dividends as of April 19, 2013 and January 31, 2013, 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 both April 19, 2013 and January 31, 2013. 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 Company’s shareholders. No shares of Class A Voting Stock were issued or outstanding at April 19, 2013 or January 31, 2013.


F-30




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. 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 expires in January 2014.


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 period ended April 19, 2013 and the three months ended April 30, 2012 was $209,268 and $222,276, respectively.


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.  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 Company’s 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 Company’s majority shareholder. This management fee expense is included in selling, general, and administrative expense in the consolidated statements of comprehensive income (loss).


9. Accrued Liabilities


Accrued liabilities as of April 19, 2013 and January 31, 2013 are as follows:


 

 

April 19,

 

January 31,

 

 

2013

 

2013

Accrued sales commissions

$

239,256

$

313,924

Accrued bonuses

 

115,060

 

599,272

Taxes payable

 

114,759

 

400,993

Accrued Expenses

 

757,392

 

163,207

Other

 

509,113

 

448,505

 

$

1,735,580

$

1,925,901


F-31




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 period ended April 19, 2013 and the three months ended April 30, 2012 are as follows:


 

 

April 19,

 

April 30,

 

 

2013

 

2012

Region

 

 

 

 

North America

$

5,137,363

$

6,900,814

Europe, Middle East, and Asia

 

2,019,952

 

2,523,832

Total

$

7,157,315

$

9,424,646


Geographic area information related to long-lived assets as of April 19 and January 31, 2013 is as follows:


 

 

April 19,

 

January 31,

 

 

2013

 

2013

Region

 

 

 

 

North America

$

1,054,701

$

1,111,651

Europe, Middle East, and Asia

 

591,622

 

647,915

Total

$

1,646,363

$

1,759,566


11. Subsequent Event


On March 1, 2013, the Company entered into an Agreement and Plan of Merger to merge with a subsidiary of SCG Financial Acquisition Corp. (SCG), to become a subsidiary of SCG for an estimated purchase price of $45,000,000 upon completion of certain requirements. The merger was consummated on April 19, 2013.




F-32





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Shareholders and 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.)  as of December 31, 2012, and the related consolidated statements of operations, stockholders’ 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 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 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 Company’s 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, 2012 and the results of their operations and  cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.


The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, a working capital deficit and a need for new capital. These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/ Baker Tilly Virchow Krause, LLP



Minneapolis, Minnesota

February 15, 2013



F-33





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 Company’s 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-34





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-35





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-36





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-37





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-38





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-39



Reach Media Group Holdings, Inc.

(dba RMG Networks, Inc.)

Notes to the Consolidated Financial Statements



 

1.

Nature of Business and Management’s 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 Company’s platform delivers premium video content and information to high value consumer audiences. RMG’s 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.


Management’s 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 People’s 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-40



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 Board’s (FASB) Accounting Standards Codification (ASC) 605-45 Principal Agent Considerations (Reporting Revenue Gross as a Principal versus Net as an Agent) the Company has recorded its advertising revenues on a gross basis.


Payments to airline and other partners for revenue sharing are paid on a monthly basis either under a minimum annual guarantee (based upon estimated advertising revenues), or as a percentage of the advertising revenues following collection from customers. The portion of revenue that 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. RMG’s 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 Company’s corporate credit cards and as guarantees required under lease agreements for two of the Company’s office facilities.  Restriction requirements continue through the term of the leases, which expire in 2015 and 2020, respectively.  




F-41



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 Company’s 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 management’s 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 asset’s 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 group’s carrying amount may not be recoverable.



F-42



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 unit’s 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-43



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 Company’s 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 company’s chief operating decision maker (the Company’s Chief Executive Officer (CEO)) in assessing performance and deciding how to allocate resources.  The Company’s business is conducted in a single operating segment.  The CEO reviews a single set of financial data that encompasses the Company’s 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 FASB’s 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 Sections—Amendments 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-44



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, Intangibles—Goodwill 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 entity’s 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 entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position.  This includes the effect or potential effect of rights of setoff associated with an entity’s 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, Intangibles—Goodwill 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-45



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-46



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-47



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 Company’s 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 Company’s 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-48



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-49



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 EMN’s operations were included in RMG’s 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 Company’s monthly lease obligations.  Based upon the then current real estate market conditions, the Company believed that these leases had been impaired and accrued $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-50



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 Company’s obligations under these contracts.  In the opinion of management, any liabilities resulting from these uncertainties will not have a material adverse effect on the Company’s 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-51



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 Company’s 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 Company’s 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 Company’s 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-52



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-53



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-54



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-55



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 Company’s 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 Company’s 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 purchaser’s 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 Company’s 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:


 

 

 

Options Available

 

Number of Shares

 

Weighted Average Exercise Price

Balances, December 31, 2011

 

12,089,848

 

15,851,031

 

0.327

 

Authorized

 

-

 

-

 

 

 

Granted

 

(679,000)

 

679,000

 

0.306

 

Exercised

 

-

 

-

 

-

 

Forfeited

 

2,652,451

 

(2,652,451)

 

0.307

 

Expired

 

329,736

 

(329,736)

 

0.294

Balances, December 31, 2012

 

14,393,035

 

13,547,844

 

$  0.331


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.



F-56



Reach Media Group Holdings, Inc.

(dba RMG Networks, Inc.)

Notes to the Consolidated Financial Statements



 

10.

Stock Options (continued)


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:


 

 

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


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 Company’s 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 Company’s 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 Company’s 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 Company’s 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.


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 Company’s 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.


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 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.




F-57



Reach Media Group Holdings, Inc.

(dba RMG Networks, Inc.)

Notes to the Consolidated Financial Statements



 

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.


 

 

2012

 

2011

Options to purchase common stock

 

13,547,844

 

15,851,031

Warrants to purchase common stock

 

24,013,216

 

27,448,216

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

 

10,802,107

 

10,944,760

 

 

90,072,302

 

95,953,142


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.  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.




F-58





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 Company’s 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-59





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-60





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-61





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-62





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-63





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-64



Reach Media Group Holdings, Inc.

(dba RMG Networks, Inc.)

Notes to the Consolidated Financial Statements




1.

Nature of Business and Management’s 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 Company’s platform delivers premium video content and information to high value consumer audiences. RMG’s 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.


Management’s 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 People’s Republic of China would impose restrictions over the transfer of funds to the U.S.

 



F-65



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 Board’s (FASB) Accounting Standards Codification (ASC) 605-45 Principal Agent Considerations (Reporting Revenue Gross as a Principal versus Net as an Agent) the Company has recorded its advertising revenues on a gross basis.


Payments to airline and other partners for revenue sharing are paid on a monthly basis either under a minimum annual guarantee (based upon estimated advertising revenues), or as a percentage of the advertising revenues following collection from customers.


The 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 Company’s corporate credit cards and as guarantees required under lease agreements for one of the Company’s office facilities.  Restriction requirements continue through the term of the lease, which expires in 2013.



F-66



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 Company’s 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 management’s 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 asset’s 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-67



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 group’s 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 unit’s 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-68



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 Company’s 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 company’s chief operating decision maker (the Company’s Chief Executive Officer (CEO)) in assessing performance and deciding how to allocate resources.  The Company’s business is conducted in a single operating segment.  The CEO reviews a single set of financial data that encompasses the Company’s 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-69



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 entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position.  This includes the effect or potential effect of rights of setoff associated with an entity’s 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, Intangibles—Goodwill 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-70



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-71



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 Company’s 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-72



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 Company’s 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-73



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-74



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 Company’s 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-75



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 Company’s 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-76



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 Company’s 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 Company’s 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-77



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 Company’s 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-78



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-79



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-80



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 Company’s 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 Company’s 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 purchaser’s 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 Company’s 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-81



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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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-82



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-83




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-84





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-85





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-86





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-87





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-88





1.     Nature of Business and Management’s 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 Company’s platform delivers premium video content and information to high value consumer audiences. RMG’s 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.


Management’s 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 Company’s 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 People’s Republic of China would impose restrictions over the transfer of funds to the U.S.



F-89





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 Board’s (FASB) Accounting Standards Codification (ASC) 605-45 Principal Agent Considerations (Reporting Revenue Gross as a Principal versus Net as an Agent) the Company has recorded its advertising revenues on a gross basis.


Payments to airline and other partners for revenue sharing are paid on a monthly basis either under a minimum annual guarantee (based upon estimated advertising revenues), or as a percentage of the advertising revenues following collection from customers. The portion of revenue that 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. RMG’s 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 Company’s corporate credit cards and as guarantees required under lease agreements for two of the Company’s office facilities.  Restriction requirements continue through the term of the leases, which expire in 2015 and 2020, respectively.  




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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 Company’s 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 management’s 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 asset’s 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 group’s carrying amount may not be recoverable.



F-91





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 unit’s 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-92





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 Company’s 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 company’s chief operating decision maker (the Company’s Chief Executive Officer (CEO)) in assessing performance and deciding how to allocate resources.  The Company’s business is conducted in a single operating segment.  The CEO reviews a single set of financial data that encompasses the Company’s 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 FASB’s 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 Sections—Amendments 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-93





2.     Significant Accounting Policies (continued)


Recently Issued Accounting Pronouncements: (continued)


In July 2012, the FASB issued ASU 2012-02, Intangibles—Goodwill 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 entity’s 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 entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position.  This includes the effect or potential effect of rights of setoff associated with an entity’s 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, Intangibles—Goodwill 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-94





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




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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 Company’s 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.  




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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 Company’s 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-97





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-98





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 Company’s monthly lease obligations.  Based upon the then current real estate market conditions, the Company believed that these leases had been impaired and accrued $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 Company’s obligations under these contracts.  In the opinion of management, any liabilities resulting from these uncertainties will not have a material adverse effect on the Company’s 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-99





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 Company’s 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 Company’s 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 Company’s 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-100





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-101




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-102





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 Company’s 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 Company’s 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 purchaser’s 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 Company’s 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-103





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 Company’s 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-104





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-105





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To Stockholders of SCG Financial Acquisition Corp.


We have audited the accompanying balance sheets of SCG Financial Acquisition Corp. (a development stage company) (the “Company”) as of December 31, 2012 and 2011, and the related statements of operations, stockholders' equity, and cash flows for the year ended December 31, 2012 and the periods from January 5, 2011 (date of inception) to December 31, 2011, as well as for the period from January 5, 2011 (date of inception) to December 31, 2012. The Company’s management is responsible for these financial statements. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in all material respects, the financial position of SCG Financial Acquisition Corp. (a development stage company) as of December 31, 2012 and 2011 and the results of its operations and its cash flows for the year ended December 31, 2012 and the periods from January 5, 2011 (date of inception) to December 31 2011 and January 5, 2011 (date of inception) to December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), SCG Financial Acquisition Corp.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 7, 2013 expressed an adverse opinion.



/s/ Rothstein Kass


Roseland, New Jersey

March 7, 2013



F-106





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Stockholders of SCG Financial Acquisition Corp.


We have audited SCG Financial Acquisition Corp’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). SCG Financial Acquisition Corp’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.


A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment:


Management has identified a material weakness in controls related to the accounting for warrants issued in connection with the Company’s Initial Public Offering. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2012 financial statements, and this report does not affect our report dated March 7, 2013 on those financial statements.


In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, SCG Financial Acquisition Corp. has not maintained effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets and the related statements of income, stockholders’ equity, and cash flows of SCG Financial Acquisition Corp, and our report dated March 7, 2013, expressed an unqualified opinion.


/s/ Rothstein Kass


Roseland, New Jersey

March 7, 2013




F-107





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

BALANCE SHEETS


 

 

December 31,

2012

 

December 31,

2011

 

 

 

 

As Restated

ASSETS

 

 

 

 

Current Assets:

 

 

 

 

Cash

$

411,217

$

348,373

Prepaid Expense

 

3,570

 

18,622

Total Current Assets

 

414,787

 

366,995

 

 

 

 

 

Noncurrent Assets:

 

 

 

 

Investments Held in Trust

 

80,000,537

 

80,037,977

 

 

 

 

 

Total Assets

$

80,415,324

$

80,404,972

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

Current Liabilities:

 

 

 

 

Accrued Expenses

$

1,334,740

$

176,285

Notes Payable – Sponsor

 

460,000

 

0

Notes Payable – Chief Executive Officer

 

200,000

 

0

Total Current Liabilities

 

1,994,740

 

176,285

 

 

 

 

 

Other Liabilities:

 

 

 

 

Deferred Underwriter's Fee

 

2,000,000

 

2,000,000

Warrant liability

 

3,000,000

 

3,600,000

 

 

 

 

 

Total Liabilities

 

6,994,740

 

5,776,285

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Common Stock, subject to possible redemption: 6,842,058
and 6,962,869 shares (at redemption value) as of
December 31, 2012 and December 31, 2011, respectively

 

68,420,583

 

69,628,686

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

Common Stock, $.0001 par value, 250,000,000 shares
authorized; 2,681,752 and 2,560,941 shares issued and outstanding
as of December 31, 2012 and December 31, 2011, respectively
(excluding 6,842,058 and 6,962,869 shares subject to
possible redemption as of December 31, 2012 and
December 31, 2011, respectively)

 

268

 

256

Additional Paid-in Capital

 

4,999,733

 

4,999,745

Deficit Accumulated during Development Stage

 

-

 

-

Total Stockholders' Equity

 

5,000,001

 

5,000,001

 

 

 

 

 

Total Liabilities and Stockholders' Equity

$

80,415,324

$

80,404,972


The accompanying notes are an integral part of the financial statements.




F-108





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

STATEMENTS OF OPERATIONS


 

 

Year Ended

December 31, 2012

 

For the

Period from

January 5, 2011

(date of inception)

to December 31,

2011

 

For the

Period from

January 5, 2011

(date of inception)

to December 31,

2012

 

 

 

 

As Restated

 

 

Revenue

$

-

$

-

$

-

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

Due Diligence/Transaction Costs

 

(1,260,414)

 

 

 

(1,260,414)

General and Administrative

 

(601,275)

 

(400,482)

 

(1,001,757)

 

 

 

 

 

 

 

Loss from Operations

 

(1,861,689)

 

(400,482)

 

(2,262,171)

Interest Income

 

53,586

 

37,977

 

91,563

Change in fair value of warrant liability

 

600,000

 

600,000

 

1,200,000

 

 

 

 

 

 

 

Net Income (Loss) Attributable to
Common Stockholders

 

(1,208,103)

 

237,495

 

(970,608)

 

 

 

 

 

 

 

Weighted Average Number of Common Shares Outstanding, excludes shares subject to possible redemption - basic and diluted  

 

2,551,764

 

2,265,722

 

2,409,727

 

 

 

 

 

 

 

Basic and Diluted Net Income (Loss) per common share, excludes shares subject to possible redemption - basic and diluted

$

(0.47)

$

0.10

$

(0.40)


The accompanying notes are an integral part of the financial statements.




F-109





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Period from January 5, 2011 (date of inception) to December 31, 2012


 

 

 

 

 

Additional
Paid-in

Capital

 

 

Deficit
Accumulated
During
Development

Stage

 

 

Total
Stockholders'

Equity

 

 

Common Stock

 

 

 

Amount

Shares

 

 

$.0001 Par

Sale of common stock issued to initial stockholders on January 28, 2011

 

1,752,381

 

$

175

 

$

24,825

 

$

-

 

$

25,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of 8,000,000 units on April 18, 2011, net of underwriters' discount, warrant liability and Offering costs (As Restated)

 

8,000,000

 

 

800

 

 

73,591,191

 

 

 

 

 

73,591,991

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeiture of sponsor shares in connection with the underwriter’s election to not exercise their over-allotment option

 

(228,571)

 

 

(23)

 

 

23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders (As Restated)

 

 

 

 

 

 

 

 

 

 

237,495

 

 

237,495

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale of private placement warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On April 12, 2011

 

 

 

 

 

 

 

3,000,000

 

 

 

 

 

3,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net proceeds subject to possible redemption of 6,962,869 shares at redemption value (As Restated)

 

(6,962,869)

 

 

(696)

 

 

(71,616,294)

 

 

(237,495)

 

 

(71,854,485)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2011(As Restated)

 

2,560,941

 

$

256

 

$

4,999,745

 

$

-

 

$

5,000,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in shares subject to possible redemption to 6,842,058 common shares at redemption value

 

120,811

 

 

12

 

 

(12)

 

 

1,208,103

 

 

1,208,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common shares not subject to possible redemption

 

 

 

 

 

 

 

 

 

 

(1,208,103)

 

 

(1,208,103)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

2,681,752

 

$

268

 

$

4,999,733

 

$

-

 

$

5,000,001


The accompanying notes are an integral part of the financial statements.




F-110





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

STATEMENTS OF CASH FLOWS


 

 

Year Ended

December 31, 2012

 

January 5, 2011

(date of inception) to

December 31, 2011

 

January 5, 2011

(date of inception) to

December 31, 2012

 

 

 

 

As Restated

 

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net Income (Loss)

$

(1,208,103)

$

237,495

$

(970,608)

Adjustments to reconcile net income (loss)

to net cash used in operating activities:

 

 

 

 

 

 

Change in fair value of warrant liability

 

(600,000)

 

(600,000)

$

(1,200,000)

Changes in operating assets and liabilities:

 

 

 

 

 

 

(Increase) decrease in accrued

interest income

 

37,416

 

(37,977)

 

(561)

(Increase) decrease in prepaid expenses

 

15,050

 

(18,622)

 

(3,570)

Increase in accrued expenses

 

1,158,481

 

176,285

 

1,334,764

 

 

 

 

 

 

 

Net cash used in operating activities

 

(597,156)

 

(242,819)

 

(839,975)

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Investments held in Trust Account

 

-

 

(80,000,000)

 

(80,000,000)

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Proceeds from public Offering, net of underwriting discount

 

 

 

78,000,000

 

78,000,000

Proceeds from issuance of warrants

 

 

 

3,000,000

 

3,000,000

Proceeds from notes payable, Sponsor

 

460,000

 

175,000

 

375,000

Proceeds from notes payable,

Chief Executive Officer

 

200,000

 

 

 

460,000

Proceeds from issuance of stock

to initial investor

 

 

 

25,000

 

25,000

Payment of note payable, stockholder

 

 

 

(175,000)

 

(175,000)

Payment of Offering costs

 

 

 

(433,808)

 

(433,808)

 

 

 

 

 

 

 

Net cash provided by financing activities

 

660,000

 

80,591,192

 

81,251,192

 

 

 

 

 

 

 

Net increase in cash

 

62,844

 

348,373

 

411,217

 

 

 

 

 

 

 

Cash at beginning of the period

 

348,373

 

-

 

-

 

 

 

 

 

 

 

Cash at end of the period

$

411,217

$

348,373

$

411,217

 

 

 

 

 

 

 

Supplemental disclosure of non-cash

financing activities:
Deferred underwriter’s fee

$

-

$

2,000,000

$

2,000,000

 

 

 

 

 

 

 

Notes payable transferred to

Chief Executive Officer

$

200,000

$

-

$

200,000

Adjustment for warrant liability in

connection with the public offering

$

-

$

4,200,000

$

4,200,000


The accompanying notes are an integral part of the financial statements.




F-111





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

NOTES TO FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to December 31, 2012


NOTE A—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS


SCG Financial Acquisition Corp. (a corporation in the development stage) (the “Company”) 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 has neither engaged in any operations nor generated any income, other than interest on the Trust Account assets (the “Trust Account”). The Company is focused on identifying a prospective target business or asset with which to consummate an Initial Business Combination. The Company is considered to be in the development stage as defined in FASB Accounting Standards Codification 915, or FASB ASC 915, “Development Stage Entities,” and is subject to the risks associated with activities of development stage companies. The Company has selected December 31 as its fiscal year end. All activity through December 31, 2012 relates to the Company’s formation, initial public offering (“Offering”) and identification and investigation of prospective target businesses with which to consummate an Initial Business Combination.


The registration statement for the Offering was declared effective April 8, 2011. The Company consummated the Offering on April 18, 2011 and received net proceeds of approximately $82,566,000, before deducting underwriting compensation of $4,000,000 (which includes $2,000,000 of deferred contingent underwriting compensation payable upon consummation of an Initial Business Combination) and includes $3,000,000 received for the purchase of 4,000,000 warrants by SCG Financial Holdings LLC (the “Sponsor”). Total offering costs (excluding $2,000,000 in underwriting fees) was $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 are identical to the warrants sold in the Offering, except that if held by the original holder or its permitted assigns, they (i) may be exercised for cash or on a cashless basis and (ii) are not subject to being called for redemption.


Total gross proceeds to the Company from the 8,000,000 units sold in the Offering was $80,000,000. The Company’s management has 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 are intended to be generally applied toward consummating an Initial Business Combination. Furthermore, there is no assurance that the Company will be able to successfully consummate an Initial Business Combination.


On April 27, 2011, $80,000,000 from the Offering and Sponsor Warrants that was placed in a Trust Account (“Trust Account”) was invested, as provided in the Company’s registration statement. The Company is 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 will be maintained until the earlier of (i) the consummation of an Initial Business Combination or (ii) the distribution of the Trust Account as described below.


On May 2, 2012, the Company’s common stock commenced trading on The Nasdaq Capital Market (“Nasdaq”), under the symbol “SCGQ”. Prior to May 2, 2012, the common stock was quoted on the Over-the-Counter Bulletin Board quotation system under the same symbol. The warrants and units continue to be quoted on the Over-the-Counter Bulletin Board quotation system under the symbols SCGW and SCGU, respectively.




F-112





SCG FINANCIAL ACQUISITION CORP

(a development stage company)

NOTES TO FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to December 31, 2012


NOTE A—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS (continued)


The Company, after signing a definitive agreement for the acquisition of one or more target businesses or assets, will not submit the transaction for stockholder approval, unless otherwise required by law or the rules of the Nasdaq Stock Market. The Company will proceed with an Initial Business Combination if it is approved by the board of directors. Only in the event that the Company is required to seek stockholder approval in connection with its Initial Business Combination, the Company will proceed with an Initial Business Combination only if a majority of the outstanding shares of common stock voted are voted in favor of the Initial Business Combination. In connection with such a vote, if an Initial Business Combination is approved and consummated, stockholders that elect to redeem their shares of common stock will be entitled to receive their pro-rata portion of the Trust Account as follows: (i) public stockholders voting against the Initial Business Combination and electing to redeem shares of common stock shall be entitled to receive a per share pro rata portion of the Trust Account (excluding interest and net of taxes) and (ii) public stockholders voting in favor of the Initial Business Combination and electing to redeem shares of common stock shall be entitled to receive a per share pro rata portion of the Trust Account (together with interest thereon which was not previously used for working capital but net of taxes). These shares of common stock are recorded at a fair value and classified as temporary equity, in accordance with ASC 480. The Sponsor, Gregory H. Sachs and each member of the Sponsor have agreed, in the event the Company is required to seek stockholder approval of its Initial Business Combination, to vote the initial shares acquired by them in favor of approving an Initial Business Combination. The Sponsor, Gregory H. Sachs and each member of the Sponsor have also agreed to vote shares of common stock acquired by them in the Offering or in the aftermarket in favor of an Initial Business Combination submitted to the Company’s stockholders for approval.


The Company has identified two Initial Business Combination candidates, Reach Media Group Holdings, Inc. (“RMG”) and Symon Communications, Inc. (“Symon”). On November 20, 2012 and December 7, 2012, the Company entered into non-binding letter of intents with RMG and Symon, respectively. On December 19, 2012, the Company held a special meeting of stockholders, during which the shareholders approved extending the date by which the Company must either consummate a business combination or commence proceedings to dissolve and liquidate from January 12, 2013 to April 12, 2013 (see Note J).


On November 11, 2012, 50% of the equity interests of Sponsor was transferred to 2012 DOOH Investments LLC (“DOOH”), an entity controlled by Donald R. Wilson, Jr. The Company and DOOH entered into an equity commitment letter agreement on December 14, 2012 whereby DOOH agreed to purchase, from the Company and/or in the open market or through privately negotiated transactions, an aggregate of two million three hundred fifty thousand (2,350,000) shares of common stock of the Company. Pursuant to this agreement, after the stock has been acquired, the Company will issue 120,000 shares of common stock as compensation. As of December 31, 2012, the common stock had not been acquired.


Going Concern Consideration


The Company’s Sponsor, officers and directors have agreed that the Company will have until April 12, 2013 to consummate an Initial Business Combination due to the approval of at least 65% of the holders of the Company’s common stock. The Company has obtained the necessary shareholder approval to extend the timeframe to consummate an Initial Business Combination until April 12, 2013. If the Company does not consummate an Initial Business Combination within this period of time, it shall (i) cease all operations except for the purposes of winding up, (ii) redeem the public shares of common stock for a per share pro rata portion of the Trust Account, including a portion of the interest earned thereon which was not previously used for working capital (less up to $100,000 of such net interest to pay dissolution expenses), but net of any taxes (which redemption would completely extinguish such holders’ rights as stockholders, including the right to receive further liquidation distributions, if any) and (iii) as promptly as possible following such redemption, dissolve and liquidate the balance of the Company’s net assets to its remaining stockholders, as part of its plan of dissolution and liquidation. This mandatory liquidation and subsequent dissolution raises substantial doubt about the Company’s ability to continue as a going concern.




F-113





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

NOTES TO FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to December 31, 2012


NOTE A—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS (continued)


The Sponsor, Gregory H. Sachs and each member of the Sponsor have waived their rights to participate in any redemption with respect to their initial shares. However, if the Sponsor, Gregory H. Sachs or any member of the Sponsor acquire shares of common stock after the Offering, they will be entitled to a pro rata share of the Trust Account upon the Company’s redemption or liquidation in the event the Company does not consummate an Initial Business Combination within the required time period. In the event of such distribution, it is possible that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per unit in the Offering.


NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of presentation


The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange of Commission (SEC).


Development stage company


The Company complies with the reporting requirements of FASB ASC 915, “Development Stage Entities.” At December 31, 2012, the Company had not commenced any operations nor generated revenue to date, other than interest on the Trust Account balance. All activity through December 31, 2012 relates to the Company’s formation, the Offering and the investigation of prospective target businesses with which to consummate an Initial Business Combination.


Net loss per common share


The Company complies with accounting and disclosure requirements of FASB ASC 260, “Earnings Per Share.” Net loss per common share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding for the period. At December 31, 2012, the Company did not have any dilutive securities and other contracts that could, potentially, be exercised or converted into common stock and then share in the earnings of the Company.  At December 31, 2012, the Company had outstanding warrants to purchase 12,000,000 shares of common stock. For all periods presented, the weighted average of these shares was excluded from the calculation of diluted income (loss) per common share because their inclusion would have been anti-dilutive. As a result, diluted loss per common share is the same as basic loss per common share for the period.


Concentration of credit risk


Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which, at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.




F-114





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

NOTES TO FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to December 31, 2012



NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


Warrant Liability


The Company accounts for the 12,000,000 warrants issued in connection with the Offering (8,000,000) and Private Placement (4,000,000) in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision they do not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statement of operations. The fair value of warrants issued by the Company in connection the Offering and Private Placement of securities has been estimated using the warrants quoted market price.


Fair value of financial instruments


The fair value of the Company’s assets and liabilities, which qualify as financial instruments under FASB ASC 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the balance sheets.


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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


Redeemable common stock


The 8,000,000 common shares sold as part of the Offering contain a redemption feature which allows for the redemption of common shares under the Company’s liquidation or tender offer/stockholder approval provisions. In accordance with FASB ASC 480 "Distinguishing Liabilities from Equity", redemption provisions not solely within the control of the Company require the security to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity’s equity instruments, are excluded from the provisions of FASB ASC 480. Although the Company does not specify a maximum redemption threshold, its Charter provides that in no event will it redeem any of its public shares in an amount that would cause its net tangible assets (stockholders’ equity) to be less than $5,000,001. In such case, the Company would not proceed with the redemption of its public shares and the related Initial Business Combination, and instead may search for an alternate Initial Business Combination.


The Company recognizes changes in redemption value immediately as they occur and will adjust the carrying value of the security to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common stock shall be affected by charges against the par value of common stock and retained earnings, or in the absence of retained earnings, by charges against paid-in capital in accordance with ASC 480-10-S99. During the year ended December 31, 2012 and the period from January 5, 2011 (date of inception) to December 31, 2011, changes from the initial redemption value were ($1,208,103) and $237,495, respectively, while changes from the initial number of shares subject to redemption were (120,811) and 23,750, respectively. Changes in redemption value and amounts are primarily due to the net income (loss) of the Company. Accordingly, at December 31, 2012 and December 31, 2011, 6,842,058 and 6,962,869 public shares, respectively, are classified outside of permanent equity at their redemption value. The redemption value is equal to the pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less franchise and income taxes payable (approximately $10.00 per share at December 31, 2012 and 2011).




F-115





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

NOTES TO FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to December 31, 2012


NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


Reclassifications


Certain reclassifications have been made to amounts previously reported for 2011 to conform with the 2012 presentation. Such reclassifications have no effect on previously reported net loss.


Securities held in Trust Account


Investment securities consist of United States Treasury securities. The Company classifies its securities as held-to-maturity in accordance with FASB ASC 320 “Investments - Debt and Equity Securities.” Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. Held-to-maturity treasury securities are recorded at amortized cost and adjusted for the amortization or accretion of premiums or discounts.


A decline in the market value of held-to-maturity securities below cost that is deemed to be other than temporary, results in an impairment that reduces the carrying costs to such securities' fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other than temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and the duration of the impairment, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective-interest method. Such amortization and accretion is included in the “interest income” line item in the statements of operations. Interest income is recognized when earned.


Income tax


The Company complies with the accounting and reporting requirements of Financial Accounting Standards Board Accounting Standards Codification 740, or FASB ASC 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the interim financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company established a full valuation allowance as of December 31, 2012 and December 31, 2011 of $330,000 and $60,000, respectively. The deferred tax asset is comprised of expenses non-deductible in the development stage


There were no unrecognized tax benefits as of December 31, 2012. FASB ASC 740 prescribes a recognition threshold and a measurement attribute for the interim financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at December 31, 2012. The Company is not currently aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The adoption of the provisions of FASB ASC 740 did not have a material impact on the Company’s financial position and results of operation and cash flows as of and for the period ended December 31, 2012.


The Company is subject to income tax examinations by major taxing authorities and has been since its inception. The Company is incorporated in the state of Delaware and is therefore required to pay franchise taxes to the state of Delaware on an annual basis.




F-116





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

NOTES TO FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to December 31, 2012


NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


Accrued expense


The Company is required to estimate certain expenses as of the balance sheet date and make appropriate accruals based on the these estimates. The following table sets forth the accrued expense breakdown as of December 31, 2012 and 2011.

 

 

 

December 31, 2012

 

December 31, 2011

 

 

 

 

 

Accrued Delaware franchise tax

$

354,020

$

152,384

Accrued professional fees

 

980,720

 

23,901

 

 

 

 

 

Total accrued expenses

$

1,334,740

$

176,285


Recently issued accounting standards


The Company does not believe that the adoption of any recently issued, but not yet effective, accounting standards will have a material impact on its financial position and results of operations.


NOTE C - RESTATEMENT OF PREVIOUSLY ISSUED AUDITED FINANCIAL STATEMENTS


The Company has restated its audited financial statements as of December 31, 2011 to correct its accounting for an adjustment related to the warrants issued in connection with the Offering, which comprise all of the outstanding warrants of the Company as of December 31, 2011. The Company’s original accounting treatment did not recognize a derivative liability and did not recognize any changes in the fair value of that derivative liability in its statements of operations.


In March 2013, the Company concluded it should correct its accounting related to the Company’s outstanding warrants. The Company had initially accounted for the warrants as a component of equity but upon further evaluation of the terms of the warrant, concluded that the warrants should be accounted for as a derivative liability. The warrants issued contain 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 of this provision, the Company has restated its financial statements to reflect the Company’s warrants as a derivative liability with changes in the fair value recorded in the current period earnings.




F-117





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

NOTES TO FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to December 31, 2012


NOTE C - RESTATEMENT OF PREVIOUSLY ISSUED AUDITED FINANCIAL STATEMENTS (continued)


The following tables summarize the adjustments made to the previously reported December 31, 2011 balance sheet, statement of operations and statement of cash flow:


December 31, 2011


Selected audited balance sheet information

 

 

 

(as previously
reported)

 

Effect of
Restatement

 

(as restated)

 

 

 

 

 

 

 

Warrant liability

$

-

$

3,600,000

$

3,600,000

Total Liabilities

 

2,176,285

 

3,600,000

 

5,776,285

 

 

 

 

 

 

 

Common Stock, subject to

possible redemption

 

73,228,686

 

(3,600,000

 

69,628,686

 

 

 

 

 

 

 

Common Stock

 

952

 

(696)

 

256

Additional Paid-in Capital

 

5,361,554

 

(361,809)

 

4,999,745

Deficit Accumulated during

the Development Stage

 

(362,505)

 

362,505

 

-

Total Stockholders' Equity

 

5,000,001

 

-

 

5,000,001

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

$

80,404,972

$

-

$

80,404,972


From the period from January 5, 2011 (date of inception) to December 31, 2011


Selected audited statement of operations

 

 

 

(as previously
reported)

 

Effect of
Restatement

 

(as restated)

Expenses:

 

 

 

 

 

 

Change in fair value of warrant liability

$

-

$

600,000

$

600,000

 

 

 

 

 

 

 

Income (Loss) Attributable to

 

 

 

 

 

 

Common Stockholders

$

(362,505)

$

600,000

$

237,495

 

 

 

 

 

 

 

Basic and Diluted Net Loss per common share, excludes shares subject to possible redemption - basic and diluted

$

(0.05)

$

0.15

$

0.10


Selected audited statement of cash flows


 

 

(as previously
reported)

 

Effect of
Restatement

 

(as restated)

Operating activities:

 

 

 

 

 

 

Net income (loss)

$

(362,505)

$

600,000

$

237,495

Gain on change in fair value of warrant liability

$

-

$

(600,000)

$

(600,000)




F-118





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

NOTES TO FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to December 31, 2012


NOTE D—INITIAL PUBLIC OFFERING


The Company consummated its Offering on April 18, 2011. Pursuant to the Offering, the Company sold 8,000,000 units at $10.00 per unit (“Units”). Each Unit consists of one share of the Company’s common stock, $0.0001 par value, and one redeemable common stock purchase warrant (“Warrant”). Each Warrant will entitle the holder to purchase from the Company one share of common stock at an exercise price of $11.50 commencing on the later of (a) one year from the date of the prospectus for the Offering (April 12, 2012) or (b) 30 days after the completion of an Initial Business Combination, and will expire five years from the date of the consummation of the Initial Business Combination. The Warrants will be redeemable by the Company at a price of $0.01 per Warrant upon 30 days prior notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $17.50 per share for any 20 trading days within a 30 trading day period ending on the third business day prior to the date on which notice of redemption is given.


NOTE E - 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 five years after the date of the Company's initial business combination. The warrants issued contain 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. Management used the quoted market price for the valuation of the warrants to determine the warrant liability to be $3,000,000 and $3,600,000 as of December 31, 2012 and 2011, respectively. 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.


NOTE F—RELATED PARTY TRANSACTIONS


The Company issued $75,000 and $100,000 unsecured promissory notes to the Sponsor on January 28, 2011 and February 9, 2011, respectively. The notes were non-interest bearing and were payable on the earlier of December 30, 2011 or the consummation of the Offering. The notes were repaid from the proceeds of the Company’s Offering. The Company issued two $100,000 unsecured promissory notes to the Sponsor on August 15, 2012 and October 11, 2012. These notes are non-interest bearing and are payable upon the consummation of the Initial Business Combination or liquidation. Both of the $100,000 promissory notes were transferred to Gregory H. Sachs, Chief Executive Officer, on November 18, 2012. The Company issued $100,000 and $360,000 unsecured promissory notes to the Sponsor on December 5, 2012 and December 21, 2012, respectively. These notes are also non-interest bearing and payable upon the consummation of the Initial Business Combination or liquidation.


On January 28, 2011, the Company issued to the Sponsor 1,752,381 shares of restricted common stock for an aggregate purchase price of $25,000 in cash. The purchase price for each share of common stock was approximately $0.0001 per share. These shares included 228,571 shares of common stock that were forfeited on June 2, 2011 (as a result of the underwriters not exercising their overallotment option) upon the expiration of the underwriter’s overallotment option. The Sponsor and its permitted transferees own 16% of the Company’s issued and outstanding shares after the Offering. A portion of the Sponsor’s shares, in an amount equal to 3% of the Company’s issued and outstanding shares, will be subject to forfeiture by the Sponsor in the event the last sales price of the Company’s stock does not equal or exceed $12.00 per share for any 20 trading days within any 30 trading day period within 24 months following the closing of an Initial Business Combination. The Sponsor, Gregory H. Sachs and each member of the Sponsor have agreed that they will not sell or transfer their initial shares until one year following the consummation of an Initial Business Combination, subject to earlier release in certain circumstances.




F-119





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

NOTES TO FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to December 31, 2012


NOTE F—RELATED PARTY TRANSACTIONS (continued)


The Sponsor purchased, in a private placement, 4,000,000 warrants, which are the same warrants disclosed in Note E, prior to the Offering at a price of $0.75 per warrant (an aggregate purchase price of $3,000,000) from the Company. Based on the observable market prices, the Company believes that the purchase price of $0.75 per warrant for such warrants exceeded the fair value of such warrants on the date of the purchase. The valuation was based on comparable initial public offerings by previous blank check companies. The Sponsor has agreed that the warrants purchased will not be sold or transferred until 30 days following consummation of an Initial Business Combination, subject to certain limited exceptions. If the Company does not complete an Initial Business Combination, then the proceeds will be part of the liquidating distribution to the public stockholders and the warrants issued to the Sponsor will expire worthless. The warrants purchased by the Sponsor are accounted for under ASC 815-40-15-7D, “Contracts in Entity’s own Equity.”


The following table summarizes the activity with respect to Sponsor warrants for the period from January 5, 2011 (date of inception) to December 31, 2012:


 

 

Number of

Warrants

Warrants outstanding at January 5, 2011 (date of inception)

 

-

Issued

 

4,000,000

Excercised

 

-

Cancelled

 

-

Warrants outstanding at December 31, 2011

 

4,000,000

Issued

 

-

Excercised

 

-

Cancelled

 

-

Warrants outstanding at December 31, 2012

 

4,000,000


The Company has entered into an Administrative Services Agreement, effective as of April 12, 2011, with Sachs Capital Group, LP, an affiliate of the Sponsor, for an estimated aggregate monthly fee of $7,500 for office space and secretarial and administrative services, with up to an additional $7,500 for other operating expenses incurred by the Sponsor on behalf of the Company. This agreement will expire upon the earlier of (a) the successful completion of our Company’s Initial Business Combination or (b) April 12, 2013. The Company has incurred $90,000 and $60,000 under this arrangement for the years ended December 31, 2012 and 2011, respectively.


The Sponsor is entitled to registration rights pursuant to a registration rights agreement. The Sponsor will be entitled to demand registration rights and certain “piggy-back” registration rights with respect to its shares of common stock, the Sponsor Warrants and the common stock underlying the Sponsor Warrants, commencing on the date such common stock or Sponsor Warrants are released from escrow. The Company will bear the expenses incurred in connection with the filing of any such registration statements.


NOTE G—COMMITMENTS AND CONTINGENCIES


In conjunction with the Offering on April 18, 2011, the Company granted the underwriters a 45-day option to purchase up to 1,200,000 additional Units to cover the over-allotment at the Offering price less the underwriting discounts and commissions.  This option expired unexercised on June 2, 2011.


A contingent fee payable to the underwriters of the Offering equal to 2.50% of the gross proceeds from the sale of the Units sold in the Offering will become payable from the amounts held in the Trust Account solely in the event the Company consummates its Initial Business Combination. Such contingent fee is reflected as deferred underwriter’s fee of $2,000,000 on the accompanying December 31, 2012 and 2011 balance sheets.




F-120





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

NOTES TO FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to December 31, 2012


NOTE H—INVESTMENT IN TRUST ACCOUNT


On April 27, 2011, $80,000,000 from the Offering and the sale of the Sponsor Warrants that was placed in a Trust Account was invested, as provided in the Company’s registration statement.  The Company is permitted to invest the proceeds of the Trust Account in U.S. “government securities,” within the meaning of Section 2(a)(16) of 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 will be maintained until the earlier of (i) the consummation of an Initial Business Combination or (ii) the distribution of the Trust Account.


Investment securities in the Company’s Trust Account, at fair value, consist of $79,999,200 and $80,041,697 in United States Treasury Bills and $2,592 and $740 of cash equivalents as of December 31, 2012 and December 31, 2011, respectively. The Company classifies its United States Treasury and equivalent securities as held-to-maturity in accordance with FASB ASC 320, "Investments - Debt and Equity Securities.” Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. Held-to-maturity treasury securities are recorded at amortized cost on the accompanying balance sheets and adjusted for the amortization or accretion of premiums or discounts. The carrying amount, gross unrealized holding gains and fair value of held-to-maturity securities at December 31, 2012 and December 31, 2011 are as follows:

 

 

 

Carrying
Amount

 

Gross
Unrealized
Holding
Gains (Loss)

 

Fair Value

Held-to-maturity:

 

 

 

 

 

 

  U.S. Treasury Securities – December 31, 2012

$

79,997,945

$

1,255

$

79,999,200

  U.S. Treasury Securities – December 31, 2011

$

80,037,237

$

4,460

$

80,041,697


NOTE I—FAIR VALUE MEASUREMENTS


The Company adopted FASB ASC 820, “Fair Value Measurements” for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. The adoption of FASB ASC 820 did not have an impact on the Company’s financial position or results of operations.


The Company defines fair value as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. The fair value estimates presented in the table below are based on information available to the Company as of December 31, 2012 and 2011.


The accounting standard regarding fair value measurements discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:


• Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.


• Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.


• Level 3: Unobservable inputs that reflect the reporting entity's own assumptions.




F-121





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

NOTES TO FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to December 31, 2012


NOTE I—FAIR VALUE MEASUREMENTS (continued)


Warrant Liability


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 2012 and 2011. There are no assets written down to fair value on non-recurring basis.


The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2012 and 2011, 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)

Assets:

 

 

 

 

 

 

 

 

U.S. Treasury Securities held in Trust Account:
December 31, 2012

$

79,999,200

$

79,999,200

 

 

December 31, 2011

$

80,041,697

$

80,041,697

 

 

Liabilities:

 

 

 

 

 

 

 

 

Warrant Liability:

 

 

 

 

 

 

 

 

December 31, 2012

$

3,000,000

 

$

3,000,000

 

December 31, 2011

$

3,600,000

 

$

3,600,000

 


NOTE J—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 December 31, 2012, the Company has not issued any shares of preferred stock.




F-122





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

NOTES TO FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to December 31, 2012


NOTE K – QUARTERLY FINANCIAL RESULTS (UNAUDITED)


The following table sets forth certain unaudited quarterly results of operations of the Company for the year ended December 31, 2012 and the period from January 5, 2011 (date of inception) to December 31, 2011. In the opinion of management, this information has been prepared on the same basis as the audited financial statements and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the quarterly information when read in conjunction with the audited financial statements and related notes included above. The quarterly operating results are not necessarily indicative of future results of operations.

 

 

 

For the Quarter Ended

 

 

March 31,

2012

 

June 30,

2012

 

 

September

30, 2012

 

December 31,

2012

Net income (loss) attributable to common stockholders

$

369,140

$

(15,640)

 

$

504,892

$

(2,066,495)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per common share, excludes shares subject to possible redemption – basic and diluted

$

0.15

$

(0.01)

 

$

0.20

$

(0.81)


 

 

For the Quarter Ended

 

 

March 31,

2011

 

June 30,

2011

 

 

September

30, 2011

 

 

December

31, 2011

Net income (loss) attributable to common stockholders

$

-

$

(111,187)

 

$

(101,992)

 

$

450,674

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per common share, excludes shares subject to possible redemption – basic and diluted

$

-

$

(0.04)

 

$

(0.04)

 

$

0.18


NOTE L -- SUBSEQUENT EVENTS


The Company issued a $150,000 unsecured promissory note to the Sponsor on January 11, 2013. This note is non-interest bearing and is payable upon the consummation of the Initial Business Combination or liquidation.


On January 11, 2013, the Company entered into an Agreement and Plan of Merger with RMG (“Merger Agreement”), whereby the Company will merge with and into RMG. In connection with the Merger, RMG’s stockholders will receive an aggregate of (i) 400,000 Company common shares, and (ii) $10,000 in cash, to be deposited into an escrow account. Additionally, the Company will pay, on behalf of RMG and its subsidiaries, all indebtedness of RMG Networks, Inc., a Delaware corporation and a wholly-owned subsidiary of RMG, equal to $23,500,000. Pursuant to the Merger Agreement, the Company will conduct a tender offer pursuant to Rule 13e-4 and Regulation 14E of the Exchange Act (the “Tender Offer”). Through the Tender Offer, the Company’s stockholders will be provided with the opportunity to redeem their common shares at a purchase price of $10.00 per share, net to the seller in cash, without interest, upon the consummation of the Merger.


On February 11, 2013, the Company announced its intent to commence the Tender Offer to purchase all of the issued and outstanding SCG common shares pursuant to Rule13e-4 and Regulation 14E of the Securities Exchange Act of 1934, as amended.


On February 7, 2013, an Amendment to the Underwriting Agreement by and between SCG Financial Acquisition Corp. and Lazard Capital Markets LLC was executed, whereby the deferred underwriting commission was reduced from $2,000,000 to $500,000.



F-123





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

NOTES TO FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to December 31, 2012


NOTE L -- SUBSEQUENT EVENTS (continued)


On February 5, 2013, the Company engaged an investment bank in connection with the possible acquisition or purchase by the Company of RMG and Symon Communications, Inc. For each transaction, a fee of $750,000 is payable upon consummation thereof, for a maximum fee of $1,500,000, plus expenses.


On March 1, 2013, the Company, Symon Holdings Corporation (“Symon”), and Golden Gate Capital Investment Fund II, L.P., a Delaware limited partnership, solely in its capacity as securityholders’ representative (the “Securityholders’ Representative”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms and conditions of the Merger Agreement, a subsidiary of the Company (“Merger Sub”) will merge with and into Symon, following which the separate corporate existence of Merger Sub will cease and Symon will continue its existence under the laws of the State of Delaware as the surviving corporation (the “Surviving Corporation”) and an indirect wholly-owned subsidiary of SCG (collectively, the “Merger”). In connection with the Merger, Symon’s stockholders will receive an aggregate of $45 million, minus (i) the amount of any indebtedness of Symon and its subsidiaries as of the date (the “Closing Date”) of the closing of the Merger (the “Closing”), which indebtedness will be repaid in full by SCG on the Closing Date, (ii) the amount, if any, by which the expenses of Symon and its subsidiaries and security holders in connection with the transactions contemplated by the Merger Agreement (the “Transaction Expenses”) exceed $2 million, and (iii) $250,000, which amount will be paid by SCG to the Securityholders’ Representative on the Closing Date to be held in trust as a source of reimbursement for costs and expenses incurred by the Securityholders’ Representative in such capacity (the “Expense Fund”). Pursuant to the Merger Agreement, SCG is required to pay, on the Closing Date, the Transaction Expenses.


On March 1, 2013, SCG entered into a financing commitment with the Donald R. Wilson, Jr. 2002 Trust (the “Trust”), whereby the Trust has provided a standby credit facility up to the aggregate amount of i) SCG’s obligations under the Merger Agreement with Symon and ii) all out-of-pocket fees, expenses, and other amounts payable by SCG under or in connection with the Merger Agreement with Symon. Such amount will be reduced by the aggregate amount of cash available to SCG as of the closing date of the merger from cash on hand, cash from SCG’s Public Shares, and net cash proceeds from any alternative debt financing. The fixed rate of interest for the first twelve months is 15% per annum, 5% of which will be payment-in-kind and added each month to the principal balance. In exchange for the financing commitment, the Trust will receive 100,000 shares of SCG Common Shares.



F-124





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

INTERIM BALANCE SHEETS


 

 

March 31, 2013

 

December 31,

2012

 

 

(Unaudited)

 

(Audited)

ASSETS

 

 

 

 

Current Assets:

 

 

 

 

Cash

$

100,155

$

411,217

Prepaid Lender Fees

 

350,000

 

 

Prepaid Expense

 

3,755

 

3,570

Total Current Assets

 

453,910

 

414,787

 

 

 

 

 

Noncurrent Assets:

 

 

 

 

Investments Held in Trust Account

 

80,010,531

 

80,000,537

 

 

 

 

 

Total Assets

 

80,464,441

 

80,415,324

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

Current Liabilities:

 

 

 

 

Accounts Payable and Accrued Expenses

 

1,466,411

 

1,334,740

Notes Payable, Chief Executive Officer

 

200,000

 

200,000

Notes Payable, Sponsor

 

1,095,000

 

460,000

Total Current Liabilities

 

2,761,411

 

1,994,740

 

 

 

 

 

Other Liabilities:

 

 

 

 

Warrant Liability

 

4,440,000

 

3,000,000

Deferred Underwriter's Fee

 

500,000

 

2,000,000

 

 

 

 

 

Total Liabilities

 

7,701,411

 

6,994,740

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Common Stock, subject to possible redemption: 6,776,303 and 6,842,058 shares (at redemption value) as of March 31, 2013 and December 31, 2012, respectively  

 

67,763,029

 

68,420,583

 

 

 

 

 

Stockholders' Equity

 

 

 

 

Common Stock, $.0001 par value, 250,000,000 shares authorized; 2,867,507 and 2,681,752 shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively (excluding 6,776,303 and 6,842,058 shares subject to possible redemption as of March 31, 2013 and December 31, 2012, respectively)  

 

287

 

268

Additional Paid-in Capital

 

4,999,714

 

4,999,733

Deficit Accumulated during Development Stage

 

-

 

-

Total Stockholders' Equity

 

5,000,001

 

5,000,001

Total Liabilities and Stockholders' Equity

$

80,464,441

$

80,415,324


The accompanying notes are an integral part of the unaudited financial statements.



F-125





SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

INTERIM STATEMENTS OF OPERATIONS

(Unaudited)


 

 

Three

Months

Ended

March 31,

2013

 

Three

Months

Ended

March 31,

2012

 

For the

Period from

January 5,

2011 (date of

inception) To

March 31,

2013

Revenue

$

-

$

-

$

-

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

Due Diligence/Transaction Costs

 

(494,262)

 

(97,584)

 

(1,754,676)

Stock Compensation

 

(1,200,000)

 

-

 

(1,200,000)

General and Administrative

 

(233,286)

 

(140,639)

 

(1,235,042)

 

 

 

 

 

 

 

Loss from Operations

 

(1,927,548)

 

(238,223)

 

(4,189,718)

Change in Fair Value of Warrant Liability

 

(1,440,000)

 

600,000

 

(240,000)

Interest Income

 

9,993

 

7,363

 

101,556

 

 

 

 

 

 

 

Net Income (Loss) Attributable to Common Stockholders

$

(3,357,555)

$

369,140

$

(4,328,162)

 

 

 

 

 

 

 

Weighted Average Number of Common Shares Outstanding, excludes shares subject to possible redemption - basic and diluted  

 

2,789,077

 

2,524,027

 

2,428,382

 

 

 

 

 

 

 

Basic and Diluted Net Income (Loss) per common share, excludes shares subject to possible redemption - basic and diluted

$

(1.20)

$

0.15

$

(1.78)



The accompanying notes are an integral part of the unaudited financial statements.



F-126






SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

INTERIM STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the Period from January 5, 2011 (date of inception) to March 31, 2013

(Unaudited)


 

 

 

 

 

 

 

 

Deficit

 

 

 

 

 

 

 

 

Accumulated

 

 

Common Stock

 

Additional

 

During

 

Total

 

 

Amount

 

Paid-in

 

Development

 

Stockholders'

Shares

 

$.0001 Par

 

Capital

 

Stage

 

Equity

Sale of common stock issued to initial stockholders on January 28, 2011

 

1,752,381

$

175

$

24,825

$

-

$

25,000

Sale of 8,000,000 units on April 18, 2011, net of underwriters' discount and offering costs

 

8,000,000

 

800

 

73,591,191

 

 

 

73,591,991

Forfeiture of sponsor shares in connection with the underwriter’s election to not exercise their over-allotment option

 

(228,571)

 

(23)

 

23

 

 

 

 

Net income attributable to common stockholders

 

 

 

 

 

 

 

237,495

 

237,495

Sale of private placement warrants

 

 

 

 

 

 

 

 

 

 

On April 12, 2011

 

 

 

 

 

3,000,000

 

 

 

3,000,000

Net proceeds subject to possible redemption of 7,322,869 shares at redemption value

 

(6,962,869)

 

(696)

 

(71,616,294)

 

(237,495)

 

(71,854,485)

Balance at December 31, 2011

 

2,560,941

$

256

$

4,999,745

$

-

$

5,000,001

Change in shares subject to possible redemption to 6,842,058 common shares at redemption value

 

120,811

 

12

 

(12)

 

1,208,103

 

1,208,103

Net loss attributable to common shares not subject to possible redemption

 

 

 

 

 

 

 

(1,208,103)

 

(1,208,103)

Balance, December 31, 2012

 

2,681,752

$

268

$

4,999,733

$

-

$

5,000,001

Issuance of 120,000 shares on February 8, 2013

 

120,000

 

12

 

1,199,988

 

 

 

1,200,000

Net loss attributable to common shares not subject to possible redemption

 

 

 

 

 

 

 

(3,357,555)

 

(3,357,555)

Reduction of deferred underwriter’s fee

 

 

 

 

 

1,500,000

 

 

 

1,500,000

Change in shares subject to possible redemption to 6,776,303 common shares at redemption value

 

65,755

 

7

 

(2,700,007)

 

3,357,555

 

657,555

Balance, March 31, 2013 (Unaudited)

 

2,867,507

$

287

$

4,999,714

$

-

$

5,000,001



The accompanying notes are an integral part of the unaudited financial statements.



F-127






SCG FINANCIAL ACQUISITION CORP.

(a development stage company)

INTERIM STATEMENTS OF CASH FLOWS

(Unaudited)


 

 

Three

Months Ended

March 31, 2013

 

Three

Months Ended

March 31, 2012

 

For the

Period from

January 5, 2011 (date of inception)

to March 31, 2013

Cash Flows from Operating Activities

 

 

 

 

 

 

Net Income (Loss)

$

(3,357,555)

$

369,140

$

(4,328,162)

Adjustments to reconcile net income/(loss) to net cash used in operating activities:

 

 

 

 

 

 

Change in fair value of warrant liability

 

1,440,000

 

(600,000)

 

240,000

Non-cash expense for stock compensation

 

1,200,000

 

 

 

1,200,000

Changes in Operating Assets and Liabilities

 

 

 

 

 

 

(Increase) in accrued interest income

 

(9,994)

 

(7,363)

 

(10,532)

(Increase) decrease in prepaid expenses

 

(185)

 

13,877

 

(3,755)

Increase in prepaid lender fees

 

(350,000

 

 

 

(350,000)

Increase in accrued expenses

 

131,672

 

98,572

 

1,466,412

Net cash used in operating activities

 

(946,062)

 

(125,774)

 

(1,786,037)

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Investments held in Trust Account

 

-

 

 

 

(80,000,000)

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Proceeds from public offering, net of underwriting discount

 

 

 

 

 

78,000,000

Proceeds from issuance of warrants

 

 

 

 

 

3,000,000

Proceeds from notes payable, Sponsor

 

635,000

 

 

 

1,270,000

Proceeds from notes payable,

Chief Executive Officer

 

 

 

 

 

200,000

Proceeds from issuance of stock to initial investor

 

 

 

 

 

25,000

Payment of note payable, Sponsor

 

 

 

 

 

(175,000)

Payment of offering costs

 

 

 

 

 

(433,808)

 

 

 

 

 

 

 

Net cash provided by financing activities

 

635,000

 

 

 

81,886,192

 

 

 

 

 

 

 

Net increase (decrease)  in cash

 

(311,062)

 

(125,774)

 

100,155

 

 

 

 

 

 

 

Cash at beginning of the period

 

411,217

 

348,373

 

-

 

 

 

 

 

 

 

Cash at end of the period

$

100,155

$

222,599

$

100,155

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

Deferred underwriter’s fee

$

(1,500,000)

$

-

$

500,000


The accompanying notes are an integral part of the unaudited financial statements.



F-128



SCG Financial Acquisition Corp.

(a development stage company)

NOTES TO INTERIM FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to March 31, 2013

(Unaudited)



NOTE A—DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS


SCG Financial Acquisition Corp. (a corporation in the development stage) (the “Company”) 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 that the Company had not yet identified (“Initial Business Combination”). As of March 31, 2013, he Company had neither engaged in any operations nor generated any income, other than interest on the trust account assets (the “Trust Account”). As of March 31, 2013, 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 is subject to the risks associated with activities of development stage companies. The Company has selected December 31 as its fiscal year end.


All activity through March 31, 2013 relates to the Company’s formation, initial public offering (“Offering”) and identification and investigation of prospective target businesses with which to consummate an Initial Business Combination.


The registration statement for the Offering was declared effective April 8, 2011. The Company consummated the Offering on April 18, 2011 and received net proceeds of approximately $82,566,000, before deducting underwriting compensation of $4,000,000 (which includes $2,000,000 of deferred contingent underwriting compensation originally payable upon consummation of an Initial Business Combination, which amount was reduced to $500,000 in April 2013) and includes $3,000,000 received for the purchase of 4,000,000 warrants by SCG Financial Holdings LLC (the “Sponsor”). Total offering costs (excluding $2,000,000 in underwriting fees, which was subsequently reduced to $500,000) was $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 are identical to the warrants sold in the Offering, except that if held by the original holder or its permitted assigns, they (i) may be exercised for cash or on a cashless basis and (ii) are not subject to being called for redemption.


Total gross proceeds to the Company from the 8,000,000 units sold in the offering was $80,000,000. The Company’s management has 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 was placed in a trust account (“Trust Account”) was invested, as provided in the Company’s registration statement. The Company was permitted to invest the proceeds of the Trust Account in U.S. “government securities,” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940 (the “1940 Act”) with a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the 1940 Act. The Trust Account assets were to be maintained until the earlier of (i) the consummation of an Initial Business Combination or (ii) the distribution of the Trust Account as described below.


On May 2, 2012, the Company’s common stock commenced trading on The Nasdaq Capital Market (“Nasdaq”), under the symbol “SCGQ”. Prior to May 2, 2012, the common stock was quoted on the Over-the-Counter Bulletin Board quotation system under the same symbol. The warrants and units continue to be quoted on the Over-the-Counter Bulletin Board quotation system under the symbols SCGQW and SCGQU, respectively.


On January 11, 2013, the Company entered into an Agreement and Plan of Merger (the “RMG Merger Agreement”) with Reach Media Group Holdings, Inc. (“RMG”), pursuant to which the Company acquired RMG as its Initial Business Combination, effective April 8, 2013. Pursuant to the RMG Merger Agreement, the Company conducted a tender offer pursuant to Rule 13e-4 and Regulation 14E of the Exchange Act (the “Tender Offer”). See Note J – Subsequent Events.


On March 1, 2013, the Company entered into an Agreement and Plan of Merger (the “Symon Merger Agreement”) with Symon Holdings Corporation (“Symon”), pursuant to which the Company acquired Symon, effective April 19, 2013. See Note J – Subsequent Events.


The Company formed SCG Financial Merger II Corp. and SCG Financial Merger III Corp. for the purposes of its business combinations with RMG and Symon on January 10, 2013 and February 27, 2013, respectively. These subsidiaries were inactive during the period ended March 31, 2013.



F-129



SCG Financial Acquisition Corp.

(a development stage company)

NOTES TO INTERIM FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to March 31, 2013

(Unaudited)



NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of presentation


The accompanying unaudited interim financial statements should be read in conjunction with the audited statements and notes thereto included in the Company’s 2012 Annual Report on Form 10-K filed with the SEC on March 14, 2013. The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange of Commission (SEC), and reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position as of March 31, 2013 and the results of operations for the three months ended March 31, 2013 and 2012 and the period from January 5, 2011 (date of inception) to March 31, 2013. The balance sheet as of December 31, 2012, as presented herein, was derived from the Company’s audited financial statements as reported in previous filings with the SEC. Certain information and disclosures normally included in interim financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.


Development stage company


The Company complies with the reporting requirements of FASB ASC 915, “Development Stage Entities.” At March 31, 2013, the Company had not commenced any operations nor generated revenue to date, other than interest on the Trust Account balance. All activity through March 31, 2013 relates to the Company’s formation, the Offering and the investigation of prospective target businesses with which to consummate an Initial Business Combination.


Net loss per common share


The Company complies with accounting and disclosure requirements of FASB ASC 260, “Earnings Per Share.” Net loss per common share is computed by dividing net loss applicable to common stockholders by the weighted average number of common shares outstanding for the period. At March 31, 2013, the Company did not have any dilutive securities and other contracts that could, potentially, be exercised or converted into common stock and then share in the earnings of the Company. As a result, diluted loss per common share is the same as basic loss per common share for the period.


Concentration of credit risk


Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which, at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.


Restricted cash equivalents held in the Trust Account


The amounts held in the Trust Account represented substantially all of the proceeds of the Offering and were classified as restricted assets since such amounts could only be used by the Company in connection with the consummation of an Initial Business Combination. As of March 31, 2013, the funds held in the Trust Account were invested primarily in United States Treasury Securities.


Fair value of financial instruments


The fair value of the Company’s assets and liabilities, which qualify as financial instruments under FASB ASC 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the balance sheets.


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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.



F-130



SCG Financial Acquisition Corp.

(a development stage company)

NOTES TO INTERIM FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to March 31, 2013

(Unaudited)



Redeemable common stock


The 8,000,000 common shares sold as part of the Offering contain a redemption feature which allowed for the redemption of common shares under the Company’s liquidation or tender offer/stockholder approval provisions. In accordance with FASB ASC 480, redemption provisions not solely within the control of the Company require the security to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity’s equity instruments, are excluded from the provisions of FASB ASC 480. Although the Company does not specify a maximum redemption threshold, its Charter provides that in no event will it redeem any of its public shares in an amount that would cause its net tangible assets (stockholders’ equity) to be less than $5,000,001. In such case, the Company would not proceed with the redemption of its public shares and the related Initial Business Combination, and instead would have been entitled to search for an alternate Initial Business Combination.


The Company recognizes changes in redemption value immediately as they occur and will adjust the carrying value of the security to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common stock shall be affected by charges against the par value of common stock and retained earnings, or in the absence of retained earnings, by charges against paid-in capital in accordance with ASC 480-10-S99. During the three months ended March 31, 2013 and period from January 5, 2011 (date of inception) to December 31, 2012, changes from the initial redemption value were $657,555 and $68,420,583, respectively, while changes from the initial number of shares subject to redemption were 65,755 and 6,842,058, respectively. Changes in redemption value and amounts are primarily due to the net income of the Company. Accordingly, at March 31, 2013 and December 31, 2012, 6,776,303 and 6,842,058 public shares, respectively, are classified outside of permanent equity at their redemption value. The redemption value is equal to the pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less franchise and income taxes payable (approximately $10.00 per share at March 31, 2013).


Securities held in Trust Account


Investment securities consist of United States Treasury securities. The Company classifies its securities as held-to-maturity in accordance with FASB ASC 320 “Investments - Debt and Equity Securities.” Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. Held-to-maturity treasury securities are recorded at amortized cost and adjusted for the amortization or accretion of premiums or discounts.


A decline in the market value of held-to-maturity securities below cost that is deemed to be other than temporary, results in an impairment that reduces the carrying costs to such securities' fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other than temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and the duration of the impairment, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the geographic area or industry the investee operates in. Premiums and discounts are amortized or accreted over the life of the related held-to-maturity security as an adjustment to yield using the effective-interest method. Such amortization and accretion is included in the “interest income” line item in the statements of operations. Interest income is recognized when earned.


Equity-based payments to non-employees


The Company complies with the accounting and reporting requirements of FASB ASC 505-50 “Equity-Based Payments to Non-Employees” which require companies to record compensation expense for transactions that involve the issuance of equity instruments in exchange for goods or services with non-employees. The amount of the compensation expense is based on the estimated fair value of the awards of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.  During the three month period ended March 31, 2013, the Company issued 120,000 shares of common stock to DRW Commodities, LLC (“DRW”), as assignee of 2012 DOOH Investments LLC (“DOOH”), an entity controlled by Donald R. Wilson, Jr., pursuant to the terms of an equity commitment letter entered into in December 2012 between the Company and DOOH (and subsequently assigned to DRW), pursuant to which DRW agreed to purchase from the Company and/or in the open market or through privately negotiated transactions, an aggregate of two million three hundred fifty thousand (2,350,000) shares of common stock of the Company.  DRW agreed not to redeem its shares from the Trust prior to the consummation of the Company’s contemplated business combinations.



F-131



SCG Financial Acquisition Corp.

(a development stage company)

NOTES TO INTERIM FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to March 31, 2013

(Unaudited)



Income taxes


The Company complies with the accounting and reporting requirements of Financial Accounting Standards Board Accounting Standards Codification 740, or FASB ASC 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the interim financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.


There were no unrecognized tax benefits as of March 31, 2013. FASB ASC 740 prescribes a recognition threshold and a measurement attribute for the interim financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at March 31, 2013. The Company is not currently aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The adoption of the provisions of FASB ASC 740 did not have a material impact on the Company’s financial position and results of operation and cash flows as of and for the period ended March 31, 2013.


The Company is subject to income tax examinations by major taxing authorities and has been since its inception. The Company may be subject to potential examination by U.S. federal, U.S. states or foreign jurisdiction authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal, U.S. state and foreign tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.


Recently issued accounting standards


The Company does not believe that the adoption of any recently issued, but not yet effective, accounting standards will have a material impact on its financial position and results of operations.


NOTE C—INITIAL PUBLIC OFFERING


The Company consummated its Offering on April 18, 2011. Pursuant to the Offering, the Company sold 8,000,000 units at $10.00 per unit (“Units”). Each Unit consists of one share of the Company’s common stock, $0.0001 par value, and one redeemable common stock purchase warrant (“Warrant”). Each Warrant will entitle the holder to purchase from the Company one share of common stock at an exercise price of $11.50 commencing on the later of (a) one year from the date of the prospectus for the Offering (April 12, 2012) or (b) 30 days after the completion of an Initial Business Combination, and will expire five years from the date of the consummation of the Initial Business Combination. The Warrants will be redeemable by the Company at a price of $0.01 per Warrant upon 30 days prior notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $17.50 per share for any 20 trading days within a 30 trading day period ending on the third business day prior to the date on which notice of redemption is given.


NOTE D - 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 five years after the date of the Company's initial business combination. The warrants issued contain a restructuring price adjustment provision in the event of 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. Management used the quoted market price for the valuation of the warrants to determine the warrant liability to be $4,440,000 and $3,000,000 as of March 31, 2013 and December 31, 2012, respectively. 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.




F-132



SCG Financial Acquisition Corp.

(a development stage company)

NOTES TO INTERIM FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to March 31, 2013

(Unaudited)



NOTE E—RELATED PARTY TRANSACTIONS


The Company issued $75,000 and $100,000 unsecured promissory notes to the Sponsor on January 28, 2011 and February 9, 2011, respectively. The notes were non-interest bearing and were payable on the earlier of December 30, 2011 or the consummation of the Offering. The notes were repaid from the proceeds of the Company’s Offering. The Company issued two $100,000 unsecured promissory notes to the Sponsor on August 15, 2012 and October 11, 2012. These notes are non-interest bearing and are payable upon the consummation of the Initial Business Combination or liquidation. Both of the $100,000 promissory notes were transferred to Gregory H. Sachs, Chief Executive Officer, on November 18, 2012. The Company issued $100,000, $360,000, $150,000, $50,000 and $435,000 unsecured promissory notes to the Sponsor on


December 5, 2012, December 21, 2012, January 11, 2013, March 13, 2013 and March 28, 2013, respectively. These notes are also non-interest bearing and were payable upon the consummation of the Initial Business Combination or liquidation.


On January 28, 2011, the Company issued to the Sponsor 1,752,381 shares of restricted common stock for an aggregate purchase price of $25,000 in cash. The purchase price for each share of common stock was approximately $0.0001 per share. These shares included 228,571 shares of common stock that were forfeited on June 2, 2011 (as a result of the underwriters not exercising their overallotment option) upon the expiration of the underwriter’s overallotment option. The Sponsor and its permitted transferees own 16% of the Company’s issued and outstanding shares after the Offering. A portion of the Sponsor’s shares, in an amount equal to 3% of the Company’s issued and outstanding shares, will be subject to forfeiture by the Sponsor in the event the last sales price of the Company’s stock does not equal or exceed $12.00 per share for any 20 trading days within any 30 trading day period within 24 months following the closing of an Initial Business Combination. The Sponsor, Gregory H. Sachs and each member of the Sponsor have agreed that they will not sell or transfer their initial shares until one year following the consummation of an Initial Business Combination, subject to earlier release in certain circumstances.


The Sponsor purchased, in a private placement, 4,000,000 warrants (the “Sponsor Warrants”) prior to the Offering at a price of $0.75 per warrant (an aggregate purchase price of $3,000,000) from the Company. Based on the observable market prices, the Company believes that the purchase price of $0.75 per warrant for such Sponsor Warrants exceeded the fair value of such warrants on the date of the purchase. The valuation was based on comparable initial public offerings by previous blank check companies. The Sponsor has agreed that the Sponsor Warrants will not be sold or transferred until 30 days following consummation of an Initial Business Combination, subject to certain limited exceptions. The Sponsor Warrants are accounted for in accordance with ASC 480-10-S99.


The Company entered into an Administrative Services Agreement, effective as of April 12, 2011, with Sachs Capital Group, LP, an affiliate of the Sponsor, for an estimated aggregate monthly fee of $7,500 for office space and secretarial and administrative services, with up to an additional $7,500 for other operating expenses incurred by the Sponsor on behalf of the Company. The Company has paid Sachs Capital Group, L.P. $172,500 under this agreement. This agreement was to expire upon the earlier of: (a) the successful completion of our Company’s Initial Business Combination, (b) January 12, 2013 (plus one 3 month extension subject to (i) a signed letter of intent and (ii) approval of at least 65% of the holders of the Company’s common stock), or (c) the date on which the Company is dissolved and liquidated. This agreement terminated upon the consummation of the Initial Business Combination on April 9, 2013 and through the date of this report, the additional $7,500 has not been paid to Sachs Capital Group LP.


The Sponsor is entitled to registration rights pursuant to a registration rights agreement. The Sponsor will be entitled to demand registration rights and certain “piggy-back” registration rights with respect to its shares of common stock, the Sponsor Warrants and the common stock underlying the Sponsor Warrants, commencing on the date such common stock or Sponsor Warrants are released from escrow. The Company will bear the expenses incurred in connection with the filing of any such registration statements.


NOTE F—COMMITMENTS AND CONTINGENCIES


In conjunction with the Offering on April 18, 2011, the Company granted the underwriters a 45-day option to purchase up to 1,200,000 additional Units to cover the over-allotment at the initial offering price less the underwriting discounts and commissions.  This option expired unexercised on June 2, 2011.




F-133



SCG Financial Acquisition Corp.

(a development stage company)

NOTES TO INTERIM FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to March 31, 2013

(Unaudited)



A contingent fee payable to the underwriters of the Offering equal to 2.50% of the gross proceeds from the sale of the Units sold in the Offering will become payable from the amounts held in the Trust Account solely in the event the Company consummates its Initial Business Combination. On February 7, 2013, an Amendment to the Underwriting Agreement by and between the Company and the underwriter was executed, whereby the deferred underwriting commission was reduced from $2,000,000 to $500,000.


On February 5, 2013, the Company engaged an investment bank in connection with the possible acquisition or purchase by the Company of RMG and Symon. For each transaction, a fee of $750,000 would be payable upon consummation thereof, for a maximum fee of $1,500,000, plus expenses.


NOTE G—INVESTMENT IN TRUST ACCOUNT


On April 27, 2011, $80,000,000 from the Offering and the sale of the Sponsor Warrants that was placed in a Trust Account was invested, as provided in the Company’s registration statement.  The Company was permitted to invest the proceeds of the Trust Account in U.S. “government securities,” within the meaning of Section 2(a)(16) of the 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 to be maintained until the earlier of (i) the consummation of an Initial Business Combination or (ii) the distribution of the Trust Account.


Investment securities in the Company’s Trust Account consist of $80,000,000 and $79,999,200 in United States Treasury Bills and $10,661 and $2,592 of cash equivalents as of March 31, 2013 and December 31, 2012, respectively. The Company classifies its United States Treasury and equivalent securities as held-to-maturity in accordance with FASB ASC 320, "Investments - Debt and Equity Securities.” Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. Held-to-maturity treasury securities are recorded at amortized cost on the accompanying balance sheets and adjusted for the amortization or accretion of premiums or discounts. The carrying amount, gross unrealized holding gains and fair value of held-to-maturity securities at March 31, 2013 and December 31, 2012 are as follows:


 

 

Carrying

Amount

 

Gross

Unrealized

Holding

Gains (Loss)

 

Fair Value

Held-to-maturity:

 

 

 

 

 

 

U.S. Treasury Securities – March 31, 2013

$

79,999,870

$

130

$

80,000,000

U.S. Treasury Securities – December 31, 2012

$

79,997,945

$

1,255

$

79,999,200


NOTE H—FAIR VALUE MEASUREMENTS


The Company adopted FASB ASC 820, “Fair Value Measurements” for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. The adoption of FASB ASC 820 did not have an impact on the Company’s financial position or results of operations.


The Company defines fair value as the amount at which an asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. The fair value estimates presented in the table below are based on information available to the Company as of March 31, 2013 and December 31, 2012.


The accounting standard regarding fair value measurements discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:



F-134



SCG Financial Acquisition Corp.

(a development stage company)

NOTES TO INTERIM FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to March 31, 2013

(Unaudited)




·

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

·

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

·

Level 3: Unobservable inputs that reflect the reporting entity's own assumptions.


Warrant Liability


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 three month period ended March 31, 2013 or the year ended December 31, 2012. There are no assets written down to fair value on non-recurring basis.


The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012, 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)

Assets:

 

 

 

 

 

 

 

 

U.S. Treasury Securities held in Trust Account:

March 31, 2013

$

80,000,000

$

80,000,000

 

 

December 31, 2012

$

79,999,200

$

79,999,200

 

 

Liabilities:

 

 

 

 

 

 

 

 

Warrant Liability:

 

 

 

 

 

 

 

 

March 31, 2013

$

4,440,000

 

$

4,440,000

 

December 31, 2012

$

3,000,000

 

$

3,000,000

 


NOTE I—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 March 31, 2013, the Company has not issued any shares of preferred stock.


NOTE J—SUBSEQUENT EVENTS


On April 8, 2013, the Company consummated its acquisition of RMG pursuant to the RMG Merger Agreement, among the Company, SCG Financial Merger II Corp., a Delaware corporation and an indirect subsidiary of SCG (“RMG Merger Sub”), RMG, and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity    as Stockholder Representative (the “Stockholder Representative”). Pursuant to the terms of the RMG Merger Agreement, at the closing RMG was merged with and into RMG Merger Sub (the “RMG Merger”), with RMG continuing as the surviving corporation. As a result of the RMG Merger, RMG became a wholly-owned, indirect subsidiary of the Company. In connection with the RMG Merger, RMG’s former stockholders became entitled to receive (i) 400,001 shares of the



F-135



SCG Financial Acquisition Corp.

(a development stage company)

NOTES TO INTERIM FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to March 31, 2013

(Unaudited)



Company’s common stock, of which 300,000 shares were deposited in an escrow account, (ii) $10,000 in cash, payable pro rata to the former holders of RMG’s Series C Preferred Stock, and (iii) $10,000 in cash, all of which was deposited in an escrow account to be used to reimburse the Stockholder Representative for any losses the Stockholder Representative might incur pursuant to the terms and conditions of the RMG Merger Agreement. Additionally, at the closing of the RMG Merger, the Company paid, on behalf of RMG and its subsidiaries, all indebtedness of RMG Networks, Inc., a Delaware corporation and a wholly-owned subsidiary of RMG. The aggregate amount of indebtedness repaid was equal to $23,500,000 (consisting of $21,000,000 in cash and 250,000 shares of the Company’s common stock).


In connection with the RMG Merger, 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 RMG Merger, pursuant to the 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.


On April 8, 2013, the Company issued to each of Donald R. Wilson, Jr. and Gregory H. Sachs warrants exercisable for 533,333 shares of the Company’s common stock (the “Note Conversion Warrants”). The Note Conversion Warrants were issued upon the conversion by each of Mr. Wilson and Mr. Sachs of a Promissory Note issued by the Company to the Sponsor in the aggregate principal amount of $800,000, which Promissory Note was subsequently assigned by the Sponsor to Mr. Wilson and Mr. Sachs in the aggregate principal amount of $400,000 each. The conversion price of the Promissory Notes was $0.75 per Note Conversion Warrant. The Company also repaid the remaining Promissory Notes issued by the Company to (i) the Sponsor in an aggregate principal amount of $295,000 and (ii) Mr. Sachs in an aggregate principal amount of $200,000, which Promissory Note had originally been issued by the Company to the Sponsor and was subsequently assigned to Mr. Sachs.


On April 19, 2013, the Company consummated its acquisition of Symon pursuant to the Symon Merger Agreement among the Company, SCG Financial Merger III Corp., a Delaware corporation and an indirect wholly-owned Subsidiary of SCG (“Symon Merger Sub”), Symon and Golden Gate Capital Investment Fund II, L.P., a Delaware limited partnership, solely in its capacity as securityholders’ representative (the “Securityholders’ Representative”). Pursuant to the terms of the Symon Merger Agreement, at the closing Symon Merger Sub was merged with and into Symon (the “Symon Merger”), with Symon continuing as the surviving corporation. As a result of the Symon Merger, Symon became a wholly-owned subsidiary of the Company. In connection with the Symon Merger, Symon’s stockholders received an aggregate of $45 million, minus (i) the amount of any indebtedness of Symon and its subsidiaries as of the date, which indebtedness was repaid in full by us at the closing, (ii) $1,523,251, representing the amount by which the expenses of Symon and its subsidiaries and securityholders in connection with the transactions contemplated by the Symon Merger Agreement exceeded the permitted transaction-related costs of $2 million, and (iii) $250,000, which amount was paid to the Securityholders’ Representative to be held in trust as a source of reimbursement for costs and expenses incurred by the Securityholders’ Representative in such capacity. At the closing, the Company also paid the expenses of Symon and its subsidiaries and securityholders incurred in connection with the transactions contemplated by the Symon Merger Agreement.


On April 19, 2013, the Company entered into a Credit Agreement by and among the Company and certain of its direct and indirect domestic subsidiaries party thereto from time to time as borrowers (the “Borrowers”), certain of the Company’s direct and indirect domestic subsidiaries party thereto from time to time as guarantors (the “Guarantors” and, together with the Borrowers, collectively, the “Loan Parties”), the financial institutions from time to time party thereto as lenders (the “Senior Lenders”), Kayne Anderson Credit Advisors, LLC, as administrative agent (the “Senior Administrative Agent”), and Comvest Capital II, L.P., as Documentation Agent (the “Senior Credit Agreement”). 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 will bear 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%.



F-136



SCG Financial Acquisition Corp.

(a development stage company)

NOTES TO INTERIM FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to March 31, 2013

(Unaudited)



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 will not be 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.


On April 19, 2013, the Company entered into a Junior Credit Agreement by and among the Borrowers, the Guarantors, the financial institutions from time to time party thereto as lenders (the “Junior Credit Agreement Lenders”), and Plexus Fund II, L.P., as administrative agent for the Junior Credit Agreement Lenders (the “Junior Credit Agreement Administrative Agent”) (the “Junior Credit Agreement”). The Junior Credit Agreement provides for a five-year unsecured $2.5 million junior Term Loan A (issued with an original issue discount of $315,000) and a five-year unsecured $7.5 million junior Term Loan B (the “Junior Loans”). Each of the Junior Loans was funded in full on April 19, 2013. The Junior Loans are guaranteed jointly and severally by the Guarantors.


The Term Loan A will bear interest at a fixed rate of 12% per annum and the Term Loan B will bear 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, April 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.


The required annual principal payments on the Senior and Junior Credit Facilities are as follows:


 

 

Principal Payments

 

 

Senior Credit Facility

 

Junior Credit Facility

2013

$

1,200,000

$

-

2014

 

2,400,000

 

-

2015

 

2,400,000

 

-

2016

 

2,400,000

 

-

2017

 

2,400,000

 

-

2018

 

13,200,000

 

10,000,000

Total

$

24,000,000

$

10,000,000



In consideration for the Term Loan A under the Junior Credit Agreement, the Company issued to the Junior Credit Agreement Lenders an aggregate of 31,500 SCG Common Shares on April 19, 2013. In addition, on April 19, 2013 SCG also issued an aggregate of 31,500 SCG Common Shares to certain affiliates of Kayne Anderson Mezzanine Partners in consideration for the assistance of Kayne Anderson Mezzanine Partners in arranging and structuring the financing provided under the Junior Credit Agreement.




F-137



SCG Financial Acquisition Corp.

(a development stage company)

NOTES TO INTERIM FINANCIAL STATEMENTS

For the period from January 5, 2011 (date of inception) to March 31, 2013

(Unaudited)



On April 19, 2013, the Company entered into a Common Stock Purchase Agreement (the “DRW Purchase Agreement”) with DRW Commodities, LLC (“DRW”) pursuant to which DRW purchased 500,000 shares of the Company’s common stock, at a purchase price of $10 per share.


In April 2013, the Company issued 100,000 shares of the Company’s common stock to the Donald R. Wilson, Jr. 2002 Trust (the "Trust"), pursuant to the terms of a financing commitment entered into between the Company and the Trust on March 1, 2013, whereby the Trust provided a standby credit facility up to the aggregate amount of (i) the Company’s obligations under the Symon Merger Agreement (ii) all out-of-pocket fees, expenses, and other amounts payable by the Company under or in connection with the Symon Merger Agreement with Symon. Such amount was reduced by the aggregate amount of cash available to the Company as of the closing date of the Symon Merger from cash on hand, cash from the sale of shares in the IPO, and net cash proceeds from any alternative debt financing. The fixed rate of interest for the first twelve months is 15% per annum, 5% of which will be payment-in-kind and added each month to the principal balance.


On April 25, 2012, SCG Financial Merger I Corp., a wholly-owned subsidiary of the Company and the direct parent company of Symon and RMG (“SCG Intermediate”), entered into an employment agreement with Garry K. McGuire, the Company’s Chief Executive Officer.  Mr. McGuire is expected to provide his services as Chief Executive Officer of the Company through this employment agreement with SCG Intermediate.  Pursuant to the employment agreement, Mr. McGuire has agreed to serve as Chief Executive Officer of SCG Intermediate for a three year term commencing on April 25, 2013.  Pursuant to the employment agreement, Mr. McGuire will also serve as a member of the Board of Directors of SCG Intermediate.  Under the employment agreement, Mr. McGuire is entitled to receive an annual salary of $450,000 per year, subject to annual increases at the discretion of the Board of Directors.  Mr. McGuire will also be entitled to an annual bonus of up to $480,000 based on SCG Intermediate’s achievement of certain earnings before interest, taxes and depreciation targets to be established by the Board of Directors on an annual basis.  Bonus amounts payable to Mr. McGuire payable to Mr. McGuire under his employment agreement will be calculated on a quarterly basis, and Mr. McGuire will be paid a pro rata portion of the following the completion of each fiscal quarter.  If Mr. McGuire receives quarterly bonus payments in excess of the amount actually earned through the end of the fiscal year, Mr. McGuire will be required to repay such excess bonus amounts to SCG Intermediate.  Alternatively, SCG Intermediate may retain or forfeit other compensation, payments or awards payable to Mr. McGuire until such excess bonus payments are recovered.


In May 2013, 120,000 shares of the Company’s common stock that had been issued to DRW pursuant to an Equity Commitment Letter, dated December 14, 2012, between the Company and DRW (as assignee of 2012 DOOH Investments, LLC), were returned to the Company and cancelled.


Our common stock is listed on the Nasdaq Capital Market, a national securities exchange. On May 3, 2013, we received notification from the Nasdaq that it intends to delist our common stock, due to our failure to satisfy the initial listing requirement that we have at least 300 “round lot” holders of our common stock. We intend to submit an appeal letter to the Nasdaq hearings panel outlining our plan to remain in compliance with the listing requirements, including by increasing our number of shareholders pursuant to a Form S-1 offering.




F-138






3,561,888 Shares of




[i12219002.jpg]





Common Stock









 

PROSPECTUS

 









Sole Book Running Manager

Roth Capital Partners

 

 

 

 

 

 

Co-Manager

Northland Capital Markets










                   , 2013








PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13.  Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses, other than the underwriting discount, payable by us in connection with the sale of common stock being registered. All amounts are estimated except the SEC registration fee.



Securities and Exchange Commission Registration Fee

$

6,275

FINRA Filing Fee

$

4,813

Printing Expenses

$

50,000

Accounting Fees and Expenses

$

100,000

Legal Fees and Expenses

$

300,000

Transfer Agent and Registrar

$

5,000

Non-Accountable Expense Allowance

$

400,000

Miscellaneous Fees and Expenses

$

33,912

 

 

 

Total

$

900,000


Item 14.  Indemnification of Directors and Officers.

Section 145 of the Delaware General Corporation Law (or DGCL) provides, in effect, that any person made a party to any action by reason of the fact that he is or was a director, officer, employee or agent of ours may, and in certain cases must, be indemnified by us against, in the case of a non-derivative action, judgments, fines, amounts paid in settlement, and reasonable expenses (including attorneys fees) incurred by him as a result of such action, and in the case of a derivative action, against expenses (including attorneys fees), if in either type of action he acted in good faith and in a manner he reasonably believed to be in or not opposed to our best interests. This indemnification does not apply, (i) in a derivative action, to matters as to which it is adjudged that the director, officer, employee or agent is liable to us, unless upon court order it is determined that, despite such adjudication of liability, but in view of all the circumstances of the case, he is fairly and reasonably entitled to indemnity for expenses, and, (ii) in a non-derivative action, to any criminal proceeding in which such person had no reasonable cause to believe his conduct was unlawful.

Article VIII of our restated certificate of incorporation provides that no director of ours shall be liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director to the fullest extent permitted by the DGCL.

Article VIII of our restated certificate of incorporation also provides that we shall indemnify to the fullest extent permitted by Delaware law any and all of our directors and officers, or former directors and officers, or any person who may have served at our request as a director or officer of another corporation, partnership, limited liability company joint venture, trust or other enterprise.

Item 15.  Recent sales of unregistered securities.

In January 2011, the Sponsor purchased 2,190,477 SCG Common Shares (the “Founder Shares”) for an aggregate purchase price of $25,000, or approximately $0.01 per share.  On April 12, 2011, SCG effected a 0.8 for one reverse split, the result of which left the Sponsor with 1,752,381 Founder Shares.  The Sponsor returned an aggregate of 228,571 Founder Shares to SCG for no consideration after the underwriters of SCG’s Initial Public Offering determined that they would not exercise their option to purchase additional units to cover any over-allotments.  In addition, simultaneously with the consummation of its initial public offering, SCG issued and sold to the Sponsor warrants to purchase up to 4,000,000 SCG Common Shares (the “Founder Warrants”) at a price of $0.75 per warrant for an aggregate purchase price of $3,000,000.  The Founder Shares and the Founder Warrants were issued in transactions exempt from the registration requirements in reliance upon Section 4(2) of the Securities Act in that they were issued to in a transaction not involving a public offering solely to accredited investors.

In connection with the Equity Commitment Letter and the Assignment Agreement, on February 8, 2013, DRW was issued 120,000 SCG Shares in consideration for DRW’s purchase of 2,354,450 Common Shares pursuant to the terms of the Equity Commitment Letter.  Such shares were issued in transactions exempt from the registration requirements in reliance upon Section 4(2) of the Securities Act in that such shares were issued to in a transaction not involving a public offering solely to accredited investors.

On April 8, 2013, the Company issued to each of Donald R. Wilson, Jr. and Gregory H. Sachs warrants exercisable for 533,333 SCG Common Shares (the “Note Conversion Warrants”).  The Note Conversion Warrants were issued upon the conversion by each of Mr. Wilson and Mr. Sachs of a Promissory Note issued by SCG to the Sponsor and in the aggregate principal amount of $800,000, which Promissory Note was subsequently assigned by the Sponsor to Mr. Wilson and Mr. Sachs in the aggregate principal amount of $400,000 each.  The conversion price of the Promissory Notes was $0.75 per Note Conversion Warrant.  The Note Conversion Warrants were issued in reliance upon Section 4(2) of the Securities Act in that such warrants were issued to in a transaction not involving a public offering solely to accredited investors.



II-1





In consideration for the Term Loan A under the Junior Credit Agreement entered into by SCG on April 19, 2013, SCG issued to the Junior Credit Agreement Lenders an aggregate of 31,500 SCG Common Shares. In addition, on April 19, 2013 SCG also issued an aggregate of 31,500 SCG Common Shares to certain affiliates of Kayne Anderson Mezzanine Partners in consideration for the assistance of Kayne Anderson Mezzanine Partners in arranging and structuring the financing provided under the Junior Credit Agreement. All such shares were issued in reliance upon Section 4(2) of the Securities Act, as such shares were issued to in a transaction not involving a public offering solely to a single accredited investor.

On April 19, 2013, SCG entered into a Common Stock Purchase Agreement with DRW, pursuant to which DRW agreed to purchase 500,000 SCG Common Shares (the “DRW Shares”) at a price of $10 per share. The DRW Shares were issued in a transaction exempt from the registration requirements of the Securities Act in reliance upon Section 4(2) of the Securities Act, as such shares were issued to in a transaction not involving a public offering solely to a single accredited investor.

Item 16.  Exhibits and financial statement schedules.

(a)

Exhibit Index

A list of exhibits filed with this registration statement on Form S-1 is set forth on the Exhibit Index and is incorporated in this Item 16(a) by reference.

(b)

Financial Statement Schedule.

None.

Item 17.  Undertakings.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by the controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1)

For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2)

For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.



II-2





SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, Illinois on the 15th day of July, 2013.



 

RMG NETWORKS HOLDING CORPORATION

 

 

 

 

 

 

 

By:

/s/ Gregory H. Sachs

 

 

Gregory H. Sachs

 

 

Executive Chairman



Pursuant to the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed by the following persons in the capacities indicated below.


Signature

 

Title

 

Date

 

 

 

 

 

/s/ Gregory H. Sachs

 

Executive Chairman

 

July 15, 2013

Gregory H. Sachs

 

 

 

 

 

 

 

 

 

*

 

Chief Executive Officer and Director

 

July 15, 2013

Garry K. McGuire, Jr.

 

(Principal Executive Officer)

 

 

 

 

 

 

 

*

 

Chief Financial Officer

 

July 15, 2013

William Cole

 

(Principal Financial and Accounting Officer)

 

 

 

 

 

 

 

*

 

Director

 

July 15, 2013

Marvin Shrear

 

 

 

 

 

 

 

 

 

*

 

Director

 

July 15, 2013

Jonathan Trutter

 

 

 

 

 

 

 

 

 

*

 

Director

 

July 15, 2013

Alan Swimmer

 

 

 

 

 

 

 

 

 

*

 

Director

 

July 15, 2013

Jeffrey Hayzlett

 

 

 

 


*By:

/s/ Gregory H. Sachs

 

Gregory H. Sachs, Attorney-in-fact




II-3





EXHIBIT INDEX


Exhibit

Number

Description

 

 

1.1

Form of Underwriting Agreement between RMG Networks Holding Corporation and Roth Capital Partners, LLC †

2.1

Agreement and Plan of Merger, dated as of January 11, 2013, by and among SCG Financial Acquisition Corp., SCG Financial Merger II Corp., Reach Media Group Holdings, Inc. and Shareholder Representative Services LLC, solely in its capacity as stockholder representative (1)

2.2

Amendment No. 1 to Agreement and Plan of Merger, dated as of April 8, 2013, and among SCG Financial Acquisition Corp., SCG Financial Merger II Corp., Reach Media Group Holdings, Inc. and Shareholder Representative Services LLC, solely in its capacity as stockholder representative (5)

2.3

Agreement and Plan of Merger, dated as of March 1, 2013, by and among SCG Financial Acquisition Corp., SCG Financial Merger II Corp., Reach Media Group Holdings, Inc. and Shareholder Representative Services LLC, solely in its capacity as stockholder representative. (6)

3.1

Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on April 12, 2011 (2)

3.2

By-laws (3)

4.1

Specimen Unit Certificate (3)

4.2

Specimen common stock Certificate (3)

4.3

Specimen Warrant Certificate (3)

4.4

Warrant Agreement, dated April 12, 2011, by and between SCG Financial Acquisition Corp. and Continental Stock Transfer & Trust company (2)

5.1

Form of Legal Opinion of Greenberg Traurig, LLP ††

10.1

Promissory Note, dated January 28, 2011, issued to SCG Financial Holdings LLC (3)

10.2

Form of Letter Agreement between the Registrant and SCG Financial Holdings LLC (3)

10.3

Form of Letter Agreement between the Registrant and certain directors and officers of the Registrant (3)

10.4

Investment Management Trust Agreement, dated April 12, 2011, by and between SCG Financial Acquisition Corp. and Continental Stock Transfer & Trust company (2)

10.5

Administrative Services Agreement dated April 12, 2011 by and between SCG Financial Acquisition Corp. and Sachs Capital Group LP (2)

10.6

Registration Rights Agreement, dated April 12, 2011, by and between SCG Financial Acquisition Corp. and SCG Financial Holdings LLC (2)

10.7

Securities Purchase Agreement, dated January 28, 2011, between the Registrant SCG Financial Holdings LLC (3)

10.8

Warrant Subscription Agreement, dated January 28, 2011, between the Registrant and SCG Financial Holdings LLC (3)

10.9

Form of Indemnity Agreement (3)

10.10

Promissory Note, dated February 9, 2011, issued to SCG Financial Holdings LLC (3)

10.11

Amendment No. 1 to Warrant Subscription Agreement, dated March 4, 2011, between the Registrant and SCG Financial Holdings LLC(3)

10.12

Amendment No. 2 to the Warrant Subscription Agreement, dated April 12, 2011, by and among SCG Financial Acquisition Corp. and SCG Financial Holdings LLC (2)

10.13

Letter Agreement dated April 12, 2011 by and among SCG Financial Acquisition Corp., SCG Financial Holdings LLC, Gregory H. Sachs and the members of SCG Financial Holdings LLC (3)

10.14  

Underwriting Agreement, dated April 12, 2011, by and between SCG Financial Acquisition Corp. and Lazard Capital Markets LLC, as representative of the underwriters (2) 

10.15

Equity Commitment Letter Agreement by and between SCG Financial Acquisition Corp. and 2012 DOOH Investments LLC (4)

10.16

Escrow Agreement, dated as of April 8, 2012, by and among SCG Financial Acquisition Corp., Wilmington Trust, N.A., and Shareholder Representative Services LLC(5)

10.17

Form of Lock-Up Agreement(5)

10.18

Registration Rights Agreement, dated April 8, 2013, by and among SCG and the former RMG stockholders part thereto(5)




II-4






Exhibit

Number

Description

 

 

10.19

Registration Rights Agreement, dated April 8, 2013, by and among SCG, Special Value Opportunities Fund, LLC, Special Value Expansion Fund, LLC and Tennenbaum Opportunities Partners V, LP(5)

10.20

Credit Agreement, dated April 19, 2013, by and among by and among SCG Financial Acquisition Corp., certain direct and indirect domestic subsidiaries of SCG Financial Acquisition Corp. party thereto from time to time as borrowers, certain direct and indirect domestic subsidiaries of SCG Financial Acquisition Corp. party thereto from time to time as guarantors, the financial institutions from time to time party thereto as lenders, and Kaye Anderson Credit Advisors, LLC, as administrative agent. ††

10.21

Junior Credit Agreement, dated April 19, 2013, by and among by and among SCG Financial Acquisition Corp., certain direct and indirect domestic subsidiaries of SCG Financial Acquisition Corp. party thereto from time to time as borrowers, certain direct and indirect domestic subsidiaries of SCG Financial Acquisition Corp. party thereto from time to time as guarantors, the financial institutions from time to time party thereto as lenders, and Plexus Fund II, L.P., as administrative agent for the lenders thereunder. ††

10.22

Investor Rights Agreement, dated April 19, 2013, by and among SCG Financial Acquisition Corp., Plexus Fund II, L.P., Kayne Anderson Mezzanine Partners (QP), LP, KAMPO US, LP and Kayne Anderson Mezzanine Partners, LP. *

10.23

Common Stock Purchase Agreement, dated April 19, 2013, by and between SCG Financial Acquisition Corp. and DRW Commodities, LLC. ††

10.24

Registration Rights Agreement, dated April 19, 2013, by and between SCG Financial Acquisition Corp. and DRW Commodities, LLC. ††

10.25

Employment Agreement, dated as of April 25, 2013, by and between SCG Financial Merger I Corp. and Garry K. McGuire (7)

14.1

Code of Conduct (3)

21.1

List of Subsidiaries ††

23.1

Consent of Frank, Rimerman + Co., LLP ††

23.2

Consent of Baker Tilly Virchow Krause, LLP ††

23.3

Consent of Rothstein Kass ††

23.4

Consent of BDO USA, LLP ††

23.5

Consent of Greenberg Traurig, LLP (included in Exhibit 5.1) ††

24.1

Power of Attorney (previously included on the signature page to this Registration Statement).


                           

 

(1)

Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by SCG on January 17, 2013.

(2)

Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by SCG on April 18, 2011.

(3)

Incorporated by reference to an exhibit to the Registration Statement on Form S-1 filed by SCG on April 8, 2011.

(4)

Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by SCG on December 14, 2012.

(5)

Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by SCG on April 12, 2013.

(6)

Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by SCG on March 1, 2013.

(7)

Incorporated by reference to an exhibit to the Current Report on Form 8-K filed by SCG on May 1, 2013.

*

Filed herewith.

To be filed by amendment.

††

Previously filed.


II-5