UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-35534

RMG NETWORKS HOLDING CORPORATION

15301 Dallas Parkway

Suite 500

Addison, Texas 75001

(800) 827-9666

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Common Stock, par value $0.0001 per share

Securities registered pursuant to Section 12(b) of the Act

NASDAQ Capital Market

Name of each exchange on which registered

Warrants to purchase shares of Common Stock

Units, each comprising of one share of Common Stock and one Warrant

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐     No  ☒.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ☐     No  ☒.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒      No  ☐  .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒      No   ☐  .

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No   ☒.

As of June 30, 2017, the aggregate market value of the common stock held by nonaffiliates of the registrant, based on the $2.64 closing price (following the 1-for-4 reverse stock split completed on August 14, 2017) of the registrant’s common stock as reported on the NASDAQ Stock Market on that date, was approximately $12.6 million. For purposes of this computation, all officers, directors and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.

As of April 4, 2018, there were 11,156,257 shares of common stock of the registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this annual report on Form 10-K, to the extent not set forth in this Form 10-K, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the annual meeting of stockholders to be held in 2018, to be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, 2017.

TABLE OF CONTENTS

Unless the context otherwise requires, when we use the words the “Company,” “RMG”, “RMG Networks,” “we,” “us,” or “our Company” in this Form 10-K, we are referring to RMG Networks Holding Corporation, a Delaware corporation, and its subsidiaries, unless it is clear from the context or expressly stated that these references are only to RMG Networks Holding Corporation.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (the “Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements can be identified by the use of forward-looking terminology, including the words “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will,” “potential,” “projects,” “predicts,” “continue,” or “should,” or, in each case, their negative or other variations or comparable terminology. There can be no assurance that actual results will not materially differ from expectations. You should read statements that contain these words carefully because they:

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 Form 10-K 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:

You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-K. 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 above. 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 Form 10-K 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 Form 10-K could have a material adverse effect on us.

This Form 10-K 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 industries referenced may not grow at such projected rates or at all. The failure of these industries to grow at such 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.

PART I

Item 1.     Business

Overview

RMG goes beyond traditional communications to help businesses increase productivity, efficiency, and engagement through intelligent digital signage messaging. By combining leading software, hardware, business applications, and services, we offer a single point of accountability for integrated data visualization and real-time performance management. We are headquartered in Addison, Texas, with additional offices in the United States, United Kingdom and the United Arab Emirates.

We provide enterprise communication solutions that empower organizations to visualize critical business data to better run their businesses in contact center, supply chain, internal communications, hospitality, retail and other applications primarily in the financial services, telecommunications, manufacturing, healthcare, pharmaceutical, utility and transportation industries, and for federal, state and local governments. We differentiate ourselves through dynamic business data visualization delivering 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. Our solutions are comprised of a suite of products that include proprietary software, software-embedded hardware, maintenance and support services, content and creative services, installation services and third-party displays.

We power thousands of digital screens and end-points, and the diversity of products that we offer, combined with our technical expertise, provide our customers and partners with business data visualization 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 and growing technology and services companies.

Our operations span over 30 years with our principal subsidiary having been in operation since 1980.

Proposed Transaction with an Affiliate of the Company’s Executive Chairman Gregory H. Sachs

On April 2, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SCG Digital, LLC, a Delaware limited liability company (“Parent”), SCG Digital Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”) and SCG Digital Financing, LLC, a Delaware limited liability company and an affiliate of Parent, solely for the purposes of Sections 6.19, 8.03 and 8.04 of the Merger Agreement. Under the terms, and subject to the conditions, of the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent (the “Merger”). Shareholders of the Company’s common stock (other than Parent and its affiliates and rollover shareholders that enter into agreements with Parent to contribute shares of Company common stock to an affiliate of Parent prior to the closing of the Merger) will receive $1.27 in cash per share in the Merger. Shareholders of the Company’s common stock (other than Parent and its affiliates and rollover shareholders that enter into agreements with Parent to contribute shares of Company common stock to an affiliate of Parent prior to the closing of the Merger) will receive $1.27 in cash per share in the Merger. Parent is owned by SCG Digital Holdings, Inc., a Delaware corporation and an affiliate of Gregory H. Sachs, the Company’s Executive Chairman (collectively, the “Sponsor”).

Mr. Sachs and certain of his affiliates have entered into a voting agreement (the “Voting Agreement”) with the Company and agreed, among other things, to vote his shares of the Company’s common stock in favor of adoption and approval of this Agreement and to take certain other actions in furtherance of the transactions contemplated by the Merger Agreement.  All members of the Board of Directors of the Company in attendance at the meeting approved the Merger Agreement on the unanimous recommendation (with Mr. Sachs recusing himself and one member unable to attend the final meeting due to a personal matter) of a Special Committee comprised entirely of independent directors of the Company (the “Special Committee”).

The Merger Agreement contains a “go shop” provision pursuant to which the Company has the right to solicit and engage in discussions and negotiations with respect to competing proposals through May 17, 2018 (the “Initial Go Shop End Date”); provided that such end date may be extended at the election of the Company (upon written notice to Parent) at any time prior to the Initial Go Shop End Date until June 1, 2018 (such period commencing with the Execution Date, as may

be extended, the “Go-Shop Period”). After the conclusion of the Go-Shop Period, the Company may continue discussions with any “Excluded Person”, defined as a party that submits (and has not withdrawn) a written proposal during the Go-shop Period that the Special Committee determines in good faith, after consultation with its financial advisor and outside legal counsel, is, or would reasonably be expected to lead to, a “Superior Proposal,” as defined in the Merger Agreement and with whom the Company remains in continuous active discussions.

Except with respect to Excluded Persons, after the conclusion of the Go-Shop Period, the Company will be subject to a “no-shop” restriction on its ability to solicit third-party proposals, provide information and engage in discussions with third parties. The no-shop provision is subject to a “fiduciary-out” provision that allows the Company to provide information and participate in discussions with respect to third party proposals submitted after the conclusion of the Go-Shop Period and with respect to which the Special Committee has made the determinations previously described.

The Company may terminate the Merger Agreement under certain circumstances, including if its Board of Directors determines in good faith that it has received a Superior Proposal, and otherwise complies with certain terms of the Merger Agreement. In connection with such termination, a termination fee, as well as reimbursement for certain fees and expenses up to an “Expense Make Whole Threshold” may be payable by the Company to Parent in the following circumstances: (i) if such termination occurs before the Initial Go Shop End Date, the Company will not be required to pay a termination fee, (ii) if the Go Shop Period is extended and the Merger Agreement is terminated by the Company before the Non-Solicitation Start Date so that the Company can enter into an alternative acquisition agreement with an Excluded Person, then the Company will be required to pay a fee of $150,000 and (iii) if the Merger Agreement is terminated by the Company or Parent in certain other circumstances more fully set forth in the Merger Agreement, then the Company will be required to pay a fee of $500,000.  In the event that the Merger Agreement is terminated by the Company due to a material breach of the Merger Agreement by Parent or Merger Sub or in the event that Parent or Merger Sub fail to consummate the Merger when otherwise obligated to do so pursuant to the terms and conditions thereof, the Merger Agreement provides for Parent to pay to the Company a penalty loan of $1 million (the “Penalty Loan”) upon termination of the Merger Agreement.

Consummation of the Merger is subject to various conditions, including adoption of the Merger by a vote of a majority of the minority shareholders of the outstanding shares of the Company’s common stock (other than any rollover investors, shareholders affiliated with Parent and the Company’s executive officers) and other customary closing conditions described in the Merger Agreement, and other customary closing conditions. The parties expect to close the transaction during the second quarter of 2018. 

In connection with the Merger Agreement, on April 2, 2018, the Company and certain of its subsidiaries (the “Borrowers”) entered into the Subordinated Loan and Security Agreement (the “Subordinated Loan Agreement”) with SCG Digital Financing, LLC (the “Subordinated Lender”), pursuant to which the Subordinated Lender agreed to make available to the Borrowers a bridge loan (the “Bridge Loan”) in the principal amount of $2 million.  The Subordinated Lender is an affiliate of Mr. Sachs.  If the Penalty Loan is funded pursuant to the terms of the Merger Agreement, the Penalty Loan will also be a credit extension under the Subordinated Loan Agreement and subject to its terms (the Penalty Loan together with the Bridge Loan, the “Subordinated Loans”). The Subordinated Loans are secured by a second priority lien in all of the assets of the Borrowers. The Bridge Loan matures on the later of April 2, 2019 or, if the Penalty Loan is funded, one year following the funding of the Penalty Loan, at which time all outstanding principal and interest on the Subordinated Loans are due.  No principal payments are required under either the Bridge Loan or the Penalty Loan prior to maturity and, except in limited circumstances, no principal payments are permitted prior to the first anniversary of the closing date.  Interest on the Bridge Loan accrues at a per annum cash interest rate equal to 8.0% above the prime rate plus 2.0% paid-in-kind and interest on the Penalty Loan will accrue at a per annum paid-in-kind interest rate equal to 5% above the prime rate.   If the Bridge Loan is prepaid prior to the stated maturity date thereof, the Borrowers are obligated to pay a prepayment premium equal to the interest the loans would have accrued if they had remained outstanding through maturity.  During an event of default, the rate of interest on the Subordinated Loans would increase to 2.5% above the otherwise applicable rate, until such event of default is cured or waived. All accrued and unpaid cash interest is payable quarterly on the last day of each fiscal quarter.

Upon the occurrence of certain events (including the failure of the Company’s unaffiliated shareholders to approve the Merger), the Subordinated Lender has the right to convert principal and accrued interest outstanding under the Bridge Loan into shares of Series A Preferred Stock of the Company on the terms set forth therein.

The Subordinated Loans are subordinated to the obligations under the Amended and Restated Loan and Security Agreement (the “Restated Loan Agreement”) dated October 13, 2017 with Silicon Valley Bank (the “Bank”) pursuant to

a Subordination Agreement dated as of April 2, 2018.

On April 2, 2018, the Borrowers also entered into the First Amendment (the “First Amendment”) to the Restated Loan Agreement with the Bank. Pursuant to the First Amendment, the minimum EBITDA covenant in the Restated Loan Agreement was amended and the Bank consented to the incurrence of certain subordinated debt pursuant to the Subordinated Loan Agreement (as defined above) by the Company and certain of its subsidiaries, among other things.

The Special Committee engaged Lake Street Capital Markets LLC (“Lake Street”) to provide a fairness opinion to the Special Committee. On April 2, 2018, Lake Street delivered an opinion to the Special Committee that as of the date of the opinion, the merger consideration to be received by holders of the Company’s common stock is fair to such holders (other than the holders of Company common stock that are affiliates of Parent) from a financial point of view.  

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 Networks Holdings, Inc., f/k/a Reach Media Group Holdings, Inc. (“Reach Media Group”), which became our Media business, pursuant to a merger agreement, dated as of January 11, 2013, as amended. On April 19, 2013, we consummated the acquisition of RMG Enterprise Holdings Corporation, f/k/a Symon Holdings Corporation (“Symon”), which became our Enterprise Solutions business, pursuant to a merger agreement, dated as of March 1, 2013. As a result of the Reach Media Group and Symon acquisitions, Reach Media Group and Symon became our subsidiaries, and the businesses and assets of Reach Media Group, Symon and their subsidiaries became our only operations. Symon was considered to be our predecessor for accounting purposes. On July 1, 2015, we sold the assets of our Airline Media Network to an unaffiliated third party, effectively exiting what were the legacy operations of our Media business.

Industry

We believe digital signage in business environments allows companies to engage targeted audiences, such as employees and consumers, more effectively than traditional communications. The digital signage industry is comprised of software, hardware, content, and professional services that create solutions for business customers. Frost & Sullivan, in its 2015 Analysis of the Global Digital Signage Systems Market report, estimated that the market for digital signage system technology in 2014 was approximately $1.5 billion and expects the market to grow from 2014 to 2020 at a compound annual growth rate of 13.2%. Others, such as IHS, Inc. estimate that aggregate global digital signage expenditures, including ancillary components, approached $14 billion in 2014.

As digital signage systems have evolved, they have become more cost effective and are 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. We believe customers are increasingly recognizing the flexibility and cost-effectiveness digital signage can provide compared to other forms of communication.

A key market driver that is dramatically impacting the traditional digital signage industry and driving increased utilization of digital signage solutions is a 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 and collecting data in real time, often in an interactive manner.

Competitive Strengths

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

We provide dynamic “real time” business data visualization. Differentiated from digital signage solutions that only offer the capability to place a set loop of content onto one or a few display endpoints, we offer solutions to dynamically visualize critical business data and content that help companies track and measure their operations or communicate with target audiences more efficiently and effectively. Our technology platforms and integrated solutions can interface with a customer’s disparate business systems, assemble data, apply business logic and display the output in real-time on thousands of end points across a multinational network.

Our products can be easily adapted to satisfy a wide array of customer applications.  Our solutions encompass a full array of key consumer-facing, corporate and advertising network types. We believe our solutions add significant value and provide a definable return on investment across a diverse set of business applications such as real-time reporting and alerting for contact centers, supply chain warehousing and manufacturing. Other enterprise uses include company news and “real time” information for employee or corporate communications. Our products are also commonly used in public-facing environments, such as retail operations, hotels, convention centers, hospitals, universities, casinos and government facilities. Our enterprise software suite incorporates leading network security features and is both robust and scalable. Our solutions meet the requirements of many of the largest financial services and telecommunications companies in the United States. Our data-integration components ensure that nearly any external source can be leveraged in a solution, including databases, telephony, interactive kiosks, POS, RSS and web content, among others.

We offer comprehensive, configurable solutions and not just individual solution components.  One key to our market leadership is our robust software suite that offers flexibility for nearly any client application. This includes installations ranging from a single display to many hundreds or even thousands of end-points. This platform allows us to build, manage, maintain and monetize comprehensive 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, and a wide range of proprietary and third-party flat screen displays, kiosks, video walls, mobile devices and other digital signage endpoints. We also provide a wide range of professional services including installation and training, software and hardware maintenance and support, and creative content. We are typically the prime source 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 multinational team of content writers, video producers, graphic designers and editors who develop both original and subscription content as required by customers.

We are trusted by some of the largest organizations in the world.  Some of the largest and most demanding organizations, including a majority of Fortune 100 companies, count on our solutions every day to inform, educate and motivate their employees and customers and to build their brands. Because of our products’ abilities to integrate with mission critical software applications, our solutions are required to pass a higher level of security testing. 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 their firewalls. Being a trusted solution provider to large multi-national corporations also affords us the opportunity to efficiently cross sell throughout a customer’s global footprint and sell solutions for additional application areas into a single organization.

We serve customers through a multinational footprint.  We have offices or personnel focused on developing business located in North America, Europe, and the Middle East. We service thousands of customers worldwide and estimate that hundreds of thousands of people globally view our content each day on our customers’ installations. Our multinational 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 efficiently utilize our multinational footprint, we have well-established relationships with leading business partners and resellers around the world.

Experienced management team. Our management team has significant experience in growing technology and services companies.

Growth Strategy

Our growth strategy is to leverage and continue to build upon our past successes, including through the following:

Expanding our installed customer footprint.  We have identified and are pursuing numerous opportunities to expand our customer base, including:

Growing and expanding our customer base.  We have identified and are currently pursuing numerous opportunities to expand our existing base of business, including:

Products and Solutions

We provide enterprise communication solutions that empower organizations to visualize critical business data to better run their businesses. Our proprietary software platform seamlessly integrates with our customers’ existing mission critical departmental applications and offers premise-based or hosted content management, content subscription services and mobility solutions. We work closely with leading global technology partners, developing proprietary technical interfaces.

Our solutions portfolio, comprised of solutions for contact center, internal communications, supply chain and consumer-facing retail, financial services, higher education and hospitality applications are offered through our Enterprise Server Software platform and our newly-released KorbytTM Software platform.

Enterprise Server Software Platform

Our enterprise server software platform solutions are primarily offered with perpetual use software licenses and annual maintenance & support contracts and are generally on-premises deployments within our customers’ networks. Substantially all of our historical revenue has been generated from our enterprise server software platform. Solutions are assembled from the following product components:

Enterprise Server (“ES”) is a robust software application server used to collect content (data, video, graphics, and text) from various application and other data sources, organize the content according to business rules and distribute the content to a variety of end-points, including our proprietary media players, PCs and mobile devices. Our data collectors connect ES with customers’ enterprise applications to retrieve real-time data. Our data collectors give us a distinct advantage by being able to deliver solutions more quickly, less expensively and with higher quality than the competition.

Design Studio (“DS”) is a software offering that is installed on the client’s PC (DS) and used to design the look, feel, function and timing of how content is played 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™ software is a fully integrated internal communications software product delivering real-time business data and other content across all employee devices, including desktop, laptop, mobile and tablet. InView is a messaging platform that enables real time communication of rich media, including business data, to all or a subset of connected corporate users. Automatic message delivery ensures employees are aware of critical events, for example call volumes spikes or emergency weather conditions, allowing them to quickly respond with appropriate actions to exceed established company goals.

Korbyt™ Software Platform

We released our Korbyt Software Platform in the fourth quarter of 2017. Our Korbyt software platform solutions are primarily offered through a subscription model and have the flexibility of being deployed in the cloud, on-premises or in a hybrid environment. Our Korbyt cloud offering utilizes a multi-tenant architecture, which enables us to run a single instance of our software code, add subscribers with minimal incremental expense and deploy new applications and upgrades quickly and efficiently. Solutions are assembled from the following product components:

Korbyt™ Signage gives companies the power to communicate more effectively with seamless content creation and distribution across digital signage networks. Korbyt Signage provides end users with an easy to use, browser-based content authoring tool, an intuitive content management system and enterprise scalable device management and alerting features.

KorbytGO™  provides companies with a mobile app platform that enables organizations to connect with their employees, managers and leadership through a mobile phone, a device that is readily used and preferred by employees. Employers are able to communicate in real-time to keep employees up to date on company initiatives, key performance indicators, benefits information, safety announcements and more. Key features include a dynamic company newsfeed, personalized messaging capabilities based on the employee’s preferences, built-in shift scheduling and employee chat applications, user generated content publishing, and advanced audience analytics for administrators included automatic employee groups and messaging based on a user’s behavior in the application.

Hardware and Subscription Products:

Subscription Content Services provides syndicated “business-appropriate” news and current information, created by our editors. In addition, weather, stock information, airport flight data and over 100 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.

Media Players/Smart Digital Appliances (“SDA”) are media players with our software pre-loaded that function as the content storage and rendering hardware between our ES or Korbyt content engine and the visual display end-points (LED displays, HD TVs or PCs). SDAs “pull” content and content rules and parameters from ES or Korbyt and then render the content on the displays according to established rules and layouts.

Electronic Displays (“ED”) include a line of displays designed by us, such as door displays 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 MAX LED (“MAX”) includes a line of customizable LED display solutions for indoor and outdoor market applications. RMG’s MAX series offers full custom LED solution that scale to HD-quality image support, 4K and beyond, in addition to delivering embedded audio, energy efficiency, low heat emissions and an industry-leading 1.2mm pixel pitch. RMG MAX LED visual solutions integrate with RMG’s current software and creative content media players to further leverage the strength of existing platforms.

Multinational Sales Model

We sell products and services through a multinational professional sales force, as well as through a select group of resellers and local partners. In North America, approximately 91% of sales were generated solely by our sales team, with approximately 9% through resellers in the year ended December 31, 2017. Outside of the United States, the situation is reversed, with approximately 70% of sales coming from the reseller channel. Overall, approximately 70% of global sales were derived from direct sales, with the remaining 30% generated through indirect partner channels.

Our multinational sales team includes approximately 41 sales representatives and sales support staff as of December 31, 2017. The sales representatives each have multiple 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 subject matter experts and 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 quarterly 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 generally supported by one or more of our sales team members to assist them with proposing unique solutions for clients and prospects.

Customers

Customers around the world purchase our enterprise communication solutions including software, hardware and services. 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 solution which includes 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 stream and a close business relationship. 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.

Competition

Holding a strong, competitive position in the market for intelligent visual solutions requires maintaining a diverse product portfolio that addresses a wide variety of customer needs.  We believe we have been a leading multinational provider of such products and services for more than 30 years. Our customers include many of the largest organizations in the world and, as a result, our brand is established in the geographies in which we do business. 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 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. Some competitors offer a range of products and services; others offer only a single part of the overall digital signage solution. Though our direct competitors are numerous, diverse and vary greatly in size, we view our principal competitors as Broadsign, Four Winds Interactive, Inova, Janus Displays, Nanonation, Navori, Scala, Stratacache, Nanolumens, Visix, Social Chorus and Dynamic Signal.

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 optimized customer solutions; a highly qualified staff of installation, integration and creative design professionals; seamless integration with customers’ IT infrastructure, data, and security environments; custom screen and content design; and post-sale customer service and multinational technical support. We believe that our relative size and competitive strategy gives us an advantage in the markets we serve.

Employees

As of December 31, 2017, we had 162 multinational employees, with 111 in our North American operations and 51 employees in our international operations. 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.

As of December 31, 2017, we had two issued patents in the United States that expire in 2021. Neither of these patents are material to our business. We cannot ensure that any future 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 operations 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.

Available Information

We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, or SEC. Our website address is www.rmgnetworks.com.

Item 1A. Risk Factors

An investment in our securities involves a high degree of risk. Holders of our securities should carefully consider the following risk factors and the other information contained in this Form 10-K, including our historical financial statements and related notes included herein.  The following discussion highlights some of the risks that may affect future operating results. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or businesses in general, may also impair our businesses or operations. If any of the following risks or uncertainties actually occur, our business, financial condition and operating results could be adversely affected in a material way. This could cause the trading prices of our securities to decline, perhaps significantly, and you may lose part or all of your investment.

Risks Relating to the Merger

The consummation of the proposed merger of the Company with an affiliate of Gregory H. Sachs, the Company’s Executive Chairman, is not certain and its delay or failure could adversely affect our operating results or the price of our common stock. 

On April 3, 2018, the Company announced an agreement to be acquired through the Merger of the Company with an entity controlled by SCG Digital Holdings, Inc., a Delaware corporation and an affiliate Gregory H. Sachs. The Company cannot provide any assurance that the proposed Merger will be consummated. If consummated, it is currently anticipated to be completed in the second quarter of 2018. However, the Company cannot assure you of the timing of the closing.

Consummation of the proposed Merger is subject to the satisfaction of various conditions, including adoption of the Merger by a vote of a majority of the minority shareholders of the outstanding shares of the Company’s common stock and other customary closing conditions described in the Merger Agreement. The Company cannot guarantee that these closing conditions will be satisfied, that the Company will receive the required approvals or that the proposed Merger will be successfully completed. Many of these conditions are out of the Company’s control. In the event that the proposed Merger is not completed or is delayed:

Any of these events could have a materially negative impact on the Company’s results of operations and financial condition and could adversely affect the price of the Company’s common stock.

We have incurred, and will continue to incur, substantial costs in connection with the proposed merger. 

The Company has incurred, and will continue to incur, substantial costs in connection with the proposed Merger. These costs are primarily associated with the fees of attorneys, accountants and financial advisors of the Special Committee of our Board of Directors and of our Board of Directors. In addition, the Company has diverted significant management resources in an effort to complete the proposed Merger, and we are subject to restrictions contained in the Merger Agreement on the conduct of our business until the closing of the proposed Merger. If the proposed Merger is not completed, the Company will have incurred significant costs, including the diversion of management resources and, depending on the circumstances, payment of a termination fee of up to $500,000 to Parent, plus reimbursement for Parent’s out of pocket legal fees and other expenses, for which we will have received little or no benefit.

If we breach covenants under our $2 million Bridge Loan with SCG Digital Financing LLC (“Subordinated Lender”), an affiliate of Gregory H. Sachs, our Executive Chairman, we could be held in default under such loan, which could accelerate our repayment date and materially adversely affect the value of our stockholders’ investments in us.

On April 2, 2018, in connection with the Merger Agreement, we obtained the Bridge Loan from the Subordinated Lender in an aggregate principal amount of $2 million. The Bridge Loan was fully drawn as of the closing of the facility and is secured by a second lien on all of the Borrowers’ assets. The Bridge Loan bears interest at a rate equal to the prime rate plus 10% and imposes a number of affirmative and negative covenants on the Borrowers.  If the Bridge Loan is prepaid, prior to the stated maturity date thereof, the Borrowers are obligated to pay a prepayment premium equal to the interest the loans would have accrued if they had remained outstanding through maturity. If we should breach certain of those covenants or otherwise default on the Bridge Loan, or if the Merger Agreement is terminated other than for a material breach of Parent or in the event that the Company enters into a definitive agreement with respect to an alternative transaction that constitutes a Superior Proposal pursuant to the Merger Agreement, Subordinated Lender would have the right to accelerate the repayment date. If we do not have sufficient cash to repay the Bridge Loan at that time, we would be forced to refinance the Bridge Loan. We cannot assure you that such refinancing would be available to the Company on favorable terms or at all. In the event that we are unable to refinance the Bridge Loan, subject to certain restrictions in the subordination agreement among Silicon Valley Bank, our senior lender, Subordinated Lender and the Borrower, Subordinated Lender is entitled to take remedies against the company, including foreclosing on the collateral securing the Bridge Loan. In such event, the Company may be forced to file for bankruptcy protection, which would materially adversely affect the value of our stockholders’ investments in us.

Risks Related to Our Business

We may not be able to generate sufficient cash to service our debt obligations.

Effective October 13, 2017, we entered into an amended and restated loan and security agreement (the “Restated Loan

Agreement”) with Silicon Valley Bank (the “Bank”) pursuant to which the Bank agreed to make a revolving credit facility available to the Company and certain of its subsidiaries (collectively, the “Borrowers”) in the principal amount of up to $7.5 million (the “Revolving Facility”).  The Revolving Facility is secured by a first-priority security interest in substantially all of our assets. When we have a balance outstanding, our ability to make payments on and to refinance our outstanding indebtedness will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. Likewise, when we have a balance outstanding, we may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If we are unable to make payments or otherwise default on our debt obligations, the lender could foreclose on our assets, which would have a material adverse effect on our business, financial condition and results of operations.

Our outstanding indebtedness requires us to comply with certain financial covenants, the default of which may result in the acceleration of our indebtedness.

The Revolving Facility contains financial and operational covenants, including covenants requiring us to achieve specified levels of consolidated EBITDA. Failure to comply with these or other covenants in the Revolving Facility would result in an event of default. In the event of any default under the Revolving Facility, the lenders could elect to declare all borrowings outstanding, together with accrued and unpaid interest and other fees, to be immediately due and payable and could foreclose on our assets.

We may require significant amounts of additional financing to execute our business plan and fund our other liquidity needs. If our future operating results do not meet or exceed our projections or we are unable to raise sufficient funds, we may be unable to continue operations and could be forced to substantially curtail operations or cease operations all together.

As of December 31, 2017, we had cash and cash equivalents of $1.5 million, including $1.2 million held in bank accounts of our subsidiaries located outside the United States, approximately $1.3 million in outstanding indebtedness under the Revolving Facility, and approximately $2.5 million in unused availability under the Revolving Facility. If we are unable to increase our revenues or decrease our operating expenses to meet our operating plan, or if we fail to meet any of the financial covenants in the Revolving Facility and are unable to obtain a waiver or an amendment from the Bank to allow us to continue to borrow under the Revolving Facility, we may need to obtain additional capital within the next twelve months to fund our planned operations. Under those circumstances, we may need to pursue one or more alternatives, such as to reduce or delay planned capital expenditures or investments in our business, seek additional financing, sell assets or curtail our operations. Any such actions may materially and adversely affect our future prospects. In addition, we cannot assure you that we will be able to raise additional equity capital or obtain additional financing on commercially reasonable terms or at all.

We have a history of incurring significant net losses, and our future profitability is not assured.

For the years ended December 31, 2017 and 2016, we incurred total losses from continuing operations of approximately $5.2 million and $4.5 million, respectively. Our operating results for future periods are subject to numerous uncertainties and there can be no assurances that we will be profitable in the foreseeable future, if at all. If our revenues in a given period are below levels that would result in profitable operation, we may be unable to reduce costs since a significant part of our cost of revenues and operating expenses are fixed, which could materially and adversely affect our business and, therefore, our results of operations and lead to a net loss (or a larger net loss) for that period and subsequent periods. 

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

The markets for digital signage are very competitive and we must compete with other established providers. We compete with larger companies in many of the markets we serve.

We expect existing competitors and new entrants into the markets where we do business to constantly revise and improve their business models, technology, and offerings in light of challenges from us or other companies in the industry. If we cannot respond effectively to advances by our competitors, our business and financial performance may be adversely affected.

Increased competition may result in new products and services that fundamentally change our markets, reduce prices,

reduce margins or decrease our market share. We may be unable to compete successfully against current or future competitors, some of whom may have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we do.

Implementation and integration of new products, such as expanding our software, media player and services product portfolios and our recently-released Korbyt Software platform offerings, could harm our results of operations.

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

The process of introducing a new product to the market is extremely complex, time consuming and expensive, and will become more complex as new platforms and technologies emerge. In the event we are not successful in developing a wide range of offerings or do not gain wide acceptance in the marketplace, we may not recoup our investment costs, and our business, financial condition and results of operations may be materially adversely affected. In addition, implementation of our Korbyt Software platform offerings may reduce demand for our existing product lines, which may have a material adverse effect on our business, financial condition or result of operations.

If we fail to successfully manage our business model transition to cloud-based products and a subscription pricing model, our results of operations could be negatively impacted.

To address the industry transition to cloud and mobile, we have accelerated our move to the cloud with the release of our Korbyt Software platform in the fourth quarter of 2017. The launch of the Korbyt Software platform begins our multi-year, strategic transition from a perpetual use software license and maintenance business model to a subscription business model. While we will continue to sell perpetual use software licenses for our ES software platform, we expect the customer transition to the Korbyt platform and subscription business model will drive an increasing portion of our revenues in the future to subscriptions. The subscription model prices and delivers our products in a way that differs from the historical perpetual pricing and delivery methods. These changes reflect a significant shift from perpetual license sales and distribution of our software in favor of providing our customers the right to access certain of our software in a hosted environment or use downloaded software for a specified subscription period. During this transition, revenue, orders, gross margin, gross margin, net income (loss), earnings (loss) per share, deferred revenue, and cash flow from operations will be impacted as more revenue is recognized ratably rather than up front.

Our ability to achieve our financial objectives is subject to risks and uncertainties. Our new offerings require a considerable investment of technical, financial, legal, and sales resources, and a scalable organization. Market acceptance of such offerings is affected by a variety of factors, including but not limited to: security, reliability, performance, current license terms, customer preference, social/community engagement, customer concerns with entrusting a third party to store and manage their data, public concerns regarding privacy and the enactment of restrictive laws or regulations. Whether our business model transition will prove successful and will accomplish our business and financial objectives is subject to numerous uncertainties, including but not limited to: customer demand, attach and renewal rates, channel acceptance, our ability to further develop and scale infrastructure, our ability to include functionality and usability in such offerings that address customer requirements, tax and accounting implications, pricing, and our costs. In addition, the metrics we use to gauge the status of our business model transition may evolve over the course of the transition as significant trends emerge. If we are unable to successfully establish these new offerings and navigate our business model transition in light of the foregoing risks and uncertainties, our results of operations could be negatively impacted. 

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

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

Similar slowdowns could affect our customers in the hospitality industry in the wake of terrorist attacks, economic downturns or material changes in corporate travel habits. In addition, expenditures tend to be cyclical, reflecting economic conditions, budgeting and buying patterns. Periods of a slowing economy or recession, or periods of economic uncertainty, may be accompanied by a decrease in spending.

Continued weakness in the industries we serve has had, and may in the future have, an adverse effect on sales of our products and our results of operations. A long term continued or heightened economic downturn in one or more of the key industries that we serve, or in the worldwide economy, could cause actual results of operations to differ materially from historical and expected results.

Furthermore, even in the absence of a downturn in general economic conditions, our customers may reduce the money they spend on our products and services for a number of other reasons, including:

Such conditions could have a material and adverse effect on our ability to generate revenue from our products and services, with a corresponding adverse effect on our financial condition and results of operations.

The process of a U.K. exit from the European Union could adversely impact our business, results of operations and financial condition.

On June 23, 2016, the U.K. Government held an in-or-out referendum on the U.K.’s membership within the E.U. The referendum results favored a U.K. exit from the E.U. (“Brexit”). On March 29, 2017, the U.K. government delivered formal notice to the E.U. of its intent to exit, triggering a two-year countdown to the U.K.’s withdrawal from the E.U. A process of negotiation is determining the future terms of the U.K.’s relationship with the E.U.

When Brexit occurs, we will likely face new regulatory costs and challenges, the scope of which are presently unknown.  Depending on the terms of Brexit, if any, the U.K. could also lose access to the single E.U. market and to the global trade deals negotiated by the E.U. on behalf of its members. Such a decline in trade could affect the attractiveness of the U.K. as a global investment center and, as a result, could have a detrimental impact on U.K. growth.  Such a decline could also make our doing business in Europe more difficult, which could delay new sales contracts and reduce the scope of such sales contracts.  The uncertainty of the outcome of the Brexit process could also have a negative impact on the U.K. and other European economies. Although we have an international customer base, we could be adversely affected by reduced growth and greater volatility in the U.K. and European economies.  

Currency exchange rates in the British pound and the euro with respect to each other and the U.S. dollar have already been affected by Brexit.  As a significant portion of our revenues are derived from our U.K. operations, further exchange rate fluctuations could adversely affect our business, our results of operations and financial condition.

Our revenues are sensitive to fluctuations in foreign currency exchange rates and are principally exposed to fluctuations in the value of the U.S. dollar, the British pound and the euro. Changes to U.K. immigration policy could likewise occur because of Brexit. Although the U.K. would likely retain its diverse pool of talent, London’s role as a global center for business may decline, particularly if access to the single E.U. market is interrupted. Any of the foregoing factors could have a material adverse effect on our business, results of operations or financial condition.

The recent and ongoing global economic uncertainty may adversely impact our business, operating results or financial condition.

As widely reported, financial markets in the U.S., Europe and Asia experienced extreme disruption in 2008 and 2009. While there has been improvement in recent years, the worldwide economy remains fragile as uncertainty remains regarding when each global region’s economy will improve to historical growth levels. In addition, political changes in the United States, the United Kingdom and other nations, including the probability of Brexit, contribute to economic

uncertainty. Any return to the conditions that existed during the 2008-2009 recession or other unfavorable changes in economic conditions, including declining consumer confidence, concerns about inflation or deflation, the threat of another recession, increases in the rates of default and bankruptcy, sovereign credit concerns in Europe and the Middle East, the extended decline in crude oil prices and its effects on Middle Eastern economies and extreme volatility in the credit and equity markets, may lead to decreased demand or delay in payments by our customers or to slowing of their payments to us, and our results of operations and financial condition could be adversely affected by these actions. These challenging economic conditions also may result in:

Currency fluctuations may adversely affect our business.

For the year ended December 31, 2017, approximately 34% of our revenues were generated outside of the United States. Accordingly, we receive a significant portion of our revenues in pounds sterling, euros, and other foreign currencies. However, for financial reporting purposes, we use the U.S. dollar. To the extent the U.S. dollar strengthens against the pounds sterling and other foreign currencies, the translation of foreign currency denominated transactions will result in reduced revenue, operating expenses and net income for us. We have not entered into agreements or purchased instruments to hedge our exchange rate risks, although we may do so in the future. The availability and effectiveness of any hedging transaction may be limited, and we may not be able to successfully hedge our exchange rate risks.

A higher percentage of our sales and profitability occur in the third and fourth quarters.

We sell more of our products in the third and fourth quarters because of traditional technology buying patterns of our customers. Corporate year end budgets, government buying, and regional economics will affect the amount of our products and services that will fit into customers’ budgets late in the year. Any unanticipated decrease in demand for our products during the third and fourth quarters could have an adverse effect on our annual sales, profitability, and cash flow from operations. In addition, slower selling cycles during the first and second quarters may adversely affect our stock price.

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.

Our business could be adversely affected if our consumer protection, data privacy and security practices are not adequate, or are perceived as being inadequate, to prevent data breaches, or by the application of consumer protection and data privacy and security laws generally. 

In the course of our business, we collect certain personal information that may be considered personally identifiable information (“PII”).  Although we take measures to protect PII from unauthorized access, acquisition, disclosure and misuse, our security controls, policies and practices may not be able to prevent the improper or unauthorized access, acquisition or disclosure of such PII.  In addition, third party vendors and business partners which in the course of our business receive access to PII that we collect also may not prevent data security breaches with respect to the PII we provide them or fully enforce our policies, contractual obligations, and disclosures regarding the collection, use, storage, transfer and retention of personal data.  The unauthorized access, acquisition or disclosure of PII could significantly harm our reputation, compel us to comply with disparate breach notification laws and otherwise subject us to proceedings by governmental entities or others and substantial legal liability.  A perception that we do not adequately secure PII could result in a loss of current or potential consumers and business partners, as well as a loss of anticipated revenues.  Our key

business partners also face these same risks with respect to PII they collect and data security breaches with respect to such information could cause reputational hard to them and negatively impact our ability to offer our products and services through their platforms. 

In addition, the rate of data privacy, security and consumer protection law-making is accelerating globally, and the interpretation and application of consumer protection and data privacy and security laws in the United States, Europe and elsewhere are often uncertain, contradictory and in flux.  It is possible that these laws may be interpreted or applied in a manner that is adverse to us or otherwise inconsistent with our practices, which could result in litigation, regulatory investigations and potential legal liability or require us to change our practice in a manner adverse to our business.  As a result, our reputation may be harmed, we could incur substantial costs, and we could lose both customers and revenue. 

Any failure by us, or our agents to comply with our privacy policies or with other federal, state or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others as well as resulting liability. 

Our business could be adversely affected if our cybersecurity practices are inadequate to prevent unauthorized intrusions or theft of data. 

We are at risk for interruptions, outages, and breaches of: (i) operational systems (including business, financial, accounting, product development, consumer receivables, data processing, or manufacturing processes); and/or (ii) our facility security systems.  Such cyber incidents could materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively sensitive information; compromise personally identifiable information of customers, employees or other; jeopardize the security of our facilities; and/or affect the performance of our customer-facing solutions.  A cyber incident could be caused by malicious third parties using sophisticated, targeted methods to circumvent firewalls, encryption, and other security defenses, including hacking, fraud, trickery, or other forms of deception.  The techniques used by third parties change frequently and may be difficult to detect for long periods of time.  A significant cyber incident could impact production capability, harm our reputation and/or subject us to regulatory actions or litigation. 

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

Our ability to effectively serve our customers on a timely basis depends significantly on our information systems. 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 rely on third parties for data transmission, and the interruption or unavailability of adequate bandwidth for transmission could prevent us from distributing our cloud-based and program services as planned.

We transmit our cloud-based offerings and most of the content that we provide to our customers using Internet connectivity supplied by a variety of third-party network providers. If we experience failures or limited network capacity, we may be unable to maintain programming commitments. Problems with data transmission may be due to hardware failures, operating system failures or other causes beyond our control. In addition, there are a limited number of Internet providers with whom we could contract, and we may be unable to replace our current providers on favorable terms, if at all. If the transmission of data to our customers becomes unavailable, limited due to bandwidth constraints or is interrupted or delayed because of necessary equipment changes, our customer relationships and our ability to obtain revenues from current and new customers could suffer.

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

From time to time, we have experienced delays in manufacturing our products for several reasons, including component delivery delays, component shortages and component quality deficiencies. Component shortages, delays in the delivery of components 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 processes or solutions offerings to accommodate these components. Modification of our manufacturing processes or our solutions offerings to use alternative components could cause significant delays and reduce our ability to generate revenues.

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

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

Our products often operate on the same network used by our customers for other aspects of their businesses, and we may be held responsible for defects or breakdowns in these networks if it is believed that such defects or breakdowns were caused by our products.

Our products are operated across our customers’ proprietary networks, which are used to operate other aspects of these customers’ businesses. In these circumstances, any defect or virus that occurs on our products may enter a customer’s network, which could impact other aspects of the customer’s business. The impact on a customer’s business could be severe, and if we were held responsible, it could have an adverse effect on our customer relationships and on our operating results.

The content we distribute to customers may expose us to liability.

We provide or facilitate the distribution of content for our customers. This content is procured from third-parties and can include news, weather, sports and stock information as well as other types of media content. As a distributor of content,

we face potential liability for negligence, copyright, patent or trademark infringement, or other claims based on the content that we distribute. We or entities that we license content from may not be adequately insured or indemnified to cover claims of these types or liability that may be imposed on us.

Our operations are subject to numerous U.S. and foreign laws, regulations and restrictions affecting our services, solutions, labor and the markets in which we operate, and non-compliance with these laws, regulations and restrictions could have a material adverse effect on our business and financial condition.

Various aspects of our services and solutions offerings are subject to U.S. federal, state and local regulation, as well as regulations outside the United States. Failure to comply with regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of service, and/or the imposition of civil and criminal penalties, including fines which could have a material adverse effect on our business, reputation and financial condition.  In addition, our international business subjects us to numerous U.S. and foreign laws and regulations, including, without limitation, the Foreign Corrupt Practices Act (“FCPA”). We hold contracts with various instrumentalities of foreign governments, potentially increasing our FCPA compliance risk. Our failure or the failure of our sales representatives or consultants to comply with these laws and regulations could have a material adverse effect on our business, financial condition and results of operation. In addition, even an inadvertent failure to comply with laws and regulations, as well as rapidly evolving social expectations of corporate fairness, could damage our reputation and brands.  Any or all of the foregoing could have a negative impact on our business, financial condition, results of operations, and cash flow. 

We are subject to risks related to our international operations.

We currently have direct sales coverage in North America, the United Kingdom, South East Asia and the United Arab Emirates, as well as coverage of emerging markets through distributors, value added resellers and system integrators in Europe, Asia and the Middle East.  Approximately 34% and 31% of our revenue was derived from international markets in the years ended December 31, 2017 and 2016, respectively, and we hope to expand the volume of the services and solutions that we provide internationally.  Our international operations subject us to additional risks, including: 

These risks could restrict our ability to provide services to international clients and could have a material adverse effect on our business, financial condition and results of operations. 

We may not be able to receive or retain the necessary licenses or authorizations required for us to export or re-export our products, technical data or services, which could have a material adverse effect on our business, financial condition and results of operations.

In order for us to export certain services or solutions, we are required to obtain licenses from the U.S. government. We cannot be sure of our ability to obtain the U.S. government licenses or other approvals required to export our services and solutions for sales to foreign governments, foreign commercial clients or foreign destinations. Failure to receive required licenses or authorizations could hinder our ability to export our services and solutions and could harm our business, financial condition and results of operations. Export transactions may also be subject to the import laws of the importing and destination countries. If we fail to comply with these import laws, our ability to sell our services and solutions may be negatively impacted which would have a material adverse effect on our business and results of operations. 

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

We continue to strive to expand, our operations into new markets. The growth in our business and operations has required, and will continue to require, significant attention from management and places a strain on operational systems and resources. To accommodate this growth, we will need to upgrade, improve or implement a variety of operational and financial systems, procedures and controls, including the improvement of accounting and other internal management systems, all of which require substantial management efforts.

We will also need to continue to expand, train, manage and motivate our workforce, manage our relationships with our customers, and add sales and marketing offices and personnel to service these relationships. All of these endeavors will require substantial managerial efforts and skill and 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.

Our strategy to expand our sales and marketing operations and activities may not generate the revenue increases anticipated or such revenue increases may only be realized over a longer period than currently expected.

Building a digital signage solutions customer base and achieving broader market acceptance of our digital signage solutions will depend to a significant extent on our ability to expand our sales and marketing operations and activities. We plan to expand our direct sales force both domestically and internationally; however, there is significant competition for direct sales personnel with the sales skills and technical knowledge that we require. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of direct sales personnel. Our business could be harmed if our sales and marketing expansion efforts do not generate a corresponding significant increase in revenue.

We must adapt our business model to keep pace with rapid changes in the visual communications market, including rapidly changing technologies and the development of new products and services.

Providing visual communications solutions is a relatively new and rapidly evolving business, and we will not be successful if our business model does not keep pace with new trends and developments. If we are unable to adapt our business model to keep pace with changes in the industry, or if we are unable to continue to demonstrate the value of our services to our customers, our business, results of operations, financial condition and liquidity could be materially adversely affected. Our success is also dependent on our ability to adapt to rapidly changing technology and to make investments to develop new products and services. Accordingly, to maintain our competitive position and our revenue base, we must continually modernize and improve the features, reliability and functionality of our products and services. Future technological advances may result in the availability of new service or product offerings or increase in the efficiency of our existing offerings. Some of our competitors have longer operating histories, larger client bases, longer relationships with clients, greater brand or name recognition, or significantly greater financial, technical, marketing and public relations resources than we do. As a result, they may be in a position to respond more quickly to new or emerging technologies and changes in customer requirements, and to develop and promote their products and services more effectively than we can. We may not be able to adapt to such technological changes or offer new products on a timely or cost-effective basis or establish or maintain competitive positions. If we are unable to develop and introduce new products and services, or enhancements to existing products and services, in a timely and successful manner, our business, results of operations, financial condition and liquidity could be materially and adversely affected.

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

Our success and ability to compete depends in some regard upon the protection of our proprietary technology. As of December 31, 2017, we held two issued patents in the United States. Any patents issued may provide only limited protection for our technology and the rights that may be granted under any future issued patents may not provide competitive advantages to us. Also, patent protection in foreign countries may be limited or unavailable where we need this protection. Competitors may independently develop similar technologies, design around our patents or successfully challenge any issued patent that we hold.  

We rely upon trademark, copyright and trade secret laws and contractual restrictions to protect our proprietary rights, and if these rights are not sufficiently protected, our ability to compete and generate revenues could be harmed.

We rely on a combination of trademark, copyright and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. Our ability to compete and expand our business could suffer if these rights are not adequately protected. We seek to protect our source code for our software, 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 our proprietary information to execute confidentiality and invention assignment agreements. The steps taken by us to protect our proprietary information may not be adequate to prevent misappropriation of our technology. Our proprietary rights may not be adequately protected because:

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

We have not registered copyrights for many of our software, written materials or other copyrightable works. The United States Copyright Act automatically protects all of our copyrightable works, but, without registration, we cannot enforce those copyrights against infringers or seek certain statutory remedies for any such infringement. Preventing others from copying our products, written materials and other copyrightable works is important to our overall success in the marketplace. In the event we decide to enforce any of our unregistered copyrights against infringers, we will first be required to register the relevant copyrights, and we cannot be sure that all of the material for which we seek copyright registration would be registrable, in whole or in part, or that, once registered, we would be successful in bringing a copyright claim against any such infringers.

Litigation may be necessary to protect our trademarks and other intellectual property rights, to enforce these rights or to defend against claims by third parties alleging that we infringe, dilute or otherwise violate third-party trademark or other intellectual property rights. Any litigation or claims brought by or against us, whether with or without merit, or whether successful or not, could result in substantial costs and diversion of our resources, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. Any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property rights, could subject us to significant liabilities, require us to seek licenses on unfavorable terms, if available at all or prevent us from manufacturing or selling certain products, any of which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

We may face intellectual property infringement claims that could be time-consuming, costly to defend and result in its loss of significant rights.

Other parties may assert intellectual property infringement claims against us, and our products may infringe the intellectual property rights of third parties. From time to time, we receive letters alleging infringement of intellectual property rights of others. We may also initiate claims against third parties to defend our intellectual property. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our core business. If there is a successful claim of infringement against us, we may be required to pay substantial damages to the party claiming infringement, develop non-infringing technology or enter into royalty or license agreements that may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis could harm our business. Also, we may be unaware of filed patent applications that relate to our products. Parties

making infringement claims may be able to obtain an injunction, which could prevent us from operating portions of our business or using technology that contains the allegedly infringing intellectual property. Any intellectual property litigation could adversely affect our business, financial condition or results of operations.

We depend on key executive management and other key personnel and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.

We depend on the leadership and experience of our key executive management, as well as other key personnel with specialized industry, sales and technical knowledge and/or industry relationships. Because of the intense competition for these employees, particularly in certain of the metropolitan areas in which we operate, we may be unable to retain our management team and other key personnel and may be unable to find qualified replacements if their services were no longer available to us. Most of our key employees are employed on an “at will” basis and we do not have key-man life insurance covering any of our employees. The loss of the services of any of our executive management members or other key personnel could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all.

Our facilities are located in areas that could be negatively impacted by natural disasters.

Our business operations depend on our ability to maintain and protect our facilities, computer systems and personnel, which are primarily located in Addison, Texas. In addition, we manage our networks from our headquarters in Addison. Addison is located in an area that experiences frequent severe weather, including tornadoes. Should a tornado, war, terrorist act or other catastrophe, such as fires, floods, power loss, communication failure or similar events, disable our facilities, our operations would be disrupted. While we have developed a backup and recovery plan, such plan may not ultimately prove effective.

Changes in government regulation could require us to change our business practices and expose us to legal action.

The Federal Communications Commission, or the FCC, has broad jurisdiction over the telecommunications industry in the United States, and the governments of other nations have regulatory bodies performing similar functions. FCC licensing, program content and related regulations generally do not currently affect us. However, the FCC or analogous agencies in other countries could promulgate new regulations that impact our business directly or indirectly or interpret existing laws in a manner that would cause us to incur significant compliance costs or force us to alter our business strategy. 

FCC (and similar foreign agency) regulations also affect many of our content providers and, therefore, these regulations may indirectly affect our business. In addition, the industries in which we provide service are subject to regulation by the Federal Trade Commission, the Food and Drug Administration and other federal and state agencies, and to review by various civic groups and trade organizations. New laws or regulations governing our business or the industries we serve could substantially harm our business. 

We may also be required to obtain various regulatory approvals from local, state or national governmental bodies. We may not be able to obtain any required approvals, and any approval may be granted on terms that are unacceptable to us or that adversely affect our business. 

Changes in regulations relating to Wi-Fi networks, cellular 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 and cellular networks. The Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, liability for distributing materials that infringe copyrights or other rights. Portions of the Communications Decency Act are intended to provide statutory protections to online service providers who distribute third-party content. The Child Online Protection Act and the Children’s Online Privacy Protection Act restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from minors. The costs of compliance with these regulations, and other regulations relating to our Wi-Fi networks or other areas of our business, may be significant. The manner in which these and other regulations may be interpreted or enforced may subject us to potential liability, which in turn could have an adverse effect on our business, financial condition or results of operations. Changes to these and other regulations may impose additional burdens on us or otherwise adversely affect our business and financial results because of, for example, increased costs relating to legal compliance, defense against adverse

claims or damages, or the reduction or elimination of features, functionality or content from our Wi-Fi networks. Likewise, any failure on our part to comply with these and other regulations may subject us to additional liabilities.

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

In the past, we have grown our businesses in part through acquisitions. As part of our business strategy, we may make future acquisitions of, or investments in, technologies, products and businesses that we believe could complement or expand our business, enhance our technical capabilities or offer growth opportunities. However, we may be unable to identify suitable acquisition candidates in the future or make these acquisitions on a commercially reasonable basis, or at all. In addition, we may spend significant management time and resources in analyzing and negotiating acquisitions or investments that do not come to fruition. These resources could otherwise be spent on our own customer development, marketing and customer sales efforts and research and development. 

Any future acquisitions and investments we may undertake, subject us to various risks, including: 

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 and the Middle East. In many cases, we have limited experience in these regions, and may encounter difficulties due to different technology standards, legal considerations, language barriers, distance and cultural differences. We may not be able to manage operations in these regions effectively and efficiently or compete effectively in these new markets. If we do not generate sufficient revenues from these regions to offset the expense of expansion into these regions, or if we do not effectively manage accounts receivable, foreign currency exchange rate fluctuations and taxes, our business and our ability to increase revenues and enhance our operating results could suffer.

Risks Related to Our Common Stock

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

As of December 31, 2017, Donald R. Wilson, Jr. and affiliated entities beneficially owned approximately 42% of our outstanding common stock, and Gregory H. Sachs, our Executive Chairman, and affiliated entities beneficially owned approximately 23% of our outstanding common stock. As a result, these persons and entities have the ability to exercise control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change in control of our company that other stockholders may view as beneficial.  

We may not be able to maintain our listing on Nasdaq.

On January 9, 2018, we received a written notice from Nasdaq indicating that we were not in compliance with the Nasdaq Listing Rule which requires us to maintain a minimum bid price of $1.00 per share, and providing us with a period of 180 calendar days, until July 9, 2018, to remedy the noncompliance by maintaining a minimum bid price of $1.00 per share for at least ten consecutive business days. On March 15, 2018, we received written notification from Nasdaq indicating that we had regained compliance with the minimum bid price requirement, as a result of the closing bid price of our common stock having been at $1.00 per share or greater for at least ten consecutive business days. Notwithstanding that

we are not currently subject to delisting based on the minimum bid price requirement, our common stock has traded below $1.00 on many trading days. If the closing bid price for our common stock is below $1.00 for a period of 30 consecutive business days, we would again be subject to potential delisting from Nasdaq. Furthermore, we have received non-compliance notices from Nasdaq in the past, and in 2017, we effected a 1-for-4 reverse stock split of our common stock in order to regain compliance following a previous notice of failure to meet the Nasdaq minimum bid price requirement. We intend to continue to monitor the bid price of our common stock. If our common stock once again does not trade at a level that is likely to maintain compliance with the Nasdaq requirements, our board of directors may consider other options that may be available to achieve compliance, including by carrying out an additional reverse stock split, if necessary. Such measures could have negative implications.

If our common stock is delisted from Nasdaq, it would likely trade only on the over-the-counter market (the “OTC”). If our common stock were to trade on the OTC, selling our common stock could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage may be reduced. In addition, in the event our common stock is delisted, broker-dealers transacting in our common stock would be subject to certain additional regulatory burdens, which may discourage them from effecting transactions in our common stock, thus further limiting the liquidity of our common stock and potentially resulting in lower prices and larger spreads in the bid and ask prices for our common stock. 

Compliance with the Sarbanes-Oxley Act of 2002 requires substantial financial and management resources.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and report on our system of internal controls and, if and when we are no longer a “smaller reporting company,” will require that we have such system of internal controls audited. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny, civil or criminal penalties and/or Stockholder litigation. Any inability to provide reliable financial reports could harm our business. Furthermore, any failure to implement required new or improved controls, or difficulties encountered in the implementation of adequate controls over our financial processes and reporting in the future, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our securities.

We may issue additional shares of our common stock or other equity securities, which would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders. This might have an adverse effect on the market price of our common stock.

We may finance the execution of our business plan or generate additional working capital through additional equity financings. Therefore, subject to the rules of the SEC and Nasdaq, we may issue additional shares of our common stock, preferred stock, warrants and other equity securities of equal or senior rank, with or without stockholder approval, in a number of circumstances from time to time. The issuance by us of shares of our common stock, preferred stock, warrants or other equity securities of equal or senior rank may have the following effects:

In addition, 9,649,318 outstanding warrants to purchase an aggregate of 2,756,810 shares of common stock are currently exercisable. These warrants would only be exercised if the $40.25 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.

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

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

our directors. In addition, in certain circumstances, Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.

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

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

Item 1B.   Unresolved Staff Comments

None.

Item 2.     Properties

Our corporate headquarters is located in a facility in Addison, a suburb of Dallas, Texas, with approximately 31,255 rentable square feet.

Our EMEA (Europe, Middle East & Asia) operations are based in our leased offices located in and around London, England, with two sub-offices serving the Middle East located in Dubai and Abu Dhabi, United Arab Emirates.

Our corporate headquarters is subject to a long-term lease, which expires in 2025. We believe our facilities are adequate to meet our current needs and intend to add or change facilities as our needs require.

We also have leased office space associated with our legacy Media business, which we sold on July 1, 2015. These office leases are located in New York City and expire from 2018 to 2021. We have subleased these offices.

Item 3.     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.

Class Action and Stockholder Derivative Lawsuit

On March 23, 2018, a class action and a verified stockholder derivative complaint on behalf of the Company entitled Eric Weinstein et al. v. Gregory H. Sachs et al., Case No. 2018-0210-AGB was filed in the Court of Chancery in the State of Delaware against the Company, as nominal defendant, and certain individual shareholders, directors and former employee of the Company, as defendants (the “Weinstein Proceeding”).  The lawsuit alleges that certain members of the Company’s Board breached their fiduciary duties of good faith and loyalty by agreeing to enter into a purchase agreement (the “Purchase Agreement”) with certain investors on March 25, 2015 to sell such investors shares of preferred stock of the Company, (i) on terms that allowed a small group of investors to acquire common stock of the Company at a significant discount, in a quantity that entrenched their power within the Company, favoring their interests to the detriment of the Company’s minority stockholders, and (ii) by knowingly making false and misleading disclosures, and failing to disclose all material information, to the Company’s stockholders.  The complaint further alleges that Mr. Sachs and Mr. Donald Wilson, as the Company’s controlling stockholders, breached their fiduciary duties of good faith and loyalty by agreeing to issue preferred stock of the Company on terms that allowed a small group of investors to acquire common stock of the Company at a significant discount, in a quantity that entrenched their power within the Company, favoring their interests to the detriment of the Company.  The complaint also alleges that certain of the Company’s insiders, including four directors and a former employee, were unjustly enriched by the opportunity to acquire common stock of the Company at a discount to its trading price at the time.  The lawsuit seeks to cause the defendants to disgorge to the Company the stock that they received at a discount to the market price, and also seeks an award of appropriate damages, plus pre- and post-judgment interest for the plaintiff, the class and the Company. The Company believes that the allegations set forth in the complaint are without merit and intends to defend itself vigorously in the proceedings. Due to the inherent uncertainties

of litigation and the early stage of the proceedings, the Company cannot predict the ultimate outcome of this matter.

Patent Litigation

On March 27, 2018, Ultravision Technologies, LLC (“Ultravision”), filed patent infringement complaints against us in the International Trade Commission (“ITC”) and the United States District Court for the Eastern District of Texas, Marshall Division (“District Court”), alleging infringement of claims in two United States patents based on modular LED display panels sold by the Company. The ITC matter is entitled In the Matter of Certain Modular LED Display Panels (No. 337-3302). The ITC complaint seeks exclusion and cease and desist orders.  Pursuant to the complaint filed in the District Court, Case No. 2:18-cv-00109-JRG, Ultravision is seeking to enjoin the Company from further acts of direct and/or indirect infringement of such United States patents, including the manufacture, sale, offer for sale, importation and use of the infringing products, unspecified monetary relief, injunctive relief for the payment of royalties and reimbursement for costs and attorneys’ fees. The Company intends to defend itself vigorously in the proceedings. Due to the inherent uncertainties of litigation and the early stage of the proceedings, the Company cannot predict the ultimate outcome of this matter. 

Item 4.     Mine Safety Disclosures

Not applicable.

PART II

Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Market Price for Equity Securities

Our common stock is quoted on the NASDAQ Capital Market after transitioning from the NASDAQ Global Market on February 25, 2016, and our warrants and units are quoted on the OTC bulletin board, under the symbols “RMGN” and “RMGNW, respectively. Our units commenced public trading on April 13, 2011 and were quoted on the OTC bulletin board until April 18, 2016. Our common stock was quoted on the OTC bulletin board until its listing on the NASDAQ Stock Market on May 2, 2012.

The following table sets forth the high and low bid prices as quoted on the NASDAQ Stock Market (with respect to our common stock) and OTCBB (with respect to our warrants) for the periods indicated (after giving effect to a 1-for-4 reverse stock split effected in August 2017).

As of March 22, 2018, there were 20 holders of record of our common stock, five holders of record of our warrants and one holder of record of our units. These numbers exclude holders whose securities are held in nominee or street name by brokers.

Dividends

To date, we have not paid any dividends on our common stock, and we do not expect to pay any dividends in the foreseeable future. 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 our operating subsidiaries through a distribution, loan or other transaction, and will be within the discretion of our board of directors. The terms of our existing indebtedness also limits our ability to pay dividends. Investors should not purchase our common stock with the expectation of receiving cash dividends.

Item 6.   Selected Financial Data

As a smaller reporting company, we are not required to provide the information required by this Item.

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company was formed on January 5, 2011, for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction or other similar business transaction, one or more operating businesses or assets. The Company consummated the acquisition Reach Media Group on April 8, 2013, and on April 19, 2013, acquired Symon. Symon is considered to be the Company’s predecessor corporation for accounting purposes.

The Company is one of the largest integrated digital signage solution providers, offering enterprise-class digital signage solutions that are relied upon by a majority of Fortune 100 companies and thousands of overall customers in locations worldwide. Through an extensive suite of products that include proprietary software, software-embedded hardware, maintenance and creative content service, installation services, and third-party displays, the Company delivers complete end-to-end intelligent visual communication solutions to its clients for critical contact center, supply chain, internal 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. Our installations deliver real-time intelligent visual content that enhances the ways in which organizations communicate with employees and customers to drive productivity and engagement. The solutions are designed to integrate seamlessly with a customer’s IT infrastructure, data and security environments. The Company conducts operations through its RMG Enterprise Solutions business unit.

On July 1, 2015, the Company divested its RMG Media Networks business unit which was focused on selling advertising across airline digital media assets in executive clubs, on in-flight entertainment, on in-flight Wi-Fi portals and in private airport terminals. Therefore, the financial information discussed below and in the consolidated financial statements and accompanying footnotes are exclusive of our Media business, classified as discontinued operations, unless specifically identified otherwise.

Revenue

The Company derives its revenue as follows from three primary sources:

1. Product sales:

2. Subscription and customer support services:

3. Professional services:

Revenue is recognized as outlined in  “Critical Accounting Policies - Revenue Recognition” below. The Company sells its solutions through its multinational sales force and through a select group of resellers and business partners. In North America, the Company’s sales team generated approximately 91% and 92% of its annual sales in 2017 and 2016, respectively, while 9% and 8% of its sales were generated through resellers in 2017 and 2016, respectively. Outside the United States, approximately 70% and 66% of sales come from the reseller channel in 2017 and 2016, respectively. Overall, approximately 70% and 75% of the Company’s multinational enterprise sales are derived from direct sales in

2017 and 2016, respectively, with the remaining 30% and 25% generated through indirect partner channels in 2017 and 2016, respectively.

The Company has formal contracts with its resellers that set the terms and conditions under which the parties conduct business. The resellers purchase products and services from the Company, generally with agreed-upon discounts, and resell the products and services to their customers, who are the end-users of the products and services. The Company does not offer contractual rights of return other than under standard product warranties, and product returns from resellers have been insignificant to date. The Company sells directly to its resellers and recognizes revenue on sales to resellers upon delivery, consistent with its recognition policies. The Company bills resellers directly for the products and services they purchase. Software licenses and product warranties pass directly from the Company to the end-users.

Cost of Revenue

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 the Company’s assembly and distribution operations. The cost of revenue associated with professional services consists of the salary and related benefit costs and the travel costs of the Company’s employees providing installation and training services as well as on-site installation costs from third-party providers.  The cost of revenue associated with maintenance and content services consists of the salary and related benefit costs of the Company’s employees engaged in providing customer support and content services,  the annual costs associated with acquiring data from third-party content providers, and costs associated with cloud hosting services related to providing software-as-a-service to customers.

Operating Expenses

The Company’s operating expenses are comprised of the following components:

Trends in Operating Results

The Company is a leading multinational provider of enterprise-class digital signage solutions and as such, its operations are subject to factors that generally affect corporate budgets, including but not limited to general economic conditions, employment levels, business conditions, and global uncertainty.

Since the arrival of our chief executive officer in July 2014, the Company has been executing a multi-year strategic turnaround plan that emphasizes delivering new, innovative products and solutions, diversifying into select industry verticals, improving the effectiveness and productivity of its sales and marketing efforts, and implementing a cost rationalization effort. During 2015, the Company made progress on its multi-year strategic turnaround plan by strengthening the executive leadership team, enhancing the breadth and depth of its suite of product offerings, continuing its targeted solution area focus such as contact centers and internal communications, improving the effectiveness and productivity of its sales organization, significantly reducing its cost structure, and divesting its non-core Media business. The Company continued executing its strategic plan in 2016 and 2017, as it further enhanced its product offerings and solution portfolio and strengthened its management team with the addition of a new chief technology officer and chief marketing and creative officer. In the fourth quarter of 2017, the Company released KorbytTM, its next-generation visual

enterprise communications software platform that gives companies the power to communicate more effectively with seamless content creation and distribution across digital signage networks, desktops and mobile devices. In the fourth quarter of 2017, the Company also released KorbytGOTM,  a mobile app that enables organizations to connect with its employees, managers and leadership through a mobile phone, a device that is readily used and preferred by employees. The Korbyt platform offers a set of innovative features as well as flexible deployment options, both in cloud and on-premise environments, that are anticipated to open new global market opportunities, particularly in the retail, hospitality and internal communications markets. The platform also leverages the Company’s heritage and expertise in data-intensive applications, such as contact center and supply chain, offering an application programming interface (“API”) set that helps enable data integration with virtually any enterprise-level data sources as well as offering substantially improved scalability in high-performance environments. Finally, the Company maintained a reduced level of operating costs to support its effort to achieve long-term sustainable profitability.

Revenues

The launch of Korbyt in the fourth quarter of 2017 begins the Company’s multi-year, strategic transition from a perpetual use software license and maintenance business model to a subscription business model. While we will continue to sell perpetual use software licenses for our ES software platform, we expect the customer transition to the Korbyt platform and subscription business model will drive an increasing portion of our revenues in the future to subscriptions. The subscription model prices and delivers our products in a way that differs from the historical perpetual pricing and delivery methods. These changes reflect a significant shift from perpetual license sales and distribution of our software in favor of providing our customers the right to access certain of our software in a hosted environment or use downloaded software for a specified subscription period. During this transition, revenue, orders, gross margin, gross margin, net income (loss), earnings (loss) per share, deferred revenue, and cash flow from operations will be impacted as more revenue is recognized ratably rather than up front.

Professional services revenue varies greatly based on the open project backlog at designated points in time. Going forward, we expect that professional services revenues will be largely dependent on the Company’s success in signing larger deals with significant professional services components.

Expenses

Since 2015, the Company has significantly reduced its overall cost structure as a result of headcount reductions across the organization, closing underperforming geographies, divesting its non-core Media business, reducing ineffective marketing initiatives, and developing more efficient product distribution operations. Beginning in 2017, the Company has begun investing in areas that it believes have a strong return potential such as sales and marketing, content-related services and research and development, while it continues to tightly monitor general and administrative costs.

Results of Operations

Comparison of the years ended December 31, 2017 and 2016

The following financial statements present the results of operations of the Company for the years ended December 31, 2017 and 2016.  

Revenue

Revenue was $37.0 million and $37.6 million for the years ended December 31, 2017 and 2016, respectively, a decrease of $0.6 million, or 1.5%.  

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

Revenues declined in the North America region in 2017, resulting primarily from weaker orders driving decreased products revenue. United Kingdom revenues increased in 2017 as compared to 2016, due to higher product revenue, offset by lower maintenance and content services and professional services revenue. Revenue in the Middle East region increased 59.5% in 2017 as compared to 2016,  due to higher products revenue driven by several significant projects in the region.  Revenue in Europe and Other regions decreased 57.5% as compared to 2016, due primarily to lower orders driving decreased product revenue. 

The following table summarizes the composition of the Company’s revenue and cost of revenue for the years ended December 31, 2017 and 2016.

Revenues derived from product sales for the year ended December 31, 2017 increased by $0.1 million, or 0.6%, as compared to the year ended December 31, 2016, primarily driven by increased sales of proprietary media player hardware and RMG MAX LED screens in international markets, partially offset by decreased hardware and software sales in North America. Revenues derived from maintenance and content service contracts for the year ended December 31, 2017 decreased by $0.3 million, or 2.5%, as compared to the year ended 2016, primarily due lower revenues in the United Kingdom. Professional service revenue is impacted by the sales mix and professional services employee utilization in any given year. In the year ended December 31, 2017, professional services revenue decreased $0.3 million, or 4.3%, as compared to the year ended December 31, 2016.

Cost of Revenue

Cost of revenue was $15.9 million and $15.5 million for the years ended December 31, 2017 and 2016, respectively, an increase of $0.4 million, or 2.8%, primarily attributable to a sales mix with a lower proportion of software sales in 2017 and a combination of non-recurring credits to product and maintenance costs from a component manufacturer and resolution of a vendor billing matter that occurred in 2016. Specifically, cost of revenue related to products increased $0.5 million in 2017 as compared to 2016 due primarily to lower software sales in 2017 and the non-recurring credit to product costs from a component manufacturer in 2016. Cost of revenue related to maintenance and content increased $0.3 million due to the non-recurring credits to maintenance costs from resolution of a vendor billing matter during the year ended 2016. Cost of revenue related to professional services decreased $0.4 million in 2017 due to lower headcount and cost reductions implemented during the year.

The following table reflects the Company’s gross margins for the years ended December 31, 2017 and 2016:

The Company’s overall gross margin for the year ended December 31, 2017 decreased to 57.1% from 58.8% for the year ended December 31, 2016. The lower gross margin was primarily attributable to the following:

Operating Expenses

Operating expenses totaled $26.0 million for the year ended December 31, 2017, a $0.7 million decrease as compared to $26.7 million for the year ended December 31, 2016. This 2.7% decrease was attributable to the following items:

Warrant Liability Expense

The Company calculates its warrant liability based on the quoted market value of its outstanding warrants. The gain (loss) on change in warrant liability for the years ended December 31, 2017 and 2016, were $0.3 million and $(0.2) million, respectively. A gain on change in warrant liability represents a decrease in the amount of the Company’s warrant liability during that year.

Interest and other – Net

Interest (expense) and other income - net for the year ended December 31, 2017 and 2016 was $(0.5) million and $0.4 million, respectively, a $1.0 million increase in expense.  The changes to Interest (expense) and other income - net was primarily due to the stabilization of the British pound sterling against the U.S. dollar resulting in a foreign currency loss as compared to the opposite situation in 2016 that resulted in a foreign currency gain. 

Income Tax Expense

The income tax expense for the years ended December 31, 2017 and 2016 were $52 thousand and $143 thousand, respectively, resulting from foreign taxes.  The Company had book net losses in the years ended December 31, 2017 and 2016 with a U.S. full valuation allowance against the resulting deferred tax asset at December 31, 2017 and 2016.

Liquidity and Capital Resources

The Company has a history of operating losses and negative cash flow, including the Media business which continued to generate losses until its divestiture on July 1, 2015. As such, the Company took several steps in 2016 to reduce its operating costs and in 2017, continued to closely monitor its cash projections and evaluate its operating structure for opportunities to reduce operating costs. In order to ensure the Company had adequate working capital, effective November 2, 2015, the Company and certain of its subsidiaries (collectively, the “Borrowers”) entered into a loan and security agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”), pursuant to which the Bank agreed to make a revolving credit facility (the “Revolving Facility”) available to the Borrowers in the principal amount of up to $7.5 million.  The Revolving Facility has an effective date (the “Effective Date”) of October 13, 2015, and originally matured on October 13, 2017. The Revolving Facility was amended and restated effective October 13, 2017, pursuant to an amended and restated loan and security agreement (the “Restated Loan Agreement”), with an extended maturity date of March 31, 2019. Availability

under the Revolving Facility is tied to a borrowing base formula.  Interest on advances under the Revolving Facility (the “Advances”) will accrue on the unpaid principal balance of such Advances at a per annum rate equal to the greater of 4.50% or either 1.75% above the prime rate or 2.75% above the prime rate, depending on whether certain conditions are satisfied.  During an event of default, the rate of interest would increase to 5% above the otherwise applicable rate, until such event of default is cured or waived. All accrued and unpaid interest is payable monthly on the last calendar day of each month.

While the Company was in compliance with its financial covenants under the Loan Agreement as of December 31, 2017, management determined that it expected to become non-compliant with its financial covenants under the Loan Agreement in 2018. The Company entered into discussions with the Bank and, on April 2, 2018, the Borrowers entered into the First Amendment with the Bank. Pursuant to the First Amendment, the minimum EBITDA covenant in the Restated Loan Agreement was amended and the Bank consented to the incurrence of certain subordinated debt pursuant to the Subordinated Loan Agreement by the Company and certain of its subsidiaries, among other things.

In connection with the First Amendment and the Merger Agreement, on April 2, 2018, the Borrowers also entered into the Subordinated Loan Agreement with the Subordinated Lender, pursuant to which the Subordinated Lender agreed to make available to the Borrowers the Bridge Loan in the principal amount of $2 million, providing the Company with additional liquidity.  The Subordinated Lender is an affiliate of Mr. Sachs.  If the Penalty Loan is funded pursuant to the terms of the Merger Agreement, the Penalty Loan will also be a credit extension under the Subordinated Loan Agreement and subject to its terms. The Subordinated Loans are secured by a second priority lien in all of the assets of the Borrowers. The Bridge Loan matures on the later of April 2, 2019 or, if the Penalty Loan is funded, one year following the funding of the Penalty Loan, at which time all outstanding principal and interest on the Subordinated Loans are due.  No principal payments are required under either the Bridge Loan or the Penalty Loan prior to maturity and, except in limited circumstances, no principal payments are permitted prior to the first anniversary of the closing date.  Interest on the Bridge Loan accrues at a per annum cash interest rate equal to 8.0% above the prime rate plus 2.0% paid-in-kind and interest on the Penalty Loan will accrue at a per annum paid-in-kind interest rate equal to 5% above the prime rate.  If the Bridge Loan is prepaid prior to the stated maturity date thereof, the Borrowers are obligated to pay a prepayment premium equal to the interest the loans would have accrued if they had remained outstanding through maturity.  During an event of default, the rate of interest on the Subordinated Loans would increase to 2.5% above the otherwise applicable rate, until such event of default is cured or waived. All accrued and unpaid cash interest is payable quarterly on the last day of each fiscal quarter.

In November 2016, the Company filed a “shelf” registration statement on Form S-3 with the SEC which allows the Company to quickly seek to raise equity capital through a variety of structures in the public markets. On December 29, 2016, the Company completed a rights offering to existing stockholders of record at November 29, 2016 as well as the related sale of shares to existing stockholders pursuant to a standby purchase agreement. Pursuant to the rights offering and the related private placement, the Company issued an aggregate of 1,935,477 split-adjusted shares of common stock at a price of $2.48 per share for gross proceeds of approximately $4.8 million. The rights offering generated $4.4 million in net cash proceeds, net of $0.4 million in transaction expenses, to be used for general working capital purposes.

At December 31, 2017, the Company had $1.3 million in borrowings and $2.5 million in unused availability under the Revolving Facility. At December 31, 2017, the Company’s cash and cash equivalents balance was $1.5 million. This includes cash and cash equivalents of $1.2 million held in bank accounts of its subsidiaries located outside the United States. The Company currently plans to use this cash to fund its ongoing foreign operations. Starting in 2018, if the Company were to repatriate the cash held by its subsidiary located outside the United States, it may not incur tax liabilities due to the Tax Cuts and Jobs Act of 2017 passed by the U.S. Congress.

The Company continues to analyze its liquidity to ensure it is able to execute its planned operations. Through the combination of the Company’s cash and availability under the Revolving Facility, the ability to seek new capital through the equity capital markets via its effective “shelf” registration statement, and its current forecasts, the Company believes it should have adequate cash to operate the Company through at least the next twelve months. However, if the Company is unable to achieve its forecasts, fails to meet any of the financial covenants in the Revolving Facility and is unable to obtain a waiver or an amendment from the Bank to allow it to continue to borrow, or raise additional equity capital, the Company may need to pursue one or more alternatives, such as to reduce or delay investments in its business, or seek additional financing. There is no assurance, however, that the Company will be able to raise additional capital or obtain additional financing on commercially reasonable terms or at all.  

The Company has generated and used cash, inclusive of discontinued operations, as follows:

Operating Activities

Cash used in operating activities of $3.7 million during 2017 resulted primarily from the Company’s net loss of $5.2 million. The net loss is offset primarily by the following non-cash items:

In addition, the following principal changes in assets and liabilities affected cash from operating activities during the year:

Investing Activities

Cash used in investing activities of $0.1 million during 2017 resulted primarily from expenditures for property and equipment.

Financing Activities

Cash used in financing activities of $0.1 million during 2017 resulted primarily from the $0.1 million of debt issuance costs from renewing the Revolving Facility during 2017.  See “Note 4. Revolving Facility” in the accompanying Notes to the Consolidated Financial Statements.

Critical Accounting Policies

The Company’s significant accounting policies are described in Note 1 of the Company’s consolidated financial statements included elsewhere in this filing. The Company’s consolidated 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, United Kingdom, Europe, Middle East and Asia. Accounts receivable are recorded at the invoiced amounts and do not bear interest. The allowance requires judgment and is reviewed monthly, and the Company establishes reserves for doubtful accounts on a case-by-case basis based on historical collection experience and a current review of the collectability of accounts. The Company’s collection experience has been consistent with its 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 net realizable value. Slow moving and obsolete inventories are written off based on historical experience and estimated future usage.

Intangible Assets

Intangible assets include software and technology and customer relationships associated with the acquisition of Symon. The intangible assets are being amortized over their estimated useful lives. The definite lived intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment evaluation involves testing the recoverability of the asset on an undiscounted cash-flow basis, and, if the asset is not recoverable, recognizing an impairment charge, if necessary, to reduce the asset’s carrying amount to its fair value. Intangible assets are evaluated for impairment annually and on an interim basis as events and circumstances warrant by comparing the fair value of the intangible asset with its carrying amount.

There was no impairment of definite lived intangible assets during 2017 and 2016.

The Company’s intangible assets are amortized as follows:

Deferred Revenue

Deferred revenue consists of billings or payments received in advance of revenue recognition from maintenance and content services contracts, software subscriptions and some professional service agreements. Deferred revenue is recognized as the revenue recognition criteria are met. The Company generally invoices the customer in advance for maintenance and content agreements and software subscriptions.

Impairment of Long-lived Assets

In accordance with ASC 360, Property, Plant, and Equipment, long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted net cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset.

There was no impairment of long-lived assets during 2017 and 2016.

Income Taxes

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

Under ASC 740, Income Taxes (“ASC 740”), the Company recognizes the effect of uncertain tax positions, if any, only if those positions are more likely than not of being realized.  It also requires the Company to accrue interest and penalties where there is an underpayment of taxes, based on management’s best estimate of the amount ultimately to be paid, in the same period that the interest would begin accruing or the penalties would first be assessed.  The Company maintains accruals for uncertain tax positions until examination of the tax year is completed by the applicable taxing authority, available review periods expire, or additional facts and circumstances cause it to change its assessment of the appropriate accrual amounts (see Note 5 of the Company’s consolidated financial statements included elsewhere in this filing).  As of December 31, 2017 and 2016, the Company had no accrual recorded for uncertain tax positions.  In December 2017, the U.S. Congress passed the Tax Cut and Jobs Act of 2017 (“TCAJA”) which reduced the federal income tax rate applicable to corporations to 21% from a maximum rate of 35%. The new rate is applicable for the 2018 tax year, but the Company applied the new rate to temporary differences that will reverse after 2017 in accordance with ASC 740, resulting in a decreased value to deferred tax assets of $9.5 million, which is fully offset against the change in the valuation allowance attributable to such assets (see Note 5 of the Company’s consolidated financial statements included elsewhere in this filing). In addition to the reduced tax rate, the TCAJA includes a deemed repatriation provision which requires companies to pay tax on their foreign accumulated earnings and profits measured at either November 2, 2017 or December 31, 2017, whichever produces the greater amount, at a reduced rate with an election to pay the tax over an 8-year period. As of December 31, 2017, the Company has $5.2 million of accumulated earnings in controlled foreign subsidiaries of which $2.3 million is includible as taxable income in 2017 subject to this tax provision. Due to the Company’s current tax loss and federal net operating loss carryforwards of approximately $68.7 million, the Company will apply the deemed repatriation to 2017 taxes and not opt to defer the tax over 8 years. 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:

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 a customer’s acceptance is required for professional services, 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

Products consist of proprietary software and hardware equipment. The Company considers the sale of software more than incidental to the hardware as it is essential to the functionality of the hardware products. The Company enters into multiple-product and services contracts, which may include any combination of equipment and software products, professional services, maintenance and content services.

Multiple Element Arrangements (“MEAs”) are arrangements with customers which include multiple deliverables, including a combination of equipment and services. The deliverables included in the MEAs are separated into more than one unit of accounting when (i) the delivered equipment has value to the customer on a stand-alone basis, and (ii) delivery of the undelivered service element(s) is probable and substantially in the Company’s control. Revenue from arrangements for the sale of tangible products containing both software and non-software components that function together to deliver the product’s essential functionality requires allocation of the arrangement consideration to the separate deliverables using the relative selling price (“RSP”) method for each unit of accounting based first on Vendor Specific Objective Evidence (“VSOE”) if it exists, second on third-party evidence (“TPE”) if it exists, and on estimated selling price (“ESP”) if neither VSOE or TPE of selling price of the Company’s various applicable tangible products containing essential software products and services. The Company establishes the pricing for its units of accounting as follows:

The Company has also established VSOE for its professional services,  software subscriptions, and maintenance and content services based on the same criteria as previously discussed under the software revenue recognition rules.

The Company uses the estimated selling price to determine the relative sales price of its products. Revenue for elements that cannot be separated is recognized once the revenue recognition criteria for the entire arrangement has been met or over the period that our last remaining obligation to perform is fulfilled. Consideration for elements that are deemed separable is allocated to the separate elements at the inception of the arrangement on the basis of their relative selling price and recognized based on meeting authoritative criteria.

The Company sells its products and services through its multinational sales force and through a select group of resellers and business partners. In North America, approximately 91% of sales in 2017 were generated solely by the Company’s sales team, with 9% through resellers. Internationally, the situation is reversed, with around 70% of sales in 2017 coming from the reseller channel. Overall, approximately 70% of the Company’s multinational sales in 2017 were derived from direct sales, with the remaining 30% generated through indirect partner channels. The Company has formal contracts with its resellers that set the terms and conditions under which the parties conduct business. The resellers purchase products and services from the Company, generally with agreed-upon discounts, and resell the products and services to their customers, who are the end-users of the products and services. The Company does not offer contractual rights of return other than under standard product warranties and product returns from resellers have be insignificant to date. The Company therefore sells directly to its resellers and recognizes revenue on sales to resellers upon delivery, consistent with its recognition policies as discussed above. The Company bills the resellers directly for the products and services they purchase. Software licenses and product warranties pass directly from the Company to the end-users.

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

Product revenue

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

Maintenance and content services revenue

Maintenance support revenue consists of support and updates for perpetual use software licenses,  and hardware maintenance and repair. Software subscription revenue consists of the right to access and use software, support and software 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 subscription 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 five years. Perpetual use software license maintenance, content services and software subscriptions are renewable by the customer at the end of each contract term. 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.

Professional services revenue

Professional services consist primarily of project management, installation, training and custom creative services. Installation fees are contracted either on a fixed-fee basis or on a time-and-materials basis. For both fixed-fee and time-and materials contracts, the Company recognizes revenue using the percentage-of-completion method as services are performed. 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 using the percentage-of-completion method as the Company performs the services.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Concentration of Credit Risk and Fair Value of Financial Instruments

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, and accounts receivable. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities reflected in the financial statements approximates fair value due to the short-term maturity of these instruments; the secured line of credit’s carrying value approximates its fair value due to the variable market interest rate of the debt.

The Company does not generally require collateral or other security for accounts receivable. However, credit risk is mitigated by the Company’s ongoing evaluations of customer creditworthiness. The Company maintains an allowance for doubtful accounts receivable balances.

The Company maintains its cash and cash equivalents in the United States with one financial institution. These balances routinely exceed the Federal Deposit Insurance Corporation insurable limit. Cash and cash equivalents of $1.2 million held in foreign countries as of December 31, 2017 were not insured.

Fair Value Measurements

The Company follows the authoritative guidance on fair value measurements and disclosures with respect to assets and liabilities that are measured at fair value on both a recurring and non-recurring basis. Under this guidance, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels defined as follows:

As part of its testing of intangible assets for impairment, the Company fair values all of its assets and liabilities, many of which were based on discounted cash flows analysis and forecasted future operating results which represent Level 3 inputs. In addition, the Company values its warrant liability at the end of each period based on Level 2 inputs.

Research and Development Costs

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

Net Income (Loss) per Common Share

Basic net income (loss) per share for each class of participating common stock, excluding any dilutive effects of stock options, and warrants, is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share is computed similar to basic; however diluted income (loss) per share reflects the assumed conversion of all potentially dilutive securities. There were no stock options, warrants, or other equity instruments outstanding at December 31, 2017 and 2016 that had a dilutive effect on net loss per 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 period-ending exchange rates. Income and expense items are translated to U.S. dollars at the weighted-average rate of exchange prevailing during the period. Resultant translation adjustments are recorded in accumulated other comprehensive income (loss), a separate component of stockholders’ equity.

The Company includes currency gains and losses on temporary intercompany advances in the determination of net income. Currency gains and losses are included in interest and other expenses in the consolidated statements of comprehensive loss.

Business Segment

Operating segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly by the Company’s chief operating decision maker (the Company’s Chief Executive Officer (“CEO”)) in assessing performance and deciding how to allocate resources. The Company’s business operates as one business segment, Enterprise Solutions. See “Note 14, Discontinued Operations” of the Company’s consolidated financial statements included elsewhere in this filing regarding the Company’s decision to exit the Media segment in 2015.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC No. 718-10 - “Compensation – Stock Compensation”. Stock-based compensation expense recognized during the period is based on the value of the portion of share-based awards that are ultimately expected to vest during the period. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of restricted stock is determined based on the number of shares granted and the closing price of the Company’s common stock on the date of grant. Compensation expense for all share-based payment awards is recognized using the straight-line amortization method over the vesting period.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

As a smaller reporting company, we are not required to provide the information required by this Item.

Item 8. Financial Statements and Supplementary Data

Our consolidated financial statements and related notes required by this item are set forth as a separate section of this Report. See Part IV, Item 15 of this Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information required to be disclosed is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting during the year ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Our internal control system was 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.

Under the supervision and with the participation of management, including its principal executive officer and principal financial officer, our management assessed the design and operating effectiveness of internal control over financial reporting as of December 31, 2017 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (May 14, 2013). Based on its evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.

PART III

The information required by Items 10, 11, 12, 13 and 14 is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2018 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2017.

PART IV

Item 15.    Exhibits, Financial Statement Schedules.

The following documents are filed as part of this report. All amounts presented and discussed are in thousands, except share and per share data.

Consolidated Financial Statements:

No financial statement schedules have been filed as part of this Annual Report on Form 10-K because they are not applicable, not required or because the information is otherwise included in our financial statements or notes thereto.

*       Filed herewith

**     Furnished herewith

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

RMG Networks Holding Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of RMG Networks Holding Corporation and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive loss, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended,  in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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 are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company's auditor since 2015.

/s/ Whitley Penn LLP

Dallas, Texas

April 4, 2018

RMG Networks Holding Corporation

Consolidated Balance Sheets

December 31, 2017 and 2016

(in thousands, except share and per share data)