|• FORM 10-Q • EXHIBIT 10.1 • EXHIBIT 31.1 • EXHIBIT 32.1 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2012
o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from______________ to _______________
Commission File Number: 000-26213
(Exact name of registrant as specified in its charter)
11101 W. 120th Ave., Suite 200, Broomfield, Colorado 80021
(Address of principal executive offices)
(Issuer’s telephone number)
Indicate by check mark whether the registrant (1) 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 x No o
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The number of shares outstanding of the Issuer’s common stock as of May 14, 2012, was 6,318,877.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
for the three months ended March 31, 2012 and 2011
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the Three Months Ended March 31, 2012
The accompanying notes are an integral part of these consolidated financial statements
CASH FLOW STATEMENTS
for the three months ended March 31, 2012 and 2011
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
March 31, 2012
1. Organization and Significant Accounting Policies
Description of Business: Roomlinx, Inc. (“Roomlinx” or the “Company”) is incorporated under the laws of the state of Nevada. The Company sells, installs, and services in-room media and entertainment solutions for hotels, resorts, and time share properties; including its proprietary Interactive TV platform, internet, and free to guest and on demand programming. Roomlinx also sells, installs and services telephone, internet, and television services for residential consumers. The Company develops software and integrates hardware to facilitate the distribution of Hollywood, adult, and specialty content, business applications, national and local advertising, and concierge services. The Company also sells, installs and services hardware for wired networking solutions and wireless fidelity networking solutions, also known as Wi-Fi, for high-speed internet access to hotels, resorts, and time share locations. The Company installs and creates services that address the productivity and communications needs of hotel, resort and time share guests, as well as residential consumers.
Basis of Presentation: The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments considered necessary for a fair presentation, have been included in the accompanying unaudited financial statements. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the financial statements and notes thereto, included in the Company’s Form 10-K as of and for the year ended December 31, 2011.
Basis of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Cardinal Hospitality, Ltd. and its 50% owned subsidiary Arista Communications, LLC. All intercompany accounts and transactions have been eliminated in consolidation.
Reclassification: Certain amounts in the 2011 financial statements have been reclassified to conform to the current year presentation.
Revenue Recognition: Revenue is derived from the installation and ongoing services of in-room media, entertainment, and HD television programming solutions in addition to wired networking solutions and Wireless Fidelity networking solutions. Revenue is recognized when all applicable recognition criteria have been met, which generally include a) persuasive evidence of an existing arrangement; b) fixed or determinable price; c) delivery has occurring or service has been rendered; d) collectability of the sales price is reasonably assured.
Wherein installation and service arrangements are contractually predetermined, and whereas such contractual arrangements may provide for multiple deliverables, revenue is recognized in accordance with ASC Topic 650, Multiple Deliverable Revenue, the application of which may be to defer revenue recognition for installations across the service period of the contract and to re-allocate and/or defer revenue recognition across various service arrangements. Below is a summary of the execution of such application as it relates to installation and service arrangements the Company has with its customers.
The Company enters into contractual arrangements to provide multiple deliverables which may include some or all of the following - systems installations and a variety of services related to high speed internet access, free-to-guest, video on demand and iTV systems as well as residential phone, internet and television. Each of these elements must be identified and individually evaluated for separation. The term “element” is used interchangeably with the term “deliverable” and the Company considers the facts and circumstances as it relates to its performance obligations in the arrangement and includes product and service elements, a license or right to use an asset, and other obligations negotiated for and assumed in the agreement. Analyzing an arrangement to identify all of the elements requires the use of judgment. In the determination of the elements included in Roomlinx agreements, embedded software and inconsequential or perfunctory activities were taken into consideration.
Once the Deliverables have been identified, the Relative Fair Value of each Element was determined under the concept of Relative Selling Price (RSP) for which the Company applied the hierarchy of selling price under ASC Topic 605 as follows:
VSOE - Vendor specific objective evidence is still the most preferred criteria with which to establish fair value of a deliverable. VSOE is the price of a deliverable when a company sells it on an open market separately from a bundled transaction.
TPE - Third party evidence is the second most preferred criteria with which to establish fair value of a deliverable. The measure for the pricing of this criterion is the price that a competitor or other third party sells a similar deliverable in a similar transaction or situation.
RSP - Relative selling price is the price that management would use for a deliverable if the item were sold separately on a regular basis which is consistent with company selling practices. The clear distinction between RSP and VSOE is that under VSOE, management must sell or intend to sell the deliverable separately from the bundle, or has sold the deliverable separately from the bundle already. With RSP, a company may have no plan to sell the deliverable on a stand-alone basis.
Hospitality Installation Revenues
Hospitality installations include High Speed Internet Access (HSIA), Interactive Television (iTV), Free to Guest (FTG) and Video on Demand (VOD). Under the terms of these typical product sales and equipment installation contracts, a 50% deposit is due at the time of contract execution and is recorded as deferred revenue. Upon the completion of the installation process, deferred revenue is realized. However, in some cases related to VOD installations or upgrades, the Company extends credit to customers and records a receivable against the revenue recognized at the completion of the installation. Monthly payments against those receivables equal a pre-determined percentage of VOD guest room revenue until such time as the receivable has been paid in full. Thereafter, 100% of the monthly invoice is recorded as recurring VOD revenue.
Additionally, the Company may provide the customer with a lease financing arrangement provided the customer has demonstrated its credit worthiness to the satisfaction of the Company. Under the terms and conditions of the lease arrangements, these leases have been classified and recorded as Sale-Type Leases under ASC Topic 840-30 and accordingly, revenue is recognized upon completion and customer acceptance of the installation which gives rise to a lease receivable and unearned income.
Hospitality Service, Content and Usage Revenues
The Company provides ongoing 24x7 support, content and maintenance as applicable to those products purchased, installed and serviced under contract. Support, when exclusive, is primarily invoiced in advance quarterly, creating deferred revenue which is subsequently recognized in the appropriate periods. When not exclusive, support is invoiced in arrears on a monthly basis with content and usage, which are dependent on guest take rates and buying habits. Service maintenance and usage revenue also includes revenue from meeting room services, which are billed as the events occur.
Residential revenues consist of equipment sales and installation charges, support and maintenance of voice, internet, and television services, and content provider residuals, installation commissions, and management fees. Installations charges are added to the monthly service fee for voice, internet, and television, which is invoiced in advance creating deferred revenue to be realized in the appropriate period. The Company’s policy prohibits the issuance of customer credits during the month of cancelation. The Company earns residuals equal to ‘x’% of monthly customer service charges and a flat rate for each new customer sign up. Residuals are recorded monthly. Commissions and management fees are variable and therefore revenue is recognized at the time of payment.
Inventory: Inventory, principally large order quantity items which are required for the Company’s media and entertainment installations, is stated at the lower of cost (first-in, first-out) basis or market. The Company maintains only the inventory necessary for contemplated installations and its inventory is recorded net of any reserve for excess and obsolescence. Work in progress represents the cost of equipment and third party installation related to installations which were not completed prior to year-end.
Inventory balances as of March 31, 2012 and December 31 2011 are as follows:
Credit Risk: The Company’s operating cash balances are maintained in financial institutions and periodically exceed federally insured limits. The Company believes that the financial strength of these institutions mitigates the underlying risk of loss. To date, these concentrations of credit risk have not had a significant impact on the Company’s financial position or results of operations.
Accounts Receivable: At March 31, 2012, one customer represented 20% one customer represented 18%, and one customer represented 7% of the accounts receivable balance compared to one customer representing 42% and one customer representing 13% of the accounts receivable balance at March 31, 2011.
Revenue: During the three months ended March 31, 2012 four customers each contributed 11% of Roomlinx’s US hospitality revenue compared to one customer contributing 12%, one customer contributing 11% and one customer contributing 5% Roomlinx’s US hospitality revenue during the same period in 2011. Additionally, one customer contributed 53% to Roomlinx’s Canadian hospitality revenue in 2012 versus 52% in 2011.
Fair Value Measurement: The Company discloses fair value information about financial instruments based on a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2012.
The respective carrying value of certain financial instruments approximate their fair values. These financial instruments include cash and cash equivalents, accounts receivable, leases receivable, accounts payable, accrued liabilities, capital lease obligations, notes payable and the line of credit. The carrying value of cash and cash equivalents, accounts receivable, leases receivable, accounts payable and accrued liabilities approximate fair value due to their short term nature. The carrying amount of capital lease obligations and notes payable approximates their fair values as the pricing and terms of these liabilities approximate market rates. The fair value of the line of credit is not practicable to estimate because of the related party nature of the underlying transactions. The Company has no financial instruments with the exception of cash and cash equivalents (level 1) valued on a recurring basis.
Segments: We operate and prepare our financial reports based on two segments; Hospitality and Residential. We have determined these segments based on the location, design, and end users of our products.
Hospitality: Our Hospitality segment includes hotels, resorts, and timeshare properties in the United States, Canada, and Other Foreign. As of March 31, 2012 and 2011, Other Foreign included Mexico and Aruba. The products offered under our hospitality segment include the installation of, and the support and service of, high-speed internet access networks, proprietary Interactive TV platform, free to guest programming, and on-demand movie programming, as well as advertising and e-commerce products.
Residential: Our residential segment includes multi-dwelling unit customers and business customers (non-hospitality) in the United States. The products offered include the installation of, and the support and service of, telephone, internet, and television services.
Foreign Currency Translation: The US Dollar is the functional currency of the Company. Assets and liabilities denominated in foreign currencies are re-measured into US Dollars and the resulting gains and losses are included in the consolidated statement of operations as a component of other income (expense).
Earnings Per Share: The Company computes earnings per share by dividing net income (loss) by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the period. Dilutive common stock equivalents consist of shares issuable upon the exercise of the Company’s stock options and warrants. Potentially dilutive securities, purchase stock options and warrants, are excluded from the calculation when their inclusion would be anti-dilutive, such as periods when a net loss is reported or when the exercise price of the instrument exceeds the fair market value. Accordingly, the weighted average shares outstanding have not been adjusted for dilutive shares. Outstanding stock options and warrants are not considered in the calculation as the impact of the potential common shares (totaling approximately 1,914,744 shares as of March 31, 2012 and 534,744 as of March 31, 2011) would be to decrease the net loss per share.
2. Leases Receivable
As of March 31, 2012, the Company had $3,433,122 in leases receivables, compared to $3,692,424 at December 31, 2011. During the three months ended March 31, 2012 and 2011 the Company received payments of $248,151 and $156,678 respectively. The Company did not enter into any new leases in the three months ended March 31, 2012 and entered into two leases during the three months ended March 31, 2011 for an aggregate of $338,780. These leases have terms of 60 months and interest rates of 9.5%.
Future minimum receipts on lease receivables are as follows:
3. Notes Payable
The Company has two notes payable with an aggregate principal balance of $44,298 ($38,223 and $6,075, respectively) at March 31, 2012 and $59,285 ($51,790 and $7,495, respectively) at December 31, 2011. These notes bear interest at 12% and 11%, respectively, and expire November 1, 2012 and March 1, 2013, respectively. Monthly principal and interest payments total $5,533.
4. Line of Credit
The Company maintains a Revolving Credit, Security and Warrant Purchase Agreement (the “Credit Agreement”) with Cenfin LLC (the owner of Cenfin LLC beneficially owns approximately 38.7% of the Company’s common stock, inclusive of warrants, as of March 31, 2012), a Delaware limited liability company (“Cenfin”) that was originally entered into on June 5, 2009. The Credit Agreement, which has been amended from time to time and matures on June 5, 2017, provides the Company with a maximum borrowing capacity of $25,000,000 and asserts certain financial and non-financial covenants. Under and subject to the terms of the Credit Agreement, interest accrues at the Federal Funds Rate plus 5%, is payable quarterly, and is collateralized by substantially all of the assets of the Company. Additionally and pursuant to each advance, the Company will issue Cenfin a Revolving Credit Note and warrants to purchase shares of Roomlinx common stock equal to 50% of the principal amount funded divided by (i) $2.00 on the first $5,000,000 of borrowings on or after July 15, 2010 ($4,712,000 as of March 31, 2012) or (ii) thereafter the fair market value of the Company’s common stock on the date of such draw for advances in excess of $5,000,000. The exercise price of the warrants is $2.00 for the warrants issued on the first $5,000,000 of borrowings made after July 15, 2010 and, thereafter, the average of the high and low market price for the Company’s common stock on the date of issuance. The exercise period of these warrants expire three years from the date of issuance.
As of March 31, 2012 and December 31, 2011, the Company has drawn $5,176,000 and $4,176,000, respectively, against the line of credit (draws of $1,000,000 and $260,000 for the three month periods ended March 31, 2012 and 2011, respectively). No repayments have been made on the line of credit borrowings. These advances will be repaid at various dates between 2014 and 2017. The balance on the line of credit is reduced by a discount in the amount of $1,425,343 and $1,150,777 as of March 31, 2012 and December 31, 2011, respectively (see Note 6). The Company was in compliance with all covenants as of March 31, 2012, at which time $19,824,000 was available under the Line of Credit. Interest expense of $60,604 and $26,901 was recorded for the three month periods ended March 31, 2012 and 2011, respectively.
The fair value of the warrants granted during the three months ended March 31, 2012 was $350,167. The fair value of the warrant grants were estimated on the date of grant utilizing the Black-Scholes option pricing model adjusted for a blockage discount. The Company recorded a debt discount of $350,167 in connection with these warrant grants.
Future minimum payments against the line of credit are as follows:
5. Commitments and Contingencies
Operating Leases: The Company leases its current office space under operating lease agreements having expiration dates through 2014. Under the terms of these agreements, the Company exercised its option to give a six month notice on November 30, 2011 of its intent to vacate the premises and terminate its leases as of May 31, 2012. On April 10, 2012 the Company executed a lease agreement for new office space with an effective date of May 1, 2012. Terms of the lease establish a base rent per square foot plus operating expenses throughout the term of the lease which expires September 30, 2015. The Company’s future minimum lease payments are as follows: $82,592 for the year ended March 31, 2013; $132,849 for the year ended March 31, 2014; $149,898 for the year ended March 31, 2015; and $76,042 for the year ended March 31, 2016.
Capital Lease Obligations: The Company has capital lease arrangements related to the acquisition of software. These arrangements are collateralized by the software and expire at varying dates through March 2015 with future minimum lease payments as follows: $16,539 for the year ended March 31, 2013; $13,740 for the year ended March 31, 2014; and $13,740 for the year ended March 31, 2015.
Preferred Stock: The Company has authorized 5,000,000 preferred shares with a $0.20 par value, of which 720,000 shares have been designated as Class A Preferred Stock. The Class A Preferred stock has a liquidation preference of $0.20 per share and is entitled to receive cumulative annual dividends at the rate of 9%, payable in either cash or additional shares of Class A Preferred Stock, at the option of the Company. As of March 31, 2012 and 2011, there were 720,000 shares of Class A Preferred Stock issued and outstanding. Class A dividends accumulated and unpaid as of March 31, 2012, were $175,440; these dividends have not been declared by the board of directors and therefore are not included in accrued expenses.
Common Stock: The Company has authorized 200,000,000 shares of $0.001 par value common stock. As of March 31, 2012 and December 31, 2011, there were 5,118,877 shares of common stock issued and outstanding.
Warrants: During the three months ended March 31, 2012, 250,000 warrants were granted pursuant to the clauses the Credit Agreement. The warrants were issued at an exercise price of $2.00, vested immediately, and expire 3 years from the date of grant. During 2011, 65,000 warrants were granted pursuant to the Credit Agreement. The warrants were issued at an exercise price of $2.00, vested immediately, and expire at 3 years from the grant dates.
During 2011, an aggregate of 62,500 warrants previously issued under the Credit Agreement were exercised. The warrants were exercised at a strike price of $2.00 resulting in cash receipts of $125,000.
As of March 31, 2012, the Company had outstanding 976,550 warrants issued in connection with the line of credit (see Note 4).
The following are assumptions utilized in estimation of the fair value of the warrants granted during the three month periods ended March 31, 2012 and 2011:
The following is a summary of such outstanding warrants for the three month period ended March 31, 2012:
Options: In 2004, the Company adopted a long term incentive stock option plan (the “Stock Option Plan”) which covers key employees, officers, directors and other individuals providing bona fide services to the Company. The Stock Option Plan provides for the issuance of up to 1,200,000 shares of common stock upon exercise of options which may be granted pursuant to the Stock Option Plan. As of March 31, 2012, options to purchase 939,194 shares were outstanding. The options vest as determined by the Board of Directors and are exercisable for a period of no more than 10 years.
During the three month period ended March 31, 2012, the board of directors approved the grant of an aggregate of 340,000 Incentive Stock Options and an aggregate of 195,000 Non-Qualified options. Such options were issued at an exercise price of $4.00, vest at various times over three years, and expire 7 years from the grant date. No grants were made for the three month period ended March 31, 2011.
The following are the assumptions utilized in the estimation of stock-based compensation related to the stock option grants for the three month period ended March 31, 2012:
A summary of stock option activity under the Stock Option Plan is presented below:
The Company recorded stock-based compensation expense of $53,317 and $150,971 for the three month periods ended March 31, 2012 and 2011, respectively. The amounts are recorded in selling, general and administrative expense in the statement of operations. The fair value of stock options that vested and became exercisable during the three months ended March 31, 2012 and 2011 was $1,401 and $22,090 respectively. At March 31, 2012, there was approximately $2,263,568 in unrecognized compensation cost related to stock options that will be recorded over a weighted average future period of approximately 3 years.
A summary of the activity of non-vested options under the Company’s plan for the three months ended March 31, 2012 is presented below:
7. Segment Information
Financial information for our segments, as of March 31, 2012 and 2011, is as follows:
8. Subsequent Events
On May 4, 2012, the Company entered into a Securities Purchase Agreement with certain investors (collectively, the “Investors”), pursuant to which the Investors purchased Units from Roomlinx for a purchase price of $2.50 per Unit. Each Unit consisted of (x) one share of common stock of Roomlinx and (y) a warrant to purchase one-half share of common stock at an exercise price of $3.75 per share, subject to adjustment as provided in the warrant. Roomlinx sold and issued an aggregate of 1,200,000 shares of common stock to the Investors and issued warrants to the Investors for the purchase of an additional 600,000 shares of common stock. Roomlinx received approximately $2.8 million (gross proceeds of $3,000,000 less placement fees and other offering expenses) from the Investors in respect of the sale of Units. Roomlinx has the right to sell up to an additional 400,000 Units on the same terms as the Units sold by Roomlinx pursuant to the Securities Purchase Agreement; provided that the closing of the sale of any such additional Units takes place by the close of business on May 25, 2012. Proceeds from the offering will be used for general corporate and working capital purposes including deployment of the Company’s iTV applications under a Master Service Agreement with Hyatt Corporation announced on March 13, 2012.
The following discussion and analysis should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and the consolidated financial statements and related notes thereto included in our December 31, 2011 Annual Report on Form 10-K, filed with the SEC and with the unaudited interim financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q, as well as our reports on Form 8-K and other SEC filings.
This report contains or incorporates forward-looking statements within the meaning of the federal securities laws that involve risks and uncertainties. We develop forward-looking statements by combining currently available information with our beliefs and assumptions. These statements relate to future events, including the Company’s future performance, and management’s expectations, beliefs, intentions, plans or projections relating to the future and some of these statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “seeks,” “future,” “continue,” “contemplate,” “would,” “will,” “may,” “should,” and the negative or other variations of those terms or comparable terminology or by discussion of strategy, plans, opportunities or intentions. As a result, actual results, performance or achievements may vary materially from those anticipated by the forward-looking statements. These statements include, among others:
- Statements concerning the benefits that are expected to result from business activities and results of exploration that are contemplated or completed, such as increased revenues; and
- Statements of the Company’s expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts.
Among the factors that could cause actual results, performance or achievements to differ materially from those indicated by such forward-looking statements are:
Roomlinx makes these statements under the protection afforded by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Because forward-looking statements are subject to assumptions and uncertainties, actual results, performance or achievements may differ materially from those expressed or implied by such forward-looking statements. Stockholders are cautioned not to place undue reliance on such statements, which speak only as of the date such statements are made. Except to the extent required by applicable law or regulation, Roomlinx undertakes no obligation to revise or update any forward-looking statement, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.
Roomlinx, Inc., a Nevada corporation (“we,” “us” or the “Company”), provides four core products and services:
In-room media and entertainment
Roomlinx provides a suite of in-room media and entertainment products and services for hotels, resorts, and time share properties. Products and services included within our in-room media and entertainment offering include our proprietary Interactive TV platform (“iTV”) and on-demand movies.
The Company develops proprietary software and integrates hardware to facilitate the distribution of its Interactive TV platform. With Roomlinx iTV guests will have access to a robust feature set through the HDTV such as:
Hotel guests can also easily order room service, interact with hotel associates, make restaurant reservations, edit and print documents as well as gain direct access to local dining, shopping, nightlife, cultural events or attractions all through a dynamic user interface on the TV. The Interactive TV platform integrates the TV and Internet experience.
The Company provides proprietary software, a media console, which may include a DVD player, and numerous input jacks for the hotel guest, a proprietary wireless keyboard with built-in mouse, and a proprietary remote control with a built in mouse. The Company installs and supports these components.
The Company also supplies video-on-demand services to the hospitality industry. Roomlinx offers a full selection of video-on-demand services and technology; including first non-theatrical release Hollywood motion pictures, adult, and specialty content.
Hotel customers sign long-term service agreements, where we provide the maintenance for the networks, as well as the right to provide value added services over the network.
The Company generates revenue through:
Free-To-Guest Television Programming.
Our hotel satellite television programming services provide for delivery and viewing of high definition and standard definition television programming for hotels, resorts, and time share properties. The Company installs and provides services that address the entertainment and information needs of hotel guests and resort guests. We specialize in providing advanced high definition equipment for delivering digital television programming such as ESPN, HBO, Starz, and other specialty and local channels.
The Company generates revenue through:
Customers typically pay a one-time fee for the installation of the equipment and then pay monthly programming fees for delivery of a specific TV channel lineup.
Wired Networking Solutions and Wireless Fidelity Networking Solutions.
We provide wired networking solutions and wireless fidelity networking solutions, also known as Wi-Fi, for high speed internet access at hotels, resorts, and timeshare locations. The Company installs and creates services that address the productivity and communications needs of hotel, resort, and timeshare guests. We specialize in providing advanced Wi-Fi wireless services such as the wireless standards known as 802.11a/b/g/n/i.
Hotel customers sign long-term service agreements, where we provide the maintenance for the networks, as well as the right to provide value added services over the network.
The Company generates revenue through:
Customers typically pay a one-time fee for the installation of the network and then pay monthly maintenance fees for the upkeep and support of the network.
Residential Media and Communications
We provide residential and business customers telecommunication services including telephone, satellite television, and wired and wireless internet access. Telephone service is provided through traditional, analog “twisted pair” lines, as well as digital voice over internet protocol (“VoIP”) Analog phone service is typically provided via an interconnection agreement with CenturyLink, Inc. (formerly Qwest Communications), which allows the Company to resell CenturyLink service through their wholesale and retail accounts with CenturyLink. VoIP service is provided at properties where the Company maintains a broadband internet service to the end customer, allowing the Company to provide digital phone service (VoIP) over the same lines as their internet service.
Television service is typically provided via the Company’s agreements with DISH Network and DirecTV. Most television service to customers is provided via a head-end distribution system, or an L-Band digital distribution system. Television service is offered in high definition whenever possible.
Internet service is provided via both wired and wireless network design. The Company provisions and manages broadband access to the residential customers through both wholesale and resale methods. Wholesale methods exist when the Company owns and controls the internet circuit and resale methods exist when the Company uses an affiliated third party to provide the internet circuit.
The Company generates revenue through:
Trends and Business Outlook
Our goal is to be the leading provider of all facets of in-room entertainment, programming, and internet connectivity. We believe that we are developing the scale, capacity, and reach to respond to our customers needs quickly and that our product offerings differentiate us from other market participants in terms of usability, technical innovation and breadth of offerings. Over the past year, we have taken significant steps towards these goals and in the first quarter of 2012 we signed a master service agreement with Hyatt Corporation validating our technology and our market approach. We anticipate our focus shifting to operations in order to execute on the Hyatt master service agreement. We anticipate installing up to 60,000 Hyatt hotel rooms over the next twenty-four months.
We believe there has been a fundamental shift in the way people communicate and from where they get their content. This shift is affecting guest habits within the hotel room. Hotel guests are getting their content from the internet or alternative, mobile sources like laptops and smartphones. Roomlinx developed the Interactive TV platform to embrace these changing habits and allow guests easy access to their content, work, and the internet via the in-room flat panel LCD. The majority of Roomlinx’s growth is the result of a fundamental shift in the way people communicate and from where they get their content and this shift is affecting guest habits within the hotel industry. We have seen strong usage of the Interactive TV platform at our current hotel installations and we believe there is even greater ability to monetize our Interactive TV platform as we increase hotel penetration and usage. We believe our Interactive TV platform creates a true differentiation for Roomlinx and we will continue to invest in product enhancements and Interactive TV sales and marketing efforts.
Although our current results demonstrate the initial success of our efforts, general economic conditions and market uncertainty may still negatively affect our financial results in future periods. We anticipate that the rate of new orders may vary significantly from quarter to quarter. Consequently, if anticipated sales and shipments in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our operating results for that quarter and future quarters may be adversely affected. Further, given the lag between the incurrence of expenses in connection with sales “wins” and the resulting revenue stream, we anticipate that, while we will see organic growth that positions us for future profitability, our costs of sales and other operating expenses will exceed our revenues in the near term. We have incurred operating losses since our inception.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts and property and equipment valuation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.
Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
The Company enters into contractual arrangements to provide multiple deliverables which may include some or all of the following - systems installations and a variety of services related to high speed internet access, free-to-guest programming, video on demand, and iTV as well as residential phone, internet and television. Each of these elements must be identified and individually evaluated for separation. The term “element” is used interchangeably with the term “deliverable” and the Company considers the facts and circumstances as it relates to its performance obligations in the arrangement and includes product and service elements, a license or right to use an asset, and other obligations negotiated for and assumed in the agreement. Analyzing an arrangement to identify all of the elements requires the use of judgment, however, once the deliverables have been identified, the Relative Fair Value of each Element was determined under the concept of Relative Selling Price (RSP) for which the Company applied the hierarchy of selling price under ASU Topic 650.
The effect of application of this standard may be to defer revenue recognition for installations across the service period of the contract and to re-allocate and/or defer revenue recognition across various service arrangements.
In order to promote the Interactive TV platform, Roomlinx has agreed to provide certain customers with direct sales-type lease financing to cover the cost of installation. These transactions result in the recognition of revenue and associated costs in full upon the customer’s acceptance of the installation project and give rise to a lease receivable and unearned income.
We estimate the collectability of our trade receivables. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including analysis of historical collection rates and the current credit-worthiness of significant customers.
Inventory includes materials on-hand at our warehouses as well as the cost of hardware, software, and labor which has been incurred by us for installation at our customer’s property, but has not been accepted by the customer.
Since inception, we have accumulated substantial net operating loss carry forwards for tax purposes. There are statutory limitations on our ability to realize any future benefit from these potential tax assets and we are uncertain as to whether we will ever utilize the tax loss carry forwards. Accordingly, we have recorded a valuation allowance to offset the deferred tax asset.
The Company provides compensation costs for our stock option plans determined in accordance with the fair value based method to estimate the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model and provide for expense recognition over the service period, if any, of the stock option.
In connection with the sale of debt or equity instruments, we may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.
RESULTS OF OPERATIONS
On March 12, 2012, Roomlinx and Hyatt Corporation entered into a Master Services and Equipment Purchase Agreement (hereinafter the “Hyatt MSA”) pursuant to which Roomlinx agreed to provide in-room media and entertainment solutions, including its proprietary Interactive TV (or iTV) platform, high speed internet, free-to-guest, on-demand programming and related support services, to Hyatt-owned, managed or franchised hotels that are located in the United States, Canada and the Caribbean. Roomlinx’s iTV system may be provided in the “full option” (Interactive TV), the “mid option” (SmartTV) or the “lite option” (Video on Demand).
THREE MONTHS ENDED MARCH 31, 2012 COMPARED TO THREE MONTHS ENDED MARCH 31, 2011
Revenues for the three months ended March 31, 2012 and 2011 were $1,537,541 and $1,423,172 respectively, an increase of $114,369 or 8%, resulting from a 20% increase in installation revenues associated with in-room media and entertainment products and a 7% increase in recurring revenues.
Direct costs exclusive of operating expenses and depreciation for the three months ended March 31, 2012 and 2011 were $1,220,378 and $963,383 respectively, an increase of $256,995 or 27%. The increase in cost allocation is 55% to installation revenue and 45% to recurring revenue. The cost of installation was primarily attributable to increased installation material costs for a pilot program while the costs associated with recurring revenues reflect additional personnel costs in our 24x7 call center. This was expected as the Company has increased headcount to support future demand as a result of the Hyatt MSA.
Our Hospitality segment includes hotel and meeting rooms in the following geographic segments: United States, Canada, and Other Foreign. As of March 31, 2012 and 2011, Other Foreign included Mexico and Aruba. The products offered under our hospitality segment include the installation of, and the support and service of, high-speed internet access, interactive TV services, free to guest programming, and on-demand programming, as well as advertising and e-commerce products.
United States: US hospitality revenue for the three months ended March 31, 2012 and 2011 was $1,105,549 and $886,371 respectively, an increase of $219,178 or 25%. This increase is primarily due to increased installations, hardware sales, and recurring revenue streams of our media and entertainment products.
Canada: Canadian hospitality revenue for the three months ended March 31, 2012 and 2011was $159,074 and $264,992 respectively, a decrease of $105,918 or 40%. This revenue is primarily variable as it is dependent on hotel guest purchases of video on demand films.
Other Foreign: Other foreign hospitality revenue for the three months ended March 31, 2012 and 2011 was $34,004 and $48,669, respectively, a decrease of $14,665 or 30%.
Our residential segment includes multi-dwelling unit and business customers in the United States. The products offered include the installation of, and the support and service of, telephone, internet, and television services.
Residential revenue for the three months ended March 31, 2012 and 2011 was $238,914 and $223,140 respectively, and increase of $15,774 or 7%.
Total operating expense for the three months ended March 31, 2012 and 2011 was $1,261,814 and $998,206; an increase of $263,608, or 26%. This increase was primarily due to payroll and related costs associated with hiring personnel to scale our operations for anticipated rapid growth of installation of our products pursuant to the then ongoing negotiation and signing of the Hyatt MSA on March 12, 2012.
Our operations department expense increased $206,786 to $438,763 in the three months ended March 31, 2012 compared to the same period in 2011. This increase is primarily due to an increase of $140,781 in payroll and related expenses related to increased staffing levels to support our commitments in regards to the Hyatt MSA.
Our product development department expense increased $38,292 to $260,733 in the three months ended March 31, 2012 compared to same period in 2011. This increase is primarily due to an increase in payroll and related costs of $54,227 in 2011, less a decrease of $23,916 in the cost of test equipment resulting from utilization of similar equipment at current hotel installations.
Our selling, general and administrative expenses increased $13,888 to $383,216 in the three months ended March 31, 2012 compared to the same period in 2011. This increase is attributable to an increase in payroll and related costs offset by decreased stock compensation expense.
Depreciation expense for the three months ended March 31, 2012 and 2011 was $179,102 and $174,460 respectively, an increase of $4,642 or 2.7%.
Our operating loss for the three months ended March 31, 2012 and 2011 was $944,651 and $538,417 respectively, an increase of $406,234 or 75%. This increase is primarily attributable to personnel costs associated with the hiring of operational personnel to support the Hyatt MSA as more fully described under total operating expense.
For the three months ended March 31, 2012 and 2011, our non-operating income was $57,968 and $64,578 respectively. Non-operating income consists of interest income earned on lease receivables.
Our non-operating expenses for the three months ended March 31, 2012 and 2011 were $ $138,552 and $63,528 respectively, an increase of $75,024. This increase is primarily attributable to an increase in interest expense of $29,330 consistent with the increase in our line of credit and an increase in financing costs of $52,484 associated with debt discount expense on warrants issued pursuant to draws against our line of credit. Our foreign currency loss was $390 for the three months ended March 31, 2012 as compared to $3,550 for the three months ended March 31, 2011. This decrease is due to the fluctuations in the value of the foreign currency.
For the three months ended March 31, 2012, we reported a net loss of $1,025,235, compared to a net loss of $537,367 for the three months ended March 31, 2011. As discussed above, increased personnel costs associated with the ramp up of personnel to support the Hyatt MSA was the primary factor that contributed to the increased net loss.
LIQUIDITY & CAPITAL RESOURCES
As of March 31, 2012 we had $814,379 in cash and cash equivalents, which amount, in addition to the credit facility provided by Cenfin, LLC, is sufficient to fund operating activities, new product installations, and to continue investing in our new media and entertainment product through 2012. Working capital at March 31, 2012 was $2,162,667.
Net cash used by operating activities was $738,503 and $174,051 for the three months ended March 31, 2012 and 2011, respectively. The increase in cash used in operations of $564,452 was primarily attributable to the increase in net loss of $486,058; while the fluctuation in working capital increased $495,297. Fluctuations in working capital (current assets less current liabilities) are primarily due to the timing of the customer’s acceptance of installations resulting in the expensing of inventory and the corresponding revenue recognition of deposits previously classified as deferred revenue. Changes in significant recurring non-cash adjustments, such as stock based compensation were offset by other non-cash items.
Net cash provided by investing activities was $207,915 for the three months ended March 31, 2012 compared to $343,197 used by investing activities during the same period in 2011. The increase in cash provided by investing activities of $551,112 was primarily attributable to (i) an increase in 2011 cash receipts against leases receivable totaling $91,473, and (ii) a savings of $426,900 resulting from equipment installation lease financing transactions in 2011 versus 2012.
Net cash provided by financing activities for the three months ended March 31, 2012 and 2011 was $981,457 and $358,257 respectively. The increase in cash $623,200 is primarily attributable to Company financing operations with advances against its line of credit and capital leases totaling $1,000,000 in 2012 compared to line of credit advances and sales of securities totaling $385,000 in 2011. Payments on lease and notes payable also decreased $9,200 in 2012 versus 2011.
We have operating and capital lease commitments, note payable commitments, and a line of credit commitment. The following table summarizes these commitments at March 31, 2012:
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to risk from potential changes in the U.S./Canadian currency exchange rates as they relate to our services and purchases for our Canadian customers.
Foreign exchange gain / (loss)
Foreign transactions resulted in a loss of $390 for the three months ended March 31, 2012 compared to a loss of $3,550 for the three months ended March 31, 2011. The amount of gain (loss) will vary based upon the volume of foreign currency denominated transactions and fluctuations in the value of the Canadian dollar vis-à-vis the US dollar.
Translation of Financial Results
Because we translate a portion of our financial results from Canadian dollars to U.S. dollars, fluctuations in the value of the Canadian dollar directly affect on our reported consolidated results. We do not hedge against the possible impact of this risk. A ten percent adverse change in the foreign currency exchange rate would not have a significant impact on our consolidated results of operations or financial position.
Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
As of March 31, 2012, our management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on their review and evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. However, it should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our fiscal quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Pursuant to an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), on January 18, 2012, the Company granted 125,000 warrants to Cenfin LLC, pursuant to the clauses outlined in the Credit Agreement dated June 5, 2009, as amended (See Note 4 to Consolidated Financial Statements). Such warrants were issued at an exercise price of $2.00 per share and vest immediately; the warrants expire 3 years from the date of issuance.
Pursuant to an exemption from registration pursuant to Section 4(2) of the Securities Act, on March 14, 2012, in connection with the Master Services & Equipment Purchase Agreement between the Company and Hyatt Corporation, the board of directors approved the grant of an aggregate of 500,000 options to purchase shares of common stock, pursuant to the Company’s Long-Term Incentive Plan, to employees and/or contractors of the Company including the grant of 117,500 options to Michael S. Wasik, the Chief Executive Officer of the Company and the grant of 10,000 to Steve Skalski, the Chief Operating Officer of the Company. Such options were issued at an exercise of $4.00 per share, vest on the anniversary of the grant date ratably over a 3 year period subject to certain performance metrics determined by the board of directors, and expire 7 years from the grant date.
Pursuant to an exemption from registration pursuant to Section 4(2) of the Securities Act, on March 16, 2012, the Company granted 125,000 warrants to Cenfin LLC, pursuant to the clauses outlined in the Credit Agreement dated June 5, 2009, as amended (See Note 4 to Consolidated Financial Statements). Such warrants were issued at an exercise price of $2.00 per share and vest immediately; the warrants expire 3 years from the date of issuance.
Item 3. Defaults Upon Senior Securities
Item 4. (Removed and Reserved)
Item 5. Other Information
Item 6. Exhibits
10.1 Master Service and Equipment Purchase Agreement, dated March 12, 2012, by and between Hyatt Corporation and the Company.*
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Executive and Chief Financial Officers.
32.1 Certification of the Chief Executive and Chief Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed separately with the Securities and Exchange Commission. Brackets surrounding asterisks in this exhibit denote the omissions.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.