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ROOMLINX INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) 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. FORWARD-LOOKING STATEMENTS 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: ? the risk that the Company will not achieve the strategic benefits of the acquisition of Canadian Communications; ? the volume and timing of systems sales and installations, the length of sales cycles and the installation process and the possibility that the Company's products will not achieve or sustain market acceptance; ? the timing, cost and success or failure of new product and service introductions, development and product upgrade releases; ? competitive pressures including product offerings, pricing and promotional activities; ? errors or similar problems in its products; 12-------------------------------------------------------------------------------- ? the outcome of any legal proceeding that has been or may be instituted against the Company and others; ? the ability to attract and retain qualified personnel; ? maintaining intellectual property rights and successful litigation involving intellectual property rights; ? legislative, regulatory and economic developments; ? risks related to third-party suppliers and the ability to obtain, use or successfully integrate third-party licensed technology; ? breach of security by third parties; and ? those factors discussed in "Risk Factors" in the Company's periodic filings with the Securities and Exchange Commission (the "SEC"). 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. GENERAL Overview 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: ? Internet Apps including Netflix, Pandora, Hulu, YouTube, Facebook, and many more ? International and U.S. television programming on demand ? Click and Go TV program guide or Interactive Program Guide (dware) ? Web Games ? MP3 player and thumb drive access ? Ability to send directions from the iTV system to a mobile device 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. 13 -------------------------------------------------------------------------------- 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: ? Ongoing connectivity service and support contracts ? Network design and installation services ? Delivery of content and advertising ? Delivery of business and entertainment applications ? E-commerce ? The customization of its software ? Software licensing ? Delivery of pay-per-view content ? Sale of video-on-demand systems 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: ? The design and installation of FTG systems ? Delivery of television programming fees and/or commissions 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: ? Ongoing connectivity service and support contracts ? Network design and installation services 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. 14 -------------------------------------------------------------------------------- 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: ? Network design and installation services ? Delivery of telephone service (billed monthly) ? Delivery of Internet service (billed monthly) ? Delivery of television service (billed by the satellite provider with monthly commissions paid to the Company) ? Management fees for the management of affiliated communication systems 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. 15 -------------------------------------------------------------------------------- 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. 16 -------------------------------------------------------------------------------- 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. Hospitality 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%. Residential 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%. Operational Expenses 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. 17 -------------------------------------------------------------------------------- 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. Non-Operating 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. FINANCIAL CONDITION 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. Operating Activities 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. 18 -------------------------------------------------------------------------------- Investing Activities 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. Financing Activities 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. Contractual Obligations 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: Years ended Line of Notes Lease Obligations Minimum March 31, Credit Payable Capital Operating Payments 2013 $ - $ 44,298 $ 16,539 $ 82,592 $ 143,429 2014 464,000 - 13,740 132,849 610,589 2015 1,232,000 - 13,740 149,898 1,395,638 2016 2,480,000 - - 76,042 2,556,042 2017 1,000,000 - - - 1,000,000 $ 5,176,000 $ 44,298 $ 44,019 $ 441,381 $ 5,705,698 |