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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, 2013 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. 18 FORWARD-LOOKING STATEMENTS This report contains or incorporates forward-looking statements within the meaning of the federal securities laws that involve risks and uncertainties. Statements regarding future events, developments, the Company's future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future are forward-looking statements within the meaning of these laws. We develop forward-looking statements by combining currently available information with our beliefs and assumptions. These statements relate to future events, including our 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 we expect will result from our business activities and results of exploration that we contemplate or have completed, such as increased revenues; and - statements of our 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 failure of the Company to consummate the Merger with Signal Point ? the continued suspension of certain obligations of the Company and Hyatt pursuant to the MSA or the removal of such obligations from the MSA and the restructure or release of the obligations of certain Hyatt hotels to install the Company's iTV product; ? the Company's successful implementation of new products and services (either generally or with specific key customers); ? the Company's ability to satisfy the contractual terms of key customer contracts; ? the risk that we will not achieve the strategic benefits of the acquisition of Canadian Communications; ? demand for the new products and services, the volume and timing of systems sales and installations, the length of sales cycles and the installation process and the possibility that our products will not achieve or sustain market acceptance; ? unexpected changes in technologies and technological advances and ability to commercialize and manufacture products; ? the timing, cost and success or failure of new product and service introductions, development and product upgrade releases; ? the Company's ability to successfully compete against competitors offering similar products and services; ? the ability to obtain adequate financing in the future; ? the Company's ability to establish and maintain strategic relationships, including the risk that key customer contracts may be terminated before their full term; ? general economic and business conditions; ? errors or similar problems in our products, including product liabilities; ? the outcome of any legal proceeding that has been or may be instituted against us and others and changes in, or failure to comply with, governmental regulations; ? our ability to attract and retain qualified personnel; ? maintaining our intellectual property rights and litigation involving intellectual property rights; ? legislative, regulatory and economic developments; ? risks related to third-party suppliers and our ability to obtain, use or successfully integrate third-party licensed technology; ? breach of our security by third parties; and ? those factors discussed in "Risk Factors" in our periodic filings with the Securities and Exchange Commission (the "SEC"). 19 We make 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 Currently we offer the following services to our customers: † Site-specific determination of needs and requirements; † Design and installation of the wireless or wired network; † Customized development, design and installation of a media and entertainment system; † IP-based delivery of on-demand high-definition and standard-definition programming including Hollywood, Adult, and specialty content; † Delivery of free-to-guest ("FTG") television programming via satellite; † Delivery of an interactive ("click and go") programming guide; † Full maintenance and support of the network and Interactive TV product; † Technical support to assist guests, hotel staff, and residential and business customers, 24 hours a day, 7 days a week, 365 days a year; † Delivery of an advertising and E-commerce platform through iTV. 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 ("IPG") ? 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 and an extended USB port 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. 20 The Company generates revenue through: ? On-going 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 ("FTG"). 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. 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 "VoIP". Analog phone service is typically provided via an interconnection agreement with CenturyLink, Inc., 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 is provided via a head-end distribution system, or an L-Band digital distribution system. Television service is offered in high definition whenever possible. 21 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 Recent Financial Developments Merger Agreement: On March 14, 2014, the Company entered into the Merger Agreement with Signal Point and the Merger Subsidiary. Upon the terms and subject to the conditions set forth in the Merger Agreement, the Merger Subsidiary will be merged with and into Signal Point, a provider of domestic and international telecommunications services, with Signal Point continuing as the surviving entity in the Merger as a wholly-owned subsidiary of the Company. Simultaneous with the effective time of the Merger (the "Effective Time), the Company will effect the Reverse Stock Split of with respect to its common stock utilizing a ratio resulting in the Company having 600,000 shares of common stock issued and outstanding following the Reverse Stock Split. At the Effective Time, pursuant to the terms and subject to the conditions set forth in the Merger Agreement: ? all shares of Signal Point common stock issued and outstanding immediately prior to the Effective Time will be exchanged for an aggregate of 120,000,000 restricted shares of common stock of the Company, and the holders of Signal Point common stock immediately prior to the Effective Time will, when taken together with shares of Company common stock (i) issuable at the Effective Time to The Robert DePalo Special Opportunity Fund, LLC upon conversion of approximately $3,200,000 of indebtedness at $1.20 per share of Signal Point (or approximately 2,666,667 shares) and (ii) issuable pursuant to any equity offering consummated by any party to the Merger Agreement prior to the Effective Time, hold shares of Company common stock representing in the aggregate eighty-six percent (86%) of the outstanding shares of the Company's common stock immediately following the Effective Time (as defined below); ? the shares of Signal Point's Series A Preferred Stock and Series B Preferred Stock issued and outstanding immediately prior to the Effective Time will be exchanged for shares of Series A Preferred Stock and Series B Preferred Stock, as applicable, of the Company, having substantially identical terms to Signal Point's Series A Preferred Stock and Series B Preferred Stock, except in connection with dividends payable from the revenues of Roomlinx Sub; ? all options to purchase Signal Point common stock and restricted stock awards issued and outstanding immediately prior to the Effective Time under the current Signal Point Employee Incentive Plan will be exchanged for options and awards to purchase an identical number of shares of Company common stock on the same terms and conditions; ? each share of the Company's common stock issued and outstanding immediately prior to the Effective Time, but after giving effect to the Reverse Stock Split, will remain outstanding. Also, the holders of the Company's common stock immediately prior to the Effective Time and Cenfin, LLC, a secured lender of the Company (in exchange for its agreement at the closing of the Merger to restructure indebtedness owed to it by the Company), will receive additional (but restricted) shares of the Company's common stock at the Effective Time. Accordingly, the holders of the Company's common stock will hold shares of Company common stock which, when taken together with shares of Company common stock (i) issuable upon the exercise of Roomlinx warrants outstanding immediately prior to the Effective Time (not including out-of-the-money warrants) and (ii) to be issued to Cenfin, LLC in exchange for its agreement to restructure indebtedness owed to it by the Company, will represent in the aggregate fourteen percent (14%) of the outstanding shares of the Company's common stock immediately following the Effective Time; 22 ? holders of the existing preferred stock of the Company will receive payments and common stock with respect to such shares, the Company's preferred stock will be cancelled and there will be no existing shares of the Company's preferred stock outstanding following the Merger, except as described above; the total commitment for the preferred shares will be cash of approximately $214, 000 and 215,000 shares of common stock. The Company expects to fund this obligation from its current cash holdings; and ? all outstanding options to purchase Company capital stock issued under the Company's Stock Option Plan will terminate in accordance with the terms thereof. Also, at the closing of the Merger, Signal Point will make a cash contribution to the Company in an amount equal to One Million Dollars ($1,000,000) (subject to certain limitations regarding the use thereof). Simultaneously with the Merger, upon the terms and conditions set forth in the Merger Agreement, the Company will (i) change its name from "Roomlinx, Inc." to "Signal Share, Inc.", (ii) amend and restate its articles of incorporation to substantially conform to the certificate of incorporation currently in effect for Signal Point, (iii) assume certain obligations of Signal Point, and (iv) transfer substantially all of its assets (excluding shares of Cardinal Broadband owned by the Company which will be placed in escrow at closing pending receipt of certain regulatory approvals) and liabilities into a newly-formed, wholly-owned subsidiary named "SignalShare Hospitality, Inc." (Roomlinx Sub"). Following the consummation of the Merger, Aaron Dobrinsky, the current President of Signal Point, will serve as the Chief Executive Officer and a director of the Company, and Christopher Broderick, the current Chief Operating Officer of Signal Point, will serve as the Chief Operating Officer and a director of the Company. Hyatt Master Services Agreement: On March 12, 2012, Roomlinx and Hyatt Corporation entered into a Master Services and Equipment Purchase Agreement (the "MSA") pursuant to which Roomlinx has 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. Under the agreement, Hyatt will use its commercially reasonable efforts to cause its managed hotels to order the installation of the Company's iTV product in a minimum number of rooms in Hyatt hotels within certain time frames. In December 2012, Roomlinx and Hyatt mutually agreed to suspend certain Hyatt obligations under the MSA that had not been met, including the suspension of the obligations of Hyatt to cause a certain number of rooms in both Hyatt owned and managed properties to place orders for Roomlinx's iTV products within certain time frames. At the time of the December 2012 suspension of these Hyatt obligations, the Company had installed certain services and products in approximately 19,000 rooms (including approximately 9,000 installs of its iTV product) in Hyatt hotels. During the year ended December 31, 2013, the Company completed the installation of approximately 1,000 additional rooms. As of June 30, 2014 and December 31, 2013, deposits received on statements of work for Hyatt properties are recorded as customer deposits in the accompanying balance sheet in the amount of approximately $1,262,000 and $1,295,000, respectively. See risk factors for discussion of potential effect on Company. Trends and Business Outlook 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, such as 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' growth in 2013 recurring revenues can be attributed to sales of our Interactive TV product, high speed internet services and free-to-guest TV programming. 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. 23 Although our current results demonstrate the success of our initial efforts, general economic conditions, aged hotel infrastructure, and market uncertainty may still negatively affect our financial results in future periods. We anticipate that the rate of installations will become more predictable however may vary from quarter to quarter. Consequently, if anticipated installations 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 hotel installations, we anticipate that, while we will see organic growth that positions us for future profitability, our costs of sales and other operating expenses may 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. 24 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. Recently issued and adopted accounting pronouncements: The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company's consolidated financial statements properly reflect the change. In May 2014, FASB issued ASU No. 2014-09 "Revenue from Contracts from Customers," which supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)," and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to the exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early adoption not permitted. The Company is currently evaluating the new standard and assessing the potential impact on its operations and financial statements. RESULTS OF OPERATIONS The Company measures its performance and recurring revenue trend based on the number of revenue generating units ("RGUs") in service. Regarding the hospitality sector, a hotel room may have one or more RGUs. An RGU is defined as a product or service for which we invoice the hotel monthly, including interactive television, video on demand, free to guest programming, and high speed internet access. Residential properties may also have more than one RGU, which includes telephone, internet and television. As of June 30, 2014 the Company was servicing approximately 63,000 RGUs within the hospitality sector representing a net decrease of 600 RGUs or 1%, within the hospitality sector over the twelve months ended June 30, 2014, and 16 residential communities and small businesses, representing an additional 3,200 RGUs. THREE MONTHS ENDED JUNE 30, 2014 COMPARED TO THREE MONTHS ENDED JUNE 30, 2013 During the year ended December 31, 2013, the Company realized a loss on discontinued operations related to the determination to cancel hospitality contracts serviced by Cardinal Hospitality, Ltd., a wholly-owned subsidiary (see note 7 of the financial statements) as of December 20, 2013. The cancellation of these contracts was based on an analysis by the Company whereby it was determined that the continuing decline of recurring revenues associated with the CHL VOD product were generating losses at the individual property level. Accordingly the Company determined to eliminate these contracts. Under ASC 360-10, the consolidated comprehensive statement of loss for the three and six months ended June 30, 2013 has been reclassified to be consistent with the presentation for the three and six months ended June 30, 2014. 25 Our revenues for the three months ended June 30, 2014 and 2013 were $1,896,412 and $2,343,810 respectively, a decrease of $447,398 or 19%, reflecting an increase in hospitality recurring service revenue of approximately $120,000, or 10%, a decrease in product and installation revenue of approximately $536,000 of 58%, and a decrease in residential recurring revenue of approximately $32,000, or 15%. The increase in hospitality recurring revenue was attributable to the increase in higher recurring revenue installs over the twelve months ended June 30, 2014. We believe the decline in residential recurring revenue relates to a reduction in use of traditional phone lines and increased competition. Direct costs exclusive of operating expenses and depreciation ("direct costs") for the three months ended June 30, 2014 and 2013 were $1,183,156 and $1,722,675 respectively, a decrease of $539,519 or 31%. Direct costs of hospitality decreased approximately $516,000 or 33%, primarily related to the reduction in the installation of equipment. Direct costs of residential services had a net decrease of approximately $24,000. Hospitality The hospitality segment includes hotel and meeting rooms in the following geographic segments: United States and Foreign. As of June 30, 2014 and 2013, Foreign included Canada, 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. Effective December 20, 2013, substantially all Canadian and Aruba hospitality contracts serviced by CHL were cancelled by Roomlinx, as more fully discussed in note 7 of the financial statements. United States: US hospitality revenue for the three months ended June 30, 2014 and 2013 was $1,697,670 and $1,961,059 respectively, a decrease of $263,389 or 13%. This decrease consists of a decrease in installation revenue of approximately $399,000 or 50%, offset by an increase in recurring service revenue of approximately $136,000, or 12%. Foreign: Foreign hospitality revenue for the three months ended June 30, 2014 and 2013 was $12,698 and $164,912, respectively, a decrease of $152,214 or 92%. This decrease is primarily due to approximately $137,000 of installation revenue in 2013 compared to none in 2014. The remaining decrease is attributable to the cancelation of service contracts related to VOD revenues which the Company determined were no longer profitable. 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 June 30, 2014 and 2013 was $186,044 and $217,839 respectively, a decrease of $31,795 or 15%. We believe the decline in recurring revenue relates to a reduction in use of traditional phone lines and increased competition. Operational Expenses Total operating expense for the three months ended June 30, 2014 and 2013 was $922,432 and $1,205,651, a decrease of $283,219 or 23%. This decrease is primarily due to a cost reduction and containment program wherein the Company realized a 9% decrease in personnel, reducing payroll and related costs approximately $240,000, and a net decline in various operating expenses of approximately $6,000. Our operations department expense decreased $20,936, or 8%, to $250,729 in the three months ended June 30, 2014 compared to the same period in 2013. This decrease is primarily due to a decrease in personnel, reducing payroll and related costs approximately $26,000 and an increase of approximately $5,000 in various operating costs. 26 Our product development department expense decreased $59,962, or 31%, to $135,295 in the three months ended June 30, 2014 compared to same period in 2013. This decrease is primarily due to a decrease in personnel, reducing payroll and related costs approximately $64,000 and an increase of approximately $4,000 in various operating costs. Our selling, general and administrative expenses decreased $189,074 or 28% to $485,219 in the three months ended June 30, 2014 compared to the same period in 2013. This decrease is primarily attributable to approximate fluctuations as follows: (i) payroll and related costs, including stock based compensation decreased $150,000, (ii) professional fees decreased $42,000, and (iii) marketing costs decreased $23,000; offset by an increase in bad debt expense of $59,000. Depreciation expense for the three months ended June 30, 2014 and 2013 was $51,189 and $64,436 respectively. Our operating loss for the three months ended June 30, 2014 and 2013 was $209,176 and $584,516 respectively, a decrease of $375,340 or 64%. This decrease is primarily attributable to cost savings achieved through the Company's 2013 cost reduction and containment program. For the three months ended June 30, 2014 and 2013, continuing operational expenses, which consist of operating, product development, and selling, general and administrative costs, decreased 24% as a percentage of recurring revenue to 58% in 2014 compared to 81% in 2013. Non-Operating For the three months ended June 30, 2014 and 2013, our non-operating income was $95,821 and $48,234 respectively. The increase of $47,587 is primarily due to a gain recorded on the settlement of previously recorded liabilities and a decline in interest income earned on lease receivables as a result of (i) less properties under lease as of June 30, 2014 as compared to June 30, 2013 and (ii) under the imputed interest method, the recognition of interest income declines over time. Our non-operating expenses for the three months ended June 30, 2014 and 2013 were $146,326 and $144,064 respectively, an increase of $2,262. Non-operating expenses are primarily interest expense and the fluctuation is attributable to the maturity of various notes and capital lease obligations in 2013. Discontinued operations are the result of the termination of all CHL contracts on December 20, 2013. Under ASC 360-10, the consolidated statements of comprehensive income have been reclassified for the three months ended June 30, 2014 and 2013, to identify a loss on discontinued operations of $46,657 and $38,744 respectively. For the three months ended June 30, 2014, we reported a net loss of $306,338, compared to a net loss of $719,090 for the three months ended June 30, 2013, a reduction of net loss of $412,752, or 57%. This decrease is primarily attributable to cost savings achieved through the Company's 2013 cost reduction and containment program as discussed under Operational Expenses above and the elimination of the increased loss from discontinued operations approximating $8,000. SIX MONTHS ENDED JUNE 30, 2014 COMPARED TO SIX MONTHS ENDED JUNE 30, 2013 During the year ended December 31, 2013, the Company realized a loss on discontinued operations related to the determination to cancel hospitality contracts serviced by Cardinal Hospitality, Ltd., a wholly-owned subsidiary (see note 7 of the financial statements) as of December 20, 2013. The cancellation of these contracts was based on an analysis by the Company whereby it was determined that the continuing decline of recurring revenues associated with the CHL VOD product were generating losses at the individual property level. Accordingly the Company determined to eliminate these contracts. Under ASC 360-10, the consolidated comprehensive statement of loss for the six months ended June 30, 2013 has been reclassified to be consistent with the presentation for the six months ended June 30, 2014. Our revenues for the six months ended June 30, 2014 and 2013 were $3,526,569 and $4,356,135 respectively, a decrease of $829,566 or 19%, reflecting an increase in hospitality recurring service revenue of approximately $189,000, or 8%, a decrease in product and installation revenue of approximately $957,000, or 65%, and a decrease in residential recurring revenue of approximately $61,000, or 14%. The increase in hospitality recurring revenue was attributable to the increase in higher recurring revenue installs over the twelve months ended June 30, 2014. We believe the decline in residential recurring revenue relates to a reduction in use of traditional phone lines and increased competition. 27 Direct costs exclusive of operating expenses and depreciation ("direct costs") for the six months ended June 30, 2014 and 2013 were $2,234,973 and $3,355,935 respectively, a decrease of $1,120,962 or 33%. Direct costs of hospitality decreased approximately $1,080,000 or 36%, primarily related to the reduction in the installation of equipment. Direct costs of residential had a net decrease of approximately $44,000. Hospitality The hospitality segment includes hotel and meeting rooms in the following geographic segments: United States and Foreign. As of June 30, 2014 and 2013, Foreign included Canada, 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. Effective December 20, 2013, substantially all Canadian and Aruba hospitality contracts serviced by CHL were cancelled by Roomlinx, as more fully discussed in note 7 of the financial statements. United States: US hospitality revenue for the six months ended June 30, 2014 and 2013 was $3,125,801 and $3,712,717 respectively, a decrease of $586,916 or 16%. This decrease consists of a decrease in installation revenue of approximately $820,000 or 61%, offset by an increase in recurring service revenue of approximately $233,000, or 10%. Foreign: Foreign hospitality revenue for the six months ended June 30, 2014 and 2013 was $26,450 and $208,101, respectively, a decrease of $181,651 or 87%. This decrease is primarily due to approximately $137,000 of installation revenue in 2013 compared to none in 2014. The remaining decrease is attributable to the cancelation of service contracts related to VOD revenues which the Company determined were no longer profitable. 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 six months ended June 30, 2014 and 2013 was $374,318 and $435,317 respectively, a decrease of $60,999 or 14%. We believe the decline in recurring revenue relates to a reduction in use of traditional phone lines and increased competition. Operational Expenses Total operating expense for the six months ended June 30, 2014 and 2013 was $1,929,421 and $2,813,366, a decrease of $883,945 or 31%. This decrease is primarily due to a cost reduction and containment program wherein the Company realized a 34% decrease in personnel, reducing payroll and related costs approximately $497,000, and a net decline in various operating expenses of approximately $19,000. Our operations department expense decreased $293,288, or 37%, to $502,942 in the six months ended June 30, 2014 compared to the same period in 2013. This decrease is primarily due to a decrease in personnel, reducing payroll and related costs approximately $288,000. Our product development department expense decreased $193,862, or 41%, to $279,687 in the six months ended June 30, 2014 compared to same period in 2013. This decrease is primarily due to a decrease in personnel, reducing payroll and related costs approximately $191,000. Our selling, general and administrative expenses decreased $384,486 or 27% to $1,030,248 in the six months ended June 30, 2014 compared to the same period in 2013. This decrease is primarily attributable to approximate fluctuations as follows: (i) payroll and related costs, including stock based compensation decreased $198,000, (ii) professional fees decreased $94,000, offset by an increase in bad debt expense of $129,000 and a net increase in various operating costs of $6,000. Depreciation expense for the six months ended June 30, 2014 and 2013 was $116,544 and $128,853 respectively. 28 Our operating loss for the six months ended June 30, 2014 and 2013 was $637,825 and $1,813,166 respectively, a decrease of $1,175,341 or 65%. This decrease is primarily attributable to cost savings achieved through the Company's 2013 cost reduction and containment program. For the six months ended June 30, 2014 and 2013, continuing operational expenses, which consist of operating, product development, and selling, general and administrative costs, decreased 32% as a percentage of recurring revenue to 60% in 2014 compared to 93% in 2013. Non-Operating For the six months ended June 30, 2014 and 2013, our non-operating income was $137,524 and $100,960 respectively. The increase of $36,564 is primarily due to a gain recorded on the settlement of previously recorded liabilities and a decline in interest income earned on lease receivables as a result of (i) less properties under lease as of June 30, 2014 as compared to June 30, 2013 and (ii) under the imputed interest method, the recognition of interest income declines over time. Our non-operating expenses for the six months ended June 30, 2014 and 2013 were $298,758 and $297,757 respectively, a increase of $1,001. Non-operating expenses are primarily interest expense and the fluctuation is attributable to the maturity of various notes and capital lease obligations in 2013. Discontinued operations are the result of the termination of all CHL contracts on December 20, 2013. Under ASC 360-10, the consolidated statements of comprehensive income have been reclassified for the six months ended June 30, 2013, to identify a loss on discontinued operations of $107,686. For the six months ended June 30, 2014, we reported a net loss of $845,716, compared to a net loss of $2,117,649 for the six months ended June 30, 2013, a reduction of net loss of $1,271,933 or 60%. This decrease is primarily attributable to cost savings achieved through the Company's 2013 cost reduction and containment program as discussed under Operational Expenses above and the elimination of the reduced loss from discontinued operations approximating $61,000. FINANCIAL CONDITION LIQUIDITY & CAPITAL RESOURCES The Company had a working capital deficit of $1,111,095 at June 30, 2014 as compared to a deficit of $946,114 at December 31, 2013. The increase in working capital deficit of $164,981 is primarily due to the change in working capital assets and liabilities associated with ongoing operations. As of June 30, 2014 we had $1,863,005 in cash and cash equivalents, which is sufficient to continue business operations for at least the next twelve months. On March 14, 2014, the Company entered into the Merger Agreement with Signal Point the Merger Subsidiary. At the closing of the Merger, Signal Point will make a cash contribution to the Company in an amount equal to One Million Dollars ($1,000,000) (subject to certain limitations regarding the use thereof). The Company is in receipt of a letter from Technology Integration Group ("TIG") demanding payment of approximately $2,430,000 with respect to inventory and services which the Company purchased from TIG. As of June 30, 2014 and December 31, 2013, the Company has approximately $2,100,000 (net of payments made) recorded in accounts payable in the accompanying consolidated balance sheets. TIG subsequently filed an action in California State Court although the Company has not yet been served in such action. The Company believes that it has meritorious defenses and counterclaims in respect of TIG's claim. The Company intends to pursue a settlement of all claims with TIG and is in discussions with TIG in respect thereof. The Company is in receipt of a request for indemnification from Hyatt in connection with a case brought in US Federal Court in California by Ameranth, Inc., against, among others, Hyatt. In connection with such case, the plaintiffs have identified the Company's e-concierge software as allegedly infringing Ameranth's patents. The Company licenses the e-concierge software from a third party and accordingly has made a corresponding indemnification request to such third party. The Company believes that any such claim may also be covered by the Company's liability insurance coverage and accordingly the Company does not expect that this matter will result in any material liability to the Company. 29 The Company is in receipt of a District Court Civil Summons, dated August 23, 2013, in the matter of "ScanSource v. Roomlinx, Inc.", commenced in the District Court of Greenville County, South Carolina (the "Action"). The plaintiffs in the Action claim that the Company owes them approximately $473,000 with respect to inventory which the Company purchased. The amount is recorded in accounts payable in the accompanying consolidated balance sheets as of June 30, 2014 and December 31, 2013. The Company intends to pursue a settlement of all claims. The Company is in receipt of a letter from the BSA Software Alliance ("BSA") in connection with copyright infringement of computer software products alleging the unauthorized duplication of various computer software products. BSA has threatened to file an action against the Company if it does not timely respond to its request for an internal audit. The Company intends to review BSA's claims and respond appropriately. The Company has been named in a Civil Action in the United States Court for the District of Colorado by a former employee who alleges retaliation and discrimination pursuant to his termination of employment, for which he is seeking damages approximating $85,000. Concomitant with the legal process, the parties are actively negotiating a settlement of the plaintiff's claims. The Company is in receipt of a District Court Civil Summons, dated July 21, 2014, in the matter of "Arrow Electronics, Inc. v. Roomlinx, Inc., d/b/a Cardinal Broadband, d/b/a Roomlinx," commenced in the District Court of Broomfield County, Colorado. The plaintiff in such action claims that the Company owes it approximately $85,000 with respect to goods sold and delivered and/or services rendered to the Company by the plaintiff. The Company has accrued for this liability on its financial statements but believes that it has meritorious defenses and counterclaims with respect to the Arrow action, and intends to pursue a settlement of all claims in such action. As of June 30, 2014, the Company has $1,474,649 in inventory, net of the reserve for obsolescence. Management is currently focused on turning this inventory through its sales efforts. Proceeds received from the sale of this inventory will enhance our ability to settle outstanding payables. As discussed in Note 5 to our interim financial statements, the Company's Credit Agreement with Cenfin LLC ("Cenfin") was recently amended to provide that the determination as to whether Cenfin will advance funds under the Credit Agreement shall be made solely by Cenfin. Accordingly, there are no guarantees that Cenfin will make any additional advances under the Credit Agreement. If the Company is unable to borrow additional funds under the line of credit or obtain financing from alternative sources, the Company estimates its current cash and cash equivalents are sufficient to fund operations for at least the next twelve months. Operating Activities Net cash used by operating activities decreased to $326,771 for the six months ended June 30, 2014 from $1,894,849 for the six months ended June 30, 2013, a decrease of $1,568,078. This decrease was attributable to a decrease in net loss of $1,271,933 adjusted by (i) a decrease of $88,883 in the change from non-cash expenses including but not limited to stock based compensation, amortization of debt discount, depreciation, provision of uncollectible accounts and loss on discontinued operations and (ii) the change in operating assets and liabilities, which primarily represent current assets and liabilities, or working capital, decreased the use of cash by $385,028. The change in operating assets and liabilities is 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 and the payment of vendor invoices. Investing Activities Net cash provided by investing activities was $420,069 for the six months ended June 30, 2014 compared to $453,282 provided by investing activities during the same period in 2013. The decrease in cash provided by investing activities of $33,213 was attributable to a decrease in 2014 cash receipts against leases receivable totaling $39,753 and a decrease capital expenditures of $6,540. Cash receipts from lease receivables will continue to decline as these assets mature. 30 Financing Activities Net cash used in financing activities for the six months ended June 30, 2014 was $351,521, compared to $12,735 for the six months ended June 30, 2013, an increase of $338,786. The decrease in cash used is primarily attributable to a $340,000 principal payment against the line of credit. 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 June 30, 2014: Twelve Months Line of Notes Lease Obligations Minimum Ended June 30, Credit Payable Capital Operating Payments 2015 $ 124,000 $ 11,688 $ 105,607 $ 151,210 $ 392,505 2016 1,942,000 13,040 - 38,021 1,993,061 2017 2,770,000 1,152 - - 2,771,152 $ 4,836,000 $ 25,880 $ 105,607 $ 189,231 $ 5,156,718 |