10-K 1 t78744_10k.htm FORM 10-K



UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2013
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File No. 000-26213
 
ROOMLINX, INC.
 
(Exact name of registrant as specified in its charter)
 
Nevada
83-0401552
(State or other jurisdiction of
 incorporation or organization)
(I.R.S. Employer
Identification No.)
 
11101 W. 120th Avenue, Suite 200, Broomfield, CO 80021
(Address of principal executive offices)
 
(303) 544-1111
(Registrant’s telephone number)
 
Securities registered under Section 12(b) of the Act:
 
None
 
Securities registered under Section 12(g) of the Act:
     
(i) Common Stock, $.001 par value per share; and (ii) Preferred Stock, $.20 par value per share.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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 Rule12b-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 Act.)  YES o NO x
 
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant based upon the closing sale price of the common stock on June 30, 2013, the last business day of the registrant’s most recently completed second quarter, as reported on the OTC Bulletin Board, was approximately $4,163,518.
 
As of March 15, 2014, the registrant’s issued and outstanding shares were as follows:  6,411,413 shares common stock, 720,000 shares of Class A Preferred Stock.
 
Documents incorporated by reference: None.
 
 
 

 

 
TABLE OF CONTENTS
     
PART I
   
     
Item 1.
Business
3
     
Item 1A.
Risk Factors
14
     
Item 1B.
Unresolved Staff Comments
25
     
Item 2.
Properties
25
     
Item 3.
Legal Proceedings
25
     
Item 4.
Mine Safety Disclosures
26
     
PART II
   
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
27
     
Item 6.
Selected Financial Data
29
     
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
     
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
40
     
Item 8.
Financial Statements and Supplementary Data
43
     
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
65
     
Item 9A.
Controls and Procedures
65
     
Item 9B.
Other Information
66
     
PART III
   
     
Item 10.
Directors, Executive Officers and Corporate Governance
67
     
Item 11.
Executive Compensation
71
     
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
74
     
Item 13.
Certain Relationships and Related Transactions, and Director Independence
76
     
Item 14.
Principal Accounting Fees and Services
78
     
PART IV
   
     
Item 15.
Exhibits, Financial Statement Schedules
78
     
Signatures
82
 
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PART I
 
ITEM 1. DESCRIPTION OF BUSINESS
 
Some of the statements contained in this Annual Report on Form 10-K discuss future expectations, contain projections of results of operations or financial condition or state other “forward-looking” information. Those statements include statements regarding the intent, belief or current expectations of Roomlinx, Inc. (“we,” “us,” “our” or the “Company”) and our management team.  Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements. These risks and uncertainties include but are not limited to those risks and uncertainties set forth in Item 1A of this report.  In light of the significant risks and uncertainties inherent in the forward-looking statements included in this report, the inclusion of such statements should not be regarded as a representation by us or any other person that our objectives and plans will be achieved.
 
The Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with Signal Point Holdings Corp. (“Signal Point”) on March 14, 2014, pursuant to which a wholly-owned subsidiary of the Company will merge with and into Signal Point.  In the event of the consummation of the merger and the restructuring of the Company contemplated by the Merger Agreement (including a reverse split of the Company’s common stock utilizing a ratio resulting in the Company having 600,000 shares of outstanding common stock), the business operations of the Company and Signal Point will be combined, and the Company will be owned 14% by current security holders of the Company and 86% by current security holders of Signal Point.  On March 17, 2014, the Company filed a Current Report on Form 8-K and a preliminary proxy statement on Schedule 14A, each of which describes the terms of the merger and the material provisions of the Merger Agreement.  For a detailed summary of the merger with Signal Point, see the section of this Item 1 entitled “Recent Developments.”
 
General
 
As used in this Annual Report, references to “the Company”, “we”, “our”, “ours”, and “us” refer to Roomlinx, Inc. and consolidated subsidiaries, unless otherwise indicated.
 
We prepare our financials in United States dollars and in accordance with generally accepted principles as applied in the United States, referred to U.S. GAAP.  In this Annual Report, references to “$” and “dollars” are to United States dollars and “CDN” are to Canadian dollars.
 
Background
 
Roomlinx, Inc.
 
Roomlinx, Inc. was formed in 1998, is incorporated under the laws of the state of Nevada, and has its headquarters at 11101 W. 120th Avenue, Suite 200, Broomfield, CO 80021.
 
On October 1, 2010, Roomlinx, Inc. acquired 100% of the membership interests of Canadian Communications, LLC and its wholly owned subsidiaries, Cardinal Connect, LLC, a non-operating entity, Cardinal Broadband, LLC, and Cardinal Hospitality, Ltd, entity.  The acquisition of Canadian Communications, LLC also included a 50% joint venture interest in Arista Communications, LLC; Roomlinx, Inc. has maintained this 50% joint venture interest.  Cardinal Broadband operates as a division of Roomlinx.
 
Cardinal Broadband, a Division of Roomlinx, Inc.
 
Cardinal Broadband, LLC was formed in 2005 as a Colorado Limited Liability Company.  Pursuant to the acquisition of Canadian Communications, LLC on October 1, 2010, Roomlinx, Inc. became the 100% member of Cardinal Broadband, LLC.  Subsequent to the acquisition, Cardinal Broadband became a division of Roomlinx, Inc.
 
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Cardinal Broadband offers residential and business customers telecommunication services including telephone, satellite television, and wired and wireless internet access.  Cardinal Broadband is a Certified Local Exchange Carrier (“CLEC”), and as such has a tariff filed with the Colorado Public Utility Commission that allows it to provide traditional land line services throughout Colorado.  Cardinal Broadband offers “bundled” service wherever possible, meaning that they can provide telephone, television, and internet service to the same customer, allowing a single point of contact for customer service and a single invoice for  multiple services.
 
Arista Communications, LLC
 
Arista Communications, LLC is a joint venture between Cardinal Broadband and Wiens Real Estate Ventures, LLC, with each entity having a 50% membership interest.
 
Wiens is the developer of the Arista residential/retail/office development in Broomfield, Colorado.  The joint venture was formed to provide telecommunication services to the Arista community.  Arista Communications provides telephone, television, and internet connectivity to the residents and businesses of the Arista development, including the 1st Bank Center, an 8,000-seat music and sports venue.  Roomlinx owns a 50% membership interest in Arista Communications through its Cardinal Broadband division.  Cardinal Broadband manages the operations of Arista Communications.  The financial statements of Arista Communications, LLC are consolidated with Roomlinx in accordance with ASC Topic 810, Consolidation.
 
Cardinal Hospitality, Ltd.
 
Cardinal Hospitality, Ltd. (“CHL”) was formed in September of 2005, and is incorporated in British Columbia, Canada.  Pursuant to the October 1, 2010 acquisition of Canadian Communications, LLC, Roomlinx, Inc. became the sole shareholder of Cardinal Hospitality, Ltd.  It remains a separate and wholly owned subsidiary of Roomlinx, Inc.
 
CHL supplies video-on-demand services to the hospitality industry.  CHL operates systems throughout Canada.  CHL was formed in 2006 with the acquisition of the proprietary Video-on-Demand (VOD) technology formerly offered through GalaVu Entertainment Networks.  CHL also acquired the existing contracts of GalaVu.  CHL offers a full selection of video-on-demand services and technology; including first non-theatrical release Hollywood motion pictures, adult, and specialty content.
 
Effective December 20, 2013, Roomlinx cancelled all of CHL’s customer contracts. This resulted in the presentation of discontinued operations in the consolidated statements of comprehensive loss.  See note 10 to the financial statements for further discussion.
 
Business
 
The Company’s primary business is focused on providing in-room media, entertainment, and HD television programming solutions along with wired networking solutions and Wireless Fidelity networking solutions, also known as Wi-Fi, for high speed internet access to hotels, resorts, and time share properties. The Company also provides both wired and wireless internet access, HD satellite television service, and telephone service both Plain Old Telephone Service (“POTS”) and Voice over Internet Protocol (“VOIP”), to residential and business customers. 
 
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 December 31, 2013, the Company was servicing approximately 64,000 RGUs within the hospitality sector, and 14 residential communities and small businesses representing an additional 2,400 RGUs.
 
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Our 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.
 
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
 
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The following are examples of three different custom user interfaces of the Roomlinx Interactive TV platform in use today:
 
(GRAPHIC)
 
(GRAPHIC)
 
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(GRAPHIC)
 
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.
 
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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.
 
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
 
Our Business Strategy
 
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 customers’ needs quickly and that our product offerings differentiate us from other market participants in terms of usability, technical innovation and breadth of offerings.  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.  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.  These investments and enhancements will be focused on meeting the desires of hotel guests in a manner consistent with hotel needs.
 
To this end, our sales and product initiatives are aimed at accelerating market penetration by significantly reducing the cost of installation while still meeting the needs of hotel guests and generating an attractive gross margin.  Roomlinx continues development of its iTV Mobile product and believes it is the next progression in the Roomlinx product offerings.  Roomlinx iTV brings the internet, content and guest services to the hotel room TV, Roomlinx iTV Mobile expands the benefits of iTV to guests’ personal devices.  We believe iTV Mobile will accelerate market penetration by allowing properties to choose between full iTV integration and a more cost effective iTV mobile option.
 
The Company believes the benefits of iTV Mobile include:
 
                            ●      Low cost installation option for hotels, which allows for a disruptive business model
 
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                            ●
      Significantly lower cost for Roomlinx to service and support
                            ●
      Expanded market opportunity to attract limited service hotels with a lower cost installation
                            ●
      Rapid installation ensures less ‘down time’ for hotel rooms to be offline
                            ●
      Opportunity to license software allowing for accelerated market penetration
                            ●
      Guest will appreciate multiple options to access media and entertainment through personal devices
                            ●
      Strong recurring revenue model for Roomlinx
                            ●
      Provides for a new service offering and revenue stream for hotels
  
Our strategy is to focus our resources on delivering quality voice, video, data, media and entertainment, advertising, and E-commerce services to the hospitality industry and residential/business customers. We plan to penetrate the hotel, resort, and timeshare verticals through direct sales, channel sales agents, and acquisitions. We plan to continually develop our Interactive TV platform to meet the needs of the ever changing habits of the hotel guest.
 
Our objective is to increase our recurring revenues and to generate profits through the installation of our Interactive TV platform, high speed internet products, high definition television, and our video-on-demand products.  Roomlinx’ goal is to be the sole source solution for in-room technology, redefining how hotel guests access content, communicate, and use business tools.
 
Our residential and business telecommunications division, Cardinal Broadband, will seek to continue to expand its customer base by continuing to market to its current residential properties with the aim to increase its penetration at those properties.
 
Our short term strategies include the following:
 
 
v
We are seeking to grow the number of rooms installed with our Interactive TV platform.
 
v
We are seeking to grow the number of RGUs under management.
 
v
We are seeking to attain preferred vendor status or become a brand standard with additional premier hotel brands.
 
v
We aspire to increase our advertising revenue by leveraging our portfolio of iTV installations.
 
v
We plan to forge strong business partnerships with Fortune 500 companies that create operational efficiencies and product enhancements.
 
v
We are seeking to leverage our core competencies by expanding the markets we serve beyond the United States, Canada, Mexico and Aruba into the Middle-East, Africa, Central America and the Caribbean.
 
v
We anticipate expanding the IP-based services and Interactive TV platform that we offer to include:
 
Integration with new and ever increasing consumer web applications
 
Continued custom integration with the Hotel’s back office applications
 
Expanded IP-based advertising through the  television and personal devices
 
Expanded IP-based E-Commerce through the  television and personal devices
 
Growth in our custom software development and professional services revenues
 
v
Through acquisition or organic growth we plan to:
 
Increase our media and entertainment base of customers
 
Increase our high speed Internet base of customers
 
Explore leveraging our current networks for use by mobile carriers
 
Offer additional synergistic technologies or services that allow us to sell more of our Interactive TV product
 
Our longer term strategies include the following:
 
 
v
Expansion into the European and Asian hotel markets.
 
v
Expansion into additional vertical markets, such as healthcare and high end retirement homes.
 
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To recap we seek to deepen penetration within our installed customer base and expand the breadth of our overall customer base by distinguishing our current and future offerings with value-added solutions through increased marketing activities and continued custom, proprietary software development efforts that enhance the Interactive TV platform.
 
We cannot assure our investors that we will be successful in attaining these goals or that we will not pursue other strategies when opportunities arise. Capital constraints and competition, among other factors, may preclude us from attaining our goals.
 
Sales and Marketing
 
Sales
 
As of March 15, 2014, our sales efforts focused on strategic relationships with hardware, software, bandwidth and content providers. These strategic partners stand to benefit by increasing sales of their products and services, or strengthening existing relationships, as a result of pairing their offerings with Roomlinx offerings.  The size and scope of our strategic partners increases visibility and credibility at the corporate level of our brand targets allowing for simultaneous top down and bottom up sales strategies.
 
Marketing
 
We deploy a marketing mix consisting of:
 
 
Public Relations Programs. Communicate key initiatives, positive results, points of differentiation and promotions through press releases, industry events and key affiliations such as HTNG (Hotel Technology Next Generation) and AHLA (American Hotel and Lodging Association).
 
Direct Marketing Campaigns.  Including digital, print and video delivery.
 
Product Development.  Keeping a pulse on industry needs and wants through continual user research and development projects that result in differentiated products and services that provide financial and brand value to clients.
 
Operations
 
We have built a foundation on which to achieve quality customer service and scalability. We have achieved this by building the internal infrastructure, partnerships, and controls to scale quickly and offer quality services within the following areas: system design, system integration, system deployment, software development, project management, technical support, and on-going services.
 
For our high speed wired and wireless offering we act as a system designer, installer, and integrator that aggregates the products and services required to install wireless high-speed networks and deploys them through a delivery infrastructure that combines in-house technical and RF (radio frequency) experts with select system integrators in the customer’s area. After installation we seek to manage the network under a long-term contract.
 
For our proprietary Interactive TV platform and video-on-demand offering, we control the development of the product in-house, allowing us to have ultimate control of response time to customer requests for product customization and version updates.  For installation and support we utilize both certified partners and in-house personnel.  We use in-house personnel for project management and pro-active monitoring of our technical components in the field.
 
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For our free-to-guest television programming, we design and deploy these projects using in-house personnel, as well as third party certified companies.  We purchase satellite television programming then resell to our hotel customers as an integrated package with our aforementioned offerings.  Ongoing service and support is provided using in-house resources and certified partners.  We use in-house personnel for project management and pro-active monitoring of our technical components in the field.
 
For our residential telecommunications offerings, we design and deploy these projects using in-house personnel, as well as outsourcing installation labor as needed.  Ongoing service and support is provided using in-house resources.  Television content and bandwidth provisioning is secured through 3rd party providers.
 
Competition
 
Wired and Wireless High-Speed Internet Offering
 
The market for our high-speed internet (“HSIA”) services has leveled off. Our competitors may use the same products and services in competition with us. With time and capital, it would be possible for competitors to replicate our services and offer similar services at a lower price. We expect that we will compete primarily on the basis of the functionality, breadth, quality and price of our services. Our current and potential competitors include:
 
 
Other wireless high-speed internet access providers, such as Guest-Tek, AT&T, Swisscom, and SONIFI (formerly LodgeNet)
 
Many of our existing and potential competitors may have greater financial, technical, marketing and distribution resources than we do. Additionally, many of these companies may have greater name recognition and more established relationships with our target customers.  However, with our FTG and iTV products we are able to offer HSIA services as part of a larger bundle of value services.
 
Media and Entertainment
 
The current market conditions for Interactive TV services are evolving.  The demand for internet content continues to increase.  Many of our key competitors offer an interactive solution that delivers TV services via IP (Internet Protocol), interactive local information, and traditional VOD; however delivering internet content to the television continues to be a key differentiator for Roomlinx.
 
The market for free to guest services in the hospitality industry is strong, and we believe it will remain strong for the future due to the demand for HD content.   We continue to win customers by being a single source for all of a hotel’s telecommunication needs and offering our value added iTV platform.
 
Key competitors include: Guestek, SONIFI, Swisscom and Quadriga.
 
Residential and Business Telecommunications
 
This market is served by multiple competitors, primarily the Incumbent Local Exchange Carriers (ILECs) (CenturyLink), the cable company (Comcast), and multiple small independent companies providing individual television, telephone, and internet services.  We believe we will continue to gain customers by distinguishing ourselves from our competitors by superior service and competitive pricing.  Sometimes we gain a competitive advantage because we are not an ILEC or large cable company, as many customers prefer a company who is not so large and can give customized attention to their individual needs.
 
Many of our existing and potential competitors may have greater financial, technical, marketing and distribution resources than we do. Additionally, many of these companies may have greater name recognition and more established relationships with our target customers.
 
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Product Development
 
We seek to continually enhance the features and performance of our existing products and services. In addition, we are continuing to evaluate new products to meet our customers’ expectations of ongoing innovation and enhancements.
 
Our ability to meet our customers’ expectations depends on a number of factors, including our ability to identify and respond to emerging technological trends in our target markets, develop and maintain competitive products, enhance our existing products by adding features and functionality that differentiate them from those of our competitors and offering products on a timely basis and at competitive prices. Consequently, we have made, and we intend to continue to make, investments in product development.
 
Patents and Trademarks
 
We own the registered trademarks of “SuiteSpeed®,” “SmartRoom®,” and “Roomlinx®.” We also have proprietary processes and other trade secrets that we utilize in our business.
 
Recent Developments
 
Merger Agreement:
 
On March 14, 2014, the Company entered into the Merger Agreement with Signal Point and Roomlinx Merger Corp., a Delaware corporation and wholly-owned subsidiary of the Company (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 (the “Merger”).
 
Simultaneous with the effective time of the Merger (the “Effective Time”), the Company will effect a reverse split of its common stock (the “Reverse Stock Split”) 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;
 
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 (as defined below);
 
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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;
 
holders of the existing preferred stock of the Company will receive payments 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; 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.
 
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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 December 31, 2013 and 2012, deposits received on statements of work for Hyatt properties are recorded as customer deposits in the accompanying balance sheet in the amount of approximately $1,295,000 and $1,125,000, respectively.
 
See risk factors for discussion of potential effect on Company.
 
Employees
 
As of March 15, 2014 we had a total of 38 full-time personnel and one part-time employee. None of our employees are covered by a collective bargaining agreement. .
 
Environmental Matters
 
We believe that we are in compliance with all current federal and state environmental laws and currently have no costs associated with compliance with environmental laws or regulations.
 
ITEM 1A. RISK FACTORS
 
An investment in our company is very speculative and involves a very high degree of risk.  An investment in our company is suitable only for the persons who can afford the loss of their entire investment.  Accordingly, investors should carefully consider the following risk factors, as well as other information set forth in this report, in making an investment decision with respect to our securities. We have sought to identify what we believe to be all material risks and uncertainties to our business and ownership of our common stock, but we cannot predict whether, or to what extent, any of such risks or uncertainties may be realized nor can we guarantee that we have identified all possible risks and uncertainties that might arise.  Additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial may also harm our business operations. If any of these risks or uncertainties occurs, it could have a material adverse effect on our business.
 
Risks Relating to Our Business
 
Failure to Consummate the Merger with Signal Point Holdings Corp. Could Have an Adverse Effect on Our Operations
 
The consummation of the merger and other transactions contemplated under the Company’s Merger Agreement with Signal Point is subject to various conditions, including the Company and Roomlinx Sub having required levels of cash, cash equivalents, inventory and receivables as of the closing date, the Company’s entry into a debt restructuring agreement with its secured lender, conversion of certain debts of Signal Point into equity of Signal Point, the assumption of certain liabilities by Roomlinx Sub of third party creditors of the Company, and customary conditions, including stockholder approval at both companies.
 
If the Company does not consummate the merger with Signal Point, the potential effects on our operations, customers, suppliers and other stakeholders, including the Company’s creditors, could be materially adverse.  The factors taken into consideration by the Company’s board of directors in determining that the merger with Signal Point is in the best interests of the Company, such as sustained losses by the Company, inability to obtain additional financing, vendor liabilities, the going concern of the Company and its financial situation, would continue to be concerns of the Company.
 
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Certain Information Has Been Omitted from the Proxy Statement
 
The proxy statement filed by the Company in connection with the merger omits certain information about Signal Point which is to be determined prior to the closing of the Merger.  In accordance with applicable law, the Company will file an amendment to the Form 8-K filed in connection with the merger with Signal Point (the “8-K Amendment”) to disclose the financial statements of Signal Point, pro forma financial information and other information required by Regulation 14A under the Exchange Act to be disclosed therein.  The Company will also disclose in the 8-K Amendment additional information regarding Signal Point and the post-merger management and stockholders of the Company, including but not limited to, information regarding security ownership of certain beneficial owners and management, directors and executive officers (including compensation thereof), and management’s discussion and analysis of financial condition and results of operations.
 
Accordingly, any investor purchasing the Company’s securities prior to the filing of the 8-K Amendment will be doing so without the benefit of this additional information, and will be purchasing the Company’s securities based on the limited information regarding Signal Point contained in the Company’s current public filings.
 
We Have Only a Limited Operating History, Which Makes It Difficult to Evaluate an Investment in Our Common Stock.
 
We have only a limited operating history upon which our business, financial condition and operating results may be evaluated. We face a number of risks encountered by early stage technology companies that participate in new technology markets, including our ability to:
 
 
Maintain our engineering and support organizations, as well as our distribution channels;
 
Negotiate and maintain favorable rates with our vendors;
 
Retain and expand our customer base at profitable rates;
 
Recoup our expenses associated with the wireless devices we resell to subscribers;
 
Manage expanding operations, including our ability to expand our systems if our subscriber base grows substantially;
 
Attract and retain management and technical personnel;
 
Find adequate sources of financing; and
 
Anticipate and respond to market competition and changes in technologies as they develop and become available.
 
We may not be successful in addressing or mitigating these risks and uncertainties, and if we are not successful our business could be significantly and adversely affected.
 
Both our management and our independent registered public accounting firm have identified material weaknesses in our internal control over financial reporting. If we are unable to correct these weaknesses, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected, and investor confidence and the market price of our shares may be adversely impacted.
 
The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, if in future years, we were to meet certain market capitalization and other benchmarks, our independent registered public accounting firm would also report on the effectiveness of our internal control over financial reporting.  As of December 31, 2013, our management concluded that our internal control over our financial reporting was not effective.
 
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In connection with their audit of our financial statements for the year ended December 31, 2013, our management and our independent registered public accounting firm identified and communicated to us material weaknesses in our internal control over financial reporting as defined in the standards established by the U.S. Public Company Accounting Oversight Board that there is reasonable possibility that a material misstatement in our annual or interim financial statements would not be prevented or detected on a timely basis by our internal controls. The material weaknesses identified by our independent auditors include lack of adequate resources and experience within the accounting and finance department to ensure timely identification, resolution and recording of accounting matters. 
 
Although we have adopted a remediation plan to improve our internal control over financial reporting, the plan may not be sufficient to overcome these material weaknesses. We will continue to implement measures to remedy these material weaknesses as well as other deficiencies identified by our independent auditors and us in order to meet the deadline and requirements imposed by Section 404 of the Sarbanes-Oxley Act. If we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting. Moreover, effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important to help prevent fraud. As a result, our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the market price of our shares.
 
Some of Our Supplies Are Provided By One Supplier Each
 
The remote control devices required to utilize our services are currently supplied by a single supplier.  The content for our unlimited movie services is currently supplied by a single supplier.    Therefore, in the event that the supply of any of these items from any of these suppliers was to be interrupted without sufficient notice, it would have a material adverse impact on us.
 
Substantial Dependence on Our Contract with Hyatt
 
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 December 31, 2013 and 2012, deposits received on statements of work for Hyatt properties are recorded as customer deposits in the accompanying balance sheet in the amount of approximately $1,295,000 and $1,125,000, respectively.
 
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Dependence on Key Customers and Suppliers
 
As a result of having signed the MSA, Hyatt Corporation properties accounted for 78% of Roomlinx revenue in 2013.  The remote control devices required to utilize our services are currently supplied by a single supplier and the content for our unlimited movie services is currently supplied by a single supplier.  Therefore, in the event that the supply of any of these items from any of these suppliers was to be interrupted without sufficient notice, it may have a material adverse impact on us.
 
New Technologies May Make Our Products and Services Obsolete or Unneeded
 
New and emerging technological advances, such as mobile computing devices that allow consumers to view movies and obtain information may adversely impact or eliminate the demand for our products and services.  The increasing availability of content on such devices, the improved video quality of the content on such devices and faster wireless delivery speeds may make hotel guests less likely to purchase our services. Our success can depend on new product development. The entertainment and communications industry is ever-changing as new technologies are introduced. Advances in technology, such as new video formats, downloading or alternative methods of product delivery and distribution channels, such as the Internet, or certain changes in consumer behavior driven by these or other technologies and methods of delivery, could have a negative effect on our business. These changes could lower cost barriers for our competitors desiring to enter into, or expand their presence in, the television-based interactive services business. Increased competition may adversely affect our business including the scale, source and volatility of our revenue streams, cost structures and cash flow, and may require us to significantly change our operations.
 
Our Business is Generally Impacted by Conditions Affecting the Hospitality Industry’s Performance
 
Our results are generally connected to the performance of the hospitality industry, where occupancy rates may fluctuate resulting from various factors. Reduction in hotel occupancy and consumer buy rates resulting from business, economic or other events, such as generally weak economic conditions, significant international crises, acts of terrorism, war or public health issues, adversely impacts our business, financial condition and results of operations. The general economic conditions over the last several years have adversely affected the hotel industry and our business and any recovery may not be sustained. The overall travel industry and consumer buying pattern can be, has been in the past and/or currently is, adversely affected by weaker general economic climates, consumer sentiment, geopolitical instability and concerns about public health.
 
To Generate Increased Revenue We Will Have to Increase Substantially the Number of Our Customers, Which May be Difficult to Accomplish.
 
Adding new customers will depend to a large extent on the success of our direct and indirect distribution channels and acquisition strategy, and there can be no assurance that these will be successful. Our customers’ experiences may be unsatisfactory to the extent that our service malfunctions or our customer care efforts, including our website and 800 number customer service efforts, do not meet or exceed subscriber expectations. In addition, factors beyond our control, such as technological limitations of the current generation of devices, which may cause our customers’ experiences with our service to not meet their expectations, can adversely affect our revenues.
 
We May Acquire or Make Investments in Companies or Technologies That Could Cause Loss of Value to Our Stockholders and Disruption of Our Business.
 
Subject to our capital constraints, we intend to continue to explore opportunities to acquire companies or technologies in the future.  Entering into an acquisition entails many risks, any of which could adversely affect our business, including:
 
 
Failure to integrate the acquired assets and/or companies with our current business;
 
The price we pay may exceed the value we eventually realize;
 
Loss of share value to our existing stockholders as a result of issuing equity securities as part or all of the purchase price;
 
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Potential loss of key employees from either our current business or the acquired business;
 
Entering into markets in which we have little or no prior experience;
 
Diversion of management’s attention from other business concerns;
 
Assumption of unanticipated liabilities related to the acquired assets; and
 
The business or technologies we acquire or in which we invest may have limited operating histories, may require substantial working capital, and may be subject to many of the same risks we are.
 
We Have Limited Resources and We May be Unable to Effectively Support Our Operations.
 
We must continue to develop and expand our systems and operations in order to remain competitive. We expect this to place strain on our managerial, operational and financial resources. We may be unable to develop and expand our systems and operations for one or more of the following reasons:
 
 
We may not be able to retain at reasonable compensation rates qualified engineers and other employees necessary to expand our capacity on a timely basis;
 
We may not be able to dedicate the capital necessary to effectively develop and expand our systems and operations; and
 
We may not be able to expand our customer service, billing and other related support systems.
 
If we cannot manage our operations effectively, our business and operating results will suffer.  Moreover, even if we are successful in obtaining new customers for our products and services, we may encounter difficulty in, or be unable to, obtaining adequate resources, including financial and human, to roll-out our products and services to such customers.
 
Our Business Could be Harmed if we are Unable to Protect our Proprietary Technology.
 
We rely primarily on a combination of trade secrets, copyright and trademark laws and confidentiality procedures to protect our technology. Despite these precautions, unauthorized third parties may infringe, copy, or reverse engineer portions of our technology. In the absence of significant patent protection, we may be vulnerable to competitors who attempt to copy our products, processes or technology, which could harm our business.
 
Our Business Prospects Depend in Part on Our Ability to Maintain and Improve Our Services as Well as to Develop New Services.
 
We believe that our business prospects depend in part on our ability to maintain and improve our current services and to develop new services. Our services will have to achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new services and service enhancements. Additionally, our new services and service enhancements may not achieve market acceptance.
 
Our Management and Operational Systems Might Be Inadequate to Handle Our Potential Growth.
 
We may experience growth that could place a significant strain upon our management and operational systems and resources.  Failure to manage our growth effectively could have a material adverse effect upon our business, results of operations and financial condition.  Our ability to compete effectively and to manage future growth will require us to continue to improve our operational systems, organization and financial and management controls, reporting systems and procedures.  We may fail to make these improvements effectively.  Additionally, our efforts to make these improvements may divert the focus of our personnel.  We must integrate our key executives into a cohesive management team to expand our business.  If new hires perform poorly, or if we are unsuccessful in hiring, training and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed.  To manage the growth we will need to increase our operational and financial systems, procedures and controls.  Our current and planned personnel, systems, procedures and controls may not be adequate to support our future operations.  We may not be able to effectively manage such growth, and failure to do so could have a material adverse effect on our business, financial condition and results of operations.
 
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If We Do Not Respond Effectively and on A Timely Basis to Rapid Technological Change, Our Business Could Suffer.
 
Our industry is characterized by rapidly changing technologies, industry standards, customer needs and competition, as well as by frequent new product and service introductions. Our services are integrated with the computer systems of our customers. We must respond to technological changes affecting both our customers and suppliers. We may not be successful in developing and marketing, on a timely and cost-effective basis, new services that respond to technological changes, evolving industry standards or changing customer requirements. Our success will depend, in part, on our ability to accomplish all of the following in a timely and cost-effective manner:
 
 
Effectively using and integrating new technologies;
 
Continuing to develop our technical expertise;
 
Enhancing our engineering and system design services;
 
Developing services that meet changing customer needs;
 
Advertising and marketing our services; and
 
Influencing and responding to emerging industry standards and other changes.
 
We Depend on Retaining Key Personnel. The Loss of Our Key Employees Could Materially Adversely Affect Our Business.
 
Due to the technical nature of our services and the dynamic market in which we compete, our performance depends in part on our retaining key employees. Competitors and others may attempt to recruit our employees. A major part of our compensation to our key employees is in the form of stock option grants. A prolonged depression in our stock price could make it difficult for us to retain our employees and recruit additional qualified personnel.
 
If Our Hotel Customers Become Dissatisfied With Our Service, They May Elect Not to Renew Certain Products or Services With Us or They May Elect to Terminate Service Agreements, Which Could Have an Adverse Effect on Our Ability to Maintain or Grow Our Revenue.
 
In the event our customers become dissatisfied with the scope or capability of our products or services, or the level of revenue from our services, they may elect not to renew certain products or services upon expiration or terminate their existing agreements with us. The loss of these products or services or a loss of any significant number of hotel customers could have a detrimental effect on our operations and financial condition.
 
Our Data Systems Could Fail or Their Security Could Be Compromised, and We Will Increasingly Be Handling Personal Data Requiring Our Compliance With a Variety of Regulations.
 
Our business operations depend on the reliability of sophisticated data systems. Any failure of these systems, or any breach of our systems’ security measures, could adversely affect our operations, at least until our data can be restored and/or the breaches remediated. We have, to a limited extent, begun to serve as a conduit for personal information to third-party credit processors, service partners and others, and it is likely we will do so more regularly. The handling of such personal information requires we comply with a variety of federal, state and industry requirements governing the use and protection of such information, including, but not limited to, FTC consumer protection regulations and Payment Card Industry (“PCI”) data security standards and, for the Healthcare division, the requirements of the Health Insurance Portability and Accountability Act (“HIPAA”) and regulations thereunder. While we believe we have taken the steps necessary to assure compliance with all applicable regulations and have made necessary changes to our data systems, any failure of these systems or any breach of the security of these systems could adversely affect our operations and expose us to increased cost, liability for lost personal information and increased regulatory obligations.
 
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An Interruption in the Supply of Products and Services That We Obtain From Third Parties Could Cause a Decline in Sales of Our Services.
 
In designing, developing and supporting our services, we rely on many third party providers. These suppliers may experience difficulty in supplying us products or services sufficient to meet our needs or they may terminate or fail to renew contracts for supplying us these products or services on terms we find acceptable. If our liquidity deteriorates, our vendors may tighten our credit, making it more difficult for us to obtain suppliers on terms satisfactory to us. Any significant interruption in the supply of any of these products or services could cause a decline in sales of our services, unless and until we are able to replace the functionality provided by these products and services. We also depend on third parties to deliver and support reliable products, enhance their current products, develop new products on a timely and cost-effective basis and respond to emerging industry standards and other technological changes.
 
We Operate in a Very Competitive Industry, Which May Negatively Impact Our Prices for Our Services or Cause Us to Lose Business Opportunities.
 
The market for our services is becoming increasingly competitive. Our competitors may use the same products and services in competition with us. With time and capital, it would be possible for competitors to replicate our services and offer similar services at a lower price. We expect that we will compete primarily on the basis of the functionality, breadth, quality and price of our services. Our current and potential competitors include:
 
 
Other wireless high speed internet access providers, such as SDSN, Guest-Tek Wayport, Greentree, Core Communications and StayOnLine;
 
Other viable network carriers, such as SBC, Comcast, Sprint and COX Communications; and
 
Other internal information technology departments of large companies.
 
Many of our existing and potential competitors have substantially greater financial, technical, marketing and distribution resources than we do. Additionally, many of these companies have greater name recognition and more established relationships with our target customers. Furthermore, these competitors may be able to adopt more aggressive pricing policies and offer customers more attractive terms than we can. In addition, we have established strategic relationships with many of our potential competitors. In the event such companies decide to compete directly with us, such relationships would likely be terminated, which could have a material adverse effect on our business and reduce our market share or force us to lower prices to unprofitable levels.
 
We May be Sued by Third Parties For Infringement of Their Proprietary Rights and We May Incur Substantial Defense Costs and Possibly Substantial Royalty Obligations or Lose The Right to Use Technology Important To Our Business.
 
Any intellectual property claims, with or without merit, could be time consuming and expensive to litigate or settle and could divert management attention from administering our business. A third party asserting infringement claims against us or our customers with respect to our current or future products may materially adversely affect us by, for example, causing us to enter into costly royalty arrangements or forcing us to incur settlement or litigation costs.
 
Our Quarterly Operating Results are Subject to Significant Fluctuations and, As A Result, Period-To-Period Comparisons of Our Results of Operations are Not Necessarily Meaningful.
 
 
The success of our brand building and marketing campaigns;
 
Price competition from potential competitors;
 
The amount and timing of operating costs and capital expenditures relating to establishing the Company’s business operations;
 
The demand for and market acceptance of our products and services;
 
Changes in the mix of services sold by our competitors;
 
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Technical difficulties or network downtime affecting communications generally;
 
The ability to meet any increased technological demands of our customers; and
 
Economic conditions specific to our industry.
 
Therefore, our operating results for any particular quarter may differ materially from our expectations or those of security analysts and securities traders and may not be indicative of future operating results. The failure to meet expectations may cause the price of our common stock to decline. Since we are susceptible to these fluctuations, the market price of our common stock may be volatile, which can result in significant losses for investors who purchase our common stock prior to a significant decline in our stock price.
 
Covenants under our Credit Facility may restrict our future operations and adverse consequences could result in the event of non-compliance
 
Our current Credit Facility contains covenants which may restrict our ability to finance future operations or capital needs or to engage in other business activities. Future borrowing instruments, such as credit facilities and indentures, if any, are also likely to contain restrictive covenants and may require us to pledge assets as security under those future arrangements. The terms of our current Credit Facility, include many restrictive financial and other covenants. Events beyond our control, including changes in general economic and business conditions, as well as our financial performance, may adversely affect our business. Such changes in general economic and business conditions, or our financial performance, may affect our ability to meet those covenants and to otherwise remain in compliance with the requirements of our Credit Facility and other material agreements. A breach of any of these covenants would result in a default under the applicable debt instrument or agreement. In that event, the amounts under the applicable agreement could be declared immediately due and payable, or require us to amend the Credit Facility, resulting in significantly higher annual interest expense, and such a default may cause a default under some of our material agreements. As a result of these covenants and restrictions, we are limited in how to conduct our business and we may be unable to compete effectively, to meet our customer demands for installations or service or take advantage of new business opportunities.
 
 A Significant Amount of Our Common Stock is Held by a Few Stockholders
 
As of March 15, 2014, Matthew Hulsizer and Jennifer Just, directly and indirectly, together with certain of their affiliates, held 1,492,522 (or approximately 23.3%) of our outstanding shares of common stock and beneficially own approximately 31.8% (common stock, inclusive of warrants) and could, therefore, have a significant influence on us.
 
Many of our Key Functions Are Concentrated in a Single Location, and a Natural Disaster Could Seriously Impact Our Ability to Operate.
 
Our IT systems, production, inventory control systems, executive offices and finance/accounting functions, among others, are primarily centralized in our Broomfield, Colorado facility. A natural disaster, such as a tornado, could seriously disrupt our ability to continue or resume normal operations for some period of time. While we have certain business continuity plans in place, no assurances can be given as to how quickly we would be able to resume operations and how long it may take to return to normal operations. We may experience business interruptions and could incur substantial losses beyond what may be covered by applicable insurance policies, and may experience a loss of customers, vendors and employees during the recovery period.
 
Potential Fluctuations in Quarterly Operating Results
 
Our quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, most of which are outside of our control, including: the demand for our products and services; seasonal trends in purchasing; the amount and timing of capital expenditures and other costs relating to the development of our products and services; price competition or pricing changes in the industry; technical difficulties or system downtime; general economic conditions, and economic conditions specific to the hospitality industry. Our quarterly results may also be significantly impacted by the impact of the accounting treatment of acquisitions, financing transactions or other matters. Due to the foregoing factors, among others, it is likely that our operating results will fall below our expectations or those of investors in some future quarter.
 
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Limitation of Liability and Indemnification of Officers and Directors
 
Our officers and directors are required to exercise good faith and high integrity in the management of our affairs. Our Articles of Incorporation provides, however, that our officers and directors shall have no personal liability to us or our stockholders for damages for any breach of duty owed to us or our stockholders, unless they breached their duty of loyalty, did not act in good faith, knowingly violated a law, or received an improper personal benefit.  Our Articles of Incorporation and By-Laws also provide for the indemnification by us of our officers and directors against any losses or liabilities they may incur by reason of their serving in such capacitates, provided that they do not breach their duty of loyalty, act in good faith, do not knowingly violate a law, and do not received an improper personal benefit. Additionally, we have entered into individual  Indemnification Agreements with each of our directors and officers to implement with more specificity the indemnification provisions provided by the Company’s By-Laws and provide, among other things, that to the fullest extent permitted by applicable law, the Company will indemnify such director or officer against any and all losses, expenses and liabilities arising out of such director’s or officer’s service as a director or officer of the Company, as the case may be. The Indemnification Agreements also contain detailed provisions concerning expense advancement and reimbursement.
 
 Disclosure Controls and Procedures and Potential Inability to Make Required Public Filings; Material Weakness in our Internal Controls
 
Given our limited personnel, we may be unable to maintain effective controls to ensure that we are able to make all required public filings in a timely manner. In fact, from December 27, 2005 until May 14, 2009, our Common Stock was removed from listing from the OTC Bulletin Board as a result of our failure to timely make all our required public filings.  If we do not make all public filings in a timely manner, our shares of common stock may again be delisted from the OTC Bulletin Board and we could also be subject to regulatory action and/or lawsuits by stockholders.  
 
Both our management and our independent registered public accounting firm have identified material weaknesses in our internal control over financial reporting. If we are unable to correct these weaknesses, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected, and investor confidence and the market price of our shares may be adversely impacted.
 
The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, if in future years, we were to meet certain market capitalization and other benchmarks, our independent registered public accounting firm would also report on the effectiveness of our internal control over financial reporting.  As of December 31, 2013, our management concluded that our internal control over our financial reporting is not effective.
 
In connection with their audit of our financial statements for the year ended December 31, 2013, our management and our independent registered public accounting firm identified and communicated to us material weaknesses in our internal control over financial reporting as defined in the standards established by the U.S. Public Company Accounting Oversight Board that there is reasonable possibility that a material misstatement in our annual or interim financial statements would not be prevented or detected on a timely basis by our internal controls. The material weakness identified by our independent auditors relate to a lack of adequate resources and experience within the accounting and finance department to ensure timely identification, resolution and recording of accounting matters. 
 
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Although we have adopted a remediation plan to improve our internal control over financial reporting, the plan may not be sufficient to overcome these material weaknesses. We will continue to implement measures to remedy these material weaknesses as well as other deficiencies identified by our independent auditors and us in order to meet the deadline and requirements imposed by Section 404 of the Sarbanes-Oxley Act. If we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting. Moreover, effective internal control over financial reporting is necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the market price of our shares.
 
Risks Relating to Our Common Stock
 
Resale of Shares Could Adversely Affect the Market Price of Our Common Stock and Our Ability to Raise Additional Equity Capital
 
The sale or availability for sale, of common stock in the public market pursuant to filed or future prospectuses may adversely affect the prevailing market price of our common stock and may impair our ability to raise additional capital by selling equity or equity-linked securities. The resale of a substantial number of shares of our common stock in the public market could adversely affect the market price for our common stock and make it more difficult for you to sell our shares at times and prices that you feel are appropriate.
 
Further Issuances of Equity Securities May Be Dilutive to Current Stockholders.
 
It is likely that we will be required to seek additional capital in the future. This capital funding could involve one or more types of equity securities, including convertible debt, common or convertible preferred stock and warrants to acquire common or preferred stock. Such equity securities could be issued at or below the then-prevailing market price for our common stock. Any issuance of additional shares of our common stock will be dilutive to existing stockholders and could adversely affect the market price of our common stock.
 
Articles of Incorporation Grants the Board of Directors the Power to Designate and Issue Additional Shares of Preferred Stock.
 
Our Articles of Incorporation grants our Board of Directors authority to, without any action by our stockholders, designate and issue, from our authorized capital, shares in such classes or series as it deems appropriate and establish the rights, preferences, and privileges of such shares, including dividends, liquidation and voting rights. The rights of holders of classes or series of preferred stock that may be issued could be superior to the rights of the common stock offered hereby.  Our board of directors’ ability to designate and issue shares could impede or deter an unsolicited tender offer or takeover proposal. Further, the issuance of additional shares having preferential rights could adversely affect other rights appurtenant to the shares of common stock offered hereby. Any such issuances will dilute the percentage of ownership interest of our stockholders and may dilute our book value.
 
Lack of Liquid Trading Market for Common Stock
 
Although our stock is quoted on the OTC Bulletin Board (the “OTCBB”) under the symbol “RMLX”, the market for our common stock is not liquid as there have been days when our stock did not trade even though it was quoted.
 
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Limited Market Due To Penny Stock
 
Our stock differs from many stocks, in that it is considered a penny stock. The Securities and Exchange Commission has adopted a number of rules to regulate penny stocks. These rules include, but are not limited to, Rules 3a5l-l, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and Exchange Act of 1934, as amended. Because our securities probably constitute penny stock within the meaning of the rules, the rules would apply to our securities and us. The rules may further affect the ability of owners of our stock to sell their securities in any market that may develop for them. There may be a limited market for penny stocks, due to the regulatory burdens on broker-dealers. The market among dealers may not be active. Investors in penny stock often are unable to sell stock back to the dealer that sold them the stock. The mark-ups or commissions charged by the broker-dealers may be greater than any profit a seller may make. Because of large dealer spreads, investors may be unable to sell the stock immediately back to the dealer at the same price the dealer sold the stock to the investor. In some cases, the stock may fall quickly in value. Investors may be unable to reap any profit from any sale of the stock, if they can sell it at all.
 
Stockholders should be aware that, according to the Securities and Exchange Commission Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. These patterns include: control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; “boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons; excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
 
Furthermore, the penny stock designation may adversely affect the development of any public market for our shares of common stock or, if such a market develops, its continuation. Broker-dealers are required to personally determine whether an investment in penny stock is suitable for customers. Penny stocks are securities (i) with a price of less than five dollars per share; (ii) that are not traded on a “recognized” national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); and (iv) of an issuer with net tangible assets less than $2,000,000 (if the issuer has been in continuous operation for at least three years) or $5,000,000 (if in continuous operation for less than three years), or with average annual revenues of less than $6,000,000 for the last three years. Section 15(g) of the Exchange Act and Rule 15g-2 of the Commission require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account. Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be penny stock. Rule 15g-9 of the Commission requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor.
 
This procedure requires the broker-dealer to (i) obtain from the investor information concerning his financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for the Company’s stockholders to resell their shares to third parties or to otherwise dispose of them.
 
The Trading Price of Our Common Stock May Fluctuate Significantly Due To Factors Beyond Our Control
 
The trading price of our common stock will be subject to significant fluctuations in response to numerous factors, including:
 
 
Variations in anticipated or actual results of operations;
 
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Announcements of new products or technological innovations by us or our competitors;
 
Changes in earnings estimates of operational results by analysts;
 
Inability of market makers to combat short positions on the stock;
 
Inability of the market to absorb large blocks of stock sold into the market; and
 
Comments about us or our markets posted on the Internet.
 
Moreover, the stock market from time to time has experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging growth companies and which often have been unrelated to the operating performance of the companies. These broad market fluctuations may adversely affect the market price of our common stock. If our stockholders sell substantial amounts of their common stock in the public market, the price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity related securities in the future at a price we deem appropriate.
 
We Do Not Intend to Pay Dividends on Our Common Stock.
 
We have never paid or declared any cash dividends on our common stock and intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares of common stock unless they sell them.
 
Sarbanes-Oxley and Federal Securities Laws Reporting Requirements Can Be Expensive
 
As a public reporting company, we are subject to the Sarbanes-Oxley Act of 2002, as well as the information and reporting requirements of the Securities Exchange Act of 1934, as amended and other federal securities laws. The costs of compliance with the Sarbanes-Oxley Act and of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC, and furnishing audited reports to stockholders, are significant and may increase in the future.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
ITEM 2. PROPERTY
 
We lease our principal offices, which are located at 11101 W. 120th Avenue, Suite 200, Broomfield, CO 80021, consisting of approximately 10,500 square feet.
 
ITEM 3. LEGAL PROCEEDINGS
 
The Company is in receipt of a District Court Civil Summons, dated May 29, 2012, in the matter of “CLC Networks, Inc. and Skada Capital, LLC v. Roomlinx, Inc.”, commenced in the District Court of Boulder County, Colorado (the “Action”).  The plaintiffs in the Action claimed that the Company owed them certain unpaid sales commissions, including with respect to Hyatt Corporation in connection with that certain Master Services and Equipment Purchase Agreement, as described in the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on March 13, 2012. 
 
Effective February 3, 2014, the parties executed a Compromise and Settlement Agreement (the “Agreement”) in which the Parties mutually agree to all of its contents and the consideration transferred does not in any way constitute an admission of disputed facts.  Under the terms of the Agreement, Roomlinx agrees to consideration in an amount of $106,528.32, such payment to consist of nineteen equal installments approximating $5,607 with the first payment due on March 15, 2014 and the final payment due on September 15, 2015.  Upon receipt of the final payment the Plaintiff will take such action as necessary to dismiss the Action.  As of December 31, 2013, the consideration is recorded in accrued expenses on the consolidated balance sheet.
 
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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 December 31, 2013 and 2012, the Company had approximately $2,100,000 (net of payments made in 2013) and $2,430,000, respectively, 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.
 
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 December 31, 2013 and 2012.   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 is in receipt of a letter from an attorney representing a past employee claiming retaliation and discrimination in connection with the termination of his employment seeking damages approximating $85,000.  No claim has been file with the District Court.  The Company rejects these charges and should it be served with a summons, the Company will vigorously defend its position.
 
Other than the foregoing, there are no material legal proceedings to which the Company (or any officer or director of the Company, or any affiliate or owner of record or beneficially of more than five percent of the Common Stock, to management’s knowledge) is party to or to which the property of the Company is subject is pending, and no such material proceeding is known by management of the Company to be contemplated.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.
 
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PART II
 
The Company entered into a Merger Agreement with Signal Point on March 14, 2014, pursuant to which a wholly-owned subsidiary of the Company will merge with and into Signal Point.  In the event of the consummation of the merger and the restructuring of the Company contemplated by the Merger Agreement (including a reverse split of the Company’s common stock utilizing a ratio resulting in the Company having 600,000 shares of outstanding common stock), the business operations of the Company and Signal Point will be combined, and the Company will be owned 14% by current security holders of the Company and 86% by current security holders of Signal Point.  On March 17, 2014, the Company filed a Current Report on Form 8-K and a preliminary proxy statement on Schedule 14A, each of which describes the terms of the merger and the material provisions of the Merger Agreement.  For a detailed summary of the merger with Signal Point, see the section entitled “Recent Developments” in Item 1 to this Annual Report on Form 10-K.
 
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASERS OF EQUITY SECURITIES
 
Our common stock trades on the OTC-Bulletin Board under the symbol RMLX. Our Class A Preferred Stock trades on the OTC-Bulletin Board under the symbol “RMLXP”. For the periods indicated, the following table sets forth the high and low bid quotations for our Common Stock and Class A Preferred Stock as reported by the National Quotation Bureau, Inc. The quotations represent inter-dealer quotations without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
                 
SYMBOL
 
TIME PERIOD
 
LOW
   
HIGH
 
 
RMLX
 
January 1, - March 31, 2012
  $ 2.25     $ 4.80  
                     
   
April 1, - June 30,  2012
  $ 2.15     $ 3.50  
                     
   
July 1, - September 30, 2012
  $ 2.30     $ 3.98  
                     
   
October 1, - December 31, 2012
  $ 1.80     $ 2.75  
                     
   
January 1, - March 31, 2013
  $ 1.15     $ 2.39  
                     
   
April 1, - June 30,  2013
  $ 0.52     $ 1.90  
                     
   
July 1, - September 30, 2013
  $ 0.11     $ 0.65  
                     
   
October 1, - December 31, 2013
  $ 0.03     $ 0.34  
 
RMLXP
 
January 1, - March 31, 2012
  $ 0.10     $ 0.10  
                     
   
April 1, - June 30,  2012
  $ 0.10     $ 0.10  
                     
   
July 1, - September 30, 2012
  $ 0.10     $ 0.12  
                     
   
October 1, - December 31, 2012
  $ 0.05     $ 0.12  
                     
   
January 1, - March 31, 2013
  $ 0.20     $ 0.20  
                     
   
April 1, - June 30,  2013
  $ 0.10     $ 0.20  
                     
   
July 1, - September 30, 2013
  $ 0.10     $ 0.11  
                     
   
October 1, - December 31, 2013
  $ 0.10     $ 0.10  
 
The closing bid for our Common Stock on the OTC-Bulletin Board on March 15, 2014 was $0.30. Stockholders are urged to obtain current market quotations for our common stock. As of March 15, 2014, 6,411,413 shares of Common Stock were issued and outstanding which were held of record by approximately 270 shareholders.  As of March 15, 2014, 720,000 shares of Class A Preferred Stock were issued and outstanding which were held of record by approximately 40 shareholders.
 
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Dividends
 
The Company has not paid any cash dividends on its stock. Dividends may not be paid on the common stock while there are accrued but unpaid dividends on the Class A Preferred Stock, which bears a 9% cumulative dividend. As of December 31, 2013 accumulated but unpaid Class A Preferred Stock dividends aggregated $198,120. Payments must come from funds legally available for dividend payments.  It is the current intention of the Company to retain any earnings in the foreseeable future to finance the growth and development of its business and not pay dividends on the common stock.
 
Issuer Purchases of Equity Securities
 
During 2013, the Company did not repurchase any shares of our common or preferred stock.
 
Performance Graph
 
The following graph compares the percentage change in the Company’s cumulative total stockholder return on its common stock with (i) the cumulative total return of the NASDAQ Market Index and (ii) the cumulative total return of all companies (the “Peer Group”) with the same four-digit standard industrial code (“SIC”) as the Company (SIC 4841 – Cable and Other Pay Television Services over the period and SIC 4899 – Communication Services, NEC) over the period from January 1, 2008 through December 31, 2013.  The graph assumes an initial investment of $100 in each of the Company, the NASDAQ Market Index and the Peer Group and reinvestment of dividends. The Company did not declare or pay any dividends on its common stock in 2012. The graph is not necessarily indicative of future price performance.
 
This graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or under the Exchange Act, except to the extent the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.
 
GRAPH
 
Footnotes:
             
 
$100 invested on 01/01/08 in stock or index, including reinvestment of dividends
 
Fiscal years ended December 31

 
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Recent Sales of Unregistered Securities
 
There have been no recent sales of unregistered securities.
 
ITEM 6. SELECTED FINANCIAL DATA
 
Not required.
 
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read together with our consolidated financial statements, the accompanying notes to these financial statements, and the other financial information that appears elsewhere in this Annual Report on Form 10-K or our SEC filings.
 
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
 
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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.
 
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 (“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.
 
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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 voice over internet protocol (“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 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
 
Highlights
 
The highlights and business developments for the year ended December 31, 2013 include the following:
 
 
US hospitality recurring revenue increased approximately $2,025,000 or 70%.
 
Installation of approximately 1,000 iTV rooms under the Master Services Agreement with Hyatt Hotels.
 
Implemented company-wide cost containment program yielding approximately a $1,525,000 decrease in costs year over year.
 
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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. Roomlinx’s media and entertainment solutions may be provided in the “full option” (Interactive TV) or the “lite option” (Video on Demand).
 
Pursuant to the MSA, we have agreed to make financing available to hotels that exceed certain minimum credit criteria for the purchase of equipment necessary for the provision of the Services at annual interest rates of no greater than 11.5% per annum and subject to certain restrictions and limitations. The amount of financing that Roomlinx is required to provide will not exceed the lesser of (i) the amount of installation fees that are payable by Hyatt-owned hotels under Hotel Service Agreements that have not elected to receive equipment financing or (ii) $11 million. To date, no financing has been requested by Hyatt properties.
 
The MSA terminates on the later of (i) 60 days following the five year anniversary of the effective date or (ii) if any Hotel Services Agreement is in effect on such five year anniversary, then the MSA will continue to apply to such Hotel Services Agreement until it expires. The MSA may be terminated by Hyatt in the event (i) Roomlinx is in breach of certain obligations under the MSA, (ii) Roomlinx is subject to bankruptcy, assignment for the benefit of its creditors, is in receivership or similar proceeding or (iii) in the event of a delegation, transfer, assignment, change of control or ownership by Roomlinx or the sale of all or substantially all of its assets.
 
In March 2012, Roomlinx and Hyatt entered into the MSA which provided for, among other things, the obligation of Hyatt to order and to 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 measured from March 2012, subject to Roomlinx’s satisfaction of certain other conditions of the MSA.
 
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 December 31, 2013 and 2012, deposits received on statements of work for Hyatt properties are recorded as customer deposits in the accompanying balance sheet in the amount of approximately $1,295,000 and $1,125,000, respectively.
 
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.
 
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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
 
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 ASC Topic 605, “Revenue Recognition”.
 
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.
 
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The Company reviews the carrying value of long-lived assets, such as property and equipment, whenever events or circumstances indicate the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized to reduce the carrying value of the asset to its estimated fair value.
 
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
 
YEAR ENDED DECEMBER 31, 2013 COMPARED TO YEAR ENDED DECEMBER 31, 2012
 
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 10 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 year ended December 31, 2012 has been reclassified to be consistent with the presentation for the year ended December 31, 2013.
 
Our revenues for the years ended December 31, 2013 and 2012 were $9,448,543 and $13,003,915 respectively, a decrease of $3,555,372, or 27%, reflecting a decrease in installation revenue of approximately $5,600,000 and an increase in recurring revenue of approximately $1,925,000.  Substantially all of the changes in revenue were attributable to the Hyatt MSA.  The decrease in installation revenue was primarily realized in the fourth quarter of 2013 vs 2012, when the Company installed approximately 1,700 RGU’s in 2013 vs 20,000 RGU’s in 2012, the result of Hyatt and Roomlinx agreeing to slow installations of the iTV product at the end of 2012.  The increase in annual recurring revenue reflects the substantial number of hotel installations in 2012 and 2013, generating an increase of approximately $1,975,000.
 
Direct costs exclusive of operating expenses for the years ended December 31, 2013 and 2012 were $6,880,509 and $11,875,850 respectively, a decrease of $4,995,251, or 42%.  Installation direct costs decreased approximately $6,200,000 and include the cost of equipment, warehousing and freight, 3rd party labor, transportation costs and direct payroll costs. Recurring direct costs increased approximately $1,100,000 and primarily include the costs of our 24x7 call center, free to guest programming, pay per view content and 3rd party labor.  This cost increase was due to the increase in recurring revenue.
 
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Hospitality
 
The hospitality segment includes hotel and meeting rooms in the following geographic segments: United States, Canada, and Other Foreign.  As of December 31, 2013, 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, video-on-demand, free to guest programming, and, advertising and e-commerce products.  Effective December 20, 2013, Canadian and Aruba hospitality contracts serviced by CHL were cancelled by Roomlinx, as more fully discussed in note 10 of the financial statements.
 
United States: US hospitality revenue for the year ended December 31, 2013 and 2012 was $8,050,570 and $11,922,741 respectively, a decrease of $3,872,171 or 32%.  This decrease consists of approximately $5,900,000 of installation revenue and an increase in recurring revenue of $2,025,000 or 70%.  As of December 31, 2013 and 2012, the Company had approximately 64,000 and 43,500 RGUs in service.  Substantially all of the increased revenue was attributable to the Hyatt MSA.
 
Canada: Canadian hospitality revenue for the year ended December 31, 2013 and 2012 was $360,977 and $41,873 respectively, an increase of $319,104.  This increase is primarily due to installation revenue of approximately $282,000 in 2013 vs $0 in 2012.  Recurring revenue increased from approximately $42,000 to $79,000, or $37,000 as a result of 2013 installations.
 
Other Foreign: Other foreign hospitality revenue for the years ended December 31, 2013 and 2012 was $175,002 and $124,247 respectively, an increase of $50,775 or 41%.  This increase is primarily due to installation revenue of approximately $137,000 in 2013.  Recurring revenue decreased from approximately $124,000 to $38,000, the result of cancelling a contract with a resort hotel.
 
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 year ended December 31, 2013 and 2012 was $861,994 and $915,054 respectively, a decrease of $53,060 or 6%.  We believe the decline in recurring revenue relates to a reduction in use of traditional phone lines and increased competition.
 
Operational Expenses
 
Total operating expenses for the years ended December 31, 2013 and 2012 were $5,836,664 and $6,955,509 respectively, for a net decrease of $1,118,845, comprised of a decrease of $1,951,274 in continuing costs of operations less a loss on asset impairment of $832,429. The decrease in operating costs is primarily due to a cost reduction and containment program generating a savings of approximately $1,525,000, the result of a 37% decrease in personnel, reducing payroll and related costs of approximately $1,372,000, and various operating costs with a net decrease approximating $153,000, as discussed in the following paragraphs.  Additional decreases in cost included approximately $269,000 in bad debt expense and approximately $250,000 in depreciation expense related to impaired assets less approximately $106,000 related to litigation settlement costs as discussed in note 17 to the financial statements.
 
Operations expense for the years ended December 31, 2013 and 2012 was $1,278,320 and $2,128,652, respectively, a decrease of $850,332 or 40%.  This decrease is primarily due to a 71% decrease in personnel, reducing payroll and related costs approximately $829,000,
 
Product development expenses for the years ended December 31, 2013 and 2012 was $805,885 and $1,280,743, respectively, a decrease of $474,858 or 37%.  This decrease is primarily due to a 58% decrease in personnel, reducing payroll and related costs approximately $423,000, and reductions in various operating accounts approximating $51,000.
 
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Selling, general and administrative expenses for the years ended December 31, 2013 and 2012 was $2,672,324 and $3,047,946, respectively, a decrease of $375,622 or 12%.  This decrease is primarily due to the following decreases in costs: (i) a 59% decrease in personnel, reducing payroll and related costs approximately $120,000, (ii) bad debt expense decrease of $269,000, (iii) a decrease in marketing of $45,000, and various operating accounts with a net decrease of approximately $84,000.  These decreases were offset by an increase in legal fees approximating $46,000 and approximately $106,000 related to litigation settlement costs as discussed in note 17 to the financial statements.
 
Depreciation expense for the years ended December 31, 2013 and 2012 was $247,706 and $498,168, respectively, a decrease of $250,462 or 50%.  This decrease reflects the reduction in depreciation expense attributable to the impairment of property and equipment recorded at September 30, 2012.
 
During the year ended December 31, 2013, the Company recognized a loss on the impairment of assets of $832,429 related to the determination that the carrying value of inventory would not be recoverable from the estimated future cash flows expected from their use and eventual disposition (see note 5 to the financial statements).
 
Our operating loss decreased to $3,268,720 for the year ended December 31, 2013 compared to $5,827,444 for the year ended December 31, 2012, a decrease of $2,558,724, or 44%.  This decrease is primarily attributable to a net increase in revenues less direct costs and the cost savings achieved through the Company’s 2013 cost reduction and containment program, as described above.  For the years ended December 31, 2013 and 2012, continuing operational expenses (operating, product development, and selling, general and administrative costs) decreased 82% as a percentage of recurring revenue to 81% in 2013 compared to 163% in 2012.
 
Non-Operating
 
For the years ended December 31, 2013 and 2012, the Company’s non-operating income was $180,220 and $287,759 respectively.  The net decrease of $107,539 is due to the decline in interest income on lease receivables.  During 2013, leases of approximately $340,000 terminated. Non-operating expenses for the years ended December 31, 2013 and 2012 were $642,813 and $601,725 respectively, an increase of $41,088.  This increase is primarily due to the outstanding carrying value of the Cenfin line of credit year over year.
 
Discontinued operations are the result of the termination of all CHL contracts on December 20, 2013, resulting in a loss on discontinued operations of $422,503 for the year ended December 31, 2013.  Under ASC 360-10, the consolidated statements of comprehensive income have been reclassified for the year ended December 31, 2012, to identify a loss on discontinued operations of $1,250,324.
 
For the years ended December 31, 2013 and 2012, the Company experienced net losses of $4,153,816 and $7,391,734 respectively, a net decrease of $3,327,918, comprised of an increase in revenue less direct costs of approximately $1,520,000, a decrease of approximately $1,800,000 in costs of operations, and a decrease of approximately $830,000 in loss from discontinued operations less a loss on asset impairment of approximately $832,000, all of which are more fully described above.
 
Related Party Transactions
 
Since June 5, 2009 the Company has maintained a Revolving Credit, Security and Warrant Purchase Agreement (the “Credit Agreement”) with Cenfin LLC, an entity principally owned by significant shareholders of the Company (see Note 8 to the Financial Statements).  The Credit Agreement permits us to borrow up to $25 million until June 5, 2017.  On May 3, 2013, the Company and Cenfin executed a fourth amendment to the Credit Agreement which provided Cenfin sole and absolute discretion related to funding any advance requested by Roomlinx.  Advances must be repaid at the earlier of 5 years from the date of borrowing or at the expiration of the Credit Agreement. The principal balance may be repaid at any time without penalty.  Borrowings accrue interest, payable quarterly on the unpaid principal and interest at a rate equal to the Federal Funds Rate at July 15 of each year plus 5% (approximately 5.09% at December 31, 2013).  The Credit Agreement is collateralized by substantially all of our assets, and requires we maintain a total outstanding indebtedness to total assets ratio of less than 3 to 1.
 
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The Credit Agreement requires that, in conjunction with each advance, we issue Cenfin 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 ($4,172,000 as of December 31, 2013) 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.
 
During the year ended December 31, 2013, the Company made interest payments of $256,942. Amounts outstanding under the Credit Agreement were $5,176,000 at December 31, 2013.
 
Effective July 25, 2012, Roomlinx entered into a consulting arrangement for marketing services with TRG, Inc., an entity owned by Michael S. Wasik, the CEO and Chairman of Roomlinx.  The marketing services were to be performed by Chris Wasik, the wife of Mr. Wasik.  As of December 31, 2012, Roomlinx had paid TRG $94,950 for services performed in accordance with said arrangement.  At the beginning of December 2012, Chris Wasik became an employee of Roomlinx as its Director of Marketing with a salary of $85,000 per annum, effectively severing the consulting arrangement with TRG.  Subsequently in December 2013, Ms. Wasik assumed responsibility for the Company’s call center at which time her salary was increased to $101,400.  For the year ended December 31, 2013, Ms. Wasik was paid $88,275 as an employee of the Company.
 
The wife of Jason Andrew Baxter, the Company’s Chief Operating Officer, provides certain contract and financial services to the Company through Baxter Facilities, LLC, a limited liability company co-owned by Mr. Baxter.  The Company has paid Baxter Facilities, LLC $23,448 and $46,321 for its services for the years ended December 31, 2013 and 2012, respectively.
 
FINANCIAL CONDITION
 
LIQUIDITY & CAPITAL RESOURCES
 
As of December 31, 2013 the Company had $2,125,655 in cash and cash equivalent, which is sufficient to continue business operations for at least the next twelve months.  During the first half of 2013, the Company executed against a phased reduction whereby at the end of the year, the Company had realized a 37% reduction in personnel to mitigate its fixed cost base, substantially contributing to the reduction of operational expenses, which consist of operations, product development and selling, general and administrative costs as a percentage of recurring revenue to 79%, as compared to 170% for the same period in 2012.  In addition, the Company has developed an effective vendor management program to reduce its outstanding payables and extend payment terms.
 
Working capital at December 31, 2013 was a deficit of $946,114 as compared to $1,700,723 at December 31, 2012.  The decrease in working capital of $2,646,837 is primarily due to (i) a reduction in cash approximating $1,085,000 of which a substantial portion was related to vendor payments in the second quarter of 2013, (ii) an impairment of asset charge related to inventory approximating $832,000 recorded on the consolidated statements of comprehensive income, and (iii) the recognition of a loss on discontinued operations of which approximately $167,000 related to accounts receivable and inventory.  Additionally, $464,000 of the Cenfin line of credit was classified as a current liability thereby resulting in a reduction in working capital.  The remaining decrease in working capital of approximately $100,000 is the net change in the working capital assets and liabilities.
 
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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.  The amount (net of payments made in 2013) is recorded in accounts payable in the accompanying consolidated balance sheets as of December 31, 2013 and 2012.  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.
 
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 December 31, 2013 and 2012.   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 is in receipt of a letter from an attorney representing a past employee claiming retaliation and discrimination in connection with the termination of his employment seeking damages approximating $85,000.  No claim has been file with the District Court.  The Company rejects these charges and should it be served with a summons, the Company will vigorously defend its position
 
As discussed in Note 7 to the 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 was $1,950,101 and $1,793,538 for the years ended December 31, 2013 and 2012, respectively.  The increase in cash used in operations of $156,563 was attributable to the decrease in cash provided by operations of $3,394,481 less the decrease in net loss of $3,237,918.  Cash provided by operations included (i) a decrease of $519,646 in non-cash expenses consisting of a decrease of $827,821 from the loss on discontinued operations, a decrease in the provision for uncollectible accounts and leases receivable of $400,157, a decrease in depreciation expense of $250,462, an increase in loss on asset impairment of $832,429 and fluctuations in other recurring non-cash adjustments such as stock based compensation and the amortization of debt discount, and (ii) a decrease of $2,874,835 from the fluctuation in changes in operating assets and liabilities.
 
Investing Activities
 
Net cash provided by investing activities was $907,321 for the year ended December 31, 2013 compared to $628,268 provided by investing activities during the same period in 2012.  The increase in cash provided by investing activities of $279,053 was attributable to a savings of $142,879 resulting from a decrease in financing customer installation, and a savings of $189,940 resulting from a decline in capital expenditures during 2013 versus 2012, offset by a decrease in 2013 cash receipts against leases receivable totaling $48,766.
 
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Financing Activities
 
Net cash used in financing activities for the year ended December 31, 2013 was $22,752 compared to $3,963,505 of net cash provided by financing activities for the year ended December 31, 2012. .  The decrease in cash of $3,986,257 in financing activities is primarily attributable to 2012 activities that included (i) the sale of common stock which resulted in proceeds of $2,933,311 and (ii) the receipt of an advance against its line of credit in the amount of $1,000,000.
 
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 December 31, 2013:
 
Years ended
 
Line of
   
Notes
   
Lease Obligations
   
Minimum
 
December 31,
 
Credit
   
Payable
   
Capital
   
Operating
   
Payments
 
2014
  $ 464,000     $ 11,065     $ 12,309     $ 224,934     $ 712,308  
2015
    1,232,000       12,345       3,253       114,064       1,361,662  
2016
    2,480,000       7,851       -       -       2,487,851  
2017
    1,000,000       -       -       -       1,000,000  
    $ 5,176,000     $ 31,261     $ 15,562     $ 338,998     $ 5,561,821  
 
 
(1)
The Line of Credit, as shown on the Balance Sheet at December 31, 2013 is shown net of the debt discount of $826,797.
 
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 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);
 
39
 

 

 
 
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”).
 
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.
 
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
 
We are exposed to market risks, primarily changes in U.S. and LIBOR interest rates and 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)
 
Transactions denominated in a foreign currency give rise to a gain (loss) which is included in selling, general and administrative expenses in the consolidated statement of comprehensive income (loss).  For the years ended December 31, 2013 and 2012, transaction losses were not material.
 
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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 effect 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.
 
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GHP Horwath, P.C.

Member Crowe Horwath International

 

1670 Broadway, Suite 3000

Denver, CO 80202

+1.303.831.5000 Tel

+1.303.831.5032 Fax
www.ghphorwath.com

 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

Board of Directors and Shareholders

Roomlinx, Inc.

 

We have audited the accompanying consolidated balance sheets of Roomlinx, Inc. and its subsidiaries (“the Company”) as of December 31, 2013 and 2012, and the related statements of comprehensive loss, changes in deficit, and cash flows for the years then ended.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

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

 

As discussed in Note 17 to the consolidated financial statements, in March 2014, the Company entered into a merger agreement with a company in a related industry. Our opinion is not modified with respect to this matter.

 

 

/s/ GHP Horwath, P.C.

 

Denver, Colorado

March 31, 2014

 

 
 
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Roomlinx, Inc.
CONSOLIDATED BALANCE SHEETS
                         
   
2013
   
2012
 
 
ASSETS
 
           
Current assets:
           
Cash and cash equivalents
  $ 2,125,655     $ 3,211,182  
Accounts receivable, net
    1,241,459       1,761,503  
Leases receivable, current portion
    764,879       995,220  
Prepaid and other current assets
    87,303       115,902  
Inventory, net
    1,434,337       3,308,792  
Total current assets
    5,653,633       9,392,599  
                 
Property and equipment, net
    317,486       790,873  
Leases receivable, non-current
    816,487       1,672,245  
Total assets
  $ 6,787,606     $ 11,855,717  
                 
 
LIABILITIES AND DEFICIT
                 
                 
Current liabilities:
               
Line of credit, current portion
  $ 464,000     $ -  
Accounts payable
    3,970,034       5,079,204  
Accrued expenses and other current liabilities
    512,683       668,012  
Customer deposits
    1,295,450       1,125,248  
Notes payable and other obligations, current portion
    23,374       21,884  
Unearned income, current portion
    59,344       187,540  
Deferred revenue, current portion
    274,862       609,988  
Total current liabilities
    6,599,747       7,691,876  
                 
Deferred revenue, less current portion
    251,595       294,963  
Notes payable and other obligations, less current portion
    23,449       47,691  
Unearned income, less current portion
    103,268       198,404  
Line of credit, net of discount, less current portion
    3,885,203       4,007,177  
                 
Total liabilities
    10,863,262       12,240,111  
                 
Deficit:
               
Preferred stock - $0.20 par value, 5,000,000 shares authorized:
               
Class A - 720,000 shares authorized, issued and outstanding (liquidation preference of $144,000 at December 31, 2013 and 2012)
    144,000       144,000  
Common stock - $0.001 par value, 200,000,000 shares authorized: 6,411,413 and 6,405,413 shares issued and outstanding at December 31, 2013 and 2012, respectively
    6,411       6,405  
Additional paid-in capital
    37,460,577       36,971,369  
Accumulated deficit
    (41,713,638 )     (37,571,896 )
Accumulated other comprehensive income
    (18,976 )     7,684  
Total Roomlinx, Inc. shareholders’ deficit
    (4,121,626 )     (442,438 )
Non-controlling interest
    45,970       58,044  
Total deficit
    (4,075,656 )     (384,394 )
Total liabilities and deficit
  $ 6,787,606     $ 11,855,717  
 
The accompanying notes are an integral part of these consolidated financial statements.

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Roomlinx, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
for the years ended December 31, 2013 and 2012
                 
   
2013
   
2012
 
Revenues:
           
Hospitality:
           
Product and installation
  $ 3,556,389     $ 9,034,223  
Services
    5,030,160       3,054,638  
Residential:
               
Services
    861,994       915,054  
  Total
    9,448,543       13,003,915  
                 
Direct costs and operating expenses:
               
Direct costs (exclusive of operating expenses and depreciation shown seperately below):
               
Hospitality
    6,259,578       11,231,195  
Residential
    621,021       644,655  
Operating expenses:
               
Operations
    1,278,320       2,128,652  
Product development
    805,885       1,280,743  
Selling, general and administrative
    2,672,324       3,047,946  
Depreciation
    247,706       498,168  
Loss on asset impairment
    832,429       -  
      12,717,263       18,831,359  
Operating loss
    (3,268,720 )     (5,827,444 )
                 
Non-operating income (expense):
               
Interest expense
    (642,813 )     (601,725 )
Interest income
    180,220       287,759  
      (462,593 )     (313,966 )
                 
Net loss from continuing operations
    (3,731,313 )     (6,141,410 )
                 
Discontinued operations:
               
Loss from discontinued operations
    (422,503 )     (1,250,324 )
                 
Net loss
    (4,153,816 )     (7,391,734 )
                 
Less: net loss attributable to the non-controlling interest
    12,074       5,763  
                 
Net loss attributable to the Company
    (4,141,742 )     (7,385,971 )
                 
Other comprehensive (loss) income:
               
Currency translation (loss) income
    (26,660 )     16,486  
                 
Comprehensive loss
    (4,168,402 )     (7,369,485 )
                 
Comprehensive loss attributable to the non-controlling interest
    -       -  
                 
Comprehensive loss attributable to the Company
  $ (4,168,402 )   $ (7,369,485 )
                 
Net loss per common share:
               
Basic and diluted
  $ (0.65 )   $ (1.27 )
                 
Loss attributable to continuing operations per common share                
       Basic and diluted   $ (0.58 )   $ (1.06 )
                 
Loss attributable to discontined operations per common share                
       Basic and diluted   $ (0.07 )   $ (0.22 )
                 
Weighted average shares outstanding:
               
Basic and diluted
    6,407,484       5,809,406  

The accompanying notes are an integral part of these consolidated financial statements.
 
44
 

 

 
Roomlinx, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT
for the yearss ended December 31, 2013 and 2012
(unaudited)
 
   
Roomlinx, Inc. Shareholders
             
                                 
Accumulated
                   
   
Preferred Stock A
   
Common Stock
   
Additional
   
Other
               
Total
 
   
Number of
   
Par Value
   
Number of
   
Par Value
   
Paid - in
   
Comprehensive
   
Accumulated
   
Non-Contolling
   
Stockholders
 
   
Shares
    $0.20    
Shares
    $0.001    
Capital
   
Income (Loss)
   
(Deficit)
   
Interest
   
(Deficit) Equity
 
Balances, January 1, 2012
    720,000     $ 144,000       5,118,877     $ 5,119     $ 33,102,512     $ (8,802 )   $ (30,185,925 )   $ 63,807     $ 3,120,711  
                                                                         
Warrants issued in conjuction with draw on line of credit
 
   
 
                            350,167                               350,167  
Shares issued at $2.50 per share, net of costs
                    1,280,000       1,280       2,992,031                               2,993,311  
Cashless option exercises
                    6,536       6       (6 )                             -  
Stock based compensation
                                    526,665                               526,665  
Comprehensive income (loss):
                                                                       
Net loss
                                                    (7,385,971 )     (5,763 )     (7,391,734 )
Translation loss
                                            16,486                       16,486  
                                                                         
Balances, December 31, 2012
    720,000     $ 144,000       6,405,413     $ 6,405     $ 36,971,369     $ 7,684     $ (37,571,896 )   $ 58,044     $ (384,394 )
                                                                         
Restricted shares of common stock vested
                    6,000       6       11,994                               12,000  
Stock based compensation
                                    477,214                               477,214  
Comprehensive income (loss):
                                                                       
Net loss
                                                    (4,141,742 )     (12,074 )     (4,153,816 )
Translation loss
                                            (26,660 )                     (26,660 )
                                                                         
Balances, December 31, 2013
    720,000     $ 144,000       6,411,413     $ 6,411     $ 37,460,577     $ (18,976 )   $ (41,713,638 )   $ 45,970     $ (4,075,656 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
45
 

 

 
Roomlinx, Inc.
CONSOLIDATED CASH FLOW STATEMENTS
for the years ended December 31, 2013 and 2012
(unaudited)
 
             
   
2013
   
2012
 
Cash flows from operating activities:
           
 Net loss
  $ (4,153,816 )   $ (7,391,734 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:
         
 Depreciation
    247,706       498,168  
 Amortization of debt discount
    342,026       332,121  
 Stock-based compensation
    477,214       526,665  
 Compensation cost related to restricted stock issuances
    16,077       -  
 Settlement of royalty payable
    -       (179,834 )
 Provision for uncollectable accounts and leases receivable
    (48,000 )     352,157  
 Reserve for inventory obsolescence
    -       30,000  
 Asset impairment
    832,429       -  
 Loss on discontinued operations
    422,503       1,250,324  
 Change in operating assets and liabilities:
            -  
 Accounts receivable
    590,016       (1,075,299 )
 Prepaid and other current assets
    28,599       76,319  
 Inventory
    995,345       (2,240,883 )
 Accounts payable and other liabilities
    (1,264,499 )     4,832,326  
 Customer deposits
    166,125       1,125,248  
 Unearned income
    (223,332 )     (222,495 )
 Deferred revenue
    (378,494 )     293,379  
 Total adjustments
    2,203,715       5,598,196  
 Net cash used in operating activities:
    (1,950,101 )     (1,793,538 )
                 
 Cash flows from investing activities:
               
 Lease financing provided to customers
    -       (142,879 )
 Payments received on leases receivable
    923,861       972,627  
 Purchase of property and equipment
    (16,540 )     (201,480 )
 Net cash provided by investing activities:
    907,321       628,268  
                 
 Cash flows from financing activities:
               
 Proceeds from sale of common stock, net
    -       2,993,311  
 Proceeds from the line of credit
    -       1,000,000  
 Proceeds from notes payable
    -       45,000  
 Payments on capital lease
    (11,499 )     (13,280 )
 Payments on notes payable
    (11,253 )     (61,526 )
 Net cash (used in) provided by financing activities
    (22,752 )     3,963,505  
                 
 Effects of foreign currency translation
    (19,995 )     51,719  
                 
 Net (decrease) increase in cash and equivalents
    (1,085,527 )     2,849,954  
 Cash and equivalents at beginning of period
    3,211,182       361,228  
 Cash and equivalents at end of period
  $ 2,125,655     $ 3,211,182  
                 
 Supplemental cash flow information:
               
 Cash paid for interest
  $ 285,454     $ 264,900  
                 
 Non-cash investing and financing activities:
               
 Restricted stock vested
  $ 12,000     $ -  
 Assets acquired under capital lease
  $ -     $ 34,617  
 Warants isssed in connection with line of credit
  $ -     $ 350,167  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
46
 

 

 
Roomlinx, Inc.
Notes to Consolidated Financial Statements
December 31, 2013 and 2012
 
1.     Organization and Significant Accounting Policies
 
Description of Business:    Roomlinx, Inc. (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 video 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. The Company may utilize third party contractors to install such hardware and software.
 
Basis of Consolidation:  The consolidated financial statements include Roomlinx, Inc. and its wholly-owned subsidiaries, Canadian Communications LLC, Cardinal Connect, LLC, Cardinal Broadband, LLC, Cardinal Hospitality, Ltd., and Arista Communications, LLC, a 50% subsidiary, controlled by the Company.  Canadian Communications and Cardinal Connect, LLC, are non-operating entities.  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
Discontinued Operations:    During the year ended December 31, 2013, the Company terminated all hotel contracts serviced by Cardinal Hospitality, Ltd. (see note 10) meeting the definition under applicable accounting standards of a discontinued operation.  All prior periods have been reclassified to present these operations as discontinued.  Financial information in the consolidated financial statements and related notes have also been revised to reflect the results of continuing operations for all periods presented.
 
Reclassification:  Certain amounts in the prior period financial statements have been reclassified to conform to the current year presentation.
 
Going Concern and Management Plans:    The Company has experienced recurring losses and negative cash flows from operations.  At December 31, 2013, the Company had approximate balances of cash and cash equivalents of $2,125,000, working capital deficit of $964,000, total deficit of $4,076,000 and accumulated deficit of $41,714,000.  To date the Company has in large part relied on debt and equity financing to fund its shortfall in cash generated from operations.  As of December 31, 2013, the Company has available approximately $19,800,000 under its line of credit, however, as described below, any borrowings under the line of credit could be limited.
 
As described in Note 7, on May 4, 2013, the Company executed a Fourth Amendment to the Revolving Credit, Security and Warrant Purchase Agreement previously entered into by them on June 5, 2009 (the “Original Agreement”).  Pursuant to the Amendment, the Original Agreement has been amended to provide that the making of any and all Revolving Loans (as defined in the Original Agreement) shall be at the sole and absolute discretion of Cenfin.  Accordingly, the Company’s ability to borrow under the line of credit is at the discretion of the lender, and there are no assurances that the lender will permit the Company to borrow under the line of credit.  Management is closely monitoring the cash balances, cash needs and expense levels and has implemented a cost reduction plan. In addition, in March 2014, the Company entered into a merger agreement with a company in a similar industry (see note 17).  Accordingly, the Company’s cash balance has remained relatively constant through the six months ended December 31, 2013.  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.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might result should the Company be unable to continue as a going concern.
 
47
 

 

 
Use of Estimates:    The preparation of the Company’s consolidated financial statements in conformity with generally accepted accounting principles requires the Company’s management to make estimates and assumptions that affect the amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Fair Value Measurements:    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 December 31, 2013 and 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.
 
Cash and cash equivalents:  The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. From time to time, the Company’s cash account balances exceed the balances as covered by the Federal Deposit Insurance System. The Company has never suffered a loss due to such excess balances.
 
Accounts Receivable:    Accounts receivables are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Accounts receivable are stated at the amount billed to the customer. Accounts receivable in excess of 30 days old are considered delinquent.  Outstanding customer invoices are periodically assessed for collectability. The assessment and related estimate are based on current credit-worthiness and payment history.  As of December 31, 2013 and 2012, the Company recorded an allowance in the amount of $181,000 and $229,000, respectively.
 
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 generally maintains only the inventory necessary for contemplated installations.  Work in progress represents the cost of equipment and third party installation related to installations which were not yet completed.
 
The Company performs an analysis of slow-moving or obsolete inventory periodically and any necessary valuation reserves, which could potentially be significant, are included in the period in which the evaluations are completed.  As of December 31, 2013 and 2012, the inventory obsolescence reserve of $120,000 was mainly related to raw materials and results in a new cost basis for accounting purposes.
 
Leases Receivable:    Leases receivable represent 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 equal to the gross lease payments and unearned income representing the implicit interest in these lease payments.  Unearned income is amortized over the life of the lease to interest income on a monthly basis.  The carrying amount of leases receivable are reduced by a valuation allowance that reflects the Company’s best estimate of the amounts that may not be collected. This estimate is based on an assessment of current creditworthiness and payment history.  As of December 31, 2012 an allowance was recorded in the amount of $135,000.  No such allowance was recorded as of December 31, 2013.
 
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Property and Equipment:    Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, generally five years for leasehold improvements, hospitality and residential equipment, and three years for computer related assets.
 
Long-Lived Assets:  The Company reviews the carrying value of long-lived assets, such as property and equipment, whenever events or circumstances indicate the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized to reduce the carrying value of the asset to its estimated fair value.
 
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 WiFi 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.
 
Installations and service arrangements are contractually predetermined and such contractual arrangements may provide for multiple deliverables, revenue is recognized in accordance with ASC Topic 650, Multiple Deliverable Revenue.  The application of ASC Topic 650 may result in the deferral of revenue recognition for installations across the service period of the contract and the re-allocation and/or deferral of revenue recognition across various service arrangements.  Below is a summary of such application of the revenue recognition policy 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, we determine the Relative Fair Value of each Element 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.
 
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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.
 
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.
 
For the years ended December 31, 2013 and 2012, the Company recorded $3,556,389 and $9,034,223 of product and installation revenue, respectively.
 
Hospitality Service, Content and Usage Revenues
 
The Company provides ongoing 24x7 support to both its hotel customers and their guests, content and maintenance as applicable to those products purchased, installed and serviced under contract.  Generally, 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
 
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 as a percent 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.
 
Concentrations
 
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 December 31, 2013 and 2012, Hyatt Corporation-controlled properties represented 30% and 56%, respectively of accounts receivable, and other Hyatt properties in the aggregate represented 36% and 20%, respectively, of accounts receivable.
 
Revenue:  For the year ended December 31, 2013 and 2012, Hyatt Corporation-controlled properties contributed 39% and 48%, respectively, and other Hyatt properties in the aggregate contributed 39% and 27%, respectively, of Roomlinx’s US Hospitality revenue. 
 
Stock Based Compensation:  Roomlinx recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. Stock option compensation expense is recognized over the period during which an employee is required to provide service in exchange for the award (generally the vesting period). The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option pricing model.
 
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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 December 31, 2013 and 2012, 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.
 
Advertising Costs:    Advertising costs are expensed as incurred.  During the years ended December 31, 2013 and 2012, advertising costs were $39,308 and $78,822, respectively.
 
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 2,423,053 and 2,628,874 as of December 31, 2013 and 2012, respectively) would be to decrease the net loss per share.
 
Income Taxes:    The Company accounts for income taxes under the liability method in accordance with ASC 740, “Income Taxes”.  Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities that will result in taxable or deductible amounts in future years.  Under this method, deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded when the ultimate realization of a deferred tax asset is considered to be unlikely.
 
The Company uses a two-step process to evaluate a tax position. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
 
Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The Company reports tax-related interest and penalties as a component of income tax expense.
 
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Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of December 31, 2013 and 2012 is not material to its results of operations, financial condition, or cash flows. The Company also believes that the total amount of unrecognized tax benefits as of December 31, 2013 and 2012, if recognized, would not have a material effect on its effective tax rate. The Company further believes that there are no tax positions for which it is reasonably possible, based on current tax law and policy that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition or cash flows.
 
The amount of income taxes the Company pays is subject to ongoing examinations by federal and state tax authorities. To date, there have been no reviews performed by federal or state tax authorities on any of the Company’s previously filed returns. The Company’s 2007 and later tax returns are still subject to examination.
 
Recently Issued and Adopted Accounting Standards: Management has evaluated recently issued pronouncements of various authoritative accounting organizations, primarily the Financial Accounting Standards Board (“FASB”), the SEC, and the Emerging Issues Task Force (“EITF”) to determine their applicability and does not believe that any of these pronouncements will have a significant impact on the Company’s financial statements.
 
2.      Leases Receivable
 
As of December 31, 2013, the Company had leases receivable of $1,581,366 compared to $2,802,465, recorded net of an allowance for uncollectable leases receivable of $135,000, at December 31, 2012.  During the years ended December 31, 2013 and 2012, the Company received payments of $923,861 and $972,627 respectively.  The Company did not enter into any new leases in 2013 versus the Company entered into one lease receivable in the amount of $142,879 in 2012.   These leases have initial terms of 60 months and an average interest rate of 9.5%.  In addition, during the years ended December 31, 2013 and 2012, the Company recorded a loss of $73,262 and $60,211, respectively, related to the early termination of lease receivable contracts.  These amounts are net of the return of equipment to inventory and are included in direct costs in the consolidated statements of comprehensive loss.
 
Future minimum receipts on leases receivable are as follows:
 
Years Ended
December 31,
 
Minimum Receipts
 
2014
  $ 764,878  
2015
    546,973  
2016
    250,464  
2017
    19,051  
    $ 1,581,366  
 
3.    Inventory
 
Inventory balances as of December 31, 2013 and 2012 are as follows:
 
   
2013
   
2012
 
Raw materials
  $ 1,399,444     $ 2,546,441  
Work in process
    154,893       882,351  
      1,554,337       3,428,792  
Reserve  for obsolescence
    (120,000 )     (120,000 )
Inventory, net
  $ 1,434,337     $ 3,308,792  
 
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4.      Property and Equipment
 
At December 31, 2013 and 2012, property and equipment consisted of the following:
 
   
2013
   
2012
 
Leasehold improvements
  $ 17,195     $ 17,195  
Hospitality property equipment
    479,387       745,117  
Residential property equipment
    351,727       351,727  
Computers and office equipment
    601,171       590,566  
Software
    141,807       141,807  
      1,591,287       1,846,412  
Accumulated depreciation
    (1,273,801 )     (1,055,539 )
    $ 317,486     $ 790,873  
 
Depreciation expense for the years ended December 31, 2013 and 2012 was $247,706 and $498,168, respectively.
 
As of December 31, 2013 and 2012, the total assets purchased under capital lease were $64,617 with accumulated amortization of $50,193 and $38,654, respectively.  Depreciation of assets under capital lease for the years ended December 31, 2013 and 2012 was $11,539 and $10,905, respectively.
 
5.    Asset Impairment
 
During 2013, the Company maintained inventories to support certain executed Hyatt hotel contracts and SOWs (Statements of Work).
 
The receipt of SOWs plus their respective deposits for the installation of the iTV product in approximately 4,600 rooms resulted in the Company executing purchased orders to acquire appropriate levels of inventories during the year ended December 31, 2012.  Thereafter, the parties agreed to a suspension of iTV installations.  During the three months ended September 30, 2013, the Company successfully completed the installation of approximately 1,000 of these rooms, which the Company believed could result in Hyatt’s release of those other properties with SOWs for its iTV product; however, there has been no further action by Hyatt. In consideration of this and other factors, as of December 31, 2013, the Company recorded a loss on asset impairment of $832,429 related to inventory. The charge is included in the loss on asset impairment on the consolidated comprehensive statement of loss for the year ended December 31, 2013.
 
In assessing impairment for long-lived assets we followed the provisions of ASC 360.  We performed our testing of the asset group and our assessment included contractual terms and identifiable cash flows associated with providing on-going service.  In performing the test, we determined that the total of the expected future undiscounted cash flows was less than the carrying value of the asset group. Therefore an impairment charge was required.
 
6.     Notes Payable
 
As of December 31, 2013 and 2012, the Company had the following outstanding notes payable:
 
   
2013
   
2012
 
Note payable to the FCC; monthly principal and interest payment of $1,188; interest at 11% per annum; and matures in August 2016.
  $ 31,261     $ 41,178  
                 
Note payable, assumed as part of the acquisition of Canadian Communications on October 1, 2010, monthly principal and interest payment of $537; interest at 11% per annum; and matured in March 2013.
    -       1,583  
      31,261       42,761  
Less: current portion
    (11,065 )     (10,631 )
    $ 20,196     $ 32,130  
 
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Future minimum payments under notes payable are as follows:
 
Years ended
December 31,
 
Minimum Payments
 
2014
  $ 11,065  
2015
    12,345  
2016
    7,851  
    $ 31,261  
 
7.     Line of Credit
 
On June 5, 2009 we entered into a Revolving Credit, Security and Warrant Purchase Agreement (the “Credit Agreement”) with Cenfin LLC, an entity principally owned by significant shareholders of the Company.  The Credit Agreement permits us to borrow up to $25 million until June 5, 2017.  On May 3, 2013, the Company and Cenfin executed a fourth amendment to the Credit Agreement which provided Cenfin sole and absolute discretion related to funding any advance requested by Roomlinx.  Advances must be repaid at the earlier of 5 years from the date of borrowing or at the expiration of the Credit Agreement. The principal balance may be repaid at any time without penalty.  Borrowings accrue interest, payable quarterly on the unpaid principal and interest at a rate equal to the Federal Funds Rate at July 15 of each year plus 5% (approximately 5.09% at December 31, 2013).  The Credit Agreement is collateralized by substantially all of our assets, and requires we maintain a total outstanding indebtedness to total assets ratio of less than 3 to 1.
 
Amounts outstanding under the Credit Agreement were $5,176,000 at December 31, 2013 and 2012.  These advances will be repaid at various dates between 2014 and 2017.  A total of $19,824,000 is available for future borrowings. Interest expense, exclusive of accretion of the debt discount of $342,026 and $332,121, of $257,566 and $260,221 was recorded for the years ended December 31, 2013 and 2012, respectively.
 
The Credit Agreement requires that, in conjunction with each advance, we issue Cenfin 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 December 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.
 
Using the Black-Scholes pricing model adjusted for a blockage discount, warrants issued during the year ended December 31, 2012 were valued at approximately $350,000 (see Note 12).   The fair value of warrants issued since inception of the Credit Agreement is approximately $2,760,000 which is being amortized to earnings as additional interest expense over the term of the related indebtedness, accordingly additional interest expense of $342,026 and $332,121 was recorded for the years ended December 31, 2013 and 2012, respectively.  The unamortized balance of the debt discount was $826,797 and $1,168,823 at December 31, 2013 and 2012, respectively.  Borrowings outstanding are reported net of the debt discount associated with these borrowings.
 
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Future minimum payments under the line of credit are as follows:
 
Years ended
December 31,
 
Minimum Receipts
 
2014
  $ 464,000  
2015
    1,232,000  
2016
    2,480,000  
2017
    1,000,000  
    $ 5,176,000  
 
As noted in management’s plans, the Company has entered into a merger agreement. Upon execution of the merger, the Company is to make a $750,000 accelerated payment to the debt holder. In addition, all payments beginning in December 2014 will be pro-rated based on the accelerated payment.
 
8.    Settlement of Royalty Payable
 
In November 2011, the Company entered into a revised license agreement for studio films. Under the terms of the agreement, the Company was required to pay $105,000 in four equal quarterly payments to settle all previous amounts due to a studio.  In August 2012, the Company made the final payment resulting in a gain on the settlement of royalty payable in the amount of $179,834, such amount representing the excess of the accrued liability less the agreed upon settlement of $105,000. The settlement of royalty payable is included in other income on the consolidated statement of comprehensive loss for the year ended December 31, 2012.
 
9.     Commitments and Contingencies
 
Operating Leases:     On April 10, 2012 the Company executed a lease agreement for office space with an effective date of May 1, 2012.  Terms of the lease established a base rent per square foot plus operating expenses throughout the term of the lease which expires September 30, 2015, and which includes the lessor waiving several months of base rent and pre-defined annual escalation of the base rent per square foot.  Effective November 29, 2013, the parties executed a First Amendment wherein the landlord granted the Company a deferred rent period (commencing on July 1, 2013 and ending on July 31, 2014) reducing the base and additional monthly rent to $7,000, thereby deferring approximately $13,700 per month or $178,100, with such amount payable at the end of the deferred rent period, pursuant to which at December 31, 2013 approximately $82,200 was recorded in accounts payable in the accompanying consolidated balance sheet.  The Company had a deferred rent liability (exclusive of that recorded in accounts payable) of $46,820 and $55,025 included in other liabilities (current and non-current) as of December 31, 2013 and 2012, respectively.  The Company’s future minimum lease payments are as follows:  $148,585 and $114,064 for the years ending December 31, 2014 and 2015, respectively.
 
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 September 2015 with future minimum lease payments as follows:  $12,309 and $3,253 for the years ended December 31, 2014 and 2015, respectively, less imputed interest of $950.
 
10.     Discontinued Operations
 
In September 2012, we determined not to continue investing in its proprietary traditional VOD system and to move to a third-party video on demand (“VOD”) system, which resulted in the Company recording a loss on asset impairment approximating $1,112,000 (see below). In October 2013, the Company performed an analysis of VOD sales revenue at Cardinal Hospitality Ltd. (“CHL”), its wholly-owned Canadian subsidiary servicing the hospitality industry.  The result was that CHL had realized a decline in sales revenue in hotels on a year over year basis, which was attributed to guest preferences such as alternative access to content available via their laptops, our decision in 2012 to not invest in upgrading old technology and the hotels not willing to purchase newer technology.  Further, the Company determined CHL did not provide positive cash flow and therefore at the end of November, the Company determined to issue a notice to all CHL customers that it would no longer provide support as of December 20, 2013.
 
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CHL properties include hotels in Canada and the Caribbean providing VOD.  Under ASC 205-20-45-1, the elimination of operations result in the presentation of a loss from discontinued operations in the consolidated statements of comprehensive loss for the years December 31, 2013 and 2012.
 
During the three months ended September 30, 2012, the Company determined that it would no longer utilize its proprietary VOD system in future VOD service installations.  Rather than invest in upgrading or refreshing its proprietary technology, the Company determined it would purchase a third-party platform for all future VOD installations.  In addition, it concluded that its primary business strategy and technology development efforts will be focused on its proprietary interactive TV platform.  Due to the economy class nature of the CHL properties, management determined that the interactive TV platform is not appropriate for deployment at those properties.  Consequently, while services provided to the CHL properties will continue, no significant new business development will be pursued.
 
As a result of this strategic change we performed an evaluation as of September 30, 2012 of our long-lived assets associated with the CHL properties consisting primarily of property, plant, and equipment and property receivables.  In assessing impairment for long-lived assets we followed the provisions of ASC 360.  We performed our testing of the asset group at the individual property level, and our assessment included contractual terms and identifiable cash flows associated with providing on-going service.
 
In performing the test, we determined that the total of the expected future undiscounted cash flows directly related to services provided at the CHL properties was less than the carrying value of the asset group. Therefore, an impairment charge was required.  An impairment charge of approximately $920,000 and $47,000 related to property, plant and equipment and property receivables, respectively, represented the difference between the fair values of the asset group and its carrying values and is reflected as loss on asset impairment in the consolidated statement of comprehensive income (loss) for the year ended December 31, 2012.  The impairment charges resulted from the excess of the carrying value of the asset group over the fair value (calculated based on the discounted expected future cash flows associated with VOD and free to guest services during the underlying contractual period).
 
In addition, we performed an analysis of the value of inventory held by CHL to determine the impact of the change in business strategy, as of September 30, 2012.  We determined that a write off of approximately $146,000 was required to reflect the obsolete nature of the inventory associated with VOD service.  The charge is included in the loss from discontinued operations (see Note 10) in the consolidated statement of comprehensive loss for the year ended December 31, 2012.
 
Below is the statement of comprehensive loss related to the asset group serviced by CHL for the years ended December 31, 2013 and 2012.
 
   
2013
   
2012
 
             
Hospitality services revenue
  $ 356,097     $ 611,950  
                 
Direct costs (exclusive of operating expenses and depreciation shown separately below):
    355,019       761,391  
Selling, general and administrative
    27,108       15,800  
Depreciation
    110,688       152,447  
Loss on asset impairment
    -       1,112,470  
      492,815       2,042,108  
                 
Operating loss
    (136,718 )     (1,430,158 )
                 
Non-operating (expense) income forgiveness of debt
    -       179,834  
                 
Loss from operations
    (136,718 )     (1,250,324 )