RMG Networks Holding Corp

On July 16, 2018, the Company paid $62,750 of interest owed to SCG Digital Finance, LLC under the Subordinated Loan Agreement pursuant to which the Bridge Loan was made for interest due June 30, 2018. The Company inadvertently failed to pay the interest payment when it came due on June 30, 2018 and it paid the default interest premium of $2,015 on July 17, 2018. On July 23, 2018, the Company received a letter from the Subordinated Lender, notifying the Company that it is in default under the Subordinated Loan Agreement due to the Company’s failure to timely pay cash interest pursuant to the terms of the Subordinated Loan Agreement. In the letter, the Subordinated Lender also states that the breaches of the Merger Agreement alleged by Parent in its letters dated June 21, 2018, July 10, 2018 and July 20, 2018 constitute breaches of the Subordinated Loan Agreement. In addition, the Subordinated Lender states that it is not exercising any remedies at this time but reserves its rights and remedies. Additionally, the default under the Subordinated Loan Agreement caused a cross default under the Loan Agreement as a result of the Company’s failure to timely pay cash interest on the Subordinated Loan Agreement due on June 30, 2018. As of August 14, 2018, there was no arrearage of interest due to the Subordinated Lender by the Company.

At June 30, 2018, the Company had $1.1 million in borrowings and $2.4 million in unused availability under the Revolving Facility and $2.0 million in borrowings under the Bridge Loan. On July 16, 2018, the Company paid interest owed to the Subordinated Lender under the Subordinated Loan Agreement for interest due June 30, 2018. The Company inadvertently failed to pay the interest payment when it came due on June 30, 2018 and it paid the default interest premium on July 17, 2018. On July 23, 2018, the Subordinated Lender delivered a Notice of Default to the Company for failure to make a payment of interest due within the timeframe specified in the Subordinated Loan Agreement. The Subordinated Loan Agreement permits the Subordinated Lender to exercise certain remedies in the event of such a default, including demanding immediate repayment of all outstanding principal and interest. In addition, the Subordinated Lender states that it is not exercising any remedies with respect to the Default at this time but reserves its rights and remedies. The Default has caused a cross-default under the Restated Loan Agreement, which has caused the Company to not be in compliance with all covenants thereunder as referenced above.

On April 2, 2018, in connection with the Merger Agreement, we obtained the Bridge Loan from the Subordinated Lender in an aggregate principal amount of $2 million. The Bridge Loan was fully drawn as of the closing of the facility and is secured by a second lien on all of the Borrowers’ assets. The Bridge Loan accrues interest at a rate equal to the prime rate plus 8% plus 2.0% paid-in-kind and imposes a number of affirmative and negative covenants on the Borrowers. If the Bridge Loan is prepaid, prior to the stated maturity date thereof, the Borrowers are obligated to pay a prepayment premium equal to the interest the loans would have accrued if they had remained outstanding through maturity. As noted above the Subordinated Lender has given notice to us that we have breached the interest payment terms of the Subordinated Loan Agreement, thus causing the Default.  The Subordinated Lender currently has the right to accelerate the repayment date. In addition, if we should breach certain other of those covenants or otherwise additionally default on the Bridge Loan, or if the Merger Agreement is terminated other than for a material breach of Parent or in the event that the Company enters into a definitive agreement with respect to an alternative transaction that constitutes a Superior Proposal pursuant to the Merger Agreement, the Subordinated Lender would have additional rights to accelerate the repayment date. If we do not have sufficient cash to repay the Bridge Loan at that time, we would be forced to refinance the Bridge Loan. We cannot assure you that such refinancing would be available to the Company on favorable terms or at all. In the event that we are unable to refinance the Bridge Loan, subject to certain restrictions in the subordination agreement among Silicon Valley Bank, our senior lender, the Subordinated Lender and the Borrower, the Subordinated Lender is entitled to take remedies against the Company, including foreclosing on the collateral securing the Bridge Loan. In addition, the Bank has the right to exercise its remedies under the Restated Loan Agreement, which entitles the Bank to cease lending money to us and to accelerate the repayment date of our obligations to the Bank. If any such events occur, the Company may be forced to file for bankruptcy protection, which would materially adversely affect the value of our stockholders’ investments in us.

In addition, the rate of data privacy, security and consumer protection law-making is accelerating globally, and the interpretation and application of consumer protection and data privacy and security laws in the United States, Europe and elsewhere are often uncertain, contradictory and in flux.  For example, the European Union has adopted new data privacy regulations, the General Data Protection Regulation, or GDPR, which became effective in 2016 and became enforceable in May 2018. These regulations comprehensively reform the prior data protection rules of the European Union in order to protect the use and disclosure of personal information, and are more stringent and apply to a broader range of personal data than those in the United States. The GDPR is applicable to U.S.-based companies, such as ours, that do business or offer services in the European Union. Our current processes and practices do not comply with the GDPR, and we will need to expend considerable time and resources, including management attention, to revise our practices and bring them into compliance.  The GDPR and other changes in laws or regulations associated with the enhanced protection of personal and other types of data could greatly increase the size of potential fines related to data protection and our cost of providing our products and services and could result in changes to our business practices or even prevent us from offering certain products or services in jurisdictions in which we operate. It is possible that these laws may be interpreted or applied in a manner that is adverse to us or otherwise inconsistent with our practices, which could result in litigation, regulatory investigations and potential legal liability or require us to change our practice in a manner adverse to our business.  As a result, our reputation may be harmed, we could incur substantial costs, and we could lose both customers and revenue. 

On August 9, 2018, RMG Networks Holdings Corporation (the “Company”) received notice from Nasdaq that we no longer comply with Nasdaq Listing Rules 5605(b)(1), 5605(c)(2) and 5605(d)(2) due to the resignations from our board of directors effective August 2, 2018, of Jeffrey Hayzlett, Alan Swimmer, and Jonathan Trutter which resulted in us having only one independent director and no members remaining on its audit and compensation committees.

Nasdaq advised us that, although we would normally have 45 calendar days to submit a plan to regain compliance, Nasdaq has determined to apply more stringent criteria based upon its review of our recent disclosures, particularly surrounding the simultaneous resignations of three of our independent directors. We must submit a plan on or before August 23, 2018. Nasdaq advised us that, if our plan is accepted, Nasdaq can grant an extension of time to evidence compliance of up to 180 calendar days from the date of the notice letter. The Company is considering its options with respect to the actions it will take in response to Nasdaq’s notice.