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RIMG > SEC Filings for RIMG > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for RIMAGE CORP


9-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table sets forth, for the periods indicated, selected items from the Company's condensed consolidated statements of operations.
                                        Percentage (%)       Percentage (%)
                                         of Revenues            Inc/(Dec)
                                      Three Months Ended         Between
                                          March 31,              Periods
                                       2013         2012      2013 vs. 2012
Revenues                             100.0  %     100.0  %          0.2  %
Cost of revenues                     (52.6 )      (50.8 )           3.8
Gross profit                          47.4         49.2            (3.5 )
Operating expenses:
Research and development              17.2         16.0             8.1
Selling, general and administrative   49.8         47.3             5.7
Amortization of intangibles            0.8          1.3           (36.4 )
Operating loss                       (20.5 )      (15.3 )          34.3
Other expense, net                    (0.5 )       (0.3 )          42.6
Loss before income taxes             (21.0 )      (15.6 )          34.5
Income tax benefit                    (0.3 )       (6.5 )         (95.8 )
Net loss                             (20.7 )       (9.1 )         128.3
Noncontrolling interest                0.3          0.3            (3.1 )
Net loss attributable to Rimage      (20.4 )       (8.8 )         133.3

Overview
Rimage helps businesses deliver digital content directly and securely to their customers, employees and partners. The Company organizes and manages its business in two reportable segments based on the nature of its products and markets, consisting of disc publishing and enterprise content distribution software (previously referred to as online publishing). Rimage's disc publishing segment supplies customers in North America, Europe and Asia with industry-leading solutions that archive, distribute and protect content on CDs, DVDs and Blu-ray Discs. The Company's enterprise content distribution software segment enables online distribution of content through two delivery systems, 1) live and on-demand streaming video through its enterprise video communications product line, acquired as part of the acquisition of Qumu, and 2) secure push-based content delivery to tablets, smart phones and personal computers through its Signal online content delivery solution, introduced in the second quarter of 2012.
Rimage distributes its disc publishing systems from its operations in the United States, Germany, Japan and China. The Company also distributes related consumables for use with its disc publishing systems, consisting of media kits, ribbons, ink cartridges and blank CD-R, DVD-R and Blu-ray media. These systems allow customers to distribute digital content in markets and applications such as medical imaging; business services, including banking and finance; entertainment content workflows; manufacturing and government law enforcement, including surveillance and evidence management. As Rimage's sales within North America and Europe have averaged nearly 90% of total sales over the past three years, the strength of the economies in these regions plays an important role in determining the success of Rimage.
On October 10, 2011, the Company acquired 100% of the capital stock of Qumu by merger. Based in San Bruno, California, Qumu is a leading supplier of enterprise video communication solutions and social enterprise applications for business. As a result of the acquisition, Qumu is a wholly-owned subsidiary of the Company.
The Company introduced its Signal secure online content delivery solution in the second quarter of 2012, and generated initial revenues in the third quarter of 2012. Signal pushes content directly to tablets, smart phones and personal computers. Signal is now part of the Qumu product family. Qumu initiated development in 2012 to integrate Signal content distribution functionalities with the Qumu solution. The Company will also allocate sales resources to target stand-alone sales of Signal to selected vertical markets, including the media and entertainment sector.
Through the acquisition of Qumu, the Company's enterprise video communications solutions, included in the enterprise content distribution software segment, are deployed primarily through the sale of software licenses, software on a server appliance and


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software-enabled devices. Software maintenance contracts and professional services are also sold with these solutions. The Signal solution, also included in the enterprise content distribution software segment, is deployed through sale of a software license or software on a server appliance or through a cloud based Software-as-a-Service (SaaS) platform, depending on customer preference. The Company's disc publishing segment earns revenues through the sale of equipment, consumables and parts as well as maintenance contracts, repair and installation services. Product revenues on the accompanying Condensed Consolidated Statements of Operations include the Company's sale of equipment, appliances, software-enabled devices, consumables, parts and software licenses. Service revenues on the Condensed Consolidated Statements of Operations include revenues from maintenance contracts, repair, installation, software and maintenance subscription arrangements and professional services. Rimage has no long-term debt and does not require significant capital investment as all fabrication of its products is outsourced to vendors. Results of Operations
Revenues.
The table below describes Rimage's revenues by segment and product category (in thousands):

                                                                                                    Inc (Dec)
                                                       Three Months Ended March 31,                  Between
                                                    2013                    2012                     Periods
                                                     $            %          $          %          $          %
Disc publishing
Disc publishing equipment:
Producer                                       $    2,155         11 %   $  2,779       14 %   $  (624 )    -22  %
Professional                                        1,293          7 %      3,208       16 %    (1,915 )    -60  %
Desktop                                               404          2 %        529        3 %      (125 )    -24  %
Total disc publishing equipment                     3,852         20 %      6,516       33 %    (2,664 )    -41  %
Recurring:
Consumables and parts                               8,157         42 %      8,551       44 %      (394 )     -5  %
Service                                             3,138         16 %      3,017       16 %       121        4  %
Total recurring                                    11,295         58 %     11,568       59 %      (273 )     -2  %
Total disc publishing                              15,147         78 %     18,084       93 %    (2,937 )    -16  %
Enterprise content distribution software
Software licenses and appliances                    2,060         11 %        332        2 %     1,728      520  %
Service                                             2,289         12 %      1,045        5 %     1,244      119  %
Total enterprise content distribution software      4,349         22 %      1,377        7 %     2,972      216  %
Total revenues                                 $   19,496        100 %   $ 19,461      100 %   $    35        -  %

Total revenues for the three months ended March 31, 2013 were $19.5 million, consistent with revenues in the same prior-year period. The enterprise content distribution software segment generated revenues of $4.3 million in the first quarter of 2013, an increase of approximately $3.0 million from the first quarter in 2012. Offsetting this increase was a 16%, or $2.9 million, decline in revenues from the disc publishing segment to $15.1 million. Consolidated product revenues decreased $1.3 million from the prior year's first quarter, while consolidated service revenues increased $1.4 million. The decline in product revenues was driven by a $3.0 million reduction in sales of disc publishing products, partially offset by growth of $1.7 million in enterprise content distribution software product sales. The rise in service revenues primarily reflects growth in subscription and maintenance revenues from the enterprise content distribution software segment. International sales, inclusive of the impact of currency changes, decreased 7% during the three months ended March 31, 2013, and comprised 35% of total revenues for the three months ended March 31, 2013, compared to 38% of total revenues for the same period in 2012. In the aggregate, currency fluctuations decreased consolidated revenues for the three months ended March 31, 2013 by $0.2 million, or less than 1% relative to the same period in 2012.
Disc Publishing. The reduction in disc publishing revenues reflects declines of $2.6 million and $0.4 million in equipment revenues and consumables and parts revenues, respectively, partially offset by a $0.1 million increase in service revenues. The decrease in disc publishing equipment revenues was impacted by a continuation of an expected transition of customers' purchases over time from physical distribution of content on discs to online forms of distribution. For the first quarter of 2013, the disc publishing segment experienced sales declines primarily in the U.S. and also internationally. Equipment sales in the U.S. were negatively impacted by a large refresh sale in the U.S. retail market in the first quarter of 2012 which did not reoccur in the current period. Additionally, some of the Company's government and commercial customers continued to face funding challenges, negatively impacting sales in the current period. Sales to the Company's European channel partners were negatively impacted by continued economic challenges affecting European markets and increased competition. The decline in consumable sales in the current period


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was primarily due to decreased usage of consumable products by the Company's retail customers and other segments of the Company's customer base. Enterprise Content Distribution Software. The $3.0 million increase in revenues from the enterprise content distribution software segment reflects the continuation of positive sales momentum established in the second half of 2012. The increase in revenues consisted of growth of $1.7 million in software and appliance licenses and $1.2 million in services, comprised of software maintenance contracts, subscription licenses and professional services. The enterprise content distribution software segment ended the first quarter 2013 with a contracted commitment backlog aggregating $12.4 million. The Company defines contracted commitments as the dollar value of signed customer purchase commitments.
Future consolidated revenues will be dependent upon many factors, including the rate of growth of the Company's enterprise content distribution software segment, whether Qumu structures its software license arrangements with customers as term or perpetual licenses, which impacts the timing of revenue recognition, the rate of technology substitution for disc publishing products and the rate of associated decline in revenue as a result of technology substitution, the Company's ability to successfully commercialize its Signal online content delivery solution as an integrated enhancement to the distribution capabilities of the Qumu product line and as a stand-alone solution, the success of the Company's deployment of a complete disc publishing solution for medical imaging in hospitals in China and the rate of adoption of the Company's solutions-based products in targeted vertical markets. Other factors that will influence future consolidated revenues include the timing of new product introductions, the rate of adoption of other new applications for the Company's products in its targeted markets, the performance of the Company's channel partners, the timing of customer orders and related product deliveries, the Company's ability to maintain continuous supply of its products and components, the impact of changes in economic conditions and the impact of foreign currency exchange rate fluctuations.
Gross Profit. Gross profit as a percentage of total revenues was 47.4% for the three months ended March 31, 2013, compared to 49.2% for the same period in 2012. Gross profit as a percentage of revenues for the Company's disc publishing and enterprise content distribution software segments in the first quarter of 2013 was 43.7% and 60.1%, respectively, compared to 50.5% and 31.8% for the respective segments in the prior-year period. The enterprise content distribution software margins for the three months ended March 31, 2013 and 2012 are inclusive of the impact of approximately $0.1 million and $0.2 million, respectively, in amortization expense associated with intangible assets acquired as a result of the Qumu acquisition. Cost of revenues in 2013 are expected to include approximately $0.6 million of amortization expense for purchased intangibles.
The decline in consolidated gross profit as a percentage of total revenues for the current period was primarily impacted by a lower volume and concentration of disc publishing equipment sales, which generally carry higher margins than other disc publishing products and services. Further, a reduced volume of Producer equipment sales in the first quarter of 2013 led to lower production levels and a resulting underabsorption of fixed manufacturing costs, negatively impacting gross profit as a percentage of revenues. Inclusive of the impact of amortization expense, the enterprise content distribution software segment contributed a 3.7 percentage point favorable impact to gross profit as a percentage of total revenues in the current period. Enterprise content distribution software margins in the current quarter were favorably impacted by an increased volume and concentration of higher margin software license revenues relative to service revenues and increased sales volume to absorb fixed service costs compared to the prior-year's first quarter.
Future gross profit margins will be impacted by the rate of growth of the Company's enterprise content distribution software segment, which has historically generated higher gross margins than the Company's disc publishing segment. Future gross margins will also continue to be affected by many other factors, including product mix, the timing of new product introductions, the timing of customer orders and related product deliveries, changes in material costs and supply sources, manufacturing volume, the growth rate of service-related revenues relative to associated service support costs and foreign currency exchange rate fluctuations.
Operating Expenses. Total operating expenses were $13.2 million in the first quarter of 2013, compared to $12.5 million in the same prior-year period. Direct operating expenses for the enterprise content distribution software segment grew $1.2 million between periods to $6.0 million, while direct operating expenses for the disc publishing segment decreased by $0.5 million to $7.2 million. Research and development expenses totaled $3.4 million and $3.1 million for the three months ended March 31, 2013 and 2012, respectively, representing 17.2%, and 16.0% of revenues in the respective periods. The $0.3 million rise in expenses between periods primarily reflects an increase in headcount and project spending to support software development associated with the enterprise content distribution software segment.
Selling, general and administrative expenses for the three months ended March 31, 2013 totaled $9.7 million, or 49.8% of revenues, compared to expenses in the same prior-year period of $9.2 million, or 47.3% of revenues. The $0.5 million increase in expenses in the current-year period consists of a $0.9 million rise in direct expenses to support the enterprise content distribution software segment, partially offset by a $0.4 million reduction in direct expenses of the disc publishing segment. Primary contributors to


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the growth in expenses in the enterprise content distribution software segment in the first quarter of 2013 were increased sales commissions stemming from an increase in revenues relative to the prior year's first quarter and non-recurring severance costs. The decline in disc publishing segment expenses primarily reflects expense reductions in disc publishing sales and marketing. Amortization of Purchased Intangibles. Operating expenses for the three months ended March 31, 2013 and 2012 include approximately $0.2 million in each quarter for the amortization of intangible assets acquired as part of the Company's acquisition of Qumu in October 2011. Operating expenses in 2013 are expected to include approximately $0.6 million of amortization expense associated with the Qumu acquisition, exclusive of the portion classified in cost of revenue. Other Income, Net. The Company recognized interest income on cash and marketable securities of $11,000 and $2,000 for the three month periods ended March 31, 2013 and 2012, respectively. Other income in each period also included net losses on foreign currency transactions of $107,000 and $72,000, respectively. Income Taxes. The provision for income taxes represents federal, state, and foreign income taxes or income tax benefit on income or loss. For the three months ended March 31, 2013 and 2012, the Company recorded an income tax benefit of $54,000 and $1.3 million, respectively.
The tax benefit amount recorded in the current-year period reflects a tax benefit recorded for the Company's subsidiary in Europe, partially offset by U.S. state income taxes. The smaller income tax benefit recorded in the first quarter of 2013 occurred as a result of the Company's establishment of a valuation allowance against its U.S. deferred tax assets in the third quarter of 2012.
Net Loss / Net Loss Per Share. Resulting net loss attributable to Rimage for the three months ended March 31, 2013 and 2012 amounted to $4.0 million and $1.7 million, respectively. Related net loss per diluted share amounts were $0.46 and $0.17, respectively.
Segment Operating Results
Management evaluates segment performance based on revenue and operating income
(loss). The operating income (loss) for the Company's enterprise content distribution software and disc publishing segments include all the direct costs of each business. Beginning with the first quarter of fiscal 2013, the measurement of operating income (loss) by segment includes an allocation of corporate expenses incurred to support each reportable segment. Previously reported amounts included all corporate and other unallocated expenses in the disc publishing segment, a portion of which were incurred to support the enterprise content distribution software segment. The Company revised the amounts previously reported as operating income (loss) by segment to align to the current period's presentation. This realignment had no effect on previously reported consolidated net sales or consolidated operating income (loss). Operating income (loss) for each reportable segment was as follows (in thousands):

                                                     Disc         Enterprise Content
Reportable Segments                               Publishing     Distribution Software      Total
Three months ended March 31, 2013
Operating income (loss)                         $        691     $        (4,687 )       $   (3,996 )
Three months ended March 31, 2012
Operating income (loss)                                2,149              (5,124 )           (2,975 )

Disc Publishing. Operating income was $0.7 million in the first quarter of 2013, compared with $2.1 million in the first quarter of 2012. The $1.4 million reduction in operating income between periods was driven primarily by the gross margin impact of a $2.9 million decline in revenues coupled with a decrease in gross margin as a percentage of revenues to 43.7% from 50.5%. The revenue decline was comprised primarily of equipment sales, which generally carry higher margins than other disc publishing products and services. This, coupled with a resulting underabsorption of fixed manufacturing costs, drove the reduction in gross profit as a percentage of revenues in the first quarter of 2013. Partially offsetting the negative impact of these changes was a $0.5 million reduction in direct operating expenses and a $0.6 million reduction in allocated corporate costs compared to the first quarter of 2012. The reduction in allocated corporate costs was driven primarily by the redirection of a portion of existing corporate resources to support the increasing business requirements of the enterprise content distribution software segment.
Enterprise Content Distribution Software. Operating loss was $4.7 million in the first quarter of 2013, compared to an operating loss of $5.1 million in the first quarter of 2012. The $0.4 million reduction in operating loss was driven primarily by revenue growth of $3.0 million and a rise in gross margin as a percentage of revenues to 60.1% from 31.8% in the prior year's first quarter.


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The gross margin in the current quarter was favorably impacted relative to the prior-year's first quarter by an increased volume and concentration of higher margin software license revenues and increased sales volume to absorb fixed service costs. Partially offsetting the favorable impact of the above was an increase in direct operating expenses of $1.2 million and a $0.6 million increase in allocated corporate costs compared to the first quarter of 2012. The primary contributors to the increase in direct operating costs were higher sales commissions resulting from the increase in revenues, non-recurring severance costs and increased costs to support software development projects. The increase in allocated corporate costs was driven primarily by increased consumption of existing corporate resources to support the growth initiatives of the enterprise content distribution software segment.
Liquidity and Capital Resources
The Company expects it will be able to maintain current operations and anticipated capital expenditure requirements for the foreseeable future through its internally generated funds and cash reserves. At March 31, 2013, the Company had working capital of $52.3 million, down $3.8 million from working capital reported at December 31, 2012. The primary contributors to the decrease in working capital were the generation of a net loss adjusted for non-cash items during the three months ended March 31, 2013 of 2.0 million, purchases of property and equipment of $0.2 million and an investment of $0.4 million in BriefCam, a privately-held Israeli company that develops video synopsis software for surveillance applications. Exclusive of a small amount of capital lease obligations, Rimage has no long-term debt and does not require significant capital investment for its ongoing operations as all fabrication of tooling-intensive parts is outsourced to vendors.
Since October 2010, the Company's Board of Directors has approved cumulative common stock repurchases of up to 3,500,000 shares. Shares may be purchased at prevailing market prices in the open market or in private transactions, subject to market conditions, share price, trading volume and other factors. The repurchase program may be discontinued at any time. The repurchase program has been funded to date using cash on hand. The Company did not repurchase any shares of its common stock during the three months ended March 31, 2013. As of March 31, 2013, the Company had 778,365 shares available for repurchase under the authorizations.
The Company's primary source of cash from operating activities has been cash collections from sales of products and services to customers. The Company expects cash generated by operating activities to be affected by increases or decreases in sales and timing of collections. The Company's primary use of cash for operating activities has been for personnel costs and purchases of inventory. The Company expects cash flows from operating activities to be affected by fluctuations in revenues, personnel costs and inventory requirements as the Company continues to increase its investment in resources to support the growth of the enterprise content distribution software segment and optimizes costs and reduces inventory purchases in line with revenues in the disc publishing segment.
Net cash used by operating activities totaled $1.0 million and $0.7 million for the three months ended March 31, 2013 and 2012, respectively. The $0.3 million increase in cash used by operating activities resulted from a $1.7 million increase in net loss adjusted for non-cash and non-operating items, partially offset by a $1.4 million increase in cash from changes in operating assets and liabilities. Primarily contributing to the change in operating assets and liabilities compared to the prior-year period were favorable changes of $1.6 million in prepaid income taxes, $0.8 million in inventories and $0.5 million in deferred revenue, partially offset by a $1.8 million unfavorable change in accounts receivable. The favorable change in prepaid income taxes was primarily due to a federal tax refund received during the current period. The favorable change in inventories compared to the prior year was primarily due to reduced inventory purchases in the current period in response to lower product demand. The favorable change in deferred revenue compared to the prior-year period resulted from an increase in maintenance contract attachments for the Company's disc publishing systems and an increase in software related revenue deferrals for the Company's enterprise content distribution software segment. The unfavorable change in accounts receivable was primarily due to a larger reduction in receivables during the prior-year period due to the timing of sales and related collections.
Investing activities provided net cash of $9.9 million for the three months ended March 31, 2013 and consumed net cash of $1.0 million for the three months ended March 31, 2012. The fluctuations in investing activities were primarily due to $10.5 million in maturities of marketable securities, net of related purchases, during the three months ended March 31, 2013. The Company invests in highly liquid marketable securities with maturities ranging from three to 12 months. Investing activities in the current-year period also included a $0.4 million equity investment in BriefCam. Purchases of property and equipment during the three months ended March 31, 2013 and 2012 amounted to $0.2 million and $1.0 million, respectively. Capital expenditures in 2013 are currently expected to amount to less than $1 million.
Financing activities used net cash of $9,000 for the three months ended March 31, 2013, compared to net cash used of $1.7 million for the same prior-year period, consisting primarily of dividend payments. On October 26, 2012, the Company's Board of Directors approved the termination of the Company's quarterly dividend payment. The Company does not currently expect to pay a dividend in 2013.


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Critical Accounting Policies
Management utilizes its technical knowledge, cumulative business experience, judgment and other factors in the selection and application of the Company's accounting policies. The accounting policies considered by management to be the most critical to the presentation of the condensed consolidated financial statements because they require the most difficult, subjective and complex judgments include revenue recognition, allowance for doubtful accounts, . . .

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