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RIMG > SEC Filings for RIMG > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for RIMAGE CORP


8-Aug-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 (%)       Percentage (%)       Percentage (%)
                                 of Revenues            Inc/(Dec)          of Revenues           Inc/(Dec)
                              Three Months Ended         Between         Six Months Ended         Between
                                   June 30,              Periods             June 30,             Periods
                               2013         2012      2013 vs. 2012      2013        2012      2013 vs. 2012
Revenues                     100.0  %     100.0  %           16.2  %    100.0  %   100.0  %           7.9  %
Cost of revenues             (50.8 )      (54.6 )             8.1       (51.7 )    (52.7 )            6.0
Gross profit                  49.2         45.4              25.9        48.3       47.3             10.2
Operating expenses:
Research and development      15.2         15.8              11.4        16.2       15.9              9.7
Selling, general and
administrative                42.0         48.5               0.7        45.8       47.9              3.2
Amortization of intangibles    0.7          1.4             (40.9 )       0.8        1.4            (38.7 )
Operating loss                (8.7 )      (20.4 )           (50.1 )     (14.4 )    (17.8 )          (12.7 )
Other expense, net            (0.5 )          -          (2,675.0 )      (0.5 )     (0.2 )          212.5
Loss before income taxes      (9.2 )      (20.4 )           (47.3 )     (14.9 )    (17.9 )          (10.5 )
Income tax expense
(benefit)                      0.2         (4.9 )          (105.9 )         -       (5.8 )         (100.0 )
Net loss                      (9.5 )      (15.4 )           (28.6 )     (14.9 )    (12.2 )           31.9
Noncontrolling interest        0.3          0.4             (11.3 )       0.3        0.4             (7.4 )
Net loss attributable to
Rimage                        (9.2 )      (15.0 )           (29.1 )     (14.5 )    (11.8 )           33.1

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 live and on-demand streaming video as well as secure push-based content delivery to tablets, smart phones and personal computers through its enterprise video communications product line, acquired as part of the acquisition of Qumu.
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 and records; financial services; 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.

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, software-enabled devices and a cloud-based Software-as-a-Service (SaaS) platform. Software maintenance contracts and professional services are also sold with these solutions. 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


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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)                                                      Inc (Dec)
                            Three Months Ended June 30,                Between                Six Months Ended June 30,               Between
                         2013                  2012                    Periods            2013                 2012                   Periods
                          $           %         $          %         $          %          $          %         $          %         $         %
Disc publishing
Disc publishing
equipment:
Producer             $    2,124      10 %   $  2,383      13 %   $  (259 )    -11  %   $  4,279      11 %   $  5,161      14 %   $  (882 )   -17  %
Professional              1,860       9 %      2,517      14 %      (657 )    -26  %      3,153       8 %      5,725      15 %    (2,572 )   -45  %
Desktop                     376       2 %        475       3 %       (99 )    -21  %        780       2 %      1,004       3 %      (224 )   -22  %
Total disc
publishing equipment      4,360      21 %      5,375      29 %    (1,015 )    -19  %      8,212      20 %     11,890      32 %    (3,678 )   -31  %
Recurring:
Consumables and
parts                     9,097      43 %      8,528      47 %       569        7  %     17,254      42 %     17,080      45 %       174       1  %
Service                   2,962      14 %      3,000      16 %       (38 )     -1  %      6,100      15 %      6,017      16 %        83       1  %
Total recurring          12,059      57 %     11,528      63 %       531        5  %     23,354      57 %     23,097      61 %       257       1  %
Total disc
publishing               16,419      77 %     16,903      92 %      (484 )     -3  %     31,566      77 %     34,987      93 %    (3,421 )   -10  %
Enterprise content
distribution
software
Software licenses
and appliances            2,208      10 %        278       2 %     1,930      694  %      4,268      10 %        610       2 %     3,658     600  %
Service                   2,621      12 %      1,103       6 %     1,518      138  %      4,910      12 %      2,148       6 %     2,762     129  %
Total enterprise
content distribution
software                  4,829      23 %      1,381       8 %     3,448      250  %      9,178      23 %      2,758       7 %     6,420     233  %
Total revenues       $   21,248     100 %   $ 18,284     100 %   $ 2,964       16  %   $ 40,744     100 %   $ 37,745     100 %   $ 2,999       8  %
Total revenues
Product              $   15,665      74 %   $ 14,181      78 %   $ 1,484       10  %   $ 29,734      73 %   $ 29,580      78 %   $   154       1  %
Service                   5,583      26 %      4,103      22 %     1,480       36  %     11,010      27 %      8,165      22 %     2,845      35  %
Total revenues       $   21,248     100 %   $ 18,284     100 %   $ 2,964       16  %   $ 40,744     100 %   $ 37,745     100 %   $ 2,999       8  %

Total revenues increased 16% and 8% for the three and six months ended June 30, 2013 to $21.2 million and $40.7 million, respectively, from $18.3 million and $37.7 million in the respective prior-year periods. The increase in total revenues in the second quarter and year-to-date periods reflects a $3.4 million and $6.4 million increase in enterprise content distribution software segment revenues in each respective period, partially offset by a $0.5 million and $3.4 million reduction in disc publishing revenues for the same periods. Consolidated product revenues increased $1.5 million and $0.2 million for the three and six months ended June 30, 2013, respectively, while consolidated service revenues increased $1.5 million and $2.8 million compared to the same prior-year periods. The increase in product revenues in the current year's second quarter and year-to-date periods was driven by growth of $1.9 million and $3.7 million in enterprise content distribution software product sales, partially offset by a reduction of $0.4 million and $3.5 million in sales of disc publishing products in each respective period. The rise in service revenues in each period primarily reflects growth in subscription and maintenance revenues from the enterprise content distribution software segment. International sales, inclusive of the impact of currency changes, increased 25% and 9% during the three and six months ended June 30, 2013, respectively, and comprised 40% and 38% of total revenues for each respective period, compared to 37% of total revenues for each of the same periods in 2012. In the aggregate, currency fluctuations decreased consolidated revenues for the three and six months ended June 30, 2013 by less than $0.1 million and $0.2 million, respectively, or less than 1% relative to the same periods in 2012.
Disc Publishing. The current-year reductions in disc publishing revenues primarily reflect declines of $1.0 million and $3.7 million in equipment revenues, partially offset by increases in consumables and parts revenues of $0.6 million and $0.2 for the three and six months ended June 30, 2013, respectively. The decrease in disc publishing equipment revenues for the current-year periods 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 second quarter of 2013, the disc publishing segment experienced overall sales


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declines primarily in its Asia Pacific region, while the year-to-date period in 2013 was impacted by sales declines primarily in the U.S. and also internationally. Sales to the Company's Asian channel partners were negatively impacted by general market softness and the impact of foreign currency fluctuations. Equipment sales in the U.S. were negatively impacted in the current year-to-date period 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-year periods. The increase in consumable sales in the second quarter of 2013 was primarily due to a large order for media kits from a U.S. retail customer. Retail product orders tend to be large and fluctuate from quarter to quarter due to timing of purchases. Sales of consumable products from other segments of the Company's customer base declined in the current-year periods as a result of decreased usage.
Enterprise Content Distribution Software. The increase in enterprise content distribution software revenues reflects the continuation of positive sales momentum established in the second half of 2012. The increase in revenues for the three and six months ended June 30, 2013 consisted of growth of $1.9 million and $3.7 million in software and appliance licenses and $1.5 million and $2.8 million in services for each respective period. Services are comprised of software maintenance contracts, subscription licenses and professional services. Contracted commitments for the enterprise content distribution software segment for the second quarter and year-to-date period in 2013 totaled $3.4 million and $7.8 million, respectively, and contracted commitment backlog aggregated $11.1 million as of June 30, 2013. 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 software license arrangements with customers are structured 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 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 49.2% and 48.3% for the three and six months ended June 30, 2013, respectively, compared to 45.4% and 47.3% for the same periods in 2012. Gross profit as a percentage of revenues for the Company's disc publishing segment was 43.3% and 43.5% for the three and six months ended June 30, 2013, respectively, compared to 45.8% and 48.2% for the same periods in 2012. Gross profit as a percentage of revenues for the Company's enterprise content distribution software segment was 69.2% and 64.9% for the three and six months ended June 30, 2013, respectively, compared to 40.8% and 36.3% for the same periods in 2012. The enterprise content distribution software margins for the three and six months ended June 30, 2013 and 2012 are inclusive of the impact of approximately $0.1 million and $0.3 million, respectively, in amortization expense associated with intangible assets acquired as a result of the Qumu acquisition, compared to $0.2 million and $0.4 million for the respective prior-year periods. Cost of revenues in 2013 are expected to include approximately $0.6 million of amortization expense for purchased intangibles.
The increase in consolidated gross profit as a percentage of total revenues for the current-year periods was primarily impacted by the generation of improved margins from the enterprise content distribution software segment, reflecting 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 periods. Inclusive of the impact of amortization expense, the enterprise content distribution software segment contributed a 5.9% and 4.8% favorable impact to gross profit as a percentage of total revenues in the second quarter and year-to-date period of 2013, respectively. A shift in the concentration of disc publishing sales to lower margin products, consisting primarily of a lower volume and concentration of equipment sales and a higher volume and concentration of media kit sales, partially offset the favorable impact of improved margins from the enterprise content distribution software segment. Further, a reduced volume of Producer equipment sales in the first half of 2013 led to lower production levels and a resulting underabsorption of fixed manufacturing costs, negatively impacting gross profit as a percentage of revenues.
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 $12.3 million and $25.5 million for the three and six months ended June 30, 2013, respectively, compared to $12.0 million and $24.6 million in the respective prior-year periods. Direct operating expenses


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for the enterprise content distribution software segment were $5.4 million and $11.4 million for the three and six months ended June 30, 2013, respectively, representing an increase of $0.5 million and $1.6 million from the respective prior-year periods. Direct operating expenses for the disc publishing segment decreased by $0.2 million and $0.7 million to $6.9 million and $14.1 million for the three and six months ended June 30, 2013, respectively.
Research and development expenses totaled $3.2 million and $6.6 million for the three and six months ended June 30, 2013, respectively, representing 15.2% and 16.2% of revenues for each respective period. Research and development expenses totaled $2.9 million and $6.0 million for the three and six months ended June 30, 2012, respectively, representing 15.8% and 15.9% of revenues for each respective period. The $0.3 million and $0.6 million rise in expenses between respective 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 totaled $8.9 million and $18.6 million for the three and six months ended June 30, 2013, or 42.0% and 45.8% of revenues, respectively, compared to expenses in the same prior-year periods of $8.9 million and $18.1 million, or 48.5% and 47.9% of revenues for each respective period. The $0.5 million increase in expenses in the current year-to-date period consists of a $1.1 million rise in direct expenses to support the enterprise content distribution software segment, partially offset by a $0.6 million reduction in direct expenses of the disc publishing segment. Primary contributors to the growth in expenses in the enterprise content distribution software segment in 2013 were increased sales commissions stemming from an increase in revenues relative to the prior year and non-recurring severance costs. The decline in disc publishing segment expenses primarily reflects expense reductions driven by reduced sales and marketing headcount and marketing programs as well as lower legal fees, partially offset by non-recurring severance costs.
Amortization of Purchased Intangibles. Operating expenses for the three and six months ended June 30, 2013 include approximately $0.2 million and $0.3 million for the amortization of intangible assets acquired as part of the Company's acquisition of Qumu in October 2011, compared to $0.3 million and $0.5 million in the respective prior-year periods. 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 $4,000 and $15,000 for the three and six months ended June 30, 2013, respectively, compared to $19,000 and $21,000 for the respective prior-year periods. Other income also included net losses on foreign currency transactions of $108,000 and $215,000 for the three and six months ended June 30, 2013, respectively, compared to net losses of $13,000 and $85,000 for the respective prior-year periods.
Income Taxes. The provision for income taxes represents federal, state, and foreign income taxes or income tax benefit on income or loss. The Company recorded income tax expense of $53,000 and an income tax benefit of $1,000 for the three and six months ended June 30, 2013, respectively. The Company recorded an income tax benefit for the three and six months ended June 30, 2012 of $0.9 million and $2.2 million, respectively.
Amounts recorded in the current-year periods reflect a tax benefit recorded for the Company's subsidiary in Europe, offset by U.S. state income taxes. The smaller income tax benefit recorded in the 2013 periods 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 and six months ended June 30, 2013 was $2.0 million and $5.9 million, respectively, compared to $2.8 million and $4.5 million for the same prior-year periods. Related net loss per diluted share amounts were $0.22 and $0.68 for the three and six months ended June 30, 2013, respectively, compared to $0.27 and $0.44 for the respective prior-year periods. 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).


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Operating income (loss) for each reportable segment was as follows (in thousands):

                                                                  Enterprise
                                                                    Content
                                                    Disc         Distribution
Reportable Segments                              Publishing        Software           Total
Three months ended June 30, 2013
Operating income (loss)                              1,398          (3,256 )       $   (1,858 )
Three months ended June 30, 2012
Operating income (loss)                              1,219          (4,946 )           (3,727 )
Six months ended June 30, 2013
Operating income (loss)                              2,089          (7,943 )           (5,854 )
Six months ended June 30, 2012
Operating income (loss)                              3,368         (10,070 )           (6,702 )

Disc Publishing. Operating income increased $0.2 million during the second quarter of 2013 compared to the second quarter of 2012 and decreased $1.3 million during the six months ended June 30, 2013 compared to the same period in 2012. Operating income in the current-year's second quarter and year-to-date periods was reduced by the gross margin impact of a $0.5 million and $1.3 million decline in revenues in each respective period coupled with a decrease in gross margin as a percentage of revenues to 43.3% from 45.8% in the second quarter and a decrease to 43.5% from 48.2% for the current year-to-date period. A shift in the concentration of disc publishing sales to lower margin products, consisting primarily of a lower volume and concentration of equipment sales and a higher volume and concentration of media kits, negatively impacted gross margins for both 2013 periods. This, coupled with a resulting underabsorption of fixed manufacturing costs, drove the reduction in gross profit as a percentage of revenues in the current-year periods. A reduction compared to the prior-year periods in direct expenses and allocated corporate costs to support the disc publishing business offset the impact of the revenue and margin decline in the second quarter and partially offset the impact of the same in the year-to-date period. The reduction in allocated corporate costs for both current-year periods 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 decreased $1.7 million during the second quarter of 2013 compared to the second quarter of 2012 and decreased $2.1 million during the six months ended June 30, 2013 compared to the same period in 2012. The decrease in operating loss in the current year's second quarter and year-to-date periods was driven primarily by a $3.4 million and $6.4 million increase in revenues in each respective period, coupled with an increase in gross margin as a percentage of revenue to 69.2% from 40.8% in the second quarter and an increase to 64.9% from 36.3% in the current year-to-date period. Partially offsetting the favorable revenue and margin impact in each current-year period was an increase in direct operating expenses and allocated corporate expenses. The gross margin in the current quarter and year-to-date periods was favorably impacted relative to the prior-year by an increased volume and concentration of higher margin software license revenues and increased sales volume to absorb fixed service costs. 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 June 30, 2013, the Company had working capital of $51.4 million, down $4.7 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 six months ended June 30, 2013 of $2.8 million, purchases of property and equipment of $0.6 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 . . .

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