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RMGN > SEC Filings for RMGN > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for RMG NETWORKS HOLDING CORP

Form 10-Q for RMG NETWORKS HOLDING CORP


9-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this report and in our annual report on Form 10-K for the year ended December 31, 2013. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in "Risk Factors" in Item 1A of Part II.

Overview

The Company was formed on January 5, 2011 for the purpose of acquiring, through a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, exchangeable share transaction or other similar business transaction, one or more operating businesses or assets. The Company consummated the acquisition of Reach Media Group Holdings, Inc. ("RMG") on April 8, 2013 and on April 19, 2013 acquired Symon Holdings Corporation ("Symon"). Symon is considered to be the Company's predecessor corporation for accounting purposes.

As a result of its two acquisitions, the Company is a global provider of media applications and enterprise-class digital signage solutions. Through an extensive suite of products, including media services, proprietary software, software-embedded hardware, maintenance and creative content service, installation services, and third-party displays, the Company delivers complete end-to-end intelligent visual communication solutions to its clients. The Company is one of the largest integrated digital signage solution providers globally and conducts operations through its RMG Media Networks and its RMG Enterprise Solutions business units.

The RMG Media Networks business unit engages elusive audience segments with relevant content and advertising delivered through digital place-based networks. These networks include the RMG Airline Media Network. The RMG Airline Media Network is a U.S.-based network focused on selling advertising across airline digital media assets in executive clubs, on in-flight entertainment, or IFE, systems, on in-flight Wi-Fi portals and in private airport terminals. The network, which spans almost all major commercial passenger airlines in the United States, delivers advertising to an audience of affluent travelers and business decision makers in a captive and distraction-free video environment.

The RMG Enterprise Solutions business unit provides end-to-end digital signage applications to power intelligent visual communication implementations for critical contact center, supply chain, employee communications, hospitality, retail and other applications with a large concentration of customers in the financial services, telecommunications, manufacturing, healthcare, pharmaceutical, utility and transportation industries, and in federal, state and local governments. These solutions are relied upon by approximately 70% of the North American Fortune 100 companies and thousands of overall customers in locations worldwide. The installations of Enterprise Solutions deliver real-time intelligent visual content that enhance the ways in which organizations communicate with employees and customers. The solutions are designed to integrate seamlessly with a customer's IT infrastructure and data and security environments.

Revenue

The Company derives its revenue as follows:

? Advertising

? Product sales:

? Licenses to use its proprietary software products;

? Proprietary software-embedded media players;

? Proprietary LED displays; and

? Third-party flat screen displays and other third-party hardware.

? Customer support services:

? Product maintenance services; and

? Subscription-based and custom creative content services.

? Professional installation and training services

Revenue is recognized as outlined in "Critical Accounting Policies - Revenue Recognition" below.

RMG Media Networks Revenues

The Company sells advertising through agencies and directly to a variety of customers under contracts ranging from one month to one year. Contracts usually specify the network placement, the expected number of impressions (determined by passenger or visitor counts), and the cost per thousand impressions ("CPM") over the contract period to arrive at a contract amount. The Company bills for these advertising services as required by the customer, but most frequently on a monthly basis following the delivery of the contracted ad insertions. Revenue is recognized at the end of the month in which fulfillment of the advertising orders occurred.


RMG Enterprise Solutions Revenues

The Company sells its Enterprise products and services through its global sales force and through a select group of resellers and business partners. In the United States, approximately 90% or more of its enterprise sales are generated solely by the Company's sales team, with 10% or less through resellers in 2013. In the United Kingdom, Western Europe, the Middle East and India, the situation is reversed, with around 85% of sales coming from the reseller channel. Overall, approximately 67% of the Company's global enterprise revenues are derived from direct sales, with the remaining 33% generated through indirect partner channels.

The Company has formal contracts with its resellers that set the terms and conditions under which the parties conduct business. The resellers purchase products and services from the Company, generally with agreed-upon discounts, and resell the products and services to their customers, who are the end-users of the products and services. The Company does not offer contractual rights of return other than under standard product warranties, and product returns from resellers have been insignificant to date. The Company sells directly to its resellers and recognizes revenue on sales to resellers upon delivery, consistent with its recognition policies. The Company bills resellers directly for the products and services they purchase. Software licenses and product warranties pass directly from the Company to the end-users.

Cost of Revenue

RMG Media Networks Cost of Revenue

The cost of revenue associated with RMG Media Networks revenues consists primarily of revenue sharing with the Company's airline and other business partners. Revenue sharing payments to airlines and other business partners are made on a monthly basis under either under minimum annual guarantees, or as a percentage of advertising revenues following collection from customers. The portion of revenue shared with partners ranges from 25% to 80% depending on the partner and the media asset. The Company makes minimum annual payments to three partners and revenue sharing payments to all other partners. The Company's partnership agreements have terms generally ranging from one to five years. Four of the Company's partnership agreements renew automatically unless terminated prior to renewal, and the remaining agreements have no obligation to renew.

RMG Enterprise Solutions Cost of Revenue

The cost of revenue associated with RMG Enterprise Solutions product sales consist primarily of the costs of media players, the costs of third-party flat screen displays and the operating costs of the Company's assembly and distribution center. The cost of revenue of professional services is the salary and related benefit costs of the Company's employees and the travel costs of personnel providing installation and training services. The cost of revenue of maintenance and content services consists of the salary and related benefit costs of personnel engaged in providing maintenance and content services and the annual costs associated with acquiring data from third-party content providers.

Operating Expenses

The Company's operating expenses are comprised of the following components:

? Sales and marketing expenses include salaries and related benefit costs of sales personnel, sales commissions, travel by sales and sales support personnel, and marketing and advertising costs.

? Research and development ("R&D") costs consist of salaries and related benefit costs of R&D personnel and expenditures to outside third-party contractors. To date, all R&D expenses are expensed as incurred.

? General and administrative expenses consist primarily of salaries and related benefit costs of executives, accounting, finance, administrative, and IT personnel. Also included in this category are other corporate expenses such as rent, utilities, insurance, professional service fees, office expenses, travel by general and administrative personnel and meeting expenses.

? Acquisition expenses are comprised of the following:

? Professional fees paid to attorneys, accountants, consultants and other professionals in connection with the acquisitions of RMG and Symon.

? All costs associated with integrating and restructuring the operations of the acquired companies.

? Expenses incurred by the Company prior to the acquisitions while still a development stage company.

? Depreciation and amortization costs include depreciation of the Company's office furniture, fixtures and equipment and amortization of intangible assets.


Given the nature of the formation of the Company, its financial results are required to be reported on a basis that includes various groupings of the three companies (RMG Networks Holding Corporation, RMG and Symon), and for different time periods, both before and after the two acquisitions.

Results of Operations

Comparison of the three months ended March 31, 2014 to the period February 1, 2013 through April 19, 2013

As discussed above, the Company acquired RMG on April 8, 2013 and Symon on April 19, 2013. Prior to its acquisition, Symon had a January 31 fiscal year end. The financial statements for the three months ended March 31, 2014 include the results of operations of RMG Networks, RMG, and Symon (the "Successor Company"). The financial statements for the period February 1 through April 19, 2013 include only the results of operations of Symon (the "Predecessor Company"). As a result, the financial results shown are not generally comparable on a meaningful basis.

                                          Successor        Predecessor
                                           Company           Company
                                        Three Months       February 1,
                                            Ended          2013 through
                                          March 31,         April 19,                   Change
                                            2014               2013             Dollars            %
Revenue                                 $  11,775,129     $    7,157,315     $   4,617,814           64.5 %
Cost Of Revenue                             6,615,642          2,971,467         3,644,175          122.6 %
Gross Profit                                5,159,487          4,185,848           973,639           23.3 %
Operating Expenses -
Sales and marketing                         5,233,280          1,729,871         3,503,409          202.5 %
General and administrative                  5,405,768          1,739,348         3,666,420          210.8 %
Research and development                    1,091,926            512,985           578,941          112.9 %
Acquisition expenses                                -          3,143,251        (3,143,251 )       -100.0 %
Depreciation and amortization               1,920,033            140,293         1,779,740              -
Total Operating Expenses                   13,651,007          7,265,748         6,385,259           87.9 %
Operating Income (Loss)                    (8,491,520 )       (3,079,900 )      (5,411,620 )       -175.7 %
Warrant liability expense                  (4,641,471 )                -        (4,641,471 )            -
Interest expense and other - net             (248,739 )          (14,553 )        (234,186 )            -
Income (Loss) Before Income Taxes         (13,381,730 )       (3,094,453 )     (10,287,277 )       -332.4 %
Income Tax Expense (Benefit)                 (950,079 )         (540,897 )        (409,182 )         75.6 %
Net Income (Loss)                       $ (12,431,651 )   $   (2,553,556 )   $  (9,878,095 )       -386.8 %

Revenue

Revenue was $11,775,129 and $7,157,315 for the three months ended March 31, 2014 and the period February 1 through April 19, 2013, respectively. This represents a $4,617,814, or 64.5%, increase. This difference in revenue is due to the fact that revenues for the three months ended March 31, 2014 include advertising revenues for the Successor Company, while revenues for the period February 1 through April 19, 2013 include only the revenues of the Predecessor Company. Revenues for the three months ended March 31, 2014 are $209,913 less than they would have been had the Predecessor Company's deferred revenue at the acquisition date not been required to be adjusted to market value at the acquisition date in accordance with US GAAP.

During the three months ended March 31, 2014 and the period February 1 through April 19, 2013, the Company's revenues were derived as follows.

                                               Successor       Predecessor
                                                Company          Company
                                                               February 1,
                                             Three Months          2013
                                                 Ended           through
                                               March 31,        April 19,
                                                 2014              2013
          Revenue :
          Advertising                        $   2,546,091     $          -
          Products                               2,287,747        2,239,236
          Maintenance and content services       4,302,725        3,954,520
          Professional services                  2,638,566        1,323,559
          Total                              $  11,775,129     $  7,157,315


The fluctuations in the components of revenues between the two periods are due to the same reasons stated above with respect to total revenues. Specifically, the RMG Media Networks business unit was not included in operations for the period February 1 through April 19, 2013, and, as a result, there was no advertising revenue. In addition, revenues for the three months ended March 31, 2014 are for the Successor Company for a 90-day period while revenues for the period February 1 through April 19, 2013 are for the Predecessor Company for a 78-day period.

The following table reflects the Company's sales on a geographic basis.

                     Successor Company              Predecessor Company
                    Three Months Ended           February 1, 2013 through
Region                March 31, 2014                  April 19, 2013
North America    $   8,585,432        72.9 %   $      5,137,362         71.8 %
International-
United Kingdom       1,571,693                          911,879
Middle East            903,711                          485,712
Europe                 627,473                          616,710
Other                   86,820                            5,652
                     3,189,697        27.1 %          2,019,953         28.2 %
Total            $  11,775,129       100.0 %   $      7,157,315        100.0 %

The increase in North America business for the three months ended March 31, 2014 was due to the inclusion of the RMG Media Networks advertising revenues which were almost exclusively generated in North America. The RMG Media Networks business unit was not included in operations for the period February 1 through April 19, 2013.

We believe that a better basis for comparing the Company's financial results can be found in Note #14 to the Company's unaudited consolidated financial statements located elsewhere in this filing that provides unaudited "Pro-Forma" financial results for the three months ended March 31, 2014 and 2013. These Pro-Forma financial results present the Company's results of operations assuming the acquisitions of Reach Media and Symon had occurred on January 1, 2012 and the Company had operated as a combined entity since that date. The financial results include the following entries required under GAAP purchase accounting guidelines:

? Amortization expense includes amortization of the fair value of Intangible Assets that were acquired.

? Revenues have been reduced based on the adjustment to market value of the Company's customer order backlog that existed at the acquisition date.

Operating expenses do not include any acquisition related expenses.

The Pro-Forma financial results reflect revenues of $11,916,056 and $14,437,155 for the three months ended March 31, 2014 and 2013, respectively. These revenue totals would be $68,986 and $577,749 higher for 2014 and 2013, respectively, if the balance of the Enterprise Solutions business unit's deferred revenue at the acquisition date had not been required to be adjusted to market at the acquisition date in accordance with GAAP purchase accounting guidelines. Excluding these reductions, the Company's revenues were $3,029,862, or 20.2%, less for the three months ended March 31, 2014.

Differences in the composition of the Company's revenues for the two Pro-Forma periods are as follows:

? Advertising revenues for the Company's Media Networks business unit totaled $2,546,091 and $5,592,874 for the three months ended March 31, 2014 and 2013, respectively. This is a $3,046,783, or 54.5%, decrease.

? Revenues from sales of products of the Enterprise Solutions business unit totaled $2,287,747 and $3,415,497 for the three months ended March 31, 2014 and 2013, respectively. This is a $1,127,750, or 33.0%, decrease.

? Excluding the revenue reductions previously discussed, maintenance and content services revenue for the Enterprise Solutions business unit totaled $4,512,638 and $4,082,034 for the three months ended March 31, 2014 and 2013, respectively. This is $430,604, or 10.5%, increase.

? The Company's professional services revenues totaled $2,638,566 and $1,924,499 for the three months ended March 31, 2014 and 2013. This is a $714,067, or 37.1%, increase and was due to improved productivity and increased use of third-party contractors for installation services.

Cost of Revenue

Cost of revenue totaled $6,615,642 and $2,971,467 for the three months ended March 31, 2014 and for the period February 1 through April 19, 2013, respectively. This $3,644,175, or 122.6%, increase in cost of revenue is directly attributable to the previous explanations given for the fluctuations in revenues, i.e., the cost of revenues are comprised of cost of revenue totals for different time periods and different groupings of companies.


The following table summarizes the composition of the Company's revenue and cost of revenue for the three months ended March 31, 2014 and for the period February 1 through April 19, 2013.

                              Successor                     Predecessor
                               Company                        Company
                            Three Months                     February 1
                                ended                         through                                Change
                              March 31,                      April 19,
                                2014              %             2013             %           Dollars           %
Revenue -
Advertising                 $   2,546,091          21.6 %   $          -             -     $ 2,546,091              -
Products                        2,287,747          19.4 %      2,239,236          31.3 %        48,511            2.2 %
Maintenance and content
services                        4,302,725          36.6 %      3,594,520          50.2 %       708,205           19.7 %
Professional services           2,638,566          22.4 %      1,323,559          18.5 %     1,315,007     -     99.4 %
Total                          11,775,129         100.0 %      7,157,315         100.0 %     4,617,814     -     64.5 %
Cost of Revenue -
Advertising                     2,335,743          35.3 %              -             -       2,335,743              -
Products                        1,909,923          28.9 %      1,498,135          50.4 %       411,788           27.5 %
Maintenance and content
services                          760,146          11.5 %        611,692          20.6 %       148,454           24.3 %
Professional services           1,609,830          24.3 %        861,640          29.0 %       748,190           86.8 %
Total                       $   6,615,642         100.0     $  2,971,467         100.0 %     3,644,175          122.6 %

The fluctuations in the components of cost of revenues between the two periods are due to the same reasons stated above with respect to total revenues. Specifically, since the Media Networks business unit is not included in operations for the period February 1 through April 19, 2013, there is no advertising revenue for that period and, as a result, no associated cost of advertising revenue.

The following table reflects the Company's gross margins for the three months ended March 31, 2014 and the period February 1 through April 19, 2013:

                                      Successor Company             Predecessor Company
                                     Three Months Ended          February 1, 2013 through
                                       March 31, 2014                 April 19, 2013
                                          $           %                  $              %
Advertising                        $    210,348        8.3 %                    -          -
Products                                377,824       16.5 %              741,101       33.1 %
Maintenance and content services      3,542,579       82.3 %            2,982,828       83.0 %
Professional services                 1,028,736       39.0 %              461,919       34.9 %
Total                                 5,159,487       43.8 %            4,185,848       58.5 %

The Company's overall gross margin for the three months ended March 31, 2014 decreased to 43.8% from 58.5% for the period February 1 through April 19, 2013. The lower gross margin was primarily attributable to the following:

? Advertising revenue, which comprised 21.6% of total revenues for the three months ended March 31, 2014, generates a lower gross margin than the average gross margin for the Company's other products and services. As previously noted, there was no advertising revenue for the period February 1 through April 19, 2013.

? The Company also had a lower gross margin on product sales for the three months ended March 31, 2014.

Operating Expenses

Operating expenses totaled $13,651,007 and $7,265,748 for the three months ended March 31, 2014 and the period February 1 through April 19, 2013, respectively. This $6,385,259, or 87.9%, increase in operating expenses is due primarily to the Company's growth initiatives, which includes additional sales and sales support personnel and marketing programs, and expenditures for enhanced infrastructure, i.e., systems and personnel. The increase is also directly attributable to the previous explanations given for the fluctuations in revenues and cost of revenues, i.e., the operating expenses are comprised of operating expense totals for different time periods and different groupings of companies.


In addition, during the three months ended March 31, 2014 the Company incurred amortization expense of $1,660,000 related to the intangible assets recorded as a result of the acquisitions of RMG and Symon in accordance with GAAP purchase accounting guidelines.

A comparison of operating expenses shown in the Pro-Forma financial results reflects that pro-forma operating expenses totaled $13,438,507 and $9,968,352 for the three months ended March 31, 2014 and 2013, respectively. As previously discussed, operating expenses do not include any acquisition related expenses. The increase in operating expenses was primarily due to implementing the Company's multiple new sales growth initiatives. These initiatives include additional sales and sales support personnel and new marketing programs, materials and personnel. In addition, the Company incurred additional general and administrative expenses related to expanding its infrastructure, both personnel and systems.

Warrant Liability Expense

The Company calculates its warrant liability based on the quoted market value of its outstanding warrants. The warrant liability expense for the three months ended March 31, 2014 of $4,641,471 represents the costs associated with the increase in the Company's warrant liability for warrants that were exchanged for common stock and that remain outstanding at March 31, 2014. The financial results for the period February 1 through April 19, 2013 include only the results of Symon, which had no outstanding warrants.

Interest and other - Net

Interest expense and other - net for the three months ended March 31, 2014 increased by $234,186 compared to the period February 1 through April 19, 2013, primarily due to the following items:

? Interest expense of $190,000 related to the Company's outstanding debt.

? Loan origination fees of $57,161.

The financial results shown for the period February 1 through April 19, 2013 include only the Predecessor Company which had no outstanding debt.

Liquidity and Capital Resources

The Company's primary source of liquidity prior to acquiring RMG and Symon had been the cash generated from its initial public offering. Historically, Symon has generated cash from the sales of its products and services to its global customers. In addition, both RMG and Symon had realized cash through debt agreements with lenders.

In April 2013, the Company entered into two debt agreements whereby it received $34,000,000 of cash. These funds were used to finance the acquisition of Symon.

In August 2013, the Company completed a public offering of 5,365,000 shares of its common stock at a public offering price of $8.00 per share, minus the underwriters' discount of $0.56 per share. The Company received net proceeds of approximately $39.1 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company used substantially all of the net proceeds of the offering to prepay a portion of its outstanding senior indebtedness.

The Company has entered into revenue sharing agreements with certain customers that require the Company to make minimum revenue sharing payments of $7,842,448 in 2014, $8,619,842 in 2015, and $6,000,000 in 2016.

At March 31, 2014, the Company's cash and cash equivalents balance was $4,761,726. This included cash and cash equivalents of $1,020,585 held in bank accounts of its subsidiaries located outside the United States. The Company currently plans to use this cash to fund its ongoing foreign operations. If the Company were to repatriate the cash held by its subsidiary located outside the United States, it may incur tax liabilities. . . .

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