RMG Posts $19.6M Q2 Operating Loss, But Bags 27K License Deal And Ad Revenues Improving

August 7, 2014 by Dave Haynes

Somebody else will pick RMG’s latest earnings apart with more detail and insight (no MBA on my resume), but I can tell you the latest numbers are very red and the whole thing looks to be a bit of a cluster – though ad revenues are definitely better than the first part of the year and they bagged a big software deal with a telecom.

The news release for the 2nd Quarter of RMG Networks Holding Corporation (NASDAQ:RMGN) says:

• Consolidated revenue of $16.4 million, on an adjusted basis1,2, increased 29.9% from the first quarter 2014; consolidated adjusted revenue was comprised of $11.5 million in adjusted Enterprise revenue1,2 and $4.9 million in Media revenue,
• Adjusted EBITDA loss of $2.8 million represented a $2.6 million improvement from the first quarter 2014
• Won the largest Enterprise software sale in company history, with over 27,000 software licenses to a Tier 1 telecom provider
• Completed reallocation of corporate resources that streamlined the business and is expected to reduce ongoing operating expense levels
• Subsequent to quarter-end, amended the Senior Credit facility, adding $3.4 million in net cash proceeds to the balance sheet and eliminated financial covenants until at least mid-year 2015

I use the term cluster(add naughty word here) because of the added line of credit and this passage:

During the second quarter of 2014, the company incurred approximately $14.0 million in non-recurring charges comprised of the following:

• Impairment charges of $1.3 million and $5.9 million related to goodwill and intangible assets, respectively, within the Media Unit
• A $6.2 million loss accrual charge on a long-term contract, resulting from a revised forecast of the revenue associated with the contract
• Approximately $0.6 million in costs related to the departure of the company’s former CEO and a reorganization of certain business operations

New CEO Robert Michelson says: “Our second quarter results demonstrate sequential growth in revenue and gross margin in both units as sales execution improved and that costs were strictly controlled. We are focused on continuing to deliver sequential growth through the second half of the year.”

“As previously announced, we have made some changes to our senior leadership team and are now refocusing our efforts on a limited number of strategic initiatives in key industries, products and solutions and plan to pursue our investments in a measured manner. We are managing the business with the goal of achieving profitable growth by measuring our performance against a refined set of benchmarked metrics.”

“Finally, we will maintain clarity in our communications to all audiences through consistency and transparency. With momentum building in the business, refocused execution, and a bolstered balance sheet, we are prepared to achieve the company’s growth potential and long-term strategic objectives.”

Here’s the balance of the release:

Second Quarter Financial Review

RMG Networks completed the business combinations of Reach Media Group Holdings, Inc. and Symon Holdings Corporation, or Symon, on April 8 and April 19, 2013, respectively. Symon was determined to be the Predecessor Company for accounting purposes and accordingly Symon’s historical financials are included for comparison in RMG Networks’ “as-reported” financials. Because Symon recorded results of operations on a January 31 fiscal year and because the results of Reach Media Group Holdings, Inc. are included in Predecessor Company financials only as of the date of combination, second quarter 2014 results as-reported are not comparable with the Predecessor Company’s results for second quarter 2013. In addition, “as-reported” results include certain items and the effects of purchase accounting which RMG Networks does not believe reflect the underlying performance of its business. Therefore, for ease of comparison, the following provides adjusted results for the second quarter of 2014 and pro forma combined results for the second quarter of 2013 as if the companies had existed as a combined entity for the relevant periods and adjusting for the items described above.

Adjusted and Pro Forma Combined Results
Second Quarter Revenue. Total adjusted revenues in the second quarter of 2014 were $16.4 million, a sequential increase of 29.9% from $12.6 million in the first quarter of 2014.

• Adjusted Enterprise revenue of $11.5 million increased 14.4% from $10.1 million in the first quarter of 2014, driven by an increase in product sales. Adjusted gross margin improved to 58.9% from 57.5% in the first quarter of 2014, due to a favorable product mix driven by a large software sale.
• Media revenue of $4.9 million increased 91.3% from $2.5 million in the first quarter of 2014, due to a rebound in advertising demand and better sales execution. Adjusted gross margin improved to 13.8% from (16.8)% in the first quarter of 2014, due to increased revenue generation.

On a year over year basis, total adjusted revenues in the second quarter of 2014 represented a decrease of 13.3% from $18.9 million of pro forma combined revenues in the second quarter of 2013.

• Adjusted Enterprise revenue decreased 3.8% from $12.0 million in the second quarter of 2013, due to a slight decrease in product sales and professional services. Adjusted Enterprise gross margin was 58.9% compared to 54.2% in the second quarter of 2013, increasing year over year due to a favorable sales mix resulting from a large software sale in the second quarter of 2014.
• Media revenue decreased 29.6% from $6.9 million in the second quarter of 2013, primarily due to continued headwinds in the out-of-home advertising sector. Adjusted Media gross margin was 13.8% compared to 38.6% in the second quarter of 2013, due primarily to lower revenue generation failing to cover fixed costs of sales.

Second Quarter Adjusted EBITDA. Adjusted EBITDA loss was $2.8 million, improving from a loss of $5.3 million in the first quarter of 2014, due to higher revenues, improved gross margins and lower cash operating expenses.

On a year over year basis, adjusted EBITDA decreased in the second quarter from pro forma combined adjusted EBITDA of $0.8 million in the second quarter of 2013, due to the reasons described above.

During the second quarter of 2014, the company incurred approximately $14.0 million in non-recurring charges comprised of the following:

• Impairment charges of $1.3 million and $5.9 million related to goodwill and intangible assets, respectively, within the Media Unit
• A $6.2 million loss accrual charge on a long-term contract, resulting from a revised forecast of the revenue associated with the contract
• Approximately $0.6 million in costs related to the departure of the company’s former CEO and a reorganization of certain business operations

Reported Results
Second Quarter. Total reported revenue for the quarter ended June 30, 2014 was $13.4 million; total revenue for the successor company from April 20, 2013 through June 30, 2013 was $15.1 million.

Operating loss for the quarter ended June 30, 2014 was $19.6 million; operating loss for the successor company from April 20, 2013 through June 30, 2013, was $2.9 million.

Legal Matters

From time to time, the company has been and may become involved in legal proceedings arising in the ordinary course of its business. Although the results of litigation and claims cannot be predicted with certainty, RMG Networks is not presently involved in any legal proceeding in which the outcome, if determined adversely to the company, would be expected to have a material adverse effect on its business, operating results, or financial condition. Regardless of the outcome, however, litigation can have an adverse impact on the company because of defense and settlement costs, diversion of management resources, and other factors. The currently expected financial impact of ongoing legal proceedings is reflected in accruals in costs of revenues and in a reserve for legal expenses which was accrued in the second quarter of 2013 in the amount of $500,000.

Amended Senior Credit Facility

As previously disclosed, on July 16, 2014 the company successfully completed a Third Amendment to its senior credit facility. The amended term loan facility increased from $8 million to $12 million, adding approximately $3.4 million in net cash proceeds to the company’s balance sheet. The amendment also eliminated financial covenants until at least mid-year 2015, providing the company with substantial operating flexibility. The amended 3-year facility, which matures in July 2017, bears interest at a fixed rate of 12% and continues to defer principal payments until maturity.

Outlook

For the remainder of 2014, RMG Networks expects to see continued sequential quarterly adjusted revenue increases with sequential reductions in quarterly cash operating expenses7, resulting in sequential quarterly Adjusted EBITDA increases. Over the long term, given the leadership positions the company holds in the growing industries in which its competes, the company continues to strongly believe in its prospects for generating revenue growth, for developing material operating leverage and for producing significant adjusted EBITDA.

Ouch.