RMG Networks Holding Corp - 10-K filing on 2014-03-31

Note 18 - Segment Reporting

12 Months Ended

Dec. 31, 2013

Segment Reporting Disclosure [Text Block]

18. Segment Reporting

The Company provides advertising services through digital place-based networks and sells enterprise-class digital signage solutions to customers worldwide. The Company has two seperate reporting business segments - Media and Enterprise - for the following reasons:

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The segments have different business models. The Media segment sells advertising to major corporate advertisers and the advertising is placed on screens owned by business partners. In return for the use of their screens, the business partners share in the advertising revenue. The Enterprise segment sells intelligent visual solutions that consist of its proprietary software and hardware products and third-party displays. The Enterprise segment also provides installation services and maintenance and support services to corporate customers.

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The segments have different economic characteristics. The Media segment has higher rate of sales growth than the Enterprise segment. The Enterprise segment realizes a higher gross margin on revenues than the Advertising segment.

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Each segment has a different head of operations that manages the segment. Each segment head utilizes discrete financial information about his individual segment and regularly reviews the operating results of that component.

Since the Company operates as a highly integrated entity which is characterized by substantial inter-segment cooperation and sharing of personnel and assets, it limits its segment reporting to revenues, cost of revenues, and gross profit by segment.

An analysis of the two reporting business segments follows:

	Successor Company						Predecessor Company
	April 20, 2013 through December 31, 2013						February 1, 2012 through January 31, 2013
	Advertising			Enterprise			Advertising		Enterprise

Revenues		16,859,940			33,417,707			-		42,528,391
Cost of Revenues		10,718,458			18,967,138			-		18,441,521
Gross Profit		6,141,482			14,450,569			-		24,086,870
Gross Profit %		36	%		43	%		-		57	%

During the period April 20, 2013 through December 31, 2013, the Advertising segment realized a 36% gross margin on total revenues and the Enterprise segment realized a gross margin of 43% on total revenues. Total Advertising segment revenues included $896,833 of professional services revenues. Excluding the professional services revenues, the Advertising segment realized a gross margin of 33% from advertising services.

During the period April 20, 2013 through December 31, 2013, $4,399,479 of Enterprise revenues were excluded to reflect the amortization of the customer order backlog from the date of acquisition in accordance with US GAAP. If these revenues had not been excluded, the Enterprise segment would have realized a gross margin of 50%. The Enterprise segment gross margin was lower than in the period February 1, 2012 through January 31, 2013 because of sales mix.

During the period February 1, 2012 through January 31, 2013, the Enterprise segment realized a gross margin of 57%. The Predecessor company consisted only of the Enterprise segment during this period, and, as a result, there were no advertising segment revenues.