RMG Networks Holding Corp - 10-Q filing on 2014-11-14

Note 20 - Segment Reporting

9 Months Ended

Sep. 30, 2014

Segment Reporting Disclosure [Text Block]

20. 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 separate 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 is projected to have a higher rate of sales growth than the Enterprise segment. The Enterprise segment realizes a higher gross margin on revenues than the Media 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						Successor Company						Predecessor Company
	Nine Months Ended September 30, 2014						April 20, 2013 Through June 30, 2013						February 1, 2013 Through June 30, 2013
	Media			Enterprise			Media			Enterprise			Media		Enterprise

Revenue		$10,989,894			$28,075,037		$	5,556,557		$	9,493,470			-	$	7,157,315
Cost of Revenue		9,955,072			14,016,032			3,355,883			5,031,229			-		2,971,467
Gross Profit		1,034,822			14,059,005			2,200,674			4,462,241			-		4,185,848
Gross Profit %		9.4	%		50.1	%		39.6	%		47.0	%		-		58.5	%

	Successor Company						Successor Company
	Three Months Ended September 30, 2014						Three Months Ended September 30, 2013
	Media			Enterprise			Media			Enterprise

Revenues	$	3,572,657		$	10,340,759		$	4,308,717		$	11,274,106
Cost of Revenues		35,058			4,993,212			3,352,016			5,947,464
Gross Profit		3,537,599			5,347,547			956,701			5,326,642
Gross Profit %		99.0	%		51.7	%		22.2	%		47.2	%

For the nine months ended September 30, 2014, the Media segment’s Cost of Revenue includes a charge of $1,373,371 related to an estimated loss recognized on a long-term contract. Without the inclusion of this loss, the Media segment’s gross margin for the nine months ended September 30, 2014 was 21.9%.

During the period February 1, 2013 through April 19, 2013, the Enterprise segment realized a gross margin of 58.5%. The Predecessor Company consisted only of the Enterprise segment during this period, and, as a result, there were no advertising segment revenues on which the Company realizes a lower gross margin.

For the three months ended September 30, 2014, the Media segment's Cost of Revenue includes a credit of $2,756,733 related to a change in the estimated loss recognized on a long-term contract. Without the inclusion of the change in the estimated loss, the Media segment's gross margin for the three months ended September 30, 2014 was 21.9%.