It has been 10 weeks since my last post, which discussed RMG Networks’ plight in the wake of its disastrous first quarter earnings report. Since that time I have effectively taken a hiatus, and have been gratified by several people who told me that they took notice. I actually took the time to write a post about the Wireless Ronin-CRI merger announcement, but ultimately decided that I care about it as much as you do, and decided not to publish it. Billions of electrons were spared the humiliation of being wasted in the process, which is more than can be said for the investors in RNIN equity. So it is somewhat ironic that the first post of the summer must be on the topic of RMG once again.
It seems that while Americans were barbecuing their way through Memorial Day and Independence Day, RMG was basting in the juices of its own failed non-strategy. Shut off from its plan to acquire businesses by the double whammy of a deflated share price and thin trading, it has been forced to operate the businesses it has in place, namely the company formerly known as profitable Symon and the media businesses known mostly for their Powerpoint pitches. It hasn’t gone well. Symon’s model and team had been revamped by a group of media executives and financial wranglers, and competitors are swarming to the honeypot of disaffected customers and perceived weakness. Further, the Dallas-based group was presumably reporting up to a CTO based in San Francisco who had more experience in managing outsourcing contracts than managing a software development and sales organization (more on that in a moment).
More telling were the events on the media side of the business. On July 8th, RMG was named in a lawsuit filed by Crown Enterprises, a sister company of Regus, RMG’s partner and landlord for the widely hyped RMG Office Media Network. It seems that under the terms of a contract signed in 2013, Crown agreed to make a capital investment of nearly $4 million to equip and install a digital signage network in its office locations, which RMG was to operate under a service agreement. That agreement included revenue sharing on a 55%/45% basis in Crown’s favor, which included $13 million in minimum revenue sharing payments over three years: $3 million in 2014, $4 million in 2015 and $6 million in 2016. Minimum payments were contracted to be paid quarterly. The January and April payments of $750K each were made on time. The July 1 payment was not made, and in the complaint, Crown claimed that RMG had told them that the next two payments were not forthcoming. The suit was filed exactly one week after the breach occurred, which would seem to indicate that Crown was somewhat displeased with its erstwhile partner. While the suit does not ask for specific damages other than noting that Crown had suffered damages in excess of the legal threshold of $75,000, one can assume that it will seek to recover the $3.8 million that was spent on deploying the network, as well as the $11.5 million in contractual guarantees. There are clues in Count 4 of the complaint that it could be more:
38. Crown Enterprises reasonably and substantially relied on RMG’s promise to Crown Enterprises’ detriment, including but not limited to Crown Enterprises’ expenditure of $3,838,007.67 to outfit the business centers with the technology required to broadcast RMG’s advertising and content.
39. RMG could foresee Crown Enterprises’ reliance.
I am not an attorney, and I did not stay at a Holiday Inn Express last night, but when the phrase “reasonably and substantially relied upon RMG’s promise” is in the complaint, that could be the basis for a claim of fraud in the inducement. While it is unclear to this layman whether fraud related to a contract can result in an award of exemplary damages (a/k/a treble damages) in Texas, at a minimum the phrase is a scary legal shot over the bow, and this may well get ugly. If that is not enough, there is talk on the street that RMG’s airline seatback media business may be in for trouble as airlines consider taking it in-house as contracts expire, and new technology on board modern airliners opens up alternative delivery methods and new competitors. In short, trouble in paradise on the media side of things.
A few days after the lawsuit was filed, RMG’s Chairman acquired and augmented the company’s senior debt to the tune of $12 million at a nice 12% rate. Senior debt holders are generally first in line ahead of equity holders in a liquidation, for those wondering why someone would take that on.
All of that is a precursor to RMG’s upcoming 2Q earnings announcement, the substance of which is already well known to the Board. Therefore, the time for accountability was at hand. CEO Garry McGuire was sacked on Thursday, and it was reported that the aforementioned CTO was given his walking papers earlier in the week. Mr. McGuire was rewarded for his contribution to RMG’s success with an eyebrow-raising check for about $450K upon his resignation. He also received 100,000 shares of RMG stock. Look for a block trade on that. McGuire was replaced as CEO by Robert Michelson, with Board crony Loren Buck promoted to COO. With power now fully consolidated in Chicago, home of the primary investors and debt holder of San Francisco and Dallas-based RMG, the real question is:
Michelson and Buck are deal guys by pedigree. Greg Sachs and Don Wilson, the primary equity and debt holders, are deal guys by DNA. Michelson was explicitly named “interim” CEO, but the guess here is that a search for a permanent CEO is not on just yet. Bob is there to do what he does: deals. There are two types of deals, buy side and sell side. The challenges RMG faces in executing buy side deals has been documented and discussed. By all accounts, Garry McGuire was desperately trying to line up sell side deals in his waning days to no avail. So Michelson is likely in place to reduce overhead, find a buyer for pieces of RMG so that it can re-organize around what is left, then collect his bonus and keep a Board seat when a new operator is brought in. Here is how that might work:
The four pillars of the RMG media business are the Airline (seatback), Airport (executive lounges), Office (Regus), and Mall (Akoo) networks. Let’s begin by eliminating the Office network as a sale candidate, since it is somewhat encumbered by a lawsuit that can be tied to its underperformance as an ad vehicle, proving once again that press releases are easier than ad sales. Then there is Akoo, a cluster of food court venues, with the operative word being cluster, as in Charlie Foxtrot. Acquired for next to nothing, which represented a slight overpayment, it was assumed that RMG’s media ad sales force could monetize Akoo. If it can be unloaded, the proceeds might cover the legal fees involved, so it remains irrelevant in any case. The Airline business would be difficult to unload as well, as any diligence process would include review of contracts, discussion with airline partners relative to go-forward plans, and examination of the competitive landscape, which is clearly evolving. It seems to be more of a candidate for investment than for divestiture. That leaves the Airport business, which has a larger group of potential buyers and is easier to understand and value. For that reason alone, it is both the most salable asset in the Media division as well as the one most worth building around. I think they stand pat.
The gutting of Symon included tossing its global brand out in favor of RMG’s. It was clear from the outset that Symon was bought to meet the goals of the pre-IPO SPAC and to provide a revenue and earning foundation to the still-evolving media business. It was never a strategic fit for a company run by media mavens and financiers. The Symon product excels at corporate communications and call centers in particular. The RMG media networks focus on neither. The sales model and management were re-engineered, and the headquarters was relocated. Many Symon long-timers are now gone, and many others have been looking outward for their next opportunity. The Symon business is no Akoo: it just needs an owner that understands enterprise software development and sales. Symon is a salable asset with value and a large set of potential buyers. The challenge for RMG would be dealing with the fact that they likely could not recover even half of what they paid for Symon (about $45 million in cash) just two years ago, given that the market capitalization of the entire company is currently about $28 million. But tough times call for tough measures and proceeds from a Symon sale would provide much needed cash for investment in media assets and potential acquisitions. Dumping the software business and the overhead associated with it would also leave RMG free to seek a reseller agreement with a software partner to attempt to revive its enterprise group around services such as creative, operations and even ad sales. It would be a lower cost, lower risk way to appear to remain active in the enterprise space, which might soften the perceptions on the street if they were to sell Symon so quickly. There is one candidate that RMG has already attempted to partner with in at least one major retail pursuit who might listen. Let’s just call them strange bedfellows and leave it at that.
The travails of RMG Networks can be traced back to its origin based upon financial wizardry rather than cogent strategy. Public companies pay a heavy price for their access to capital, and one part of that payment is accountability for results. RMG’s largest shareholders have seen tens of millions of dollars of their owned equity value erased, with a very long and difficult road ahead to regain even some of that. There are two strong indicators that they will take a shot at reorganizing around the Media business. The first is the hiring of a reasonably high profile executive to take on media sales, who had to be privy to RMG’s current status and go-forward strategy before leaving Microsoft. The other is the presence of a deal guy known to the key investors at the helm, replacing the media guy they inherited. Gratuitous focus on the Symon asset in the upcoming earnings announcement would be consistent with such a plan.
Neither the media side nor the solutions side of the digital signage business is easy. Some of the lessons of RMG’s struggle are that parts and management need to mesh, critical assumptions need to be based on reality, and strategy trumps perception management. One other lesson might be that IPOs are a sword with two edges.