Rage Software  (RGE)

News:

21/01/01 Rage announces profits warning, Directors make token share purchase
In line with the recent spate of profits warnings by UK and US games companies, Rage has issued its own, predicting that:
-  overall sales would be affected by  the lower than expected shipment of PS2s over the Christmas period. This, however, also has much to do with an oversupply of PS2 games at the console's launch and the inability of Rage to sufficiently differentiate its one PS2 title, Wild Wild Racing.
- exceptional and one-off losses would be greater than anticipated. However, the Company did not detail what the exceptionals might be.
In attempt to counterbalance the bad news, two Rage shareholders also made share purchases as an indication of their continued confidence in the Company. However since the investments, of £15,000 and £20,000 were made by two directors who sold over £250,000 of options each around the same time last year, the move should probably be considered a token gesture only.

15/02/01 Rage secure OEM deal
Rage has revealed that it has sold the OEM rights to all its titles to be released in the next two years to the OEM division of Interplay (part of the Titus Group that SCi has had to write off debts from). The move represents a stark contrast to the Company's pioneering and highly profitable in-house OEM performance of just 3 years ago but does secure a £2m revenue flow that has little but opportunity cost attached to it so should flow direct to the bottom line. Given the precarious cash position that the Company is thought to be in, this is a welcome short-term boost.

28/03/01 Rage unveils precarious cash position, disappointing interims

Rage revealed the extent of its current cash and trading problems with dismal interims that had as much to do with poor trading results as the Company's decision to change its accounting policy.
Rage only effectively shipped one new product (Wild Wild Racing) which, despite achieving sales of 75,000 units, failed to meet expectations. The PS2 game was a launch title that shipped into a vastly oversupplied market and suffered the consequences. The losses were exacerbated by the decision to change the Company's accounting policy in respect of development costs and advances from third parties. Historically, the Company had chosen to capitalise such costs and revenues until the release of the product but will now write off all costs as incurred. The effects of this on Rage's past, current and future accounts will be very significant and cynics might point to the fact that it shifts a significant quantity (over £8m) of losses into previous accounting periods. However, it does serve to increase the losses incurred in the half year to 31/12/00 as a significant amount of development expenditure was incurred which would not have been recognised under the previous accounting policy. Thus, with 4 new titles to be released during the H201, the second half of the year should result in far stronger results.
Most worrying, though, is the revelation that Rage is down to its last £1m and with a monthly cash burn rate of around £1m, the Company has only 1 month or so to secure additional funding. Furthermore, the Company revealed that it is unlikely to return to profitability before the end of 2002. The directors, however, appear not be too worried and point to three options it has to solve its crisis. They claim that they are close to signing terms with a lending bank to secure a credit facility but also revealed an alternative plan to raise funds via private equity or debt and the potential for a more drastic "trade finance" solution from a larger third party games company (that would almost certainly see them hand over the publishing rights to their products in development). Assuming no sales and the maintenance of the current overhead, Rage's peak cash requirement is around £18m. However, the Company has 9 products scheduled for FY02 (including the recently signed David Beckham game license) so will certainly not require all this amount. There is, though, no denying the seriousness of the situation facing Rage and even if it does secure short-term funding the Company has yet to prove its publisher business model can work.

12/06/01 Rage unveils financing package
Rage revealed that it had secured an equity line of credit from US financing group GEM Global Yield Fund of £15m. The financing, which is made available on a draw-down basis, will see the cash converted into equity at a 10% discounted rate to the market price at the time of draw-down and was secured with a further guarantee of warrants which are issued in parallel with (and on similar conditions to) the equity credit line. Although this theoretically puts the current management at serious risk of losing control of the Company (assuming all the £15m line is drawn-down and not sold, Gem would gain a 76.4% share of Rage), it is understood that Gem intend to sell their stakes, once converted into ordinary shares, as soon as is practical. This will likely, though, result in considerable dilution for existing shareholders and could lead to a depressed stock price if the Gem fail to sell their stakes quickly and take up residence as an overhanging seller in the market. Since the subscription price will vary according to the market price at the time of draw-down, it is impossible to say what level of dilution will take place. It is just as well, therefore, that Rage has also secured a £5m credit facility from the Royal Bank of Scotland.
The Rage management, though, are confident that due to their release schedule over the next two years and the availability of the banking facility, their use of the equity credit line will be kept to a minimum. In fact, the Company does not expect to need to use the whole facility although break-even remains around 16-18  months away.
Clearly this is an important move for Rage as it substantially reduces the potential of the Company suffering another cash crisis. Furthermore, it allows Rage to better prepare for the market upswing in terms of both development and  marketing budgets (Rage has always been at the lower budget end of the games publishers).
Rage have, commercially, performed poorly over the last few years but have now been extended a lifeline. Their ability to turn their substantial release schedule into profits will be scrutinised closely over the next 24 months and given the potentially punitive nature of the current financing, the Company may find it difficult to come back from continued commercial underperformance.

20/08/01 Rage prelims revealed
As it indicated at the interim stage (see 28/03/01 news), Rage has opted to follow the trend set by other games companies in using this year to get as much bad news out of the way as possible. Whilst t/o has risen an impressive 72%, losses have increased from £6.7m to £17m. Whilst the change in accounting policy (development costs are now written off as incurred) announced in March will have made a significant contribution to this, the failure of the company to produce best-sellers continues to plague the business. The current (FY02) financial year looks considerably better than last with a increased number of products due for release (14 SKUs Vs 5 SKUs). However, unless those products perform unusually well, Rage is unlikely to return to profitability before its original target of calendar Q4 02. With funding secured, there is also the potential for Rage to sign up more products from third party developers and under the current accounting policy unless they were finished products shipping this year, the costs of these deals would negatively impact the current year.

03/09/01 BSkyB deal announced
Rage has secured a distribution deal with satellite broadcaster BSkyB for the iDTV version of its Denki Blocks puzzle game. The deal will see Denki Blocks launched on Sky Digital's games channel as a pay-per-play service where users pay 25-50p per Denki Blocks game session. Rage will receive a percentage of this (typically around 20% of net receipts to Sky). The Sky games service, although extremely popular with millions of user sessions per week, features a broad range of free and pay-per-play games including Empire's Pipemania. Royalty flows should therefore be immaterial.

06/09/01 Unreal technology sublicensing deal struck
Just over a year after it signed a deal with Epic Games to sublicense its Unreal games engine, Rage has secured its first major customer, German developer Westka Interactive. The deal, worth $500,000 to Rage (out of which a royalty is paid to Epic), will see Westka incorporate the Unreal games technology into a forthcoming release.

22/10/01 Rage raises £1m of new money
Rage has used its rising share price to raise just over £1m of new money, in preference to continued use of the ELOC (see 12/06/01 news). The money will be used for working capital as the Company continues to strive towards profitability.

30/10/01 Rage becomes Nintendo developer
This "development agreement" is simply Rage becoming an official developer of games for the Nintendo Game Cube and should not be construed as Rage becoming a developer for Nintendo's publishing arm. Nintendo is keen to encourage third party publishers to produce games for its Game Cube console and most publishers have by now sought and received official developer status. This announcement, especially in light of Rage's continued use of the ELOC facility which is more punitive the lower the share price, should not be seen as a material development.

07/12/01 Rage to launch Andy McNab range
Rage has signed a global licensing agreement with Andy McNab to use the ex-SAS soldier-turned-author's name and expertise for a range of new multi-platform games. The deal represents Rage's move into the special forces action-strategy genre, one that has become highly popular and over the last 12 months increasingly crowded. Although the Andy McNab name is strong and will no doubt assist sales, it is still the quality of the game that will determine whether Rage can create a games franchise out of it. Whilst US developer Red Storm (since sold to Ubisoft) achieved considerable success with the Tom Clancy name, other author-based deals have not fared so well. Michael Crichton's Timeline game, for example, failed miserably despite the strength of the license.  

21/03/02 Rage Interims and profits warning

Rage registered a strong sales increase during the first half of its FY02 but failed to trim costs sufficiently to improve its profitability. The Company also warned that full year sales would be lower and losses, as a result, higher than anticipated. Turnover in the first half of the year principally comprised sales from 5 products, 3 of which failed to meet expectation.
The prospects for Rage look grim. Losses will continue despite 9 new SKUs scheduled for the second half of the year, a reflection, perhaps of the low sales potential of many of these titles. Rage's balance sheet reveals a significant increase in creditors (from £2.8m to £7.5m) whilst cash levels are, unsurprisingly, zero. The Company needs to fund both its internal development studios and other departments (around £10m/year) as well as the variable manufacturing and marketing costs associated with bringing titles to market (around £7/console title unit manufactured).
So what options are available to the Company?
Rage has drawn down £4m of the £15m ELOC it secured in June last year but claims that market conditions have prevented it from making further use of this facility. Trade options appear fairly exhausted; the Company has secured distribution agreements for most of the major territories and will have, no doubt, done its best to ensure cash advances as part of these deals. The Company is therefore left with:
-  trying to secure banking facilities, which, given the Company's already weak balance sheet may prove difficult or;
-  selling-off or closing down parts of the Company (i.e. development studios) or other IPR (publishing rights, licenses). The Company would, obviously, view this as a last resort since these assets form the basis of future profit potential for the Company.
Whichever is chosen, the Company's precarious financials will necessitate a decision soon.

16/05/02 Rage secures Ubi Soft distribution deal
Rage has signed the North (and, less importantly, South American) publishing rights for its Rocky series of games to French publisher Ubi Soft. The cross-collateralised deal comprises a £1.3 advance and guaranteed sales for the 4 Rocky SKUs. Given the context in which the deal has taken place, this move will be considered a welcome boon for the early cash injection ($0.5m on signing) it brings. Whilst it is good news that the Company has now signed up all its FY03 products with North American distributors its choice of Ubi Soft (who are understood to have taken a close look at acquiring the Company earlier in the year) for what is considered by many to be Rage's strongest product, may prove unwise. Ubi Soft is a predominantly European-focused publisher with comparatively limited US market reach. During the last 6 months, Ubi Soft was the 18th largest console publisher in the US with a market share of only around 1.6%. In addition, the French publisher has historically built itself through a policy of quantity over quality with over 150 releases in its financial year to March 02. Rage will need to ensure that Ubi Soft gives its Rocky products sufficient attention or else it risks failing to generate any royalties over and above the guarantee.

27/05/02 Last ditch fund raising is attempted
Rage have announced that it has placed around £3.5m (£3.1m net) of new shares at a deep discount of 1.25p and has proposed an open offer to raise an additional £2m from existing shareholders. A minimum of £2.2m will need to be paid  to its creditors, leaving the Company with £0.9m which it believes will be sufficient to take it through to profitability.  However, this assumes that the Company retains the £6.2m overdraft facility it currently has with Bank of Scotland. The principal use of this facility is the working capital requirement for manufacturing and marketing new releases. Without this the Company's ability to launch new titles would be severely restricted and with no prospect of future sales, the Company would be forced to put itself into liquidation. The problem for Rage comes from the fact that the bank will withdraw the facility if the Company fails to secure shareholder approval for the £5.5m placing and open offer.
Even if the Company achieves the fund raising , it still faces two key problems:
* The Company's cost base is still too high, it will almost certainly have to reduce its headcount and in doing so slim its product release schedule.
* The Company is still likely to face working capital issues with its Christmas releases and beyond, especially if its products continue to under perform at retail.
Shareholders will therefore need Rage to not only raise the full amount but also produce a AAA selling title from its summer releases. All other scenarios look unpleasantly bleak.

20/06/02 £5m raised in total
Counfounding critics, Rage secured an additional £1.5m of new money via the deep discounted open offer to existing shareholders announced on 27/05/02. The Company intends to pay £2.2m of the total £5m proceeds to trade creditors and the inland revenue with the remaining £2.8m being used for working capital. The Company has also instigated a considerable cost-reduction programme underpinned by a reduction in headcount from around 230 to around 160 (this has yet to be finalised). Rage now has 4 titles (7 SKUs) for release during the remainder of calendar 02 with a further 4 titles (9 SKUs) for release between January and June 03. The Company believes that it has sufficient working capital to see it through this period and to profitability in FY03. Whilst for most territories, Rage has handed distribution and some publishing responsibilities (and thus costs) to third parties, it still has a number of territories in which it will publish alone and has earmarked a minimum of £3m for marketing (approximately 10% of forecast FY03 turnover) during FY03. Rage will have to get its cost base down considerably from its high of earlier this year if it is to meet this cash flow target. It will also have to ensure that product in development is not compromised in doing so as it is still a company in dire need of a hit.

02/10/02 Trading update and studio disposal
Rage's bullish" trading" update revealed more by way of positive trading aspirations rather than positive sales achievements. Retailer orders for Rocky are forecast to be in excess of 500,000, reflecting the favourable specialist press reviews of the multi-platform product and Ubi Soft are reported to have allocated several million dollars to support the North American launch in November. Rage also revealed that it had begun discussions with overseas third party publishers and distributors to license several of their other titles in development.
The trading update also revealed the disposal of the Company's Birmingham studios and the new entity, called Swordfish Studios, will continue to operate as a third party developer for Rage. The establishment of Swordfish Studios has resulted in the resignation of director Trevor Williams and the move of Rage founder and one-time CEO Paul Finnegan to a part time role as Executive Deputy Chairman. Combined with other cost-cutting measures, Rage has now successfully reduced its costs base by 31% since the beginning of the year.
Finally, Rage revealed that it had begun legal proceedings against US-based publisher Majesco Sales Inc to try to secure £1.2m in royalties/guarantees owed. Since the Company has had to initiate legal proceedings, this is likely to trigger a bad debt provision in either the current or previous (y/e 30/06/02) financial year.

21/10/02 Prelims
With 3 times the number of releases, Rage demonstrated substantial year on year sales growth in the 12 months to 30/06/02 compared to the previous financial period. However, whilst the Company achieved sales growth of over 110%, to £12.3m, operating losses only decreased a disappointing 6%, to £15.5m. Contributing to the losses was the £1.2m bad debt provision discussed in the previous news item (see above) although the Company's continued inability to covers its overheads is still very much evident.
To correct this, Rage has embarked on a two-pronged strategy of cost reductions and a focus away from a larger number of lower quality original IP titles towards a smaller number of more mass market, higher quality titles. The cost reductions are discussed in the previous news item whilst the Company used the prelims to reveal that it is making headway towards achieving the second objective. Rage's multi-format Rocky game continues to receive positive press reviews and retail orders have now exceeded 650,000 units. Investors should note that these are only forecast total shipping figures rather than sell-through figures although UK sales of the Xbox version (the only SKU released to date ) have been strong.
Whether Rocky sales will be strong enough to see the Company through to profitability remains to be seen although the Company is confident of moving cash flow positive by the end of the year and hitting its current full year profit forecasts. Given Rage's current share price and its historic trading record, investors should expect a further trading update before the end of the calendar year when more concrete news of Rocky sales will have been received.

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