Participants

Jon M. Niermann; President, CEO & Director; Loop Media, Inc.

Neil T. Watanabe; CFO; Loop Media, Inc.

Darren Paul Aftahi; MD & Senior Research Analyst; ROTH MKM Partners, LLC, Research Division

David Marsh

Presentation

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Loop Media's financial results for the fiscal second quarter of 2023 ended March 31, 2023. Joining us today are Loop's CEO; Mr. Jon Niermann; and the company's CFO, Mr. Neil Watanabe.
By now everyone should have access to the fiscal second quarter 2023 earnings press release, which the company issued earlier today at approximately 4:05 p.m. Eastern Time. The release is available in the Investor Relations section of Loop's website at www.loop.tv. In addition, this call will also be available for webcast replay on the company's website.
Following management's remarks, we'll open the call for your questions. Certain comments made on this conference call and webcast are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain known and unknown risks and uncertainties as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. These forward-looking statements are also subject to other risks and uncertainties that are described from time to time in the company's filings with the SEC. Do not place undue reliance on any forward-looking statements, which are being made only as of the date of this call. Except as required by law, the company undertakes no obligation to revise or publicly release the results of any revision to any forward-looking statements.
The company's presentation also includes certain non-GAAP financial measures, including adjusted EBITDA as supplemental measures of performance of our business. All non-GAAP measures have been reconciled to the most directly compared GAAP measures in accordance with the SEC rules. You'll find reconciliation charts and other important information in the earnings press release and Form 8-K furnished with the SEC.
I would like to turn the call over to Loop's CEO, Mr. Jon Niermann.

Jon M. Niermann

Thank you, and good afternoon, everyone. We provided in our public filings in March that we believe that we could achieve $4.5 million to $5 million in second fiscal quarter revenue but we actually ended up at $5.4 million. While down from our fiscal first quarter, this did represent an increase of 11% year-over-year. Also, as previously disclosed in our public filings, we saw headwinds in overall digital ad spend beginning in the second half of our quarter ended December 31, 2022, and continuing into our fiscal quarter for 3 months ended March 31, 2023, that unfortunately ended our streak of sequential growth quarters that have occurred since fiscal year 2021.
This confirmed that we are not immune to the challenges the broader macroeconomic environment presents and its impact on advertising. Like many companies that rely on the advertising market, we continue to see industry and macro headwinds in overall digital ad spend. In addition, these headwinds were exacerbated in our second fiscal quarter by the traditional seasonality of advertising with the January to March quarter typically being the slowest for ad sales for us and the market generally.
As a result, it was a challenging quarter in which we saw our revenue and our bottom line negatively impacted. We have focused on our business and operations and how better to insulate the business from external forces and factors and how internally to reduce the impact of advertising market downturns like we've recently experienced. We believe the recent challenges in the advertising market will make our business stronger as we look to bolster the company's direct ad sales efforts and focus on key advertising geographies and venue types.
We believe our recent growth in distribution and the extended reach of our platform has set us up for future revenue growth. We believe the streaming TV for business sector is an early-stage growth market and are encouraged by the comparisons to streaming in consumer homes and where the market was a dozen years ago as streaming started to replace cable and satellite.
Despite these advertising market and macro headwinds, we delivered over 57,000 active Loop Players/Partner Screens across the Loop platform at the end of March 23, which is a 5.4x the 10,500 active Loop Player/Partner Screens we had at the end of March '22. This includes over 32,000 active Loop Players in our O&O platform and approximately 25,000 screens across our Partner Platform at the end of March '23. This performance continues to validate our distribution model and the appeal of our content and technology stack across various venue types and geographies, which we believe will positively impact our operating results when advertising spend begins to increase.
Given recent challenges in the overall ad market, we have focused our efforts on increased efficiency and cost cutting, while still maintaining our focus on and dedication to the continued growth of our business. As a result, we have made cuts and adjustments across several aspects of our business. Part of these changes were coincidently just the natural result of where we are in the growth cycle, with the downturn in advertising demand and other challenges, reinforcing changes that we were looking to make in any event.
We are implementing a plan to reduce our overall operating costs, including labor which will be reduced by approximately 20%. Part of this reduction included integrating our Loop Media Studios division into other parts of the business. We also renegotiated or signed content licenses to reduce average content costs and found ways to make our content license margins stronger. In fact, we saw a very positive uplift in margin towards the end of the quarter in March.
I would like to briefly touch on our business model for those new to the Loop story. Simply put, Loop brings streaming TV to businesses. We distribute our content, advertising inventory to digital screens located in out-of-home locations, primarily through our owned and operated streaming platform of Loop Players, which is what we refer to as our O&O network and through screens on digital platforms owned and operated by third parties, which is what we refer to as our Partner Platform. We believe our long-term business model of providing free streaming TV to businesses through our free-to-the-user Loop Player will make the distribution growth in our O&O platform more resilient than a subscription-based business model or one that requires an end user to provide a credit card or other payment information.
Our larger distribution footprint has increased our monthly video impressions viewed, which we estimate now to be over 2 billion, the average number of viewers estimate in each location across our O&O platform. Our new customers added during the quarter once again included a diverse set of businesses, such as restaurants, bars, gyms, college campuses, office buildings and various types of retail establishments.
More Americans are now watching streaming TV over cable largely because they could select specific content whenever they want to watch it as well as better economics. However, traditional streaming content of longer-form TV series and movies doesn't work in public venues. So the demand for a product like Loop that offers engaging, vibe enhancing short-form content makes businesses eager to try our service. We are an all-in-one solution offering all that they need in terms of appropriate content and digital signage for free, which is truly disruptive to the traditional pay TV model and additional digital signage charges that go away once you get Loop.
A very important strategic step that we recently took as a company is the development of our direct ad sales efforts, which are ramping up in the current fiscal quarter. The growth in our distribution, referred to earlier, has allowed us to make a greater push into direct sales during our current fiscal quarter beyond our traditional sole focus on open exchange programmatic digital advertising.
Our reliance on the programmatic open exchange as our main source of revenue made us vulnerable to the dramatic downturn industry-wide in that ad sector. We are correcting that by building up our direct sales function. Direct ad sales typically result in higher CPMs for advertising inventory and better, more predictable quality of revenue.
We believe the scale of our distribution platform and the premium quality of our content makes us attractive to companies wishing to advertise directly in digital media outside of the home, extending their audience reach further. In addition to these efforts, we have assembled an efficient and focused direct sales team and expect to see the results of their efforts over the course of the second half of fiscal '23.
Direct ad sales typically require a minimum threshold of distribution reach before it can be deemed scalable, and our recent distribution growth has allowed us to generate more interest from a greater number of ad sales buyers. We are pleased to say that we are at the stage of growth now and look forward to more of an impact from direct sales in the quarters ahead and becoming less dependent on programmatic advertising demand.
Turning to our sales channels. I'm happy to report that our affiliate program for the distribution of new Loop Player installations to our out-of-home customers performed exceptionally well during the quarter, meaningfully contributing to our 22% growth in quarterly active units from the end of the period prior. Our affiliate program provides thousands of affiliate members nationwide with an opportunity to promote and distribute our proprietary Loop Players to out-of-home customers in return for an affiliate distribution fee.
Our focus and investment in this program throughout fiscal '22 are beginning to pay off and is validating a key part of our distribution strategy. Looking ahead, we believe the digital, out-of-home retail media market will continue to gain an increasing share of advertising spend as several industry forecasts predict. With our strong pipeline of partners and expanding distribution network and our commitment to efficient new customer acquisition, we believe the Loop is well positioned to deliver another year of significant revenue growth in the second half of 2023.
With over 32 million small- to medium-sized businesses that we could target, more than 32,000 Loop Players we currently have in circulation, along with our 25,000 Partner Platform Screens represent a small percentage of the opportunities that we believe are available to us.
With that, I will turn the call over to Neil to take you through our financial results. Neil?

Neil T. Watanabe

Thank you, Jon, and good afternoon, everyone. As we review our financial results, I wanted to remind everyone that our comparisons and variances commentary refer to the prior year's quarter, unless otherwise specified. As reported in our earnings press release, revenues for the second and first quarter increased 11% to $5.4 million compared to $4.9 million in the year ago quarter. The increase was driven by significantly more Loop Players deployed in the market as well as the benefit from our Partner Platform business launched in May of 2022, offset by a general slowdown in the overall digital advertising spend due to the macroeconomic environment.
Going a layer deeper on our Loop Player penetration. As of December 31, 2022, we had approximately 26,900 quarterly active units or Loop Players in the market compared to approximately 33,000 active units as of March 31, 2023, a 22% increase in just 3 months. The Player growth was driven primarily by our marketing efforts and increased focus on our affiliate program. It's important to note that quarterly active units do not include any Partner Platform Screens which is an initiative we launched in May of 2022 with 1 partner on 17,000 screens.
Our current partner screens as of March 31, 2023, is now 25,000. Gross profit in the second quarter increased slightly to $1.36 (sic) [$1.6 million] compared to $1.4 million in the year ago period. Gross margin rate was 29% compared to 34% for the year ago period. The increase in gross profit dollars was primarily driven by new contracts with reduced average content cost. When compared to the prior quarter, fiscal Q2 gross margin decreased primarily due to the lower revenue and recurring content costs.
The increase in gross profit dollars was driven by increased revenues, while the decline in gross margin rate was primarily driven by revenue mix as the year ago period did not include the launch of our partner platform business, which carries a lower gross margin but a higher operating margin. When compared to the prior quarter, gross margin percentages were relatively flat.
Total SG&A expenses excluding stock compensation and depreciation and amortization in the fiscal second quarter were $7.8 million compared to $4.7 million for the year ago period. The increase in SG&A was primarily due to greater marketing, customer acquisition and retention spend.
We anticipate an improvement of our operating expense leverage in the second half of our fiscal year as we seek to increase revenues while taking action to reduce the percentage of our SG&A expenses in both headcount, marketing and operating expense efficiencies as discussed by Jon. Net loss in the fiscal second quarter of 2023 was $9.8 million or a loss of $0.17 per share compared to a net loss of $5 million or a loss of $0.11 per share for the comparable period in fiscal 2022. Adjusted EBITDA in the fiscal year second quarter was a loss of $5.6 million compared to a loss of $3.0 million for the same period in fiscal 2022.
Turning to our balance sheet. Cash and cash equivalents were $4.7 million on March 31, 2023, compared to $7.8 million on December 31, 2022. We are managing our cash and have taken steps toward improving the days of our outstanding accounts receivable, negotiating improved vendor payment terms and overall good expense control. As of March 31, 2023, we had $9.1 million of total debt compared to $7.1 million on March 31, 2022. We continue to envisage strong, clear growth, both year-over-year and quarter-over-quarter. Our commitment to marketing and expansion of our Loop Player distribution will be the primary drivers for growth and driving profitability in the future.
Despite the current market softness that Jon alluded to earlier, we plan to continue increasing penetration of our Loop Players and efficiently growing quarterly active units to be poised for growth when digital advertising spend increases. We are focused on increasing our revenues, gross margins and controlling our expenses based on our current forecast as we plan to continue to reduce the adjusted EBITDA loss on a quarterly basis.
I'd like to thank everyone for listening today. We look forward to providing further updates on our next conference call. This concludes our prepared remarks, and we will now open it up for questions.

Question and Answer Session

Operator

(Operator Instructions) Our first question comes from Darren Aftahi with ROTH MKM.

Darren Paul Aftahi

Jon, maybe could you just talk about, in general, it looked like your business under indexed a little worse than maybe what the broader ad environment did or at least has been reported thus far. So just kind of curious, if you just kind of talk about the March quarter and then maybe how things have trended post that in months of April and May.

Jon M. Niermann

Darren, yes, that's why we talked about and called out the open exchange programmatic, which we're solely dependent on. If you look at our growth, really last fall, kind of when we hit the scale to where we could start looking at direct and it takes a little bit of time to build that. And we've kind of really started getting into that at the end of Q2 and that's increasing towards Q3.
So I think that sole dependency -- if you look at the overall ad market, that open exchange really took a hit and that's where we were living. So as we kind of talked about fixing that vulnerability was just a matter of our growth cycle, frankly, that's really the only way we could have gotten that worked well up to that point.
But going forward, we can't be dependent on that. So I think that will explain -- and again, it doesn't matter about the platform size when there's no ad [bill] coming in, the revenue is going to take a hit like it did. But we said going forward, we're more prepared to do that. In terms of just specifically, obviously, I can't talk about that where it's going, but we're always keeping an eye out for how things are shifting in the industry and any signs going forward that we could adjust to.

Darren Paul Aftahi

Just as a follow-up on direct ad sales. Like is everything in place for that to be impactful in the current quarter we're in?

Jon M. Niermann

Yes. So it's in place and the team is making some great progress in that area already with some things coming across the line.

Darren Paul Aftahi

Great. Two more, maybe. Your pipeline for new distribution deals, how is that looking? And then I believe you have 30,000 partner screens as the opportunity, and I think you said you have 25,000 live. Just kind of what's the time frame for getting the additional 5,000 plus on the network.

Jon M. Niermann

So on the latter part, it's really just a matter of testing and when they open up and expand. If you kind of recall when we started that, we started with 5,000. And then after that, we all tested and it worked well, it increased to 17,000. I'd say it's very similar to this. It's just really a function of testing and the partners being ready to go and expand it. So that, we believe, will obviously have an impact going forward.
And then I think overall, the pipeline we're pleased with. There's -- as we alluded, at the end of the call, there's a big greenfield for everybody in this industry that is looking for streaming out of home. So some of the longer-tail deals that we've been working on for a while those obviously the time for those happening could be closer. So we feel good about what's in the pipeline and kind of the road ahead.

Darren Paul Aftahi

And last one for me. Are you guys done with your payments on your music license renewals?

Jon M. Niermann

Those are Neil, do you want to jump into that?

Neil T. Watanabe

Yes, those are pretty much done for the next bit of time, Darren. I think we had talked in the previous conference call that we had renewed our content partner licenses in the first quarter, primarily most of them, and they go for about a 2-year agreement. So we don't have any renewals coming up for a bit of time on the primary 3 that we probably referenced with you in the past.

Jon M. Niermann

Darren, I wanted to just add color to that. I mean it's the same as direct sales. Once you hit a certain scale, as you know, we are able to do better deals. And as Neil kind of explained, redoing some of those content deals had a positive impact on the margin. So in terms of where we are with content, again, we feel positive.

Operator

(Operator Instructions) Our next question comes from David Marsh with Singular Research.

David Marsh

I wanted to start with the comment about the expense reduction. I wasn't sure if I heard you correctly. I thought I heard 20% reduction in expenses. And I wasn't sure if that was tied to a reduction in force or if they were just ongoing expenses that you were able to -- that you're able to target that aren't labor?

Jon M. Niermann

Yes, go ahead, Neil. Go ahead. You got it.

Neil T. Watanabe

Jon's reference specifically on the 20% was related to payroll and labor, and that was not obviously the only area of expense reduction. We looked at other areas and operations and marketing costs that we also have enacted that will be seen -- reflected in Q3 and Q4 in the back half of the year. So there's just been an overall leveraging of expenses and with the goal of improving profitability and cash flow, et cetera.
But to your answer that 20% was specifically related to the headcount, labor reductions, partly due to what Jon had talked about in the early part of the call with the kind of reformation of our 1 group for content creation, et cetera, that has been sort of [widened] and moved into other parts of our business.

Jon M. Niermann

Yes. And I think also, it's worth pointing out with kind of the evolution of the business, it was a good time for us to repurpose ahead and have somebody really focused on operations and diving into efficiencies and cuts there. So I think we'll continue to discover some new things. But to Neil's point, we're looking at several areas across the board, but that was labor specifically that figure.

David Marsh

That's helpful. And then could you just talk about liquidity. Obviously, the cash came down a bit with the loss during the quarter. But can you just talk about your liquidity position? And if you feel comfortable in terms of the position and whether or not you feel like there could need to be a capital raise or if you feel like you have what you need on hand and currently available?

Neil T. Watanabe

You want to take that one, Jon?

Jon M. Niermann

Yes, go ahead, Neil.

Neil T. Watanabe

Sure. As it relates to liquidity, we obviously have clearly been focusing on improving our cash burn and part of that starts with the operating components of increasing revenue, improving gross margin and reducing expenses. And so sequentially through the remainder of the year, we certainly expect to see progress in all those areas as a result of that. In addition, we are in process of -- we have a credit facility, and we're in the process of looking and evaluating how as our revenue grows so does our receivables, which is basically collateral for our borrowing line.
And as a result of our increased revenue that we're expecting, that allows for us to, based on the normal and current process and agreement, allows us to flex our accordion from currently where it's at $6 million limit up to $8 million and then further from there. Later in the year, we certainly anticipate that there'll be more borrowing capacity. So that's an avenue of opportunity for us.
And so we're obviously exploring other options to evaluate capital raise. But we just (inaudible) and what I can tell you is based on our forecast and our evaluation of all our cash needs. We were able to support that we have the ability to fund the operations and the budget for the next 12 months.

David Marsh

Yes, that's perfect. And then just kind of just shifting gears a bit. With regard to the advertising, obviously, in the last cycle of political spend, you guys really didn't have the screen distribution that you have now. Is political something that you think that you guys can capture? And have you had any early indications of interest in that particular space?

Jon M. Niermann

Yes, we actually did benefit from that in November. I mean, it was -- to your point, we weren't as big as then as we are now, but we saw a very positive traction in that area. So that is something that we're open to. It's something that works out of home. And whenever those cycles come around, we'll be ready for it.

Operator

There are no further questions at this time. I'd like to turn the call back over to Jon Niermann for closing remarks.

Jon M. Niermann

We appreciate it. Thank you, everybody, for taking the time to join us today. That will end our call. I appreciate you dialing in. Thank you.

Operator

Thank you. This concludes the program. You may now disconnect.