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ADGL > SEC Filings for ADGL > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for ALLDIGITAL HOLDINGS, INC.

Form 10-Q for ALLDIGITAL HOLDINGS, INC.


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion contains statements that constitute forward-looking statements. Such statements can be identified by the use of the forward-looking words "anticipate," "estimate," "project," "likely," "believe," "intend" or "expect" or similar words. When considering such forward-looking statements, you should keep in mind the risk factors noted in the section of this Report entitled "Risk Factors" and other cautionary statements throughout this Report. You should also keep in mind that all forward-looking statements are based on management's existing beliefs about present and future events outside of management's control and on assumptions that may prove to be incorrect.

Aftermarket Enterprises, Inc. ("Aftermarket" with reference to periods or operations prior to the Merger; "AllDigital Holdings" for periods following the Merger) acquired all of the assets and operations of AllDigital, Inc. ("AllDigital") in a reverse triangular merger (the "Merger") that was effected on July 29, 2011. Effective August 25, 2011, Aftermarket Enterprises name was changed to AllDigital Holdings, Inc. AllDigital, Inc. is now AllDigital Holdings, Inc.'swholly-owned operating subsidiary. As of the date of the Merger, the Company had two business lines: AllDigital, Inc.'s digital media services business and Aftermarket's automotive accessories business. On September 27, 2011, AllDigital Holdings sold the automotive accessories business to the former president of Aftermarket.

In this section, AllDigital Holdings and AllDigital, as a consolidated entity going forward (without Aftermarket's auto accessories business), are referred to as the "Company," "we" or "us." To the extent we need to distinguish the separate corporate histories, businesses or financial results of the two entities, we refer to Aftermarket or AllDigital individually.

Certain Defined Terms

In this Report, we use certain technical terms to describe our business, which terms are important to an understanding of our business, including the following:

? "Apps" are software applications that operate on a Device, and which can act as the front-end of a remotely hosted, cloud-based Digital Service.

? "Devices" are Internet-connected devices, including without limitation smart phones, tablet computers, desktop and laptop computers, game consoles, televisions, home theatre systems, streaming players, "smart" appliances, and digital signage.

? "Digital Services" are remotely hosted, cloud-based software applications intended for use on, interactivity with, and the delivery of digital media to or from, one or more Devices. Examples of Digital Services including NetFlix's Movies On-Demand, Google Maps, Pandora Radio, Amazon's Kindle, and Facebook.

? "Pairing" is the process of setting-up and managing the ongoing data exchange between a Digital Service and a Device. Pairing includes not only the initial process of ensuring the compatibility of the Digital Service with one or more Devices but may also include any or all of the following:

? managing various elements of and processes related to the ongoing data exchange between a Digital Service and a Device, including Device compatibility, security, quality of service, and dynamic updates;

? procuring and managing high-speed and scalable cloud-based storage;

? applying real-time business rules, work flows, and processes to data assets (e.g., such as converting master video files into formats compatible with the target Device) and Digital Services (e.g., user authentication); and

? acting as the origin for data exchange between the Digital Service and Device.

AllDigital Overview

AllDigital was incorporated in the State of California on August 3, 2009 with the primary purpose of developing the first comprehensive offering of software tools and back-end services dedicated to managing the complex Pairing of cloud-based digital media and Digital Services with Internet-connected Devices.

Our products and services provide the software tools and back-end services required by content owners and providers of Digital Services to manage and optimize the ongoing Pairing of digital media and Digital Services with an increasingly diverse and complex offering of Devices. We accomplish this by enabling, and maximizing the performance of, the cloud-based storage, processing and transit of digital media and Digital Services to multiple Devices simultaneously. Our business model primarily targets content owners and providers of Digital Services that need to distribute their digital media and Digital Services to a large, increasingly fragmented, and rapidly growing market of diverse Devices operating on a number of different Device platforms.

For the first nine months of 2012, we have continued to expand existing customer relationships, established new customer relationships through word of mouth and partner referrals, continued to develop and mature different elements of the Media i/o platform and overall product portfolio, and worked with selected customers on novel digital media and Digital Service to Device implementations.

General Outlook

Since our inception, there has been significant and growing interest in our services.

We recognized $2,467,232 in revenues for the nine months ended September 30, 2012, compared to $1,833,269 in revenues for the same period in 2011. Our customers to date have largely been a result of direct sales, word of mouth, or partner referrals.

We believe Digital Services are not only rapidly proliferating, but are becoming increasingly critical to enterprise core business applications, implemented to achieve a wide variety of objectives, driving new business models and business strategies, and changing the way AllDigital's customers store and originate data and software applications.

Many of the Digital Service and App pioneers (such as Facebook, Netflix and Pandora) have made, and must continue to make, significant, ongoing investments in order to keep their services Paired to hundreds of different types of Devices. Smaller and emerging companies typically lack the scale and expertise to compete. AllDigital was founded to enable its customers to outsource the complex process of Pairing a Digital Service to a Device to a trusted, third party service provider.

We expect that the need for Digital-Service-to-Device software tools and back-end services will accelerate significantly over the next 2-3 years, which acceleration we anticipate will be driven by the convergence of the following two key market dynamics: (1) The market for Devices is substantial and rapidly growing, and, (2) Digital Services are increasingly critical to enterprise core business applications, are implemented to achieve a wide variety of objectives and are rapidly proliferating.

We also believe the growth of the Digital Services market will not be sustainable without the creation of third party service providers that offer to market players the software tools and back-end services necessary to the ongoing Pairing of reliable, secure and high-speed Digital Services to various Devices and Device platforms.

Our ability to successfully generate future revenues is dependent on a number of factors, including (i) the availability of capital to continue to develop, operate and maintain our proprietary Media i/o platform and other products, (ii) the ability to commercialize our portfolio of products to content owners, Digital Services providers, and other enterprises, and (iii) our ability to develop channel and other partnerships with other organizations within and outside the digital media services industry. We may encounter setbacks related to these activities.

Results of Operations - Three Months Ended September 30, 2012 and 2011

The following discussions are based on the consolidated balance sheets as September 30, 2012 (unaudited) and December 31, 2011 and statement of operations for the three months ended September 30, 2012 and 2011(unaudited) and notes thereto.

The tables presented below, which compare AllDigital's results of operations from one period to another, present the results for each period and the change in those results from one period to another in both dollars and percentage change. The columns present the following:

? The first two data columns in each table show the dollar results for each period presented.

? The columns entitled "Dollar variance" and "% variance" show the change in results, both in dollars and percentages. These two columns show favorable changes as positive and unfavorable changes as negative. For example, when net sales increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative in both columns.

Three Months Ended September 30, 2012(Unaudited) Compared to Three Months Ended
                         September 30, 2011 (Unaudited)



                             For the three months ended September      Dollar variance        % variance
                                             30,                          favorable            favorable
                                   2012                  2011           (unfavorable)        (unfavorable)
Net sales                   $          868,956       $     741,558     $        127,398                17.2 %
Cost of sales                          661,165             501,600             (159,565 )             (31.8 %)
Gross profit                           207,791             239,958              (32,167 )             (13.4 %)

Operating expenses
Selling, marketing and
advertising                            100,588              69,403              (31,185 )             (44.9 %)
General and
administrative                         339,074             449,165              110,091                24.5 %
Total operating expenses               439,662             518,568               78,906                15.2 %

Loss from continuing
operations                            (231,871 )          (278,610 )             46,739                16.8 %

Other income (expense)
Interest income                            213                 251                  (38 )             (15.1 %)
Interest expense                           (27 )            (3,964 )              3,937                99.3 %
Organization costs
writeoff                                     -            (790,840 )            790,840               100.0 %
Other income                           195,000                   -              195,000                   -
Total other income
(expense)                              195,186            (794,553 )            989,739               124.6 %

Loss from continuing
operations before
provision for income
taxes                                  (36,685 )        (1,073,163 )          1,036,478                96.6 %
Provision for income
taxes                                        -                 800                  800               100.0 %
Net loss from continuing
operations                             (36,685 )        (1,073,963 )          1,037,278                96.6 %
Income from discontinued
operations                                   -               5,000               (5,000 )            (100.0 %)
Net loss                    $          (36,685 )     $  (1,068,963 )   $      1,032,278                96.6 %

Net Sales. Net sales increased by $127,398, or 17% in the third quarter of 2012 compared to the third quarter of 2011, primarily due to $119,584 increase in non-recurring projects and by $7,814 increase in recurring monthly maintenance and support contracts with new and existing customers.

Gross Profit. Gross profit decreased by $32,167, or 13%, in the third quarter of 2012 compared to the third quarter of 2011. The decrease in gross profit primarily resulted from an increase in cost of sales of $159,565 partially offset by an increase in sales of $127,398. The increase in cost of sales was primarily due to an increase in engineering and software development personnel for current and future projects of $234,667 offset by a decrease of $109,058 for 3rd party contracted services.

Selling, Marketing and Advertising Expenses. Selling, marketing and advertising expenses increased by $31,185, or 45%, in the third quarter of 2012 compared to the third quarter of 2011. 85% of the increase was due to increased salary and payroll related expenses, 19% was due to increased advertising expense, and a decrease of 4% was due to other selling expenses.

General and Administrative Expenses. General and Administrative expenses decreased by $110,091, or 25%, in the third quarter of 2012 compared to the third quarter of 2011. The decrease was primarily due to decreases of $94,256 in consultants and outside services, $31,309 in legal expenses, $21,625 in audit expenses, and $4,093 in salary and payroll related expenses, offset by increases of $20,047 in rent, $12,500 in software expenses, $4,507 in depreciation expense, and $4,138 in other expenses.

Interest Expense. Interest expense decreased by $3,937 in the third quarter of 2012 as compared to the third quarter of 2011. The decrease was primarily due to $3,836 in interest expense related to the Notes in the third quarter of 2011 compared to $0 in the third quarter of 2012. There were no Notes in the third quarter of 2012.

Organization Costs Writeoff. Organization costs writeoff were $0 in the third quarter of 2012 compared to $790,840 in the third quarter of 2011. These costs were incurred in connection with the July 2011 Merger and were determined to have no future value.

Other Income. Other income was $195,000 in the third quarter of 2012 compared to $0 in the third quarter of 2011. This was the result of a settlement with a former customer.

Results of Operations - Nine Months Ended September 30, 2012 and 2011

The following discussions are based on the consolidated balance sheets as September 30, 2012 (unaudited) and December 31, 2011 and statement of operations for the nine months ended September 30, 2012 and 2011(unaudited) and notes thereto.

The tables presented below, which compare AllDigital's results of operations from one period to another, present the results for each period and the change in those results from one period to another in both dollars and percentage change. The columns present the following:

? The first two data columns in each table show the dollar results for each period presented.

? The columns entitled "Dollar variance" and "% variance" show the change in results, both in dollars and percentages. These two columns show favorable changes as positive and unfavorable changes as negative. For example, when net sales increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative in both columns.

 Nine Months Ended September 30, 2012(Unaudited) Compared to Nine Months Ended
                         September 30, 2011 (Unaudited)



                              For the nine months ended        Dollar variance        % variance
                                    September 30,                 favorable            favorable
                                2012              2011          (unfavorable)        (unfavorable)
Net sales                   $   2,467,232     $  1,833,269     $        633,963                34.6 %
Cost of sales                   1,904,140        1,130,072             (774,068 )             (68.5 %)
Gross profit                      563,092          703,197             (140,105 )             (19.9 %)

Operating expenses
Selling, marketing and
advertising                       488,121          136,323             (351,798 )            (258.1 %)
General and
administrative                  1,167,984          815,431             (352,553 )             (43.2 %)
Total operating expenses        1,656,105          951,754             (704,351 )             (74.0 %)

Loss from continuing
operations                     (1,093,013 )       (248,557 )           (844,456 )            (339.7 %)

Other income (expense)
Interest income                     1,065              658                  407                61.9 %
Interest expense                     (112 )        (26,055 )             25,943                99.6 %
Organization costs
writeoff                                -         (790,840 )            790,840               100.0 %
Other income                      195,521                -              195,521                   -
Total other income
(expense)                         196,474         (816,237 )          1,012,711               124.1 %

Loss from continuing
operations before
provision for income
taxes                            (896,539 )     (1,064,794 )            168,255                15.8 %
Provision for income
taxes                              (2,400 )         (2,400 )                  -                   -
Net loss from continuing
operations                       (898,939 )     (1,067,194 )            168,255                15.8 %
Income from discontinued
operations                              -            5,000               (5,000 )            (100.0 %)
Net loss                    $    (898,939 )   $ (1,062,194 )   $        163,255                15.4 %

Net Sales. Net sales increased by $633,963, or 35% in the first nine months of 2012 compared to the first nine months of 2011, due to $368,806 increase in recognition of percentage of completion related to our contracts and completion of projects with new customers, and $265,157 in recurring monthly maintenance and support contracts with new and existing customers.

Gross Profit. Gross profit decreased by $140,105, or 20%, in the first nine months of 2012 compared to the first nine months of 2011. The decrease in gross profit primarily resulted from $569,282 in salaries and related expenses for new engineering and software development resources for current and future projects, $138,670 more for 3rd party contracted resources as we transitioned to more in-house personnel, $30,711 more equipment expenses, $27,450 more operating leases, and $7,955 other cost of sales, offset by $633,963 increased net sales.

Selling, Marketing and Advertising Expenses. Selling, marketing and advertising expenses increased by $351,798, or 258%, in the first nine months of 2012 compared to the first nine months of 2011. 72% of the increase was due to increased salary and payroll related expenses, primarily due to the addition of one new employee in August 2011 and one in September 2011, 10% was due to increased advertising expense, 8% was due to increased outside services, 6% was due to increased travel, and 4% was due to other selling expenses.

General and Administrative Expenses. General and Administrative expenses increased by $352,553, or 43%, in the first nine months of 2012 compared to the first nine months of 2011. The increase was primarily due to increases of $230,145 in salary and payroll related expenses, $62,241 in rent expense, $34,946 in software maintenance and support, bad debt expense of $34,072 related to one customer, $19,577 in depreciation and amortization, $15,003 for phones and internet expense, $11,062 in equipment expense, $7,718 in accounting expense, $4,985 in legal expense, and $16,691 in other expenses, offset by a decrease of $83,887 in consultants and outside services primarily related to the third quarter 2011 reverse merger.

Interest Expense. Interest expense decreased by $25,943 in the first nine months of 2012 as compared to the first nine months of 2011. The decrease was primarily due to $25,616 in interest expense related to the Notes in the first nine months of 2011 compared to $0 in the first nine months of 2012. There were no Notes in the first nine months of 2012.

Organization Costs Writeoff. Organization costs writeoff were $0 in the first nine months of 2012 compared to $790,840 in the first ninth months of 2011. These costs were incurred in connection with the July 2011 Merger and were determined to have no future value.

Other Income. Other income was $195,521 in the first nine months of 2012 compared to $0 in the first nine months of 2011. $195,000 was the result of a settlement with a former customer.

Liquidity and Capital Resources

As of September 30, 2012, we had current assets of $880,974, including $648,632 in cash and cash equivalents. As of December 31, 2011, we had current assets of $1,159,088, including $998,853 in cash and cash equivalents.

Cash decreased $350,221 from $998,853 at December 31, 2011 to $648,632 at September 30, 2012, due primarily to net cash used in operating activities of $321,565 in the first nine months of 2012. Net cash used in operating activities consisted of $898,939 in operating loss, $53,867 increase in account receivable, and $29,921 increase in prepaid expenses, offset by $264,454 increase in accounts payable and accrued expenses, $213,744 in noncash adjustments, $171,284 increase in deferred revenue, and $11,680 decrease in deferred costs. Net cash provided by operating activities was $466,638 for nine months ended September 30, 2011.

$41,156 cash was used in investing activities in the first nine months of 2012. $32,656 was used for the purchase of furniture, computer equipment and building signs and $8,500 was used for the purchase of a domain name.$91,309 was used in investing activities for the purchase of computer equipment and software in the first nine months of 2011.

$12,500 in cash was provided by financing activities in the first nine months of 2012. 50,000 common stock options were exercised by a former employee in the third quarter of 2012. In November 2010, AllDigital commenced an offering of up to $500,000 in convertible promissory notes in a bridge financing in order to raise funds primarily to pay the legal, audit and other transaction costs directly related to the completed Merger transaction with Aftermarket. The final $200,000 of the $500,000 bridge financing was provided in the first nine months of 2011. Amounts raised in the bridge financing were converted into common stock and warrants as part of the approximately $1,000,000 offering conducted by Aftermarket that closed immediately prior to the merger. In addition, $481,650 was raised in the third quarter of 2011 through a private placement of common stock.

We monitor our financial resources on an ongoing basis and may adjust planned business activities and operations as needed to ensure that we have sufficient operating capital. We evaluate our capital needs, and the availability and cost of capital on an ongoing basis and expect to seek capital when and on such terms as deemed appropriate based upon an assessment of then-current liquidity, capital needs, and the availability and cost of capital. Given our early stage of operations, we do not expect that bank or other institutional debt financing will be available. We expect that any capital we raise will be through the issuance of equity securities, warrants or similar securities. We believe that we will be able to obtain financing when and as needed, but may be required to pay a high price for capital. On October 9, 2012, the Company announced that it signed an engagement letter with Merriman Capital, Inc., an investment banking firm, to function as its capital markets advisor. Merriman will advise AllDigital on various strategic matters, including potentially raising capital. We do not have any commitments to provide capital.

Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, and all of the other information set forth in this Report before deciding to invest in shares of our common stock. In addition to historical information, the information in this Report contains forward-looking statements about our future business and performance. Our actual operating results and financial performance may be different from what we expect as of the date of this Report. The risks described in this Report represent the risks that management has identified and determined to be material to our company. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also materially harm our business operations and financial condition.

We are in an early stage of operations and may be unable to generate significant revenue in the future.

AllDigital Holdings was incorporated in 2006, and AllDigital was incorporated in 2009. Both have been operating for only a limited period of time and are in an early stage of operations. We may be unable to expand revenue at the rate anticipated. If we do not generate significant revenue in the future, or if costs of expansion and operation exceed revenues, we will not be profitable. We may be unable to execute our business plan, generate significant revenue or significant profits.

We have a limited operating history and cannot ensure the long-term successful operation of our business or the execution of our business plan.

We have a limited operating history, and as such, investors have no meaningful track record by which to evaluate our future performance. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by growing companies in new and rapidly evolving markets. We may be unable to accomplish any of the following, which would materially impact our ability to implement our business plan:

? establishing and maintaining broad market acceptance of our products, services and platform, and converting that acceptance into direct and indirect sources of revenue;

? establishing and maintaining adoption of our technology on a wide variety of Devices and Device platforms;

? timely and successfully developing new products, services, service and platform features, and increasing the functionality and features of our existing products, services, platform and technology;

? developing products and services that result in a high degree of customer satisfaction and a high level of end-customer usage;

? successfully responding to competition, including competition from emerging technologies and solutions;

? developing and maintaining strategic relationships to enhance the distribution, features, content and utility of our products, services, platform and technology; and

? identifying, attracting and retaining talented technical and creative services staff at reasonable market compensation rates in the markets in which we employ.

Our business strategy may be unsuccessful and we may be unable to address the risks we face in a cost-effective manner, if at all. If we are unable to successfully accomplish these tasks, our business will be harmed.

We will likely need to raise additional capital in order to continue and grow our operations, and we may be unable to obtain additional capital on reasonable terms, or at all.

We generated negative cash flows from operations during the nine months ended September 30, 2012, have a working capital deficiency at September 30, 2012 and have limited cash. If we continue to use cash in our operations, we will need to raise capital. Given our early stage of operations, we do not expect that bank or other institutional debt financing will be available. We expect that any capital we raise will be through the issuance of equity securities, warrants or similar securities. We have no commitments from any parties to provide capital and may not be able to raise capital on reasonable terms, or at all. If we need, and are unable to raise, capital, we will be required to significantly curtail our marketing efforts and may be required to cease operations.

We will be unable to implement our business plan if we cannot raise sufficient capital and may be required to pay a high price for capital.

We had current assets of $880,974 and current liabilities of $937,820, for negative net working capital of $56,846, as of September 30, 2012. We will need to obtain additional capital to implement our business plan and meet our financial obligations as they become due. We may not be able to raise the additional capital needed or may be required to pay a high price for capital. . . .

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