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

Show all filings for MEDL MOBILE HOLDINGS, INC.

Form 10-Q for MEDL MOBILE HOLDINGS, INC.


14-Nov-2012

Quarterly Report


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

Forward Looking Statements

Some of the statements contained in this Form 10-Q that are not historical facts are "forward-looking statements" which can be identified by the use of terminology such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 10-Q, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.

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All written forward-looking statements made in connection with this Form 10-Q that are attributable to us or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.

Overview

We are primarily engaged in the monetization of mobile application software or "Apps" through four revenue generating platforms: (i) development of customized Apps for third parties to monetize their particular intellectual property, persona or brand, (ii) incubation of Apps in partnership with third parties and from a library of more than 75,000 original Apps concept submissions, (iii) sale of advertising and sponsorship opportunities directly to brands via mobile advertising networks, and (iv) acquisition of Apps from other developers and use of a proprietary application programming interface, or API, to make Apps recommendations for our user base.

Share Exchange

On June 24, 2011, we completed a share exchange pursuant to which we acquired all of the capital stock of MEDL Mobile, Inc., a California corporation ("MEDL"), which became our wholly owned subsidiary. In connection with this share exchange, we discontinued our former business and succeeded to the business of MEDL as our sole line of business. The share exchange is accounted for as a recapitalization. MEDL is the acquirer for accounting purposes and we are the acquired company. Accordingly, MEDL's historical financial statements for periods prior to the acquisition have become those of the Registrant retroactively restated for, and giving effect to, the number of shares received in the share exchange. The accumulated earnings of MEDL were also carried forward after the acquisition. Operations reported for periods prior to the share exchange are those of MEDL.

Inedible Acquisition

On February 28, 2012, we acquired Inedible Software, LLC ("Inedible"), a developer of mobile apps and related mobile app technologies whose principal asset was a customer list. While the acquisition of Inedible was structured as a purchase of an entity, we did not acquire any ongoing business operations and the purpose of the transaction was to acquire Inedible's customer list as a conduit to Apple for future potential. As a result, Inedible became a wholly owned subsidiary of the Company. The results of operations of Inedible are included on a going forward basis from the date of acquisition, although Inedible is no longer actively engaged in any business activities.

Critical Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to investment tax credits, bad debts, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Cash and Cash Equivalents

We consider all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased, to be cash equivalents. We maintain cash and cash equivalent balances at one financial institution that is insured by the Federal Deposit Insurance Corporation. Any amounts of cash in financial institutions over FDIC insured limits, expose us to cash concentration risk.

Revenue Recognition

Our main source of revenue is from the development of custom applications or "Apps" for customers. We use a hybrid method for recognizing revenue that includes elements from both ASC 985-605, Software Revenue Recognition and ASC 605-35, Construction-Type and Production-Type Contracts.

We recognize revenues in accordance with ASC 985-605 when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. Nonrecurring revenues related to perpetual license sale with multiple elements are recognized in accordance with the guidance on software revenue recognition.

When the arrangement with a customer includes significant production, modification, or customization of the software, we recognize the related revenue using the percentage-of-completion method in accordance with the accounting guidance and certain production-type contracts contained in ASC 605-35. We use the percentage of completion method provided all of the following conditions exist:

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the contract includes provisions that clearly specify the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged and the manner and terms of settlement;

the customer can be expected to satisfy its obligations under the contract;

the Company can be expected to perform its contractual obligations; and

reliable estimates of progress towards completion can be made.

We measure completion based on achieving milestones detailed in the agreements with the customers. Costs of providing services, including services accounted for in accordance with ASC 605-35, are expensed as incurred.

The following is an example of how revenue is recognized involving an arrangement with a customer that includes significant production, modification, or customization of the software: a typical project will require between 50-100 working days from beginning to end. On average 25-50 cumulative working days are expended prior to the start of development and this work typically includes, design, storyboards, and architecture. Prior to developing the App, hard costs are incurred as a number of variables are taken into account for preparation.
Those often include the following:

understanding the client's business situation and environment, including their competitive landscape;

researching and establishing the goals of the App;

understanding and researching the target and potential App use cases;

developing a monetization strategy;

determining functionality and articulating the functionality through a storyboard and functional specification document; and

determining the resources and timeline needed to complete the final work product.

Therefore, since significant work has been undertaken by us, we typically receive a non-refundable payment of up to fifty (50%) percent of the proposed project contract at the time that the contract is signed or soon thereafter. The revenue is recognized at this point in time. Another twenty five (25%) percent of the contract is typically billable per stated terms of the contract and revenue is recognized at that time, typically upon release of beta version of the App. Upon completion of the App to the client typically the remaining twenty five (25%) percent is billed to the client and recognized as revenue to us.

We also generate revenue from the sale of Apps through the Apple store and other App marketplaces. This revenue is recognized in the period the App is sold to the end user on an accrual basis.

Accounts Receivable

Accounts receivable are stated at the amounts management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable.

Income Taxes

Income taxes are accounted for under the asset and liability method in accordance with ASC 740, Income Taxes . Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance to the extent that the recoverability of the asset is unlikely to be recognized. We follow ASC 740 rules governing uncertain tax positions, which provides guidance for recognition and measurement. This prescribes a threshold condition that a tax position must meet for any of the benefits of the uncertain tax position to be recognized in the financial statements. It also provides accounting guidance on derecognition, classification and disclosure of these uncertain tax positions.

Uncertainty in Income Taxes

Under ASC 740-10-25 recognition and measurement of uncertain income tax positions is required using a "more-likely-than-not" approach. Management evaluates their tax positions on an annual basis.

Research and Development

We incur costs on activities that relate to research and development of new technology and products. Research and development costs are expensed as incurred.

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Fair Value of Financial Instruments

We adopted ASC 820, Fair Value Measurements and Disclosure , for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing US GAAP that require the use of fair value measurements which establishes a framework for measuring fair value and expands disclosure about such fair value measurements.

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC-820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

        Level 1:   Observable inputs such as quoted market prices in active
                   markets for identical assets or liabilities

        Level 2:   Observable market-based inputs or unobservable inputs that are
                   corroborated by market data

        Level 3:   Unobservable inputs for which there is little or no market
                   data, which require the use of the reporting entity's own
                   assumptions.

The carrying amounts reported in the balance sheet for cash, accounts payable, and accrued liabilities approximate their estimated fair market value based on the short-term maturity of this instrument.

In addition, FASB ASC 825-10-25 Fair Value Option was effective for January 1, 2008. ASC 825-10-25 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value.

Goodwill and Other Intangible Assets

In accordance with ASC 350-30-65 (formerly SFAS 142, Goodwill and Other Intangible Assets ), we assess the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets were comprised of website assets. Factors we consider to be important which could trigger an impairment review include the following:

1. Significant underperformance relative to expected historical or projected future operating results;

2. Significant changes in the manner of use of the acquired assets or the strategy for the overall business; and

3. Significant negative industry or economic trends.

When we determine that the carrying value of intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, we record an impairment charge. We measure any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows.

Stock Based Compensation

We apply ASC 718-10 and ASC 505-50 (formerly SFAS 123R) in accounting for stock options issued to employees. The amount of compensation cost for share-based payments is measured based upon the fair value on the grant date of the equity instruments issued. For stock options issued to non-employees, we apply the same standard.

Results of Operations

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

The following table presents our results of operations for the three months ended September 30, 2012 compared to the three months ended September 30, 2011.

                                             Three Months
                                                 Ended
                                             September 30,       Three Months Ended
                                                 2012            September 30, 2011      $ Change       % Change
Revenues                                   $       1,118,232     $          705,028     $  413,204             59 %

Cost of goods sold                                   912,076                369,673        542,403            147 %

Gross profit                                         206,156                335,355       (129,199 )          -39 %

Expenses:
Selling, general and administrative                1,000,144                611,322        388,822             64 %

Loss from Operations                                (793,988 )             (275,967 )     (518,021 )          188 %

Other income (expense):
Decrease in fair value of warrants                    93,948                      -         93,948            100 %

Net loss                                   $        (700,040 )   $         (275,967 )   $ (424,073 )          154 %

Revenues

Revenues for the three months ended September 30, 2012 increased to $1,118,232 as compared to $705,028 for the three months ended September 30, 2011, an increase of $413,204 or 59%. The increase is primarily attributable to growth of our customer base through our direct sales efforts. The revenue increase was driven by the demand for the development of customized mobile applications for third parties to monetize their particular intellectual property, persona or brand. Specifically, there has been significant growth in the demand for mobile applications with a limited supply of qualified developers available to meet the demand. Based upon our success with past clients, we have become a preferred vendor in long-term relationships with some of our larger customers, yielding organic revenue growth. In addition, our services have expanded resulting in increased project fees. Historically, we have been tasked to develop mobile front-end applications. However, more recently we have worked on more expansive projects including back-end development and website development, as well as marketing and monetization strategies.

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Based on the unpredictability of market and customer demand, we cannot accurately predict revenue trends on a quarter to quarter basis.

Cost of Goods Sold

Cost of goods sold for the three months ended September 30, 2012 increased to $912,076 as compared to $369,673 for the three months ended September 30, 2011, an increase of $542,403 or 147%. The increase is primarily due to the increase in employees and outside contractors to fulfill customer orders for new mobile applications. The additional employees included developers, project managers, visual architects, and graphic designers. This trend of hiring will be dependent on the growth of future revenue and the related commitments to complete development projects on a timely basis.

Gross Profit

Gross profit for the three months ended September 30, 2012 decreased to $206,156 as compared to $335,355 for the three months ended September 30, 2011, a decrease of $129,199 or 39%. The gross profit decreased due to increased cost of goods sold as discussed above.

Operating Expenses

Operating expenses for the three months ended September 30, 2012 increased to $1,000,144 as compared to $611,322 for the three months ended September 30, 2011, an increase of $388,822 or 64%. The increase is primarily attributable to a $235,422 increase in support staff and sales and marketing staff, a $29,946 increase in rent expense due to moving into new corporate offices, a $40,479 increase in bad debt expense and a $47,723 increase in costs associated with being a public company, which include legal and accounting costs, stock option expense, and investor relations expense. In addition, there was $58,438 of increased expense for the expansion of the MEDL advertising and acquisition teams in which new employees were hired to develop an advertising business and to acquire new apps for the MEDL platform. These expenses are all recurring in nature.

Other Income/Expenses

Other income for the three months ended September 30, 2012 increased to $93,948 as compared to $0 for the three months ended September 30, 2011, an increase of $93,948 or 100%. The increase is attributable to the decrease in the fair value of warrants issued in a private placement in March 2012.

Net Loss

Net loss for the three months ended September 30, 2012 increased to $700,040 as compared to $275,967 for the three months ended September 30, 2011, an increase of $424,073 or 154%. The increase in net loss was a result of the increase in costs at a faster rate than the revenue growth of the company as discussed above.

Results of Operations

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

The following table presents our results of operations for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.

                                           Nine Months Ended     Nine Months Ended
                                             September 30,         September 30,
                                                 2012                  2011              $ Change        % Change
Revenues                                   $       2,712,892     $       1,656,751     $  1,056,141             64 %

Cost of goods sold                                 1,651,949               780,434          871,515            112 %

Gross profit                                       1,060,943               876,317          184,626             21 %

Expenses:
Selling, general and administrative                3,482,154             1,357,511        2,124,643            157 %

Loss from Operations                              (2,421,211 )            (481,194 )     (1,940,017 )          403 %

Other income (expense):
Decrease in fair value of warrants                   447,976                     -          447,976            100 %
Interest expense                                           -                (2,712 )          2,712           -100 %
Total Other Income (Expense)                         447,976                (2,712 )        450,688

Net loss                                   $      (1,973,235 )   $        (483,906 )   $ (1,489,329 )          308 %

Revenues

Revenues for the nine months ended September 30, 2012 increased to $2,712,892 as compared to $1,656,751 for the nine months ended September 30, 2011, an increase of $1,056,141 or 64%. The increase is primarily attributable to growth of our customer base through our expanded sales efforts and referrals from existing customers. The revenue increase was driven by the demand for the development of customized mobile applications for third parties to monetize their particular intellectual property, persona or brand. Specifically, there has been significant growth in the demand for mobile applications with a limited supply of qualified developers available to meet the demand. Based upon our success with past clients, we have become a preferred vendor in long-term relationships with some of our larger customers, yielding organic revenue growth. In addition, our services have expanded resulting in increased project fees. Historically, we have been tasked to develop mobile front-end applications. However, more recently we have worked on more expansive projects including back-end development and website development, as well as marketing and monetization strategies.

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Based on the unpredictability of market and customer demand, we cannot accurately predict revenue trends on a quarter to quarter basis.

Cost of Goods Sold

Cost of goods sold for the nine months ended September 30, 2012 increased to $1,651,949 as compared to $780,434 for the nine months ended September 30, 2011, an increase of $871,515 or 112%. The increase is primarily due to the increase in employees and outside contractors to fulfill customer orders for new mobile applications. The additional employees included developers, project managers, visual architects, and graphic designers. This trend of hiring will be dependent on the growth of future revenue and the related commitments to complete development projects on a timely basis.

Gross Profit

Gross profit for the nine months ended September 30, 2012 increased to $1,060,943 as compared to $876,317 for the nine months ended September 30, 2011, an increase of $184,626 or 21%. The gross profit increased due to the additional business and related revenue generated which utilized both existing employees and new employees in producing the mobile applications finished product for our customers.

Operating Expenses

Operating expenses for the nine months ended September 30, 2012 increased to $3,482,154 as compared to $1,357,511 for the nine months ended September 30, 2011, an increase of $2,124,643 or 157%. The increase is primarily attributable to an increase of $981,646 in support staff, sales and marketing staff, increased rent expense of $82,582 for new corporate offices, as well as $227,004 in costs associated with being a public company which include legal and accounting costs, stock option expense, investor relations and public relations expense. In addition, there was $214,346 of increased expense for the expansion of the MEDL advertising and acquisition teams in which new employees were hired to develop an advertising business and to acquire new apps for the MEDL platform, an increase in bad debt expense of $114,720, and an increase in marketing expense of $153,231 as the company increased its marketing efforts including attending more trade shows. These expenses are all recurring in nature.

Other Income/Expenses

Other income for the nine months ended September 30, 2012 increased to $447,976 as compared to $0 for the nine months ended September 30, 2011, an increase of 100%. The increase is attributable to the decrease in the fair value of warrants issued in a private placement in March 2012. Other expenses for the nine months ended September 30, 2012 decreased to $0 as compared to $2,712 for the nine months ended September 30, 2011, a decrease of $2,712 or 100%. The decrease is attributable to no interest expense in 2012.

Net Loss

Net loss for the nine months ended September 30, 2012 increased to $1,973,235 as compared to $483,906 for the nine months ended September 30, 2011, an increase of $1,489,329 or 308%. The loss was a result of the increase in costs at a faster rate than the revenue growth of the company as discussed above.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

Our business is still in the early stages, having commenced operations on March 4, 2009. At September 30, 2012 and December 31, 2011, we had cash of $944,034 and $1,075,307, respectively and working capital of $627,830 and $1,281,354, respectively.

Net cash used in operating activities for the nine months ended September 30, 2012 was $1,542,025 compared to net cash used in operating activities of $681,604 for the nine months ended September 30, 2011. The increase in net cash used in operating activities was primarily attributable to the $1,973,235 net loss for the period versus a net loss of only $483,906 for the nine months ended September 30, 2011. Net cash used in investing activities for the nine months ended September 30, 2012 was $77,524 as compared to net cash used in investing activities of $61,301 for the nine months ended September 30, 2011. The increase in net cash used in investing activities was attributable to fixed asset purchases. Net cash provided by financing activities for the nine months ended September 30, 2012 was $1,488,276 as compared to net cash provided by financing activities of $2,459,466 for the nine months ended September 30, 2011. Net cash provided by financing activities was primarily the result of $1,485,000 of net proceeds from a private placement described below that closed on March 28, 2012.

To date we have financed our operations through internally generated revenue from operations, the sale of our equity, the issuance of notes and loans from a shareholder.

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In connection with the closing of the share exchange on June 24, 2011, we sold 10,000,000 shares of our common stock at a purchase price of $0.25 per share in a private placement to accredited investors, resulting in aggregate gross proceeds of $2,500,000 (including the exchange of bridge notes in the aggregate principal amount of $300,000).

On March 28, 2012, we entered into a securities purchase agreement with an accredited investor whereby we sold an aggregate of 1,000,000 units (the "Units"), each Unit comprised of three shares of our common stock and a warrant . . .

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