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| AUGT > SEC Filings for AUGT > Form 10-Q on 9-Jan-2013 | All Recent SEC Filings |
9-Jan-2013
Quarterly Report
The following discussion and analysis summarizes the significant factors affecting our results of operations, financial condition and liquidity position for the three and nine months ended November 30, 2012 and 2011, and should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this filing.
This report contains forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
Factors that might affect our forward-looking statements include, among other things:
? overall economic and business conditions;
? the demand for our products and services;
? competitive factors in the industries in which we compete;
? the results of our pending and future litigation;
? the emergence of new technologies which compete with our product and service offerings;
? our cash position and cash burn rate;
? other capital market conditions, including availability of funding sources;
? the strength of our intellectual property portfolio; and
? changes in government regulations related to our industry.
In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions. These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail under the heading "Risk Factors" included in other reports we file with the Securities and Exchange Commission. Also, these forward-looking statements represent our estimates and assumptions only as of the date of the document containing the applicable statement.
Unless required by law, we undertake no obligation to update or revise any forward-looking statements to reflect new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements.
OVERVIEW
Business Update
The financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of November 30, 2012 and February 29, 2012, the Company had accumulated deficits of $87.4 million and $72.5 million, respectively. The Company is subject to the risks and challenges associated with companies at a similar stage of development including dependence on key individuals, challenges related to the successful development and marketing of its products and services, and the integration of business combinations, and competition from substitute products and services and by larger companies with greater financial, technical management and marketing resources. As of November 30, 2012, the Company had working capital of $2.9 million, and cash and cash equivalents of $1.8 million. In order to fund existing operations for the remainder of fiscal 2013 and into fiscal 2014, the Company will need to raise additional cash through equity or debt financings, and/or sell certain strategic assets, such as its purchased technology or patent portfolio. There is no certainty that the Company has the ability to raise additional funds through debt or equity financings under terms acceptable to the Company, or that the Company has the ability to sell strategic assets, which, if a sale is completed, may adversely affect ongoing operations.
In September 2012, we adopted a restructuring plan which includes reducing the number of employees, slowing the pace of investments in our IP portfolio and minimizing variable expenses. We are restructuring overall corporate overhead expenses in order to focus our business around our mobile marketing and advertising technology and services. We intend to minimize cash spend while carefully investing our resources and protecting our strategic assets to strengthen our position in the mobile marketing and mobile advertising industry. We believe that the restructuring plan will improve cash flow by approximately $6.0 million on an annual basis. Additionally, as part of this restructuring plan, we have made the decision to market certain patents for sale, specifically the IP and patents acquired in the Geos IP asset acquisition and the JAGTAG business combination. Due to active efforts undertaken in the third quarter to market certain patents for sale and as a result of the interim period goodwill impairment assessment (see Note 6), management concluded that a triggering event has occurred requiring us to assess whether the carrying amount of our certain intellectual property assets is recoverable. Identified intangible assets are included in both reporting units of our single operating segment. However, the intellectual property for which indications of impairment existed during the period are included in the IP Holding reporting unit, and those assets that were determined to be impaired amounted to a net carrying value of $9.3 million prior to the impairment write-down. The Company estimated the fair value of the patents subject to the impairment analysis by calculating the expected proceeds to be received through a sale, exclusive license agreement and royalties that would have been paid to a third party had the Company not owned the patents. The expected proceeds to be received through a sale did not include an estimate of fees to be received by the company related to participating in future licensing fees received by a purchaser. Such fees are considered contingent gains and are recognized when earned.
Following the completion of that analysis, the Company determined that the fair value of the patents acquired in the Geos IP asset acquisition and the JAGTAG business combination, which are not core to the ongoing business operations, were less than the carrying value primarily due to the reduction in the expected future cash flows to be received through potential licensing or sale since the Company has restructured and changed its strategy related to certain non-core assets. As a result, the Company recorded an impairment charge of $5.6 million in the third quarter of fiscal 2013, which was included in the Impairment of long-lived identified intangibles and decline in fair value of long-term investment.
The fair values of the GEOS and JAGTAG IP patents are presented as Intangible assets available for sale in the consolidated balance sheets, as the Company obtained approval of the board prior to November 30, 2012 to market the patents for sale. We believe that this plan will be implemented within the next 12 months.
In September 2012, we borrowed $450,000 from two lenders. The loans were used for working capital. We borrowed a total of $250,000 from one lender. This loan bears interest at the rate of 12% per year and is due to be paid on the earlier of the first anniversary of the loan, the closing of a financing transaction through which we raise gross proceeds of not less than $10 million, an event of default as defined in the promissory note or upon a change of control as defined in the promissory note. In addition, we issued a note payable in the amount of $200,000 to Ernest W. Purcell, a former director. This loan was paid in full in October 2012.
On October 3, 2012, we completed a public offering of our securities pursuant to which we sold 8.5 million shares of common stock registered on a Form S-3 registration statement at a price to the public of $0.80 per share. We also issued warrants to purchase an additional 2.125 million shares of common stock at an exercise price of $0.96 per share. We raised $6.2 million in proceeds, net of $0.6 million in costs related to the offering, leaving approximately $48.0 million in value of unsold securities of the $75.0 million registered on the Form S-3, which we filed in June 2011. We intend to use the net proceeds from this offering for organic expansion in existing and new markets and for general corporate purposes.
Business
Augme provides mobile marketing and advertising technology and services that enable brands, advertising agencies, media companies and enterprise customers to seamlessly drive sales, engagement and loyalty. Augme purchased the assets of the mobile marketing and mobile advertising company, Hipcricket, Inc. ("Hipcricket") in August 2011 following the acquisition of the assets of JAGTAG, Inc. in July 2011. Hipcricket is a mobile marketing company that creates measurable, real-time, one-to-one relationships between advertisers and their customers and prospective customers using text messages, multimedia messages, mobile web sites, mobile applications, mobile coupons, quick response codes and a mobile advertising network. Augme markets its services primarily through a direct sales force as well as through other service providers. Marketing and selling our software and services under the Hipcricket brand, our platform has provided measurable successes across more than 225,000 campaigns for our clients.
Hipcricket's AD LIFE Platform (the "Platform") is a true end-to-end mobile marketing and mobile advertising solution, enabling customers to quickly create, deploy and measure rich-media, interactive marketing campaigns across multiple networks and devices through a single access point. Campaigns built on this proprietary software-as-a-service ("SaaS") platform provide optimized marketing messages to the consumer by delivering Customer Relationship Management ("CRM")-driven personalized brand experiences to customers where they work, play and live. The Platform is a product of combining Hipcricket's Hip 7.0 and Augme's AD LIFE and AD SERVE platforms and technologies. For the quarter ended November 30, 2012, approximately 37% of revenues related to Software as a Service ("SaaS")-based sales, approximately 40% of revenues related to mobile advertising solutions and approximately 23% of revenues were generated from other sources, including individual campaign fees, development work for marketing campaigns and shorter term licenses.
The Platform features an analytical engine that uses real-time campaign data, enabling brands, advertising agencies and media companies to plan, execute, monitor and measure mobile marketing and advertising campaigns in real time throughout the campaign lifecycle. Through Hipcricket, Augme has delivered over 225,000 campaigns to date and has over a 95% renewal rate among its 220+ total customer base.
The Platform is built on Augme's patented intellectual property ("IP"). Augme has invested a significant amount of its resources and capital building its patent portfolio, which management believes is foundational to targeted Internet functions, such as advertising, broadcasting and content delivery. The first of Augme's core patents was granted in 2003 with a 1999 priority date, placing Augme's invention ahead of the inception of many leading Internet advertising and mobile marketing companies. The patents cover a two code module system, designed to automatically assemble content delivery on back-end server systems allowing websites to target content to end-users' preferences, networks, devices and installed Internet capabilities from any website destination. Augme believes that all patent families remain open for additional divisional and continuation-in-part filings with applications in various stages of approval.
On May 24, 2012, we completed our acquisition of all of the common stock and all of the preferred stock of Geos Communications IP Holdings, Inc. ("Geos IP"). By acquiring the Geos IP stock, the Company acquired five U. S. patents covering Voice over Internet Protocol ("VoIP") and other mobility inventions and seven U.S. patent applications and 18 pending international patent applications covering related invention families within the field of mobile VoIP. The patents will allow the Company to expand its mobile marketing and mobile advertising technology offerings to include adaptive voice technologies for any mobile environment, VoIP-enabled mobile marketing and advertising, VoIP-enabled e-commerce and VoIP-enabled services and support features within the Company's AD LIFE mobile marketing and mobile advertising platform.
Liquidity and Capital Resources
As discussed above, we completed a public offering of our securities on October 3, 2012 through which we raised $6.2 million in proceeds net of $0.6 million in cost related to the offering, we adopted a restructuring plan and we borrowed funds totaling $450,000, all of which positively impacted our liquidity during the quarter ended November 30, 2012.
Net cash used in operating activities was $10.4 million during the nine months ended November 30, 2012. Net cash used in operating activities reflects the net loss for the period, partially offset by depreciation and amortization, asset impairment, stock option and warrant expense and changes in operating assets and liabilities. Included in the net loss for the period was a non-cash adjustment to the acquisition related contingent obligation of $12.2 million. Net cash used in operating activities during the nine months ended November 30, 2011 was $10.0 million, reflecting the net loss for the period, partially offset by stock option and warrant expense, depreciation and amortization and changes in operating assets and liabilities.
Net cash used in investing activities was $6.9 million during the nine months ended November 30, 2012. Cash of $3.2 million was used for payment of the Hipcricket acquisition-related contingent consideration. We used $2.7 million for legal actions in support of our patent enforcement and $0.8 million to purchase patents, which we capitalize as intangible assets. Additionally, the Company used cash of $0.2 million for a long-term investment.
On May 24, 2012, the Company acquired all of the common stock and all of the preferred stock of Geos IP. We paid $355,000 in cash and $3.8 million in Augme's common stock (1,860,465 shares at a price of $2.05 per share) for the purchase.
During the second and third quarter of fiscal 2013, the Company issued 9,234,871 shares of common stock as part of the satisfaction of the contingent consideration obligation related to the acquisition of Hipcricket in August 2011.
Net cash used in investing activities during the nine months ended November 30, 2011 was $5.7 million, which included $4.0 million used for the purchase of Hipcricket and JAGTAG, as well as $1.7 million used for legal actions supporting our patent enforcement initiatives.
Aside from the loans we received in the amount of $450,000, net cash provided by financing activities during the nine months ended November 30, 2012 included the net proceeds received from the sale of our common stock of $6.2 million and proceeds received from the exercise of options and warrants of $1.3 million. During the nine months ended November 30, 2011, cash was provided by net proceeds received from the sale of common stock of $18.7 million and proceeds received from the exercise of stock options and warrants of $2.8 million.
As previously discussed, our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of November 30, 2012 and February 29, 2012, the Company has accumulated deficits of $87.4 million and $72.5 million, respectively.
Since the end of the last fiscal year, we have experienced significant changes in our capital stock, stockholders' equity and net assets. The number of shares of our common stock outstanding has increased by 21.6 million shares, primarily as a result of the sale of our common stock and the payment with stock of the contingent consideration related to the acquisition of Hipcricket in August 2011.
On June 29, 2011, we filed a Form S-3 registration statement with the Securities and Exchange Commission for the purpose of raising up to $75.0 million through sales of our securities. The registration statement was declared effective on July 13, 2011. The registration statement allows us to raise capital by engaging in securities offerings from time-to-time, as funds are needed. Following the public sale of our securities made in November 2011 and October 2012, there remains approximately $48.0 million in value of unsold securities of the $75.0 million registered.
Trends, Events and Uncertainties
The Company operates in the mobile marketing industry and, accordingly, its business, revenues, results of operations and prospects can be affected by a variety of factors. For example, management of the Company believes that any of the following factors could have a significant negative effect on the Company's future financial position, results of operations and cash flows: lack of cash and the ability to raise cash as and when needed; unanticipated fluctuations in quarterly operating results, adverse changes in the Company's relationship with significant customers or failure to secure contracts with other customers, intense competition, regulation that may adversely impact the Company's operations, failure to attract and retain key personnel, failure to protect intellectual property, decrease in the migration trends from traditional advertising methods to digital and mobile media and the inability to manage growth.
The mobile marketing and advertising landscape, while in its early stages, is highly competitive. Many of the landscape's significant providers are focused on delivering point solutions targeting a specific segment of the mobile marketing and/or advertising landscape. We believe Augme differentiates itself from the competition by offering a true end-to-end mobile advertising and marketing solution delivered through its SaaS AD LIFE platform.
In late 2010, the FTC and the Department of Commerce each issued a staff report proposing new frameworks for consumer privacy protection; the FTC report called for federal "Do Not Track" legislation. If "Do Not Track" legislation is passed, it could negatively impact our mobile ad network. Any significant restriction on our ability to utilize the functions of our technology could have a material adverse effect on our business, revenues, results of operations and prospects.
Industry Overview
We believe that the convergence of several factors is fundamentally changing the way advertisers reach their audiences. We anticipate consumers will continue to increase their usage of mobile devices as their medium for content consumption, creating a significant opportunity for mobile advertising. These factors include:
Adoption of faster and more functional mobile connected devices create greater mobile advertising and marketing opportunities.
The ubiquity and utility of mobile devices continue to grow, empowering advertisers and marketers with a wider audience and greater delivery capabilities than ever seen before. There has been widespread adoption of mobile connected devices, driven by intuitive user interfaces, lower price points, increased functionality, faster processing speeds, better graphics processors and advanced display technologies with touch capabilities. It has become possible to deliver innovative, interactive and engaging consumer media experiences on a wide variety of mobile connected devices. A 2011 report by Cisco Systems projects that the number of mobile connected devices worldwide will reach 7.1 billion by 2015. According to IDC, the number of smartphones shipped by vendors is expected to increase from approximately 305 million in 2010 to more than one billion by 2015, representing a compound annual growth rate of approximately 27%. IDC also estimates that nearly 63 million tablets will be shipped in 2011, growing to 135 million tablets in 2015, representing a compound annual growth rate of 22%.
Mobile usage has disrupted how content is consumed.
Consumers are increasingly using their mobile devices instead of their personal computers and other traditional media to access content. For example, according to industry research conducted by Kleiner Perkins Caufield & Byers, a venture capital firm, 33% of the traffic on Facebook came from mobile devices in 2011, up from 1% in 2008. Consumers use their mobile devices in all aspects of their daily lives, such as reading the news, playing games, checking sports scores, shopping, checking the weather, banking, obtaining maps and directions and listening to the radio. According to eMarketer, Inc., which publishes data, analysis and insights on digital marketing, media and commerce, the amount of time spent by consumers with their mobile devices is rising at a faster rate than the time spent viewing other types of media.
The advertising industry is being disrupted by mobile advertising.
As advertisers seek to maximize the effectiveness of their campaigns, we believe the attractiveness of traditional advertising media, such as outdoor billboards, newspapers, magazines, radio and even television, is declining relative to digital advertising. We believe this decline is due to several inherent limitations in traditional advertising, such as its limited ability to target specific audiences, its limited ability to measure audience reach, performance and in some cases, its limited geographic range. According to a December 2011 report by eMarketer, consumers are spending a larger proportion of their time with digital media, while there has been a concurrent decline in the share of time spent with traditional media. However, according to the eMarketer report, advertising spending is significantly lower on mobile than it is for other types of media, relative to consumer time spent with each type of media. Although there is still significant spending on traditional advertising, advertisers are shifting their budgets to digital channels, both online and mobile.
As consumers spend more time online using their personal computers, we believe digital advertising can be more effective than traditional advertising because it allows for user interaction, provides better measurement and achieves an expanded reach.
However, even PC-based online digital advertising suffers from a number of significant limitations, including:
Limited personalization. Computers often have multiple users, thus yielding audiences with limited personalization. This limits the ability of advertisers to target end users on an individual basis.
Limited real-time accessibility. Computers are typically used at home or in the office. Even laptops that can physically be with the user when traveling are usually used from a fixed location at the destination, where they are turned on and wirelessly connected to the Internet. As a result, user engagement with ads is generally limited to the time spent in front of the computer screen in a fixed location.
Limited location targeting. Most location targeting through personal computers is limited to a broad geographic area based on the records of the user's Internet service provider. This limits the ability to deliver highly targeted advertising that is relevant to a consumer.
Our Solution
We believe mobile advertising provides significant benefits both to developers and to advertisers over traditional advertising media and PC-based online digital advertising. For developers, mobile advertising provides the opportunity to make money, acquire users and gain insight into mobile application ("app") usage. For advertisers, we believe that the combination of the personal nature of mobile devices, their enhanced functionality and the rise of app-enabled experiences creates a powerful platform for highly targeted and effective advertising. Additionally;
Anytime, anywhere access. Mobile devices generally accompany users at all hours of the day and are typically turned on at all times. This provides advertisers the opportunity for nearly continual access to the user. An advertiser can reach audiences at all stages of the purchase decision - awareness, research, opinion, consideration and ultimately, purchase - in order to increase the likelihood that the viewer will become a purchaser of the product or service being advertised. This ability to target audiences at all times of the day, regardless of location, makes mobile advertising an attractive opportunity for advertisers, especially compared to newspapers, magazines, television and radio or to digital advertising delivered through personal computers.
Personalization. Mobile devices are inherently personal and are most often used by one person. Users often download and use a variety of apps that reflect their personal preferences and interests. In addition to customized apps, users can personalize and provide target ability via scans and messaging interactions with their mobile devices delivering a multi-channel mobile interface experience for the end users. When a user downloads any one of these mobile channels to his or her individual device, data is often exchanged that can provide information about the user's interests. As the user downloads and registers, more data can be collected about this user's preferences, which provides an opportunity to personalize the mobile advertising experience.
Location targeting and relevance. Data from mobile devices is often shared in a manner that can identify the device's location. This enables location-targeted advertising, which has the potential to increase the impact and relevance of an ad to the user. For example, in PC-based online advertising, firms can assess a user's browsing behavior to provide limited targeting of advertising to that user. With mobile advertising, on the other hand, an ad can be targeted to a consumer who is in close proximity to a specific location, such as a retail store, or to a consumer who recently visited that store. We believe the ad also has the potential to influence the user to walk into a nearby store.
More complete user engagement. Apps on mobile connected devices typically show one or two ads on each page view. We believe this limited number of ads on a small device screen can often capture the attention of the user better than the many banner ads on a typical PC-based web page. Furthermore, ads on a mobile device can take advantage of features of the device itself, such as the touch screen, swipe functionality and the accelerometer, which detects motion, to enable the user to manipulate and more deeply engage with the ad. Mobile device users can also act upon an ad immediately by, for example, downloading an app or other content, calling an advertiser directly from the mobile phone, or using the map on the device to find a nearby retail store or service provider. In some cases, mobile users can even take their device to a store to physically redeem an offer from an ad.
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