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MEDL > SEC Filings for MEDL > Form 10-K on 1-Apr-2013All Recent SEC Filings

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Form 10-K for MEDL MOBILE HOLDINGS, INC.


1-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the related notes included elsewhere in this Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-K, particularly in "Forward-Looking Information" and "Risk Factors."

Recent Events

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.

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.

On November 2, 2102, we formed Hang With, Inc. to focus on creating a live social mobile video platform. The App is called "Hang w/" and was approved for release by Apple on March 20, 2013. This new App provides an important new channel of advertising revenue. As of the date of this Report, "Hang w/" is available for download on the Apple App Store. The goal of the platform is twofold: 1) to become the premiere social media network for people around the globe to connect, communicate and share experiences via live streaming broadcasts; and 2) to enable celebrities and public figures to easily monetize their fan bases. "Hang w/" allows live real-time video to be sent from one phone to many. Any user can be a broadcaster and/or a follower. After a follower receives a notification that the broadcaster is live, the follower views a short pre-roll advertisement before watching a live video feed sent directly from the broadcaster's smartphone camera. The follower is able to chat with the broadcaster and other followers during the broadcast. A post-roll advertisement ends the broadcast.

Overview

We have built a system for developing and taking ownership of Mobile Apps. To date, we have developed a library of approximately 200 Apps for iPhone, iTouch, iPad and Android. MEDL and MEDL Apps have been featured on CNBC, BBC, ABC, CBS, NBC, CNN, in the pages of Esquire, Fast Company, The New York Times, The LA Times, The Chicago Tribune, The Orange County Register, The Washington Post and The Guardian; and by top sites such as Mashable, Macworld and Gizmodo. Multiple MEDL Apps have reached #1 in their category on the Apple App Store.

In the fourth quarter of 2012 we reorganized our corporate focus to better capitalize upon market opportunities. MEDL is now focused on three symbiotic areas of opportunity:


1. MEDL Custom Development

Mission: To develop the cutting edge standard for mobile applications across platform, operating system and classification - on behalf of industry leaders.

2. MEDL Marketing Technologies

Mission: To create scalable technology solutions which solve the challenges of discovery and monetization in the mobile ecosystem.

3. MEDL Ventures

Mission: To incubate and develop the next generation of great mobile apps, both in partnership and as wholly owned entities.

1. Custom Development

Our custom development arm develops Apps for customers that vary in size from small start-ups to large multinational corporations, in a diverse range of industries including retailing, fast food, air travel, medical devices, higher education and fashion. We are typically paid a fixed price for development of the App, our customers cover the development costs and own the final work product while we retain ownership of the elements of the computer code.

For the years ended December 31, 2012 and 2011, revenues from custom development accounted for approximately 85% and 93%, respectively, of our total revenues.

MEDL believes it is known for quality, strategic mobile development; securing development and consulting contracts with companies such as Hyundai, Disney, Taco Bell, Iconix Brand Group, Monster.com, Emirates Airlines, Teleflora, Medtronic, Kaiser Permanente and About.com.

At the present time, we prepare for our customers, packages for sale in the Apple App Store and the Google Android Marketplace. This package includes app store copy, sample screen shots and SEO tags to improve discovery of the Apps in the App stores. We are familiar with the App stores' requirements and our average approval time is 5-10 days. During this phase, we also work with customers to develop a custom launch plan, or to augment their existing plans. We use tools including social network marketing, viral videos, bloggers, banner marketing, public relations and integration into our clients' existing advertising and marketing strategies to further this launch plan. We also leverage what we believe to be our deep marketing and advertising experience to work effectively with advertising, media and PR agencies.

In addition, we provide maintenance, reporting and upgrades and also integrate third party vendors into an App to provide a complete suite of user analytics, which allows customers to track downloads, total number of App user sessions, time spent per session, features of the App accessed and advertising click-through.

2. Marketing Technologies

MEDL Marketing Technologies were created to drive user acquisition and create an ever-growing base of users who can be monetized via advertising and sponsorship.
Marketing Technologies aims to solve a vast inefficiency in the market. The low barrier to entry for app development encourages innovation on a massive scale, causing developers to create new apps faster than consumers can find them.

We believe that we have solved this problem by developing a patent-pending algorithmic MEDL Brain that learns user behavior and then makes recommendations based upon this user behavior ("MEDL Brain"). This fully proprietary technology collects quantitative and qualitative user analytics and analyzes behavior in order to place users into "Mobile Lifestyle" categories. As the Brain collects data and "gets smarter", it can use these Mobile Lifestyles to make better and better recommendations. Each user's data is kept in a Detailed Anonymous Profile ("DAP"). As a user engages a mobile application, the DAP collects information such as:

Device Data: Operating System, Language Settings, Device Type

Quantitative Data: Location, Frequency, Timing and Duration of Usage

Qualitative Data: Direct input data, App Meta data, usage patterns, direct feedback


App usage crosses traditional demographic profiles. By categorizing users into "Mobile Lifestyles" we are able to better target recommendations for new apps, ads, content, etc. MEDL has analyzed nearly 6 million of our users and ranked them on a variant scale according to approximately 250 different "Mobile Lifestyles" such as: Active, Adult, Age, Alternative, Artistic, Athletic, Beauty Conscious, Business Person, Gender, Housewife, Gamer, Education, Budget, Creative, Employment, Marital Status, Musician, Optimistic, Organized, Outdoorsman, Parent, Planner, Profession, Religious, Single, Sports Fan, Sportsman, etc.

Using this technology, we believe we will be able to 1) drive exponential downloads of apps in the MEDL Library, and 2) better monetize our user-base via targeted advertising messages. We have an aggressive campaign to extend the reach of our MEDL Brain by acquiring underperforming apps and redeploying them with our technology embedded through our Alliance program. For the years ended December 31, 2012 and 2011, advertising revenues from what has become Marketing Technologies accounted for approximately 9% and 0%, respectively, of our total revenues.

Push Recommendations

MEDL has developed a proprietary Push Notification Center that allows us to communicate directly with our users via push messaging. The Notification Center is able to send pushes to groups of users by App and will soon be able to target direct push notification to a specific user based upon their DAP, allowing MEDL to send targeted push notifications based on specific mobile lifestyles.

Growth of the network through the MEDL Alliance

With more than 1,000,000 apps, and more being created every day, we believe that the app stores have become seas of distressed intellectual property. Tens of thousands of great apps are languishing, unable to break through the clutter and make money.

We believe the MEDL Alliance solves the problem of increasing app proliferation while also driving rapid growth of the MEDL Library through acquisition. MEDL's developer outreach program is now ongoing with new apps being added to the library on an ongoing basis. More than 50 new Apps were added to our library in 2012.

Defined Search Criteria

MEDL has developed proprietary software that can identify existing Apple and Android Apps which meet specific acquisition criteria. Once target Apps have been identified, MEDL contacts them and in many cases can acquire these applications for a percentage of future revenues.

Low cost/No cost Acquisition

In the Alliance model, MEDL can often take ownership of all app-related IP and source code in exchange for a percentage of future revenues.

Easy Onboarding

MEDL has streamlined its on-boarding process in order to rapidly add new Apps into the MEDL library via the company's proprietary custom-developed SDK.

Generating revenue through mobile advertising

Advertising Apps, products and services from within our applications represents a major opportunity for revenue moving forward.

A study by the Mobile Marketing Association finds that mobile ads should account for 7% of marketing budgets. However, mobile ads currently only represent 1% of the average company's advertising spend. (Source: Marketing Evolution, 2012) We believe that as this disparity finds balance, MEDL is well poised to see significant growth.


Monetization beyond advertising

As the app economy continues to evolve, we are getting more sophisticated in our App monetization strategies. Our primary monetization strategies beyond advertising are Pay-to-Download and Freemium.

Pay-to-download

Users pay a one-time fee to download an application. MEDL Apps range in price from $.99 to $24.99 per copy.

Freemium

The newly dominant method of monetization, the strategy is to give away the app for free - and then charge for the purchases of digital goods, additional content, to unlock items, etc.

MEDL has a large and growing library of Apps that are monetized via Freemium content - either through the sale of Digital Goods, or through the purchase of coins in a virtual Micro Economy.

Digital Goods

Digital objects are purchased within an application. Some examples of MEDL Apps that sell Digital goods include:

My Wild Night with Ted

Cheech & Chong

Zane Lamprey

Walter Foster Learn to Draw

KIDS Learn to Draw with Walter Foster

Military Regulations

Marlee Signs

Know Skateboarding Pro Tips

Tyzen Hypnosis

Micro Economy

In this strategy a secondary economy is created within the game. The user must earn or purchase credits that can be used to unlock digital goods.

This model is employed MEDL's mobile App called Journey to Real Madrid that was developed as a revenue share and as an officially licensed product of Real Madrid.

3. MEDL Ventures

We identify emerging mobile initiatives that we believe will yield a high rate of return on investment and we create of acquire Apps that address those initiatives. For the years ended December 31, 2012 and 2011, revenues from Apps sales accounted for approximately 5% of our total revenues in both years. In the fourth quarter of 2012 we made a significant shift of company resources in order to properly capitalize upon MEDL Ventures. We believe that this shift will allow us to grow this area of our business, and our overall business, more rapidly.

We evaluate Apps according to six criteria:

1. Original: We are not interested in redoing what others have already done.

2. Functional: Does it perform a service people want? Does it perform that service well?

3. Social: Does it have the ability to plug into the social graph in a way that's meaningful?

4. Simple: Can you pitch it in one sentence?

5. Marketability: Can we drive downloads using our existing marketing network.

6. Profitable: Can it be monetized?

Hang w/

The patent-pending "Hang w/" App allows live real-time video to be sent from one phone to many. The goal of the platform is twofold: 1) to become the premiere social media network for people around the globe to connect, communicate and share experiences via live streaming broadcasts; and 2) to enable celebrities and public figures to easily monetize their fan bases. The "Hang w/" live social mobile video platform was approved for release by Apple on March 20, 2013 and is available for download on the Apple App Store. This new App provides an important new channel of advertising revenue. "Hang w/" allows live real-time video to be sent from one phone to many. Any user can be a broadcaster and/or a follower. After a follower receives a notification that the broadcaster is live, the follower views a short pre-roll advertisement before watching a live video feed sent directly from the broadcaster's smartphone camera. The follower is able to chat with the broadcaster and other followers during the broadcast. A post-roll advertisement ends the broadcast.


MEDL Incubator and Partnerships

We work with internal teams and outside partners to incubate new mobile Apps that are either wholly owned by us or joint-owned by us and outside partners. The costs of development of partner Apps is typically covered in part by our partner and our partner provides their unique IP, perspective or licensed materials. Revenue from Apps that are developed in partnership is typically shared 50/50 with our development partners. MEDL has secured partnerships and revenue sharing deals with partners such as Real Madrid, DJ Pauly D, Quinton "Rampage" Jackson, Walter Foster Publishing, Encyclopedia Britannica, Cheech & Chong, Iowa State University and others.

Additionally, MEDL receives a steady flow of new App ideas that are submitted to MEDL via our proprietary App and web portal known as "The App Incubator." To date, more than 100,000 original App concepts have been submitted to us via The App Incubator. If the submission passes a series of tests it goes into development and eventually production. All ideas submitted pursuant to The Incubator App or website become our property. Submitters receive 25% of net revenues (proceeds received by us after App store commissions are taken out) generated by the App after all costs paid by us to develop and market the App have been reimbursed. We evaluate Apps based on their originality, functionality, simplicity, revenue opportunity, marketability, and on the submitters' motivation and subject matter expertise.

MEDL Key Performance Indicators:

A primary goal of MEDL Mobile is to accumulate a large user base that we can monetize through various revenue streams. We routinely monitor the following user metrics as a barometer of progress:

MEDL API Installs - Total Installations of the MEDL API (MEDL Brain/Analytics/Advertising Platform) increased to 5,052,179 for 2012 from 760,746 in 2011, an increase of 564%.

Daily Active Users - Daily Active Users (DAUs) of apps in MEDL's library increased to an average of 45,194 in 2012 from an average of 5,588 in 2011, an increase of 708%.

Monthly Active Users - Monthly Active Users (MAUs) of apps in MEDL's library increased to an average of 754,286 in 2012 from an average of 78,432 in 2011, an increase of 861%.

User Sessions - Total User Sessions of apps in MEDL's library increased to 28,162,433 for 2012 from 3,700,110 for 2011, an increase of 661%.

Results of Operations

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011


The following table presents our results of operations for the year ended
December 31, 2012 compared to the year ended December 31, 2011.


                                        Year Ended       Year Ended
                                       December 31,     December 31,
                                           2012             2011           $ Change       % Change
Revenues                              $    3,391,182   $     2,274,535   $   1,116,647           49%

Cost of goods sold                         2,287,764         1,161,038       1,126,726           97%

Gross profit                               1,103,418         1,113,497        (10,079)           -1%

Expenses:
Selling, general and administrative        4,432,294         2,863,343       1,568,951           55%

Loss from Operations                     (3,328,876)       (1,749,846)       1,579,030           90%

Other income (expense):
Decrease in fair value of warrants           495,446                 -         495,446          100%
Interest expense                                   -           (2,712)           2,712         -100%
Total Other Income (Expense)                 495,446           (2,712)         498,158

Net loss                              $  (2,833,430)   $   (1,752,558)   $ (1,080,872)           62%


Revenues

Revenues for the year ended December 31, 2012 increased to $3,391,182 as compared to $2,274,535 for the year ended December 31, 2011, an increase of $1,116,647 or 49%. 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. The increase is also attributable to advertising revenues increasing by approximately $300,000 and Apps sales increasing approximately $56,000.

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 year ended December 31, 2012 increased to $2,287,764 as compared to $1,161,038 for the year ended December 31, 2011, an increase of $1,126,726 or 97%. 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 year ended December 31, 2012 decreased to $1,103,418 as compared to $1,113,497 for the year ended December 31, 2011, a decrease of $10,079 or 1%. The gross profit decreased due to some of our custom development projects requiring more work than we anticipated when we submitted our bid for the work, requiring us to deploy more resources to produce the mobile applications finished product for our customers.

Selling, general and administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2012 increased to $4,432,294 as compared to $2,863,343 for the year ended December 31, 2011, an increase of $1,568,951 or 55%. The increase is primarily attributable to increased administrative, sales, marketing and other staff, and corresponding benefits, equal to approximately $1,121,000, an increase in payroll taxes of approximately $140,000, increased rent expense of approximately $93,000, approximately $94,000 of increased costs related to the Inedible acquisition and an increase of approximately $281,000 for legal, accounting, investor relations, public relations and other costs associated with being a public company. In addition, there was an increase in marketing expense of approximately $119,000, as the company increased its marketing efforts including attending more trade shows, and an increase in computer and internet expenses of approximately $48,000. There were increases in other selling, general and administrative expense categories but they were offset by reductions in a few of the expense categories.

Other Income/Expenses

Other income for the year ended December 31, 2012 increased to $495,446 as compared to $0 for the year ended December 31, 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 year ended December 31, 2012 decreased to $0 as compared to $2,712 for the year ended December 31, 2011, a decrease of $2,712 or 100%. The decrease is attributable to the Company not having any loans outstanding in 2012 thus did not incur interest expense in 2012.

Net Loss

Net loss for the year ended December 31, 2012 increased to $2,833,430 as compared to $1,752,558 for the year ended December 31, 2011, an increase of $1,080,872 or 62%. The increased 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 December 31, 2012 and 2011, we had cash of $112,745 and $1,075,307, respectively. At and December 31, 2012, we had a working capital deficit of $120,663. December 31, 2011, we had working capital of $1,281,354.

Net cash used in operating activities for the year ended December 31, 2012 was $2,367,792 compared to net cash used in operating activities of $1,351,964 for the year ended December 31, 2011. The $1,015,828 increase in net cash used in operating activities was primarily attributable to the $1,080,872 increase in net loss. Net cash used in investing activities for the year ended December 31, 2012 was $83,045 as compared to $72,877 for the year ended December 31, 2011. The increase in net cash used in investing activities was due to increases in the amount of computer equipment purchased. Net cash provided by financing activities for the year ended December 31, 2012 was $ as compared to net cash provided by financing activities of $2,459,466 for the year ended December 31, 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. Net cash provided by financing activities in the year ended December 31, 2011 was the result of $2,500,000 of proceeds (including conversion of bridge notes) from a private placement that closed on June 24, 2011 partially offset by a repayment of $40,534 in shareholder loans.

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. In 2013 Hang With, Inc. has received an aggregate of $525,000 from five foreign investors that bought common stock at $0.50 per share in a private placement intended to be exempt under Rule 506 of Regulation D and Regulation S.

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 to purchase one share of our common stock at a price per Unit of $1.50. As a result of the sale, which closed on the same day as entering into the securities purchase agreement, we issued to the investor 3,000,000 shares of our common stock and a warrant to purchase 1,000,000 shares of our common stock for an aggregate purchase price of $1,500,000. The warrant has a three year term and may be exercised at an exercise price of $0.90 per share, subject to adjustment in the case of stock splits, distributions, reorganizations, recapitalizations and the like, and may be exercised on a cashless basis under certain circumstances. The warrant contains full ratchet anti-dilution protection in the case of a share issuance for consideration less than the then exercise price of the warrant, subject to customary exceptions. The securities purchase agreement also grants the investor demand registration rights, piggyback registration rights and a right of participation in certain future offerings.

On January 17, 2013, the Company entered into a three-year, five hundred thousand dollar ($500,000) secured revolving credit agreement (the "Line"). The Line is a revolving line of credit that allows us to repay principal amounts and . . .

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