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HIPP > SEC Filings for HIPP > Form 10-Q on 9-Jan-2014All Recent SEC Filings

Show all filings for HIPCRICKET, INC.

Form 10-Q for HIPCRICKET, INC.


9-Jan-2014

Quarterly Report


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

The following discussion and analysis summarizes the significant factors affecting our results of operations, financial condition and liquidity position for the three months ended November 30, 2013 and 2012, and should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this filing. As discussed in Note 2 of the Notes to Consolidated Financial Statements, our unaudited quarterly financial statements for the period ended November 30, 2012 have been restated. Comparative data for the three and nine months ended November 30, 2012 presented in the discussion below is restated.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

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.

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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 our industry;

? the results of our pending and any future litigation;

? the emergence of new technologies which compete with our product and service offerings;

? our cash position and uses of cash;

? 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. You also can identify them by the fact that they do not relate strictly to historical or current facts. Forward-looking statements reflect our current views with respect to future events and are based on assumptions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Given these uncertainties and risks, you should not place undue reliance on our forward-looking statements. We discuss many of these uncertainties and risks in greater detail under the heading "Risk Factors" in our Annual Report on Form 10-K, in Part II, Item 1A (Risk Factors) of this Report and in other reports we file with the SEC.

Our forward-looking statement are based on information currently available to us and speak only as of the date of this report. 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. You therefore 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

On October 4, 2013, we completed a $9.6 million financing transaction with 13 investors. The investors purchased units of our securities at $0.40 per unit. Each unit consisted of 1 share of our common stock and a warrant to purchase 0.3 shares of our common stock. An aggregate of 23,875,000 shares of our common stock and warrants to purchase up to 7,162,500 shares of our common stock were purchased in the financing. The warrants have a five year term and an exercise price of $0.60 per share. See the discussion included in the section titled "Liquidity and Capital Resources" for additional information relating to this offering.

On October 16, 2013, new Federal Communications Commission rules under the Telephone Consumer Protection Act of 1991 ("TCPA") became effective which impacted companies engaged in mobile marketing using opt-in databases. As a result of the regulatory change, the majority of our mobile marketing customers undertook actions to re-opt in subscribers to their SMS marketing databases during our third fiscal quarter. These activities were supported by our marketing and advertising sales representatives, many of which were diverted into customer service roles, and our product and technology teams who were already contending with completing a data center move requiring significant product and technical support. These factors negatively impacted our revenue and certain product launches in our third fiscal quarter. We expect the impact of these issues to be substantially behind us by the end of fiscal year 2014.

On November 25, 2013, we entered into an amended and restated loan and security agreement with Silicon Valley Bank ("SVB"), relating to our $5.0 million asset-based revolving loan facility. The amended and restated agreement retained substantially the same terms as the original loan and security agreement dated as of may 8, 2013, except the borrowing base was amended as of December 31, 2013 and the collateral securing the loan facility was expanded to include our intellectual property. In connection with the execution of the amended loan agreement, we obtained a waiver of our prior default of the minimum tangible net worth covenant under the loan. See Note 9 of the notes to consolidated financial statement and the discussion included in the section titled "Liquidity and Capital Resources" for additional information relating to this agreement.

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During the quarter ended November 30, 2013, we continued to invest in our sales team, including adding new senior sales leadership, to drive revenue and adoption of our ADLIFE Platform as well as identify cost savings opportunities. In November 2013, we entered into an agreement with Millennial Media, Inc. under which Millennial will license our analytics platform. We and Millennial also mutually agreed to dismiss the lawsuit between us.

Business

We provide mobile advertising and mobile marketing technology and services that empower brands, agencies and media companies to engage customers, drive loyalty and increase sales. Our proprietary software-as-a-service AD LIFE Platform allows marketers, brands, and agencies to plan, create, test, deploy, and track mobile marketing programs across nearly every mobile channel. Through the use of Consumer Response Tags such as 2D codes, UPC codes, SMS, and image recognition, our Platform facilitates consumer brand interaction and the ability to track and analyze campaign results. Using our patented device-detection and proprietary mobile content adaptation software, AD LIFE solves the mobile marketing industry problem of disparate operating systems, device types, and on-screen mobile content rendering. We also provide business-to-consumer utilities, including national mobile couponing solutions, strategic mobile healthcare tools, custom mobile application development and consumer data tracking and analytics. Our products serve advertisers and ad agencies in many vertical markets, including automotive, retail, consumer products, food and beverage, media and broadcast, pharmaceutical and restaurant brands. We have successfully completed over 250,000 mobile campaigns to date with hundreds of clients across some of the leading brands in the U.S. and have consistently maintained a customer renewal rate of over 95%.

The mobile advertising and marketing landscape, while in its early stages, is highly competitive. Many of the landscape's significant players are focused on delivering point solutions targeting a specific segment of the mobile marketing and/or advertising landscape. We believe that we differ from the competition by offering complete, end-to-end mobile advertising and marketing solutions delivered through our AD LIFE Platform.

Our advanced, comprehensive, and fully integrated Platform drives revenue primarily through license fees, marketing campaign fees, and fees associated with certain add-on promotional applications in the Platform. Additional revenue is generated by platform administration and professional service fees related to the mobilization of client content and implementation of marketing campaigns through the Platform.

Our portfolio of patents covers technical processes and methods that are believed to be a foundational component of behavioral targeting - the automatic provision of customized content to individuals based on information such as past web activity, personal preferences, geography, or demographic data. As of November 30, 2013, we owned 21 U.S. patents. We are pursuing on a selective basis, additional patents that generally relate to targeting, analytics, advanced mobile marketing, customized content delivery, and mobile and networked marketing technology.

We operate under one reportable segment. In December 2013, we relocated our corporate headquarters to 110 110th Avenue NE, Bellevue, Washington 98004. Additionally, we maintain a presence in New York, Atlanta, Miami, Dallas, Chicago, San Francisco and Los Angeles.

Liquidity and Capital Resources

Net cash used in operating activities was $9.3 million during the nine months ended November 30, 2013. Net cash used in operating activities reflects the net loss for the period, partially offset by depreciation and amortization, share-based compensation expense and changes in operating assets and liabilities. Net cash used in operating activities during the nine months ended November 30, 2012 was $10.4 million, reflecting the net loss for the period, partially offset by depreciation and amortization, asset and goodwill impairment, stock option and warrant expense and changes in operating assets and liabilities. Included in the net loss for the period were non-cash adjustments to acquisition-related contingent consideration of $12.2 million related to our acquisition of the Hipcricket, Inc. ("Hipcricket") in August 2011and deferred income tax benefits of $2.6 million related to our acquisition of GEOS Communications IP Holdings, Inc. ("GEOS") in May 2012.

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Net cash used in investing activities was approximately $541,000 during the nine months ended November 30, 2013. We used approximately $327,000 for legal actions in support of our patent enforcement, $44,000 to purchase patents, which we capitalize as intangible assets, and $170,000 for additions to property and equipment including $78,000 leasehold improvements for our new headquarters. Net cash used in investing activities was $6.9 million for the nine months ended November 30, 2012. We used $3.2 million for payment of contingent consideration related to our acquisition of Hipcricket, $2.7 million for legal actions supporting our patent enforcement initiatives and $0.8 million to purchase patents. Additionally, we used cash of $0.2 million for a long-term investment. During the nine months ended November 30, 2012, we paid $355,000 in cash and $3.8 million in our common stock (1,860,465 shares at a price of $2.05 per share) for the purchase of all of the common and preferred stock of GEOS. We also we issued 5,225,039 shares of common stock in partial satisfaction of the contingent consideration obligation related to our acquisition of Hipcricket. The fair value of the stock on the measurement date was $1.48 per share.

Net cash provided by financing activities was $10.3 million during the nine months ended November 30, 2013, compared to approximately $7.7 million for the nine months ended November 30, 2012. Cash provided by financing for the nine months ended November 30, 2013 was primarily attributed to $9.0 million in proceeds received from sale of our common stock and $1.4 million in borrowings from our loan facility. Net cash provided by financing for the nine months ended November 30, 2012 included $6.2 million in proceeds received from sale of our common stock, $1.3 million from the exercise of stock options and warrants, and $0.2 million from loans from two lenders.

As of November 30, 2013 and February 28, 2013, we had accumulated deficits of $126.1 million and $111.4 million, respectively. We are subject to the risks and challenges associated with companies at a similar stage of development, including dependence on key individuals, successful development and marketing of our products and services, integration of recent business combinations, competition from alternative products and services and larger companies with greater financial, technical management and marketing resources. Further, we may require additional financing to execute our key business strategies and fund operations, those funds may not be readily available or may not be on terms that are favorable to us. Certain financing terms could be dilutive to existing shareholders or could result in significant interest or other costs, or require us to license or relinquish certain intellectual property rights.

We operate in the mobile marketing industry and, accordingly, can be affected by a variety of factors. For example, we believe that any of the following factors could have a significant negative effect on our future financial position, results of operations and cash flows: unanticipated fluctuations in quarterly operating results, adverse changes in our relationship with significant customers or failure to secure contracts with other customers, unpredictable legal expense associated with ongoing litigation, intense competition, failure to attract and retain key personnel, failure to protect intellectual property, decreases in the migration trends from traditional advertising methods to digital and mobile media and the inability to manage growth.

In September 2012, we adopted a restructuring plan which included reducing the number of employees, slowing the pace of investments in our intellectual property ("IP") portfolio and minimizing variable expenses. We have restructured overall corporate overhead expenses in order to focus our business around our mobile marketing and advertising technology and services. Consistent with this plan, we have settled the majority of our patent litigation cases, while protecting the value of our IP assets, to reduce our ongoing legal costs, downsized our Tucson division which was primarily involved with development and monetization of our IP, streamlined personnel and variable costs and solidified the management team by appointing new personnel with extensive experience in the mobile marketing and advertising space to lead our sales and engineering teams. We have made substantial improvements in lowering our operating expenses, compared to the same period one year ago. We intend to continue to minimize cash spend and identify additional cost savings opportunities while carefully investing our resources and protecting our strategic assets to strengthen our position in the mobile marketing and mobile advertising industry.

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During the quarter ended May 31, 2013, we secured an accounts receivable credit facility from Silicon Valley Bank ("SVB") to help fund our working capital needs, which was amended and restated on November 25, 2013. The revolving loan credit facility has a two-year term and allows us to borrow up to $5.0 million based upon a formula equal to 90% of eligible accounts receivable, decreasing to 80% of eligible accounts receivable plus the least of (i) 80% of Eligible 120 Day Accounts as defined in the amended and restated loan agreement (the "Amended Agreement"), (ii)$1,000,000, and (iii) 30% of the sum of all eligible accounts plus Eligible 120 Day Accounts after December 31, 2013. The facility is secured by substantially all of our assets. Amounts drawn under the facility accrue annual interest at the prime rate plus 0.75% during a Streamline Period, as defined in the Amended Agreement, and at the prime rate plus 1.25% when a Streamline Period is not in effect. We are required to deliver periodic reports to SVB regarding our ability to meet certain financial and other covenants contained in the Amended Agreement. In late July we delivered the report to SVB indicating that as of June 30, 2013, we had breached our minimum tangible net worth covenant and began discussions of a forbearance agreement with SVB. On November 25, 2013, we entered into an amended and restated loan and security agreement with SVB. The Amended Agreement retained substantially the same terms as the original loan and security agreement, except the borrowing base was amended as described above and the collateral securing the loan facility was expanded to include our intellectual property. In connection with the execution of the Agreement, we obtained a waiver of our covenant default. As of the November 30, 2013, we had drawn $1.4 million from this line of credit and had approximately $3.2 million available based on our outstanding accounts receivable as of that date.

On October 4, 2013, we closed a $9.6 million financing transaction with 13 investors, each of which is an "accredited investor" within the meaning of the Securities Act of 1933. The investors purchased units of our securities at $0.40 per unit. Each unit consisted of one share of our common stock and a warrant to purchase 0.3 shares of our common stock. An aggregate of 23,875,000 shares of our common stock and warrants to purchase up to 7,162,500 shares of our common stock were purchased in the financing. The warrants have a five year term and an exercise price of $0.60 per share. In connection with the financing, we also entered into a registration rights agreement with each investor pursuant to which we have agreed to file and maintain effectiveness of a registration statement covering the resale of all of the shares of common stock and shares of common stock underlying the warrants sold in the financing. We filed a registration statement on Form S-1 with the SEC on November 4, 2013. The registration statement was declared effective on November 8, 2013.

In the future, we may need to raise additional cash through equity or debt financings, and/or sell all or part of our patent portfolio, while retaining the rights to use the patents in our technology. There is no certainty that we will have the ability to raise additional funds through debt or equity financings under terms acceptable to us or that we will have the ability to sell all or part of the patent portfolio. If sources of capital are unavailable, or are available only on a limited basis or under unacceptable terms, then we could be required to substantially reduce or discontinue our investments in new customers and new products; reduce selling, marketing, general and administrative costs related to our continuing operations; or limit the scope of our continuing operations. Due to the nature of our operations and financial commitments we may not have the discretion to reduce operations in an orderly manner to a more sustainable level without impacting future operations.

As of the filing of our Annual Report on Form 10-K for the fiscal year ended February 28, 2013, we no longer met the minimum $75 million public float requirement for use of Form S-3 registration for primary sales of our shares and therefore are limited in our ability to issue the remaining $41.4 million remaining on our existing Form S-3 and/or to file new shelf registration statements on Form S-3. Until such time as we satisfy the $75 million public float and other requirements for use of Form S-3 registration, we will be required to use a registration statement on Form S-1 to register securities with the SEC or issue such securities in a private placement, which could increase the cost of raising capital. If we need to raise additional capital, we do not believe that the unavailability of Form S-3 registration will be a significant limiting factor.

Critical Accounting Policies

Our critical accounting policies, as described in our Annual Report on Form 10-K for the fiscal year ended February 28, 2013, relate to capitalized legal patent costs, income taxes, business combinations, fair value measurements, goodwill, intangible assets, share-based payments, revenue recognition, and research and development costs. There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K.

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Results of Operations

The discussion below is not necessarily indicative of the results which may be expected for any subsequent periods and pertains only to the results of operations for the three and nine months ended November 30, 2013 and 2012. Our prospects should be considered in light of the risks, expenses and difficulties that we may encounter. We may not be successful in addressing these risk and difficulties. As discussed in Note 2 to the Notes to Consolidated Financial Statements, our financial statements for the unaudited quarterly and year-to-date periods ended November 30, 2012 have been restated to reflect impairment of our goodwill and intangible assets, and deferred income tax liability associated with the acquisition of Hipcricket. Net loss was also affected by the restatement. The corrections had no impact on total revenue or operating expense. Comparative data for the three and nine months ended November 30, 2012 is as restated.

COMPARISON OF THREE AND NINE MONTHS ENDED NOVEMBER 30, 2013 TO THREE AND NINE MONTHS ENDED NOVEMBER 30, 2012

Revenue

Revenues are generated through providing access to our SaaS mobile marketing platforms and services through term license fees, support fees and mobile marketing and advertising campaigns. Through our platform we deliver campaigns and other mobile marketing services using SMS, multimedia messaging service ("MMS"), quick response ("QR") codes, Geo-fencing, Mobile Web, Mobile Apps, and analytics. We also provide professional services and extensive integration into customer CRM systems using application programming interfaces ("APIs"). The revenues from these multiple elements of a contract are generally recognized over the term of the contract. For the quarter ended November 30, 2013, revenues were $6.4 million compared with $7.4 million in the quarter ended November 30, 2012, a decrease of approximately 14%. Our revenue for the quarter was adversely affected by the enactment of new TCPA regulations, which required us to divert our sales, marketing, and engineering and operations personnel to assist customers required to take action to re-opt in subscribers to the customers' SMS marketing databases. Our product and technology teams also contended with completing a data center move requiring significant product and technical support. We expect the impact of these issues to be substantially behind us by the end of fiscal year 2014. For the nine months ended November 30, 2013, revenues were $19.9 million compared with $18.7 million in the nine months ended November 30, 2012, an increase of approximately 6%. During the quarter ended November 30, 2013, approximately 13% of our revenue was generated by two customers. During the nine months ended November 30, 2013, approximately 20% of our revenue was generated by three customers.

Cost of Revenue

Cost of revenue includes the costs of hosting, short codes and mobile ad inventory. For the quarter ended November 30, 2013, cost of revenue increased 6% to $3.2 million from $3.1 million in the quarter ended November 30, 2012, and for the nine months ended November 30, 2013, the cost of revenue increased 24% to $9.2 million from $7.5 million in the nine months ended November 30, 2012. The increase in the cost of sales is as a result of a shift in business toward a greater percentage of sales from mobile advertising which carries a greater cost of sales.

Operating Expenses

Operating expenses consist of sales and marketing, technology and development, general and administrative and depreciation and amortization expenses. Salaries and personnel costs are the most significant component of the sales and marketing, technology and development and general and administrative expense categories. We include stock-based compensation expense in connection with the grant of stock options and warrants in the applicable operating expense category based on the respective equity award recipient's function. Operating expense also include non-recurring impairment charges associated with write downs of goodwill, intangible assets, and investments in the period when the value of the goodwill, assets, or investments are determined to be impaired. For the quarter and nine months ended November 30, 2013 operating expenses decreased a total of $36.9 million and $41.7 million, respectively. The three and nine months ended November 30, 2012 included $25.9 million for impairment of goodwill and $8.7 million for impairment of intangible assets and investments. Excluding these charges, the decrease in operating expenses was primarily attributed to lower staffing levels in the third quarter and first nine months of fiscal 2014 compared to the same periods a year ago, resulting from the implementation of our restructuring plan adopted in September 2012.

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Sales and marketing expense. Sales and marketing expense consists primarily of salaries and personnel costs for our sales and marketing employees, including stock-based compensation, commissions and bonuses. Additional expenses include marketing programs, consulting, travel and other related overhead. Sales and marketing expense decreased $992,089, or 26%, to $2.7 million for the quarter ended November 30, 2013 compared to $3.8 million for the quarter ended November 30, 2012. For the nine months ended November 30, 2013, sales and marketing expense decreased $2.4 million, or 21%, to $8.9 million compared to $11.3 million for the nine months ended November 30, 2012. The decrease in sales and marketing expense is related to lower payroll costs associated with reduced staffing levels in sales support and client services compared to the prior year.

Technology and development expense. Technology and development expense consists primarily of salaries and personnel costs for development employees, including stock-based compensation and bonuses. Additional expenses include costs related to the development, quality assurance and testing of new technology and enhancement of existing technology, consulting, travel and other related overhead. We experienced a $323,743 decrease, or 17%, in these expenses to $1.6 million for the quarter ended November, 2013 compared to $1.9 million for the quarter ended November 30, 2012. For the nine months ended November 30, 2013, technology and development expense decreased $975,534, or 16%, to $5.0 million compared to $5.9 million for the nine months ended November 30, 2012. The decrease is primarily related to lower personnel costs associated with reduced staffing levels compared to the prior year.

General and administrative expense. General and administrative expense consists primarily of salaries and personnel costs for product, operations, developer support, business development, administration, finance and accounting, legal, information systems and human resources employees, including stock-based compensation and bonuses. Additional expenses include consulting and professional fees, travel, insurance and other corporate expenses. General and . . .

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