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ADTM > SEC Filings for ADTM > Form 10-K on 14-Apr-2014All Recent SEC Filings

Show all filings for ADAPTIVE MEDIAS, INC.

Form 10-K for ADAPTIVE MEDIAS, INC.


14-Apr-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including, "could" "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential" and the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this Annual Report.

Factors Affecting Our Performance

We believe that the growth of our business and our future success depend on various opportunities, challenges and other factors, including the following:

Investment in Growth

The beginning part of 2014 will see Adaptive Media focus on stabilizing the technology platform. With the acquisitions of Adaptive Media, Ember and the impending business combination with OneScreen, Inc., we need to take a moment to insure all of our technology is working properly and is capable of handling the growth we see coming. With this stabilization in place, we plan to invest in additional features and technology that will further differentiate us from our competition. We will continue to invest in research and development to enhance our solution and create additional offerings. The goal of these developments will be to maximize the market penetration across our multiple streams of income. We also believe that as both our publisher and demand side sales teams becomes more seasoned, we will experience an increase in sales productivity.

Technology Enhancements and Customer Satisfaction

We will continue to make improvements to our technology platform. We will be focusing our developing efforts in two main categories. The first being to increase performance for our publishing partners through better efficiency, higher fill rates and better Cost Per Thousand ("CPM") impressions. The second will be a collaborative solution with the agencies and advertisers that could include planning, content monetization and strategic partnership opportunities. Both of these efforts will have the overarching goal of increasing our customer satisfaction and thus increased retention.

Ability to Increase Penetration in All Channels and All Devices

Our future performance is dependent on our continued ability to penetrate and grow our revenue in display, mobile and video channels. These revenues will come from both the publisher side through our RTB platform driving inventory monetization and through direct agency and advertiser contracts. Video and mobile represent the fastest growing channels currently, but we do see a significant opportunity in rich media and high impact display ads. Mobile device growth is eclipsing desktop growth. We are seeing an increase in request for cross device targeting. We are working on a unique, non-Personal Identity Identifier ("PII") solution based on our data store that will allow us to successfully identify users regardless of which device they are on.

Growth of TV to Digital Advertising and Content Monetization

TV advertising and content providers are looking to the digital marketplace for increased visibility and efficiency. We see a significant opportunity to bridge the gap between the legacy experience and what can be provided in the digital space. Powered by our custom video player, we are uniquely positioned to deliver just such a solution. This effort is not without significant risks and barriers but our distributed video player gives us the reach and the platform to deliver the content and the advertising metrics that are lacking in today's solutions.

Growth of the Real-time Advertising Exchange Market and Digital Advertising

The Exchange and Real Time Bidding platforms have grown rapidly in the past several years. We have harnessed this acceleration by combining them with our own ad server and RTB engine. While we will continue to drive additional integrations in these categories, we will also maximize the inherent opportunities that exist through our direct publisher relationships like the execution of the new high impact Internet Advertising Bureau ("IAB") Rising Stars ad units.

Seasonality

In the advertising industry, companies commonly experience seasonal fluctuations in revenue. For example, many advertisers allocate the largest portion of their budgets to the fourth quarter of the calendar year to coincide with increased holiday purchasing. Historically, the fourth quarter of the year reflects our highest level of advertising activity, and the first quarter reflects the lowest level of such activity. We expect our revenue to continue to fluctuate based on seasonal factors that affect the advertising industry as a whole.

Recently Issued Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income (AOCI) by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. The ASU is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a significant impact on the Company's results of operations or financial position.

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters, which permits an entity to release cumulative translation adjustments into net income when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, or, if a controlling financial interest is no longer held. The revised standard is effective for the Company for fiscal years beginning after December 15, 2013. The Company will adopt this guidance effective January 1, 2014. The Company does not expect the adoption of ASU 2013-05 to significantly impact its consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740). ASU 2013-11 requires that unrecognized tax benefits be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances. When those circumstances exist, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company will adopt this guidance effective January 1, 2014. The Company does not expect the adoption of ASU 2013-11 to significantly impact its consolidated financial statements.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and related notes. Our significant accounting policies are described in Note 2 to our consolidated financial statements included in our Annual Report for the year ended December 31, 2013. We have identified below our critical accounting policies and estimates that we believe require the greatest amount of judgment. These estimates and judgments have a significant impact on our consolidated financial statements. Actual results could differ materially from those estimates. The accounting policies that reflect our more significant estimates and judgments and that we believe are the most critical to fully understand and evaluate our reported financial results include the following:

Accounts Receivable and Allowance for Doubtful Accounts

The Company's accounts receivable primarily consist of trade receivables. The Company records an allowance for doubtful accounts that is based on historical trends, customer knowledge, any known disputes, and the aging of the accounts receivable balances combined with management's estimate of future potential recoverability. Receivables are written off against the allowance after all attempts to collect a receivable have failed. The Company believes its allowance for doubtful accounts as of December 31, 2013 and 2012 is adequate, but actual write-offs could exceed the recorded allowance.

Accounting for Derivatives Liabilities

The Company evaluates stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity's Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

Equity Instruments Issued to Non-Employees for Acquiring Goods or Services

Issuances of the Company's common stock or warrants for acquiring goods or services are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for the fair value of the equity instruments issued to consultants or vendors is determined at the earlier of: (i) the date at which a commitment for performance to earn the equity instruments is reached (a "performance commitment" which would include a penalty considered to be of a magnitude that is a sufficiently large disincentive for nonperformance) or (ii) the date at which performance is complete. When it is appropriate for the Company to recognize the cost of a transaction during financial reporting periods prior to the measurement date, for purposes of recognition of costs during those periods, the equity instrument is measured at the then-current fair values at each of those interim financial reporting dates

Fair Value of Financial Instruments

The Company adopted ASC Topic 820, Fair Value Measurements and Disclosures, for assets and liabilities measured at fair value on a recurring basis. ASC Topic 820 establishes a common definition for fair value to be applied to existing US GAAP that requires the use of fair value measurements that 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 Topic 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.

Goodwill and Other Intangible Assets

Intangible assets are stated at cost. Expenditures of costs incurred to renew or extend the term of a recognized intangible asset and materially extend the useful life are capitalized. When assets are sold or otherwise written off due to asset impairment, the cost and the related accumulated amortization are removed from the accounts and any realized gain or loss is recognized at that time. Useful lives of intangible assets are periodically evaluated for reasonableness and the assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may no longer be recoverable.

Amortization is computed primarily on the straight-line method for financial statement purposes over the estimated useful lives of the related intangible assets. Estimated useful lives will vary based on the nature of the intangible asset.

In accordance with ASC Topic 350-30-65, the Company assesses 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 websites, customer lists, developed technology and trade names. Factors the Company considers 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 the Company determines 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, the Company records an impairment charge. The Company measures 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

Stock-based compensation is accounted for based on the requirements of ASC Topic 718 which requires recognition in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). ASC Topic 718 also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third parties, compensation expense is determined at the "measurement date." The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date.

Year Ended December 31, 2013 compared with Year Ended December 31, 2012

Revenue

For the year ended December 31, 2013, revenue was $1,030,267 compared to $0 for the year ended December 31, 2012, an increase of $1,030,267 or 100%. This increase was due to the acquisition of Adaptive Media, Inc. and the successful growth of the Company's advertising business. We believe the Company's revenue growth will continue to accelerate in 2014.

Operating Expenses

For the year ended December 31, 2013, our operating expenses increased to $8,278,881 from $5,168,722 for the year ended December 31 2012, an increase of $3,110,159 or 60%.

For the year ended December 31, 2013, the overall increase in the operating expenses was substantially due to the increase in general and administrative expenses, legal and professional fees, and impairment of intangibles. In 2013, general and administrative expenses increased to $1,956,241 from $334,063 for the year ended December 31, 2012, an increase of $1,622,178 or 486%, primarily due to the expansion in the number of employees and consultants required to operate a growing business as the Company matured into a revenue-stage company from a development-stage one. Legal and professional fees in 2013 rose to $1,121,661 from $777,918 in 2012, an increase of $343,743 or 44%, due to multiple mergers and acquisitions, numerous financing activities, expenses related to legacy obligations of the Company, and expenses related to public-company compliance. Impairment of intangibles increased in 2013 to $342,610 from $0 in the previous year due to the write-off of certain intangibles associated with the Lone Wolf, Inc. transaction. In addition, a portion of the general and administrative expenses and legal and professional fees incurred in 2013 and 2012 were paid in the form of our restricted common stock and are reflected in the consolidated financial statements under stock compensation expense. In the event that individuals or consultants who provided services on behalf of the Company were compensated in stock, all of the common shares issued were priced at fair value based on the closing price of our stock on the date of issuance. All of the options issued were priced using the Black-Scholes option pricing model. Stock based compensation expense increased in 2013 to $4,154,665 from $3,178,144 in 2012, an increase of $976,521 or 31%. The increase in 2013 was a result of an increase in the use of stock and stock options as compensation from the prior year, as well as the granting of stock and options to a growing pool of employees and consultants. For the year ended December 31, 2013, the executive compensation increased to $447,959 from $424,940 for the year ended December 31, 2012, an increase of $23,019 or 5%.

Research and development expenses consist of software engineering costs for employees and consultants that are developing specific Adaptive Medias products. For the year ended December 31, 2013, the research and development expenses decreased to $255,745 from $453,657 for the year ended December 31, 2012, a decrease of $197,912 or 44%. This decrease is due primarily to a shift of the business model resulting from the acquisition of Adaptive Media, Inc. in July 2013.

For the year ended December 31, 2013, the Company had a gain on extinguishment of debt of $15,988 compared to a loss of $270,369 for the year ended December 31, 2012, a decrease in losses of $286,357 primarily due to favorable settlements of certain debt obligations of the Company.

For the year ended December 31, 2013, the interest expense increased to $486,396 compared to $61,866 for the year ended December 31, 2012, an increase of $424,530 or 686% due to the amortization of debt discount related to the agreement with Gemini Master Fund.

Net Loss

For the year ended December 31, 2013, we incurred a loss of $8,462,981 or $0.08 per share - basic and diluted, compared to a net loss of $5,500,957, or $0.11 per share - basic and diluted for the year ended December 31, 2012, an increase of $2,962,024 or 54%. See above for the detailed explanations of the each category of expenses.

Liquidity and Capital Resources

As of December 31, 2013, we had $22,188 cash available and $758,502 of total current assets consisting of prepaid expenses of $126,321 and accounts receivable of $609,993. We had total current liabilities of $2,011,179 consisting of accounts payable and accrued expenses of $1,711,179 and $300,000 of convertible note payable.

We currently have limited funds to pay our accounts payable and accrued expenses. Should one or more of our creditors seek or demand immediate payment in-full, we are not likely to have the resources to pay or satisfy any such claims. Thus, we face risk of defaulting on our obligations to our creditors with consequential legal and other costs adversely impact our ability to continue our existence.

Our insolvent financial condition also may create a risk that we may be forced to file for protection under applicable bankruptcy laws or state insolvency statutes. We also may face the risk that a receiver may be appointed. We face that risk and other risks resulting from our current financial condition.

During the year ended December 31, 2013, we raised $2,365,000 in equity financing and $582,700 in debt financing, however, this does not alleviate our current financial position, nor does it enable us to sustain our current operations. For these and other reasons, we anticipate that unless we can obtain sufficient capital from an outside source and do so in the very near future, we may be unable to continue to operate, continue to meet our filing obligations under the Securities Exchange Act of 1934, or otherwise satisfy our obligations to our employees, consultants, various costs to maintain our SEC reporting requirements and others.

For these and other reasons, our management recognizes the adverse difficulties and continuing severe challenges we face. Apart from the limited funds that we have received there can be no assurance that we will receive any financing or funding from any source or if any financing should be obtained, that existing shareholders will not incur substantial, immediate, and permanent dilution of their existing investment.

The following is a summary of the Company's cash flows provided by or used in operating, investing, and financing activities for the years ended December 31, 2013 and 2012:

                                    For the Fiscal Year Ended
                                                     December 31, 2013       December 31, 2012

Net cash used in operating activities               $        (2,827,966 )   $        (1,471,332 )

Net cash used in investing activities               $            (2,491 )   $                 -

Net cash provided by financing activities           $         2,789,359     $         1,534,618

Net (decrease) increase in cash                     $           (41,098 )   $            63,286

Cash - beginning of year                            $            63,286     $                 0

Cash - end of year                                  $            22,188     $            63,286

Going Concern Uncertainties

The Company has a history of operating losses and has incurred significant net losses in each fiscal year since its inception. For the years ended December 31, 2013 and 2012, we had net revenues of $1,030,267 and $0 and incurred net losses of $8,462,981 and $5,500,957, respectively. We will need to generate significant additional revenue and/or cost reductions to achieve profitability. While management believes that we may achieve profitability in the future, there can be no assurance that we will do so. Our ability to generate and sustain significant additional revenues or achieve profitability will depend upon numerous factors outside of our control, including sales of our advertising and software products and reduction of our debt obligations.

It may be necessary for us to secure additional working capital through loans or sales of common stock, and there can be no assurance that such funding will be available in the future. These conditions raise substantial doubt about our ability to continue as a going concern. Our independent registered public accounting firm has issued a "going concern" qualification as part of their opinion on our consolidated financial statements for the year ended December 31, 2013, which is contained elsewhere in this Annual Report on Form 10-K.

Capital Expenditures

We have not incurred any material capital expenditures.

Commitments and Contractual Obligations

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be considered material to investors.

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