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HIPP > SEC Filings for HIPP > Form 10-K on 14-May-2014All Recent SEC Filings

Show all filings for HIPCRICKET, INC.

Form 10-K for HIPCRICKET, INC.


Annual Report


The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed under Risk Factors above and elsewhere in this report.


On August 23, 2013, we changed our company name from Augme Technologies, Inc. to Hipcricket, Inc. Hipcricket®, Inc., Augme® Technologies™, AD LIFE®, AD SERVE®, A+®, Boombox® and the Hipcricket and Augme logos are trademarks of Hipcricket, Inc.

We provide an end-to-end, data driven mobile engagement and analytics solution that empowers brands, agencies, and media companies to drive customer engagement, loyalty and sales. Our proprietary, scalable and user friendly AD LIFE Platform
creates measurable, real-time, one-to-one relationships between companies and their current or prospective customers, using text messages, multimedia messages ("MMS"), mobile web sites, mobile applications, mobile coupons, quick response ("QR") codes and via mobile advertising.

Our AD LIFE Platform is a mobile engagement solution that simplifies the entire mobile ecosphere into a single, scalable, self-service access point. The Platform enables our customers to quickly plan, create, test, deploy, monitor, measure and optimize interactive mobile marketing and advertising programs throughout the campaign lifecycle across nearly every major mobile channel. We have delivered over 400,000 campaigns since 2004, across hundreds of customers including Fortune 100 and other established brand clients. Additionally, we have earned a greater than 90% renewal rate with our mobile marketing customers.

Using our patented device-detection and mobile content adaptation software, the AD LIFE Platform addresses 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 marketers, brands and agencies in many vertical markets including automotive, retail, consumer products, food and beverage, media and broadcast, pharmaceutical and restaurant brands.

The Platform features a rich analytics engine that sources real-time campaign data, in addition to third party and client information, to personalize mobile advertising and marketing campaigns, thereby increasing the effectiveness of these messages and the likelihood of re-engagement. The Platform automatically tracks mobile phone numbers through interactions across nearly every major mobile channel, capturing and applying additional data to build a more complete consumer profile. Our current database consists of detailed profiles on millions of mobile phone numbers, which, by employing third party data, can be turned into virtually unlimited segments. These data help advertisers understand the most effective use of advertising resources and help optimize their marketing spend, especially for projects that feature repeat customer relationships. Our applied analytics product, which was released in fiscal year 2014, offers technologies and solutions designed to help advertisers dynamically track, measure and analyze the performance of their advertising and marketing investments in real time to rapidly tailor their mobile marketing activities.

The mobile marketing and advertising competitive 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, mobile marketing, and analytics solutions delivered through our AD LIFE Platform.

Our advanced, comprehensive, and fully integrated Platform drives revenue primarily through license fees, content development fees, messaging campaign fees, and fees associated with various 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 related to 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 February 28, 2014, we owned 21 U.S. patents. We are pursuing, on a selected basis, additional patents that 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, Suite 410, Bellevue, Washington 98004. Additionally, we maintain a presence in New York, Atlanta, Miami, Dallas, Chicago, San Francisco and Los Angeles.

Liquidity and Capital Resources

Cash flow information is as follows:

                                     Fiscal Year Ended
                                       February 28,
                                  2014              2013
Cash provided by (used in):
Operating activities          $ (11,704,301 )   $ (13,086,785 )
Investing activities               (832,458 )      (7,347,198 )
Financing activities             11,186,510        13,357,849

Net cash used in operating activities was $11.7 million in the fiscal year ended February 28, 2014, compared to $13.1 million in the fiscal year ended February 28, 2013. Net cash used in operating activities for fiscal year 2014 primarily reflects the net loss for the year, which was partially offset by depreciation and amortization and employee share-based compensation. Net cash used in operating activities for the prior fiscal year primarily reflected the net loss for the year, which was partially offset by depreciation and amortization, employee share-based compensation, adjustments to the fair value of contingent consideration paid related to the Hipcricket acquisition, and the impairment of goodwill and intangible assets.

Net cash used in investing activities was $0.8 million for the fiscal year ended February 28, 2014, compared to $7.3 million in the fiscal year ended February 28, 2013. Cash to purchase patents was approximately $44,000 for the fiscal year ended February 28, 2014, compared to approximately $864,000 in fiscal year ended February 28, 2013. We spent cash for legal actions related to our patent enforcement initiatives of approximately $429,000 during fiscal year ended February 28, 2014, compared to $3.0 million during the fiscal year ended February 28, 2013. We capitalize these legal costs as intangible assets. During fiscal year 2013 we also used cash of $3.2 million for the contingent consideration related to the Hipcricket acquisition, compared to zero for fiscal year 2014.

Net cash provided by financing activities was $11.2 million in the fiscal year ended February 28, 2014 primarily due to sales of securities and borrowings from our revolving line of credit. Net cash provided by financing activities was $13.4 million in the fiscal year ended February 28, 2013, primarily due to sales of securities of $12.1 million and $1.3 million in cash received from the exercise of stock options and warrants. In September 2012, we borrowed a total of $450,000 from two lenders for working capital purposes. We borrowed $250,000 from one lender, bearing an interest rate of 12% per year and due to be paid the earlier of one year from the issue date, upon closing of a financing transaction of at least $10 million in gross proceeds, or in the event of default or a change of control as defined in the promissory note. This loan was paid in full in February 2013. We also 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.

As of February 28, 2014 and 2013, we had accumulated deficits of $133.6 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 substitute products and services and larger companies with greater financial, technical management and marketing resources. 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, 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.


We will likely require additional financing to execute our key business strategies and fund operations. Such 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 stockholders, may give new investors rights, preferences and privileges that are superior to those of existing stockholders, could result in significant interest or other costs, or may require us to license or relinquish certain intellectual property rights. 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, which would raise substantial doubt about our ability to continue as a going concern. 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. Our financial statements for the year ended February 28, 2014 contained in this report have been prepared assuming that we will continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

In January 2014, we retained the corporate advisory services of Canaccord Genuity to explore and evaluate strategic alternatives with a view to enhancing shareholder value. We intend to consider a full range of strategic alternatives, including possible acquisitions or dispositions of assets, joint ventures, strategic investments, sale of the company or other potential transactions. We have not set a timetable for completion of the strategic review, and there can be no assurance the process will result in a transaction or pursuit of any strategic alternative.

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. We received net proceeds of $9.0 million, reflecting approximately $581,000 in fees and costs associated with the financing. 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 May 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 "Amended Agreement"). The revolving loan 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 Agreement, (ii) $1,000,000, and (iii) 30% of the sum of all eligible accounts plus Eligible 120 Day Accounts after December 31, 2013 and the satisfaction of conditions specified in the Amended Agreement. The facility is secured by substantially all of our assets. During the fiscal year 2014, amounts drawn under the facility accrued 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 was not in effect. As of the February 28, 2014, we had drawn $2.2 million from this line of credit and had approximately $1.9 million available based on our outstanding accounts receivable as of that date.


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 2013, we delivered a report to SVB indicating that as of June 30, 2013, we had breached the minimum tangible net worth covenant and began discussions of a forbearance or waiver agreement with SVB. On November 25, 2013, we entered into the Amended 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 Amended Agreement, we obtained a waiver of the covenant default. Although we continue to be current with all principal and interest payments under the Amended Agreement, as of January 31, 2014, we again breached the minimum tangible net worth covenant. On March 31, 2014 we entered into a forbearance and amendment to the Amended Agreement with SVB, pursuant to which SVB agreed to forbear from taking any action to enforce its rights or remedies under the Amended Agreement until April 15, 2014. The forbearance agreement also increased the interest rate under the loan agreement to prime rate plus 3.75% during a Streamline Period and to prime rate plus 4.25% when a Streamline Period is not in effect. As of May 1, 2014, we had not regained compliance with the minimum tangible net worth covenant and are in further forbearance discussions with SVB. Currently, SVB is continuing to allow us to draw on the line of credit during these discussions. See Note 12 of the Notes to the Financial Statement for additional information about the credit facility.

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, during fiscal year 2014 we settled a majority of our patent litigation cases, while taking actions designed to protect the value of our IP, streamlined personnel and variable costs, downsized our Tucson division which was primarily involved with development and monetization of our IP, 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 our efforts to minimize cash spend and identify additional costs savings opportunities while carefully investing our resources and protecting our strategic assets to strengthen our position in the mobile marketing and mobile advertising industry.

We currently do not meet the minimum $75 million public float requirement for use of Form S-3 registration for primary sales of our common stock. 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 any public offering of our securities with the SEC or must issue such securities in a private placement or other transaction exempt from registration under federal securities law, which could increase the cost of raising capital.

Since the end of fiscal 2013, we have experienced significant changes in our capital stock, stockholders' equity and net assets. The number of shares of our common stock outstanding increased by 25.1 million shares during fiscal 2014, primarily as a result of sales of our common stock. Please refer to Note 7 of the Notes to Financial Statements.

Critical Accounting Policies and Estimates


Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.


Capitalized Legal Patent Costs. We capitalize external legal costs incurred in the defense of our patents where we believe that there is an evident increase in the value of the patent and that the successful outcome of the legal action is probable. Capitalized legal patent costs are amortized over the lesser of the estimated useful life of the underlying patents or 84 months, using the straight-line method. During the course of any legal action, the court where the case is pending makes decisions and issues rulings of various kinds, which may be favorable or unfavorable. We monitor developments in the legal action, the legal costs incurred and the anticipated outcome of the legal action, and assess the likelihood of a successful outcome based on the entire action. If changes in the anticipated outcome occur that reduce the likelihood of a successful outcome of the entire action to less than probable, the capitalized costs would be charged to expense in the period in which the change is determined. The capitalized legal patent costs are recorded within Intangible assets on our balance sheets.

Income Taxes. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense and net operating losses. In evaluating our ability to recover our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized using all available positive and negative evidence, projected future taxable income, tax planning strategies and recent financial operations. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying business.

Management evaluated the probability of the utilization of the deferred income tax asset related to the net operating loss carry forwards. We have estimated a $26.5 million deferred income tax asset that relates to federal net operating loss carry forwards at February 28, 2014. Management determined that because we have yet to generate taxable income and that the generation of taxable income in the short term is uncertain, it was appropriate to provide a valuation allowance for the total deferred income tax asset.

We have a net deferred income tax liability of $3,376,383 and $3,517,652 as of February 28, 2014 and 2013, respectively. Although we have a full valuation allowance against our net deferred tax asset, a deferred income tax liability is recorded for the difference in the income tax basis and financial statement carrying value of the indefinite-lived intangible related to the trade name acquired in the Hipcricket acquisition.

Valuation of Goodwill. Goodwill is carried at cost and is not amortized. We review goodwill for impairment annually as of the first day of our fourth fiscal quarter, generally December 1st, and whenever events or changes in circumstances suggest that the fair value of goodwill may be less than its carrying value.

The goodwill impairment test is performed at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as a "component"). An operating segment is a component of an enterprise that earns revenues and incurs expenses, for which discrete financial information is available and management regularly reviews the operating results. We have a single operating segment, however there are two reporting units for purposes of our goodwill impairment assessment. All of our recorded goodwill is attributed to the Mobile Marketing and Advertising reporting unit, which generated substantially all of our revenues and expenses. The second reporting unit represents the Intellectual Property reporting unit, which does not have any attributed goodwill.

We have an unconditional option to evaluate the impairment of goodwill by performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. If the fair value of the reporting unit is determined to be more likely than not greater than the carrying amount, further testing of goodwill impairment is not performed. If the fair value of the reporting unit is determined to be not more likely than not greater than the carrying amount, we perform a quantitative two-step impairment test.

The quantitative goodwill impairment test involves a two-step process. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, we must perform the second step of the impairment test to measure the amount of impairment loss, if any. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment loss. When performing a quantitative two-step impairment test, we depend upon our estimates of future cash flows and other factors to determine the fair value of our reporting unit. We rely on a number of factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace data.


We estimate the fair value of our reporting units using the income approach and the market approach. Using the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital risk-adjusted for business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly-traded companies with similar operating and investment characteristics as the reporting unit. The weighting of the fair value derived from the market approach ranges from 0% to 50% depending on the level of comparability of these publicly-traded companies to the reporting unit. When market comparables are not meaningful or not available, we may estimate the fair value of a reporting unit using only the income approach.

In order to assess the reasonableness of the calculated fair values of our reporting units, we also compare the sum of the reporting units' fair values to our market capitalization and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization). We compare our implied control premium to the control premiums of recent comparable market transactions for reasonableness and may adjust the fair value estimates of our reporting units by adjusting the discount rates and/or other assumptions if necessary. Financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital, which we use to determine our discount rate, and our stock price, which we use to determine our market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded. We believe that our market capitalization alone does not fully capture the fair value of our business as a whole, or the substantial value that an acquirer would obtain from its ability to obtain control of our business. As such, in determining fair value, we add a control premium to our market capitalization. To estimate the control premium, we consider our unique competitive advantages that would likely provide synergies to a market participant. In addition, we consider external market factors, which we believe, may contribute to changes in and volatility of our stock price that does not reflect our underlying fair value.

Our estimates of fair value contain uncertainties because they require management to make assumptions in the qualitative assessment of relevant events and circumstances and estimating the fair value of our reporting units including estimating future cash flows and other inputs. These calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate economic factors and the profitability of future business operations and if necessary, the fair value of a reporting units' assets and liabilities. Further, our ability to realize the future cash flows used in our fair value calculations is affected by factors such as changes in economic conditions, changes in our operating performance and changes in our business strategies. If actual results are not consistent with our estimates or assumptions, or if there are any significant changes in any of these estimates, projections and assumptions, this could have a material effect on the fair value of the reporting units in future measurement periods and result in an impairment which could materially affect our results of operations.

Valuation of Intangible Assets. We assess the recoverability of long-lived assets, including intangible assets subject to amortization, when events or . . .

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