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HIPP > SEC Filings for HIPP > Form 10-Q on 11-Jul-2014All Recent SEC Filings

Show all filings for HIPCRICKET, INC.

Form 10-Q for HIPCRICKET, INC.


11-Jul-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 May 31, 2014 and 2013, and should be read in conjunction with our financial statements and related notes included elsewhere in this filing.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report contains forward-looking statements including statements regarding, among other things, our projected sales and profitability, our growth strategies, anticipated trends in our industry, our anticipated working capital needs, our future financing plans, our ability to raise capital, our future financial position, prospects and plans, and objectives of management. 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. Our actual results may differ materially from those indicated by our forward-looking statements as a result of various factors, including the risks and uncertainties referred to the section of this report titled "Risk Factors."

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 that compete with our
            product and service offerings;

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? our cash position and uses of cash;

? capital market conditions, including availability of funding sources;

? the strength of our intellectual property portfolio;

? changes in government regulations related to our industry; and

? other specific risks referred to in the section titled "Risk Factors."

Our forward-looking statements 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.

This report may contain market data related to our business, which may have been included in articles published by independent industry sources. Although we believe these sources are reliable, we have not independently verified this market data. This market data includes projections that are based on a number of assumptions. If any one or more of these assumptions turns out to be incorrect, actual results may differ materially from the projections based on these assumptions.

OVERVIEW

Business Update

Hipcricket, Inc.'s ADLIFEŽ platform powers mobile marketing and mobile advertising campaigns using proprietary first party data along with third party data from key strategic partners to provide more informed mobile marketing and advertising campaigns to customers. During the first fiscal quarter of 2015, ended on May 31, 2014, we made significant enhancements to our platform to leverage the increased role of real-time bidding platforms in the distribution of mobile advertising inventory. We anticipate that these enhancements will allows us to efficiently source premium inventory and will contribute to improving the gross margin of our mobile advertising business.

For the first fiscal quarter ended May 31, 2014, revenue grew to $7.3 million, an increase of 25% from the same period one year ago. Approximately 42% of total revenue for the first quarter of fiscal 2015 was from mobile marketing products, including messaging, campaign fees, mobile web services, mobile app development, and licensing. Approximately 58% of total revenue was from mobile advertising. This is compared to 64% from mobile marketing and licensing and 36% from mobile advertising for the same year-ago period and is consistent with the anticipated shift in our sales mix toward a greater percentage of mobile advertising, which has been a rapidly growing part of our business.

On May 30, 2014, our Board of Directors appointed Chairman Todd E. Wilson as interim Chief Executive Officer and appointed Chief Operating Officer Douglas Stovall as President. The new management team has implemented changes to our operating plan designed to reduce operating expenses while continuing to maintain our focus on profitable revenue growth. The changes are designed to conserve our resources and realize operating efficiencies by focusing our sales efforts on higher value customers, concentrating our development effort on maintaining and enhancing our product offering, using technology to reduce product delivery costs, and consolidating certain non-core personnel positions. We expect to see the financial benefits of the new operating plan beginning in the third fiscal quarter ending November 30, 2014. 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.

Our former President and CEO, Ivan E. Braiker, ceased employment on May 30, 2014.

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On June 2, 2014, we entered into a Financing and Security Agreement, amended on June 4, 2014, with Fast Pay Partners LLC ("Fast Pay") creating an accounts receivable-based credit facility and on June 18, 2014, we used funds received under this facility to repay our revolving loan facility with Silicon Valley Bank ("SVB" and the loan facility with SVB was terminated.

On July 2, 2014, we and Chief Financial Officer Thomas J. Virgin agreed that his employment with the Company would cease as of the close of business July 3, 2014. On July 8, 2014, our Board of Directors appointed our Chairman and interim CEO, Todd E. Wilson, to serve as our principal financial officer.

Business

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 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 May 31, 2014, 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.

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We operate under one reportable segment. Our corporate headquarters are located at 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 $965,000 during the three months ended May 31, 2014, compared to $3.7 million for the three months ended May 31, 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 investing activities was approximately $74,000 during the three months ended May 31, 2014, compared to approximately $228,000 for the three months ended May 31, 2013. In the first quarter of fiscal 2015 we used approximately $3,400 of cash for legal actions in support of our patent enforcement and $70,900 of cash for additions to property and equipment. In the first quarter of fiscal 2014, we used approximately $183,000 of cash for legal actions in support of our patent enforcement and $45,500 of cash to purchase patents.

Net cash used in financing activities was $364,900 during the three months ended May 31, 2014, compared to cash provided by financing of $1.0 million for the three months ended May 31, 2013. Cash used in financing activities for the three months ended May 31, 2014 was primarily attributed to payments made on our loan facility with SVB. Net cash provided by financing for the three months ended May 31, 2013 included $1.0 million in borrowings from the loan facility.

As of May 31, 2014 and February 28, 2013, we had accumulated deficits of $139.1 million and $133.6 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. 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.

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 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.

We restructured our executive management effective May 30, 2014 and, in June 2014, implemented changes to our operating plan focused on fostering profitable revenue growth and optimizing our expense structure. The changes are designed to conserve our resources and realize operating efficiencies by focusing our sales efforts on higher value customers, concentrating our development effort on maintaining and enhancing our product offering, using technology to reduce product delivery costs, and consolidating certain non-core personnel positions. 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.

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On June 2, 2014, we secured an accounts receivable-based credit facility from Fast Pay to help fund our working capital needs. Under the terms of the Financing and Security Agreement (the "Agreement"), Fast Pay may, at its sole discretion, purchase our eligible accounts receivables. Upon any acquisition of accounts receivable, Fast Pay will advance to us up to 70% of the gross value of the purchased accounts, up to a maximum of $5.0 million in advances. Each account receivable purchased by Fast Pay will be subject to a factoring fee of
(i) 1.25%, flat fee, of the gross value of the account for the initial 30-day period; (ii) 1.25%, prorated daily, of the gross value of the account outstanding, commencing on day 30 and ending on day 89, and (iii) 1.75%, prorated daily, of the gross value of the account outstanding, commencing on day 90 and continuing thereafter. The minimum monthly fee beginning on July 1, 2014 will be $12,500. Fast pay will generally have full recourse against us in the event of nonpayment of any purchased accounts. Our obligations under the credit facility are secured by substantially all of our assets. On June 18, 2014 we used cash available from the credit facility to repay our asset-based revolving loan facility with SVB and the SVB loan facility was terminated. See Note 7 of the Notes to the Financial Statement for additional information about the credit facilities.

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.

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.

Critical Accounting Policies

Our critical accounting policies, as described in our Annual Report on Form 10-K for the fiscal year ended February 28, 2014, relate to capitalized legal patent costs, income taxes, valuation of goodwill, intangible assets, share-based payments, and revenue recognition. There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K.

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 months ended May 31, 2014 and 2013. 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.

COMPARISON OF THREE MONTHS ENDED MAY 31, 2014 TO THREE MONTHS ENDED MAY 31, 2013

Revenue

Revenue is generated through providing access to our Platform 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, MMS, 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"). Advertising revenues are generated by charging advertisers to deliver ads to users of mobile connected devices. The revenues from these multiple elements of a contract are generally recognized over the term of the contract. For the quarter ended May 31, 2014, revenues were $7.3 million compared with $5.9 million in the quarter ended May 31, 2013, an increase of approximately 25%. During the quarter ended May 31, 2014, approximately 34% of our revenue was generated by four customers.

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During fiscal 2015, we expect to increase revenues by increasing our customer base, selling additional products to existing customers, and shifting our future product mix to high growth, higher contribution product lines. We continue to experience a very high level of repeat business on our Saas-based mobile marketing revenues and we will continue to focus on growing this business. At the same time, we expect our mobile brand advertising business to expand at a faster pace than the mobile marketing business. As a result, we anticipate the mix of sales to shift toward a greater percentage of mobile advertising in the future. We believe our ability to grow revenues in the future is supported by forecasted strong industry growth.

Cost of Revenue

Cost of revenue includes the costs of hosting, short codes and mobile ad inventory. For the quarter ended May 31, 2014, cost of revenue increased 40% to $3.6 million from $2.6 million in the quarter ended May 31, 2013 primarily as a result of a shift in business toward a greater percentage of sales from mobile advertising which carries a higher cost of revenue. A large portion of our cost of revenue for mobile marketing is related to messaging infrastructure and hosting which have high fixed-cost components. We expect margins would improve as revenue from this product line increases, enabling us to realize economies of scale. The cost of revenue related to mobile advertising is primarily for mobile ad inventory. We anticipate that our investment in technology related to the purchase of mobile ad inventory using real-time bidding platforms will improve our margins on this product line during fiscal 2015. In the future we expect to continue to seek opportunities to reduce the cost of mobile ad inventory as a percentage of revenue.

Operating Expenses

Operating expenses consist of sales and marketing, technology and development, general and administrative and depreciation and amortization expense categories. 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 category based on the respective equity award recipient's function. Operating expenses also includes non-recurring impairment charges associated with write downs of goodwill, intangibles assets, and investments in the period when the value of the goodwill, assets, or investments are determined to be impaired.

For the quarter ended May 31, 2014, operating expenses decreased a total of $0.2 million to $9.1 million compared to $9.3 million for the quarter ended May 31, 2013. The decrease in operating expenses was primarily attributed to lower personnel costs compared to a year ago, partially offset by an increase in severance costs for a former executive.

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, and travel. Sales and marketing expenses were $3.1 million for the quarter ended May 31, 2014 compared with $3.3 million for the quarter ended May 31, 2013, a decrease of approximately $0.2 million, or 8%. The decrease is primarily related to lower personnel 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, and travel. We experienced a decrease of approximately $0.2 million, or 11%, in these expenses to $1.8 million for the three months ended May 31, 2014 compared to $2.0 million for the three months ended May 31, 2013. The decrease is primarily a result of lower personnel costs.

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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 occupancy expenses, consulting and professional fees, travel, insurance, other corporate expenses, and overhead. General and administrative expense increased approximately $0.3 million, or 9%, to $2.9 million at May 31, 2014 compared to $2.7 million May 31, 2013. The increase is a result of approximately $487,000 of accrued severance costs for a former executive, offset by lower outside services costs, lower occupancy and other corporate expenses.

Depreciation and Amortization. Depreciation and amortization expense of $1.3 million for the quarter ended May 31, 2014 increased by approximately $13,000 from the quarter ended May 31, 2013.

Other Income (Expense)

Other expense for the three months ended May 31, 2014 was approximately $29,000 compared to $801 for the three months ended May 31, 2013. Other expense reflects interest paid on the outstanding balance of our line of credit with SVB for the quarter ended May 31, 2014.

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