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KITM > SEC Filings for KITM > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for KITARA MEDIA CORP.

Form 10-Q for KITARA MEDIA CORP.


14-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

($ in thousands, except share and per share data)

CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "continue," or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in our other Securities and Exchange Commission filings. The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report.

Overview

We are a Delaware corporation incorporated on December 5, 2005. From our inception in 2005 until February 29, 2012, when we completed a reverse acquisition transaction with Andover Games, we were a blank check company and did not engage in active business operations other than our search for, and evaluation of, potential business opportunities for acquisition or participation. On February 29, 2012, we completed a reverse acquisition of Andover Games through a merger transaction whereby Andover Games became our wholly-owned direct subsidiary. Accordingly, the financial statements of Andover Games became our financial statements. Prior to June 30, 2013, our principal business was focused on developing mobile games for iPhone and Android platforms.

On July 1, 2013, we consummated the transactions contemplated by the K/N Merger Agreement. Upon the closing, we ceased the operations of Andover Games, our operations became entirely that of Kitara Media and NYPG and the financial statements of Kitara Media became our financial statements. For accounting purposes, the acquisition of Kitara Media was treated as an acquisition of the Company by Kitara Media and as a recapitalization of Kitara Media as Kitara Media members held a large percent of the Company's shares and exercise significant influence over the operating and financial policies of the consolidated entity and the Company was a non-operating public registrant prior to the transaction. Pursuant to ASC 805-10-11 through 55-15, the merger or acquisition of a private operating company into a non-operating public registrant with nominal assets is considered a capital transaction in substance rather than a business combination. As a result, the condensed consolidated balance sheets, statements of operations, and statements of cash flows of Kitara Media have been retroactively updated to reflect the recapitalization.

On August 19, 2013, we filed with the Secretary of the State of Delaware an amendment to our certificate of incorporation to change our name from "Ascend Acquisition Corp." to "Kitara Media Corp." to better reflect our current operations following the transactions contemplated by the K/N Merger Agreement.

On December 3, 2013, we entered into the HG Merger Agreement and simultaneously closed the transactions contemplated thereby, acquiring Health Guru Media. The financial results of operations of Health Guru Media from the date of acquisition to June 30, 2014 were consolidated into our financial statements.

On April 29, 2014, we sold a total of $7,000 of our shares of common stock (or an aggregate of 12,727,272 shares) to several accredited investors (the "Investors"), including Ironbound and Robert Regular, the Company's chief executive officer. In connection with the offering, we issued warrants to purchase an aggregate of 6,363,636 shares of common stock. The warrants are exercisable at a price of $0.825 per share and expire on April 30, 2019. We received proceeds from the offering of approximately $6,500, including the cancellation of a $1,000 promissory note held by Ironbound that was used to make its purchase in the offering, net of approximately $500 of commissions and expenses.

Results of Operations



                                        Three Months Ended          Six Months Ended
                                             June 30,                   June 30,
                                         2014          2013         2014         2013
Revenue                               $     5,230     $ 5,519     $ 12,175     $ 10,428
Cost of revenue                             4,394       3,783       10,059        7,382
Gross Profit                                  836       1,736        2,116        3,046
GP as % of revenue                             16 %        31 %         17 %         29 %

Operating expenses
Employee Expenses                           2,453       1,001        4,690        2,016
Related party expenses                          -          69            -          154
Other operating expenses                    1,549         324        3,005          519
Depreciation and amortization                 115          81          225          237
Total operating expenses                    4,117       1,475        7,920        2,926

Operating income (loss)                    (3,281 )       261       (5,804 )        120
Interest Expense                              (69 )         -         (156 )          -
Income (loss) before income taxes          (3,350 )       261       (5,960 )        120
Income taxes                                   15           -           16            -
Net income (loss)                     $    (3,365 )   $   261     $ (5,976 )   $    120

EBITDA (a non-GAAP measure)                (2,924 )       342       (5,266 )        357

Net income (loss)                     $    (3,365 )   $   261     $ (5,976 )   $    120
Depreciation and amortization                 115          81          225          237
Interest expense, less other income            69           -          156            -
Stock compensation expense                    242           -          313            -
Taxes                                          15           -           16            -
EBITDA (a non-GAAP measure)           $    (2,924 )   $   342     $ (5,266 )   $    357

Revenue and Gross Margin

Consolidated revenue for the three months ended June 30, 2014 decreased by ($289), or -5%, to $5,230 as compared to $5,519 for the three months ended June 30, 2013. Consolidated revenue for the six months ended June 30, 2014 increased by $1,747 or 17%, to $12,175 as compared to $10,428 for the six months ended June 30, 2013. The decline in revenue for the three months was primarily due to the revenue contributed by our recent acquisition of Health Guru Media of $1,674 offset by a decrease in revenue from Kitara Media of approximately ($1,999). The increase in revenue for the six months was primarily due to the revenue contributed by our recent acquisition of Health Guru Media of $4,005 offset by a decrease in revenue from Kitara Media of approximately ($2,299). The revenue decline is attributed to the increased demands and requirements from advertisers to meet new standards of ad type, location and quality from publisher traffic sources.

In order to meet these new demands and requirements, Kitara Media implemented new standards and policies and launched additional proprietary and third party verification tools to screen publisher inventory to exceed advertisers' requirements. The immediate implementation of these steps eliminated significant inventory sources and had a direct effect on revenue.

Consolidated margins for the three months ended June 30, 2014 decreased by ($900) or -52% to $836 as compared to $1,736 for the three months ended June 30, 2013. Consolidated margins for the six months ended June 30, 2014 decreased by ($930) or -31% to $2,116 as compared to $3,046 for the six months ended June 30, 2013. The decrease in margin was due to several factors in the business, including reduced bid pricing levels combined with the consistent cost of securing and maintaining quality publisher inventory. Margins were further impacted by the transition of technology during integration and deployment of new systems and methods for cost calculation, delivery and optimization.

During the six months ended June 30, 2014, we advanced development efforts with our own proprietary video content and ad delivery solution PROPEL+. This technology can help us to leverage campaign performance data for optimization and delivery, and is directly integrated with many video advertising and digital publishing partners. Evolving an integrated Video+ Portfolio with Health Guru Media video formats and a library of premium video content, PROPEL+ combines efficient delivery and optimization into one video platform to deliver strong engagement for advertisers and high revenues for publishers, as well as improve user experience with engaging digital content. We have also implemented various monitoring and screening tools in order to provide our advertisers transparency and the highest quality traffic.

Employee Expenses

Employee expenses for the three months ended June 30, 2014 increased by $1,452, or 145%, to $2,453 as compared to $1,001 for the three months ended June 30, 2013. Employee expenses for the six months ended June 30, 2014 increased by $2,674, or 133%, to $4,690 as compared to $2,016 for the six months ended June 30, 2013. The increase for the three and six months ended June 30, 2014 was primarily due to the increase in headcount and employee costs as it relates to the Health Guru Media acquisition which totaled $871 for the three months ended and $1,841 for the six months ended June 30, 2014. There was also an increase in Kitara Media's headcount predominately in C-level staff, which in total contributed approximately $249 of the increase for the three months, ended and $428 for the six months ended June 30, 2014. Additionally, there was $243 in stock based compensation for the three months ended and $313 for the six months ended June 30, 2014 vs. nothing in the prior year as there was no stock option plan in place. There was also a decline in software capitalization due to the Propel product reaching maturity in 2014 vs. 2013. The decrease in software capitalization was $90 for the three months ended and $119 for the six months ending June 30, 2014.

Other operating costs and related party expenses

Other operating costs and related party expense for the three months ended June 30, 2014 increased by $1,156, or 294%, to $1,549 as compared to $393 for the three months ended June 30, 2013. Other operating costs and related party expense for the six months ended June 30, 2014 increased by $2,332, or 347%, to $3,005 as compared to $673 for the six months ended June 30, 2013. The increase for the three and six months ended June 30, 2014 was primarily due to costs we would not have had in the prior year as it pertained to the acquisition for Health Guru Media and as a private company with centralized services. The additional operational costs as it relates to Health Guru Media acquisition totaled $440 for the three months and $1,072 for the six months ended June 30, 2014.

In an effort to improve the quality of our traffic resources, we established various vendor relationships that provide tools to monitor the quality of our traffic resources as well as provide the ability to filter any traffic that does not meet our standards. The increase in software and technical services was $385 for the three months and $493 for the six months ended June 30, 2014. We also had higher hosting costs of $30 for the three months and $88 for the six months ended June 30, 2014 due to the additional video traffic.

Legal and accounting costs were higher by approximately $103 for the three months ended June 30, 2014 as they related to our quarterly filings with the SEC that were not required in the prior year. Additionally these costs were higher by approximately $167 for the six months ended June 30, 2014 as they related to costs for the annual audit, the filing of our Annual Report on Form 10-K and related consulting costs for the valuation and tax provision. Insurance costs were higher by approximately $25 for the three months and $51 for the six months ended June 30, 2014 due to the higher coverage needed as a public entity. There was also an increase in bad debt of approximately $19 for the three months and $79 for the six months ending June 30, 2014 predominately due to the write down of various prepaid media accounts. We periodically review the prepaid media accounts to ensure they are being utilized or will make the effort to collect the balances, if possible. There was also an increase in bank fees of approximately $14 for the three months and $43 for the six months ending June 30, 2014 due to the establishment of the Wells Fargo credit facility that was not in place until November 2013.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended June 30, 2014 increased by $34, or 42%, to $115 as compared to $81 for the three months ended June 30, 2013 predominately due to the acquisition of Health Guru Media. Depreciation and amortization expense for the six months ended June 30, 2014 decreased by ($12), or -5%, to $225 as compared to $237 for the six months ended June 30, 2013. The decrease was primarily in amortization expense which was due to certain intangible assets reaching their maturity.

EBITDA (non-GAAP measure)

In addition to the results presented in accordance with generally accepted accounting principles, or GAAP, we present EBITDA which is a non-GAAP measure. We believe that this non-GAAP measure, viewed in addition to and not in lieu of our reported GAAP results, provides useful information to investors by providing a more focused measure of operating results. The non-GAAP measure presented herein may not be comparable to similarly titled measures presented by other companies.

EBITDA for the three months ended June 30, 2014 decreased by ($3,266), to ($2,924) as compared to $342 for the three months ended June 30, 2013. EBITDA for the six months ended June 30, 2014 decreased by ($5,623), to ($5,266) as compared to $357 for the six months ended June 30, 2013. Overall the decrease in EBITDA was due to higher operating costs due to the acquisition and as well as lower gross profit margin as described in detail above. Management reviews EBITDA on a monthly basis as it is a key business indicator and metric that is used internally.

We calculate EBITDA by taking the net income (loss) and adding back depreciation, amortization, interest expense, stock-based compensation, and taxes less interest income.

Liquidity and Capital Resources

Net cash provided by/(used in) operating activities

Net cash used in operating activities was ($2,343) for the six months ended June 30, 2014, compared to net cash provided of $1,651 for the six months ended June 30, 2013. The decrease in cash used for the six months ended June 30, 2014 was primarily due to the net loss of ($5,976) for the six months ended June 30, 2014 compared to net income of $120 for the six months ended June 30, 2013. The net loss was due to the added costs from the acquisition of Health Guru Media and lower gross profit margins which are described in detail above. This net cash was offset by an increase in the collection of accounts receivable. The increase in collections is a natural effect from having lower sales in the second quarter versus the fourth quarter.

Net cash used in investing activities

Net cash used in investing activities was $373 for the six months ended June 30, 2014, compared to $245 for the six months ended June 30, 2013. The cash used in both periods was primarily for software development for internal use. In 2014 and 2013, our main project was the development of the PROPEL + player, which is an ad delivery solution.

Net cash provided by/(used in) financing activities

Net cash provided by financing activities was $4,560 for the six months ended June 30, 2014, compared to ($1,369) used in financing for the six months ended June 30, 2013. On March 26, 2014, we issued a promissory note (the "Note") in favor of Ironbound with a principal amount of $1,000. The principal balance, together with interest, was due on the earlier of (a) April 25, 2014 and (b) the consummation by the Company of a private placement of its equity or debt securities or any other financing raising gross proceeds of at least $1,000 (either the "Maturity Date"). The Note was converted to equity in connection with our April 2014 offering.

As part of our financial strategy, Kitara Media established a credit facility with Wells Fargo Bank. The amount of the credit line is $5,000 initially with an option to increase to $10,000 on April 30, 2015 in two equal tranches of $2,500 each. The interest rate on the credit facility is Libor plus 4.25% with a minimum interest charge of $10 per month. There are various financial and other covenants in the credit agreement, as amended, that we must continue to satisfy in order to be compliant with the credit facility. With the acquisition of Health Guru Media, we inherited a receivable financing arrangement with Sterling National Bank - Factoring and Trade Finance Division. Health Guru Media presented invoices to the Bank who then advanced it up to 60% of eligible invoices and were permitted to remain outstanding for up to 120 days of the invoice date or 60 days past due. The Bank charged a commission rate of .35% of the gross invoice. All debits in the account bore interest daily at a rate equal to 1.75% above prime rate as published in the Wall Street Journal. On June 18, 2014, we terminated the Sterling Bank financing arrangement and on June 30, 2014 amended the Wells Fargo credit facility to include the receivables from Health Guru Media. The ability to borrow against our accounts receivable gives us greater flexibility to grow the business by providing additional liquidity and relieving the pressure we currently have in working capital.

As reported in Note 1, Organization and Description of Business, to our unaudited interim condensed financial statements, we consummated the sale, on a private placement basis, of shares of common stock which provided proceeds from the offering of approximately $6.6 million, including the cancellation of the $1 million Note held by Ironbound that was used to make its purchase in the offering, net of approximately $400 of commissions and expenses. We intend to use the proceeds from the sales for general working capital purposes.

We believe that with our current level of cash and the ability to borrow against our accounts receivables, that we will have sufficient liquidity to maintain operations for a minimum of the next twelve months.

Off-balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements.

Seasonality

We experience seasonality in our operations. Historically, video advertising revenue in the fourth quarter has been the highest.

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