As filed with the Securities and Exchange Commission on May 14, 2014
Registration No. 333-192064
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
HIPCRICKET, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 3669 | 20-0122076 |
| (State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (IRS Employee Identification No.) |
110 110th Avenue NE, Suite 410
Kirkland, Washington 98033
(855) 423-5433
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
Thomas J. Virgin
Hipcricket, Inc.
110 110th Avenue NE, Suite 410
Kirkland, Washington 98033
(855) 423-5433
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
Faith M. Wilson
PERKINS COIE, LLP
1201 Third Avenue, Suite 4900
Seattle, Washington 98101
(206) 359-3237
Fax: (206) 359-4237
Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer (Do not check if a smaller reporting company) [ ] | Smaller reporting company [X] |
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
EXPLANATORY NOTE
This Post-Effective Amendment No. 1 to Form S-1 (the “Post-Effective Amendment”) is being filed by Hipcricket, Inc. (the “Company”) pursuant to the undertakings in Item 17 of the Registration Statement on Form S-1 (No. 333-192064), as amended (the “Registration Statement”). The Registration Statement, as amended, was declared effective by the Securities and Exchange Commission on November 8, 2013, to initially register for resale by the selling stockholders identified herein up to 31,037,500 shares of the Company’s common stock, $0.0001 par value. This Post-Effective Amendment is being filed to set forth herein the Company’s audited financial statements for the year ended February 28, 2014 and to update certain other information in the Registration Statement. No additional securities are being registered under this Post-Effective Amendment.
All applicable registration and filing fees were paid at the time of the original filing of the Registration Statement.
The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 14, 2013
PROSPECTUS
31,037,500 Shares of Common Stock
This prospectus covers the resale by the selling stockholders named on page 14 of up to 31,037,500 shares of our common stock, $0.0001 par value, which include:
| · | 23,875,000 shares of common stock held by the selling stockholders; and |
| · | 7,162,500 shares of common stock issuable to the selling stockholders upon exercise of outstanding warrants. |
The prices at which the selling stockholders may sell their shares will be determined by the prevailing market price for the shares or in negotiated transactions or in any other manner as described in the section of this prospectus titled “Plan of Distribution.” We will not receive any of the proceeds from the sale of these shares. However, we may receive gross proceeds of up to $4,297,500 if all of the warrants are exercised for cash. If some or all of the warrants are exercised, the money we receive will be used for general corporate purposes, including working capital requirements. The selling stockholders may be deemed “underwriters” within the meaning of the Securities Act of 1933, as amended, in connection with the sale of their common stock under this prospectus. We will pay all the expenses incurred in connection with the offering described in this prospectus, with the exception of brokerage expenses, fees, discounts and commissions, which will all be paid by the selling stockholders. Our common stock is more fully described in the section of this prospectus titled “Description of Securities.”
Our common stock is currently quoted on the OTCQB Marketplace and the OTC Bulletin Board under the symbol “HIPP.” On May 12, 2014, the last reported sale price of our common stock on the OTC Bulletin Board was $0.27 per share. You are urged to obtain current market quotations of our common stock before purchasing any of the share being offered for sale pursuant to this prospectus.
Investing in our common stock is highly speculative and involves a high degree of risk. You should carefully consider the risks and uncertainties described under the heading “Risk Factors” beginning on page 3 of this prospectus before making a decision to purchase our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is __________, 2014.
| This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” and our consolidated financial statements and the related notes. You should only rely on the information contained in this prospectus. We have not, and the selling stockholders have not, authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is accurate only as of the date on the front cover, but the information may have changed since that date. Unless the context otherwise requires, when we use the words “Hipcricket,” “the Company,” “we,” “us” or “our Company” in this prospectus, we are referring to Hipcricket, Inc., a Delaware corporation. The Company currently does not have any subsidiaries. Our Company We provide an end-to-end, data driven mobile engagement and analytics solution that empowers brands, agencies and media companies to engage customers, drive loyalty and increase sales. Our proprietary AD LIFE software-as-a-service platform (the “Platform”) creates measurable, real-time, one-on-one relationships between companies and their current and prospective customers using text messages, multimedia messages, mobile web sites, mobile applications, mobile coupons, quick response codes and via advertising, from a single, scalable, self-service access point. The Platform allows customers to quickly plan, create, test, deploy, monitor, measure and optimize interactive mobile marketing and advertising campaigns throughout the campaign lifecycle across nearly every major mobile channel. 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. The Platform features a rich analytics engine that sources real-time campaign data in addition to third party and client information, to personalize mobile marketing and advertising campaigns. Our current database consists of detailed profiles of millions of mobile phone numbers, which, by employing third party data, can be turned into virtually unlimited segments. These data help advertisers to understand the most effective use of advertising resources and help optimize their marketing spend. Our products serve marketers, brands and ad agencies in many vertical markets, including automotive, retail, consumer products, food and beverage, media and broadcast, pharmaceutical and restaurant brands. Hipcricket®, Augme®, Augme Technologies™, AD LIFE®, AD SERVE®, A+®, Boombox® and the Company logos are trademarks of Hipcricket, Inc. Risk Factors Investing in our securities involves a high degree of risk. As an investor, you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the section titled “Risk Factors” following this prospectus summary. Corporate Information Our principal executive offices are located at 110 110th Avenue NE, Suite 410, Bellevue, Washington 98003. Our telephone number is (855) 423-5433. Our corporate website is www.hipcricket.com. Information contained in or accessible through our website is not part of this prospectus. We are a corporation organized under the laws of the State of Delaware in March 2000. We were formerly known as Augme Technologies, Inc. and changed our name to Hipcricket, Inc. in August 2013. We have been engaged in the mobile marketing and mobile advertising business since July 2009.
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| ABOUT THIS OFFERING |
| | |
| Common stock offered by selling stockholders: | Up to 31,037,500 shares of our common stock, consisting of: (i) 23,875,000 shares of common stock issued pursuant to a securities purchase agreement entered into on October 3, 2013; and (ii) 7,162,500 shares of common stock underlying warrants issued on October 4, 2013 in conjunction with the sale of our common stock. |
| Common stock outstanding as of May 1, 2014: | 154,786,916 |
| Use of Proceeds: | We will not receive any of the proceeds from those sales. We will only receive proceeds if the selling stockholders exercise the warrants for cash. See “Use of Proceeds.” |
| Offering Price: | The selling stockholders may sell all or a portion of their shares through public or private transactions at prevailing market prices or at privately negotiated prices. |
| Risk Factors: | Investment in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 3. |
| OTCBB and OTCQB Symbol: | HIPP |
This offering involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus, including our consolidated financial statements and the notes to those statements, before you purchase our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial may also impair our business. If the following risks actually occur, our business, financial condition and results of operations could be materially adversely affected, the trading price of our common stock could decline and you could lose all or part of your investment.
Risks Relating to Our Business
We have incurred a net loss from operations for the last three fiscal years. We cannot anticipate with certainty what our earnings, if any, will be in any future period.
We have incurred a net loss from operations for each of the last three fiscal years. For the fiscal years 2014, 2013, and 2012 our net loss from operations was $22.3 million, $48.8 million, and $22.6 million, respectively. For the last fiscal year ended February 28, 2014, we had negative operating cash flows of $11.7 million. As of February 28, 2014, we had accumulated deficit of $133.6 million. Our ability to generate positive cash flows from operations and net income is dependent, among other things, on the acceptance of our products in the marketplace, market conditions, cost control, and our ability to raise capital on acceptable terms. The financial statements included elsewhere in this prospectus do not include any adjustments that might result from the outcome of these uncertainties. Furthermore, developing and expanding our business may require additional capital and other expenditures. Accordingly, if we are not able to increase our revenue, we may never achieve or sustain profitability.
We are likely to need additional financing in order to continue our operations. Such financing may not be available to us when we need it, may not be on favorable terms, and may dilute the value of current stockholders’ shares.
As of February 28, 2014, we had cash and cash equivalents of $3.0 million and working capital of approximately $383,000. We are likely to need additional financing to fund our operations. Financing may not be available to us on commercially reasonable terms, if at all, when we need it. There is no assurance that our efforts to raise capital will be successful or on terms favorable to us, or that the proceeds of any future financings will be sufficient to meet our future capital needs. If sources of capital are unavailable, or are available only on a limited basis or under unacceptable terms, 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.
If we are unsuccessful in executing our business plan, we will need to raise additional capital to fund our business and to continue as a going concern.
Conditions exist that raise substantial doubt about our ability to continue as a going concern due to our limited net working capital resources and recurring net operating losses. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern will depend upon the availability and terms of future funding and our ability to increase revenue by expanding our customer base, selling additional products to existing customers and shifting our future product mix to high growth, higher contribution product lines. If we are unable to achieve these goals, our business would be jeopardized and we may not be able to continue some or all of our current operations.
Our credit facility with Silicon Valley Bank contains operating and financial covenants that may restrict our business and financing activities. We currently are not in compliance with the minimum tangible net worth financial covenant under such credit facility, enabling the Bank to exercise one or more of its available remedies, including demanding immediate repayment of all outstanding indebtedness under the facility.
In May 2013, we entered into a loan and security agreement with Silicon Valley Bank (“SVB”) for a $5.0 million asset backed revolving line of credit, which was amended and restated on November 25, 2013. Borrowings under this loan agreement are secured by substantially all of our assets. The agreement contains certain customary covenants that will, subject to limited exceptions, require SVB’s approval to, among other things, (i) transfer any part of our business or business property not associated with normal operations of the company, (ii) merge or consolidate with another company, (iii) create liens, (iv) pay dividends, or (v) make materials our business. The loan and security agreement also requires us to maintain a minimum tangible net worth of at least negative $1.25 million, subject to adjustment.
As of June 30, 2013, we breached the minimum tangible net worth covenant and subsequently received a waiver of our covenant default in connection with the execution of an amended agreement with SVB on November 25, 2013. Although we continue to be current with all principal and interest payments under the loan 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 loan agreement with SVB pursuant to which SVB agreed to forbear from taking any action to enforce its rights or remedies under the loan agreement until April 15, 2014. 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. Existing and future violations of the minimum tangible net worth covenant or any other provisions of the loan agreement, absent a waiver or forbearance agreement from SVB, of which there can be no assurance, could result in a default under the agreement, which could cause all of the outstanding indebtedness under the agreement to become immediately due and payable and terminate SVB’s commitment to extend further credit. If we are unable to generate sufficient cash available to repay our obligations when they become due and payable, either when they mature or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If SVB were to foreclose on its lien, we could lose our assets, which would impair our ability to conduct our business and continue as a going concern.
Impairment in the carrying value of goodwill or other assets could negatively affect our results of operations and net worth.
Pursuant to accounting principles generally accepted in the U.S., we are required to annually assess our goodwill and indefinite-lived intangible assets to determine if they are impaired. In addition, interim reviews must be performed whenever events or changes in circumstances indicate that impairment may have occurred. If the testing performed indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other intangible assets and the implied fair value of the goodwill or other intangible assets in the period the determination is made. Disruptions to our business, end market conditions and protracted economic weakness, unexpected significant declines in operating results, divestitures and market capitalization declines may result in additional charges for goodwill and other asset impairments. We have significant intangible assets, including goodwill with an indefinite life, which are susceptible to valuation adjustments as a result of changes in such factors and conditions. We assess the potential impairment of goodwill and indefinite-lived intangible assets on an annual basis, as well as when interim events or changes in circumstances indicate that the carrying value may not be recoverable. We assess definite lived intangible assets when events or changes in circumstances indicate that the carrying value may not be recoverable.
During fiscal year 2014, we impaired $3.5 million of our patents acquired in business combinations. During fiscal year 2013, we impaired $3.5 million of our capitalized patent litigation costs due to developments and/or settlements in the related cases, $25.9 million of our goodwill, and $8.4 million of our patents acquired in business combinations. Materially different assumptions regarding the future performance of our businesses or significant declines in our stock price could result in goodwill impairment losses. Specifically, an unanticipated deterioration in revenues and gross margins generated by our AD LIFE mobile marketing business could trigger future impairment in that business unit. We also evaluate other assets on our balance sheet whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Materially different assumptions regarding the future performance of our businesses could result in significant asset impairment losses.
We have undergone management changes beginning in June 2010 and continuing through March 2013, which could adversely impact our ability to successfully implement our business strategy.
Since June 2010, we have had a number of changes to the management team and board of directors. There can be no assurance that our new management team will function together successfully to implement our business strategy. Our performance is dependent on the services of our management as well as on our ability to recruit, retain and motivate other key employees in the fields of engineering, marketing, sales and finance.
Our business could suffer if we are unsuccessful in integrating acquisitions.
We acquired two companies during the fiscal year ended February 29, 2012 and one company during the fiscal year ended February 28, 2013. We may acquire additional companies in the future. These transactions create risks such as disruption of our ongoing business, including loss of management focus on existing business, problems retaining key personnel, additional operating losses and expenses of the businesses we acquired, and the difficulty of integrating accounting, management and other administrative systems to permit effective management. In addition, valuations supporting our acquisitions could change rapidly given the current economic climate. We could determine that such valuations have experienced impairments or other-than-temporary declines in fair value which could adversely impact our financial results.
Pending and future private securities litigation and stockholder derivative suits and other litigation may adversely affect our financial condition and results of operations or liquidity.
We and certain of our current and former executive officers and directors currently are defendants in stockholder lawsuits and other litigation proceedings described in the section of this prospectus entitled “Legal Proceedings.” Our attention may be diverted from our ordinary business operations by these lawsuits and we may incur significant expenses associated with the defense of these lawsuits (including substantial fees of lawyers and other professional advisors and potential obligations to indemnify officers and directors and others who may be parties to such actions). Depending on the outcome of these lawsuits, we may be required to pay material damages and fines, consent to injunctions on future conduct, or suffer other penalties, remedies or sanctions. The ultimate resolution of these matters could have a material adverse effect on our results of operations, financial condition, liquidity, our ability to meet our debt obligations and, consequently, negatively impact the trading prices of our common stock. In addition, the volatility of our stock price could lead to private securities litigation and stockholder derivative suits being filed against us in the future, which could result in substantial costs and a diversion of our management resources, which could harm our business.
Future advertising and competition in the mobile device market may render our technology obsolete. If that were to happen, it would have a material, adverse effect on our business and results of operations.
Newer technology may render our technology obsolete which would have a material adverse effect on our business and results of operations. We may also be required to collaborate with third parties to develop our products and may not be able to do so in a timely and cost-effective manner, if at all.
Mobile connected device users may choose not to allow marketing or advertising on their devices.
The success of our business model depends on our ability to deliver content to consumers on their mobile connected devices. Targeted delivery is done primarily through analysis of data, much of which are collected on the basis of user-provided permissions. Users may elect not to allow data sharing for a number of reasons, such as privacy and security concerns, or pricing mechanisms that may charge the user based upon the amount or types of data consumed on the device. Users may also elect to opt out of receiving targeted advertising from our Platform. In addition, the designers of mobile device operating systems are increasingly promoting features that allow device users to disable some of the functionality that facilitates tracking, targeting and content delivery, which may impair or disable our services on their devices, and device manufacturers may include these features as part of their standard device specifications. Companies may develop products that enable users to prevent ads from appearing on their mobile device screens. If any of these developments were to occur, our ability to deliver effective mobile marketing and advertising campaigns on behalf of our customers would suffer, which could adversely impact our operating results.
Information technology, network and data security risks could harm our business.
Our business faces security risks. Our failure to adequately address these risks could have an adverse effect on our business and reputation. Computer viruses, break-ins, or other security problems could lead to misappropriation of proprietary information and interruptions, delays, or cessation in service to our customers.
We rely on third parties to provide services to us. If we were to lose the services of these providers, we may not be able to find other providers who are as cost effective. This could harm our business and our results of operations.
We rely on certain technology services provided to us by third parties, and there can be no assurance that these third party service providers will be available to us in the future on acceptable commercial terms or at all. If we were to lose one or more of these service providers, we may not be able to replace them in a cost effective manner, or at all. This could harm our business and our results of operations.
We must invest in technological innovation in order to stay competitive. If we fail to make investments in technological innovations, our business and results of operations could be adversely affected.
If we fail to invest sufficiently in research and product development, our products could become less attractive to potential customers, which could have a material adverse effect on our results of operations and financial condition.
New laws or regulations could adversely affect our business and results of operations.
A number of laws and regulations may be adopted with respect to the Internet or other mobile device services covering issues such as user privacy, “indecent” materials, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual property rights and information security. Adoption of any such laws or regulations might impact our ability to deliver increasing levels of technological innovation and will likely add to the cost of making our products, which would adversely affect our results of operations.
The steps we have taken to protect our intellectual property rights may not be adequate.
We rely on a combination of contractual rights, trademarks, trade secrets, patents and copyrights to establish and protect our intellectual property rights. These offer only limited protection, however, and the steps we have taken to protect our proprietary technology may not deter its misuse, theft or misappropriation. Any of our patents, copyrights, trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Competitors may independently develop technologies or products that are substantially equivalent or superior to our solutions. Competitors may hire our former employees who may misappropriate our proprietary technology or misuse our confidential information. Although we rely in part upon confidentiality agreements with our employees, consultants and other third parties to protect our trade secrets and other confidential information, those agreements may not effectively prevent disclosure of trade secrets and other confidential information and may not provide an adequate remedy in the event of misappropriation of trade secrets or unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and confidential information, and in such cases we could not assert any trade secret rights against such parties.
Our issued patents have been in the past and may in the future be challenged by third parties, and our pending patent applications may never be granted at all. It is possible that innovations for which we seek patent protection may not be protectable. Additionally, the process of obtaining patent protection is expensive and time consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. There can be no assurance that any patents will have the coverage originally sought or adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain. Any patents that are issued may be invalidated or otherwise limited, or may lapse or may be abandoned, enabling other companies to better develop products that compete with our solutions, which could adversely affect our competitive business position, business prospects and financial condition.
We cannot assure you that the measures we have taken to protect our intellectual property will adequately protect us, and any failure to protect our intellectual property could have a material adverse effect on our business, operating results and financial condition.
If our legal actions against third parties for alleged infringement of our intellectual property rights are not resolved in our favor, our business and prospects may be impaired.
We believe that some of our competitors have inappropriately incorporated our proprietary technology into their products. In the past, we have engaged in a number of legal actions against third parties for alleged infringement of our intellectual property rights and we are currently engaged in one active and one stayed patent infringement lawsuit. We cannot guarantee the outcome of these actions. We will incur significant costs in this litigation and there can be no assurance that we will prevail or that any damages we receive will cover our costs. Furthermore, the litigation may divert our technical and management personnel from their normal responsibilities. The occurrence of any of the foregoing could adversely affect our ability to pursue our business plan. In addition, if the court determines that the patents in question are not as broad as currently believed, or otherwise issues rulings that limit the protection provided by such patents, we may suffer adverse effects from the loss of competitive advantage and our ability to offer unique products and technologies based on such patents. As a result, there could be an adverse impact on our financial condition and business prospects.
Third parties claiming that we infringe their intellectual property rights could cause us to incur significant legal expenses and prevent us from selling our solutions.
Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our potential patents may provide little or no deterrence. We have received, and may in the future receive, notices that claim we have infringed, misappropriated or otherwise violated another party’s intellectual property rights. To the extent we gain greater visibility, we face a higher risk of being the subject of intellectual property infringement claims which is not uncommon with respect to software technologies. There may be third-party intellectual property rights, including issued or pending patents that cover significant aspects of our technologies or business methods. Any intellectual property claims made against us, with or without merit, could be very time consuming, could be expensive to settle or litigate and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third party’s rights. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of one or more of our solutions or features of our solutions and may be unable to compete effectively. Any of these results would harm our business, operating results and financial condition.
In addition, our agreements with customers and channel partners include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement and, in some cases, for damages caused by us to property or persons. Large indemnity payments could harm our business, operating results and financial condition.
Failure by us to achieve and maintain effective internal control over financial reporting in accordance with the rules of the SEC could harm our business and operating results and/or result in a loss of investor confidence in our financial reports, which could in turn have a material adverse effect on our business and stock price.
We are required to comply with the management certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002. We are required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that are reasonably likely to materially affect internal controls over financial reporting. A “material weakness” is a deficiency or combination of deficiencies that results in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. If we fail to continue to comply with the requirements of Section 404, we might be subject to sanctions or investigation by regulatory authorities such as the SEC. In addition, failure to comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our financial statements, and our stock price may be adversely affected as a result. If we fail to remedy any material weakness, our financial statements may be inaccurate, we may face restricted access to the capital markets and our stock price may be adversely affected.
The passage of “do not track” legislation could have a material adverse impact on our business.
Internet privacy is an ongoing issue of concern to consumers. A survey released by Pew Internet in March 2012 on search engine use found that 73% of respondents said they would “not be OK” with search engines tracking their searches. According to the survey, the respondents believed that using tracked information from past searches to personalize their future searches was an invasion of their privacy. Pew Internet found that this applied to all age groups. In late 2010, the Federal Trade Commission (“FTC”) and the Department of Commerce each issued a staff report proposing new frameworks for consumer privacy protection; the FTC report called for federal “Do Not Track” legislation. The FTC has also increased its enforcement actions against companies that fail to live up to their privacy or data security commitments to consumers. A number of privacy and data security bills have been introduced in Congress that address the collection, maintenance and use of personal information, web browsing and geo-location data, and establish data security and breach notification requirements. Some state legislatures have adopted legislation that regulates how businesses operate on the Internet, including measures relating to privacy, data security and data breaches. Several Congressional hearings have examined privacy implications for online, offline and mobile data. Messaging using short message services (“SMS”) and (“MMS”) is always permission based, but if “do not track” legislation is passed, it could negatively impact our mobile advertising business. Any significant restriction on our ability to utilize these functions could have a material adverse result on our business, revenues and results of operations.
Our business and future plans are dependent upon key individuals and the ability to attract qualified personnel.
In order to execute our business, we will be dependent upon our executive officers, the loss of which could have a material adverse effect on our business. Moreover our success continues to depend to a significant extent on our ability to identify, attract, hire, train and retain qualified professional, creative, sales, technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that we will be successful in identifying, attracting, hiring, training and retaining such personnel in the future. The competition for software developers is especially intense because the software market has significantly expanded over the past several years. If we are unable to hire, assimilate and retain such qualified personnel in the future, our business, operating results, and financial condition could be materially adversely effected. We may also depend on third party contractors and other partners to expand our services or develop future enhancements thereto. There can be no assurance that we will be successful in either attracting and retaining qualified personnel, or creating arrangements with third parties. The failure to succeed in these endeavors could have a material adverse effect on our business and results of operations.
We are dependent on a small number of customers for a large portion of our sales and a loss of any customer that accounts for a large portion of our revenue would cause our revenue to decline substantially.
Sales to three customers accounted for approximately 15% of our revenue in fiscal year 2014. Contracts with our customers generally have no specified term. If revenue from these key customers decline for any reason (such as competitive developments), our revenue would decline and our ability to become profitable would be impaired. It is important to our ongoing success that we maintain these key customer relationships and at the same time develop new customer relationships.
We cannot guarantee that we will have the resources or the expertise to compete against larger, more established providers of marketing applications and services.
Competition in the market of mobile marketing applications and services is intense. Our products face competition from many larger, more established companies. In addition, the introduction of competing products or services could result in a decrease in the price charged by our competitors for their products and services, reduce demand for our products and services or even make our products and services obsolete, any of which would have a material adverse effect on our business, operating results and financial condition. There can be no assurance that we will be able to compete successfully with our existing or potential competitors, some of whom may have substantially greater financial, technical, and marketing resources, longer operating histories, greater name recognition or more established relationships in the industry.
Risks Relating to Ownership of Our Securities
Our common stock is considered a “penny stock.” The application of the “penny stock” rules to our common stock could limit the trading and liquidity of our common stock, adversely affect the market price of our common stock and increase the transaction costs to sell those shares.
Our common stock is a “low-priced” security or “penny stock” under rules promulgated under the Securities Exchange Act of 1934, as amended. In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealers’ duties in selling the stock, the customer’s rights and remedies and certain market and other information. Furthermore, broker-dealers must make a suitability determination approving the customer for low-priced stock transactions based on the customer’s financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions will likely decrease the willingness of broker-dealers to make a market in our common stock, will decrease liquidity of our common stock and will increase transaction costs for sales and purchases of our common stock as compared to other securities.
The OTC markets, on which our common stock is traded, are quotation systems, not issuer listing services or securities market. Buying and selling stock on these markets is not as efficient as buying and selling stock through a stock exchange. As a result, it may be difficult for you to sell your common stock or you may not be able to sell your common stock for an optimum trading price.
Our common stock is traded on the OTC Bulletin Board (“OTCBB”) and the OTCQB Marketplace (“OTCQB”), which are regulated quotation services that display real-time quotes, last sale prices and volume limitations in over-the-counter securities. Because trades and quotations on these and other OTC markets involve a manual process, the market information for such securities cannot be guaranteed. In addition, quote information, or even firm quotes, may not be available. The manual execution process may delay order processing and intervening price fluctuations may result in the failure of a limit order to execute or the execution of a market order at a significantly different price. Execution of trades, execution reporting and the delivery of legal trade confirmations may be delayed significantly. Consequently, you may not be able to sell your shares of our common stock at the optimum trading prices.
When fewer shares of our common stock are being traded on the OTCBB and/or the OTCQB, volatility of prices may increase and price movement may outpace the ability to deliver accurate quote information. Lower trading volumes in a security may result in a lower likelihood of an individual’s orders being executed, and current prices may differ significantly from the price that was quoted by at the time of the order entry. Orders for OTC market securities may be canceled or edited like orders for other securities. All requests to change or cancel an order must be submitted to, received and processed by the quotation service. Due to the manual order processing involved in handling OTC market trades, order processing and reporting may be delayed, and an individual may not be able to cancel or edit his order. Consequently, one may not be able to sell shares of common stock at the optimum trading prices.
The dealer’s spread (the difference between the bid and ask prices) may be large and may result in substantial losses to the seller of securities on the OTC markets if the common stock or other security must be sold immediately. Further, purchasers of securities may incur an immediate “paper” loss due to the price spread. Moreover, dealers trading on the OTC markets may not have a bid price for securities bought and sold through the quotation system. Due to the foregoing, demand for securities that are traded through the OTC markets may be decreased or eliminated.
Our stock price is volatile, and you may not be able to resell your shares at or above the price you paid. In addition, volatility in the price of our common stock may subject us to securities litigation resulting in substantial costs and liabilities and diverting management’s attention and resources.
The trading price of our common stock is highly volatile and subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:
| · | quarterly variations in our results of operations; |
| · | changes in estimates of our financial results; |
| · | investors’ general perception of us; |
| · | disruption of our operations; |
| · | the emergence of new sales channels in which we are unable to effectively compete; |
| · | commencement of, or our involvement in, litigation; |
| · | any major changes in our board or management; and |
| · | changes in governmental regulations or in the status of our regulatory approvals. |
In addition, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our actual operating performance.
The OTC markets, on which our stock trade tend to be highly illiquid, in part because there is no national quotation system by which potential investors can track the market price of shares except through information received or generated by a limited number of broker-dealers that make a market in particular stocks. There is a greater chance of market volatility for securities that trade on the OTC markets as opposed to a national exchange or quotation system.
Further, the trading volume in our stock is very limited, which causes high price volatility. In addition, because of the limited volume of trading, the last quoted sales price may not represent a price at which you could sell a significant number of shares, and any sustained selling of shares may dramatically reduce the price of the shares. As a result, you may not be able to resell your shares at a favorable price, or at all.
In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be a target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention from our day-to-day operations and consume resources, such as cash.
We do not expect to pay dividends for the foreseeable future, and we may never pay dividends. Investors seeking cash dividends should not purchase our common stock.
We currently intend to retain any future earnings to support the development of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including, among others, our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements to which we may be a party at the time. In addition, our ability to pay dividends on our common stock may be limited by Delaware state law. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase our common stock.
Future securities issuances by us may have dilutive or adverse effects on our existing stockholders.
We historically have financed our operations and strategic acquisitions primarily through the sale of common stock or other securities convertible or exchangeable for our common stock. We may in the future issue additional shares of common stock or convertible securities that could dilute the ownership interest of existing stockholders or may include terms that give new investors rights superior to existing stockholders. Moreover, any issuances by us of equity securities may be at or below the prevailing market price of our common stock and in any event may have a dilutive impact on your ownership interest, which could cause the market price of our common stock to decline. In addition, we have outstanding stock options and warrants to purchase our common stock which, if exercised in the future, would result in issuance of additional shares of our common stock that could dilute the ownership interest of existing stockholders. We may also raise additional funds through the incurrence of debt, and the holders of any debt we may issue would have liquidation and other rights superior to those of existing shareholders.
Provisions in our certificate of incorporation and bylaws could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which our common stockholders might otherwise receive a premium price for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:
| · | establish a classified board of directors such that not all members of the board are elected at one time; |
| allow the authorized number of our directors to be changed only by resolution of our board of directors; |
| limit the manner in which stockholders can remove directors from the board; |
| establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and for nominations to our board of directors; |
| limit who may call stockholder meetings; |
| authorize our board of directors to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership or voting power of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and |
| require the approval of the holders of at least 66 2/3% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws. |
Limitations on director liability and our indemnification of officers and directors may discourage stockholders from bringing suit against a director or officer.
Our certificate of incorporation states that our directors shall not be personally liable to us or any stockholder for monetary damages for breach of fiduciary duty as a director, except for any matter in respect of which such director shall be liable under Section 174 of the Delaware General Corporation Law or shall be liable because the director (1) shall have breached his duty of loyalty to us or our stockholders; (2) shall have acted in a manner involving intentional misconduct or a knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation of law; or (3) shall have derived an improper personal benefit. Our certificate further states that the liability of our directors shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as amended in the future. Our certificate and bylaws further provide for indemnification and advancement of expenses, to the fullest extent authorized by Delaware law, to any person who is or was made a party to or is in any way involved in any threatened, pending or completed action, suit or proceeding by reason of the fact that he is or was a director or officer of our Company or was serving at our request as a director or officer of another entity. Furthermore, we have entered into indemnification agreements with each of our executive officers and directors. The provisions of our certificate of incorporation and our obligations under the indemnification agreements may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director or officer.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking 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 described in the section of this prospectus 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 which compete with our product and service offerings; |
| our cash position and uses of cash; |
| capital market conditions, including availability of funding sources; |
| the strength of our intellectual property portfolio; |
| 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 prospectus. 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 prospectus 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.
We are registering the shares of common stock offered by this prospectus for sale by the selling stockholders identified in the section of this prospectus entitled “Selling Stockholders.” We will not receive any of the proceeds from the sale of these shares. However, if all of the warrants held by the selling stockholders are exercised for cash, we will receive gross proceeds of $4.3 million, which will be used for general working capital purposes. We will pay all expenses incurred in connection with the offering described in this prospectus. We are registering the shares in this offering pursuant to the terms of the registration rights agreement entered into between the Company and the selling stockholders dated October 4, 2013. Our common stock is more fully described in the section of this prospectus titled “Description of Securities.”
This prospectus covers the resale from time to time by the selling stockholders identified below of 31,037,500 shares of our common stock, which amount includes 7,162,500 shares issuable upon the exercise of warrants held by the selling stockholders. The common stock and warrants were issued in a private placement that closed on October 4, 2013. The warrants have a term of five years and an exercise price of $0.60 per common share. The warrants may be exercised by the holders at any time and include a cashless exercise provision. The warrants also contain provisions providing for an adjustment in the underlying number of common shares and exercise price in the event of stock dividends and splits, pro rata distributions and fundamental transactions. The warrants do not contain any price protection provisions. Additionally, the warrants contain limitation on the holders’ ability to exercise the warrants in the event such exercise causes the holder to beneficially own in excess of 4.99% of our issued and outstanding common stock, subject to a discretionary increase in such limitation by the holder to 9.99% upon 60 days’ notice.
The common stock and warrants sold in the private placement were offered and sold in reliance on the exemption from registration afforded by Section 4(a)(2) and Rule 506(b) of Regulation D promulgated under the Securities Act. Each investor in the private placement represented to us that it is an accredited investor and that it was acquiring the common stock and warrants for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof in a manner that would violate the Securities Act or any applicable state securities law.
Unless otherwise indicated in the footnotes below, no selling stockholder (i) has, or within the past three years has had, any position, office or other material relationship with us or any of our predecessors or affiliates other than as a result of the ownership of our securities, or (ii) is a broker-dealer or an affiliate of a broker-dealer.
The following table and the accompanying footnotes are based in part on information supplied to us by the selling stockholders. The table and footnotes assume that the selling stockholders will sell all of the shares listed. However, because the selling stockholders may sell all or some of their shares under this prospectus from time to time, or in another permitted manner, we cannot assure you as to the actual number of shares that will be sold by the selling stockholders or that will be held by the selling stockholders after completion of any sales. We do not know how long the selling stockholders will hold the shares before selling them. See our discussion titled “Plan of Distribution” for further information regarding the selling stockholders’ method of distribution of these shares.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to our common stock. Shares of our common stock subject to warrants that are currently exercisable or exercisable within 60 days of May 1, 2014 are considered outstanding and beneficially owned by the person holding the warrants for the purpose of calculating the percentage ownership of that person but not for the purpose of calculating the percentage ownership of any other person. Except as otherwise noted in the footnotes below, we believe the persons and entities in this table have sole voting and investing power with respect to all of the shares of our common stock beneficially owned by them, subject to community property laws, where applicable. The inclusion of any shares in this table does not constitute an admission of beneficial ownership by the person named below.
The table below sets forth, to our knowledge, information about the selling stockholders as of May 1, 2014. Information about the selling stockholders may change from time to time.
| | | Shares Beneficially Owned Prior to the Offering | | | Number of Shares Being Offered | | | Shares Beneficially Owned After the Offering (2) | |
| Name | | Number | | | Percent (1) | | | | | Number | | | Percent (1) | |
| | | | | | | | | | | | | | | | |
Aspire Capital Fund, LLC (3) | | | 1,625,000 | | | | 1.05 | % | | | 1,625,000 | | | | 0 | | | | 0.00 | % |
Jon C. Baker (4) | | | 3,204,533 | | | | 2.07 | % | | | 1,625,000 | | | | 1,579,533 | | | | 1.02 | % |
Diker Micro-Cap Fund LP (5) | | | 3,250,000 | | | | 2.10 | % | | | 3,250,000 | | | | 0 | | | | 0.00 | % |
| Unterberg Koller Capital Fund, L.P. (6) | | | 13,000,000 | | | | 8.40 | % | | | 13,000,000 | | | | 0 | | | | 0.00 | % |
Lindsay Gruber Dunham (7) | | | 162,500 | | | | * | | | | 162,500 | | | | 0 | | | | 0.00 | % |
| Jon D. and Linda W. Gruber Trust (8) | | | 1,950,000 | | | | 1.26 | % | | | 1,950,000 | | | | 0 | | | | 0.00 | % |
Jonathan Wyatt Gruber (9) | | | 162,500 | | | | * | | | | 162,500 | | | | 0 | | | | 0.00 | % |
| Lincoln Park Capital Fund, LLC (10) | | | 697,704 | | | | * | | | | 187,500 | | | | 510,204 | | | | * | |
Robert F. Moriarty (11) | | | 1,625,000 | | | | 1.05 | % | | | 1,625,000 | | | | 0 | | | | 0.00 | % |
William L. Musser (12)(13) | | | 975,000 | | | | * | | | | 975,000 | | | | 0 | | | | 0.00 | % |
New Frontier Capital, LP (13) | | | 2,275,000 | | | | 1.47 | % | | | 2,275,000 | | | | 0 | | | | 0.00 | % |
Wall Street Capital Partners, LP (14) | | | 1,950,000 | | | | 1.26 | % | | | 1,950,000 | | | | 0 | | | | 0.00 | % |
David R. Wilmerding (15) | | | 3,093,622 | | | | 2.00 | % | | | 1,625,000 | | | | 1,468,622 | | | | * | |
| (1) | Applicable percentage ownership is based on 154,786,916 shares of our common stock outstanding as of May 1, 2014. |
| (2) | Assumes the sale of all shares offered in this prospectus and no sales of any shares held by any selling stockholder as of November 1, 2013 that are not registered for resale under this prospectus. |
| (3) | The number of shares being offered includes 375,000 shares of common stock issuable upon exercise of warrants. Aspire Capital Partners, LLC is the managing member of Aspire Capital Fund, LLC. SGM Holdings Corp. is the managing member of Aspire Capital Partners, LLC. Steven G. Martin is the president and sole shareholder of SGM Holdings Corp. Erik J. Brown and Cristos Komissopoulis are principals of Aspire Capital Partners, LLC. Each may be deemed to have shared voting and dispositive with respect to the securities owned by Aspire Capital Fund, LLC. Each of Aspire Capital Partners, LLC, SGM Holdings Corp., Mr. Martin, Mr. Brown and Mr. Komissopoulos disclaims beneficial ownership of the securities held by Aspire Capital Fund, LLC., except to the extent of their pecuniary interest therein. |
| (4) | The number of shares being offered includes 375,000 shares of common stock issuable upon exercise of warrants. |
| (5) | The number of shares being offered includes 750,000 shares of common stock issuable upon exercise of warrants. Diker Management LLC (“Diker Management”) is the investment manager to Diker Micro-Cap Fund LP (“Diker Micro-Cap”). The managing members of Diker Management are Charles Diker and Mark N. Diker (together, the “Diker Managers”). Diker Management and the Diker Managers may be deemed to beneficially own the securities held by Diker Micro-Cap. Diker Management and the Diker Managers each disclaim beneficial ownership of such securities except to the extent of their pecuniary interest therein. |
| (6) | The number of shares being offered includes 3,000,000 shares of common stock issuable upon exercise of warrants. Diker Management is the investment manager to Unterberg Koller Capital Fund, L.P (the "Unterberg Koller Fund"). The managing members of Diker Management are Charles Diker and Mark N. Diker (together, the “Diker Managers”). Diker Management and the Diker Managers may be deemed to beneficially own the securities held by the Unterberg Koller Fund. Diker Management and the Diker Managers each disclaim beneficial ownership of such securities except to the extent of their pecuniary interest therein. |
| (7) | The number of shares being offered includes 37,500 shares of common stock issuable upon exercise of warrants. |
| (8) | The number of shares being offered includes 450,000 shares of common stock issuable upon exercise of warrants. Jon D. Gruber, as Trustee of the Jon D. and Linda W. Gruber Trust, has sole voting and dispositive power with respect to these shares. |
| (9) | The number of shares being offered includes 37,500 shares of common stock issuable upon exercise of warrants. |
| (10) | The number of shares being offered consists of 187,500 shares of common stock issuable upon exercise of warrants. Josh Scheinfeld and Jonathan Cope, the managing members of Lincoln Park Capital, LLC, have shared voting and dispositive power with respect to the shares held by Lincoln Park Capital Fund, LLC. |
| (11) | The number of shares being offered includes 375,000 shares of common stock issuable upon exercise of warrants. |
| (12) | The number of shares being offered includes 225,000 shares of common stock issuable upon exercise of warrants. Mr. Musser is a general partner of New Frontier Capital, L.P. |
| (13) | The number of shares being offered includes 525,000 shares of common stock issuable upon exercise of warrants. William L. Musser is the general partner of New Frontier Capital, LP and has sole voting and dispositive power over the shares. |
| (14) | The number of shares being offered includes 450,000 shares of common stock issuable upon exercise of warrants. Jeffrey Alan Kone, in his capacity as managing member of Wall Street Capital Partners L.P., has voting and dispositive authority over the shares owned by Wall Street Capital Partners L.P. |
| (15) | The number of shares being offered includes 375,000 shares of common stock issuable upon exercise of warrants. |
We are registering for resale by the selling stockholders and certain transferees a total of 31,037,500 shares of common stock, of which 23,875,000 shares are issued and outstanding and up to 7,162,500 shares are issuable upon exercise of warrants. We will not receive any of the proceeds from the sale by the selling stockholders of the shares of common stock, although we may receive up to $4.3 million upon the exercise of all of the warrants by the selling stockholders. We will bear all fees and expenses incident to our obligation to register the shares of common stock.
The selling stockholders may sell all or a portion of the shares of common stock beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of common stock may be sold on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale, in the over-the-counter market or in transactions otherwise than on these exchanges or systems or in the over-the-counter market and in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions. The selling stockholders may use any one or more of the following methods when selling shares:
| · | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
| purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| an exchange distribution in accordance with the rules of the applicable exchange; |
| privately-negotiated transactions; |
| settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part; |
| broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; |
| through the writing or settlement of options or other hedging transactions, whether such options are listed on an options exchange or otherwise; |
| a combination of any such methods of sale; and |
| any other method permitted pursuant to applicable law. |
In addition, any shares of common stock covered by this prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this prospectus.
The selling stockholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act, amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
The selling stockholders will sell their shares of common stock subject to the following:
| each sale may be made at market price prevailing at the time of such sale, at negotiated prices, at fixed prices or at carrying prices determined at the time of sale; |
| some or all of the shares of common stock may be sold through one or more broker-dealers or agents and may involve crosses, block transactions or hedging transactions. The selling stockholders may enter into hedging transactions with broker-dealers or agents, which may in turn engage in short sales of the common stock in the course of hedging in positions they assume. The selling stockholders may also sell shares of common stock short and deliver shares of common stock to close out short positions or loan or pledge shares of common stock to broker-dealers or agents that in turn may sell such shares; and |
| in connection with such sales through one or more underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and may receive commissions from the purchasers of the shares of common stock for whom they act as broker-dealer or agent or to whom they sell as principal (which discounts, concessions or commissions as to particular broker-dealers or agents may be in excess of those customary in the types of transaction involved). Any broker-dealer or agent participating in any such sale may be deemed to be an “underwriter” within the meaning of the Securities Act and will be required to deliver a copy of this prospectus to any person who purchases any share of common stock from or through such broker-dealer or agent. We have been advised that, as of the date hereof, none of the selling stockholders have made any arrangements with any broker-dealer or agent for the sale of their shares of common stock. |
The selling stockholders and any broker-dealers participating in the distribution of the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act, and any profits realized by the selling stockholders and any commissions paid, or any discounts or concessions allowed to any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act.
Selling stockholders who are “underwriters” within the meaning of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.
If required at the time a particular offering of the shares of common stock is made, a prospectus supplement or, if appropriate, a post-effective amendment to the registration statement of which this prospectus is a part, will be distributed which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-deals or agents, any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.
Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
The selling stockholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholders and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.
There can be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the registration statement, of which this prospectus forms a part.
We will pay all expenses of the registration of the shares of common stock including, without limitation, SEC filing fees and expenses of compliance with the state securities of “blue sky” laws. The selling stockholders will pay all underwriting discounts and selling commissions and expenses, brokerage fees and transfer taxes, as well as the fees and disbursements of counsel to and experts for the selling stockholders, if any. We have agreed to indemnify the selling stockholders against liabilities, including some liabilities under the Securities Act, or the selling stockholder will be entitled to contribution. The selling stockholders have agreed to indemnify us against civil liabilities, including liabilities under the Securities Act that may arise from any written information furnished to us by the selling stockholders for use in this prospectus.
We have agreed with the selling stockholders to keep the registration statement of which this prospectus forms a part effective until the earlier of October 4, 2015 and such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement or Rule 144 or may be resold pursuant to Rule 144 without regard to the current public information required thereunder and without volume or manner-of-sale restrictions.
The following description of our capital stock and provisions of our certificate of incorporation and bylaws are summaries and are qualified by reference to our certificate of incorporation and bylaws. We have filed copies of these documents with the SEC as exhibits to the registration statement of which this prospectus forms a part. As of the date of this prospectus, we have 250,000,000 authorized shares of common stock and 25,000,000 authorized shares of preferred stock. 2,000,000 shares of our authorized preferred stock have been designated as Series A Convertible Preferred Stock and 2,000,000 shares of our authorized preferred stock have been designated as Series B Convertible Preferred Stock. No shares of the Series A or Series B Convertible Preferred Stock are outstanding, and we do not intend to issue any shares of Series A or Series B Preferred Stock in the future.
Common Stock
Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. An election of directors by our stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote on the election. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our board of directors, subject to any preferential dividend rights of any series of preferred stock that we may designate and issue in the future.
In the event of our liquidation or dissolution, the holders of common stock are entitled to receive proportionately our net assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. Our outstanding shares of common stock are validly issued, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.
Preferred Stock
Under the terms of our certificate of incorporation, our board of directors is authorized to issue shares of preferred stock in one or more series without stockholder approval. Our board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. There are currently no shares of preferred stock outstanding, and we have no present plans to issue any shares of preferred stock.
Anti-Takeover Provisions
Staggered Board
Our certificate of incorporation divides our board of directors into three classes with staggered three year terms. In addition, our certificate of incorporation provides that directors may be removed (i) without cause only by the affirmative vote of the holders of 66-2/3% of the votes that all our stockholders would be entitled to cast in any election of directors (the “Voting Stock”) or (ii) with cause by the affirmative vote of the holders of a majority of our then outstanding Voting Stock, voting together as a single class. Vacancies on the board resulting from the death, resignation or removal of a director may be filled by either the affirmative vote of the voting power of the then outstanding Voting Stock, voting together as a single class, or by the affirmative vote of the remaining directors then in office. However, our certificate of incorporation provides that the authorized number of directors may be changed only by the resolution of our board of directors and newly created directorships resulting from any increase in the number of directors must be filled by the affirmative vote of the directors then in office, unless the board of directors determines by resolution that such newly created directorship shall be filled by the stockholders. The classification of our board of directors and the limitations on the ability of our stockholders to remove directors, change the authorized number of directors, and fill newly-created directorships could make it more difficult for a third party to acquire, or discourage a third party from seeking to acquire, control of our company.
Authorized but Unissued Shares
The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to any limitations imposed by the listing standards of any exchange on which our shares may be listed. These additional shares may be used for a variety of corporate finance transactions, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could make more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Special Meeting of Stockholders; Advance Notice Requirements for Stockholder Proposals and Director Nominations; Stockholder Action
Our certificate of incorporation provides that, except as otherwise required by law, special meetings of the stockholders can only be called by our board of directors and the chairman of the board (or the chief executive officer if there is no chairman). In addition, our bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of candidates for election to our board of directors. Stockholders at an annual meeting may only consider proposals or nominations specified in the notice of the meeting or brought before the meeting by or at the direction of our board of directors, or by a stockholder of record on the record date for the meeting who is entitled to vote at the meeting and who has delivered timely written notice in proper form to our secretary of the stockholder’s intention to bring such business before the meeting. These provisions could have the effect of delaying until the next stockholder meeting stockholder actions that are favored by the holders of a majority of our outstanding voting securities.
Super Majority Voting
The General Corporation Law of the State of Delaware (“DGCL”) provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless a corporation’s certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our bylaws may be amended or repealed by a majority vote of our board of directors or the affirmative vote of the holders of at least 66-2/3% of the Voting Stock, voting together as a single class. In addition, the affirmative vote of the holders of at least 66-2/3% of the Voting Stock, voting together as a single class, is required to amend or repeal or to adopt any provisions inconsistent with any of the provisions of our certificate of incorporation.
Delaware Business Combination Statute
Section 203 of the DGCL provides that, subject to exceptions set forth therein, an “interested stockholder” of a Delaware corporation shall not engage in any business combination, including mergers or consolidations or acquisitions of additional shares of the corporation, with the corporation for a three-year period following the date that such stockholder becomes an interested stockholder unless:
| prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; |
| upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, other than statutorily excluded shares; or |
| on or subsequent to such date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least 66-2/3% of the outstanding voting stock which is not owned by the interested stockholder. |
Except as otherwise set forth in Section 203, an “interested stockholder” is defined to include:
| any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the date of determination; and |
| the affiliates and associates of any such person. |
Section 203 may make it more difficult for a person who would be an interested stockholder to effect various business combinations with a corporation for a three-year period. We have not elected to be exempt from the restrictions imposed under Section 203. The provisions of Section 203 may encourage persons interested in acquiring us to negotiate in advance with our board, since the stockholder approval requirement would be avoided if a majority of the directors then in office approves either the business combination or the transaction which results in any such person becoming an interested stockholder. Such provisions also may have the effect of preventing changes in our management. It is possible that such provisions could make it more difficult to accomplish transactions, which our stockholders may otherwise deem to be in their best interests.
Limitation of Liability and Indemnification
Delaware Law
Section 102 of the DGCL permits a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit.
Section 145 of the DGCL provides that a corporation has the power to indemnify a director, officer, employee, or agent of the corporation, or a person serving at the request of the corporation for another corporation, partnership, joint venture, trust or other enterprise in related capacities against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with an action, suit or proceeding to which he was or is a party or is threatened to be made a party to any threatened, ending or completed action, suit or proceeding by reason of such position, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. The statute provides that indemnification pursuant to these provisions is not exclusive of other rights of indemnification to which a person may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Amended and Restated Certificate of Incorporation
Pursuant to Article Eight of our certificate of incorporation (“Article Eight”), we are authorized to provide indemnification of (and advancement of expenses to) directors, officers, employees and agents (and any other persons to which Delaware law permits us to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the DGCL, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to action for breach of duty to us, our stockholders and others.
Article Eight also states that our directors shall not be personally liable to us or any stockholder for monetary damages for breach of fiduciary duty as a director, except of any matter in respect of which such director shall be liable under Section 174 of the DGCL or shall be liable because the director (1) shall have breached his duty of loyalty to us or our stockholders, (2) shall have acted in a manner involving intentional misconduct or a knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation of law, or (3) shall have derived an improper personal benefit. Article Eight further states that the liability of our directors shall be eliminated or limited to the fullest extent permitted by the DGCL as amended at any time in the future.
Under Article Eight and Article Six of our bylaws, any person who was or is made a party or is threatened to be made a party to or is in any way involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, including any appeal therefrom, by reason of the fact that he is or was a director or officer of our Company or was serving at our request as a director or officer of another entity or enterprise (including any subsidiary), shall be indemnified and held harmless by us and we are required to advance all expenses incurred by such person in defense of any such proceeding prior to its final determination, to the fullest extent authorized by the DGCL. These rights are not exclusive of any other rights to which those seeking indemnification may otherwise be entitled.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and executive officers. These indemnification agreements may require us, among other things, to indemnify our directors and officers for some expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or officer in any action or proceeding arising out of his or her service as one of our directors or officers, or any of our subsidiaries or any other company or enterprise to which the person provides services at our request.
We maintain a general liability insurance policy that covers certain liabilities of directors and officers of our corporation arising out of claims based on acts or omissions in their capacities as directors or officers.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Manhattan Transfer Registrar Co., 57 Eastwood Road, Miller Place, New York 17764.
Overview
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® software-as-a service (“SaaS”) platform (“AD LIFE Platform” or the “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 proprietary 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 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, short message service (“SMS”) 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 selective basis, additional patents that generally relate to targeting, analytics, advanced mobile marketing, customized content delivery, and mobile and networked marketing technology.
We are a corporation organized under the laws of the State of Delaware in March 2000. We were formally known as Augme Technologies, Inc. and changed our name to Hipcricket, Inc. in August 2013. Our principal executive offices are located at 110 110th Avenue NE, Bellevue, WA 98004. Our telephone number is (855) 423-5433. Our corporate website is www.hipcricket.com. Information contained in or accessible through our website is not part of this prospectus.
Hipcricket®, Inc., Augme® Technologies™, AD LIFE® (“AD LIFE”), AD SERVE®, A+®, Boombox® and the Company logos are trademarks of Hipcricket, Inc.
Industry Overview
According to a 2013 report by eMarketer, Inc., which publishes data, analyses and insights on digital marketing, media and commerce, over $170 billion is spent annually in the U.S. across six channels: TV, online (often referred to as ‘digital marketing’ or ‘internet marketing’), print, radio, outdoor and directories. However, we believe that the way advertisers reach their audience is fundamentally changing, shifting more attention to online channels to reach consumers, driven by the convergence of several factors including:
| The disruption of the advertising industry by online advertising. As advertisers seek to maximize the effectiveness of their campaigns, the attractiveness of traditional advertising media, such as outdoor billboards, newspapers, magazines, radio and even television, is declining relative to online advertising. We believe this decline is due to several inherent limitations of traditional advertising, including its limited ability to target specific audiences and measure audience reach, difficulty in measuring performance effectiveness, and in some cases its limited geographic range. According to an August 2013 report by eMarketer, Inc., the average time spent with online media per day by U.S. adults surpassed television viewing time for the first time in 2013. However, advertising spending on mobile is significantly lower than it is for other types of media, relative to time spent with each type of media. Although there is still significant spending on traditional advertising, advertisers are increasingly shifting their budgets to online channels, both personal computer-based (“PC-based”) and mobile. |
| Online advertising has limitations, despite its increased effectiveness compared to traditional advertising. As consumers spend more time online, we believe online advertising can be more effective than traditional advertising because it allows for user interaction, provides better measurement and achieves an expanded reach. However, even PC-based advertising suffers from a number of significant limitations, including: |
| o | Limited personalization. Personal computers often have multiple users, thus yielding audiences with limited personalization. This limits the ability of advertisers to target end users on an individual basis. |
| Limited real-time accessibility. Personal computers are typically used at home or in the office. Even laptops that can travel with users are usually used from a fixed location, where they are turned on and wirelessly connected to the Internet. As a result, user engagement with ads is generally limited to the time spent in front of the computer screen in a fixed location. |
| Limited location targeting. Most location targeting through personal computers is limited to a broad geographic area based on the records of the user's Internet service provider. This limits the ability to deliver highly targeted advertising that is relevant to a consumer. |
| Mobile usage has disrupted how content is consumed. Consumers are increasingly using their mobile devices instead of their personal computers and other media to access content. Consumers use their mobile devices in all aspects of their daily lives, including for reading the news, playing games, checking sports scores, shopping, checking the weather, banking, obtaining maps and directions, listening to the radio and using social media. According to a 2013 study by eMarketer, Inc., the most significant growth area is mobile. eMarketer estimated that, in 2013, U.S. adults would spend an average of 2 hours and 21 minutes per day on non-voice mobile activities, including mobile internet usage on phones and tablets -- longer than they would spend online on personal computers, and nearly an hour more than they spent on mobile in 2012. |
| Adoption of faster and more functional mobile connected devices create unprecedented mobile advertising and marketing opportunities. The ubiquity and utility of mobile devices continue to grow, presenting advertisers and marketers with an unprecedented audience and new delivery capabilities. There has been widespread adoption of mobile connected devices, driven by intuitive user interfaces, lower price points, increased functionality, faster processing speeds, better graphics processors and advanced display technologies with touch capabilities. It has become possible to deliver innovative, interactive and engaging consumer media experiences on a wide variety of mobile connected devices. A 2013 report by Cisco Systems projects that by the end of 2014, the number of mobile-connected devices will exceed the number of people on earth and by 2018 there will be over 10 billion mobile-connected devices, or nearly 1.4 mobile devices per capita. According to International Data Corporation (“IDC”), a global provider of marketing intelligence for the telecommunications and consumer technology industry, in 2013, the total number of smartphones shipped around the globe surpassed one billion for the first time ever. Combined with the roll-out of 4G networks, IDC predicts that 1.7 billion smartphones and over 400 million tablets will be shipped globally by the end of 2017. IDC also estimates that tablets will grow in share of the overall smart devices market from approximately 11% in 2012, to an estimated 16% by 2017 - with a projected growth rate of over 174% between 2012 and 2017. |
The Mobile Advertising Opportunity
Advertisers and marketers seek to have spending match usage, thereby ensuring marketing budgets are spent as effectively as possible and campaigns are reaching the largest available audience. According to a December 2013 report by eMarketer, mobile advertising is expected to surpass PC-based advertising spending by 2017, reaching approximately $36 billion from $9.6 billion at the end of 2013. We believe mobile advertising provides significant benefits both to developers and to advertisers compared to traditional advertising media and PC-based advertising. For developers, mobile advertising provides the opportunity to make money, acquire users and gain insight into mobile application (“app”) usage. For advertisers, the combination of the personal nature of mobile devices, their enhanced functionality and the rise of app-enabled experiences creates a powerful platform for highly targeted and effective advertising. Mobile advertising leverages the benefits of nearly continual user access, personalization, location targeting and relevance, and enhanced user engagement and audience targeting.
Anytime, anywhere access. Mobile devices generally accompany users at all hours of the day and are typically turned on at all times. This provides advertisers the opportunity for nearly continual access to the user. An advertiser can reach audiences at all stages of the purchase decision - awareness, research, opinion, consideration and ultimately, purchase - in order to increase the likelihood that the viewer will purchase the product or service being advertised. This ability to target audiences anytime, anywhere makes mobile advertising an attractive opportunity for advertisers, especially compared to newspapers, magazines, television and radio or to digital advertising delivered through personal computers.
Personalization. Mobile devices are inherently personal and are most often used by one person. Users often download and use a variety of apps that reflect their personal preferences and interests. In addition to customized apps, users can personalize and provide targetability via scans and messaging interactions with their mobile devices delivering a multi-channel mobile interface experience for the end users. When a user downloads any one of these mobile channels to his or her individual device, data is often exchanged that can provide information about the user's interests. As the user downloads and registers, more data can be collected about this user's preferences, which provides an opportunity to personalize the mobile advertising experience. Additionally, using the significant amount of data collected from mobile devices, highly specific audiences can be created based on location and behavioral and demographic preferences to match advertisers' objectives. We believe this ability to create and deliver highly relevant audiences also enhances the value of advertising space for developers.
Location targeting and relevance. Data from mobile devices is often shared in a manner that can identify the device's location. This enables location-targeted advertising, which has the potential to increase the ad's impact and relevance to the user. For example, firms can assess a PC-user's online browsing behavior to provide limited targeting of advertising to that user. With mobile advertising, on the other hand, an ad can be personalized for a consumer who is in close proximity to a specific location, such as a retail store, or to a consumer who recently visited that store. We believe the ad also has the potential to influence the user to visit a nearby store.
More complete user engagement. Apps on mobile connected devices typically show one or two ads on each page view. We believe this limited number of ads on a small device screen can often capture the user's attention better than the many banner ads on a typical PC-based web page. Furthermore, ads on a mobile device can take advantage of features of the device itself, such as the touch screen, swipe functionality and the accelerometer, which detects motion, to enable the user to manipulate and more deeply engage with the ad. Mobile device users can also act upon an ad immediately by, for example, downloading an app or other content, calling an advertiser directly from the mobile phone, or using the map on the device to find a nearby retail store or service provider. In some cases, mobile users can even take their device to a store to physically redeem an offer from an ad.
Our AD LIFE Mobile Advertising and Marketing Platform
Despite the proliferation of sophisticated mobile devices and the enormous marketing value promised by interacting directly with mobile consumers, marketers continue to struggle to find an easy, affordable, and effective way to fully integrate mobile phones into existing marketing and advertising campaigns. We believe that our AD LIFE Platform solves this “mobile marketing puzzle.” AD LIFE allows us to provide clients a full suite of mobile marketing and advertising solutions, thus providing an end-to-end, one-stop mobile campaign management software system. It also provides marketers, brands and advertising agencies the ability to create, deliver, manage and track interactive marketing campaigns targeting mobile phone users through traditional print advertising channels, thereby enhancing and extending communication, persuasiveness and effectiveness of existing campaigns. AD LIFE does this through a comprehensive web portal with four fully integrated components:
| Consumer Response. Turnkey tools to create and assign consumer response tags (“CRTs”) that allow consumers to use their mobile phones for easy and instant access to on-demand digital content. AD LIFE's open architecture offers a wide variety of CRTs in the market today, including SMS, 2D codes, logo, and audio recognition. |
| Content Formatting. According to a 2013 report by comScore, Inc., a digital marketing analytics company, approximately 30% of all Internet searches by U.S. adults are done via a mobile device. However, an October 2013 study by The Search Agency, a global digital marketing agency, found that 44 of the Fortune 100 companies do not have dedicated digital mobile sites or otherwise offer a mobile experience separate from the desktop version of their website. The sophisticated device detection system in AD LIFE automatically renders existing digital assets for proper viewing and navigation on nearly any mobile device regardless of phone type, operating system, or mobile service provider. |
| Customer Relationship Management. Using data analysis gathered and processed using proprietary techniques, AD LIFE provides key metrics and results of client campaigns including demographic and behavioral data. |
| Promotional Partnerships. AD LIFE provides access to pre-negotiated and readily available branded content to complement existing promotions. These include rebates and coupons that operate through a partnership with one of the nation's leading promotions transaction settlement providers, and many additional applications and services fully integrated with leading technology and service partners. |
The Platform delivers the following benefits to customers:
| Device recognition technology that formats traditional digital assets into content that can be optimized for nearly any mobile device regardless of operating system or network provider; |
| Open architecture which we believe offers the widest variety of CRTs in the mobile market today, including SMS, MMS, 2D / QR codes, logo, and audio recognition, allowing consumers to use their mobile devices to easily and instantly access on-demand digital content; |
| Ability to measure campaign effectiveness using data analysis gathered and processed using proprietary techniques; these key metrics and results of client campaigns include demographic and behavioral data; |
| Ability to deliver multimedia to both smartphones and standard mobile phones, without requiring the consumer to download an application prior to use; |
| Ease of implementation and integration with a brand's existing enterprise resource planning and customer relationship management (“CRM”) systems provides the ability to optimize campaigns and fulfillment; and |
| Enables customers to implement mobile campaigns in a short time frame, typically 10-20 days. |
We believe that the key differentiating feature of our end-to-end Platform is its ability to serve clients throughout the entire customer lifecycle. The Platform's post-click engagement capabilities enable marketers to continuously re-engage with users for re-marketing purposes. Additionally, our Platform allows our customers the ability to deliver content to any mobile network, operating system or device, regardless of how the device landscape changes. This ensures that brands have the capacity to reach 100% of any intended mobile marketplace for their messaging, whether through text, QR code, or other means. Further, as a result of the amount and nature of data we collect through our Platform, we are able to provide insights into current ad campaigns and future marketing strategies.
Our Strategy
Mobile marketing and mobile advertising industry trends and analyst forecasts suggest strong industry growth as mobile continues to proliferate in consumers' lives. We believe there is a large untapped opportunity to increase marketing spending on mobile to align with usage patterns, as mobile offers a high return on investment for marketers to engage their target markets. To take advantage of these opportunities, our strategy is to continue to develop and promote our AD LIFE Platform with our current and prospective customers. We intend to continue to establish our position as a leading provider of mobile marketing and mobile advertising solutions across multiple media types and channels.
The principal elements of our strategy are to:
| Grow our revenue and focus on achieving profitability and positive cash flows from operations; |
| Further penetrate brands within our existing customer base and add new strategic relationships with brands and advertising agencies; |
| Capitalize upon our existing technology to develop new product innovations and licensing opportunities, leveraging the value of our technology and patent portfolio; |
| Innovate through continued investment in our Platform to quickly respond to changing needs of our clients and market opportunities; and |
| Shift our future product mix to high growth, higher contribution product lines. |
Competition
The mobile marketing and advertising landscape, while in its early stages, is highly competitive and fragmented, with technology evolving rapidly. Competition in the market of mobile marketing and mobile advertising applications and services is intense. Our products face competition from many larger, more established companies. In addition, the introduction of competing products and services could result in a decrease in the price charged by our competitors for their products and services, reduce demand for our products and services, or even make our products and services obsolete. Many of the landscape's significant players and new entrants are focused on delivering point solutions targeting a specific segment of the mobile marketing and/or advertising landscape. We believe that we differentiate ourselves from the competition by offering complete, end-to-end mobile advertising, mobile marketing, and analytics solutions delivered through our AD LIFE Platform.
Customers
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.
As of February 28, 2014, our customers included:
| More than 30 advertising agencies worldwide, including the six largest advertising companies in the world; |
| Four of the world's top pharmaceutical companies; |
| Six of the largest media companies in the world; |
| The two largest providers both of mobile and fixed telephony in the US; |
| Ten of the largest consumer goods companies in the world; |
| The world's largest toy company; and |
| Three of the largest auto companies in the world. |
We have delivered over 400,000 campaigns since 2004 for hundreds of customers including Fortune 100 clients and many other established brand clients. We have earned a greater than 90% renewal rate with our mobile marketing customers and have a greater than 95% success rate in selling additional products to our existing clients. Sales to three customers accounted for approximately 15% of our revenue in fiscal year 2014.
Distribution
The AD LIFE Platform is primarily sold through our in-house sales force. We currently maintain a sales presence in the Seattle metropolitan area, New York, Atlanta, Miami, Dallas, Chicago, San Francisco and Los Angeles. We currently sell our Platform primarily in the U.S. As of May 1, 2014, our sales team consisted of 28 full-time employees.
Intellectual Property
Our Platform is built on our patented intellectual property. We have invested significant resources and capital building our patent portfolio, which we believe is important to our business. We have developed and procured, intellectual property rights as a key aspect of our business strategy from our internal development activities and through strategic acquisitions.
At February 28, 2014, we owned 21 U.S. patents covering technology inventions from 1999 to 2033. Our patent portfolio protects technology which we believe is core to our business, including:
| Customized content delivery to any Internet enabled device; |
| Device, browser, software, and profile detection with content targeting; |
| Content targeting based on profiles and ambient conditions; and |
| Content targeting based on profiles within virtual environments. |
We are pursuing additional patents on a selective basis that relate to our core competencies of targeting, analytics, advanced mobile marketing, customized content delivery, and mobile and networked marketing technology. We believe that protecting these core competencies is an important aspect of our strategy. Our AD LIFE Platform incorporates our intellectual property that allows us to provide customers with the only end-to-end mobile marketing solution in the U.S. that enables precise targeting, enhanced security, mobile content richness, and a solution to device and operating system diversity and fragmentation. We believe this allows our customers to successfully expand their marketing and advertising engagement, loyalty, and sales efforts through the mobile channel. We intend to continue developing our technology through our internal development activities to enhance our technology platform.
In July 2011, we acquired JAGTAG, Inc. (“JAGTAG”), which added patents detailing the implementation of apparatuses, methods, and systems for information querying and serving on mobile and consumer Internet based on profiles. We have leveraged profile information to serve context, demographic, and behavior targeted information to users on the mobile Internet.
In May 2012, we acquired five additional issued U.S. patents through our acquisition of GEOS Communications IP Holdings, Inc. (“GEOS”). These patents cover Voice over Internet Protocol (“VoIP”) and other critical mobility inventions.
We have one active and one stayed patent infringement lawsuit based on our intellectual property. Pending patent infringement lawsuits and related matters are described in the section of this prospectus entitled “Legal Proceedings.”
Employees
At February 28, 2014, we had approximately 120 employees, including, sales, client services, technology development and information technology, executive management, accounting, and administration. None of our employees are represented by a labor union or covered by a collective employment agreement. We believe relations with our employees are satisfactory.
Our headquarters are located at 110 110th Avenue NE, Bellevue, Washington, where we lease 13,550 square feet of space for sales, client services, technical and administrative personnel under a lease that expires in June 2019. Additionally, we lease 11,850 square feet of space at 350 Seventh Avenue, 2nd Floor, in New York City, New York, for sales and client services personnel under a lease that expires in November 2014. We lease 8,452 square feet of office space in Atlanta, Georgia, for technical, sales and production personnel. This lease expires in November 2015. Additional satellite sales offices are located in Chicago, Illinois, Los Angeles, California, San Francisco, California and Dallas, Texas. The satellite offices are all less than 1,000 square feet.
In the normal course of business, we may become involved in various legal proceedings. Except as stated below, we know of no pending or threatened legal proceeding to which we are or will be a party that, if successful, might result in a material adverse change in our business, properties or financial condition.
Augme Technologies, Inc. v. AOL, Inc. and Time Warner, Inc., Civil Action No. 1:12-cv-05439-CM (transferred from Civil Action No. 1:09-cv-04299-RWS (S.D.N.Y.)), a patent infringement and trademark infringement lawsuit pending in the U.S. District Court for the Southern District of New York (transferred from the U.S. District Court for the Central District of California) since September 10, 2008.
The case is a patent infringement case originally filed by Augme against AOL, Inc. and Time Warner, Inc. in the Central District of California and subsequently transferred to the Southern District of New York. It also originally included a trademark infringement action against AOL, Inc. for use of the BOOMBOX trademark which has subsequently been dismissed. In its patent infringement claim, Augme sought both monetary relief for patent infringement damages and injunctive relief against further infringement by AOL and Time Warner. The AOL defendants and Augme agreed to settle litigation between themselves and, on February 26, 2013, the case was dismissed between those parties. The stayed case remains pending against Time Warner, Inc. Below is a summary of the current status of this case.
With regard to the patent infringement claims, Time Warner filed a Motion for Judgment on the Pleadings on September 27, 2012, and, shortly thereafter, a Motion for Rule 11 Sanctions on October 23, 2012. On October 26, 2012, the Court suasponte stayed the case regarding any claims related to U.S. Patent No. 7,269,636 (“'636 patent”), pending the outcome of the ongoing reexamination of that patent by the U.S. Patent and Trademark Office. Because the remaining patent-in-suit, U.S. Patent Nos. 6,594,691 (“'691 patent”), is closely related to the '636 patent, Augme moved to stay the case in its entirety on November 5, 2012. On December 20, 2012, Judge McMahon denied Augme's motion to stay as to the '691 patent and did not disturb the preexisting stay as to the '636 patent.
Because of Judge McMahon's requirement that all discovery in the case be completed by the end of February 2013 and given that discovery as to the '691 patent would be totally duplicative of discovery which would have to be conducted later as to the '636 patent, on January 7, 2013, Augme filed a covenant not to sue defendants on the '691 patent and a motion to dismiss the '691 patent from the case. Based on the pendency of the motion to dismiss, on January 11, 2013, Magistrate Judge Gabriel Gorenstein adjourned all further discovery as to the '691 patent.
On January 16, 2013, Judge McMahon entered an order dismissing the '691 patent from the case and maintaining the stay as to the '636 patent. She placed the case on suspension and denied Time Warner's pending motions without prejudice.
The AOL defendants and Augme agreed to settle the litigation as between Augme, on the one hand, and AOL, Inc. and AOL Advertising, Inc., on the other. Accordingly, on February 6, 2013, Augme and the AOL defendants filed a Joint Motion for Stipulated Dismissal of the case as between those parties. On February 26, 2013, Judge McMahon entered an Order of Dismissal as to the parties, AOL, Inc. and AOL Advertising, Inc. The stayed case remains pending against Time Warner, Inc.
Augme Technologies, Inc. v. Yahoo! Inc., Civil Action No. 3:09-cv-05386-JCS, a patent infringement lawsuit pending in the U.S. District Court for the Northern District of California since November 16, 2009. On December 21, 2010, Yahoo! filed a first amended answer to Augme's complaint, in which Yahoo! asserted its own counterclaim against Augme alleging infringement of, inter alia, U.S. Patent Nos. 7,640,320 (“'320 patent”) and 7,512,622 (“'622 patent”). On August 21, 2012, the parties stipulated to dismissal of Yahoo's claim for infringement of the '622 patent with prejudice.
This case is a patent infringement lawsuit brought by Augme against Yahoo, Inc. Yahoo has also counterclaimed for patent infringement. In this case, Augme is seeking monetary relief for patent infringement damage and injunctive relief against future infringement. A summary of the case is set forth below.
With respect to Augme's claims of patent infringement, on June 11, 2012, Yahoo! renewed its Motion for Summary Judgment of non-infringement. The Court heard argument on the summary judgment issues on July 20, 2012. On August 8, 2012, the Court granted Yahoo!'s Motion for Summary Judgment of non-infringement, dismissing Augme's patent claims against Yahoo! and declining to address Augme's previously filed Motion for Partial Summary Judgment of validity. Based on the Court's summary judgment order, Augme moved for Entry of Judgment under Rule 54(b). Yahoo! opposed Augme's motion in light of the pending counterclaim for infringement of the '320 patent. Nonetheless, Augme's motion was granted by the Court on October 29, 2012, and final judgment was entered shortly thereafter on November 15, 2012. On December 12, 2012, Augme filed a Notice of Appeal as to the judgment as to the Augme patent. The appeal was docketed by the Federal Circuit on December 19, 2012.
With respect to Yahoo!'s counterclaim regarding infringement of the '320 patent, the parties agreed to and filed a stipulation of non-infringement of this patent on December 13, 2012, under the Court's claim construction ruling of January 3, 2012. The parties also stipulated to entry of judgment under Rule 54(b) and 28 U.S.C. § 1292(c)(2), which permits the entry of judgment in patent cases “which … [are] final except for an accounting.” The parties also requested that the Court stay the remainder of the case pending Augme's appeal to the Federal Circuit Court of Appeals. The Court signed such an order on December 13, 2012, and entered it the next day. Augme filed with the district court a Notice of Appeal to the Federal Circuit Court of Appeals as to Yahoo!'s '320 patent judgment on January 11, 2013. The second appeal was docketed by the Federal Circuit on February 6, 2013 and consolidated with the prior appeal. Briefing on the appeals was completed by September 6, 2013. Oral argument before the Court of Appeals was held on December 5, 2013 and the parties are awaiting the Court's decision.
Brandofino Communications vs. Augme Technologies, Inc. Civil Action No. 652639/2011. On September 27, 2011, Brandofino Communications, Inc. (“Brandofino”) filed suit against Augme and New Aug LLC in the Supreme Court of the State of New York, New York County. The complaint alleges, inter alia, breach of contract and unjust enrichment claims arising from work Brandofino allegedly performed for Augme pursuant to a marketing agreement entered into by Brandofino and Augme. The complaint seeks damages in excess of $1.0 million. Augme has served its Answer and set forth counterclaims for breach of contract, unfair competition, tortious interference with business relations, and violations of New York General Business Law Section 349 (relating to violations of Augme's intellectual property rights). The Company intends to vigorously defend against Brandofino's claim and pursue its counterclaims.
Shaub & Williams, L.L.P., vs. Augme Technologies, Inc. Civil Action No. 1:13-cv-01101-GBD. Augme's prior counsel, Shaub & Williams, LLP (“S&W”), filed a Complaint in the United States District Court for the Southern District of New York seeking recovery on a quantum meruit (value of services) basis attorney's fees in the amount of $2,249,686.25 for its prior representation of Augme in litigation. Augme has denied the allegations in the Complaint and have alleged that it has paid all fees due to S&W. The Company also asserted a breach of contract counterclaim, alleging that S&W overbilled Augme and should be refunded some of the attorney's fees already paid to S&W. The parties are currently conducting discovery, and the court recently issued new discovery deadlines—fact discovery shall be completed by May 30, 2014, and expert discovery by July 15, 2014. The court has declined to set a trial date at this time.
Leibsohn, et al. v. Hipcricket, Inc. (FKA Augme Technologies), et al., No. 13-2-40007-3 (King Cty. Sup. Ct.): On November 25, 2013, stockholders of the former Hipcricket, Inc. who were stockholders when Augme purchased the assets of Hipcricket, Inc. in August 2011 filed a lawsuit in King County Superior Court alleging that Augme and its board of directors at the time made false statements which induced the plaintiff stockholders to approve the asset purchase transaction. The lawsuit asserts claims under the Washington State Securities Act as well as common-law claims for intentional misrepresentation and negligent misrepresentation. Plaintiffs seek to rescind the asset purchase transaction or obtain a “rescissionary measure of damages,” as well as compensatory damages, interest and attorneys' fees. On March 3, 2014, defendants filed a motion to dismiss the action in its entirety, and that motion will be fully briefed by April 23, 2014. An oral argument on the motion to dismiss took place on May 9, 2014. The Court took the matter under advisement and did not issue any order. The parties await the Court’s decision. Defendants intend to continue to vigorously defend the action. The Company cannot at this time estimate any potential loss that may result from this litigation.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of 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 prospectus. 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 prospectus.
Overview
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 Company 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 engage customers, drive loyalty and increase sales. Our proprietary AD LIFE software-as-a-service platform (the “Platform”) creates measurable, real-time, one-on-one relationships between companies and their current and prospective customers using text messages, multimedia messages (“MMS”), mobile web sites, mobile applications, mobile coupons, quick response (“QR”) codes and via advertising, from a single, scalable, self-service access point. The Platform allows customers to quickly plan, create, test, deploy, monitor, measure and optimize interactive mobile marketing and advertising campaigns throughout the campaign lifecycle across nearly every major mobile channel. 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. The Platform features a rich analytics engine that sources real-time campaign data in addition to third party and client information, to personalize mobile marketing and advertising campaigns. Our current database consists of detailed profiles of millions of mobile phone numbers, which, by employing third party data, can be turned into virtually unlimited segments. These data help advertisers to understand the most effective use of advertising resources and help optimize their marketing spend. Our products serve marketers, brands and ad agencies in many vertical markets, including automotive, retail, consumer products, food and beverage, media and broadcast, pharmaceutical and restaurant brands.
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 selective 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, | |
| | | | | | | |
| 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 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 that 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 our audited financial statements 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 our audited financial statements.
Results of Operations
The discussions below are not necessarily indicative of the results, which may be expected for any subsequent periods and pertains only to the results of operations for the fiscal years ended February 28, 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 Fiscal Year ended February 28, 2014 to Fiscal Year Ended February 28, 2013
Revenue
Revenues are 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 year ended February 28, 2014, revenues were $26.7 million compared to $26.2 million in the year ended February 28, 2013, an increase of 2%. Revenue for fiscal year 2014 was adversely affected by the enactment of new Telephone Consumer Protection Act (“TCPA”) regulations in October 2013, which required us to divert our sales, marketing, and engineering and operations personnel to assist customers required to take action to re-opt in subscribers to the customers' SMS marketing databases. Our product and technology teams also completed a data center move requiring significant product and technical support. Additionally, we had turnover in our sales force as we replaced underperforming personnel, which resulted in lead time for new salespeople to reach full productivity. We believe that the impact of these events is substantially behind us as of the end of fiscal 2014. During the year ended February 28, 2014, approximately 15% of our revenues were generated by three customers. 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 repeat business on our Saas-based mobile marking revenues and we will continue to focus on growing this business. At the same time, we expect mobile brand advertising business to expand at a faster pace than 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 revenues includes the costs of hosting, short codes and mobile ad inventory. For the year ended February 28, 2014, cost of revenue increased 20% to $12.4 million from $10.4 million in the prior fiscal year, 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 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 year ended February 28, 2014, operating expenses decreased a total of $42.9 million to $36.6 million compared to $79.4 million for the year ended February 28, 2013. Fiscal year 2014 included $3.5 million for impairment of intangible assets compared to $38.1 million for fiscal year 2013 for impairment of goodwill, intangible assets and investments including certain patent litigation cases. Excluding these charges, the decrease in operating expenses was primarily attributed to lower staffing levels compared to a year ago, resulting from the implementation of our restructuring plan adopted in September 2012.
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 and bonuses. Additional expenses include marketing programs, consulting, and travel. Sales and marketing expenses were $11.9 million for the year ended February 28, 2014 compared with $15.1 million for the year ended February 28, 2013, a decrease of $3.2 million, or 21%. 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. We anticipate expanding our sales force in fiscal 2015 to continue driving adoption of our Platform and increase revenue.
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 $693,000, or 9%, in these expenses to $6.8 million at February 28, 2014 compared to $7.5 million at February 28, 2013. The decrease is primarily a result of lower personnel costs associated with downsizing the Tucson office.
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 decreased $3.5 million, or 27%, to $9.2 million at February 28, 2014 compared to $12.7 million at February 28, 2013. The decrease is a result of lower personnel costs from headcount reductions, including the downsizing of our patent development and Tucson office, reducing our patent enforcement efforts, lower travel and outside service expenses, as well as reducing redundancies from our business acquisitions.
Depreciation and Amortization. Depreciation and amortization expense of $5.2 million for the year ended February 28, 2014 decreased by approximately $830,000 from $6.0 million for the year ended February 28, 2013. This decrease is primarily related to the amortization of fewer intangible assets compared to the prior year.
Impairment of goodwill and intangible assets. Impairment of goodwill, intangible assets and investments was $3.5 million for the year ended February 28, 2014 compared to $38.1 million for the year ended February 28, 2013. The decrease primarily resulted from lower write downs of intangible assets and no write downs of goodwill, compared to the prior year. The impairment charge for fiscal year 2014 was primarily attributed to the write down of our GEOS and JAGTAG IP assets of $3.0 million. During the fiscal year ended February 28, 2013 we wrote down $25.9 million of goodwill. During fiscal year 2013 we settled, dismissed, or abandoned certain litigation efforts to reduce our ongoing legal costs and wrote down the capitalized cost of these cases, resulting in an impairment charge of $3.5 million during the fiscal year ended February 28, 2013. Additionally, as a result of our decision in fiscal 2013 to explore opportunities to market and sell the rights to the GEOS and JAGTAG IP assets that are not core to our operations and as part of our impairment assessment of these intangible assets, we concluded that the carrying value for these assets were impaired and wrote down these assets by $8.4 million for the fiscal year 2013.
Other Income (Expense)
Other expense for the year ended February 28, 2014 was approximately $52,000 compared to other income of $12.1 million for the year ended February 28, 2013. Other income for fiscal year 2013 reflects a non-cash adjustment in the estimated fair value of acquisition-related contingent consideration paid to Hipcricket stockholders resulting from the difference between the contractual price used to calculate payments compared to the price of our common stock on the measurement date.
Income Tax Benefit
We recognized $115,092 in income tax benefits during the year ended February 28, 2014, compared to income tax benefits of $2.6 million for the year ended February 28, 2013. Income tax benefits recognized in fiscal year 2013 represent the income tax benefits associated with the reduction of our valuation allowance against the net deferred tax asset. As a result of our acquisition of GEOS during fiscal year 2013, certain deferred income tax liabilities were recognized, resulting in a reduction of our required valuation allowance.
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 not 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 circumstances indicate that the carrying amount of an asset may not be fully recoverable. If undiscounted expected cash flows to be generated by a long-lived asset or asset group are less than its carrying amount, we record an impairment to write down the long-lived asset or asset group to its estimated fair value. Fair value is estimated based on discounted expected future cash flows.
The estimated cash flow of our patents includes the expected proceeds to be received through a sale, exclusive license agreement and royalties that would have been paid to a third party had we not owned the patents. The expected proceeds to be received through a sale do not include an estimate of contingent fees to be received by us related to participating in future licensing fees received by a purchaser, if any, under future settlement or royalty arrangements in which they pursue. Such fees are considered contingent gains and would be recognized when earned.
Share-Based Payments. The fair value of our share-based payments for stock options and stock warrants granted to employees, directors, and other service providers is estimated at the measurement date based on the award's fair value as calculated by the Black-Scholes-Merton (“BSM”) option-pricing model and is recognized as expense over the requisite service period using a straight line method. The BSM model requires various highly judgmental assumptions including expected volatility and option life. We estimate the forfeiture rate based on historical experience. To the extent our actual forfeiture rate is different from our estimate, share-based payment expense is adjusted accordingly in that period.
Revenue Recognition. We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.
We provide access to our AD LIFE Platform and services through term license fees, support fees, and mobile marketing campaign fees. The contracts generally include multiple elements as part of the overall service delivery and revenues are generally recognized over the term of the service period or as the related services are provided. We also offer professional services related to the strategy and execution of mobile marketing campaigns. Professional services revenue is recognized as the services are performed as these services have value on a standalone basis, do not involve unique acceptance criteria.
Contracts may also include deliverables such as production and delivery of online media content, hosting, fees from content retention, delivery, custom solution creation, or placement of mobile or online advertising content. Revenues from contracts with multiple deliverables for the production and delivery of online media content and hosting are recognized over the term of the media content production, delivery or hosting period. For deliverables that do not have stand alone value, that are delivered in conjunction with a term license, support or hosting arrangement, we recognize the related revenues over the related license term, support or hosting service period.
When contracts include multiple deliverables, revenue is allocated to each respective element that is determined to have stand alone value. When these multiple deliverables can be separated into different units of accounting, we allocate the arrangement consideration to the identified separate units of accounting based on their relative selling price. Accounting guidance for multiple-deliverable arrangements provides a hierarchy to use when determining the relative selling price for each unit of accounting. We use vendor-specific objective evidence (“VSOE”) of selling price, based on the price at which we regularly sell the item on a standalone basis, if it exists. If VSOE of selling price is not available, third-party evidence (“TPE”) of selling price is used to establish the selling price if it exists. If VSOE or TPE of selling price are not available, the best estimate of selling price (“BESP”) is used. Allocation of revenue to deliverables of an arrangement is based on the VSOE for professional services revenues and on BESP for all other elements being sold on a stand-alone basis. We evaluate BESP by reviewing historical data related to sales of our deliverables.
Revenues from the creation of custom software are generally a component of contracts that include hosting and/or production and delivery services. We allocate revenues on multiple element arrangements between the software and non-software deliverables using VSOE or BESP, depending on the nature of the multiple deliverables. Software revenues are recorded when the software is completed and accepted by the client if the software has free standing functionality, the fee for the software is separately determinable and we have demonstrated our capability of completing any remaining terms under the contract. Otherwise all revenues under the multi-deliverable contracts are recognized over the term of the production and content delivery or hosting period.
Fixed-price contracts for the creation of custom software are typically of a duration of less than one year and are accounted for using the percentage-of-completion method. We use the percentage-of-completion method of accounting because we believe it is the most accurate method to recognize revenue based on the nature and scope of these service contracts; we believe it is a better measure of periodic income results than other methods and better matches revenue recognized with the costs incurred. Percentage of completion is measured based primarily on input measures such as hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. Significant judgment is required when estimating total hours and progress to completion on these arrangements which determines the amount of revenue we recognize as well as whether a loss is recognized if one is expected to be incurred for the remainder of the project. Revisions to hour and cost estimates are incorporated in the period in which the facts that give rise to the revision become known.
Revenues for producing interactive advertising content are based upon fees for the production and hosting of the advertising content and/or a percentage of the fees paid by third party advertisers. Revenues from third parties for the production and hosting of the advertising content are recorded pro rata over the related hosting period. Revenues representing a percentage of the fees paid by third party advertisers for advertising on third party or company websites are recorded when the contractual criteria has been met and amounts are due from third party advertisers.
Off-Balance Sheet Arrangements
As of February 28, 2014, we did not have off-balance sheet arrangements that are reasonably likely to have a material effect on our financial condition.
Recently Issued Accounting Standards
See Note 2: “Summary of Significant Accounting Policies – Recently Issued Accounting Standards” of the notes to our audited financial statements included elsewhere in this prospectus.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock, $0.0001 par value, is quoted on both the OTCBB and the OTCQB under the symbol “HIPP.” The following table sets forth the quarterly high and low sales prices for our common stock during the quarters indicated below, as reported on the OTCBB. This information reflects inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions.
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First quarter ended May 31, 2013 | | $ | 0.49 | | | $ | 0.31 | |
Second quarter ended August 31, 2013 | | | 0.45 | | | | 0.26 | |
Third quarter ended November 30, 2013 | | | 0.67 | | | | 0.38 | |
Fourth quarter ended February 28, 2014 | | | 0.54 | | | | 0.21 | |
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First quarter ended May 31, 2012 | | $ | 2.57 | | | $ | 1.82 | |
Second quarter ended August 31, 2012 | | | 2.38 | | | | 1.32 | |
Third quarter ended November 30, 2012 | | | 1.45 | | | | 0.50 | |
Fourth quarter ended February 28, 2013 | | | 0.90 | | | | 0.27 | |
On May 12, 2014, the closing sales price of our common stock on the OTCBB was $0.27
Holders
As of May 1, 2014, we had 455 holders of record of our common stock, according to a stockholder's list provided by our transfer agent as of that date. Because many of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of individual stockholders represented by these holders of record. The transfer agent for our common stock is Manhattan Transfer Registrar Co., 57 Eastwood Road, Miller Place, New York 11764.
Dividends
We have never declared nor paid any cash dividends on our common stock and we do not anticipate that we will pay any cash dividends on our common stock in the foreseeable future. In addition, covenants in our financing facility with SVB limit our ability to pay cash dividends.
The following table identifies our executive officers and directors, their ages, their respective offices and positions, and their respective dates of election or appointment.
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Ivan E. Braiker | | | 63 | | President and Chief Executive Officer and Director |
Thomas J. Virgin | | | 59 | | Chief Financial Officer |
Douglas Stovall | | | 45 | | Chief Operating Officer |
Michael Brochu | | | 60 | | Director, Compensation Committee Chair |
John M. Devlin, Jr. | | | 69 | | Director, Audit Committee Chair |
Donald E. Stout | | | 68 | | Director |
Todd E. Wilson | | | 42 | | Chairman of the Board and Corporate Secretary |
Executive Officers
Ivan E. Braiker, President and Chief Executive Officer and Director
Ivan Braiker has been a director and our President since August 2011 and was appointed Chief Executive Officer in March 2013. Mr. Braiker has over 30 years of executive management experience in broadcasting and media. Earlier in his career, he earned Billboard Magazine’s Trendsetter of the Year award. He was a co-founder and Chief Executive Officer of Hipcricket, Inc., a position he held from August 2004 until we acquired the assets and business of Hipcricket, Inc. in August 2011. From 2002 to 2003, he held the position of President of Streamline Publishing and was co-founder and President of New Northwest Broadcasters from 1998 through 2002. We believe that Mr. Braiker’s executive management experience in the mobile marketing and advertising business as the co-founder and Chief Executive Officer of Hipcricket, Inc., among other media companies, makes him qualified to serve as a director.
Thomas J. Virgin, Chief Financial Officer
Prior to accepting the position as our Chief Financial Officer in October 2011, Mr. Virgin was the Chief Financial Officer with Hipcricket, Inc., a position he held since May 2007. Prior to joining Hipcricket, Inc., from March 2005 to May 2007, Mr. Virgin was the Executive Vice President and Chief Financial Officer for Talyst Inc., which provided software and equipment solutions to improve efficiency and patient safety at acute care hospitals, health delivery networks and long-term-care pharmacies. Before his employment with Talyst Inc., Mr. Virgin was Chief Financial Officer and Vice President of Finance and Administration at WizKids, a Washington-based company that created and sold collectible miniature games. Mr. Virgin joined WizKids in 2001, and in 2003 he assisted with the sale of WizKids to Topps Co. Mr. Virgin started his career in public accounting by performing audit and tax work for companies in a variety of industries. He spent more than 16 years (1983 to 1999) at Seafirst Bank (now Bank of America), where he was Senior Vice President and Controller. From there, he was appointed Chief Financial Officer at T&W Financial Services Corporation, a commercial leasing company (1999 to early 2000). He subsequently served as interim Chief Financial Officer for two software companies, ThinkShare (in 2000) and Versidata Systems (2000 - 2001), where he was responsible for raising capital and financial operations.
Douglas Stovall, Chief Operating Officer
Douglas Stovall has been our Chief Operating Officer since June 2013. Mr. Stovall joined the Company in January 2010 and has over twenty years of experience in creating and directing mobile sales, product and services. Prior to his appointment as Chief Operating Officer, he had served as the Company’s Executive Vice President – Sales and Services since July 2012 and was Senior Vice President – Sales from January 2010 to June 2012. Mr. Stovall was Vice President, Mobile Business Development with Merkle Inc., a customer relationship marketing agency, from September 2009 to November 2009. Prior to that, Mr. Stovall served as Vice President, Sales with Acuity Mobile, a mobile marketing and mobile advertising company (acquired by NAVTAQ, a Nokia Company), from August 2007 to September 2009. Mr. Stovall holds an MBA with a, n emphasis in Organization and Operations Management from William Carey College, and a BS in Psychology from the University of Southern Mississippi.
Non-Employee Directors
Michael Brochu, Director, Compensation Committee Chairman
Michael Brochu has been a director since June 17, 2013. He is a seasoned technology executive with over 20 years of senior-level experience at a variety of global companies. From November 1997 until its acquisition in November 2004 by Art Technology Group, Inc., Mr. Brochu served as the President, Chief Executive Officer and Chairman of the Board of Primus Knowledge Solutions, Inc., an award-winning provider of e-service software solutions. Mr. Brochu was a member of the board of directors of Art Technology Group from November 2004 until its acquisition by Oracle Corporation in January 2011. Beginning in December 2003, Mr. Brochu served as a director of Loudeye Corp., a global leader of digital music platforms and digital media distribution services, and beginning in February 2005, as its President and Chief Executive Officer. In October 2006, Loudeye Corp. was acquired by Nokia Corp. Mr. Brochu left Nokia Corp. in December 2006. From June 2007 until its acquisition in September 2011 by WPP PLC, Mr. Brochu served as President, Chief Executive Officer and a director of Global Market Insite, Inc., a developer of digital technology platforms serving the market research industry. Mr. Brochu is currently a member of the board of directors for Centro Digital Media, Vines of Mendoza and Zotec Partners, each privately held, and GraphOn, Inc., a public company. He is also a member of the Operating Committee of BelHealth Investment Partners, a private equity firm specializing in healthcare, and is on the advisory board of Seattle-based venture capital firm Voyager Capital. Mr. Brochu holds a BBA in Finance/Accounting from the University of Texas at El Paso. We believe that Mr. Brochu’s extensive technology industry leadership and business and financial experience makes him well-qualified to serve as a director.
John M. Devlin, Jr., Director, Audit Committee Chairman
John Devlin has served as a director since March 2009. Mr. Devlin has been in the investment and asset management business for over 24 years. Before retiring from J.P. Morgan Investment Management in December 2003, he was a Senior Portfolio manager for 10 years, responsible for directing investment activity, providing pension asset and liability advice as well as tactical and strategic portfolio management for institutional relationships with over $20 billion in assets. Mr. Devlin was also the Committee Chairman for client portfolio guidelines, compliance and performance review for J.P. Morgan accounts with an asset size over $200 billion. Throughout his career at J.P. Morgan, Mr. Devlin worked in all aspects of the investment and asset management business in areas such as fixed income trading and portfolio management. Mr. Devlin is currently Managing Director of Curraugh Capital Advisors, LLC, an advisory firm, a position that he ahs sind since October 2011. From November 2008 to November 2011, Mr. Devlin was Managing Director of the American Irish Historical Society where he was responsible for managing day-to-day operations of the Society, including banking relationships, financial reporting, administration, and trustee and fund raising relationships. From October 2003 to October 2008, Mr. Devlin was the Vice Chairman of McKim & Company LLC where he was responsible for providing strategic planning and direction for McKim & Company, a venture capital source firm for start-up companies in the $1 million to $20 million bracket. Mr. Devlin also serves on the Board of Directors of Spindle Inc., a mobile payment solutions company listed on the Over-the-Counter Bulletin Board. Mr. Devlin received an MBA from Pace University in 1976 and completed his undergraduate degree in Finance at Georgetown University in 1967. We believe that Mr. Devlin’s education and experience in the finance industry makes him qualified to serve as a director.
Donald E. Stout, Director
Donald Stout has served as a director since January 2011. Mr. Stout is a member of the bars of the District of Columbia and Virginia, and he is admitted to practice before the Supreme Court of the United States, the Court of Appeals for the Federal Circuit, the Fifth Circuit of Appeals, and the U.S. Patent and Trademark Office (“USPTO”). From 1972 to the present, Mr. Stout’s legal practice has involved all facets of intellectual property, including litigation, the provision of expert witness opinions, and the licensing and representation of clients before the USPTO in diverse technological areas, including telecommunications. He has testified as an expert witness regarding obtaining and prosecuting patents. Mr. Stout has written and prosecuted hundreds of patent applications in diverse technologies and has also rendered opinions on patent infringement and/or validity. Mr. Stout has been a senior partner at the law firm of Antonelli, Terry, Stout and Kraus, LLP since 1982. He earned his J.D. degree (with honors) from George Washington University in 1972. Mr. Stout was employed by the USPTO from 1968 to 1972 as an assistant examiner involved with patent applications covering radio and television technologies. He interpreted complex technical disclosures in patents and publications involving communications technology and theory, along with principles of electrical engineering, as part of his responsibilities with the USPTO. In 1972, Mr. Stout worked as a law clerk for two former Board members of the USPTO Board of Appeals, where he assisted in deciding issues of patentability for applicants who appealed previous decisions. We believe that Mr. Stout’s extensive experience in the field of patents and intellectual property makes him well-qualified to serve as a director.
Todd E. Wilson, Chairman of the Board and Corporate Secretary
Todd Wilson has served as a director since June 2010. Mr. Wilson brings more than 16 years of experience as an investor, board member and advisor to middle-market companies. He currently serves as a Partner at Crane Street Capital, a California-based investment firm. From July 2010 to September 2011, Mr. Wilson held the position of Managing Director for the Office of Small Business Services for the City of Los Angeles. From July 2002 to December 2009, he served as a principal in the private equity group at American Capital, Ltd. Previously, from June 1999 to June 2002, he served as a principal with Wind Point Partners, a Chicago- based private equity firm with over $1.0 billion of capital under management. During his tenure as an equity investor, Mr. Wilson has worked closely with companies to maximize shareholder value and provide significant returns on corporate investments. Mr. Wilson also served as an investment banker at Merrill Lynch from July 1993 to June 1995 and Montgomery Securities from July 1995 to February 1997. We believe Mr. Wilson’s education and experience in the finance industry makes him qualified to serve as a director.
Board Composition and Election of Directors and Officers
Our board of directors is currently consists of five members. Pursuant to the terms of our certificate of incorporation, our board of directors is divided into three classes, Class I, Class II and Class III, with members of each class serving staggered three year terms. The members of the classes are divided as follows:
| Class I consists of Messrs. Braiker and Brochu, each with a term expiring at the 2014 annual meeting of stockholders; |
| Class II consists of Messrs. Stout and Wilson, each with a term expiring at the 2015 annual meeting of stockholders; and |
| Class III consists of Mr. Devlin, with a term expiring at the 2016 annual meeting of stockholders. |
Upon the expiration of the term of a class of directors, directors in that class will be eligible to be elected for a new three-year term at the annual meeting of stockholders in the year in which their term expires.
There is no arrangement or understanding between any of our directors or officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer.
Director Independence
Our board of directors has determined that each of our directors, other than Messrs. Braiker and Wilson, is independent under the listing standards of the Nasdaq Stock Market. There are no family relationships among our directors and executive officers.
Board Committees
Our board of directors has established an audit committee and a compensation committee. Each committee operates under a charter that has been approved by our board of directors. Copies of the committee charters are posted on the “Investors-Corporate Governance” section of our website, www.hipcricket.com.
John M. Devlin, Jr. (chair) and Todd Wilson are the members of the Audit Committee. The Audit Committee’s function is to oversee our accounting and financial reporting processes, internal systems of control, independent auditor relationships and the audit of our financial statements. Our board of directors has determined that Mr. Devlin is an audit committee financial expert within the meaning of Rule 407(d)(5) of SEC Regulation S-K and is independent under the Nasdaq listing rules applicable to audit committee members. Mr. Wilson is not independent under the Nasdaq listing rules applicable to audit committee members.
Michael Brochu (chair), John M. Devlin, Jr., and Donald Stout are the members of the Compensation Committee. The purpose of the Compensation Committee is to aid the board of directors in meeting its responsibilities with regard to oversight and determination of executive compensation. Among other things, the Compensation Committee reviews, recommends and approves salaries and other compensation of our executive officers, administers our equity incentive plans (including reviewing, recommending and approving stock option and other equity incentive grants to executive officers), and administers the executive officer incentive plans. Messrs. Devlin and Stout, but not Mr. Wilson, are independent under the Nasdaq listing rules applicable to compensation committee members.
Nominations to the Board of Directors
Our board of directors currently performs the functions of a corporate governance and nominating committee, the purpose of which is to identify individuals qualified to become members of our board of directors consistent with criteria set by our board and to develop our corporate governance principles. The board has not adopted procedures pursuant to which security holders may recommend nominees to the board of directors and there has been no material change to this.
The following table sets forth certain information regarding compensation for our Chief Executive Officer, our Chief Financial Officer, and our Chief Operating Officer (collectively, the “Named Executive Officers”) for the fiscal years presented below.
Name and Principal Position | | | | | | | | | | | | All Other Compensation ($) | | | | |
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| Ivan E. Braiker (4)President and Chief Executive Officer and Director | 2014 | | | 324,500 | | | | 30,000 | | | | 30,630 | | | | 24,156 | (5) | | | 409,286 | |
| 2013 | | | 284,750 | | | | — | | | | — | | | | 1,477,742 | (6) | | | 1,762,492 | |
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Thomas J. Virgin Chief Financial Officer | 2014 | | | 270,278 | | | | — | | | | 23,483 | | | | 20,525 | (7) | | | 314,286 | |
| 2013 | | | 225,631 | | | | — | | | | — | | | | 875,724 | (8) | | | 1,101,355 | |
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Douglas Stovall (9) Chief Operating Officer | 2014 | | | 258,750 | | | | 10,000 | | | | 96,483 | | | | 81,049 | (10) | | | 446,282 | |
| (1) | Represents salary paid during the fiscal year indicated. |
| (2) | Reflects a discretionary bonus paid during the fiscal year indicated. |
| (3) | Reflects the aggregate fair value of stock options on the grant date in accordance with FASB ASC Topic 718. These amounts are not paid to and may not be realized by the Named Executive Officer. Assumptions used in the calculation of these values are included in Note 8 to our audited financial statements included in this prospectus. |
| (4) | Mr. Braiker was appointed Chief Executive Officer on March 1, 2013 and has served as President since August 25, 2011. |
| (5) | Amount includes reimbursement of $16,500 for a voluntary salary decrease during January 2013 through March 2013 and $7,656 for reimbursement of medical and disability insurance premiums. |
| (6) | Amount represents earn-out compensation of $726,201 and tax gross-up of $751,540 paid in connection with the Hipcricket acquisition. |
| (7) | Amount includes reimbursement of $13,200 for a voluntary salary decrease during January 2013 through March 2013, and $7,325 for reimbursement of medical insurance premiums. |
| (8) | Amount represents earn-out compensation of $542,241 and tax gross-up of $333,483 paid in connection with the Hipcricket acquisition. |
| (9) | Mr. Stovall was appointed Chief Operating Officer on June 17, 2013 and served as Executive Vice President - Sales and Service prior to his appointment as Chief Operating Officer. As Chief Operating Officer, Mr. Stovall received a base salary of $275,000 per year for fiscal year 2014. |
| (10) | Amount includes commission payments of $73,724 under Mr. Stovall's commission plan in effect prior to his appointment as Chief Operating Officer and $7,325 for reimbursement of medical insurance premiums. |
Employment Agreements and Compensation Arrangements
On April 1, 2014, the Board of Directors of the Company, upon the recommendation of the Compensation Committee of the Board, approved amendments to the employment agreements with each of the Named Executive Officers and also approved the following compensatory plans: (1) the 2014 Equity Incentive Plan; (ii) the 2014 Incentive Compensation Plan; and (iii) the Transaction Bonus Plan.
A description of the employment agreements, as amended, and each of the recently approved compensatory plans is set forth below.
Employment Agreement with Ivan E. Braiker
On August 25, 2011, we entered into an employment agreement with Ivan E. Braiker, which was subsequently amended on November 28, 2011, May 7, 2013, July 5, 2013, and April 1, 2014, pursuant to which Mr. Braiker will be employed by us for an initial term of three years as our President prior to March 1, 2013 and as our Chief Executive Officer as of March 1, 2013. As amended on April 1, 2014, the term of Mr. Braiker's employment extends until August 25, 2015. During the first year of Mr. Braiker's employment, he received a base salary of $270,000 per year, which was amended to $300,000 per year on December 1, 2011, and to $330,000 per year on August 26, 2012. In addition to base salary, Mr. Braiker is eligible for an annual performance bonus, consistent with the annual performance bonuses afforded to other senior management employees. Mr. Braiker may receive other adjustments in compensation or a bonus, as determined in the sole discretion of the Board of Directors.
Mr. Braiker received an initial stock option to purchase 235,000 shares of the Company's common stock at an exercise price of $3.04 per share (which was the closing price of the common stock on August 24, 2011, the date the Board of Directors approved the option grant to Mr. Braiker), with 20% of the option shares vesting upon execution of the employment agreement and the balance vesting in equal monthly increments thereafter over a 36-month period. The option has a five year term. The stock option will become fully vested in the event of a Control Change, as defined in the employment agreement. This option was subsequently replaced with a new option having an exercise price of $0.42 per share but the same vesting schedule and expiration date as the original option in connection with the Company's August 2013 tender offer.
The employment agreement also includes provisions governing the termination of Mr. Braiker's employment. If Mr. Braiker's employment is terminated for Just Cause (as defined in the employment agreement), we will be required to pay to Mr. Braiker only that portion of his base salary, accrued but unused vacation pay, and to the extent required under the terms of any benefit plan or the employment agreement, the vested portion of any benefit under such plan, all as earned through the date of termination. If we terminate Mr. Braiker's employment without Just Cause, we will continue to pay to Mr. Braiker his then-current base salary, in accordance with customary payroll practices, plus accrued but unpaid vacation time, accrued but unpaid benefits and reimbursement of all unpaid business expenses (the "Continued Benefits") for a period of the greater of (a) 6 months or (b) the remainder of the employment term, including the 12-month extension until August 25, 2015 (the “Continuation Period”). Mr. Braiker will be entitled to continued participation in all medical and disability plans as if his employment had not terminated until the expiration of the Continuation Period. Mr. Braiker will also be entitled to exercise any unvested stock options and stock purchase rights granted to him and outstanding at the effective date of the termination. If Mr. Braiker terminates his employment for Good Reason (as defined in the employment agreement), we will continue to pay to him the Continued Benefits for the Continuation Period. Mr. Braiker will also be entitled to continued participation in all medical and disability plans, to the extent such plans are provided by us, at the same benefit level at which he was participating on the date of termination until the expiration of the Continuation Period. Mr. Braiker will also be entitled to exercise any unvested stock options and stock purchase rights granted to him and outstanding at the effective date of the termination of the employment agreement.
On April 1, 2014, we entered into an amendment to the employment agreement with Mr. Braiker that (i) extends his employment under the agreement for one subsequent twelve-month term, which commences August 26, 2014 and expires August 25, 2015; (ii) clarifies that in the event of a termination of his employment by the Company without Just Cause or by Mr. Braiker for Good Reason (as defined in the employment agreement), he is entitled to Continued Benefits and continued participation in medical and disability plans for a period equal to the greater of six months or the remaining period of the then current term of employment, including the 12-month extension until August 25, 2015; and (iii) amends certain bonus provisions of his agreement to reference his bonus opportunities under the 2014 Incentive Compensation Plan and the Transaction Bonus Plan, as described below.
Employment Agreement with Thomas J. Virgin
On October 7, 2011, we entered into an employment agreement with Thomas J. Virgin, which was subsequently amended on April 1, 2014, pursuant to which Mr. Virgin will be employed by us as our Chief Financial Officer for an initial term of three years. Mr. Virgin's employment agreement is substantially the same as Mr. Braiker's employment agreement, with the exception of the following: (i) Mr. Virgin's initial annual salary of $240,000 is to be increased by 10% in each of the second and third years of the term, and effective October 7, 2013, was increased to $290,400, subject to a 10% increase upon renewal of the employment agreement for a subsequent term; and (ii) Mr. Virgin received an initial stock option to purchase 100,000 shares of the Company's common stock at an exercise price of $3.10 per share, with 20% of the option shares vesting upon execution of the employment agreement, and the balance vesting in equal monthly increments thereafter over a 36-month period. The stock option will become fully vested in the event of a Control Change, as defined in the employment agreement. This option was subsequently replaced with a new option having an exercise price of $0.42 per share but the same vesting schedule and expiration date as the original option in connection with the Company's August 2013 tender offer.
On April 1, 2014, we entered into an amendment to the employment agreement with Mr. Virgin that (i) extends his employment under the agreement for one subsequent twelve-month term, which commences October 8, 2014 and expires on October 7, 2015; (ii) clarifies that in the event of a termination of his employment by the Company without Just Cause or by Mr. Virgin for Good Reason (as defined in the agreement), he is entitled to certain benefits, including salary continuation and continued participation in medical and disability plans, for a period equal to the greater of six months or the remaining period of the then current term of employment, including the 12-month extension until October 7, 2015; and (iii) amends the bonus provisions of his agreement to provide that he is eligible for bonus opportunities under the 2014 Incentive Compensation Plan and the Transaction Bonus Plan. In the event of termination of employment by the Company without Just Cause or by Mr. Virgin for Good Reason, outstanding stock options held by Mr. Virgin also will become fully vested.
Employment Agreement with Douglas O. Stovall
On June 1, 2013, we entered into an employment agreement with Douglas O. Stovall, which was subsequently amended on April 1, 2014, pursuant to which Mr. Stovall will be employed by us as our Chief Operating Officer for an initial term of fifteen months. Mr. Stovall's employment agreement is substantially the same as Mr. Braiker's employment agreement, with the exception of the following: (i) Mr. Stovall's initial annual salary was $275,000 and effective April 1, 2014, is $300,000; and (ii) Mr. Stovall received a stock option to purchase 500,000 shares of the Company's common stock at an exercise price of $0.39 per share, vesting in equal monthly increments over a 36-month period. The stock option will become fully vested in the event of a Control Change, as defined in the employment agreement. This option was subsequently replaced with a new option having an exercise price of $0.42 per share but the same vesting schedule and expiration date as the original option in connection with the Company's August 2013 tender offer.
On April 1, 2014, we entered into an amendment to the employment agreement with Mr. Stovall that (i) extends the initial term of his employment for one subsequent twelve-month term, which commences September 1, 2014 and expires on August 31, 2015; (ii) increases his salary to $300,000, effective as of April 1, 2014; (iii) clarifies that in the event of a termination of his employment by the Company without Just Cause or by Mr. Stovall for Good Reason (as defined in the agreement), he is entitled to certain benefits, including salary continuation and continued participation in medical and disability plans, for a period equal to the greater of six months or the remaining period of the then current term of employment, including the 12-month extension until August 31, 2015; and (iv) amends his bonus provisions to provide that he is eligible for bonus opportunities under the 2014 Incentive Compensation Plan and the Transaction Bonus Plan. In the event of termination of employment by the Company without Just Cause or by Mr. Virgin for Good Reason, outstanding stock options held by Mr. Virgin also will become fully vested.
2014 Equity Incentive Plan
A total of 12,000,000 shares of the Company's common stock are authorized for issuance under the 2014 Equity Incentive Plan (the “2014 Plan”). The Board and/or the Compensation Committee is authorized to administer the 2014 Plan. Employees, officers, directors, consultants, advisors and independent contractors are eligible to receive awards under the plan. Awards may consist of stock options, stock appreciation rights, stock grants, performance shares, performance units, dividend equivalents or other cash-based or equity awards.
On April 1, 2014, the Board awarded Mr. Braiker a stock option under the 2014 Plan to purchase 1,600,000 shares of the Company's common stock at an exercise price of $0.48 per share, which was in excess of the Company's closing market price of $0.28 on the date of grant. The stock option vests 50% on February 28, 2015 and 50% on February 28, 2016. Vesting of the option accelerates upon a Change of Control of the Company or due to the death or Disability of Mr. Braiker (as the terms “Change of Control” and “Disability” are defined in the 2014 Plan).
2014 Incentive Compensation Plan
Pursuant to the 2014 Incentive Compensation Plan (the “Bonus Plan”), each Named Executive officer will be eligible to receive an annual cash bonus following completion of the fiscal year 2015 based upon the level of achievement of a target revenue goal established by the Board, provided that a threshold performance level of gross margin and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) also are met. For fiscal year 2015, the target bonus opportunity for each Named Executive Officer (as a percentage of his base salary) is as follows: Mr. Braiker (50%), Mr. Stovall (35%) and Mr. Virgin (25%). No fiscal year 2015 incentive bonuses will be paid if the revenue achieved is 80% or less of the target revenue goal or if the threshold performance level of gross margin and adjusted EBITDA are not met.
The Named Executive Officers generally must remain employed with the Company through the end of fiscal year 2015 to be eligible for a bonus under the Bonus Plan, except that if a Named Executive Officer's employment is terminated by the Company without "Cause" or by the Named Executive Officer for “Good Reason” (as the terms “Cause” and “Good Reason” are defined in the Bonus Plan), the Named Executive Officer will be eligible to receive a bonus based on the level of achievement of the revenue goal as of the end of the month in which the termination of employment occurs.
Transaction Bonus Plan
The Board established a Transaction Bonus Plan, pursuant to which each Named Executive Officer will be entitled to receive a bonus of 1% of the Net Consideration (as defined in the plan) in connection with certain transactions resulting in a change in control of the Company, as more specifically set forth in the plan. Payout of a bonus award under the plan is subject to the Named Executive Officer's continued employment with the Company through the closing date of a transaction (if any). However, if a Named Executive Officer's employment is terminated by the Company without Cause or by the Named Executive Officer for Good Reason (as the terms “Cause” and “Good Reason” are defined in the plan) prior to the closing date of a transaction, a bonus award will be paid as though such Named Executive Officer had remained continuously employed through the closing date.
2010 Incentive Stock Option Plan
Option grants made to the Named Executive Officers prior to April 1, 2014 were made under our 2010 Plan, a description of which is provided under Note 8 to our audited financial statements included in this prospectus. In the event a participant's employment terminates by reason of death, “Disability” or “Retirement” (as the terms “Disability” and “Retirement” are defined in the 2010 Plan), outstanding options held by the participant will become fully vested. Options granted under the 2010 Plan also will become fully vested in the event of a “Change in Control” (as defined in the 2010 Plan), unless the plan administrator determines otherwise with respect to an equity award at the time of grant or thereafter.
Other Compensation Arrangements
Our Named Executive Officers are eligible to participate in our 401(k) plan on the same basis as other eligible employees. We do not offer a nonqualified deferred compensation plan or defined benefit pension plan.
The following table sets forth certain information concerning unexercised stock options and warrants for each Named Executive Officer as of February 28, 2014.
| | |
| | | Number of Securities Underlying Unexercised Options (#) | | | | | |
| | | | | | |
| | | | | | | | | | | | |
Ivan Braiker | 3/22/2013 | | | 150,000 | (1) | | | — | | | | 0.49 | | 3/22/2016 |
| | 8/29/2013 | | | 28,630 | | | | 4,943 | (2)(3) | | | 0.42 | | 8/25/2016 |
| | 8/29/2013 | | | 52,084 | | | | 22,917 | (2)(4) | | | 0.42 | | 12/28/2016 |
| | | | | | | | | | | | | | | |
Thomas J. Virgin | 3/22/2013 | | | 115,000 | (1) | | | — | | | | 0.49 | | 3/22/2016 |
| | 8/29/2013 | | | 11,110 | | | | 3,176 | (2)(5) | | | 0.42 | | 10/7/2016 |
| | 8/29/2013 | | | 11,796 | | | | 2,847 | (2)(6) | | | 0.42 | | 8/23/2016 |
| | 8/29/2013 | | | 41,671 | | | | 18,330 | (2)(4) | | | 0.42 | | 12/28/2016 |
| | | | | | | | | | | | | | | |
Douglas O. Stovall | 6/17/2013 | | | 97,222 | | | | 402,778 | (7) | | | 0.39 | | 6/17/2018 |
| | 8/29/2013 | | | 10,645 | | | | 2,570 | (2)(6) | | | 0.42 | | 8/23/2016 |
| | 8/29/2013 | | | 26,042 | | | | 11,459 | (2)(4) | | | 0.42 | | 12/28/2016 |
| (1) | The indicated option was granted fully vested. |
| (2) | The indicated option was a replacement grant for options cancelled under the Company's August 2013 tender offer. The replacement grants issued under the tender offer retained the original vesting terms and expiration dates of the options they replaced. |
| (3) | The indicated option vests as follows: 20% vested on the original grant date of August 25, 2011 and 80% vests 1/36th each month thereafter. |
| (4) | The indicated option vests 1/36th each month from December 29, 2011. |
| (5) | The indicated option vests as follows: 20% vested on the original grant date of October 7, 2011 and 80% vests 1/36th each month thereafter. |
| (6) | The indicated option vests 1/36th each month from August 24, 2011. |
| (7) | The indicated option vests 1/36th each month from the grant date. |
Compensatory Arrangement with Directors
Cash Compensation
Each non-employee director generally receives the following compensations for his or her service as director:
| · | A fee of $10,000 each quarter, except for the Chairman of the Board who receives $12,500 each quarter; and |
| · | A fee of $1,500 each quarter for each committee on which a director serves. |
For fiscal year 2014, the Board agreed to accept its quarterly fees in half cash and half stock. All directors are reimbursed for reasonable travel and other out-of-pocket expenses incurred when serving in the capacity of director to the Company.
Ivan Braiker, our Chief Executive Officer, was not paid additional compensation or granted equity awards for his service as director. His compensation is fully reflected in the other compensation tables contained in this prospectus.
Stock Options and Warrants; Restricted Stock Awards
Each of our directors holds stock options and/or warrants to purchase shares of our common stock. The unvested options and warrants granted prior to April 1, 2014 will vest in the event of a Control Change, as defined in the option and warrant agreements. Furthermore, in the event that we receive cash proceeds exceeding $10 million (but less than $25 million) relating to a litigation settlement, licensing fee arrangement or sale of intellectual property, the right to purchase 50% of the unvested shares of common stock subject to such awards will vest, and in the event that we receive cash proceeds exceeding $25 million relating to a litigation settlement, licensing fee arrangement or sale of intellectual property, the right to purchase 100% of the unvested shares of common stock subject to such awards will vest. Stock options and restricted stock awards granted to the non-employee directors under the 2014 Plan will become fully vested upon a Change of Control (as defined in the 2014 Plan) or upon the non-employee director's death or disability.
Director Agreements
Prior to March 24, 2014, each of our non-employee directors had entered into an agreement with us in which we agreed to pay them a transaction fee in connection with a change of control transaction. The terms of the agreements were effective during each director's service on our Board of Directors and for the six month period following resignation. In order to more closely align our directors' interests with those of our stockholders, on March 24, 2014, each director entered into a new director agreement pursuant to which the previous transaction fee arrangements were terminated and each director received stock options at an exercise price of $0.48 per share and/or will receive restricted stock awards that vest 50% on February 28, 2015 and 50% on February 28, 2016. The stock options and restricted stock awards were or will be issued from the 2014 Equity Incentive Plan pursuant to its terms and conditions.
Director Compensation
The following table reflects all compensation awarded to, earned by or paid to our non-employee directors for the fiscal year ended February 28, 2014.
| | Fees Earned or Paid In Cash ($) | | | | | | | | | All Other Compensation ($) | | | | |
| | | | | | | | | | | | | | | | |
Michael Brochu (1) | | | 15,667 | | | | 15,667 | (2) | | | 67,590 | (3) | | | — | | | | 98,924 | |
John M. Devlin | | | 26,000 | | | | 26,000 | (2) | | | — | | | | — | | | | 52,000 | |
Roberta Minicola (4) | | | 5,000 | | | | 5,000 | (2) | | | — | | | | 13,825 | (5) | | | 23,825 | |
Donald Stout | | | 23,000 | | | | 23,000 | (2) | | | — | | | | — | | | | 46,000 | |
Todd E. Wilson | | | 34,000 | | | | 34,000 | (2) | | | — | | | | 180,000 | (6) | | | 248,000 | |
| (1) | Mr. Brochu became a director on June 17, 2013. |
| (2) | Quarterly fees paid to directors in fully vested shares of our common stock. |
| (3) | The indicated award was for a warrant granted on June 17, 2013 for 300,000 shares of our common stock at a price of $0.39 per share. The warrant vests in equal monthly increments over 36 months and has a five year term. Amount reflects the aggregate fair value of stock options on the grant date in accordance with FASB ASC Topic 718. These amounts are not paid to and may not be realized by the director. Assumptions used in the calculation of these values are included in Note 8 to our audited financial statements included in this prospectus. |
| (4) | Ms. Minicola resigned her position as director on June 30, 2013. |
| (5) | Cash payment made to Ms. Minicola in connection with a consulting agreement between us and Ms. Minicola. |
| (6) | Cash payments made to Mr. Wilson in connection with a consulting agreement with Trove Capital Partners LLC. See the discussion under Item 13, "Certain Relationships and Related Transactions." |
The following table shows the number of outstanding shares underlying option and warrant awards for each of our non-employee directors and one former director as of as of February 28, 2014:
| | | | | | |
| | | | | | | |
Michael Brochu | | | — | | | | 300,000 | |
John M. Devlin | | | 116,459 | | | | 628,541 | |
Roberta Minicola | | | — | | | | 300,000 | |
Donald Stout | | | 348,000 | | | | 100,000 | |
Todd E. Wilson | | | 177,792 | | | | 100,000 | |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Related Persons
The following describes all transactions since March 1, 2013 and all proposed transactions in which we are, or we will be, a participant and the amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest.
On May 16, 2013, we entered into a Consulting Agreement, as amended, with Trove Capital Partners LLC (“Trove”), of which Todd E. Wilson, the chairman of our board of directors, is a principal. Under the agreement, we have agreed to pay Trove monthly fee of $22,500 for consulting services. The term of the agreement commenced March 1, 2013 and continues until terminated upon 30 days’ prior notice by either party. As of February 28, 2014, fees paid to Trove under the consulting agreement totaled $180,000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information, as of May 1, 2014, certain information concerning the beneficial ownership of our common stock by:
| each of our “named executive officers” as defined in the Executive Compensation section above; |
| each person known to us that beneficially owns more than 5% of our common stock; and |
| all of our current directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to our common stock. Shares of our common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of May 1, 2014 are considered outstanding and beneficially owned by the person holding the options or warrants for the purpose of calculating the percentage ownership of that person, but not for the purpose of calculating the percentage ownership of any other person. Except as otherwise noted, we believe the persons and entities in this table have sole voting and investing power with respect to all of the shares of our common stock beneficially owned by them, subject to community property laws, where applicable. The inclusion of any shares in this table does not constitute an admission of beneficial ownership by the person named below.
Name and Address of Beneficial Owner (1) | | Shares of Common Stock Beneficially Owned | | | Percentage of Common Stock Beneficially Owned (2) | |
| | | | | | | |
| Name of Executive Officers and Directors | | | | | | |
Ivan E. Braiker | | | 1,958,352 | (3) | | | 1.3 | % |
Thomas J. Virgin | | | 998,035 | (4) | | | * | |
| Douglas O. Stovall | | | 453,180 | (5) | | | * | |
Michael Brochu | | | 139,614 | (6) | | | * | |
John M. Devlin, Jr. | | | 926,216 | (7) | | | * | |
Donald E. Stout | | | 516,379 | (8) | | | * | |
Todd E. Wilson | | | 398,419 | (9) | | | * | |
All Directors and Executive Officers as a Group (7 persons) | | | 5,390,195 | (10) | | | 3.4 | % |
| | | | | | | | | |
| Greater than 5% Holders | | | | | | | | |
| Unterberg Koller Capital Fund, L.P. (11) | | | 13,000,000 | (12) | | | 8.2 | % |
| (1) | Unless otherwise indicated, the address of the beneficial owner is c/o Hipcricket, Inc., 110 110th Avenue NE, Suite 410, Bellevue, Washington 98004. |
| (2) | Applicable percentage is based on 154,786,916 shares of our common stock outstanding as of May 1, 2014. |
| (3) | Consists of (a) 1,694,007 shares of common stock and (b) 264,345 shares of common stock issuable upon exercise of options exercisable within 60 days of May 1, 2014. |
| (4) | Consists of (a) 806,499 shares of common stock and (b) 191,536 shares of common stock issuable upon exercise of options exercise within 60 days of May 1, 2014. |
| (5) | Consists of (a) 242,782 shares of common stock and (b) 210,398 shares of common stock issuable upon exercise of options and warrants exercisable within 60 days of May 1, 2014. |
| (6) | Consists of (a) 39,614 shares of common stock, and (b) 100,000 shares of common stock issuable upon exercise of options and warrants exercisable within 60 days of May 1, 2014. |
| (7) | Consists of (a) 202,611 shares of common stock and (b) 723,605 shares of common stock issuable upon exercise of options exercisable within 60 days of May 1, 2014. |
| (8) | Consists of (a) 94,544 shares of common stock and (b) 421,835 shares of common stock issuable upon exercise of warrants exercisable within 60 days of May 1, 2014. |
| (9) | Consists of (a) 142,022 shares of common stock, and (b) 256,397 shares issuable upon exercise of options and warrants exercisable within 60 days of May 1, 2014. |
| (10) | Consists of (a) 3,222,079 shares of common stock and (b) 2,16,116 shares of common stock issuable upon exercise of options and warrants exercisable within 60 days of May 1, 2014. |
| (11) | Diker Management LLC (“Diker Management”) is the investment manager to Unterberg Koller Capital Fund, L.P. (the “Unterberg Koller Fund”). The managing members of Diker Management are Charles Diker and Mark N. Diker (together, the “Diker Managers”). Diker Management and the Diker Managers may be deemed to beneficially own the securities held by the Unterberg Koller Fund. Diker Management and the Diker Managers each disclaim beneficial ownership of such securities except to the extent of their pecuniary interest therein. The address of the Unterberg Koller Fund, Diker Management and the Diker Managers is 730 Fifth Avenue, 15th Floor, New York, NY 10019. |
| (12) | Consists of (a) 10,000,000 shares of common stock, and (b) 3,000,000 shares issuable upon exercise of warrants exercisable within 60 days of May 1, 2014. |
Certain legal matters relating to the validity of the issuance of the common stock offered by this prospectus will be passed upon for us by Perkins Coie LLP, Seattle, Washington.
EXPERTS
The financial statements of Hipcricket, Inc. as of February 28, 2014 and 2013, and for the years then ended, included in the Registration Statement, of which this prospectus forms a part, have been so included in reliance on the report of Moss Adams LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We required to comply with the reporting requirements of the Exchange Act and file annual, quarterly and current reports and other information with the SEC. We make available free of charge on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon a reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
You may read and copy, for a copying fee, any document we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C., 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m. Please call the SEC at 1-800-SEC-0330 for more information on its Public Reference Room. Our SEC filings, including the registration statement of which this prospectus is a part, also will be available to you on the SEC’s website at www.sec.gov. In addition, you may request a copy of our SEC filings (excluding exhibits) at no cost by writing or telephoning us at:
Hipcricket, Inc. 110 110th Avenue NE, Suite 410 Bellevue, Washington 98004 |
Our Internet website address is www.hipcricket.com. Our website and the information contained on our website does not constitute part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.
This prospectus is part of a registration statement on Form S-1 that we have filed with the SEC. This prospectus does not contain all of the information included in the registration statement. For further information pertaining to us and our common stock, you should refer to the registration statement and its exhibits. Statements contained in this prospectus concerning any of our contracts, agreements or other documents are not necessarily complete. If a contract or document has been filed (including by incorporation by reference) as an exhibit to the registration statement, we refer you to the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit.
INDEX TO AUDITED FINANCIALS STATEMENTS
Report of Independent Registered Public Accounting Firm | F-2 |
| | |
Balance Sheets as of February 28, 2014 and 2013 | F-3 |
| | |
Statements of Operations for the years ended February 28, 2014 and 2013 | |
| | |
Statement of Stockholders’ Equity for the years ended February 28, 2014 and 2013 | F-5 |
| | |
Statements of Cash Flows for the years ended February 28, 2014 and 2013 | F-6 |
| | |
Notes to Financial Statements | F-7 |
