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MOBILEBITS HOLDINGS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following plan of operation provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions. Plan of Operation MobileBits Holdings Corporation ("MobileBits", "MB", or the "Company") was incorporated in the State of Nevada on July 22, 2008. MobileBits is a globally focused direct mobile marketing and engagement software supplier helping drive consumer purchases into the bricks and mortar stores. The Company offers a platform which enables partners and merchants to deliver and participate in a a mobile marketing and loyalty network solution called SAMY. SAMY provides enterprise software tools to merchants and retailers brands. SAMY Enterprise enables third parties to license and potentially rebrand the platform under their own label. The SAMY platform enables any merchant the ability to create and manage mobile campaigns, deals, offers, loyalty/rewards, social media and commerce to a subscribed consumer through their mobile devices resulting in increased in-store purchases at the brick and mortar store locations and continued engagement when the consumer is away from the physical store. To consumers, the SAMY experience provides a single "Mobile Mall" application and framework where a shopper can quickly and easily view and be alerted to a multitude of different and unique retailer 'applets' which can contain varying types of content interactions including special offers, in app ordering, loyalty card integrations and more. MobileBits began its business in 2009 with the goal to create a cloud based platform connecting consumers and marketers around relevant content and information through mobile devices. The goal is to allow shoppers to find 'what they want, when they want it'. On December 6, 2011 the Company merged with Pringo Inc., through MB Pringo Merger Sub, Inc., a Delaware corporation and our wholly-owned subsidiary ("Merger Sub"), completed a merger with Pringo, Inc. a Delaware corporation ("Pringo"), pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated June 23, 2011 (the "Pringo Merger"). The Los Angeles based Pringo, brought the Company a hardened development platform suite called Pringo Connect, created in 2006, as well as increasing the product development team strengthening its PHP based development capabilities. Pringo's business focus was licensing software and selling professional services to enterprises in the market to create a socially integrated website or portal. On September 28, 2012, the Company also completed a share exchange with Aixum Tec AG, a Liechtenstein Company ("Aixum") operating in Switzerland, pursuant to a Stock Exchange Agreement (the "Stock Exchange Agreement"), dated May 21, 2012 (the "Stock Exchange"). Aixum Tec AG, a European based organization focused on a merchant and consumer application software platform called SAMY4ME which provided an easy to use software interface for both businesses and consumers synchronizing loyalty card integration and offers. MobileBits subsequently integrated the Pringo Connect and the SAMY4ME platforms, shortening the name to SAMY for a broader local market while increasing SAMY'S ability to integrate third party software solutions like gift cards, loyalty and commerce systems already in the marketplace as well as to build a framework that is scalable for rapid deployment of white labeling opportunities. Today, SAMY provides a complete set of cloud based tools to connect with, create and manage mobile campaigns, deals, offers, loyalty and rewards to a subscribed mobile consumer. To businesses, SAMY provides a single self-serve out-of-the-box mobile engagement marketing and loyalty platform that enables retail businesses to create, design and publish their offers, coupons, promotions, loyalty cards and gift cards to a branded mobile storefront within SAMY. To partners, SAMY Enterprise provides a proven and successful loyalty and shopping network framework to support various business goals in any given vertical application. To consumers, SAMY provides a single "Mobile Mall" application and experience where a shopper can quickly and easily view branded storefronts and be alerted of special offers, purchase products or services, earn rewards, obtain local information and seamlessly integrate their loyalty cards with their mobile devices. 21 Summary of Acquisition Transactions Acquisition of MBPM from Proximus Mobility, LLC On May 2, 2013, the Company and Proximus Mobility, LLC ("Proximus") formed a Delaware limited liability company named MBPM, LLC ("MBPM"). Pursuant to the operating agreement entered between the parties, the Company initially has a 51% ownership interest in MBPM, and Proximus has a 49% ownership in MBPM. In connection with the formation of MBPM, the Company contributed certain goodwill and management services to MBPM and Proximus contributed all of its assets to the joint venture. On May 2, 2013, the Company entered into Equity Exchange Agreements with the members of Proximus, pursuant to which the members of Proximus agreed within a two-year period to exchange their membership units in Proximus for shares of the Company's common stock, valued up to $3,000,000 pursuant to the terms and conditions of the Equity Exchange Agreement. ValuText LLC Acquisition On May 7, 2013, the Company purchased JDN Development Company Inc.'s 50% membership interest in Value Text LLC ("ValuText") for 250,000 warrants to purchase the Company's common stock at an exercise price of $0.50 per share of which 205,000 warrants were issued to JDN Development Company and 45,000 warrants were issued to the J Cohn Marketing Group. The 250,000 warrants were valued at $60,528. The remaining 50% interest in ValuText was acquired by the Company in connection with the acquisition of Proximus. Over the next twelve months, we intend to continue growing our business by expanding our direct sales team focused on tier one, tier two retailers, shopping center owners and REITS to grow the market for SAMY. We plan to expand our sales channel into the tier three merchants as well and offer SAMY worldwide through qualified in-country re-seller partners in countries where we are currently unable or unwilling to enter ourselves due to financial requirements or unstable economic conditions. The Company currently anticipates the implementation of its business plan will require additional investment capital. The Company hopes to raise up to $10 million in equity financing in the next twelve months. If we are successful in raising the necessary funds, we will use those funds to grow our consumer network and to acquire new customers through increased advertising, sales, and marketing product fulfillment, to fund product development providing additional product functionality, to provide working capital for strategic acquisitions and for other corporate purposes. However, there is no assurance that we will be able to raise any capital to implement our business plan. 22 Results of Operations Three Months Ended July 31, 2014 compared to the Three Months Ended July 31, 2013 Revenues Our revenues were $297,027 for the three months ended July 31, 2014 compared to $284,056 for the three months ended July 31, 2013. The decrease of $12,971 is due to a $90,618 reduction in Pringo contract revenues offset by a $103,589 increase in the Samy subscription revenues resulting primarily from increased barter transactions. Cost of Revenues Our cost of revenues was $20,951 for the three months ended July 31, 2014 compared to $36,774 for the three months July 31, 2013. The decrease is due to the lower labor costs to support Pringo customers as well as a reduction in hosting fees during the three months ended July 31, 2014. Selling, General and Administrative Expenses Our total selling, general and administrative expenses were $1,347,989 for the three months ended July 31, 2014 compared to $1,031,642 for the three months ended July 31, 2013. The $316,347 increase is primarily due to a $161,137 increase in stock compensation expense, $96,264 in higher marketing expenses and $76,266 in increased professional fees offset by the $8,800 reduction in travel and entertainment expenses. Depreciation and Amortization Depreciation and amortization was $506,215 for the three months ended July 31, 2014 compared to $490,359 for the three months ended July 31, 2013. The increase is due to the amortization related to additional intangible assets acquired in the acquisitions of Proximus Mobility LLC and ValuTex LLC. Interest Income (Expense) Net interest income was $4,183 for the three months ended July 31, 2014 compared to interest expense of $10,723 for the three months ended July 31, 2013. The increase in interest income for the three-month period in 2013 is attributable to higher amortization of the discount on the Middle East franchise revenue receivable. Unrealized Foreign Currency Exchange Gain (Loss) During the three months July 31, 2013, the Company incurred an unrealized foreign exchange gain of $5,836 related to transactions of Aixum. Aixum suspended operations on March 4, 2014 related to its discharge from bankruptcy. Nine Months Ended July 31, 2014 compared to the Nine Months Ended July 31, 2013 Revenues Our revenues were $924,974 for the nine months ended July 31, 2014 compared to $1,531,515 for the nine months ended July 31, 2013. The $606,541 decrease is primarily due to $1,013,369 in international franchise license fees recognized in the nine months ended July 31, 2013 and a $168,723 reduction in Pringo contract revenues for the nine-month period in 2014. Samy subscription revenues increased $575,551 in the nine months ended July 31, 2014 compared to the same period in 2013 resulting primarily from increased barter transactions . 23 Cost of Revenues Our cost of revenues was $77,387 for the nine months ended July 31, 2014 compared to $109,753 for the nine months ended July 31, 2013. The decrease is due to the lower labor costs to support Pringo customers offset and lower hosting fees during the nine- month period in July 31, 2014. Selling, General and Administrative Expenses Our total general and administration expenses were $5,097,378 for the nine months ended July 31, 2014 compared to $4,109,427 for the same nine-month period in 2013. The increase of $987,951 is primarily attributable to the a $869,831 increase in bad debt expense, $648,217 in increased stock compensation expense, $452,619 in higher marketing expenses and a $85,050 increase in professional fees partially offset by a $556,800 gain attributable to the discharge of liabilities associated with the Aixum bankruptcy and a decreases of $502,335 in salaries and contracted labor and $51,621 in travel and entertainment expenses. Depreciation and Amortization Depreciation and amortization was $1,756,131 for the nine months ended July 31, 2014 compared to $1,440,453 for the nine months ended July 31, 2013. The increase is primarily due to the amortization related to additional intangible assets acquired in the Proximus Mobility LLC and ValuText LLC acquisitions. Interest Income Net interest income was $18,750 for the nine months ended July 31, 2014 compared with interest income of $5,967 for the nine months ended July 31, 2013. The net interest income for the nine-month period in 2014 is attributable to increased amortization of the discount on the Middle East franchise revenue receivable. Loss on Foreign Currency Exchange During the nine months ended July 31, 2014, the Company incurred realized loss on foreign currency exchange of $65,033. The loss for the nine months ended July 31, 2014 was related to the reclassification of cumulated translation adjustment from other comprehensive loss to other expense due to the bankruptcy of Aixum. Unrealized Foreign Currency Exchange Loss During the nine months ended July 31, 2014, there was no unrealized foreign exchange gain or loss as the net assets of Aixum were written off in March of 2014. The Company incurred an unrealized foreign exchange of $1,165 during the nine-month period ended July 31, 2013 related to transactions of Aixum. Liquidity and Capital Resources As reflected in the accompanying consolidated financial statements, the Company has suffered recurring losses from operations. The Company has a net loss of $6,050,205; a working capital deficit of $1,612,028; net cash used in operations of $975,215 for the nine months ended July 31, 2014; and an accumulated deficit of $43,587,230 at July 31, 2014. In addition, the Company has not completed its efforts to establish a stable recurring source of revenues sufficient to cover its operating costs for the next twelve months. These factors raise substantial doubt regarding the Company's ability to continue as a going concern. The ability of the Company to continue its operations is dependent on the successful execution of management's plans, which include the expectation of raising debt or equity based capital, with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to issue additional equity and incur additional liabilities with related parties to sustain the Company's existence although no commitments for funding have been made and no assurance can be made that such commitments will be available on terms agreeable to the Company if at all. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of assets or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 24 In response to these factors, the management intends to take on the following actions: ? seek additional funding from private placement and public offerings, ? seek additional funding from third party debt financings; and ? continue the implementation of the business plan, which may include merging or acquiring with an operating entity. Cash flows from operating activities Cash used in operating activities for the nine months ended July 31, 2014 and 2013 was $975,215 and $1,489,592, respectively. The change is primarily due to lower salary and contracted labor fees and reduced travel and entertainment expenses offset by increased marketing expenses and professional fees. Cash flows from investing activities Cash used in investing activities for the nine months ended July 31, 2014 and 2013 was $172,328 and $374,619, respectively. The decrease is due primarily to decreased software development costs and reduced purchases of property and equipment. Cash flows from financing activities Cash provided by financing activities for the nine months ended July, 31, 2014 and 2013 was $1,297,699 and $1,886,851, respectively. The cash provided by financing for both periods was primarily due to us completing approximately $965,310 and $1,876,868 of private placements, respectively. Additionally, the Company received a $112,166 advance and a $155,873 promissory note payable from a third party during the nine months ended July, 31, 2014. In the nine months ended July 31, 2014, the increase in the notes payable was $4,350 compared with $9,983 in the same nine-month period in 2013. Critical Accounting Policies Use of Estimates Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates. 25 Significant estimates made by the Company in 2014 and 2013 included: 1) 100% valuation allowance for deferred taxes due to the Company's continuing and expected future losses; 2) inputs used in its option-pricing model to calculate the Company share-based compensation arrangements; 3) allowance estimated for doubtful accounts; 4) assumptions used in the valuation models to calculate the fair values of assets acquired and liabilities assumed under acquisitions; and 5) assumptions used in the projections and discounted cash flows analysis to assess the goodwill impairment. Software Development Costs Costs of software developed internally for licensing to third parties are expensed until the technological feasibility of the software product has been established. Thereafter, software development costs incurred through the general release of the software products are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized software development costs are amortized on a straight-line basis over the products' respective estimated economic lives, which are typically three years. The amortization of capitalized software development costs, including any amounts accelerated for products that are not expected to generate sufficient future revenue to realize their carrying values, is included in depreciation and amortization expense in the consolidated statements of operations. Intangible Assets Intangible assets consist of expenditures for a domain name, the value of trade name, customer relationships, and software, which was initially recorded at the fair value on the acquisition date of Aixum and Pringo. The domain name has an estimated indefinite life, is not subject to amortization, but is reviewed annually for impairment. The identifiable intangibles are amortized over their useful lives of 3 to 10 years and are reviewed annually for impairment. Goodwill Costs of investments in excess of the underlying fair value of net assets at the date of acquisition are recorded as goodwill and assessed annually for impairment. The carrying amount of goodwill is not amortized, but we perform an annual assessment of goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. Revenue Recognition License revenue consists principally of revenue earned under software license agreements or reseller agreements to license the use of SAMY in foreign countries. License revenue is generally recognized when a signed contract or other persuasive evidence of an arrangement exists, the software has been electronically delivered, the license fee is fixed or is measured on a paid user basis; and collection of the resulting receivable is probable. When contracts contain multiple elements wherein Vendor-Specific Objective Evidence ("VSOE") exists for all undelivered elements, we account for the delivered elements in accordance with the "Residual Method." VSOE of fair value for maintenance and support is established by a stated renewal rate, if substantive, included in the license arrangement or rates charged in stand-alone sales of maintenance and support. Revenue from subscription license agreements, which include software, rights to unspecified future products and maintenance, is recognized ratably over the term of the subscription period. Provided all other revenue criteria are met, the upfront, minimum, non-refundable license fees from customers are generally recognized upon delivery and on-going royalty fees are generally recognized upon reports of new licenses issued. Revenue on sales to resellers is recognized when evidence of an end user arrangement exists and recorded net of related costs to the resellers. 26 Professional services revenue consists primarily of revenue received for assisting with the customization and implementation of our software, on-site support, and other consulting services. Many customers who license our software also enter into separate professional services arrangements with us. We always account for professional services separately from license revenue as professional services are considered essential to the functionality of the software based on the nature of our software products. Substantially all of our professional services arrangements that are billed on a time and materials basis are recognized as the services are performed. Contracts with fixed or not-to-exceed fees are recognized on a percentage-of-completion. If there is significant uncertainty about the project completion or receipt of payment for professional services, revenue is deferred until the uncertainty is sufficiently resolved. VSOE of fair value of consulting services is based upon stand-alone sales of those services. Payments received in advance of consulting services performed are deferred and recognized when the related services are performed. Work performed and expenses incurred in advance of invoicing are recorded as unbilled receivables. These amounts are billed in the subsequent month. Maintenance revenue consists of fees for providing software updates on a when and if available basis and technical support for software products ("post-contract customer support" or "PCS"). Maintenance revenue is recognized ratably over the term of the agreement. Hosting revenues are recognized in the month services are delivered. Payments received in advance of services performed are deferred. Allowances for estimated future returns and discounts are provided for upon recognition of revenue. Samy provides digital loyalty and marketing solutions that drives engagement between brick and mortar stores and consumers. Samy delivers consumer engagement on a Cost-Per Click ("CPC") basis with the tools to create, manage and measure mobile commerce through its proprietary mobile CRM software. MobileBits generates revenue on a CPC basis. Samy CPC is defined as a user (depending on what category of ad they view) who subscribes to a branded mobile store within the Samy network, then selects an ad and clicks on an offer or coupon to learn more. Share-Based Payments The Company estimates the fair value of each stock option or warrant award at the grant date by using the Black-Scholes option pricing model and common shares based on the last applicable market price of the Company's common stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee or service provider is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, the Company reduces the expense for estimated forfeitures based on historical forfeiture rates. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period. Excess tax benefits, if any, are recognized as an addition to paid-in capital. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. |