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EXCEL - IDEA: XBRL DOCUMENT - LENCO MOBILE INC. | Financial_Report.xls |
EX-31.1 - CERTIFICATION - LENCO MOBILE INC. | lncm_10q-ex3101.htm |
EX-32 - CERTIFICATION - LENCO MOBILE INC. | lncm_10q-ex3200.htm |
EX-31.2 - CERTIFICATION - LENCO MOBILE INC. | lncm_10q-ex3102.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________
Commission File Number: 000-53830
LENCO MOBILE INC. | ||
(Exact name of registrant as specified in its charter) |
Delaware | 75-3111137 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
2025 First Avenue, Suite 320, Seattle, WA | 98121 | |
(Address of principal executive offices) | (Zip Code) |
(800)-557-4148 | ||
(Registrant’s telephone number, including area code) |
Not Applicable | ||
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 12, 2014, 82,145,314 shares of Lenco Mobile Inc.’s common stock were outstanding.
LENCO MOBILE INC.
FORM 10-Q
INDEX
Page | |||
Part I | Financial Information | ||
Item 1. | Unaudited Condensed Financial Statements: | 3 | |
Condensed Consolidated Balance Sheets | 3 | ||
Condensed Consolidated Statements of Operations | 4 | ||
Condensed Consolidated Statements of Comprehensive Income (Loss) | 5 | ||
Condensed Consolidated Statements of Cash Flows | 6 | ||
Notes to Condensed Consolidated Financial Statements | 7 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12 | |
Item 4. | Controls and Procedures | 14 | |
Part II | Other Information | ||
Item 1. | Legal Proceedings | 15 | |
Item 1A. | Risk Factors | 15 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 15 | |
Item 3. | Exhibits | 16 | |
Item 4. | Mine Safety Disclosures | 16 | |
Signatures | 17 | ||
Index to Exhibits | 18 |
2 |
PART I – FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements.
Lenco Mobile Inc.
Condensed Consolidated Balance Sheets
As of | ||||||||
March 31, 2014 | December 31, 2013 | |||||||
(In thousands, except share data) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 329 | $ | 513 | ||||
Accounts receivable, net | 2,138 | 2,760 | ||||||
Other current assets | 186 | 249 | ||||||
Total current assets | 2,653 | 3,522 | ||||||
Property and equipment, net | 174 | 209 | ||||||
Other noncurrent assets: | ||||||||
Intangible assets - goodwill | 569 | 573 | ||||||
Intangible assets - other, net | 3,072 | 3,152 | ||||||
Other noncurrent assets | 122 | 109 | ||||||
Total other noncurrent assets | 3,763 | 3,834 | ||||||
Total assets | $ | 6,590 | $ | 7,565 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 7,477 | $ | 7,689 | ||||
Deferred revenue | 673 | 591 | ||||||
Retention bonus | 2,011 | 1,982 | ||||||
Preferred dividend payable | 4,952 | 4,484 | ||||||
Current portion of long-term obligations, (convertible debt portion of $260, and $260, respectively) | 12,475 | 11,579 | ||||||
Liability for reclassified equity contracts | 2,100 | 2,514 | ||||||
Total current liabilities | 29,688 | 28,839 | ||||||
Long-term obligations, less current portion, net of debt discount (of $315, and $503, respectively) | 1,702 | 1,520 | ||||||
Total liabilities | 31,390 | 30,359 | ||||||
Shareholders' equity: | ||||||||
Preferred Stock, Series A 1,000,000 shares authorized, $.001 par value, 181,180 and 181,180 shares issued and outstanding at March 31, 2014 and at December 31, 2013, respectively, Liquidation Preference of $46,219 and $43,285 at March 31, 2014 and at December 31, 2013, respectively | ||||||||
Preferred Stock, Series A1 1,000,000 shares authorized, $.001 par value, 17,733 and 17,733 shares issued and outstanding at March 31, 2014 and at December 31, 2013 respectively, Liquidation Preference of $2,345 and $2,197 at March 31, 2014 and at December 31, 2013, respectively | ||||||||
Preferred Stock, Series B1 1,000,000 shares authorized, $.001 par value, 87,717 shares issued and outstanding at March 31, 2014 and at December 31, 2013, respectively, Liquidation Preference of $9,105 and $9,038 at March 31, 2014 and at December 31, 2013, respectively | ||||||||
Preferred Stock, Series B2 1,000,000 shares authorized, $.001 par value, 58,131 shares issued and outstanding at March 31, 2014 and at December 31, 2013, respectively, Liquidation Preference of $6,034 and $5,989 at March 31, 2014 and at December 31, 2013, respectively | ||||||||
Common stock, 250,000,000 shares authorized, $.001 par value, 82,145,314 and 82,145,314 shares issued and outstanding at March 31, 2014 and at December 31, 2013, respectively, | 81 | 81 | ||||||
Additional paid in capital | 94,347 | 93,600 | ||||||
Accumulated other comprehensive loss | (574 | ) | (692 | ) | ||||
Accumulated deficit | (118,355 | ) | (115,484 | ) | ||||
Treasury stock, at cost, 1,400,000 shares | (299 | ) | (299 | ) | ||||
Total Lenco Mobile Inc. shareholders' equity | (24,800 | ) | (22,794 | ) | ||||
Total liabilities and shareholders' equity | $ | 6,590 | $ | 7,565 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3 |
Lenco Mobile Inc.
Condensed Consolidated Statements of Operations
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(In thousands, except share data) | ||||||||
Revenue | $ | 3,630 | $ | 3,661 | ||||
Cost of sales | 1,695 | 1,416 | ||||||
Gross profit | 1,935 | 2,245 | ||||||
Operating expense: | ||||||||
Sales and marketing | 1,025 | 1,181 | ||||||
General and administrative | 1,623 | 1,608 | ||||||
Research and development | 980 | 823 | ||||||
Depreciation and amortization | 113 | 305 | ||||||
Total operating expense | 3,741 | 3,917 | ||||||
Loss from operations | (1,806 | ) | (1,672 | ) | ||||
Other income (expense): | ||||||||
Interest expense, net | (1,093 | ) | (348 | ) | ||||
Other income (expense), net | (9 | ) | (30 | ) | ||||
Valuation of reclassified equity contracts | 413 | (7,358 | ) | |||||
Total other income (expense) | (689 | ) | (7,736 | ) | ||||
Loss before income taxes | (2,495 | ) | (9,408 | ) | ||||
Provision for income taxes (benefit) | (92 | ) | – | |||||
Net loss attributable to Lenco Mobile Inc. | (2,403 | ) | (9,408 | ) | ||||
Preferred stock dividends | (468 | ) | (296 | ) | ||||
Series A Preferred Stock accretion of beneficial conversion feature | – | (14 | ) | |||||
Net loss attributable to common stockholders | $ | (2,871 | ) | $ | (9,718 | ) | ||
Basic and diluted net income (loss) per share applicable to common stockholders | ||||||||
Net loss per share applicable to common stockholders - basic and diluted | $ | (0.03 | ) | $ | (0.12 | ) | ||
Weighted average shares used in per share calculation - basic and diluted | 82,145,314 | 80,478,648 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4 |
Lenco Mobile Inc.
Condensed Statements of Comprehensive (Loss)
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Net loss | $ | (2,403 | ) | $ | (9,408 | ) | ||
Foreign currency translation adjustment | (574 | ) | (393 | ) | ||||
Total comprehensive loss | $ | (2,977 | ) | $ | (9,801 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5 |
Lenco Mobile Inc.
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, | ||||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net loss attributable to Lenco Mobile Inc. | $ | (2,403 | ) | $ | (9,408 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Valuation of reclassified equity contracts | (413 | ) | 7,358 | |||||
Change attributable to noncontrolling interest | – | – | ||||||
Depreciation and amortization | 113 | 305 | ||||||
Allowance for doubtful accounts | (168 | ) | 116 | |||||
Stock compensation expense | 747 | 470 | ||||||
Amortization of debt discount | 189 | 160 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 790 | (890 | ) | |||||
Other current and non-current assets | 63 | (112 | ) | |||||
Accounts payable, accrued expenses, and other current liabilities | 780 | 186 | ||||||
Other | – | (198 | ) | |||||
Net cash used in operating activities | (302 | ) | (2,013 | ) | ||||
Cash flows from financing activities: | ||||||||
Payment of debt | – | – | ||||||
Proceeds from issuance of Series A Preferred Stock | – | 174 | ||||||
Proceeds from issuance of Series A1 Preferred Stock | – | 900 | ||||||
Proceeds from issuance of Notes | – | 600 | ||||||
Net cash provided by financing activities | – | 1,674 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 118 | (6 | ) | |||||
Net change in cash and cash equivalents | (184 | ) | (345 | ) | ||||
Cash and cash equivalents, beginning of period | 513 | 618 | ||||||
Cash and cash equivalents, end of period | $ | 329 | $ | 273 | ||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Preferred stock dividends and accretions | $ | (468 | ) | $ | (310 | ) | ||
Conversion of Retention Bonus for Series A Preferred | $ | – | $ | 600 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6 |
LENCO MOBILE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Principles
Basis of Presentation and Principals of Consolidation
The condensed consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated upon consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by U.S. generally accepted accounting principles for complete financial statements. The accompanying unaudited financial information should be read in conjunction with the audited consolidated financial statements, including the notes thereto, as of and for the year ended December 31, 2013, included in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”). The information furnished in this report reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows for each period presented. The results of operations for the interim period ended March 31, 2014 are not necessarily indicative of the results for the year ending December 31, 2014 or for any future period.
Reclassifications
Certain amounts for prior periods have been reclassified in the condensed consolidated financial statements to conform to the classification used in fiscal year 2014.
Fair Value of Financial Instruments
The carrying values of our cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term debt approximate their fair values due to their short maturities. The carrying values of our long-term liabilities approximate their fair values based on current rates of interest for instruments with similar characteristics.
Note 2. Liquidity
As of March 31, 2014, we had cash and cash equivalents of approximately $0.3 million and a working capital deficit of $27.0 million. We incurred a net loss of $2.9 million and net cash used in operations of $0.3 million for the three months ended March 31, 2014. To date, we have funded our operations primarily through sales of our common stock, convertible preferred stock, and debt financing arrangements.
Management is continuing its efforts to improve quarterly profits by enhancing revenue generation and managing the Company’s cost structure, while at the same time ensuring the Company has the resources to meet demand from its customers.
We may require additional capital to support our working capital needs in the future. Our ability to fund our capital needs will depend on many factors, including our future operating performance, our ability to successfully realign our costs or the effect of any strategic and financing alternatives we may pursue. Financing, if available, may be on terms that are significantly dilutive to our stockholders, and the prices at which investors would be willing to purchase our securities may be lower than the current price of our common stock. The holders of new securities may also receive rights, preferences or privileges that are senior to those of existing holders of our common stock. If new sources of financing are required but are insufficient or unavailable, we would be required to modify our growth and operating plans accordingly.
Note 3. Commitments and Contingencies
Retention Bonus Obligations
In connection with the acquisition of Archer USA, the Company entered into retention bonus arrangements with certain, key employees. As of March 31, 2014 and December 31, 2013, the outstanding amounts owed under these arrangements were $2.0 million and $2.0 million, respectively. Interest accrues at an annual rate of 6% on any outstanding amounts. We do not plan on paying these obligations until such time as our resources permit.
7 |
Contingencies Related to Historical Operations
The Company was incorporated in 1999 and became engaged in business in the mobile industry in early 2008. Between 1999 and 2008, the Company was engaged in different lines of business including discount brokerage and financial services, mortgage banking, and apparel. Current management was not involved with the Company prior to early 2008. There may be risks and liabilities resulting from the conduct of the Company’s business prior to February 2008 that are unknown to the management of our Company and not disclosed in these financial statements. In the event that any liabilities, liens, judgments, warrants, options, or other claims against the Company arise, these will be recorded when discovered.
Legal Proceedings
We are involved in a number of claims, proceedings and litigation arising from our operations. In accordance with applicable accounting principles and guidance, we establish a reserve for legal proceedings if and when those matters present loss contingencies that are both probable and reasonably estimable. As of the date of this report, we have not recorded a reserve related to any of the claims, proceedings or actions described below. We continue to monitor these matters for developments that would affect the likelihood of a loss and the reserved amount, if any, thereof, and adjusts the amount as appropriate. Moreover, although there is a reasonable possibility that a loss may be incurred in connection with these matters, at this time, based on the status of each matter, the possible loss or range of loss cannot in our view be reasonably estimated because, among other things, (a) the remedies sought are indeterminate or unspecified, (b) the legal and/or factual theories are not well developed; and/or (c) the matters involve complex or novel legal theories.
Archer USA was a party in a proceeding in Copenhagen, Denmark captioned Cirkelselskabet af 16. Juli 2008 in bankruptcy v. iLoop Mobile, Inc., Vedrorende sag 3, afd. B-1040-12: (Deres j.nr. 1013836). This matter was filed in the Copenhagen City Court by the trustee for Cirkelselskabet, formerly iLoop Mobile ApS (“ApS”). ApS was a Danish subsidiary of Archer USA that was declared bankrupt in July 2008. The trustee claims are based on an asset purchase agreement in December 2007 between Archer USA and ApS. Under the agreement, Archer USA forgave $2,549,794 of debt owed by ApS to Archer USA in exchange for certain assets allegedly owned by ApS. The Copenhagen City Court entered a judgment against Archer USA on February 27, 2012 for the amount of the trustee's claim plus expenses. Archer USA filed an appeal on March 26, 2012 with the High Court of Eastern Denmark (Østre Landsret). The High Court affirmed the lower court’s judgment and awarded the trustee additional expenses. On January 10, 2014, Archer USA appealed the High Court’s decision to the Supreme Court of Denmark. The Supreme Court has declined to hear Archer USA’s appeal and Archer USA has no further opportunities for appeal in Denmark. The judgment entered against Archer USA in Denmark is for $2,549,794, plus interest of approximately $1,292,047, plus fees of approximately $168,000. If Archer USA did pay this judgment, the trustee would owe Archer USA, as a creditor of the estate, approximately $3,000,000 as of March 31, 2014. We believe that it is not probable that Archer USA will pay any amounts as a result of this judgment. We believe the proceedings in the Danish courts suffered from serious violations of United States public policy and due process requirements. In addition, we believe the judgment rendered by the Danish courts is not supported by and offends bankruptcy law and principles of both Denmark and the United States. We intend to vigorously contest the validity and enforceability of this judgment in the United States and to vigorously dispute any attempt made to enforce this judgment or collect these amounts.
We are a party to a wage action captioned James O’Brien v. iLoop Mobile, Inc., Lenco Mobile, Inc. and Matthew R. Harris, No. 12-2-12705-1 (King County Superior Court, filed 4/13/2012). Plaintiff claimed breach of contract and failure to pay wages under a 2011 iLoop employment agreement and Archer USA/Lenco Mobile retention bonus agreement between Plaintiff and the Company. In his complaint, Plaintiff sought retention bonus payments and/or six months’ wages under the employment agreement; double damages in the amount of any wage liability for willful nonpayment of wages, attorneys’ fees and costs, plus pre and post-judgment interest. The court granted summary judgment in defendants’ favor, dismissing the claim under the 2011 iLoop employment agreement, all claims against Matthew Harris, as well as the claim for double damages for willful nonpayment. The plaintiff’s only surviving claim was tried and, following trial, the court entered judgment against plaintiff and in favor of defendants. The plaintiff has appealed the judgment. We believe the claims are without merit and intend to vigorously defend against them on appeal.
We are a party to an action in Nigeria captioned Skynet Telecommunications Limited, Living the Brand Limited v. Archer Mobile South Africa, Lenco Mobile Inc. USA, Suit No: LD/117/2012 (In the High Court of Lagos State in the Lagos Judicial Division Holden at Lagos, filed March 26, 2012). Plaintiffs claim more than $100,000,000 in damages for breach of an alleged partnership agreement with Archer Mobile South Africa. The Company is preparing to file its Statement of Defense in accordance with applicable court procedures. We believe the claims are without merit and intend to vigorously defend against them.
8 |
Note 4. Debt
Debt consisted of the following:
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(In thousands) | ||||||||
Current portion of long-term debt obligations, net of debt discount | 12,475 | 11,579 | ||||||
Long-term obligations, net of debt discount | 1,702 | 1,520 | ||||||
Total debt | 14,177 | 13,099 |
Note 5. Stock Options and Warrants
As of March 31, 2014, there were 9.6 million shares of common stock available for issuance pursuant to our equity compensation plans. Awards of stock options, stock appreciation rights, stock, restricted stock, restricted stock units, performance units and performance shares may be granted under the 2012 Incentive Plan. The 2012 Incentive Plan initially authorizes the issuance of up to 53 million shares of our common stock. In conjunction with the adoption of the 2012 Incentive Plan, all prior plans were suspended and no further grants are to be made from those plans. Further, any shares subject to outstanding awards under the prior plans on the effective date of the 2012 Incentive Plan that subsequently cease to be subject to such awards (other than by reason of exercise or settlement of the awards in shares), will automatically become available for issuance under the 2012 Incentive Plan, up to an aggregate maximum of 20.5 million shares.
Changes in our outstanding stock options during the three months ended March 31, 2014 were as follows:
Number of Stock Options | Weighted Average Price | Weighted Average Remaining Contractual Term | ||||||||||
Outstanding at December 31, 2013 | 53,465,045 | $ | 0.12 | 4.02 | ||||||||
Granted | 1,200,000 | $ | 0.08 | |||||||||
Exercised | – | |||||||||||
Cancelled or expired | (400,000 | ) | ||||||||||
Outstanding at March 31, 2014 | 54,265,045 | $ | 0.11 | 3.79 | ||||||||
Exercisable at March 31, 2014 | 39,354,241 | $ | 0.11 | |||||||||
Vested and expected to vest at March 31, 2014 | 54,265,045 | $ | 0.11 | 3.79 |
At March 31, 2014, there was approximately $1.7 million of unamortized stock-based compensation cost related to non-vested stock options issued. That cost is expected to be recognized as an expense over a remaining vesting period of approximately 1.0 years.
9 |
Stock based compensation is allocated as follows:
Three Months ended | Three Months ended | |||||||
March 31, 2014 | March 31, 2013 | |||||||
(in thousands) | (in thousands) | |||||||
Sales and marketing | $ | 425 | 131 | |||||
General and administrative | 267 | 264 | ||||||
Research and development | 55 | 75 | ||||||
$ | 747 | $ | 470 |
The following table summarizes outstanding warrants to purchase shares of our common stock as of March 31, 2014:
Shares of Common Stock | ||||||||||||||
Issuable from Warrants | ||||||||||||||
Outstanding as of | ||||||||||||||
March 31, | Exercise | |||||||||||||
Date of Issue | 2014 | Price | Expiration | |||||||||||
July 30, 2012 | 6,627,000 | $ | 0.05 | July 30, 2017 | ||||||||||
August 3, 2012 | 2,667,000 | $ | 0.05 | August 3, 2017 | ||||||||||
August 21, 2012 | 2,625,000 | $ | 0.05 | August 21, 2017 | ||||||||||
February 15, 2013 | 12,000,000 | $ | 0.05 | February 15, 2018 | ||||||||||
23,919,000 |
Liability For Reclassified Equity Contracts Represented by Potentially Dilutive Securities in Excess of Authorized Number of Common Shares
In accordance with ASC Topic 815, Derivatives and Hedging, the Company accounts for contracts for the issuance of common stock that are in excess of authorized shares as a liability that is recorded at fair value. This liability is required to be remeasured at each reporting period with any change in value to be included in other income and expense until such time as there is no longer an excess of the number of issued and potentially issuable securities over the number of authorized shares. This condition will change either because of an increase in the authorized number of shares or a reverse stock split as approved by shareholders or a reduction in the number of potentially issuable securities. At that time any existing liability will be eliminated.
On January 1, 2013, the combined total of the Company’s issued shares and its potentially issuable shares exceeded the authorized number of shares by 60,100,524 potentially issuable shares. This excess arose because of the conversion features of certain preferred shares that were triggered on that date, and issuances of warrants and stock options. At this initial measurement date, the fair value of the potentially issuable shares in excess of the authorized number of common shares was approximately $2.0 million, which amount was recorded as a liability for reclassified equity contracts, with a corresponding charge to shareholders’ equity. This liability was recorded based on the valuation of the last contracts to contribute to the excess.
As of March 31, 2014, potentially issuable shares in excess of the authorized number of common shares were 59,882,074 potentially issuable shares, represented by warrants, stock options, Series A and Series A/1 preferred shares, the fair value of which was measured at approximately $2.1 million. The adjustment to the liability for reclassified equity contracts at that date resulted in a charge to other income and expense of $0.4 million for the quarter then ended. The income has been recorded as valuation of reclassified equity contracts.
10 |
Note 6. Subsequent Events
The Company has received notices from seven shareholders of Series A Preferred Stock that each of them has elected to have the Company redeem the Series A Preferred Stock held by them. As of April 15, 2014, the total amount that would be required to redeem all of the shares of Series A Preferred Stock held by these seven shareholders is approximately $2.4 million. The Company is not legally able to redeem any shares at this time.
11 |
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Report and the 2013 audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (SEC) on April 15, 2014.
This Report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” “will,” “can,” “plan,” “predict,” “could,” “future,” "continue," variations of such words, and similar expressions. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined elsewhere in this report under “Item 1A. Risk Factors” and in "Item 1A. Risk Factors" of our most recent Annual Report on Form 10-K filed with the SEC. These factors may cause our actual results to differ materially from any forward-looking statements. Except as required by law, we undertake no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview
We are a global provider of mobile engagement solutions. Historically, our core operations have been conducted in South Africa through our subsidiary Archer Mobile South Africa Pty Ltd (formerly Capital Supreme (Pty) Ltd. and referred to herein as “Archer South Africa”). In December 2011, we acquired iLoop Mobile Inc. (since renamed Archer USA Inc. and referred to herein as “Archer USA”), a U.S. based mobile marketing technology and services provider. Our strategy is to focus on selling our mobile engagement solutions to large enterprises worldwide. We are an early stage business in a rapidly changing mobile engagement industry.
We were incorporated in 1999 in Delaware under the name of Shochet Holdings Corporation. Prior to 2008, Shochet Holdings Corporation completed an initial public offering, underwent several changes of control and was engaged in several different businesses, which included discount brokerage, financial services, mortgage banking and apparel; ultimately we were operating as a shell company seeking a combination with another operating company. The shell company and its predecessors had generated losses of approximately $15.8 million which are reflected in our accumulated deficit.
Results of Operations
The discussion below pertains only to our results of operations on a condensed consolidated basis for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
Consolidated Statements of Operations Data:
Three Months Ended March 31, | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||
2014 | 2013 | Diff | % Change | |||||||||||||
Revenue | $ | 3,630 | $ | 3,661 | $ | (31 | ) | -1% | ||||||||
Cost of sales | 1,695 | 1,416 | 279 | 20% | ||||||||||||
Gross profit | 1,935 | 2,245 | (310 | ) | -14% | |||||||||||
Sales and marketing | 1,025 | 1,181 | (156 | ) | -13% | |||||||||||
General and administrative | 1,623 | 1,608 | 15 | 1% | ||||||||||||
Research and development | 980 | 823 | 157 | 19% | ||||||||||||
Depreciation and amortization | 113 | 305 | (192 | ) | -63% | |||||||||||
Loss from operations | (1,806 | ) | (1,672 | ) | (134 | ) | -8% | |||||||||
Total other expense | (689 | ) | (7,736 | ) | 7,047 | 91% | ||||||||||
Loss before income taxes | (2,495 | ) | (9,408 | ) | 6,913 | 73% | ||||||||||
Income tax expense (benefit) | (92 | ) | – | (92 | ) | 100% | ||||||||||
Net loss | $ | (2,403 | ) | $ | (9,408 | ) | $ | 7,005 | 74% | |||||||
Basic income (net loss) per share | $ | (0.03 | ) | $ | (0.12 | ) | ||||||||||
Diluted income (net loss) per share | $ | (0.03 | ) | $ | (0.12 | ) |
12 |
Balance Sheet Data:
As of | ||||||||
March 31, | March 31, | |||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Balance sheet data: | ||||||||
Cash and cash equivalents and accounts receivable, net | $ | 2,467 | $ | 2,879 | ||||
Fixed assets, net | 174 | 340 | ||||||
Total assets | 6,590 | 25,524 | ||||||
Current liabilities | 29,688 | 25,261 | ||||||
Working capital | (27,035 | ) | (22,044 | ) |
Quarter Ended March 31, 2014 Compared to Quarter Ended March 31, 2013
Revenues
Revenue for the three months ended March 31, 2014 was $3.6 million compared to the revenue in the same period in 2013 of $3.6 million.
Cost of Sales
For the three months ended March 31, 2014 and 2013 cost of sales were $1.7 million and $1.4 million respectively. For the quarter ended March 31, 2014 costs of sales in South Africa was up 23%. Our cost of sales varies depending on the change in product mix, including the mix among types of messaging, and the cost of delivering messages through different aggregators and carriers.
Gross Profit
Gross Profit margin decreased from 61% to 53%. Our consolidated gross margin varies for a number of reasons, including any changes in product mix, including the mix among types of messaging, and the cost of delivering messages through different aggregators and carriers. As a result, period to period comparisons of our gross margin may not provide meaningful information concerning expected future results.
Operating Expenses
For the three months ended March 31, 2014 operating expenses decreased to $3.7 million compared to $3.9 million for the three months ended March 31, 2013.
Operating Loss
For the three months ended March 31, 2014, the Company’s loss from operations was $1.8 million, compared to a loss of $1.7 million for the three months ended March 31, 2013.
Other Income (Expense)
As of March 31, 2014 the fair value of the shares in excess of the authorized shares was approximately $2.1 million which resulted in a charge to other income during the quarter of approximately $0.4 million.
Provision for Income Taxes
Benefit of approximately of $0.1 million was recorded for the three months ended March 31, 2014 and for the three months ended March 31, 2013 we did not record any tax benefit.
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Liquidity, Going Concern and Capital Resources
As of March 31, 2014, we had cash and cash equivalents of approximately $0.3 million and a working capital deficit of $27.0 million. We incurred a net loss of $2.4 million and net cash used in operations of $0.3 million for the three months ended March 31, 2014. To date, we have funded our operations primarily through sales of our common stock, convertible preferred stock, and debt financing arrangements.
Management is continuing to manage the Company’s cost structure on a quarterly basis with the objective of improving profitability, while at the same time ensuring the Company has sufficient resources to meet demand from its customers.
We may require additional capital to support our working capital needs in the future. Our ability to fund our capital needs will depend on many factors, including our future operating performance, our ability to successfully realign our costs or the effect of any strategic and financing alternatives we may pursue. Financing, if available, may be on terms that are significantly dilutive to our stockholders, and the prices at which investors would be willing to purchase our securities may be lower than the current price of our common stock. The holders of new securities may also receive rights, preferences or privileges that are senior to those of existing holders of our common stock. If new sources of financing are required but are insufficient or unavailable, we would be required to modify our growth and operating plans accordingly.
Discussion of Cash Flows
We used cash of approximately $0.3 million and $2.0 million in our operating activities in the three months ended March 31, 2014 and 2013.
Off-Balance Sheet Arrangements
As of March 31, 2014, we did not have any off-balance sheet arrangements that have or are reasonably likely to have current or future effect on our financial condition, revenues or expenses, results of operations, liquidity or capital resources that are material to investors. In accordance with our normal business practices, we indemnify our officers and directors. We also have contractual indemnification obligations to our customers relating to third-party content and operating systems that we provide to our customers
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of senior management, including Mr. Matthew Harris, our Chief Executive Officer (“CEO”) and Mr. Douglas Durst, our Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective because of certain material weaknesses in our internal control over financial reporting that we described under Item 9A in our Annual Report on Form 10-K for the year ended December 31, 2013, which we filed with the SEC on April 15, 2014 (the “Annual Report”). In the Annual Report we described the remediation efforts we have begun to undertake in order to correct such deficiencies. As of March 31, 2014, the deficiencies described in the Annual Report still existed since the remediation efforts had not yet been fully implemented as of that date. There have been no changes in our internal controls over financial reporting or in other factors during the fiscal quarter ended March 31, 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting subsequent to the date we carried out our most recent evaluation.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are involved in a number of claims, proceedings and litigation arising from our operations. In accordance with applicable accounting principles and guidance, we establish a reserve for legal proceedings if and when those matters present loss contingencies that are both probable and reasonably estimable. As of the date of this report, we have not recorded a reserve related to any of the claims, proceedings or actions described below. We continue to monitor these matters for developments that would affect the likelihood of a loss and the reserved amount, if any, thereof, and adjusts the amount as appropriate. Moreover, although there is a reasonable possibility that a loss may be incurred in connection with these matters, at this time, based on the status of each matter, the possible loss or range of loss cannot in our view be reasonably estimated because, among other things, (a) the remedies sought are indeterminate or unspecified, (b) the legal and/or factual theories are not well developed; and/or (c) the matters involve complex or novel legal theories.
Archer USA was a party in a proceeding in Copenhagen, Denmark captioned Cirkelselskabet af 16. Juli 2008 in bankruptcy v. iLoop Mobile, Inc., Vedrorende sag 3, afd. B-1040-12: (Deres j.nr. 1013836). This matter was filed in the Copenhagen City Court by the trustee for Cirkelselskabet, formerly iLoop Mobile ApS (“ApS”). ApS was a Danish subsidiary of Archer USA that was declared bankrupt in July 2008. The trustee claims are based on an asset purchase agreement in December 2007 between Archer USA and ApS. Under the agreement, Archer USA forgave $2,549,794 of debt owed by ApS to Archer USA in exchange for certain assets allegedly owned by ApS. The Copenhagen City Court entered a judgment against Archer USA on February 27, 2012 for the amount of the trustee's claim plus expenses. Archer USA filed an appeal on March 26, 2012 with the High Court of Eastern Denmark (Østre Landsret). The High Court affirmed the lower court’s judgment and awarded the trustee additional expenses. On January 10, 2014, Archer USA appealed the High Court’s decision to the Supreme Court of Denmark. The Supreme Court has declined to hear Archer USA’s appeal and Archer USA has no further opportunities for appeal in Denmark. The judgment entered against Archer USA in Denmark is for $2,549,794, plus interest of approximately $1,292,047, plus fees of approximately $168,000. If Archer USA did pay this judgment, the trustee would owe Archer USA, as a creditor of the estate, approximately $3,000,000 as of March 31, 2014. We believe that it is not probable that Archer USA will pay any amounts as a result of this judgment. We believe the proceedings in the Danish courts suffered from serious violations of United States public policy and due process requirements. In addition, we believe the judgment rendered by the Danish courts is not supported by and offends bankruptcy law and principles of both Denmark and the United States. We intend to vigorously contest the validity and enforceability of this judgment in the United States and to vigorously dispute any attempt made to enforce this judgment or collect these amounts.
We are a party to a wage action captioned James O’Brien v. iLoop Mobile, Inc., Lenco Mobile, Inc. and Matthew R. Harris, No. 12-2-12705-1 (King County Superior Court, filed 4/13/2012). Plaintiff claimed breach of contract and failure to pay wages under a 2011 iLoop employment agreement and Archer USA/Lenco Mobile retention bonus agreement between Plaintiff and the Company. In his complaint, Plaintiff sought retention bonus payments and/or six months’ wages under the employment agreement; double damages in the amount of any wage liability for willful nonpayment of wages, attorneys’ fees and costs, plus pre and post-judgment interest. The court granted summary judgment in defendants’ favor, dismissing the claim under the 2011 iLoop employment agreement, all claims against Matthew Harris, as well as the claim for double damages for willful nonpayment. The plaintiff’s only surviving claim was tried and, following trial, the court entered judgment against plaintiff and in favor of defendants. The plaintiff has appealed the judgment. We believe the claims are without merit and intend to vigorously defend against them on appeal.
We are a party to an action in Nigeria captioned Skynet Telecommunications Limited, Living the Brand Limited v. Archer Mobile South Africa, Lenco Mobile Inc. USA, Suit No: LD/117/2012 (In the High Court of Lagos State in the Lagos Judicial Division Holden at Lagos, filed March 26, 2012). Plaintiffs claim more than $100,000,000 in damages for breach of an alleged partnership agreement with Archer Mobile South Africa. The Company is preparing to file its Statement of Defense in accordance with applicable court procedures. We believe the claims are without merit and intend to vigorously defend against them.
Item 1A. Risk Factors .
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, which we filed with the SEC on April 15, 2014.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None
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ITEM 3. EXHIBITS.
The exhibits required by this item are listed on the Exhibit Index attached hereto.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 15, 2014 | LENCO MOBILE INC. | |
By: | /s/ Matthew Harris | |
Matthew Harris | ||
Chief Executive Officer |
Dated: May 15, 2014 | LENCO MOBILE INC. | |
By: | /s/ Doug Durst | |
Doug Durst, Chief Financial Officer | ||
(Principal Accounting Officer) |
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EXHIBIT INDEX
Exhibit No. | Description |
4.1 | Form of Note Purchase and Security Agreement Filed as Exhibit 4.1 to the registrant’s Form 8-K filed on June 18, 2013 and incorporated herein by reference (Commission File No. 000-153830). |
4.2 | Form of Promissory Note Filed as Exhibit 4.2 to the registrant’s Form 8-K filed on June 18, 2013 and incorporated herein by reference (Commission File No. 000-153830). |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Accounting Officer |
32 | Section 1350 Certification |
101.INS | XBRL Instance Document |
101.SCH | XBRL Schema Document |
101.CAL | XBRL Calculation Linkbase Document |
101.DEF | XBRL Definition Linkbase Document |
101.LAB | XBRL Label Linkbase Document |
101.PRE | XBRL Presentation Linkbase Document |
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