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EX-32.1 - EXHIBIT 32.1 - Adaptive Medias, Inc.v386058_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Adaptive Medias, Inc.v386058_ex31-2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q 

(Mark One)

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal quarter ended June 30, 2014

 

or

 

¨TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________.to _______________.

 

Commission file number 000-54074

 

 

ADAPTIVE MEDIAS, INC.

(Exact name of Registrant as specified in its charter)

 

Nevada   26-0685980
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    

 

16795 Von Karman Avenue, Suite 240

Irvine, CA 92606

(Address of principal executive offices - Zip Code)

 

Registrant's telephone number, including area code: 949-525-4634

 

Securities registered pursuant to Section 12(b) of the Act:   NONE

 

Securities registered pursuant to Section 12(g) of the Act:   Common Stock

 

Indicate by check mark if the Registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ¨  No    

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨   No   x 

 

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 90 days. Yes    x     No ¨

 

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes    x    No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x 

 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 

 

  Large accelerated filer ¨ Accelerated filer ¨  
       
  Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company     

 

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes ¨   No    x 

 

As of August 14, 2014, there were 11,622,990 shares of the Registrant's common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 
 

  

ADAPTIVE MEDIAS, INC.

Table of Contents

 

  Page
PART I – FINANCIAL INFORMATION 3
Item 1. Financial Statements — Unaudited Financial Statements 3
Condensed Consolidated Balance Sheets 3
Condensed Consolidated  Statements of Operations 4
Condensed Consolidated Statement of Stockholders' Equity 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 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II – OTHER INFORMATION 22
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Mine Safety Disclosures 22
Item 5. Other Information 22
Item 6. Exhibits 23
SIGNATURES 23

 

2
 

  

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

 

ADAPTIVE MEDIAS, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

   June 30,   December 31, 
   2014   2013 
Assets          
Current assets:          
Cash  $146,995   $22,188 
Accounts receivable, net of allowance of $29,882 and $15,393, respectively   1,496,770    609,993 
Prepaid expenses   202,502    126,321 
Total current assets   1,846,267    758,502 
Furniture and fixtures, net   5,393    2,044 
Other assets:          
Intangible assets, net   2,668,318    2,878,440 
Deposits   60,468    5,793 
Total other assets   2,728,786    2,884,233 
Total assets  $4,580,446   $3,644,779 
Liabilities and Stockholders' Equity          
Current liabilities:          
Accounts payable and accrued expenses  $2,398,160   $1,711,179 
Convertible notes payable   -    300,000 
Total current liabilities   2,398,160    2,011,179 
           
Other  liabilities   38,433    - 
Total liabilities   2,436,593    2,011,179 
Stockholders' equity:          
Preferred stock, $0.001 par value, 50,000,000 shares authorized; none outstanding   -    - 
Common stock, $0.001 par value, 300,000,000 shares authorized; 6,412,225 and 4,963,022 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively   6,412    4,963 
Additional paid in capital   26,599,749    22,943,002 
Common stock payable   -    8,625 
Accumulated deficit   (24,462,308)   (21,322,990)
Total stockholders' equity   2,143,853    1,633,600 
Total liabilities and stockholders' equity  $4,580,446   $3,644,779 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3
 

  

ADAPTIVE MEDIAS, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2014   2013   2014   2013 
                 
Revenue  $1,113,185   $27,314   $1,844,788   $42,314 
                     
Cost of revenue   723,678    20,390    1,168,038    20,390 
                     
Gross profit   389,507    6,924    676,750    21,924 
                     
Operating expenses:                    
Legal and  professional fees   185,471    862,881    308,287    1,062,399 
Research and development   314,973    83,559    454,861    223,502 
General and administrative expenses   1,041,172    856,965    1,578,491    1,416,936 
Selling expenses   345,300    -    533,924    - 
Depreciation and amortization   120,260    550    239,872    550 
Stock compensation expense   341,798    1,046,506    661,102    2,254,180 
Impairment of intangibles   -    342,610    -    342,610 
Loss on disposal on equipment   643    -    643    - 
Total operating expenses   2,349,617    3,193,071    3,777,180    5,300,177 
                     
Loss from operations   (1,960,110)   (3,186,147)   (3,100,430)   (5,278,253)
                     
Other (income) expense:                    
Other income   (4,189)   -    (6,283)   - 
(Gain) loss on extinguishment of debt   (35,378)   (49,755)   43,636    (15,988)
Interest expense   1,535    117,426    1,535    118,427 
Total other (income) expense   (38,032)   67,671    38,888    102,439 
                     
Net loss  $(1,922,078)  $(3,253,818)  $(3,139,318)  $(5,380,692)
                     
Net loss per common share - basic and diluted  $(0.32)  $(1.26)  $(0.56)  $(2.22)
                     
Weighted average number of common shares outstanding - basic and diluted   6,007,039    2,573,835    5,647,959    2,426,277 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4
 

  

ADAPTIVE MEDIAS, INC.

Condensed Consolidated Statement of Stockholders' Equity

(Unaudited)

 

 

       Additional   Common       Total 
   Common Stock   Paid-in   Stock   Accumulated   Stockholders’ 
   Shares   Amount   Capital   Payable   Deficit   Equity (Deficit) 
Balance, December 31, 2013  $4,963,022   $4,963   $22,943,002   $8,625   $(21,322,990)  $1,633,600 
                               
Stock-based compensation / common shares issued for services   298,204    298    1,058,519    -    -    1,058,817 
Common shares issued for cash   1,095,334    1,095    2,463,404    -    -    2,464,499 
Common stock payable                  (8,625)        (8,625)
Common shares issued for conversion/debt   46,667    47    104,953    -    -    105,000 
Common shares issued for settlement of accounts payable   8,998    9    29,871    -    -    29,880 
Net Loss   -    -    -    -    (3,139,318)   (3,139,318)
Balance, June 30, 2014  $6,412,225   $6,412   $26,599,749   $-   $(24,462,308)  $2,143,853 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5
 

  

ADAPTIVE MEDIAS, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

   Six Months Ended 
   June 30, 
   2014   2013 
         
Cash flows from operating activities:          
Net loss  $(3,139,318)  $(5,380,692)
Adjustments to reconcile net loss          
to net cash used in operating activities:          
Depreciation   578    - 
Amortization of intangibles   239,294    550 
Allowance for bad debts   46,169    - 
Impairment of intangibles   -    342,610 
Common stock issued for services / interest   712,150    3,376,572 
Amortization of deferred financing cost   -    24,397 
Amortization of debt discount on notes payable   -    95,730 
Loss on extinguishment of debt   43,636    (15,988)
Loss on disposal of equipment   643    - 
Change in operating assets and liabilities:          
Accounts receivable   (932,946)   - 
Prepaid expenses   270,486    - 
Deposits   (54,675)   8,000 
Accounts payable and accrued expenses   753,225    180,158 
Customer deposits   -    20,000 
Other liabilities   38,433    - 
Net cash flows used in operating activities   (2,022,325)   (1,348,663)
Cash flows from investing activities:          
Cash acquired from acquisition of Lone Wolf   -    6,057 
Purchase of property and equipment   (4,570)   - 
Purchase of intangibles   (29,172)   (11,020)
Net cash flows used in investing activities   (33,742)   (4,963)
Cash flows from financing activities:          
Proceeds from notes payable   -    41,200 
Payments of notes payable   -    (41,200)
Proceeds from convertible note, net of financing cost of $43,500   -    466,500 
Payments of convertible notes payable   (275,000)   (75,000)
Proceeds from issuance of common stock   2,464,499    945,000 
Common stock payable   (8,625)   - 
Net cash flows provided by financing activities   2,180,874    1,336,500 
Net (decrease) increase in cash   124,807    (17,126)
Cash, beginning of period   22,188    63,286 
Cash, end of period  $146,995   $46,160 
           
Supplemental disclosure of cash flow information:           
Cash paid during the period for:          
Interest  $1,535   $- 
Income taxes  $-   $- 
           
Supplemental disclosure of non-cash investing and financing activities:          
Unrealized loss on available for sale investments  $-   $1,881 
Discount on convertible notes  $-   $424,600 
Warrants issued for deferred financing cost  $-   $74,955 
Common stock issued to satisfy accounts payable  $29,880   $354,922 
Common stock issued for cash-less warrant exercise  $-   $2,875 
Increase in prepaid common stock compensation  $346,667   $140,000 
Issuance of common stock for repayment of convertible note  $105,000   $- 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6
 

  

ADAPTIVE MEDIAS, INC.

Notes to Condensed Consolidated Financial Statements

June 30, 2014

(Unaudited)

 

 

Note 1 – Organization and Nature of Business

 

Adaptive Medias, Inc. (the “Company”) was formed on August 7, 2007 under the laws of the State of Nevada. The Company, through its core content monetization platform and technology, provides app developers, publishers and video content developers one of the only end-to-end monetization platforms driven by programmatic algorithms. The Company provides these unique capabilities to monetize content efficiently across multiple marketing channels, including mobile, video and online display advertising.

 

Pursuant to votes of the majority of the Board of Directors and shareholders, effective on November 6, 2013, the Company changed its name to Adaptive Medias, Inc. in order to better and more fully demonstrate the Company’s emphasis on providing a supply-side platform for mobile, video and online display advertising. In connection with the name change, effective on November 6, 2013, the Company’s ticker symbol was changed to ADTM.

 

The Company is a programmatic audience and content monetization company for website owners, app developers and video publishers who want to more effectively optimize content through advertising. Adaptive Media provides a foundation for publishers and developers looking to engage brand advertisers through a multi-channel approach that delivers integrated, engaging and impactful ads across multiple devices. Adaptive Media meets the needs of its publishers with an emphasis on maintaining user experience, while delivering timely and relevant ads through its multi-channel ad delivery and content platform.

 

 Going Concern

 

The Company’s unaudited condensed consolidated financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern. As of June 30, 2014, the Company had an accumulated deficit of $24,462,308. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

 

In order to continue as a going concern, the Company will need, among other things, additional capital resources. As of June 30, 2014, the Company has continued to raise funds through the sale of its equity securities to obtain additional operating capital. The Company is dependent upon its ability, and will continue to attempt, to secure additional equity and/or debt financing until the Company can earn revenue and realize positive cash flow from its operations. There are no assurances that the Company will be successful in earning revenue and realizing positive cash flow from its operations. Without sufficient financing it would be unlikely that the Company will continue as a going concern.

 

Based on the Company’s current rate of cash outflows, cash on hand and proceeds from the recent sale of equity securities, management believes that its current cash will not be sufficient to meet the anticipated cash needs for working capital through December 31, 2014.

 

The Company’s plans with respect to its liquidity issues include, but not limited to, the following:

 

1)Continue to raise financing through the sale of its equity and/or debt securities;

 

2)Continue to issue restricted stock for compensation due to consultants and for its legacy accounts payable in lieu of cash payments; and;

 

3)Seek additional capital in the public equity markets to continue its operations as it rolls out its current products in development, respond to competitive pressures, develop new products and services, and to support new strategic partnerships. The Company is currently evaluating additional equity financing opportunities and may execute them when appropriate. However, there can be no assurances that the Company can consummate such a transaction, or consummate a transaction at favorable pricing.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and achieve profitable operations. These condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.

 

7
 

  

ADAPTIVE MEDIAS, INC.

Notes to Condensed Consolidated Financial Statements

June 30, 2014

(Unaudited)

 

 

Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations.

 

On April 14, 2014, the shareholders of the Company authorized its Board of Directors to effectuate a reverse stock split, in such Board’s discretion (the “Reverse Stock Split”), which was ultimately declared effective by the Board of Directors as of the close of business on July 14, 2014. As a result of the Reverse Stock Split, every thirty (30) issued and outstanding shares of the Company’s common stock was changed and converted into one (1) share of common stock. Following the Reverse Stock Split, the Company continues to have 300,000,000 shares of common stock authorized for issuance, but the number of outstanding shares of the Company’s common stock was reduced from 192,364,735 shares to 6,412,225 shares. As required by the Financial Accounting Standards Board’s (FASB”) Accounting Standards Codification (“ASC”) Topic 260-10-55-12 “Earnings per Share” all share and per-share computations presented in these condensed consolidated financial statements are based on the new number of shares after the Reverse Stock Split.

 

The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Form 10-K for the year ended December 31, 2013.  In the opinion of management, all adjustments considered necessary for the fair presentation consisting solely of normal recurring adjustments, have been made.  Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Reclassifications

 

Certain reclassifications have been made to amounts in prior periods to conform to the current period presentation. All reclassifications have been applied consistently to the periods presented.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

 

Revenue Recognition

 

The Company recognizes revenue when earned and related costs of sales and expenses when incurred. The Company recognizes revenue in accordance with FASB ASC Topic 605-10-599, Revenue Recognition, Overall, SEC Materials ("Section 605-10-599"). Section 605-10-599 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured. Cost of revenue consists of the cost of the purchased goods and labor related to the corresponding sales transaction. When a right of return exists, the Company defers revenues until the right of return expires. The Company recognizes revenue from services at the time the services are completed.

 

8
 

  

ADAPTIVE MEDIAS, INC.

Notes to Condensed Consolidated Financial Statements

June 30, 2014

(Unaudited)

 

 

Net Loss Per Share Calculation

 

Net loss per share is provided in accordance with FASB ASC 260-10, Earnings per Share. Basic net loss per common share ("EPS") is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted average shares outstanding, assuming all dilutive potential common shares were issued, unless doing so is anti-dilutive. The weighted average number of common shares outstanding for computing basic and diluted EPS for the three and six months ended June 30, 2014 and 2013 were 6,007,039 and 2,573,835 and 5,647,959 and 2,426,277, respectively. Potential dilutive common shares for the three and six months ended June 30, 2014 and 2013 were 6,809,039 and 3,192,780 and 8,939,964 and 4,183,014 , respectively, and were not used in the calculation of diluted EPS as the impact would be anti-dilutive.

 

Intangible assets

 

Intangible assets consisting of websites, customer lists, developed technology and trade names and are stated at cost. Expenditures of costs incurred to renew or extend the term of a recognized intangible asset and materially extend the useful life are capitalized. When assets are sold or otherwise written off due to asset impairment, the cost and the related accumulated amortization are removed from the accounts and any realized gain or loss is recognized at that time. Useful lives of intangible assets are periodically evaluated for reasonableness and the assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may no longer be recoverable.

 

Internal Use Software Development Costs

 

The Company incurs costs to develop software for internal use. The Company expenses all costs that relate to the planning and post implementation phases of development as research and development expense. The Company capitalizes costs when preliminary efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and will be used as intended. Costs incurred for enhancements that are expected to result in additional material functionality are capitalized. The Company capitalized $29,172 and $0 in internal use software costs during the three months ended June 30, 2014 and 2013, and $29,172 and $0 for the six months ended June 30, 2014 and 2013,respectively, which are included in intangible assets on the accompanying unaudited condensed consolidated balance sheets.

 

Amortization commences when the website or software for internal use is ready for its intended use and the amortization period is the estimated useful life of the related asset, which is generally two to three years. Amortization expense totaled $547 and $0 for the three months ended June 30, 2014 and 2013, respectively, and $547 and $0 for the six months ended June 30, 2014 and 2013, respectively.

 

 Convertible Notes Payable

 

The Company evaluated the embedded conversion features within the convertible debt under FASB ASC Topic 815 “Derivatives and Hedging” and determined that neither the embedded conversion feature nor the warrants qualified for derivative accounting. Additionally, the instruments were evaluated under FASB ASC Topic 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion features. It was concluded that a beneficial conversion feature existed for the convertible debt due to the relative fair value of the warrants issued with the debt.

 

The fair value of the warrants granted as a portion of the placement fee in connection with the convertible debt issued in 2013 were estimated to be $74,955 at the date of grant using the Black-Scholes option pricing model and the following assumptions: market value of the stock on the grant date was $0.1250; risk-free interest rate of 3.90%; dividend yield of 0%; volatility factor of 400% weighted average expected life of 3 years; expected forfeiture rate of 0%.

 

The total debt discount recorded on the date of issuance was $424,600 (warrant relative fair value of approximately $222,221 and the beneficial conversion feature was approximately $202,379) which was amortized to interest expense over the term of the note. The Company had amortized $424,600 to interest expense in the consolidated statement of operations for the year ended December 31, 2013.

 

On February 10, 2014, the Company and Gemini Master Fund Ltd. (“Gemini”) settled the obligations contemplated by the Stock Purchase Agreement and due under the convertible note payable and cancelled the 133,334 warrants in exchange for: (i) the conversion of $105,000 of note principal at $0.075 per share, for a total of 46,667 shares of Company common stock, pursuant to the terms of the Note; and (ii) a cash payment of $275,000. The terms of this settlement were memorialized in the Settlement and General Release Agreement which settled all outstanding obligations with Gemini.

 

9
 

  

ADAPTIVE MEDIAS, INC.

Notes to Condensed Consolidated Financial Statements

June 30, 2014

(Unaudited)

 

 

Recently Issued Accounting Pronouncements

 

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (Topic 740). ASU 2013-11 requires that unrecognized tax benefits be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances. When those circumstances exist, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company adopted this guidance effective January 1, 2014. The adoption of ASU 2013-11 did not have a significant impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB and the International Accounting Standards Board jointly issued ASU No. 2014-9, Revenue from Contracts with Customers, which clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted under U.S. GAAP and retrospective application is permitted, but not required. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial position and results of operations.

 

Note 3 – Intangible Assets

 

The following table summarizes the intangible assets as of June 30, 2014 and December 31, 2013.

 

   Useful Lives  June 30, 2014   December 31, 2013 
            
Websites  2 years  $11,296   $11,296 
Customer lists  1 years   306,505    306,505 
Developed technology  3 years   439,588    410,416 
Trade names  3 years   85,607    85,607 
       842,996    813,824 
Less: accumulated amortization      (445,263)   (205,969)
              
Identifiable intangibles, net      397,733    607,855 
              
Goodwill      2,270,585    2,270,585 
Intangible assets, net     $2,668,318   $2,878,440 

 

For the three months ended June 30, 2014 and 2013, the amortization for intangible assets was $119,920 and $550, respectively. For the six months ended June 30, 2014 and 2013, the amortization of intangible assets was $239,294 and $550, respectively.

 

Note 4 – Income Taxes

 

The Company had net operating loss carryforwards (“NOLs”) as of December 31, 2013 of approximately $10,150,000 for both federal and state tax purposes, portions of which are expiring at various years through 2033. The Company may be able to utilize its NOLs to reduce future federal and state income tax liabilities. However, these NOLs are subject to various limitations under Internal Revenue Code (“IRC”) Section 382. IRC Section 382 limits the use of NOLs to the extent there has been an ownership change of more than 50 percentage points. In addition, the NOL carryforwards are subject to examination by the taxing authority and could be adjusted or disallowed due to such exams. Although the Company has not undergone an IRC Section 382 analysis, it is possible that the utilization of the NOLs could be significantly limited. 

 

The Company has no tax provision for the three and six month periods ended June 30, 2014 and 2013 due to losses incurred and full valuation allowances against its net deferred tax assets.

 

10
 

  

ADAPTIVE MEDIAS, INC.

Notes to Condensed Consolidated Financial Statements

June 30, 2014

(Unaudited)

 

 

Note 5 – Notes Payable

 

As of June 30, 2014, there were no outstanding notes payable. On February 10, 2014, the Company and Gemini settled the obligations contemplated by the Stock Purchase Agreement and due under the convertible note payable and cancelled the 133,334 warrants in exchange for: (i) the conversion of $105,000 of note principal at $2.25 per share, for a total of 46,667 shares of Company common stock, pursuant to the terms of the Note; and (ii) a cash payment of $275,000. The terms of this settlement were memorialized in the Settlement and General Release Agreement. This agreement settled all outstanding obligations with Gemini. In connection with this transaction, the Company recognized a loss on the settlement of the debt in the amount of $79,014.

 

Note 6 – Stockholders’ Equity

  

Issuance of Common Stock

 

During the six months ended June 30, 2014, the Company issued 298,204 shares of its common stock to various consultants in exchange for services rendered with an aggregate fair value of $1,058,817 or $3.55 per share on average. The Company also issued 46,667 shares of its common stock in connection with the settlement of a convertible note with a fair value of $105,000 (note 5). Additionally, the Company issued and sold 1,095,334 shares of its common stock to several accredited investors for an aggregate purchase price of $2,464,499 or $2.25 per share on average. Finally, in the six months ended June 30, 2014, the Company issued 8,998 shares of its common stock for settlement of $29,880 of accounts payable or $3.32 per share on average. The total number of shares outstanding as of June 30, 2014 was 6,412,225.

 

Note 7 – Warrants and Options

 

Stock Option Plans

 

The Company’s shareholders approved the Company’s 2010 Stock Incentive Plan (the “2010 Plan”) on November 2, 2010. The Plan provides for the grant of non-statutory or incentive stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based awards to the Company’s employees, Officers, Directors or consultants. The Company’s Board of Directors administers the 2010 Plan, selects the individuals to whom options will be granted, determines the number of options to be granted, and the term and exercise price of each option. Stock options granted pursuant to the terms of the 2010 Plan generally cannot be granted with an exercise price of less than 100% of the fair market value on the date of the grant. The term of the options granted under the 2010 Plan cannot be greater than 10 years. Options vest at varying rates generally over three to five years along with performance based options.

 

In September 2013, the Company approved the increase in the number of shares issuable pursuant to the 2010 Plan to 15,000,000. In December 2013, the Company’s Board of Directors approved an amendment to the Amended and Restated 2010 Stock Incentive Plan which increased the number of shares issuable pursuant to the Plan by 15,000,000 to 30,000,000 shares. Both amendments have also been approved by the Company’s shareholders. Upon completion of the Reverse Stock Split on April 14, 2014, the Company continues to have 30,000,000 shares issuable pursuant to the 2010 Plan.

 

During the year ended December 31, 2013, options for 774,750 shares had been granted, with 10,000 shares exercised, 567,528 forfeited and 542,056 outstanding and 29,457,944 shares available for future grant. Shares authorized under the amended 2010 Plan will be available for issuance pursuant to options or awards granted under the Plan, as amended from time to time.

 

The following table reflects the option activity during the six months ended June 30, 2014:

 

   Options for   Weighted 
   Common   Average 
   Shares   Exercise Price 
Outstanding as of December 31, 2013   542,056   $3.60 
Granted   241,667    1.97 
Exercised   -    - 
Forfeited, cancelled, expired   (4,677)   2.70 
Outstanding as of June 30, 2014   779,046   $2.89 

 

11
 

  

ADAPTIVE MEDIAS, INC.

Notes to Condensed Consolidated Financial Statements

June 30, 2014

(Unaudited)

 

 

For the six months ended June 30, 2014, the Company granted 241,667 options to purchase its common stock while recording stock compensation expense for these options of $576,384 using the Black-Scholes option pricing model based upon the following assumptions: term of 5 years, risk free interest rate ranging from 1.50% ~ 1.51%, a dividend yield of 0% and a volatility rate ranging from 134% ~ 145%. In that same period, 4,677 stock options were cancelled by certain consultants who no longer provided services to the Company.

 

Warrants

 

The following table reflects warrant activity during the six months ended June 30, 2014:

 

   Warrants for   Weighted 
   Common   Average 
   Shares   Exercise Price 
Outstanding and exercisable as of December 31, 2013   1,550,959   $4.80 
Granted   1,095,334    3.00 
Exercised – cash   -    - 
Exercised - cash-less exercise   -    - 
Forfeited, cancelled, expired   (133,334)   2.25 
Outstanding as of June 30, 2014 2,512,959   $4.15 

 

For the six months ended June, 2014, the Company issued 1,095,334 warrants to purchase its common stock. The warrants are non-forfeitable as of June 30, 2014. In that same period, 133,334 warrants were cancelled in connection with a settlement of a note payable (see Note 5).

 

As of June, 2014, the Company maintained total outstanding warrants to purchase 2,512,959 shares of its common stock at an average exercise price of $4.15 per share.

 

Note 9 – Commitments and Contingencies

 

Legal Proceedings

 

The Company has the following legal proceedings all of which are related to Mimvi, Inc. the predecessor company to Adaptive Medias, Inc.

 

In July 2013, the Company became aware that a default judgment had been entered against it in favor of Mario Armando Wilson and against the Company in the amount of $62,141. The Company is investigating the circumstances under which the judgment was entered, and reserves all rights to challenge the propriety of the judgment. As of June 30, 2014, the Company has accounted for approximately $35,000 being owed to Mr. Wilson.

 

The Company is in an arbitration case entitled Felix Chan v. Mimvi, Inc., pending in the American Arbitration Association, filed November 25, 2013. The claimant, Felix Chan, asserts that the Company is obliged to pay him $174,000 for services as an independent contractor of the Company. No discovery has taken place. The Company intends to vigorously defend the case. The outcome is uncertain.

 

On September 20, 2013, Eric Rice, a former employee, sued the Company (Rice v. Mimvi, etc., et al., LASC No. LC100816, Van Nuys Superior Court). The complaint alleges that the Company breached Mr. Rice's employment agreement and made misrepresentations when the Company terminated Mr. Rice. The complaint does not specify the amount of alleged damages. The Company denies any breach or misrepresentation, and the Company denies that it owes Mr. Rice anything. The Company has filed a cross-complaint against Mr. Rice for damages and other relief. Discovery is underway.

 

On July 29, 2013, Khoi Senderowicz filed a lawsuit against the Company and two other individuals, Andrew Linton and Kasian Franks (Senderowicz v. Franks, etc., et al., Case No. RG13689457, Alameda County Superior Court). The suit alleges breach of leases for real property and damages to real property and seeks $353,894 in alleged damages. The Company has responded to the Complaint and denied all claims and damages. Discovery is underway.

 

In April of 2014, the Company became aware that a lawsuit was filed against the Company in the Superior Court of Santa Clara County, California by Amanda Besemer, who was an Advisory Board member from 2010-2012. Ms. Besemer seeks damages in the amount of 26,667 shares of stock. The Company has responded to the Complaint and denied the allegations. Discovery is underway.

 

12
 

  

ADAPTIVE MEDIAS, INC.

Notes to Condensed Consolidated Financial Statements

June 30, 2014

(Unaudited)

 

 

The Company does not believe the ultimate outcome of these proceedings will have a material adverse impact on the Company’s consolidated financial statements.

 

Note 10 – Concentrations

 

The following table reflects the concentration of revenue for during the three and six months ended June 30, 2014 and 2013, respectively:

 

   Concentration for the      Concentration for the 
   Three Months Ended      Six Months Ended 
   June 30, 2014   June 30, 2013      June 30, 2014   June 30, 2013 
Customer 1   25%   -   Customer 1   20%   - 
Customer 2   16%   -   Customer 2   17%   - 
Customer 3   13%   -   Customer 3   12%   - 
Customer 4   11%   -   Customer 4   11%   - 
Customer 5   -    24%  Customer 5   -    39%
Customer 6   -    23%  Customer 6   -    18%
Customer 7   -    13%  Customer 7   -    13%
Customer 8   -    13%  Customer 8   -    10%
Customer 9   -    12%             

 

Included in accounts receivable was $1,022,509 from these four (4) customers as of June 30, 2014.

 

Note 11 – Subsequent Events

 

The Company follows the guidance in FASB ASC Topic 855, Subsequent Events (“ASC 855”), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before the consolidated financial statements are issued or are available to be issued. ASC 855 sets forth (i) the period after the balance sheet date during which management of a reporting entity evaluate events or transactions that may occur for potential recognition or disclosure in the consolidated financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its consolidated financial statements, and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

 

Entry into a Material Definitive Agreement

 

On July 1, 2014 the Company granted 125,930 stock options to several employees with a fair market value of $225,139 and granted 97,848 restricted stock grants with a fair market value of $294,027 to various employees, Directors and consultants under the terms of the 2010 Stock Incentive Plan.

 

On April 14, 2014, the shareholders of the Company authorized its Board of Directors to effectuate a reverse stock split, in such Board’s discretion (the “Reverse Stock Split”), which was ultimately declared effective by the Board of Directors as of the close of business on July 14, 2014. As a result of the Reverse Stock Split, every thirty (30) issued and outstanding shares of the Company’s common stock was changed and converted into one (1) share of common stock. The Board of Directors resolved that any fractional shares due to shareholders as a result of the Reverse Stock Split shall be rounded up to the nearest whole number of shares. Accordingly, all share and per share data have been adjusted to reflect the impact of this Reverse Stock Split.

 

On July 15, 2014, the Company executed a Stock Purchase Agreement (the “Agreement”) with OneScreen, Inc., a Delaware corporation (“OneScreen”), Media Graph, Inc., a Nevada corporation and OneScreen’s spun-off former subsidiary (“Media Graph”), and the shareholders of Media Graph, effective June 30, 2014, whereby the Company acquired certain assets of OneScreen, which immediately prior thereto were held by Media Graph, in exchange for 5,000,000 shares of the Company’s common stock (the “Acquisition”). On July 15, 2014, the parties to the Agreement executed the First Amendment to the Stock Purchase Agreement (the “Amendment”), which (i) amends the effective date of the Agreement to July 15, 2014, (ii) limits the scope of Section 5.04 of the Agreement to apply only to the Restricted Selling Shareholders, as defined in the Amendment, and (iii) adds the Selling Shareholders as a signatory to the Agreement.

 

13
 

 

ADAPTIVE MEDIAS, INC.

Notes to Condensed Consolidated Financial Statements

June 30, 2014

(Unaudited)

 

 

The assets acquired pursuant to the Acquisition consist of intellectual property, equipment, selected customer agreements and talent, which will be used to enhance the Company’s end-to-end audience and content monetization platform for display, mobile, and video advertising across all digital channels and environments. This includes video storage and hosting, video encoding, content management, HTML5/Flash video players, and advertising inventory management. OneScreen shareholders received consideration equal to approximately $16,500,000, which reflects the Company’s estimate of the value of the assets acquired.

 

Issuance of Common Stock 

 

Between July 1, 2014 and August 14, 2014, the Company issued and sold 166,666 shares of its common stock for cash proceeds of $375,000 or $2.25 per share, on average. Additionally, the Company issued 22,432 shares of common stock to various employees and consultants for services rendered with a fair value of $64,910 or $2.89 per share on average. Additionally, the Company issued 5,000,000 shares of common stock in connection with the acquisition of certain assets of Media Graph, a Delaware corporation. Finally, the Company issued 21,667 shares of common stock for settlement of $52,000 of accounts payable or $2.40 per share on average.

 

14
 

  

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis provides information to explain our results of operations and financial condition. You should also read our unaudited interim condensed consolidated financial statements and their notes included in this Form 10-Q, and our audited consolidated financial statements and their notes, Risk Factors and other information included in our Annual Report on Form 10-K for the year ended December 31, 2013. This report contains forward-looking statements. Forward-looking statements within this Form 10-Q are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “may,” “will” “plans” and other similar expressions, however, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are subject to significant risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed in, or implied by, these forward-looking statements. Except as expressly required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements to reflect events, circumstances or developments occurring subsequent to the filing of this Form 10-Q with the U.S. Securities and Exchange Commission or for any other reason and you should not place undue reliance on these forward-looking statements. You should carefully review and consider the various disclosures the Company makes in this report and our other reports filed with the U.S. Securities and Exchange Commission that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.

  

Overview

 

The Company, through its core content monetization platform and technology, provides app developers, publishers and video content developers one of the only end-to-end monetization platforms driven by programmatic algorithms. The Company provides these unique capabilities to monetize content efficiently across multiple marketing channels and devices, including mobile, video and online display advertising.

 

Pursuant to votes of the majority of the Board of Directors and shareholders, effective on November 6, 2013, the Company changed its name to Adaptive Medias, Inc. in order to better and more fully demonstrate the Company’s emphasis on providing a supply-side platform for mobile, video and online display advertising. In connection with the name change, effective on November 19, 2013, the Company’s ticker symbol was changed to ADTM.

 

The Company is a programmatic audience and content monetization company for website owners, app developers and video publishers who want to more effectively optimize content through advertising. The Company provides a foundation for publishers and developers looking to engage brand advertisers through a multi-channel approach that delivers integrated, engaging and impactful ads across multiple devices. Adaptive Media meets the needs of its publishers with an emphasis on maintaining user experience, while delivering timely and relevant ads through its multi-channel ad delivery and content platform. Our corporate headquarters are located at 16795 Von Karman Avenue, Suite 240, Irvine, California 92606. Our website address is www.adaptivem.com.

 

Business Overview

 

The Company, through its core audience and content monetization platform, provides web publishers, app developers and video content providers one of the only end-to-end monetization platforms driven by programmatic algorithms. We are a leader in programmatic, real time bidding (“RTB”) advertising across mobile, video and display, as well as, a provider of a business-to-business digital video content management platform SaaS.

 

On the supply side, the Company provides each publishing client on the supply side with unique capabilities to distribute and monetize their content across multiple channels or operating systems, where they can serve a piece of content on a laptop, a tablet and a phone without any additional cost or license. The optimization modules in our technology can be deployed across multiple channels on the platform to provide capabilities such as ad serving, RTB, ad revenue waterfall management and video content management, and enabling necessities like the video player itself. We help mobile app developers, publishers and video content developers monetize their ad inventory through our proprietary ad-delivery and optimization platform. The Company provides these unique capabilities to monetize content efficiently across multiple marketing channels, including mobile, video and online display advertising. Our relationships span across health, sports, entertainment, auto, fashion, news, tech and luxury verticals. 

 

The Company provides a foundation for publishers and developers looking to engage brand advertisers through a multi-channel approach that delivers integrated, engaging and impactful ads across multiple devices. It meets the needs of its publishers with an emphasis on maintaining user experience, while delivering timely and relevant ads through its multi-screen, multi-channel ad delivery and content platform.

 

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In short, Adaptive Media is a “one-stop-shop” when it comes to digital monetization. From licensing video content, to managing digital advertising, to connecting with leading publishers in target markets, Adaptive Media offers a complete digital technology stack to support content owners and producers.

 

On the demand side, The Company’s programmatic technology stack is advertiser-friendly; the platform provides advertisers with a brand-safe and transparent marketplace for buying media across mobile, video and display. This is essential for big brand advertisers and brand-direct ecommerce companies who require a high level of safety, context and relevance for their advertisements.

 

Launching in 2014, the Company marketplace will enable publishers a seemingly simple marriage of quality content, users and monetization opportunities side-by-side with advertising partners who drive demand. This is accomplished through a complex set of discovery technology solutions, driven by patents, and efficient algorithmic data that cohesively interact in any digital marketing environment where advertising, audience and content must come together.

 

Competition

 

There are many fractional players in this space. There are those who provide video players like Ooyala, BrightCove and Kaltura. Others provide advertising network services like BrightRoll, Grab and TubeMogul. A final group provides ad serving and demand services including RocketFuel, LiveRail or FreeWheel. These providers and their fragmented solutions only complicate the choices that a publisher, app developer or video content provider must make to participate in today’s market for audiences and advertising revenue. AOL is the only other company who can claim to provide an end-to-end solution. They have a video player and ad serving capabilities through Adap.tv, CMS and CDN capabilities through 5min Media and a wealth of inventory and demand through legacy AOL properties and exchange integration.

 

Despite AOL’s size, we have several significant advantages that give us confidence to compete in this space. The first main area of competitive advantage pertains to AOL’s legacy inventory source. While they benefit from many domains under their control, they are also hampered by the responsibility to fill advertising through these domains first. Our advantage is that we are inventory agnostic. If advertisers want and can benefit from our direct publisher inventory, we are happy to provide it. If advertisers want to take advantage of efficiencies through RTB exchange inventory, we can provide that as well. The Company is less restricted and can provide better optimization choices than AOL.

 

The second area of competitive advantage is in pricing. AOL’s legacy properties have high floor inventory costs. While they address this issue by explaining that their inventory is “premium”, the statement often falls on deaf ears as advertisers are hearing the same argument from all inventory sources. Our inventory flexibility and existing monetization contracts allow us to deliver advertising with the same quality as AOL at a lower cost per impression. This allows us an edge in negotiating onto advertising campaigns where we don’t have an existing track record.

 

Business Development

 

Our business development efforts are focused on three main areas. The first is signing content providers to syndication and monetization deals. The second is signing publishers onto our platform. The third area of focus is driving advertising demand or fulfillment through our platform. In 2013, we added approximately 50 publishers. Our overall content contracted in 2013 as we began to remove underperforming partners and categories. We expect all categories to grow in 2014 as we move toward stabilization of our platform and expansion of our technical capabilities.

 

Today our demand is consistently fulfilling at sustainable rates for our publishers. We have over 350,000 rights cleared pieces of video content across all interest categories. We have recently signed a contract with Beanstock Media which increases our publisher base with some high profile publishers including Ask.com, ChristianMingle, Dictionary.com, MeetMe, Slacker, TheDailyBeast, and ZipRealty.

 

In 2014, we are making a major push to penetrate the comScore top 1000 publisher accounts. Engaging these publishers will increase our platform utilization and SaaS income. It will increase the consumption and utilization of our content partners resulting in higher income. It will also allow for greater reach for our demand partners and advertising agencies leading to higher advertising revenues.

 

In addition to traditional digital publishers, we are making a push to penetrate select top TV properties and engage them in bridging the gap between legacy TV consumption and video advertising in digital. This will be enabled by our proprietary technology that is currently developing with the support of our adviser.

 

16
 

  

Critical Accounting Policies

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and related notes. Our significant accounting policies are described in Note 2 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. There were no significant changes to our significant accounting policies during the six months ended June 30, 2014. 

 

Three Months Ended June 30, 2014 compared with Three Months Ended June 30, 2013

 

Revenue

 

For the three months ended June 30, 2014, we recognized revenue to $1,113,185 compared to $27,314 in the comparable period of 2013, an increase of $1,085,871 or 3,976%. The increase was primarily due to the acquisitions of Adaptive Media and Ember made in July 2013 and December 2013, respectively. Additionally, this increase in revenue is attributable to both increased spending by existing customers and an increase in the number of active customers adopting our solution. We expect our revenue to continue to fluctuate based on seasonal factors that affect the advertising industry as a whole. The Company is actively working to mitigate these fluctuations by proactive planning and upfronts.

 

Cost of Revenue

 

For the three months ended June 30, 2014, our cost of revenue increased to $723,678 compared to $20,390 in the comparable period of 2013, an increase of $703,288 or 3,449%. The increase was primarily due to the acquisition of Adaptive Media and an increase in media costs to support our increased revenue. We anticipate that our cost of revenue will increase in absolute dollars as our revenue increases.

 

Operating Expenses

 

For the three months ended June 30, 2014, our operating expenses decreased to $2,349,617, compared to $3,193,071 in the comparable period of 2013, a decrease of $843,454 or 26%.

 

For the three months ended June 30, 2014, stock compensation expense decreased to $341,798 from $1,046,506 in the comparable period of 2013, a decrease of $704,708 or 67%. The decrease was primarily due to a decline in the number of options issued during the three months ended June 30, 2014. Additionally, the volatility of our common stock decreased from 400% to a rate ranging from 139% ~ 145% for the three months ended June 30, 2014, resulting in a reduction in the fair market value of the options calculated using the Black-Scholes option pricing model.

 

For the three months ended June 30, 2014, legal and professional fees decreased to $185,471 from $862,881 in the comparable period of 2013, a decrease of $677,410 or 79%. The decrease was primarily due to a more efficient allocation of internal resources and a better management of current open litigation matters, financial matters, equity issues and other activities.

 

For the three months ended June 30, 2014, our selling expenses that we incurred increased to $345,300 from $0 in the comparable period of 2013, an increase of $345,300 or 100%. The increase was primarily due to an expansion of our sales and marketing personnel and related costs. We expect sales and marketing expenses to increase in absolute dollars in future periods, but at a slower growth rate.

 

For the three months ended June 30, 2014, the research and development costs that we incurred increased to $314,973 from $83,559 in the comparable period of 2013, an increase of $231,414 or 277%. We believe that continued investment in technology is critical to attaining our strategic objectives, and, as a result, we expect research and development expenses to increase in absolute dollars in future periods.

 

For the three months ended June 30, 2014, the general and administrative expenses that we incurred increased to $1,041,172 from $856,965 in the comparable period of 2013, an increase of $184,207 or 21%. The increase was primarily due to the overall increase in our operations, specifically investor relations expenses and personnel expenses. We expect general and administrative expenses to increase in absolute dollars in future periods.

 

For the three months ended June 30, 2014, the gain on settlement of debt that we incurred decreased to $35,378 from $49,755 in the comparable period of 2013. The decrease was primarily due to the fair value measurement of restricted common stock issued to settle the convertible note payable in February 2014.

 

For the three months ended June 30, 2014, depreciation and amortization increased to $120,260 from $550 in the comparable period of 2013, an increase of $119,710. The increase was primarily due to the overall increase in furniture and fixtures and intangibles assets acquired that are being amortized over their estimated useful lives. We expect depreciation and amortization to increase in absolute dollars in future periods.

 

17
 

  

For the three months ended June 30, 2014, impairment of intangibles decreased to $0 from $342,610 in the comparable period of 2013, a decrease of $342,610 or 100%. The decrease was primarily due to the fact that the management evaluated the intangibles and concluded that no impairment was necessary for the three months ended June 30, 2014.

 

Net Loss

 

For the three months ended June 30, 2014, we incurred a loss of $1,922,078, or $0.32 basic and diluted loss per share compared to a loss of $3,253,818, or $1.26 basic and diluted loss per share for the three months ended June 30, 2013. The decrease in the net loss is described above.

 

Six Months Ended June 30, 2014 compared with Six Months Ended June 30, 2013

 

Revenue

 

For the six months ended June 30, 2014, we recognized revenue of $1,844,788 compared to $42,314 in the comparable period of 2013, an increase of $1,802,474 or 4260%. The increase was primarily due to the acquisitions of Adaptive Media and Ember made in July 2013 and December 2013, respectively. Additionally, this increase in revenue is attributable to both increased spending by existing customers and an increase in the number of active customers adopting our solution. The number of active customers increased from one as of June 30, 2013 to eighty-two (82) as of June 30, 2014. Over the last quarters we invested in sales and marketing resources and expect revenue growth to materialize from this investment over the next several years. We operate in a market with seasonal fluctuations in revenue. Historically, the fourth quarter of the year reflects our highest level of advertising activity and the first quarter reflects the lowest level of such activity. We expect our revenue to continue to fluctuate based on seasonal factors that affect the advertising industry as a whole. The Company is actively working to mitigate these fluctuations by proactive planning and upfronts.

 

Cost of Revenue

 

For the six months ended June 30, 2014, our cost of revenue increased to $1,168,038 compared to $20,390 in the comparable period of 2013, an increase of $1,147,648 or 5628%. The increase was primarily due to the acquisition of Adaptive Media and an increase in media costs to support our increased revenue. We anticipate that our cost of revenue will increase in absolute dollars as our revenue increases.

 

Operating Expenses

 

For the six months ended June 30, 2014, our operating expenses decreased to $3,777,180, compared to $5,300,177 in the comparable period of 2013, a decrease of $1,522,997 or 29%. The decrease was primarily due to a significant decrease in the stock option compensation expense and legal and professional fees.

 

For the six months ended June 30, 2014, stock compensation expense decreased to $661,102 from $2,254,180 in the comparable period of 2013, a decrease of $1,593,078 or 71%. The decrease was primarily due to a decline in the number of options issued during the six months ended June 30, 2014. Additionally, the volatility of our common stock decreased from 400% to a rate ranging from 139% ~ 145% for the six months ended June 30, 2014, resulting in a reduction in the fair market value of the options calculated using the Black-Scholes option pricing model.

 

For the six months ended June 30, 2014, legal and professional fees decreased to $308,287 from $1,062,399 in the comparable period of 2013, a decrease of $754,112 or 71%. The decrease was primarily due to a more efficient allocation of internal resources and a better management of current open litigation matters, financial matters, equity issues and other activities.

 

For the six months ended June 30, 2014, our selling expenses that we incurred increased to $533,924 from $0 in the comparable period of 2013, an increase of $533,924 or 100%. The increase was primarily due to an expansion of our sales and marketing personnel and related costs. We expect sales and marketing expenses to increase in absolute dollars in future periods, but at a slower growth rate.

 

For the six months ended June 30, 2014, the research and development costs that we incurred increased to $454,861 from $223,502 in the comparable period of 2013, an increase of $231,359 or 104%. We believe that continued investment in technology is critical to attaining our strategic objectives, and, as a result, we expect research and development expenses to increase in absolute dollars in future periods.

 

For the six months ended June 30, 2014, the general and administrative expenses that we incurred increased to $1,578,491 from $1,416,936 in the comparable period of 2013, an increase of $161,555 or 11%. The increase was primarily due to the overall increase in our operations, specifically investor relations expenses and personnel expenses. We expect general and administrative expenses to increase in absolute dollars in future periods.

 

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For the six months ended June 30, 2014, depreciation and amortization increased to $239,872 from $550 in the comparable period of 2013, an increase of $239,322. The increase was primarily due to the overall increase in furniture and fixtures and intangibles assets acquired that are being amortized over their estimated useful lives. We expect depreciation and amortization to increase in absolute dollars in future periods.

 

For the six months ended June 30, 2014, impairment of intangibles decreased to $0 from $342,610 in the comparable period of 2013, a decrease of $342,610 or 100%. The decrease was primarily due to the fact that the management evaluated the intangibles and concluded that no impairment was necessary for the six months ended June 30, 2014.

 

For the six months ended June 30, 2014, the loss on settlement of debt that we incurred increased to $43,636 from a gain of $15,988 in the comparable period of 2013. The increase was primarily due to the fair value measurement of restricted common stock issued to settle the convertible note payable in February 2014.

 

Net Loss

 

For the six months ended June 30, 2014, we incurred a loss of $3,139,318, or $0.56 basic and diluted loss per share compared to a loss of $5,380,692, or $2.22 basic and diluted loss per share for the six months ended June 30, 2013. The decrease in the net loss is described above.

 

Liquidity and Capital Resources

 

As of June 30, 2014, we had total current assets of $1,846,267 consisting of $146,995 cash, $1,496,770 accounts receivable, net of allowance of $29,882, and $202,502 prepaid expenses. We had total current liabilities of $2,398,160 consisting of accounts payable and accrued expenses. We also had non-current liabilities totaling $38,433 at June 30, 2014.

 

We currently have limited funds to pay our currently due debts and liabilities. Should one or more of our creditors seek or demand payment, we are not likely to have the resources to pay or satisfy any such claims. Thus, we face risk of defaulting on our obligations to our creditors with consequential legal and other costs which would adversely impact our ability to continue our existence as a corporate enterprise.

 

Our insolvent financial condition also may create a risk that we may be forced to file for protection under applicable bankruptcy laws or state insolvency statutes. We also may face the risk that a receiver may be appointed. We face that risk and other risks resulting from our current financial condition.

 

For these and other reasons, we anticipate that unless we can obtain sufficient capital from outside sources and do so in the very near future, we may be unable to continue to operate as a corporation, continue to meet our filing obligations under the Securities Exchange Act of 1934, or otherwise satisfy our obligations to our stock transfer agent, our accountants, our legal counsel, our EDGAR filing agent, and many others.

 

For these and other reasons, our management recognizes the adverse difficulties and continuing severe challenges we face. Apart from the funds that we have recently received, there can be no assurance that we will receive any additional financing or funding from any source or if any financing should be obtained, that existing shareholders will not incur substantial, immediate, and permanent dilution of their existing investment.

 

The following is a summary of the Company's cash flows provided by (used in) operating, investing, and financing activities for the six months ended June 30, 2014 and 2013:

 

For the Six Months Ended
   June 30, 2014   June 30, 2013 
Net cash (used in) operating activities  $(2,,022,325)  $(1,348,663)
Net cash (used in) provided by investing activities  $(33,742)  $(4,963)
Net cash provided by financing activities  $2,180,874   $1,336,500 
Net increase (decrease) in cash  $124,807   $(17,126)
Cash - beginning of period  $22,188   $63,286 
Cash - end of period  $146,995   $46,160 

 

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Going Concern Uncertainties

 

As of June 30, 2014, we do not have an adequate source of operating revenue to cover our operating costs, and have only limited working capital with which to pursue our business plan. The amount of capital required to sustain operations until we achieve positive cash flow from operations is subject to future events and uncertainties. It will be necessary for us to secure additional working capital through sales of our common stock and/or debt financing, and there can be no assurance that such funding will be available in the future. These conditions raise substantial doubt about our ability to continue as a going concern.

 

Our auditor has issued a going concern qualification as part of their opinion in their audit report contained in Form 10-K filed with the SEC for the years ended December 31, 2013 and 2012.

 

Capital Expenditures

 

For the six months ended June 30, 2014, we have not incurred any material capital expenditures.

 

Commitments and Contractual Obligations

 

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

 

Off-Balance Sheet Arrangements

 

We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be considered material to investors.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Principal Accounting Officer, carried out an evaluation of the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the "Evaluation Date"). Based upon that evaluation, our Chief Executive Officer and our Principal Accounting Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Principal Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

  

Remediation

 

To remediate the material weaknesses, as identified above, in internal control over financial reporting, management has taken or will take the following actions as the financial resources become available:

 

·We have retained additional accounting personnel, and continue to enhance our internal finance and accounting organizational

structure.

 

·We have hired a third party consultant who has the required background and experience in accounting principles generally accepted in the United States of America and with SEC rules and regulations.

 

·We are in the process of further enhancing the supervisory procedures to include additional levels of analysis and quality control reviews within the accounting and financial reporting functions.

 

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·We are in the process of strengthening our internal policies and enhancing our processes for ensuring consistent treatment and recording of reserve estimates and that validation of our conclusions regarding significant accounting policies and their application to our business transactions are carried out by personnel with an appropriate level of accounting knowledge, experience and training.

 

·We will build our procedures to effectively control our closing activities.

 

·We will improve and automate the preparation of our audit schedules to include a systematic audit of all the figures presented in the financial statements.

 

We believe that the foregoing actions will improve our internal control over financial reporting, as well as our disclosure controls and procedures. We intend to perform such procedures and commit such resources as they become available and necessary to continue to allow us to overcome or mitigate the material weaknesses such that we can make timely and accurate quarterly and annual financial filings until such time as the material weaknesses are fully addressed and remediated.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

The Company legal proceedings are summarized in Note 9 of the condensed consolidated financial statements.

 

The Company does not believe the ultimate outcome of these proceedings will have a material adverse impact on the Company’s consolidated financial statements.

 

There are presently no other material pending legal proceedings to which the Company, any executive officer, any owner of record or beneficially of more than five percent of any class of voting securities is a party or as to which any of its property is subject, and no such proceedings are known to the Company to be threatened or contemplated against it.

 

Item 1A. Risk Factors.

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

During the six months ended June 30, 2014 the Company issued 298,204 shares of common stock to various employees and consultants at an average of $3.55 per share in exchange for services rendered.

 

On February 10, the Company issued 46,667 shares of common stock to the holder of a convertible promissory note at $2.25 per share upon the conversion of the promissory note with a fair market value of $105,000.

 

During the six months ended June 30, 2014, the Company issued 8,998 shares of common stock to several investors at an average of $3.32 per share in exchange for the settlement of accounts payable in the aggregate amount of $29,880.

 

During the six months ended June 30, 2014, the Company issued 1,095,334 shares of common stock to several accredited investors at a price of $2.25 per share for an aggregate purchase price of $2,464,499.

 

No underwriters were involved in any of the issuances provided in this Item 2. The shares were issued pursuant to Section 4(2) and Rule 506 of Regulation D promulgated thereunder because such purchasers represented that they were “accredited investors” as such term is defined under the Securities Act and the sale did not involve any form of general solicitation or general advertising.  The investor made investment representations that the shares were taken for investment purposes and not with a view to resale.  The shares of Common Stock issued are restricted under Rule 144 promulgated under the Securities Act.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information.

 

None.

 

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Item 6. Exhibits

 

Number   Exhibit
31.1   Certification of the Company’s Principal Executive Officer pursuant to 15d-15(e), under the Securities and Exchange Act of 1934.
     
31.2   Certification of the Company’s Principal Financial Officer pursuant to 15d-15(e), under the Securities and Exchange Act of 1934.
     
32.1   Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

 SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  ADAPTIVE MEDIAS, INC.
   
August 14, 2014 /s/ Qayed Shareef
  Qayed Shareef
  Chief Executive Officer
  (Duly Authorized Officer and Principal Executive Officer)
   
August 14, 2014 /s/ Abdul Parmach
  Abdul Parmach
  Principal Accounting Officer
  (Duly Authorized Officer and Principal Accounting Officer)

 

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