10-Q 1 lncm_10q-093013.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

S    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

or

 

£    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)

 

  206-467-5343  
(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 S 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No £

 

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 November 14, 2013, 80,478,648 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 13
       
  Item 4. Controls and Procedures 17
       
Part II Other Information  
       
  Item 1. Legal Proceedings 18
       
  Item 1A. Risk Factors 19
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
       
  Item 3. Exhibits 20
       
  Item 4. Mine Safety Disclosures 20
       
Signatures 21
   
Index to Exhibits 22

 

 

2
 

PART I – FINANCIAL INFORMATION

 

Item 1. Unaudited Financial Statements.

 

Lenco Mobile Inc.

Condensed Consolidated Balance Sheets

 

   As of 
   September 30, 2013   December 31, 2012 
   (In thousands, except share data) 
ASSETS          
Current assets:          
Cash and cash equivalents  $29   $618 
Accounts receivable, net   3,298    1,832 
Other current assets   266    226 
Total current assets   3,593    2,676 
           
Property and equipment, net   251    401 
           
Other noncurrent assets:          
Intangible assets - goodwill   14,842    14,953 
Intangible assets - other, net   6,586    7,259 
Other noncurrent assets   107    80 
Total other noncurrent assets   21,535    22,292 
Total assets  $25,379   $25,369 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Current liabilities:          
Accounts payable and accrued expenses  $6,715   $6,712 
Deferred revenue   512    304 
Retention bonus   2,075    2,907 
Preferred dividend payable   4,011    2,533 
Current portion of long-term obligations, (convertible debt portion of $260 and $260, respectively)   3,952    3,021 
Liability for reclassified equity contracts   2,126     
Total current liabilities   19,391    15,477 
           
Long-term obligations, less current portion, net of debt discount (of $692 and $1,044 respectively)   8,399    6,104 
Total liabilities   27,790    21,581 
           
Shareholders' equity (deficit):          
Preferred Stock, Series A 1,000,000 shares authorized, $.001 par value, 181,180 and 174,229 shares issued and outstanding at September 30, 2013 and at December 31, 2012, respectively, Liquidation Preference $21,677          
Preferred Stock, Series A1 1,000,000 shares authorized, $.001 par value, 17,733 and 0 shares issued and outstanding at September 30, 2013 and at December 31, 2012 respectively, Liquidation Preference $1,836          
Preferred Stock, Series B1 1,000,000 shares authorized, $.001 par value, 87,717 shares issued and outstanding at September 30, 2013 and at December 31, 2012, Liquidation Preference $8,970          
Preferred Stock, Series B2 1,000,000 shares authorized, $.001 par value, 58,131 shares issued and outstanding at September 30, 2013 and at December 31, 2012, Liquidation Preference $5,944          
Common stock, 250,000,000 shares authorized, $.001 par value, 80,478,648 and 80,478,648 shares issued and outstanding at September 30, 2013 and at December 31, 2012   81    81 
Additional paid in capital   93,114    91,248 
Accumulated other comprehensive loss   (644)   (306)
Accumulated deficit   (94,663)   (86,936)
Treasury stock, at cost, 1,400,000 shares   (299)   (299)
Total Lenco Mobile Inc. shareholders' equity (deficit)   (2,411)   3,788 
           
Total liabilities and shareholders' equity (deficit)  $25,379   $25,369 

 

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 September 30,   Nine Months Ended September 30, 
   2013   2012   2013   2012 
   (In thousands, except share data) 
Revenue  $3,392   $4,177   $11,156   $12,471 
Cost of sales   1,372    1,747    4,983    5,086 
Gross profit   2,020    2,430    6,173    7,385 
                     
Operating expense:                    
Sales and marketing   1,103    1,120    3,383    3,598 
General and administrative   1,066    1,728    4,120    5,247 
Research and development   1,135    1,358    3,122    4,018 
Depreciation and amortization   207    429    809    1,395 
Total operating expense   3,511    4,635    11,434    14,258 
                     
Loss from operations   (1,491)   (2,205)   (5,261)   (6,873)
                     
Other income (expense):                    
Interest expense, net   (498)   (675)   (1,440)   (883)
Other income (expense), net   415        332    566 
Valuation of reclassified equity contracts   2,472        46     
Total other income (expense)   2,389    (675)   (1,062)   (317)
                     
Income (loss) from operations before income taxes   898    (2,880)   (6,323)   (7,190)
                     
Provision for income taxes   (61)   (2)   (72)   107 
                     
Income attributable to noncontrolling interest               (204)
Net income (loss) attributable to Lenco Mobile Inc.   959    (2,878)   (6,251)   (7,501)
                     
Preferred stock dividends   (467)   (290)   (1,466)   (846)
Series A Preferred Stock accretion of beneficial conversion feature       (1,132)   (14)   (3,814)
                     
Net income (loss) attributable to common stockholders  $492   $(4,300)  $(7,731)  $(12,161)
                     
Basic and diluted net income (loss) per share applicable to common stockholders                    
Net income (loss) per share applicable to common stockholders - basic  $0.01   $(0.05)  $(0.10)  $(0.15)
Net income (loss) per share applicable to common stockholders - diluted  $0.00   $(0.05)  $(0.10)  $(0.15)
Weighted average shares used in per share calculation - basic   80,478,648    80,544,300    80,478,648    80,563,250 
Weighted average shares used in per share calculation - diluted   141,201,543    80,544,300    80,478,648    80,563,250 

 

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

 

4
 

 

Lenco Mobile Inc.

Condensed Statements of Comprehensive Income (Loss)

 

   Three months ended September 30,   Nine months ended September 30, 
   2013   2012   2013   2012 
   (In thousands) 
Net Income (loss)  $959   $(2,878)  $(6,251)  $(7,297)
Foreign currency translation adjustment   (147)   (323)   (338)   (147)
Total comprehensive income (loss)  $812   $(3,201)  $(6,589)  $(7,444)

  

 

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

 

5
 

 

Lenco Mobile Inc.

Condensed Consolidated Statements of Cash Flows

 

   Nine months ended September 30, 
   2013   2012 
   (In thousands) 
Cash flows from operating activities:          
Net loss attributable to Lenco Mobile Inc.  $(6,251)  $(7,501)
Adjustments to reconcile net loss to net cash used in operating activities:          
Valuation of reclassified equity contracts   46     
Change attributable to noncontrolling interest       204 
Depreciation and amortization   809    1,395 
Stock compensation expense   1,221    1,347 
Amortization of debt discount   352    78 
Changes in operating assets and liabilities:          
Accounts receivable   (1,466)   (1,649)
Other current and non-current assets   (40)   86 
Accounts payable, accrued expenses, and other current liabilities   867    (980)
Other   186     
Income taxes receivable       450 
Net cash used in operating activities   (4,276)   (6,570)
           
Cash flows from investing activities:          
Purchase of property and equipment        (109)
Net cash used in investing activities        (109)
           
Cash flows from financing activities:          
Payment of debt       (4,120)
Proceeds from issuance of Series A Preferred Stock   174    1,053 
Proceeds from issuance of Series A1 Preferred Stock   1,150     
Proceeds from issuance of Notes   2,600    7,008 
Purchase of Treasury Stock       (232)
Net cash provided by financing activities   3,924    3,709 
           
Effect of exchange rate changes on cash and cash equivalents   (237)   25 
           
Net change in cash and cash equivalents   (589)   (2,945)
Cash and cash equivalents, beginning of period   618    3,098 
Cash and cash equivalents, end of period  $29   $153 
           
Supplemental disclosure of cash flow information:          
Cash paid for income taxes  $   $107 
Cash paid for interest  $   $159 
Supplemental disclosure of non-cash investing and financing activities:          
Preferred stock dividends and accretions  $(1,480)  $4,510 
Conversion of Retention Bonus for Series A Preferred  $600   $ 
Conversion of a portion of the Bridge Note of Series A1 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, 2012, included in our 2012 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 September 30, 2013 are not necessarily indicative of the results for the year ending December 31, 2013 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 2013.

  

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 September 30, 2013, we had cash and cash equivalents of approximately $0.0 million and a working capital deficit of $15.8 million. We incurred a net loss of $7.7 million and net cash used in operations of $4.3 million for the nine months ended September 30, 2013. 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 September 30, 2013 and December 31, 2012, the outstanding amounts owed under these arrangements were $2.1 million and $2.9 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. In January, 2013, Matthew Harris, CEO, elected to convert $0.6 million of his retention bonus agreement into 5,207 shares of our Series A Preferred Stock.

 

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

 

The Company is involved in a number of claims, proceedings and litigation arising from its operations. In accordance with applicable accounting principles and guidance, the Company establishes 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, the Company has not recorded a reserve related to any of the claims, proceedings or actions described below. The Company continues 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 is 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 that Archer USA owes the bankruptcy estate a net amount of DKK 2,550,000 (approximately $430,000) plus costs and fees as a result of 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 28, 2010 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).  We believe these claims are without merit and intend to vigorously defend the action. If the first level appeal is denied, we intend to appeal to the higher court in Denmark.

 

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 not indicated whether he intends to appeal the judgment. If the plaintiff appeals, 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.

 

On September 5, 2013 we settled the action captioned Rubin v. Lenco Mobile Inc., Lenco Mobile USA Inc. and Lenco Multimedia, Inc. (Los Angeles County Superior Court, filed July 2012). Plaintiff had alleged breach of contract, failure to pay wages, fraud, defamation, unfair competition and unjust enrichment related to the acquisition of Plaintiff’s company (Simply Ideas, LLC) and his subsequent employment with and separation from Lenco Multimedia, Inc. (formerly AdMax). The settlement in this action is not considered material.

 

8
 

 

Note 4. Related Party Transactions

 

As previously discussed, Matthew Harris elected to convert $0.6 million of his retention bonus into Series A Preferred stock in January 2013.

 

On February 15, 2013, the Company issued a promissory note to Michael Durden, a director of the Company, in the amount of $100,000. On February 22, 2013, the Company issued a promissory note to James Liang, a director of the Company, in the amount of $100,000 and a promissory note to Pablo Enterprises, in the amount of $200,000. On February 27, 2013, the Company issued a promissory note to Derace Schaffer, a director of the Company, in the amount of $200,000 (collectively, the "Bridge Notes").

 

In June 2013, James Liang, Pablo Enterprises, and Derace Schaffer elected to convert their Bridge Notes totaling $550,000, including accrued interest of $50,000, into 5,500 shares of Series A 1 Preferred stock. The remaining Bridge Note to Michael Durden is currently past the maturity date and we are reviewing options for settlement.

 

In June 2013, the Company issued Senior Secured Promissory Notes to James Liang, a director of the Company, in the amount of $325,000, a promissory note to Derace Schaffer, a director of the Company, in the amount of $525,000, and a promissory note to Pablo Enterprises in the amount of $900,000 (collectively, the “Senior Notes”).

  

Note 5. Debt

 

Debt consisted of the following:

 

   September 30,   December 31, 
   2013   2012 
   (In thousands) 
Current portion of long-term debt obligations   3,952    3,021 
Long-term obligations, net of debt discount   8,399    6,104 
Total debt   12,351    9,125 

 

In June 2013, the Company entered into a Note Purchase and Security Agreements with certain lenders pursuant to which the Lenders purchased from the Company Senior Secured Promissory Notes (the “Senior Notes” defined below) in an aggregate principal amount of $2.0 million.

 

The Senior Notes mature on January 15, 2015. The Company may prepay the Senior Notes in whole or in part from time to time without premium or penalty. Pursuant to the Senior Notes, the Company is obligated to pay the Lenders a fee that is calculated based on the timing of the amounts that are repaid. For amounts repaid on or before October 15, 2013, the fee is two and one half percent (2.5%) of the amount repaid. For amounts repaid after October 15, 2013 but on or before January 15, 2014, the fee is ten percent (10%) of the amount repaid. For amounts repaid after January 15, 2014 but on or before April 15, 2014, the fee is thirty percent (30%) of the amount repaid. For amounts repaid after April 15, 2014 but on or before July 15, 2014, the fee is sixty percent (60%) of the amount repaid. We are actively exploring means to reduce our cost of capital. For amounts repaid after July 15, 2014 but on or before October 15, 2014, the fee is one hundred percent (100%) of the amount repaid. For amounts repaid after October 15, 2014 but on or before January 15, 2015, the fee is one hundred and fifty percent (150%) of the amount repaid. We are actively exploring means to reduce our cost of capital.

 

In February 2013, the Company issued Bridge Notes to certain lenders in an aggregate principal amount of $600,000. As previously discussed, certain Lenders elected to convert amounts owed to them under the Bridge Notes in exchange for shares of Series A 1 Preferred stock. The remaining Bridge Note to Michael Durden is currently past the maturity date and we are reviewing options for settlement.

 

9
 

 

Note 6. Stock Options and Warrants

 

As of September 30, 2013, there were 7.8 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 nine months ended September 30, 2013 were as follows:

 

   Number of Stock Options   Weighted Average Price   Weighted Average Remaining Contractual Term 
Outstanding at December 31, 2012   54,065,045   $0.12      
                
Granted   4,820,000    0.03      
Exercised             
Cancelled or expired   (3,670,000)         
                
Outstanding at September 30, 2013   55,215,045   $0.12    4.30 
                
Exercisable at September 30, 2013   29,002,574   $0.12      
                
Vested and expected to vest at September 30, 2013   55,215,045   $0.12    4.30 

 

At September 30, 2013, there was approximately $2.7 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 2.0 years.  

  

Stock based compensation is allocated as follows (in thousands):

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2013   2012   2013   2012 
     
Sales and marketing  $120   $116   $388   $250 
General and administrative   81    299    612    877 
Research and development   71    75    221    220 
   $272   $490   $1,221   $1,347 

 

10
 

 

Changes in outstanding warrants were as follows during the three months ended September 30, 2013:

 

Date of Issue  

Shares of Common Stock

Issuable from Warrants

Outstanding as of
September 30, 2013

  Exercise Price   Expiration
             
November 1, 2009   175,000   $3.50   November 1, 2013
July 1, 2009   600,000   $3.20   February 2014
February 1, 2009   644,166   $1.00   February 1, 2014
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
    25,338,166        

  

Of the total amount in the table above, 23,919,000 of the warrants were issued as a consequence of the Senior Notes issued in July and August, 2012. In conjunction with the original issuance of the Senior Notes, we issued warrants to purchase up to 11,919,000 shares of common stock at an exercise price of $0.10 per share. The Senior Notes contained protective provisions that provide for a one-time adjustment upon certain issuance of additional equity or the incurrence of certain indebtedness by the Company.

 

The issuance of the Bridge Notes triggered a modification to the warrants issued in 2012, and 12,000,000 new warrants were issued to the Senior Note holders. The warrants were valued at a relative fair value of approximately $1.2 million, which resulted in an adjustment of approximately $0.2 million and was recorded as debt discount and additional paid in capital. After the modification and issue of the additional 12,000,000 warrants, debt discount at September 30, 2013, was approximately $0.7 million.

 

Liability For 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 $2.1 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 September 30, 2013, potentially issuable shares in excess of the authorized number of common shares were 60,722,895 potentially issuable shares, the fair value of which was remeasured 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 $2.5 million for the quarter then ended.  The income has been recorded as valuation of reclassified equity contracts.

 

Note 7. Stockholders’ Equity (Deficit)

 

During the nine months ended September 30, 2013, we entered into a securities purchase agreement with accredited investors pursuant to which we sold an aggregate of 11,500 shares of newly created Series A1 Convertible Preferred Stock ("Series A1 Preferred Stock") at a purchase price of $100 per share.

 

The following is a summary of the terms of the Series A1 Preferred Stock:

 

Stated Value: The stated value per share of preferred stock is $100, subject to increase for accreted dividends.

 

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Voting Rights:  The holders of the preferred stock vote on an as-converted basis together with the holders of our common stock as a single class, except with respect to any increase or decrease in the authorized shares of our common stock, as to which the holders of the preferred stock have no right to vote.

 

Negative Covenants:  As long as any preferred stock is outstanding, we are prohibited from taking any of the following actions without the consent of a majority of the then outstanding preferred stock voting as a single class with the holders of the Series A Convertible Preferred Stock:

 

  · change adversely the rights given to the preferred stock;
     
  · authorize or create any security ranking senior to or otherwise pari passu with the preferred stock;
     
  · amend our charter documents in any manner that adversely affects any rights of the preferred stock;
     
  · increase the number of authorized shares of preferred stock;
     
  · declare or pay any cash dividend or distribution on or purchase or redeem any junior securities; and
     
  · purchase or redeem any shares of preferred stock other than in accordance with the certificate of designation.

 

Dividends: The holders of the preferred stock are entitled to cumulative dividends at the rate per share (as a percentage of the stated value per share) of 6.0% per annum. Dividends accrete to, and increase the outstanding stated value of the preferred stock and compound (i) quarterly on March 31, June 30, September 30 and December 31 and (ii) when and to the extent shares of the preferred stock are converted into common stock.

 

Voluntary Conversion:  A holder of preferred stock can elect to convert its preferred stock into shares of our common stock at any time. Each share of preferred stock is convertible into that number of shares of our common stock determined by dividing the stated value of such share of preferred stock (as increased for accreted dividends) by the conversion price.

 

Conversion Price: The conversion price is $0.20 per share.

  

Liquidation Preference: The holders of preferred stock are entitled to receive out of our assets, whether capital or surplus, before any distribution or payment shall be made to the holders of our common stock or other junior securities, an amount per share of preferred stock equal to the sum of (i) the stated value of the preferred stock (as increased for accreted dividends), plus (ii) any accrued dividends thereon that have not accreted to the stated value through the date of liquidation, plus (iii) such amount necessary to make the aggregate of all amounts paid with respect to such share of preferred stock equal to an internal rate of return of 30% per annum.

 

Redemption:  We can redeem the preferred stock at any time after September 23, 2015 by paying cash in an amount equal to the sum of (i) the stated value of the preferred stock, plus (ii) any accrued dividends thereon that have not accreted to the stated value through the date of redemption, plus (iii) such amount necessary to make the aggregate of all amounts paid with respect to such share of preferred stock equal to an internal rate of return of 30% per annum. We must give the holders of the preferred stock at least 30 days advance notice of our intent to redeem the preferred stock and we must honor any conversion of the preferred stock before the redemption date.

 

In January 2013, we entered into a securities purchase agreement with accredited investors pursuant to which we sold 1,744 shares of Series A Convertible Preferred Stock at a purchase price of $115 per share, raising aggregate gross proceeds of approximately $0.2 million.

 

Note 8. Subsequent Events  

 

As of November 7, 2013, six Series A shareholders have taken steps to exercise the redemption rights under Section 5 of the Series A Certificate of Designation. The Series A shares held by these shareholders represent a potential redemption obligation of $1.7 million as of November 7, 2013.

 

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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 2012 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 2, 2013.

 

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.

 

Our results, quarterly and year to date, show continued revenue pressure (based principally on a decrease in the value of the South African Rand against the U.S. dollar), decreased operating expenses and improved operating profit. On a year over year basis, operating income from operations improved 32% for the three months ended September 30, 2013 and 23% for the nine months ended September 30, 2013.

 

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Consolidated Statements of Operations Data:    

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   (In thousands, except share data)   (In thousands, except share data) 
   2013   2012   Diff   % Change   2013   2012   Diff   % Change 
                                 
Revenue  $3,392   $4,177   $(785)   -19%   $11,156   $12,471   $(1,315)   -11% 
Cost of sales   1,372    1,747    (375)   -21%    4,983    5,086    (103)   -2% 
Gross profit   2,020    2,430    (410)   -17%    6,173    7,385    (1,212)   -16% 
                                         
Operating expense:                                        
Sales and marketing   1,103    1,120    (17)   -2%    3,383    3,598    (215)   -6% 
General and administrative   1,066    1,728    (662)   -38%    4,120    5,247    (1,127)   -21% 
Research and development   1,135    1,358    (223)   -16%    3,122    4,018    (896)   -22% 
Depreciation and amortization   207    429    (222)   -52%    809    1,395    (586)   -42% 
Loss from operations   (1,491)   (2,205)   714    32%    (5,261)   (6,873)   1,612    23% 
Total other income (expense)   2,389    (675)   3,064    454%    (1,062)   (317)   (541)   -104% 
Income (loss) before income taxes   898    (2,880)   3,778    131%    (6,323)   (7,190)   1,071    14% 
Income tax (expense) benefit   (61)   2    (59)   2950%    (72)   (107)   (179)   -167% 
Net income (loss)  $959   $(2,878)  $3,837    133%   $(6,251)  $(7,297)  $1,250    17% 
                                         
Basic net income (loss) per share  $0.01   $(0.05)            $(0.10)  $(0.15)          
Diluted net income (loss) per share  $0.00   $(0.05)            $(0.10)  $(0.15)          

 

Balance Sheet Data: 

 

   As of 
   September 30,   September 30, 
   2013   2012 
Balance sheet data:   (In thousands) 
Cash and cash equivalents and accounts receivable, net  $3,327   $3,481 
Fixed assets, net   251    382 
Total assets   25,379    36,178 
Current liabilities   19,391    14,923 
Working capital   (15,798)   (11,139)

 

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Quarter Ended September 30, 2013 Compared to Quarter Ended September 30, 2012

 

Revenues

 

Revenue for the three months ended September 30, 2013 was $3.4 million a decrease of 19% compared to the revenue in the same period in 2012 of $4.2 million. Approximately half the decrease in revenue stemmed from the year over year decrease of 17.5% in the value of the South African Rand, which resulted in revenue erosion of approximately $0.4 million.

 

Cost of Sales

 

For the three months ended September 30, 2013 and 2012 cost of sales were $1.4 million and $1.7 million respectively. 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 increased from 58% to 60%. 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 September 30, 2013 operating expenses decreased to $3.5 million compared to $4.6 million for the three months ended September 30, 2012.

 

Operating Loss

 

For the three months ended September 30, 2013, the Company’s loss from operations was $1.5 million, compared to a loss of $2.2 million for the three months ended September 30, 2012, an improvement of 32% or $0.7 million.

 

Other Income (Expense)

 

As of September 30, 2013 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 $2.5 million.

 

Provision for Income Taxes

 

For the three months ended September 30, 2013 and 2012, we did not record any tax benefit.

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Nine Months Ended September 30, 2013 Compared to Nine months Ended September 30, 2012

 

Revenues

 

Revenue for the nine months ended September 30, 2013 was $11.2 million, a decrease of $1.3 million or 11% compared to $12.5 million in the same period in 2012. The decrease in revenue was primarily the result of the year over year decrease of 15% in the value of the South African Rand, which resulted in revenue erosion of approximately $1.4 million.

 

Cost of Sales

 

For the nine months ended September 30, 2013 and 2012 cost of sales were $5.0 million and $5.1 million respectively.

 

Gross Profit

 

Gross margin decreased by 4% to 55% for the nine months ended September 30, 2013 compared to 59% for the nine months ended September 30, 2012. Generally, our overall gross margin varies depending on 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 nine months ended September 30, 2013 operating expenses decreased to $11.4 million compared to $14.3 million for the nine months ended September 30, 2012.

 

Operating Loss

 

For the nine months ended September 30, 2013, the Company’s loss from operations was $5.3 million, compared to a loss of $6.9 million in the nine months ended September 30, 2012, an improvement of 23% or $1.6 million.

 

These actions have resulted in a 23% improvement in operating losses for the nine months ended September 30, 2013, compared to nine months ended September 30, 2012.

 

Other Income (Expense)

 

As of September 30, 2013 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 $2.5 million, which resulted in a loss of approximately $0.05 million for the nine months ended September 30, 2013. 

 

Provision for Income Taxes

 

For the nine months ended September 30, 2013 and 2012, we did not record any tax benefit.

 

Liquidity, Going Concern and Capital Resources

 

As of September 30, 2013, we had cash and cash equivalents of approximately $0.00 million and a working capital deficit of $15.8 million. We incurred a net loss of $7.7 million and net cash used in operations of $4.3 million for the nine months ended September 30, 2013. 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. These actions have resulted in a 23% improvement in operating losses for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.

 

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.

 

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Recent Financing Transactions

 

During the nine months ended September 30, 2013, we raised approximately $2.6 million from the issuance of the Bridge Notes and Senior Notes. The terms of the Bridge Notes and Senior Notes are described in the notes to the condensed consolidated financial statements in this report. Approximately $550,000, including accrued interest of $50,000 of the Bridge Notes was converted into Series A1 Preferred stock following lenders’ elections to do so.

 

During the nine months ended September 30, 2013, we raised approximately $1.2 million from the issuance of 11,500 shares of Series A1 Preferred stock to accredited investors. We also raised approximately $0.2 million from the sale of 1,744 shares of Series A Preferred stock to accredited investors.

  

Discussion of Cash Flows

 

We used cash of approximately $4.3 million and $6.6 million in our operating activities in the nine months ended September 30, 2013 and 2012.

 

Our financing activities provided cash of approximately $3.9 million and $3.7 million in the nine months ended September 30, 2013 and 2012, respectively, due to proceeds from sales of Series A and Series A1 Preferred Stock, along with the issuance of the Senior Notes and Bridge Notes.

  

Off-Balance Sheet Arrangements

 

As of September 30, 2013, 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, 2012, which we filed with the SEC on April 2, 2013 (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 September 30, 2013, 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 September 30, 2013 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

 

The Company is involved in a number of claims, proceedings and litigation arising from its operations.  In accordance with applicable accounting principles and guidance, the Company establishes 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, the Company has not recorded a reserve related to any of the claims, proceedings or actions described below.  The Company continues 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 is a party in a proceeding in Copenhagen, Denmark captioned Cirkelselskabet af 16. July 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 that Archer USA owes the bankruptcy estate a net amount of DKK 2,550,000 (approximately $430,000) plus costs and fees as a result of 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 28, 2010 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).  We believe these claims are without merit and intend to vigorously defend the action.  If the first level appeal is denied, we intend to appeal to the higher court in Denmark.

 

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 not indicated whether he intends to appeal the judgment. If the plaintiff appeals, 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. Capital Supreme (PTY) Limited, 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 South Africa. We are preparing to file our Statement of Defense in accordance with applicable court procedures.  We believe the claims are without merit and intend to vigorously defend against them.

 

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On September 5, 2013 we settled the action captioned Rubin v. Lenco Mobile Inc., Lenco Mobile USA Inc. and Lenco Multimedia, Inc. (Los Angeles County Superior Court, filed July 2012). Plaintiff had alleged breach of contract, failure to pay wages, fraud, defamation, unfair competition and unjust enrichment related to the acquisition of Plaintiff’s company (Simply Ideas, LLC) and his subsequent employment with and separation from Lenco Multimedia, Inc. (formerly AdMax).

 

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, 2012, which we filed with the SEC on April 2, 2013.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

  

For the nine months ended September 30, 2013, we entered into a securities purchase agreement with accredited investors pursuant to which we sold an aggregate of 11,500 shares of newly created Series A1 Convertible Preferred Stock ("Series A1 Preferred Stock") at a purchase price of $100 per share.

 

The following is a summary of the terms of the Series A1 Preferred Stock:

 

Stated Value: The stated value per share of preferred stock is $100, subject to increase for accreted dividends.

 

Voting Rights:  The holders of the preferred stock vote on an as-converted basis together with the holders of our common stock as a single class, except with respect to any increase or decrease in the authorized shares of our common stock, as to which the holders of the preferred stock have no right to vote.

  

Negative Covenants:  As long as any preferred stock is outstanding, we are prohibited from taking any of the following actions without the consent of a majority of the then outstanding preferred stock voting as a single class with the holders of the Series A Convertible Preferred Stock:

 

  · change adversely the rights given to the preferred stock;
     
  · authorize or create any security ranking senior to or otherwise pari passu with the preferred stock;
     
  · amend our charter documents in any manner that adversely affects any rights of the preferred stock;
     
  · increase the number of authorized shares of preferred stock;
     
  · declare or pay any cash dividend or distribution on or purchase or redeem any junior securities; and
     
  · purchase or redeem any shares of preferred stock other than in accordance with the certificate of designation.

 

Dividends: The holders of the preferred stock are entitled to cumulative dividends at the rate per share (as a percentage of the stated value per share) of 6.0% per annum. Dividends accrete to, and increase the outstanding stated value of the preferred stock and compound (i) quarterly on March 31, June 30, September 30 and December 31 and (ii) when and to the extent shares of the preferred stock are converted into common stock.

 

Voluntary Conversion:  A holder of preferred stock can elect to convert its preferred stock into shares of our common stock at any time. Each share of preferred stock is convertible into that number of shares of our common stock determined by dividing the stated value of such share of preferred stock (as increased for accreted dividends) by the conversion price.

 

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Conversion Price: The conversion price is $0.20 per share.

 

Liquidation Preference: The holders of preferred stock are entitled to receive out of our assets, whether capital or surplus, before any distribution or payment shall be made to the holders of our common stock or other junior securities, an amount per share of preferred stock equal to the sum of (i) the stated value of the preferred stock (as increased for accreted dividends), plus (ii) any accrued dividends thereon that have not accreted to the stated value through the date of liquidation, plus (iii) such amount necessary to make the aggregate of all amounts paid with respect to such share of preferred stock equal to an internal rate of return of 30% per annum.

 

Redemption:  We can redeem the preferred stock at any time after September 23, 2015 by paying cash in an amount equal to the sum of (i) the stated value of the preferred stock, plus (ii) any accrued dividends thereon that have not accreted to the stated value through the date of redemption, plus (iii) such amount necessary to make the aggregate of all amounts paid with respect to such share of preferred stock equal to an internal rate of return of 30% per annum. We must give the holders of the preferred stock at least 30 days advance notice of our intent to redeem the preferred stock and we must honor any conversion of the preferred stock before the redemption date.

 

In January 2013, we entered into a securities purchase agreement with accredited investors pursuant to which we agreed to sell an aggregate of 1,744 shares of Series A Convertible Preferred Stock at a purchase price of $115 per share, raising aggregate gross proceeds of approximately $0.2 million.

 

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:  November 14, 2013  LENCO MOBILE INC.
     
  By: /s/ Matthew Harris
    Matthew Harris
    Chief Executive 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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