Adaptive Medias' (ADTM) CEO John Strong on Q4 2015 Results - Earnings Call Transcript

| About: Adaptive Medias, (ADTM)

Adaptive Medias, Inc. (OTCPK:ADTM) Q4 2015 Earnings Conference Call April 14, 2016 1:00 PM ET

Executives

John Strong – Chairman and Chief Executive Officer

Justin Bunnell – Founder and Chief Executive Officer

Analysts

Mark Cowen – Analyst

Jack Grothman – Analyst

Ali Freeman – Analyst

Operator

Good day everyone, and welcome to today’s Adaptive Media’s Fourth Quarter Earnings Conference Call. At this time all participants are in a listen only mode. Later you will have the opportunity to ask questions during the question and answer session. [Operator Instructions] It is now pleasure to turn the conference over to Mr. John B. Strong, Chairman and CEO of Adaptive Media. Please go ahead sir.

John Strong

Good afternoon and welcome to Adaptive Medias’ fourth quarter and fiscal 2015 earnings call. As a reminder, this conference is being recorded. My name is John B. Strong; I’m Adaptive Medias’ Chairman and Chief Executive Officer. With me today is Sal Aziz, our Executive Vice President of Platform and our merger partner Justin Bunnell, the Founder and Chief Executive Officer of AdSupply.

If you don't have a copy of the press release, it is available at the Adaptive Medias website at www.adapativem.com or you may call our Investor Relations firm at 818-280-6800 to receive it via e-mail.

Before we begin, I would like to take the opportunity to remind you that during the course of the call today, management may make forward-looking statements which are subject to various risks and uncertainties. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements. And reported results should not be considered as an indication of future performance.

Further, information regarding factors that could affect the company’s financial results is included in filings we make with the Securities and Exchange Commission from time-to-time, including the section entitled Risk Factors in the Company’s SEC filings.

Also, I would like to remind you that during the course of this conference call, we will discuss non-GAAP or adjusted EBITDA measures in talking about the Company’s performance. The conference call will also available through the investor relations section of Adaptive Medias website.

So to summarize 2015, we exceeded our internal goals and public forecasts driven largely by the successfully business transition from our traditional lower margin advertising business into the higher-margin turnkey and proprietary Media Graph platform. However, the buzz around Adaptive Media today and the focus of our management team is all about the AdSupply merger. But before I update you on that, I want to summarize the fourth quarter’s key takeaways.

Our revenue was up [ph] $162,000 year-over-year to $1.68 million, exceeding our recently raised guidance due to the phase out of Flash that took place in the second half of 2015, which caused the shake up clear across the ad tech space. While this continued to be a headwind in the first quarter ended March 31, albeit a little bit less so, we expect the impact to remain minimal going into the quarter and negligible thereafter. While we talked about the Flash in HTML5 issue in the last quarter, since the time we announced our AdSupply merger last month we’ve got a lot of new investors on the call this morning, so I want to quickly cover those highlights of the Flash GAAP issue.

In September of last year, Google turned much of the ad tech world upside down when it announced it would automatically start pausing Flash content on its Chrome browser. This issue affected almost all of the company's advertising partners who have had to deal with a rapid transition from Flash to HTML5. We’re utilizing our best-in-class HTMLV player in Media Graph to solve the issue on our end. However, we're independent, and our partners’ ability to adopt an HTML5 solution and for many that means they have to reengineer their ad tech platforms, which can take weeks or months and the timing of which is just beyond our own control.

The strong improvement reflects the increased mix of our higher margin Media Graph technology platform sales versus our traditional lower margin ad business. In fact, we've reached the ambitious goal we’ve set and stated in our third quarter of 2015 call of driving over of our total sales through the Media Graph platform. This is important not only for the higher gross margin, but also strategically since our full stack turnkey Media Graph solution enables us to capture a broader range of publishers and advertisers platform and ad spending dollars.

Frankly, we’re absolutely thrilled with the early adoption of the flagship Media Graph product, and its ability to capture market share and positively transform our market position throughout our industry. And when we combine the Media Graph with AdSupplys’ patented BlockIQ technology, we’re going to have a powerhouse offering that – well, I’m going to come back to that after a couple minutes after I update you on the merger status.

So the fourth quarter gross profit more than doubled to $457,000, which comprised 27% of our revenue compared with 9% a year earlier, again, that’s reflecting Media Graph’s higher-margins. At the same time our operating expenses dropped from $12.3 million in the year ago quarter to $3.6 million in the fourth quarter of 2015. General and administrative expenses continued to decline sequentially and fell to just $600,000 versus $1.3 million in the last quarter.

Our outlook looking ahead into 2016, our first quarter is always deeply seasonal, so we expect it will be soft with decreasing, but not insignificant headwinds from the Flash to HTML5 issue remaining, with only a minimal residual impact going into the current quarter. But to be as transparent as possible, I’ll also say that since the start of the year and the events that led up to our January 21st announcement of our strategic alliance AdSupply, our management team has been increasingly focused on due diligence, negotiations, building and evaluation of technology and the financial models and engaging investment bankers and more, all as a strategic alliance rapidly evolved to and through a cash bid and then to a merger agreement hammered out in March and announced on March 28. So if you're wondering whether the merger activity has been a distraction, well of course it has, but an exciting one at that. We see the merger as a catalyst for an astronomical greater step up in shareholder value than we could have ever hold for to achieve organically, so quickly. So closing the merger is our top priority.

Fortunately, I can report to you that as of today we’re much further into that process with no obstacles having surface none are either anticipated. Both companies arch are finished and most of the due diligence is completed and we’re now concentrating on completing the requisite financing and closing the merger in the current quarter.

We've already begun to take the initial steps of not only consolidating our offices, but more importantly holding late stage discussions with former and current Fortune 500 executives that will help spearhead our BlockIQ division. AdSupply’s 2015 financial audit has been completed and it posted in excess of $18 million in revenue for 2015. In fact, the fourth quarter 2015 results of both companies in the internal preliminary first quarter 2016 results of both support our outlook that we will generate approximately $2.5 million in earnings on $30 million in revenue in the combined companies first 12 months. With escalating growth rates year in its second year as its critical mass catapults the company into the mid or upper tier of our industry from which we’ll be able to successfully cater to Fortune 500 class of customers, as well as millions of SMEs and everyone in between.

As to the crown jewel of this deal, I’ll emphasize that AdSupply’s patented BlockIQ technology is a revolutionary software-as-a-service program that bypasses ad blockers and enables online publishers to recover their lost revenues. Analysts have determined that websites are currently experiencing between 20% to 40% of their ads being blocked, which resulted in a loss of over $22 billion of ad revenue last year. Experts report that the use of ad blockers in the United Sates has been increasing at an alarmingly high rate of 48% annually. And if you want to take a closer look at that subject, I would encourage you to visit the BlockIQ website at www.blockIQ.com.

So we’ve covered the mergers near and long-term fundamental and financial value added through thoroughly on March 28, and while I’d love to again walk through all of the merger synergies because I find them pretty exciting, suffice it to say that the increased value of the combined state-of-the-art product offerings, enhanced market position will have and critical mass reached is very compelling. Management of both companies were finalizing plans for what we expect to be a pretty seamless integration of both companies with Adaptive Media and our ticker symbol being the surviving entity. We then plan to uplift quickly to the NASDAQ, hopefully by years end.

In summary, we’re seeing stronger than expected early adoption of our Media Graph platform, which broadens our product and services offering, boosts our market position and higher gross margins, fourth quarter and first quarter of 2016 faced external marketplace headwinds that are now decreasing and will be minimal in the current quarter with no impact expected in the third quarter. Financially, we’re making solid progress to reach profitability, which is a top internal goal for 2016. We’re focused entirely on closing the merger with AdSupply for the astronomical increase in shareholder value we believe it offers. In either way, we expect stronger organic growth to resume in the second quarter in line with 2015s strong growth trends.

Operator, I’d like to now open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we’ll go ahead and take our first question Mark Cowen. Please go ahead, your line is open.

Mark Cowen

Thank you and good morning everybody.

John Strong

Good morning, Mark.

Mark Cowen

I was wondering if you could please comment on market acceptance and uptake of the BlockIQ that was just recently launched in December.

John Strong

Well, in the discussions that we have with people that we’re talking to about BlockIQ, it’s obviously something that they are extremely interested in because they’re losing a lot of revenue and need a solution. So if you're able to provide a solution, they’re intently interested and certainly it is not a difficult thing to get people to at least try the product, we’ve already signed up a large potential client that is going to begin testing the product this week, and Justin and his team have used the product with a couple of dozen smaller clients in their beta testing, so we know that it works, and we intend to pretty quickly, as quickly as we can go full seam and head rolling it out to as many people as we can.

Mark Cowen

Great. And with respect to the Media Graph platform.

John Strong

Yes.

Mark Cowen

If I recall, you required for about $12 million in stock give or take?

John Strong

I believe it was $16 million.

Mark Cowen

Okay. What – obviously the platform is worth more to a bigger entity that’s utilizing it and you get scale – economies of scale.

John Strong

Yes.

Mark Cowen

What do you think the Media Graph platform is worth today, if you were to try to market it and sell it to a third-party, whoever that might be?

John Strong

Well Mark, it’s actually a pretty difficult question. We've seen some of our competitors sell for prices much higher than the market cap of our company that we feel like have a lesser product offering, I can tell you that. And it's hard to quantify that when we feel like the addition of the BlockIQ technology into our Media Graph platform makes it exponentially more valuable anyway.

Mark Cowen

Have you written down any of the acquisition price of the Media Graph platform?

John Strong

Yes, we’ve had some write-downs on the acquisition price over the last two years.

Mark Cowen

Do you know off hand to about what level or how much you’ve written down?

John Strong

I’ll have to get back to you on that, I don't have that information in front of me right now.

Mark Cowen

Okay. That’s okay. And…

John Strong

You should be able to find that in our filings.

Mark Cowen

Yeah, I mean I can go that as well. And given your press release, I believe of – I forgot the date, it might have been March 28, but you’ve identified the cash value with the potential cash value on your tax losses being worth about $15 million cash value, which would equate to about $0.60 a share for your stock.

John Strong

Correct.

Mark Cowen

Okay. So with your stock trading at a third of the cash value of your NOLs, which then does not include the value of the Media Graph platform that you acquired for close to $15 million, $16 million, can you sort of try to discuss the disconnect and what the market is either missing or how – I mean, I know you’re going through an acquisition, but does it make sense to dilute your equity at this price, given the apparent significant discount that it’s trading relative to the value of the Media Graph platform and the cash value of your NOLs?

John Strong

If your basic question is am I willing to trade half of Adaptive Media’s equity for half roughly of the BlockIQ patents and technology and AdSupply’s existing business then yes, I’m definitely willing to do that. And I think that the dilution is something that, it’s going to happen in this scenario, but I believe that the improvement in the value of the two companies as one will quickly be apparent to the investing public, that’s what we believe.

Mark Cowen

I understand that, but I’m just still trying to understand the relative merit of diluting equity at this price. I understand that a smaller…

John Strong

When you say diluting the equity, are you just under the only assumption that the money will raise will come from dilution?

Mark Cowen

Well no. I mean that’s the next question, is you’ve talked about the financing and raise capital, can you comment on how you're going to approach that, and as much as the stock price is currently selling for less advance, well I need to back up, when you negotiated the transaction, did you expect your stock price would be at this level?

John Strong

Well, it was about at this level at that point, so I didn’t have any preconceived idea of what I thought the stock price would be before or after. My thoughts are really leading towards what I feel like the value of the two companies will be a year from now for our shareholders. And I think it will be exponentially higher.

Mark Cowen

Okay. Are you planning to do an equity financing?

John Strong

It will be a combination, but by no means is equity financing the only way that I plan to finance the merger.

Mark Cowen

Okay. Alright. Thank you very much.

John Strong

You’re welcome.

Operator

[Operator Instructions] Our next question comes from Jack Grothman. Please go ahead your line is open.

Jack Grothman

Hey guys, John, thanks for taking the time for me to ask today.

John Strong

You’re welcome.

Jack Grothman

So, you know, I’ve seen, but – positive press about the merger of Adaptive Medias’ and AdSupply, and I'm pretty excited about what the future holds. And I'm just curious, alright we’re in April and Justin however have already launched the BlockIQ months ago, how many clients have you picked up since then and what does that represent in dollar size for the company?

John Strong

Well, it's hard to say because the client that we’ve just signed is going to be testing. We want bills to determine for a couple of weeks, you how much revenue we’re going to help him recover. But in our preliminary talks with other clients, they are highly interested in using BlockIQ technology. And I’ll let Justin to probably comment on some of the beta testing done with their own AdSupply clients and I'll let him step in and do that for you right now because they've done a number of beta tests with clients in-house already. Justin?

Justin Bunnell

Yes. Thank you. We right – right now we're doing in March, our preliminary results are that we do about $150,000 in BlockIQ revenue, and our goal of course is to raise that, but that [indiscernible], I don’t know how many clients that represents probably around a dozen, a fairly smaller size list, no real big hitters in there.

Jack Grothman

When do you expect maybe to bring some of those guys on?

Justin Bunnell

We can’t say, it’s a long process. Larger sites have a lot of – there is a lot of people that have [indiscernible] and it’s a big change for that company, they have to decide the policies, they have to decided how they’re going to do it. So sales cycle takes about – from start to finish it could take roughly 30 days to a couple of months, while they – after their internal processes.

From our standpoint, we can – but we also have to make sure there is demand for their inventory, in the situations, sometimes, make sure there is enough of your advertiser volume to give them a better experience, so you have to sort of balance that.

Jack Grothman

Okay. Alright. Well, I appreciate it. I appreciate the time guys.

John Strong

You’re welcome.

Operator

[Operator Instructions] Our next question comes from Ali Freeman. Please go ahead your line is open.

Ali Freeman

Hi everybody. The result that you put out on the fourth quarter, are those audited results?

John Strong

Our audit is going to be filed today.

Ali Freeman

You mean the case, isn’t the case filed?

John Strong

It’s going to be filed today.

Ali Freeman

Today, okay fantastic. And is there any, is the debt on the books and on the company could have any material effect to the merger with AdSupply?

John Strong

I don’t anticipate that it will currently.

Ali Freeman

I mean how will, is the AdSupply going to assume the debt of the company currently?

John Strong

I believe that when we close the merger we’re going to put enough equity on our balance sheet that we won't have any debt on the company.

Ali Freeman

So the future raise that you will do for AdSupply will include taking up the current debt on the books?

John Strong

Yes, that’s our intention.

Ali Freeman

So how much is the full amount of the rate going to need to be, to able to do acquisition plus take off the existing debt?

John Strong

At least $10 million, probably closer to $11 million or so, but we don’t have…

Ali Freeman

And how much of that is the debt?

John Strong

The debt currently is roughly $2 million.

Ali Freeman

$2 million. And is any of the debt currently needful, they are all being paid on the, whatever they do?

John Strong

That I couldn’t comment on today, I don’t have that information.

Ali Freeman

Okay. And again, all these numbers in the fourth quarter you’ve gone through will all be in the K that will be put out today? You have any, I mean, the company will stay current, right? So everything that’s been put out will be…

John Strong

Yes. That’s absolutely our intention. So by the end of today we should have filed.

Ali Freeman

Okay perfect. Thank you.

John Strong

Alright.

Operator

[Operator Instructions] We’ll take our next question from Jack Grothman. Please go ahead, your line is open.

Jack Grothman

Yes, you know, I had one more question guys. I was curious a little bit about management team if you could talk about that at all if you plan on bringing any other executives on board to help with the management team, or how that might play out?

John Strong

Well, we’re currently, as we had said in our conference call on March 28, I’m going to remain with the company as the CEO, Justin Bunnell from AdSupply is going to be Chief Operating Officer. And to further answer the question, in discussions currently with advisors from large Fortune 500 corporations that will help us spearhead the rollout of the BlockIQ, that's one thing that we want to do. And we’re always interested in any opportunity to talk with executive level talent that might be interested in Adaptive Media in the future.

Jack Grothman

Okay. And what about BlockIQ though as it relates to executives or management being brought on from BlockIQ or is it relates to BlockIQ?

John Strong

Well, BlockIQ is going to be a very big focus of the combined company, there is no doubt about that. And so it's likely that it will have a set of executives that will spearhead the development and rollout, because it’s not just a local project. I mean we intend the BlockIQ to be available to people not just in the United States or North America. So as quickly as finances allow us, we’re going to roll it out as much as possible and we want to have as much of an executive team as we can possibly get, they can help in that process.

Jack Grothman

Alright, great. Thanks for the clarity.

Operator

Thank you. And our next question comes from Ali Freeman. Please go ahead, your line is open.

Ali Freeman

Hi, I just wanted to ask a question as well. Is the company going to need any money in the interim to get to the acquisition, like the company is going to need any bridge financing or anything, or is the company have enough working capital or revenues to get them through the completion of the acquisition?

John Strong

No, the company will need some bridge financing to take us from where we are today through the completion of the acquisition.

Ali Freeman

And how much is that estimated to be?

John Strong

I’m estimating that to be approximately $1 million.

Ali Freeman

And have you engaged somebody to start that process? I mean, the acquisition is – close, you said in the end of the first quarter…

John Strong

I’m speaking to several people about that – that capital raise. I’m confident that we’re going to be able to get that done.

Ali Freeman

So how much capital does that company have now to get to this point, where you – you need money to get through the acquisition, bridge financing. When does that…

John Strong

There is significant amount of merger expenses and legal, and things like that.

Ali Freeman

Right. So how much money does the company have now available to get them through that point where they got to do the raise?

John Strong

They don’t have enough to get to that point, that’s why we’re going to raise it.

Ali Freeman

So you’re going to – you’re doing two raises, one for the acquisition and one to get to the acquisition?

John Strong

Well, I’m going to do one raise that includes the capital I need to – for bridge, the money that I want to put on my balance sheet to retire debt, and the closing of the merger.

Operator

[Operator Instructions] And we’ll go ahead and take our next question from Mark Cowen. Please go ahead, your line is open.

Mark Cowen

Alright, thank you. I had a question, if you’re looking to raise between $10 million and $11 million and the merger as presently indicated in the letter of intent, which is non-binding is creating an $8 million payment to AdSupply, that would indicate that the majority of the fund raising is to pay AdSupply for the merger, for the combination of the company.

John Strong

Correct.

Mark Cowen

Is that payment in and of itself an obstacle to completing the transaction, in the sense that the company could carry the debt of $8 million until you start generating the revenues and earnings that you expect, which would then negate and mitigate the need to do an equity financing and raise capital at these levels?

John Strong

Mark, we don’t believe that it’s an obstacle given the value of the combined companies and the importance of the BlockIQ technology.

Mark Cowen

No, I’m not suggesting that you can’t raise the capital.

John Strong

Okay.

Mark Cowen

The question goes to merit of raising the capital now, which would be a dilutive on some level if there is equity involved.

John Strong

There again Mark, you’re assuming that the entire capital – the raise of the $8 million is going to be strictly through equity, and…

Mark Cowen

No, no, I’m not. Whatever portion of it – whatever portion of it is that is equity, because you commented on the relative percentage, my question is little looser, I’m not suggesting that it is all equity or 50% equity. The question that I’m asking is since the payment is being made to AdSupply, which is your partner, the question becomes why can't the combined company carry that $8 million debt on the combined books with a subsequent payment to AdSupply, after the combined entities is operating, creating cash flow and earnings, which would then prevent the need to raise as much capital now, which potentially could be dilutive?

John Strong

Well, that is not the agreement that we have with AdSupply. The agreement we have with AdSupply is an $8 million payment at the closing of the merger, and that's the way we intend to pursue it.

Operator

[Operator Instructions] And it does appear there are no further questions at this time. I will now hand it back over to the speakers for any additional or closing remarks.

John Strong

Thank you, operator. Well it appears we’ve taken all of our requests for questions. So in closing, I just want to remind everyone we’re executing on our business plan on schedule, we’re on budget and we're being led by the strong success of our Media Graph platform and video technology. Keep in mind, video is becoming mainstream and we had the vision years ago to build and be prepared today for the migration to this format with the best-in-class HTML5 video player.

We’re actively moving forward with the AdSupply merger and the management team has been terrific to collaborate with on everything from integration to strategic planning, and we’re on track to close by the end of the summer. I want to thank everybody for joining us today. And thanks for being on our call.

Operator

And that does conclude today’s program. We’d like to thank you for your participation. Have a wonderful day and you may disconnect at any time.

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