Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Basis of Presentation
Mobivity Holdings Corp. (the “Company” or “we”) is in the business of developing and operating proprietary platforms over which brands and enterprises can conduct national and localized, data-driven mobile marketing campaigns. Our proprietary platforms, consisting of software available to phones, tablets, PCs, and Point of Sale (“POS”) systems, allow resellers, brands and enterprises to market their products and services to consumers through text messages sent directly to consumers via mobile phones, mobile smartphone applications, and dynamically printed receipt content. On November 14, 2018, we completed the acquisition of certain operating assets relating to Belly, Inc.’s proprietary digital customer loyalty platform, including client contracts, accounts receivable and intellectual property. We generate revenue by charging the resellers, brands and enterprises a per-message transactional fee, through fixed or variable software licensing fees, or via advertising fees.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and disclosures required by GAAP for annual financial statements. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on April 15, 2019.
In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of our condensed consolidated financial statements as of September 30, 2019, and for the three and nine months ended September 30, 2019 and 2018. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the operating results for the full year ending December 31, 2019.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 expenses during the reporting period. Significant estimates used are those related to stock-based compensation, asset impairments, the valuation and useful lives of depreciable tangible and certain intangible assets, the fair value of common stock used in acquisitions of businesses, the fair value of assets and liabilities acquired in acquisitions of businesses, and the valuation allowance of deferred tax assets. Management believes that these estimates are reasonable; however, actual results may differ from these estimates.
Accounts Receivable, Allowance for Doubtful Accounts and Concentrations
Accounts receivable are carried at their estimated collectible amounts. We grant unsecured credit to substantially all of our customers. Ongoing credit evaluations are performed, and potential credit losses are charged to operations at the time the account receivable is estimated to be uncollectible. Since we cannot necessarily predict future changes in the financial stability of our customers, we cannot guarantee that our reserves will continue to be adequate.
As of September 30, 2019, and December 31, 2018, we recorded an allowance for doubtful accounts of $65,306 and $10,104, respectively.
Goodwill and Intangible Assets
Goodwill is tested for impairment at a minimum on an annual basis. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit's carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted cash flow approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach
5
uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit.
Intangible assets consist of patents and trademarks, purchased customer contracts, purchased customer and merchant relationships, purchased trade names, purchased technology, non-compete agreements, and software development costs. Intangible assets are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from one to twenty years. No significant residual value is estimated for intangible assets.
Software Development Costs
Software development costs include direct costs incurred for internally developed products and payments made to independent software developers and/or contract engineers. The Company accounts for software development costs in accordance with the FASB guidance for the costs of computer software to be sold, leased, or otherwise marketed (“ASC Subtopic 985-20”). Software development costs are capitalized once the technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses technical design documentation and integration documentation, or the completed and tested product design and working model. Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable against future revenues. Technological feasibility is evaluated on a project-by-project basis. Amounts related to software development that are not capitalized are charged immediately to the appropriate expense account. Amounts that are considered ‘research and development’ that are not capitalized are immediately charged to engineering, research, and development expense.
Capitalized costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation. Commencing upon product release, capitalized software development costs are amortized to “Amortization Expense - Development” based on the straight-line method over a twenty-four month period.
The Company evaluates the future recoverability of capitalized software development costs on an annual basis. For products that have been released in prior years, the primary evaluation criterion is ongoing relations with the customer.
Impairment of Long-Lived Assets
We evaluate long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset is expected to generate.
Foreign Currency Translation
The Company translates the financial statements of its foreign subsidiary from the local (functional) currency into US Dollars using the year or reporting period end or average exchange rates in accordance with the requirements of Accounting Standards Codification subtopic 830-10, Foreign Currency Matters (“ASC 830-10”). Assets and liabilities of these subsidiaries were translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average rates in effect for the periods presented. The cumulative translation adjustment is included in the accumulated other comprehensive gain (loss) within shareholders’ equity. Foreign currency transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the unaudited Condensed Consolidated Statements of Income and Comprehensive Income.
Revenue Recognition and Concentrations
Our Receipt and Reach and customer relationship management are hosted solutions. We generate revenue from licensing our software to clients in our software as a service model, per-message and per-minute transactional fees, and customized professional services. We recognize license/subscription fees over the period of the contract, service fees as the services are performed, and per-message or per-minute transaction revenue when the transaction takes place. Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We consider authoritative guidance on multiple deliverables in determining whether each deliverable represents a separate unit of accounting. Some customers are billed on a month-to-month basis with no contractual term and are collected by credit card. Revenue is recognized at the time that the services are rendered, and the selling price is fixed with a set range of plans. Cash received in advance of the performance of services is recorded as deferred revenue.
Accounting Standards Update (“ASU “) No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification 606 (“ASC 606”), is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition guidance. The Company adopted this standard effective January 1, 2018, applying the modified retrospective method. Upon adoption, the Company discontinued revenue deferral under the sell-through model and commenced recording revenue upon delivery to distributors, net of estimated returns. Generally, the new standard results in earlier recognition of revenues.
6
We determine revenue recognition under ASC 606 through the following steps:
identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract;
identification of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue when, or as, we satisfy a performance obligation.
During the nine months ended September 30, 2019, two customers accounted for 71% of our revenues. During the nine months ended September 30, 2018, three customers accounted for 73% of our revenues.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. We are required to record all components of comprehensive income (loss) in the consolidated financial statements in the period in which they are recognized. Net income (loss) and other comprehensive income (loss), including foreign currency translation adjustments and unrealized gains and losses on investments, are reported, net of their related tax effect, to arrive at comprehensive income (loss). For the nine months ended September 30, 2019 and 2018, the comprehensive loss was $6,315,165 and $2,979,234, respectively.
Net Loss Per Common Share
Basic net loss per share excludes any dilutive effects of options, shares subject to repurchase and warrants. Diluted net loss per share includes the impact of potentially dilutive securities. During the three and nine months ended September 30, 2019 and 2018, we had securities outstanding which could potentially dilute basic earnings per share in the future but were excluded from the computation of diluted net loss per share, as their effect would have been anti-dilutive.
Reclassifications
Certain amounts from prior periods have been reclassified to conform to the current period presentation.
Recent Accounting Pronouncements
Accounting standards promulgated by the FASB are subject to change. Changes in such standards may have an impact on the Company’s future financial statements. The following are a summary of recent accounting developments.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”. Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company adopted this standard as of January 1, 2019.
In May 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2014-09 provides principles for recognizing 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 or services. In August 2015, the FASB issued ASU 2015-14 to defer the effective date by one year with early adoption permitted as of the original effective date. This guidance was effective for the Company for its fiscal year beginning January 1, 2018. The Company adopted the modified retrospective approach to initially apply the update and recognize the remaining contract value at the date of application.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes the second step of the two-step goodwill impairment test. Under ASU 2017-04, an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019; early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently in the process of evaluating the impact of adopting ASU 2017-04 and cannot currently estimate the financial statement impact of adoption.
7
3. Goodwill and Purchased Intangibles
Goodwill
The carrying value of goodwill at September 30, 2019 and December 31, 2018 was $537,550.
The following table presents details of our purchased intangible assets as of September 30, 2019 and December 31, 2018:
Intangible assets
|
|
|
Balance at
December 31,
2018
|
|
Additions
|
|
Impairments
|
|
Amortization
|
|
Fx and Other
|
|
Balance at
September 30,
2019
|
|
Patents and trademarks
|
|
$
|
104,986
|
|
$
|
10,425
|
|
$
|
(21,400)
|
|
$
|
(9,589)
|
|
$
|
150
|
|
$
|
84,572
|
|
Customer and merchant relationships
|
|
|
836,088
|
|
|
-
|
|
|
-
|
|
|
(72,639)
|
|
|
-
|
|
|
763,449
|
|
Trade name
|
|
|
59,996
|
|
|
-
|
|
|
-
|
|
|
(6,961)
|
|
|
14
|
|
|
53,049
|
|
Acquired technology
|
|
|
161,092
|
|
|
-
|
|
|
-
|
|
|
(12,225)
|
|
|
-
|
|
|
148,867
|
|
Non-compete agreements
|
|
|
76,791
|
|
|
-
|
|
|
-
|
|
|
(11,895)
|
|
|
-
|
|
|
64,896
|
|
|
|
$
|
1,238,953
|
|
$
|
10,425
|
|
$
|
(21,400)
|
|
$
|
(113,309)
|
|
$
|
164
|
|
$
|
1,114,833
|
The intangible assets are being amortized on a straight-line basis over their estimated useful lives of one to twenty years.
Amortization expense for intangible assets was $37,779 and $9,976 for the three months ended September 30, 2019 and 2018, respectively.
Amortization expense for intangible assets was $113,309 and $31,741 for the nine months ended September 30, 2019 and 2018, respectively.
The estimated future amortization expense of our intangible assets as of September 30, 2019 is as follows:
|
Year ending December 31,
|
|
Amount
|
|
2019
|
|
$
|
37,769
|
|
2020
|
|
|
150,154
|
|
2021
|
|
|
147,258
|
|
2022
|
|
|
147,208
|
|
2023
|
|
|
140,600
|
|
Thereafter
|
|
|
491,844
|
|
Total
|
|
$
|
1,114,833
|
4. Software Development Costs
The Company has capitalized certain costs for software developed or obtained for internal use during the application development stage as it relates to specific contracts. The amounts capitalized include external direct costs of services used in developing internal-use software and for payroll and payroll-related costs of employees directly associated with the development activities
8
The following table presents details of our software development costs as of September 30, 2019 and December 31, 2018:
|
|
|
Balance at
December 31,
2018
|
|
Additions
|
|
Amortization
|
|
Balance at
September 30,
2019
|
|
Software Development Costs
|
|
$
|
542,495
|
|
$
|
861,914
|
|
$
|
(318,280)
|
|
$
|
1,086,129
|
|
|
|
$
|
542,495
|
|
$
|
861,914
|
|
$
|
(318,280)
|
|
$
|
1,086,129
|
Software development costs are being amortized on a straight-line basis over their estimated useful life of two years.
Amortization expense for software development costs was $107,258 and $68,788 for the three months ended September 30, 2019 and 2018, respectively.
Amortization expense for software development costs was $318,280 and $228,175 for the nine months ended September 30, 2019 and 2018, respectively.
The estimated future amortization expense of software development costs as of September 30, 2019 is as follows:
|
Year ending December 31,
|
|
Amount
|
|
2019
|
|
$
|
171,905
|
|
2020
|
|
|
640,572
|
|
2021
|
|
|
273,652
|
|
2022
|
|
|
-
|
|
2023
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
1,086,129
|
5. Operating Lease Assets
Adoption of Accounting Standards Codification (“ASC”) Topic 842, “Leases." The Company adopted Topic 842 on January 1, 2019, using the modified retrospective method and the optional transition method to record the adoption impact through a cumulative adjustment to equity. Results for reporting periods beginning after January 1, 2019, are presented under Topic 842, while prior periods are not adjusted and continue to be reported under the accounting standards in effect for those periods.
The following are additional details related to leases recorded on our balance sheet as of September 30, 2019:
|
Leases
|
Classification
|
|
|
Balance at
September 30,
2019
|
|
Assets
|
|
|
|
|
|
|
Operating lease assets
|
Operating lease assets
|
|
|
$
|
360,709
|
|
Total lease assets
|
|
|
|
$
|
360,709
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating lease liabilities
|
Operating lease liabilities
|
|
|
$
|
252,672
|
|
Noncurrent
|
|
|
|
|
|
|
Operating lease liabilities
|
Noncurrent operating lease liabilities
|
|
|
$
|
112,012
|
|
Total lease liabilities
|
|
|
|
$
|
364,684
|
9
The maturity analysis below summarizes the remaining future undiscounted cash flows for our operating leases, a reconciliation to operating lease liabilities reported on the Condensed Consolidated Balance Sheet, our weighted-average remaining lease term and weighted average discount rate:
|
Year ending December 31,
|
|
Amount
|
|
2019
|
|
$
|
66,686
|
|
2020
|
|
|
270,982
|
|
2021
|
|
|
35,748
|
|
2022
|
|
|
11,927
|
|
2023
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total future lease payments
|
|
|
385,343
|
|
Less: imputed interest
|
|
|
(20,659)
|
|
Total
|
|
$
|
364,684
|
|
Weighted Average Remaining Lease Term (years)
|
|
|
Operating leases
|
2
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
Operating leases
|
6.20 %
|
6. Notes Payable and Interest Expense
The following table presents details of our notes payable as of September 30, 2019 and December 31, 2018:
|
Facility
|
|
Maturity
|
|
Interest Rate
|
|
Balance at
September 30,
2019
|
|
Balance at
December 31,
2018
|
|
BDC Term Loan
|
|
October 15,2021
|
|
25 %
|
|
$
|
241,941
|
|
$
|
252,837
|
|
ACOA Note
|
|
May 1,2021
|
|
-
|
|
|
122,655
|
|
|
141,081
|
|
Wintrust Bank
|
|
November 1,2021
|
|
6.75 %
|
|
|
865,807
|
|
|
1,000,000
|
|
Related Party Note
|
|
March 31,2020
|
|
15 %
|
|
|
90,461
|
|
|
80,000
|
|
Total Debt
|
|
|
|
|
|
|
1,320,864
|
|
|
1,473,918
|
|
Less current portion
|
|
|
|
|
|
|
(618,792)
|
|
|
(1,279,590)
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
$
|
702,072
|
|
$
|
194,328
|
10
BDC Term Loan
On January 8, 2016, Livelenz, a wholly-owned subsidiary of the Company (“Livelenz”), entered into an amendment of their original loan agreement dated August 26, 2011 with the Business Development Bank of Canada (“BDC”). Under this agreement the loan will mature, and the commitments will terminate on September 15, 2019.
On July 26, 2019, Livelenz, entered into an amendment of their original loan agreement dated August 26, 2011 with the Business Development Bank of Canada (“BDC”). Under this agreement the loan will mature, and the commitments will terminate on October 15, 2021. In accordance with the amendment, the Company will commence monthly payments beginning on August 15, 2019 of principal in the amount of $8,500 in addition to the monthly payment of accrued interest. These payments will increase to $10,000 on November 15, 2019, $12,000 on May 15, 2020, $14,000 on November 15, 2020 and $16,000 on May 15, 2021 in addition to the monthly interest.
ACOA Note
On April 29, 2016, Livelenz, entered into an amendment of the original agreement dated December 2, 2014 with the Atlantic Canada Opportunities Agency (“ACOA”). Under this agreement, repayments began on June 1, 2016, and the note will mature and the commitments will terminate on May 1, 2021. The monthly principal payment amount of $3,000 will increase to $3,500 beginning on November 1, 2020.
SVB Working Capital Line of Credit Facility
In March 2016, we entered into a Working Capital Line of Credit Facility (the “Facility”) with Silicon Valley Bank (“SVB”) to provide up to $2 million to finance our general working capital needs. The Facility is funded based on cash on deposit balances and advances against our accounts receivable based on customer invoicing. Interest on Facility borrowings is calculated at rates between the prime rate minus 1.75% and prime rate plus 3.75% based on the borrowing base formula used at the time of borrowing. The Facility contains standard events of default, including payment defaults, breaches of representations, breaches of affirmative or negative covenants, and bankruptcy. As of March 31, 2018, this Facility was paid off and closed.
Under the terms of the Facility, the Company is obligated to pay a commitment fee on the available unused amount of the Facility commitments equal to 0.5% per annum.
The Company capitalized debt issuance costs of $42,287 as of March 31, 2018 related to the Facility, which have been amortized on a straight-line basis to interest expense over the two-year term of the Facility. As of September 30, 2019, the Company has fully amortized these costs.
Wintrust Loan
On November 14, 2018, the Company entered into a Loan and Security Agreement with Wintrust Bank. The Loan and Security Agreement provides for a single-term loan to us in the original principal amount of $1,000,000. Interest accrues on the unpaid principal amount at the rate of prime plus 1.5%. The loan is a three-year loan and is interest-only payable for the first six months of the loan. Commencing on May 1, 2019, the Company will commence monthly payments of principal in the amount of $33,333 in addition to the monthly payment of accrued interest. The loan is secured by all of our assets other than our intellectual property. We used the proceeds of the loan to re-finance a loan in the principal amount of $1,000,000 we assumed as part of the acquisition of the Belly assets.
Related Party Notes
During February 2018, we conducted a private placement of Unsecured Promissory Notes (individually, a “Note” and collectively, the “Notes”) in the aggregate principal amount of $1,080,000 to certain investors, officers and directors of the Company. Each Note bears interest on the unpaid balance at the rate of fifteen percent (15%) per annum and the principal and accrued interest is due and payable no later than December 1, 2020. We may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty. The Note offer was conducted by our management and there were no commissions paid by us in connection with the solicitation. As of September 30, 2019, we have repaid $1,000,000 and have $80,000 as a remaining balance of these notes plus accrued interest of $18,267.
During the nine months ended September 30, 2019 we issued unsecured notes in the principle aggregate amount of $2,500,000, which are due in the first and second quarters of 2021. These notes bear interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty.
11
On July 2, 2019 this note was converted into equity and we recorded a loss on conversion of debt of $232,462 for the three and nine months ended September 30, 2019.
Interest Expense
Interest expense was $57,569 and $25,913 during the three months ended September 30, 2019 and 2018, respectively.
Interest expense was $188,451 and $193,036 during the nine months ended September 30, 2019 and 2018, respectively.
7. Stockholders’ Equity
Common Stock
2018
On February 7, 2018, the Company issued 12,500 shares of our common stock, at a price of $0.78 per share, for the gross proceeds of $9,595 in conjunction with one employee that exercised vested stock options.
On February 23, 2018, the Company issued 1,808 shares of our common stock in a cashless transaction related to a 25,000 warrant exercise.
During the three months ended March 31, 2018, the Company issued 2,018,125 shares of common stock for $2,018,125 related to the exercise of certain warrants.
In June 2018, the Company commenced a private placement of its common shares at an offering price of $1.00 per share. As of September 30, 2018, the Company had sold 5,775,000 shares of its common stock for gross proceeds of $5,775,000. In addition, the Company issued 1,047,583 shares of its common stock associated with the cancellation of $1,000,000 of principal, $47,583 of accrued interest, and a loss on conversion of $41,902 under its February 2018 private placement Notes (See Note 6).
On August 29, 2018, the Company issued 24,792 shares of our common stock, at a price of $0.48 per share, for the gross proceeds of $11,875 in conjunction with one employee that exercised vested stock options.
On October 19, 2018, the Company issued 84,679 shares of our common stock, at a price of $1.20 per share, for the gross proceeds of $101,615 in conjunction with the exercise of warrants.
On November 6, 2018, the Company issued 8,426 shares of our common stock in a cashless transaction related to a 25,000 warrant exercise.
On December 31, 2018, the Company recorded stock-based compensation expense of $260,000 related to restricted stock units for members of our board of directors.
2019
In July 2019, the Company commenced a private placement of its common stock units, with each unit consisting of one share of our common stock and a warrant to purchase to one-half share of our common stock at an exercise price of $1.25 per share at an offering price of $1.00 per unit. As of September 30, 2019, the Company had sold 2,800,000 units of its common stock for gross proceeds of $2,800,000. In addition, the Company issued 2,582,916 units of its common stock associated with the conversion of $2,500,000 of principal, $82,916 of accrued interest, and a loss on conversion of $232,462 (See Note 6).
As of September 30, 2019, and December 31, 2018 we had an equity payable balance of $100,862.
12
Stock-based Plans
Stock Option Activity
The following table summarizes stock option activity for the year ended December 31, 2018 and for the nine months ended September 30, 2019:
|
|
Options
|
|
Outstanding at December 31, 2017
|
6,818,948
|
|
Granted
|
855,000
|
|
Exercised
|
(12,500)
|
|
Forfeit/canceled
|
(1,566,589)
|
|
Expired
|
(1,082,641)
|
|
Outstanding at December 31, 2018
|
5,012,218
|
|
Granted
|
2,205,000
|
|
Exercised
|
-
|
|
Forfeit/canceled
|
(738,389)
|
|
Expired
|
(628,402)
|
|
Outstanding at September 30, 2019
|
5,850,427
|
The weighted average exercise price of stock options granted during the period was $1.03 and the related weighted average grant date fair value was $0.72 per share.
2018
On January 1, 2018, the Company granted two employees a total of 10,000 options to purchase shares of the Company common stock at the closing price as of January 1, 2018 of $1.20 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until January 1, 2028. The total estimated value using the Black-Scholes Model, based on a volatility rate of 104.04% and an option fair value of $.97 was $9,729.
On January 8, 2018, the Company granted one employee a total of 50,000 options to purchase shares of the Company common stock at the closing price as of January 8, 2018 of $1.20 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until January 8, 2028. The total estimated value using the Black-Scholes Model, based on a volatility rate of 104.06% and an option fair value of $.97 was $48,682.
On January 29, 2018, the Company granted one employee a total of 20,000 options to purchase shares of the Company common stock at the closing price as of January 29, 2018 of $1.03 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until January 29, 2028. The total estimated value using the Black-Scholes Model, based on a volatility rate of 103.49% and an option fair value of $.83 was $16,690.
On February 7, 2018, the Company issued 12,500 shares of our common stock, at a price of $0.78 per share, for the gross proceeds of $9,595 in conjunction with one employee that exercised vested stock options.
On February 15, 2018, the Company granted one employee a total of 100,000 options to purchase shares of the Company common stock at the closing price as of February 15, 2018 of $1.12 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until February 15, 2028. The total estimated value using the Black-Scholes Model, based on a volatility rate of 103.60% and an option fair value of $.91 was $90,904.
On March 26, 2018, the Company granted one employee a total of 300,000 options to purchase shares of the Company common stock at the closing price as of March 26, 2018 of $1.10 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until March 26, 2028. The total estimated value using the Black-Scholes Model, based on a volatility rate of 101.94% and an option fair value of $.88 was $265,575.
On April 16, 2018, the Company granted one employee a total of 50,000 options to purchase shares of the Company common stock at the closing price as of April 16, 2018 of $1.06 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until April 16, 2028. The total estimated value using the Black-Scholes Model, based on a volatility rate of 102.07% and an option fair value of $.85 was $42,693.
On May 7, 2018, the Company granted one employee a total of 10,000 options to purchase shares of the Company common stock at the closing price as of May 7, 2018 of $0.90 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable
13
until May 7, 2028. The total estimated value using the Black-Scholes Model, based on a volatility rate of 101.42% and an option fair value of $.72 was $7,231.
On June 1, 2018, the Company granted one employee a total of 10,000 options to purchase shares of the Company common stock at the closing price as of June 1, 2018 of $1.12 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until June 1, 2028. The total estimated value using the Black-Scholes Model, based on a volatility rate of 95.44% and an option fair value of $.87 was $8,705.
2019
On January 7, 2019, the Company granted one employee a total of 10,000 options to purchase shares of the Company common stock at the closing price as of January 7, 2019 of $1.17 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until January 7, 2029. The total estimated value using the Black-Scholes Model, based on a volatility rate of 90.82% and an option fair value of $.88 was $8,821.
On January 21, 2019, the Company granted one employee a total of 15,000 options to purchase shares of the Company common stock at the closing price as of January 21, 2019 of $1.17 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until January 21, 2029. The total estimated value using the Black-Scholes Model, based on a volatility rate of 90.75% and an option fair value of $.88 was $13,239.
On February 12, 2019, the Company granted one employee a total of 150,000 options to purchase shares of the Company common stock at the closing price as of February 12, 2019 of $1.00 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until February 12, 2029. The total estimated value using the Black-Scholes Model, based on a volatility rate of 90.79% and an option fair value of $.75 was $113,046.
On February 18, 2019, the Company granted one employee a total of 15,000 options to purchase shares of the Company common stock at the closing price as of February 18, 2019 of $1.05 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until February 18, 2029. The total estimated value using the Black-Scholes Model, based on a volatility rate of 90.88% and an option fair value of $.84 was $12,537.
On February 25, 2019, the Company granted one employee a total of 50,000 options to purchase shares of the Company common stock at the closing price as of February 25, 2019 of $1.00 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until February 25, 2029. The total estimated value using the Black-Scholes Model, based on a volatility rate of 90.88% and an option fair value of $.75 was $37,697.
On March 11, 2019, the Company granted one employee a total of 50,000 options to purchase shares of the Company common stock at the closing price as of March 11, 2019 of $1.00 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until March 11, 2029. The total estimated value using the Black-Scholes Model, based on a volatility rate of 90.90% and an option fair value of $.75 was $37,688.
On May 17, 2019, the Company granted three employees a total of 1,775,000 options to purchase shares of the Company common stock at the closing price as of May 17, 2019 of $1.04 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until May 17, 2029. The total estimated value using the Black-Scholes Model, based on a volatility rate of 80.17% and an option fair value of $.72 was $1,283,178.
On August 21, 2019, the Company granted four employees a total of 140,000 options to purchase shares of the Company common stock at the closing price as of August 21, 2019 of $0.95 per share. The Option Shares will vest 25% on the first anniversary of the grant, then equally in 36 monthly installments thereafter and are exercisable until August 21, 2029. The total estimated value using the Black-Scholes Model, based on a volatility rate of 80.17% and an option fair value of $.65 was $91,537.
Stock-Based Compensation Expense from Stock Options and Warrants
The impact on our results of operations of recording stock-based compensation expense for the three and nine months ended September 30, 2019 and 2018 were as follows:
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
General and administrative
|
|
$
|
94,122
|
|
$
|
111,003
|
|
$
|
584,160
|
|
$
|
328,854
|
|
Sales and marketing
|
|
|
13,020
|
|
|
4,982
|
|
|
63,575
|
|
|
129,079
|
|
Engineering, research, and development
|
|
|
40,607
|
|
|
34,525
|
|
|
111,567
|
|
|
100,321
|
|
|
|
$
|
147,749
|
|
$
|
150,510
|
|
$
|
759,302
|
|
$
|
558,254
|
14
Valuation Assumptions
The fair value of each stock option award was calculated on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the nine months ended September 30, 2019 and 2018.
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
Risk-free interest rate
|
|
2.21
|
%
|
|
1.96
|
%
|
|
Expected life (years)
|
|
6.00
|
|
|
6.00
|
|
|
Expected dividend yield
|
|
-
|
%
|
|
-
|
%
|
|
Expected volatility
|
|
81.57
|
%
|
|
84.94
|
%
|
The risk-free interest rate assumption is based upon published interest rates appropriate for the expected life of our employee stock options.
The expected life of the stock options represents the weighted-average period that the stock options are expected to remain outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.
The dividend yield assumption is based on our history of not paying dividends and no future expectations of dividend payouts.
The expected volatility in 2019 and 2018 is based on the historical publicly traded price of our common stock.
Restricted stock units
The following table summarizes restricted stock unit activity under our stock-based plans for the year ended December 31, 2018 and for the nine months ended September 30, 2019:
|
|
|
Shares
|
|
Outstanding at December 31, 2017
|
|
|
662,800
|
|
Awarded
|
|
|
-
|
|
Released
|
|
|
-
|
|
Canceled/forfeited/expired
|
|
|
-
|
|
Outstanding at December 31, 2018
|
|
|
662,800
|
|
Awarded
|
|
|
294,448
|
|
Released
|
|
|
-
|
|
Canceled/forfeited/expired
|
|
|
-
|
|
Outstanding at September 30, 2019
|
|
|
957,248
|
|
|
|
|
|
|
Expected to vest at September 30, 2019
|
|
|
957,248
|
|
Vested at September 30, 2019
|
|
|
957,248
|
|
Unvested at September 30, 2019
|
|
|
-
|
|
Unrecognized expense at September 30, 2019
|
|
$
|
-
|
2018
During the twelve months ended December 31, 2018, the Company did not issue any restricted stock units. During the twelve months ended December 31, 2018, the Company recorded $37,249 in restricted stock units amortization and $260,000 in board compensation.
2019
On January 1, 2019, the Company issued to four independent directors a total of 222,224 restricted stock units. These restricted stock units were issued for the $260,000 of board compensation earned in 2018. The units were valued at $260,000 or $1.17 per share, based on the closing stock price on the date of grant. All units vested immediately. The shares of Common Stock associated with the Restricted Stock Unit evidenced by this Agreement will be issued to the director upon the earliest to occur of (A) January 1, 2022, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.
15
On March 31, 2019, the Company granted four independent directors a total of 72,224 restricted stock units. The units were valued at $65,001 or $0.90 per share, based on the closing stock price on the date of grant. All units vested immediately. The shares of Common Stock associated with the Restricted Stock Unit evidenced by this Agreement will be issued to the director upon the earliest to occur of (A) March 31, 2022, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.
Stock Based Compensation from Restricted Stock
The impact on our results of operations of recording stock-based compensation expense for restricted stock units for the three and nine months ended September 30, 2019 and 2018 was as follows:
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
General and administrative
|
|
$
|
-
|
|
$
|
-
|
|
$
|
65,001
|
|
$
|
30,546
|
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
65,001
|
|
$
|
30,546
|
As of September 30, 2019, there was no unearned restricted stock unit compensation.
Warrants Issued to Investors and Placement Agents
At September 30, 2019, we have warrants to purchase 432,500 shares of common stock at $1.20 per share, 234,500 at $1.00 per share, and 2,691,459 at $1.25 per share, respectively, which are outstanding. Of the outstanding warrants, 667,000 expire in 2020 and 2,691,459 expire in 2021.
8. Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions. This hierarchy requires companies to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, we measure certain financial assets and liabilities at fair value.
The following table presents assets that are measured and recognized at fair value as of September 30, 2019 on a recurring and non-recurring basis:
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Gains (Losses)
|
|
Goodwill (non-recurring)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
537,550
|
|
$
|
-
|
|
Intangibles, net (non-recurring)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2,200,962
|
|
$
|
-
|
The following table presents assets that are measured and recognized at fair value as of December 31, 2018 on a recurring and non-recurring basis:
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Gains (Losses)
|
|
Goodwill (non-recurring)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
537,550
|
|
$
|
-
|
|
Intangibles, net (non-recurring)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,781,448
|
|
$
|
-
|
9. Commitments and Contingencies
Litigation
As of the date of this report, there are no pending legal proceedings to which we or our properties are subject, except for routine litigation incurred in the normal course of business.
In February 2019, a complaint was filed against us and five of our employees in the U.S. Federal District Court for the Southern District of New York by mGage, LLC (mGage, LLC v. Glenn Stansbury, et al., No. 19-cv-1165-CM (S.D.N.Y. Filed 2/7/19). In the complaint, the plaintiff alleged that we and five of our employees, who previously worked at mGage, misappropriated confidential information belonging to mGage in violation of the federal Defend Trade Secrets Act, that those same individuals violated non-compete agreements through their employment at Mobivity and that we tortiously interfered with mGage’s business opportunities. On August 14, 2019 we
16
entered into a settlement agreement with mGage pursuant to which we and mGage released each other of all claims and we agreed to pay mGage $300,000 over a period of time.
10. Related Party Transactions
During February 2018, we commenced an offer to certain investors, officers and directors of the Company of up to $750,000 in Unsecured Promissory Notes (individually, a “Note” and collectively, the “Notes”). Each Note bears interest on the unpaid balance at the rate of fifteen percent (15%) per annum and the principal and accrued interest is due and payable no later than March 31, 2020. The Company may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty. As of December 31, 2018, the Note investments of $1,080,000 have been received from certain investors, officers and directors of the Company. The Note offer was conducted by our management and there were no commissions paid by us in connection with the solicitation.
During the nine months ended September 30, 2019, we issued to one of our directors, unsecured notes in the principal aggregate amount of $2,500,000, which are due and payable in the first two quarters of 2021. These notes bear interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty. We conducted a private placement of our securities in July 2019. The note holder participated in the private placement described in Note 7, by converting the principal of $2,500,000 and accrued interest of $82,916 under the notes, totaling $2,582,916, into 2,582,916 units of our securities, with each unit consisting of one share of our common stock and a warrant to purchase to one-half share of our common stock at an exercise price of $1.25 per share.
11. Subsequent Events
None
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, in connection with the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements Such forward-looking statements include statements about our expectations, beliefs or intentions regarding our potential product offerings, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made and are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” or “will,” and similar expressions or variations. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those risks disclosed under the caption “Risk Factors” included in our 2018 annual report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on April 15, 2019 and in our subsequent filings with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.
Overview
Mobivity Holdings Corp. (the “Company” or “we”) is in the business of developing and operating proprietary platforms over which brands and enterprises can conduct national and localized, data-driven marketing campaigns. Our proprietary platforms, consisting of software available to phones, tablets, PCs, and Point-of-Sale (“POS”) systems, allow resellers, brands and enterprises to market their products and services to consumers through text messages sent directly to the consumers via mobile phones, mobile smartphone applications, and dynamically printed receipt content. We generate revenue by charging the resellers, brands and enterprises a per-message transactional fee, through fixed or variable software licensing fees, or via advertising fees. We help personal care, restaurant and retail brands realize their strategy of growing their business by increasing customer frequency, engagement and spend. Mobivity's analytics services and products provide solutions that allow brands to take validated marketing actions across all channels, based on real customer behavior to create personalized, relevant, localized and targeted campaigns. With national clients such as Subway, Sonic, Chick-fil-A, and Baskin-Robbins, Mobivity's goal is to unlock the power of internal and external customer data to create a system that provides data driven insight to continually adapt and enhance communications with customers.
According to the U.S. Census Bureau, only 7% of commerce in the US occurs online which means 93% is still happening in the physical world. We believe that brands, and in particular restaurant and retail brands, need a better way to tie marketing activities to customer
17
purchases, and then use the information to build a more relevant, personal experience for each customer, at a local and national level. Mobivity is giving brands the ability to connect (and measure) marketing communications in the physical world by unlocking POS and mobile data and marrying it with other traditional tactics to create a closed loop: in some cases increasing response rates from 0.05% to 5% (or greater); improving online advertising conversion by 10X; and increasing revenue per ad by more than 2.5X.
Mobivity’s solution addresses the offline marketing problem and makes personalized marketing automation possible for offline commerce. Digital marketing is highly dynamic and personally targeted. According to studies published by McKinsey & Company, Point Drive, and the National Advertising Institute, targeted advertising generates conversion rates more than eleven times higher than non-targeted advertising, more than double the revenue per advertisement, and is 250% more efficient than non-targeted advertising. Combined with purchase data and analytics gathered by Mobivity’s products and platforms, Mobivity customers are able to quickly transform traditionally low marketing campaign response rates to exponentially higher response rates.
Recurrency
Mobivity's Recurrency platform (formerly “SmartSuite”) unlocks valuable POS and mobile data to help transform customer transactions into actionable and attributable marketing insights. Our technology provides transactional data, in real-time, that uncovers market-basket information and attributes both online and traditional promotions. Recurrency is comprised of Recapture, Recognition, Receipt, Reach, Reup, and Belly Loyalty.
Recapture
Mobivity’s Recurrency begins with Recapture, which can capture, normalize, integrate, and store transaction data for almost any POS system. This provides a clean useful dataset upon which to predict and influence your customers’ buying behavior and deliver basket-level insights to your business.
Recognition
Mobivity’s Recognition is comprised of various reporting and analytics tools to uncover patterns in the buying behaviors of consumers and leverages that data to suggest pricing optimizations, and guide marketing campaigns.
Receipt
Mobivity’s Receipt unlocks the power of transactional data to create relevant and timely customer messages. Both clients and agencies are using Receipt to drive better results and make decisions around offers, promotions, and customer engagement through the medium of the printed receipt. Our Receipt solution enables our customers with the ability to control the content on receipts printed from their point of sale, or POS system. Receipt is a software application that is installed on the POS, or directly onto receipt printer platforms, such as Epson’s OmniLink product, which dynamically controls what is printed on receipts such as coupons, announcements, or other calls-to-action, such as invitations to participate in a survey. Receipt includes a Web-based interface where users can design receipt content and implement business rules to dictate what receipt content is printed in particular situations. All receipt content is also transmitted to Receipt’s server back-end for storage and analysis via Recognition.
Reach
Mobivity’s Reach transforms standard short message service (“SMS”) and multimedia messaging service (“MMS”) messaging into a data-driven marketing medium. Mobivity’s Reach tracks and measures offer effectiveness at a more granular level than anything available in the industry, allowing clients to create smarter offers and drive higher redemption rates. Our proprietary platform connects to all wireless carriers so that any consumer, on any wireless service (for example, Verizon), can join our customer’s SMS/MMS mobile marketing campaign. Once the consumer has subscribed to our customer’s SMS/MMS mobile marketing campaign, our Web-based software solution serves as a tool by which our customers can initiate messages and other communications back to their subscribed consumers, as well as configure and administer their mobile marketing campaigns.
Reup
Mobivity’s Reup aids marketing to align focusing its attention on engaging the customer and trying to change their buying behavior. Reup allows clients to begin including, and rewarding, employee behavior as a key method to effect customer behavior and drive more revenue. By focusing on small changes - upsizing drinks, adding desserts, and promoting limited time offers - employees can have a dramatic impact on sales.
Belly Loyalty
18
Mobivity’s Belly Loyalty program focuses on a customer engagement with a customer-facing digital rewards platform via an app and digital pad. As a result of the Belly acquisition, Mobivity now has: a highly rated app (“Belly - Rewards Everyday”) on IOS and Android that leverages geolocation; an email messaging system that connects our clients to our customers; a loyalty program that rewards customer frequency.
Company Strategy
Our objective is to build an industry-leading Software-as-a-Service (SaaS) product that connects consumers to merchants and brands. The key elements to our strategy are:
Exploit the competitive advantages and operating leverage of our technology platform.
The core of our business is our proprietary Recapture POS technology. Several years of development went into designing Recapture such that the process of intercepting POS data and performing actions, such as controlling the receipt printer with receipt is scalable, portable to a wide variety of POS platforms, and does not impact performance factors including the print speed of a typical receipt printer. Furthermore, we believe the transmission of POS data to Mobivity’s cloud-based data stores presents a very competitive and innovative method of enabling POS data access. Additionally, we believe that our Reach platform is more advanced than technologies offered by our competitors and provides us with a significant competitive advantage. With more than ten years of development, we believe that our platform operates SMS text messaging transactions at a “least cost” relative to competitors while also being capable of supporting SMS text messaging transactional volume necessary to support our goal of several thousand end users. Leveraging our Recognition platform with Reach allows for full attribution of SMS offers, which we believe is a unique combination of both SMS text messaging and POS data.
Evolve our sales and customer support infrastructure to uniquely serve very large customer implementations such as franchise-based brands who operate a large number of locations.
Over the past few years we have focused our efforts on the development of our technology and solutions with the goal of selling and supporting small and medium-sized businesses. Going forward, we intend to increase significantly our investments in sales and customer support resources tailored to selling to customers that operate franchise brands. Today we support more than 30,000 merchant locations globally.
Acquire complementary businesses and technologies.
We will continue to search and identify unique opportunities which we believe will enhance our product features and functionality, revenue goals, and technology. We intend to target companies with some or all of the following characteristics: (1) an established revenue base; (2) strong pipeline and growth prospects; (3) break-even or positive cash flow; (4) opportunities for substantial expense reductions through integration into our platform; (5) strong sales teams; and (6) technology and services that further build out and differentiate our platform. Our acquisitions have historically been consummated through the issuance of a combination of our common stock and cash.
Build our intellectual property portfolio.
We currently have seven issued patents that we believe have significant potential application in the technology industry. We plan to continue our investment in building a strong intellectual property portfolio.
While these are the key elements of our current strategy, there can be no guarantees that our strategy will not change or that our strategy will be successful.
Recent Events
2018 Warrant Exercise
Between January 19, 2018 and March 31, 2018, we conducted an offer to the holders of our outstanding common stock purchase warrants pursuant to which our warrant holders will be permitted to exercise their warrants at a reduced exercise price for a period expiring on March 31, 2018. At the commencement of the warrant offer, there were warrants outstanding that entitled their holders to purchase 5,134,349 shares of our common stock at exercise prices of $1.00 and $1.20 per share. Pursuant to the offer, warrant holders exercised warrants to purchase 1,898,015 shares of our common stock, resulting in additional capital of $1,898,015. We undertook this limited-time warrant exercise price reduction in order to raise additional capital without incurring further potential dilution to our stockholders. In addition, through the warrant holders’ acceptance of our offer, we could significantly reduce the number of outstanding warrants and thereby simplify our capital structure. The warrant offer was conducted by our management and there were no commissions paid by us in connection with the solicitation.
19
Unsecured Promissory Note Investments in 2018
During February 2018, we conducted a private placement of Unsecured Promissory Notes (individually, a “Note” and collectively, the “Notes”) in the aggregate principal amount of $1,080,000 to certain investors, officers, and directors of the Company. Each Note bears interest on the unpaid balance at the rate of twelve percent (12%) per annum and the principal and accrued interest is due and payable no later than March 30, 2020. We may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty. The Note offer was conducted by our management and there were no commissions paid by us in connection with the solicitation.
June 2018 Private Placement
In June and July 2018, we conducted a private placement of our common shares at an offering price of $1.00 per shares. We had sold a total of 6,822,583 shares of our common stock for gross proceeds of $6,822,583 including $5,775,000 of cash and the cancellation of $1,000,000 of principal $47,583 of accrued interest under our February 2018 private placement Notes.
June 30, 2018 Customer Contract Expansion
On June 30, 2018 we expanded our partnership with one of our largest customers to foster additional customer engagement and long-term growth through utilization of Mobivity’s Receipt solution. With our Receipt solution which enables our customers with the ability to control the content on receipts printed from their point of sale, or POS system, and optimized business performance (Recognition), we have crafted a complete and self-optimizing solution for increasing customer acquisition, frequency and spend.
The renewed and expanded partnership utilizes the Mobivity platform for all of our customer’s locations for a term of five years and includes a co-marketing commitment from both companies to ensure the continued growth in consumer subscribers to the program. The five-year term includes a six figure monthly minimum commitment that is prepaid to Mobivity on a quarterly basis.
November 2018 Acquisition of Certain Belly, Inc. Assets
On November 14, 2018, we entered into an Asset Purchase Agreement with Belly, Inc., a Delaware corporation, pursuant to which we purchased from Belly, certain operating assets relating to Belly’s proprietary digital customer loyalty platform, including client contracts, accounts receivable and intellectual property, in exchange for our payment of $3,000,000, subject to working capital adjustments. Belly was founded in 2001 and was originally funded by Andreessen Horowitz, Lightbank, NEA, DAG Ventures, Cisco and 7-Ventures, LLC (a subsidiary of 7-Eleven, Inc). Belly is a platform-first technology company enabling businesses of all sizes to create digital connections that result in personal relationships with their customers. Belly’s platform has been deployed to more than 5,000 merchant locations and 7 million consumers. Our acquisition of the Belly assets is expected to be accretive to our top and bottom line revenue figures. The Asset Purchase Agreement contains customary representations, warranties and indemnities on the part of Belly. The closing of the acquisition took place on November 14, 2018, subject to usual and customary closing conditions. We financed the acquisition through our cash on hand.
In connection with our acquisition of the Belly assets, on November 14, 2018, we entered into a Loan and Security Agreement with Wintrust Bank. The Loan and Security Agreement provides for a single-term loan to us in the original principal amount of $1,000,000. Interest accrues on the unpaid principal amount at the rate of prime plus 1.5%. The loan is a three-year loan and is interest-only payable for the first six months of the loan. Commencing on May 1, 2019, we will commence monthly payments of principal in the amount of $33,333.33 in addition to the monthly payment of accrued interest. The loan is secured by all of our assets other than our intellectual property. We used the proceeds of the loan to re-finance a loan in the principal amount of $1,000,000 we assumed as part of the acquisition of the Belly assets.
Unsecured Promissory Note Investments in 2019
During the nine months ended September 30, 2019, we issued to one of our directors, unsecured notes in the principal aggregate amount of $2,500,000, which are due and payable in the first two quarters of 2021. These notes bear interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty. As noted in subsequent events, we conducted the private placement of our securities in July 2019. The note holder participated in the private placement described below, by converting all principal and accrued interest under the notes totaling $2,582,916, into 2,582,916 units of our securities.
2019 Private Placement
In July 2019, we commenced a private placement of 7,000,000 units of our securities, at a price of $1.00 per unit. Each unit consists of one share of our common stock and a common stock purchase warrant to purchase one-half share of our common stock, over a two- year period, at an exercise price of $1.25 per share. The offering was conducted by our management and no commission or other selling
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fees were paid by us. During the nine months ended September 30, 2019 we issued 5,382,916 units under this placement, of which 2,582,916 units were issued in connection with a conversion of related party notes payable.
Results of Operations
Revenues
Revenues consist primarily of a suite of products under the Recurrency platform. The Recurrency platform is comprised of Recapture, Recognition, Receipt, Reach, Reup, Belly Loyalty, advertising model revenues which are paid on a per coupon redemption basis, and other revenues.
Revenues for the three months ended September 30, 2019 were $2,481,986, a decrease of $2,079,382, or 46%, compared to the same period in 2018. This decrease is primarily due to the recognition of revenue under ASC 606 of $2,188,590 during the three months ended September 30, 2018 compared to the reduction of revenue under ASC 606 of $262,187 during the three months ended September 30, 2019.
Revenues for the nine months ended September 30, 2019 were $7,333,407, a decrease of $2,287,528, or 24%, compared to the same period in 2018. This decrease is primarily due to the recognition of revenue under ASC 606 of $3,631,206 during the nine months ended September 30, 2018 compared to the reduction of revenue under ASC 606 of $650,709 during the nine months ended September 30, 2019.
Cost of Revenues
Cost of revenues consist primarily of cloud-based software licensing fees, short code maintenance expenses, personnel related expenses, and other expenses.
Cost of revenues for the three months ended September 30, 2019 was $1,586,411, an increase of $565,126, or 55%, compared to the same period in 2018. This increase is primarily due to higher SMS and application costs associated with messaging fees and surcharges charged by text messaging carriers.
Cost of revenues for the nine months ended September 30, 2019 was $4,385,106, an increase of $1,814,302, or 71%, compared to the same period in 2018. This increase is primarily due to higher SMS and application costs associated with messaging fees and surcharges charged by text messaging carriers.
General and Administrative
General and administrative expenses consist primarily of salaries and personnel related expenses, consulting costs and other expenses.
General and administrative expenses increased $524,266, or 61%, to $1,381,361 during the three months ended September 30, 2019 compared to $857,095 for the same period in 2018. The increase in general and administrative expense was primarily due to an increase in personnel, legal fees, and stock-based compensation expenses.
General and administrative expenses increased $1,225,311, or 43%, to $4,101,340 during the nine months ended September 30, 2019 compared to $2,876,029 for the same period in 2018. The increase in general and administrative expense was primarily due to an increase in personnel, legal fees, and stock-based compensation expenses.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, consulting costs and other expenses
Sales and marketing expenses decreased $155,921, or 20%, to $636,757 during the three months ended September 30, 2019 compared to $792,678 for the same period in 2018. The decrease was primarily due to lower personnel and share based compensation expenses.
Sales and marketing expenses decreased $1,021,466, or 34%, to $2,025,055 during the nine months ended September 30, 2019 compared to $3,046,521 for the same period in 2018. The decrease was primarily due to lower personnel and share based compensation expenses.
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Engineering, Research & Development
Engineering, research & development costs include salaries, stock-based compensation expenses, travel, consulting costs, and other expenses.
Engineering, research & development expenses decreased $1,303,199 or 77%, to $380,539 during the three months ended September 30, 2019 compared to $1,683,738 for the same period in 2018. This decrease is primarily due to the recognition of expenses under ASC 606 of $1,303,661 during the three months ended September 30, 2018 compared to the reduction of engineering, research & development expenses under ASC 606 of $121,703 during the three months ended September 30, 2019.This decrease is also attributed to increased software capitalization.
Engineering, research & development expenses decreased $1,339,591 or 37%, to $2,298,405 during the nine months ended September 30, 2019 compared to $3,637,996 for the same period in 2018. This decrease is primarily due to the recognition of expenses under ASC 606 of $2,136,071 during the nine months ended September 30, 2018 compared to the reduction of engineering, research & development expenses under ASC 606 of $319,161 during the nine months ended September 30, 2019. This decrease is offset by an increase in external consulting fees.
Depreciation and Amortization
Depreciation and amortization expense consist of depreciation on our equipment and amortization of our intangible assets. Depreciation and amortization expense increased $68,072 or 78%, during the three months ended September 30, 2019 compared to the same period in 2018. This increase is primarily due to the increase in amortization of intangibles.
Depreciation and amortization expense consist of depreciation on our equipment and amortization of our intangible assets. Depreciation and amortization expense increased $179,862 or 64%, during the nine months ended September 30, 2019 compared to the same period in 2018. This increase is primarily due to the increase in amortization of intangibles.
Interest Expense
Interest expense consists of stated or implied interest expense on our notes payable, amortization of note discounts, and amortization of deferred financing costs. Interest expense increased $31,656, or 122%, during the three months ended September 30, 2019 compared to the same period in 2018. The increase in interest expense is primarily related to the Wintrust note.
Interest expense consists of stated or implied interest expense on our notes payable, amortization of note discounts, and amortization of deferred financing costs. Interest expense decreased $4,585, or 2%, during the nine months ended September 30, 2019 compared to the same period in 2018.
Foreign Currency
The Company’s financial results are impacted by volatility in the Canadian/U.S. Dollar exchange rate. The average U.S. Dollar exchange rate for the three and nine months ended September 30, 2019 was $1 Canadian equals $0.76 and $0.75 U.S. Dollars, respectively. This compares to an average rate of $1 Canadian equals $0.78 and $0.75 U.S. Dollars, respectively during the same periods of 2018. The Company’s functional or measurement currency is the U.S. Dollar. Based on a U.S. Dollar functional currency, the following are the key areas impacted by foreign currency volatility:
The Company sells products primarily in U.S. Dollars; therefore, reported revenues are not highly impacted by foreign currency volatility.
A portion of the Company’s expenses are incurred in Canadian Dollars and therefore fluctuate in U.S. Dollars as the U.S. Dollar varies. A weaker U.S. Dollar results in an increase in translated expenses, and a stronger U.S. Dollar results in a decrease.
Changes in foreign currency rates also impact the translated value of the Company’s working capital that is held in Canadian Dollars. Foreign exchange rate fluctuations result in foreign exchange gains or losses based upon movement in the translated value of Canadian working capital into U.S. Dollars.
The change in foreign currency was a gain of $6,642 and a loss of $2,106 for the three months ended September 30, 2019 and 2018, respectively.
The change in foreign currency was a gain of $5,740 and a loss of $3,726 for the nine months ended September 30, 2019 and 2018, respectively.
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Liquidity and Capital Resources
As of September 30, 2019, we had current assets of $3,157,732, including $975,669 in cash, and current liabilities of $5,683,727, resulting in a working capital deficit of $2,525,995.
We believe as of the date of this report, we have the working capital on hand, along with our expected cash flow from operations, to fund our current level of operations at least through the end of the next twelve months. However, there can be no assurance that we will not require additional capital. If we require additional capital, we will seek to obtain additional working capital through the sale of our securities and, if available, bank lines of credit. However, there can be no assurance we will be able to obtain access to capital as and when needed and, if so, the terms of any available financing may not be subject to commercially reasonable terms.
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