Notes to Consolidated Financial Statements
(Unaudited)
1.
Reverse Merger Transaction and Accounting
Reverse Merger Transaction
Mobivity Holdings Corp. (the “Company”) was incorporated as Ares Ventures Corporation in Nevada in 2008. In November 2010, the Company acquired CommerceTel, Inc., which was wholly-owned by CommerceTel Canada Corporation, in a reverse merger, or the “Merger”. Pursuant to the Merger, all of the issued and outstanding shares of CommerceTel, Inc. common stock were converted, at an exchange ratio of 0.7268-for-1, into an aggregate of 10,000,000 shares of the Company’s common stock, and CommerceTel, Inc. became a wholly owned subsidiary of the Company. In connection with the Merger, the Company changed its corporate name to CommerceTel Corporation in October 2010. The accompanying condensed consolidated financial statements, common share and weighted average common share basic and diluted information have been retroactively adjusted to reflect the exchange ratio in the Merger.
In connection with the Company’s acquisition of assets from Mobivity, LLC, the Company changed its corporate name to Mobivity Holdings Corp. and its operating company name from CommerceTel, Inc. to Mobivity, Inc., in August 2012.
Reverse Merger Accounting
Immediately following the consummation of the Merger: (i) the former security holders of Mobivity, Inc. common stock had an approximate 56% voting interest in the Company and the Company stockholders retained an approximate 44% voting interest; (ii) the former executive management team of Mobivity, Inc. remained as the only continuing executive management team for the Company; and (iii) the Company’s ongoing operations consist solely of the ongoing operations of Mobivity, Inc.
Based primarily on these factors, the Merger was accounted for as a reverse merger and a recapitalization in accordance with generally accepted accounting principles in the United States of America, or “GAAP”. As a result, these condensed financial statements reflect: (i) the historical results of Mobivity, Inc. prior to the Merger; (ii) the combined results of the Company following the Merger; and (iii) the acquired assets and liabilities at their historical cost.
2.
Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation
The Company is a provider of mobile marketing technology that enables major brands and enterprises to engage consumers via their mobile phones and other smart devices. Interactive electronic communications with consumers is a complex process involving communication networks and software. The Company removes this complexity through its suite of services and technologies thereby enabling brands, marketers, and content owners to communicate with their customers and consumers in general.
Principles of Accounting and Consolidation
These consolidated financial statements have been prepared in accordance with GAAP. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. 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, the valuation of the derivative liabilities, 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.
Purchase Accounting
The Company accounts for acquisitions pursuant to Accounting Standards Codification (“ASC”) No. 805 “Business Combinations”. The Company records all acquired tangible and intangible assets and all assumed liabilities based upon their estimated fair values.
Cash
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits. The Company has not experienced any losses on such accounts. The Company’s cash balances at June 30, 2013 and December 31, 2012 were $4,998,148 and $363, respectively.
Fair Value of Financial Instruments
On January 1, 2011, the Company adopted guidance which defines fair value, establishes a framework for using fair value to measure financial assets and liabilities on a recurring basis, and expands disclosures about fair value measurements. Beginning on January 1, 2011, the Company also applied the guidance to non-financial assets and liabilities measured at fair value on a non-recurring basis, which includes goodwill and intangible assets. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
Level 1 - Valuation is based upon unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.
Level 2 -Valuation is based upon quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable in the market.
Level 3 - Valuation is based on models where significant inputs are not observable. The unobservable inputs reflect the Company's own assumptions about the inputs that market participants would use.
The following table presents assets and liabilities that are measured and recognized at fair value as of June 30, 2013 on a recurring and non-recurring basis:
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Gains (Losses)
|
|
|
Goodwill (non-recurring)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,213,699
|
|
|
$
|
-
|
|
|
Intangibles, net (non-recurring)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,738,773
|
|
|
$
|
-
|
|
|
Derivatives (recurring)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
209,089
|
|
|
$
|
(3,813,598
|
)
|
|
Earn-out payable (non-recurring)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
224,000
|
|
|
$
|
-
|
|
The following table presents assets and liabilities that are measured and recognized at fair value as of December 31, 2012 on a recurring and non-recurring basis:
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Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net (non-recurring)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded goodwill and intangible assets as a result of the acquisitions completed in 2011 and 2013.
These assets were valued with the assistance of a valuation consultant and consisted of Level 3 valuation techniques.
As of December 31, 2012, the Company recorded derivative liabilities as a result of: (i) the variable maturity conversion feature (“VMCO”) in its convertible notes payable; (ii) the additional security issuance feature (“ASID”) in its convertible notes payable notes, common stock and warrants; and (iii) warrants issued to non-employees that are treated as derivative liabilities. These liabilities were valued with the assistance of a valuation consultant and consisted of Level 3 valuation techniques. As of June 30, 2013, the only remaining derivative liability related to the common stock and warrants.
The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued liabilities and notes payable. The estimated fair value of cash, accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the short-term nature of these instruments. The carrying value of notes payable also approximates fair value because their terms are similar to those in the lending market for comparable loans with comparable risks. None of these instruments are held for trading purposes.
Accounts Receivable and Factoring Agreement
Accounts Receivable
Accounts receivable are carried at their estimated collectible amounts. The Company grants unsecured credit to substantially all of its 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 the Company cannot necessarily predict future changes in the financial stability of its customers, the Company cannot guarantee that its reserves will continue to be adequate.
From time to time, the Company may have a limited number of customers with individually large amounts due. Any unanticipated change in one of the customer’s credit worthiness could have a material effect on the results of operations in the period in which such changes or events occurred. As of June 30, 2013 and December 31, 2012, the Company recorded an allowance for doubtful accounts of $34,930 and $44,700, respectively.
As of June 30, 2013, two customers’ balances represented 49% of total accounts receivable. As of December 31, 2012, one customer’s balance represented and 43% of total accounts receivable.
Factoring Agreement
In connection with a factoring agreement that the Company entered into in 2013, the Company transfers ownership of eligible accounts receivable with recourse to a third party purchaser in exchange for cash. The Company receives a percentage of the proceeds immediately upon sale of the account, and receives the remaining proceeds once the third party purchaser collects on the account. Proceeds from the transfer reflect the face value of the account less a discount. The discount is recorded as a loss in operations in the period of the sale.
Factoring discount fees, which increase based on the time frame of receivables outstanding, approximate 2% of the invoice amount, with the customer repaying the invoice within 90 days from the invoice date.
During the three months ended June 30, 2013, the Company sold $210,886 of trade accounts receivable, received cash proceeds of $239,918, and recorded fees and losses related to the sales of $4,419 in general and administrative expense in the consolidated statement of operations.
During the six months ended June 30, 2013, the Company sold $501,463 of trade accounts receivable, received cash proceeds of $476,927, and recorded fees and losses related to the sales of $10,054 in general and administrative expense in the consolidated statement of operations.
At June 30, 2013, the third party purchaser owed the Company $14,482 which is recorded in other current assets.
Equipment
Equipment, which is recorded at cost, consists primarily of computer equipment and is depreciated using the straight-line method over the estimated useful lives of the related assets (generally five years or less). Costs incurred for maintenance and repairs are expensed as incurred and expenditures for major replacements and improvements are capitalized and depreciated over their estimated remaining useful lives.
Depreciation expense for the three months ended June 30, 2013 and 2012 was $1,934 and $6,766, respectively. Depreciation expense for the six months ended June 30, 2013 and 2012 was $3,790 and $13,384, respectively. Accumulated depreciation amounts are noted in the table below.
Net property and equipment were as follows:
|
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
Equipment
|
|
$
|
158,515
|
|
|
$
|
155,716
|
|
|
Furniture and Fixtures
|
|
|
14,569
|
|
|
|
14,569
|
|
|
Subtotal
|
|
|
173,084
|
|
|
|
170,285
|
|
|
Less accumulated depreciation
|
|
|
(159,964
|
)
|
|
|
(156,174
|
)
|
|
Total
|
|
$
|
13,120
|
|
|
$
|
14,111
|
|
Goodwill and Other Intangible Assets
In 2011, the Company completed three acquisitions which resulted in the recording of goodwill and other intangible assets; and the Company capitalized patent costs related to its acquisition of U.S. Patent Number
6,788,769
from eMediacy, Inc.
During the six months ended June 30, 2013, the Company completed two acquisitions which resulted in the recording of goodwill and other intangible assets. See Note 3.
The Company periodically reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist. Goodwill and certain intangible assets are assessed annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The Company uses Level 3 inputs and a discounted cash flow methodology to estimate the fair value of a reporting unit. A discounted cash flow analysis requires one to make various judgmental assumptions including assumptions about future cash flows, growth rates, and discount rates. The assumptions about future cash flows and growth rates are based on the Company’s budget and long-term plans. Discount rate assumptions are based on an assessment of the risk inherent in the respective reporting units. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
The Company’s evaluation of goodwill completed during the year ended December 31, 2012 resulted in an impairment charge of $742,446, related to its three acquisitions during 2011.
As of June 30, 2013 and December 31, 2012, amortizable intangible assets consist of patents, trademarks, customer contracts, customer and merchant relationships, trade name, acquired technology, and non-compete agreements. These intangibles are being amortized on a straight line basis over their estimated useful lives of one to twenty years.
During the year ended December 31, 2012 the Company recognized an impairment charge of $145,396 related to the intangible assets acquired in its three acquisitions during 2011.
Impairment of Long-Lived Assets
The Company has adopted Accounting Standards Codification subtopic 360-10, “Property, Plant and Equipment” ("ASC 360-10"). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates its long-lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires that those assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.
Derivative Financial Instruments
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.
The Company reviews the terms of the common stock, warrants and convertible debt it issues to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
Bifurcated embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.
The fair value of the derivatives is estimated using a Monte Carlo simulation model. The model utilizes a series of inputs and assumptions to arrive at a fair value at the date of inception and each reporting period. Some of the key assumptions include the likelihood of future financing, stock price volatility, and discount rates.
See Note 5 for detailed information on the Company’s derivative liabilities.
Revenue Recognition
The Company’s “C4” Mobile Marketing and Customer Relationship Management (CRM) and Txtstation Control Center platforms are hosted solutions. The Company generates revenue from licensing its software to clients in its software as a service (SaaS) model, per-message and per-minute transactional fees, and customized professional services. The Company recognizes license 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. The Company recognizes revenue at the time that the services are rendered, the selling price is fixed, and collection is reasonably assured, provided no significant obligations remain. The Company considers authoritative guidance on multiple deliverables in determining whether each deliverable represents a separate unit of accounting. As for the Mobivity and Boomtext platforms, which are both hosted solutions, revenue is principally derived from subscription fees from customers. The subscription fee is billed on a month to month basis with no contractual term and is collected by credit card for Mobivity and collected by cash and credit card for Boomtext. 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.
The company generates revenue from the Stampt App through customer agreements with business owners. Revenue is principally derived from monthly subscription fees which provide a license for unlimited use of the Stampt App by the business owner and their customers. The subscription fee is billed each month to the business owner. There are no setup fees and revenue is recognized monthly as the subscription revenues are billed. There are no per-minute or transaction fees associated with the Stampt App.
As of December 31, 2012, deferred revenues from a related party totaled $35,262. This party ceased being a related party in June 2013. The Company recognized deferred revenue from this related party during the three months ended June 30, 2013 and 2012 totaling $-0- and $51,000, respectively. The Company recognized deferred revenue from this related party during the six months ended June 30, 2013 and 2012 totaling $-0- and $84,000, respectively.
As of June 30, 2013 and December 31, 2012, deferred revenues from third parties totaled $300,324 and $164,631, respectively.
During the three months ended June 30, 2013, one customer accounted for 30% of our revenues. During the six months ended June 30, 2013, one customer accounted for 30% of our revenues. No such concentrations existed in 2012.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 718 Stock Compensation, which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the employee’s requisite service period (generally the vesting period of the equity grant). In accordance with ASC 718, the Company estimates forfeitures at the time of grant and revises the estimates if necessary, if actual forfeiture rates differ from those estimates. Stock options issued to employees are accounted for at their estimated fair value determined using the Black-Scholes option-pricing model.
The Company recorded employee stock based compensation for the three months ended June 30, 2013 and 2012 of $1,184,045 and $95,568, respectively.
The Company recorded employee stock based compensation for the six months ended June 30, 2013 and 2012 of $1,277,794 and $210,429, respectively.
The Company accounts for equity instruments, including restricted stock or stock warrants, issued to non-employees in accordance with authoritative guidance for equity based payments to non-employees. Stock warrants issued to non-employees are accounted for as derivative liabilities at their estimated fair value determined using a Monte Carlo simulation. At the date of issuance, the fair value of the stock warrants is expensed to change in fair value of derivative liabilities. The fair value of options granted to non-employees is re-measured as they vest, and the resulting change in value, if any, is recognized as change in fair value of derivative liabilities during the period the related services are rendered. Restricted stock issued to non-employees is accounted for at its estimated fair value as it vests. See Note 5.
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. The Company is 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 three month and six month periods ended June 30, 2013 and 2012, the comprehensive loss was equal to the net loss.
Net Loss Per Common Share
Net loss per share is presented as both basic and diluted net loss per 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 month and six month periods ended June 30, 2013 and 2012, the Company 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
In 2013, the Financial Accounting Standards Board ("FASB") issued new accounting guidance clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. We do not anticipate that this adoption will have a significant impact on our financial position, results of operations, or cash flows.
In 2013, FASB issued new accounting guidance clarifying the accounting for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. We do not anticipate that this adoption will have a significant impact on our financial position, results of operations, or cash flows.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to:
-Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and
-Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 is not expected to have a material impact on our financial position or results of operations.
In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 is not expected to have a material impact on our financial position or results of operations.
In October 2012, the FASB issued ASU 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results of operations.
In August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (“SAB”) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our financial position or results of operations.
In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in ASU No. 2012-02. This update amends ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 is not expected to have a material impact on our financial position or results of operations.
3. Acquisitions
Sequence Acquisition
On May 13, 2013, the Company acquired certain assets of Sequence, LLC (“Sequence”) pursuant to an asset purchase agreement. Pursuant to the asset purchase agreement, the Company acquired all application software, URL’s, websites, trademarks, brands, customers and customer lists from Sequence. The Company assumed no liabilities of Sequence.
The purchase price consisted of: (1) $300,000 in cash; (2) 750,000 shares of the Company’s common stock valued based on the closing market price on the acquisition date at $183,750; and (3) twenty-four monthly earn-out payments consisting of 10% of the eligible monthly revenue subsequent to closing with a fair value of $224,000.
The Company completed the acquisition in furtherance of its strategy to acquire small, privately owned enterprises in the mobile marketing sector through an asset purchase structure. This acquisition was consistent with the Company's purchase price model in which equity will represent most of the purchase price plus a small cash component and, in some cases, the assumption of specific liabilities.
The acquisition has been accounted for as a business combination and the Company valued the assets acquired at their fair values on the date of acquisition. An independent valuation expert (Vantage Point Advisors) was hired to assist the Company in determining these fair values. Accordingly, the assets of the acquired entity were recorded at their estimated fair values at the date of the acquisition.
The allocation of the purchase price to the assets acquired based upon fair value determinations was as follows:
|
Merchant relationships
|
|
$
|
181,000
|
|
|
Trade name
|
|
|
76,000
|
|
|
Developed technology
|
|
|
71,000
|
|
|
Goodwill
|
|
|
379,750
|
|
|
Total assets acquired
|
|
$
|
707,750
|
|
The purchase price consisted of the following:
|
Cash
|
|
$
|
300,000
|
|
|
Common stock
|
|
|
183,750
|
|
|
Earn-out payable
|
|
|
224,000
|
|
|
Total purchase price
|
|
$
|
707,750
|
|
Pro forma results of operations were not included due to the investment test not reaching the level of a significant acquisition.
Front Door Insights Acquisition
On May 20, 2013, the Company acquired certain assets and liabilities of Front Door Insights, LLC (“FDI”), pursuant to an asset purchase agreement. The assets and liabilities acquired from FDI consisted of cash on hand, accounts receivable, all rights under all contracts other than excluded contracts, prepaid expenses, all technology and intellectual property rights, accounts payable, and obligations under a commercial lease.
The purchase price consisted of: (1) $100,000 in cash; (2) a promissory note in the principal amount of $1,400,000; and (3) 7,000,000 shares of the Company’s common stock valued based on the closing market price on the acquisition date at $1,034,310.
The promissory note delivered by the Company to FDI under the asset purchase agreement was non-interest bearing and was due and payable on August 20, 2013. As a result of note payable not bearing interest, a discount on the note payable of $34,904 was recorded. The Company paid the $1,400,000 promissory note on June 17, 2013. As a result of the early repayment, the discount of $34,904 was fully amortized on June 17, 2013.
The asset purchase agreement includes a working capital adjustment pursuant to which the number of shares issuable to FDI will be increased, or decreased, in the event the working capital of FDI exceeds, or is less than, $10,000, respectively, as of the closing. In either event, the number of shares issuable to FDI will be increased or decreased, as the case may be, by a share amount equal to the amount by which the working capital as of the closing exceeds or is less than $10,000, divided by $0.25. Pursuant to the asset purchase agreement, 25% of the shares to be issued to FDI, or 1,750,000 shares, will be held in escrow and available for offset against any claims for indemnification that might be brought by the Company against FDI or its members, during the first 12 months following the close, for certain breaches of the asset purchase agreement.
The asset purchase agreement contains customary representations, warranties and covenants by the parties, including each party’s agreement to indemnify the other against any claims or losses arising from their breach of the asset purchase agreement. FDI and its members have also agreed that for a period of three years following the closing not to engage in the business of providing interactive mobile marketing platforms or services or to solicit the pre-closing clients, vendors or employees of FDI, except in each case on behalf of the Company.
The Company completed the acquisition in furtherance of its strategy to acquire small, privately owned enterprises in the mobile marketing sector through an asset purchase structure. This acquisition was consistent with the Company's purchase price model in which equity will represent most of the purchase price plus a small cash component and, in some cases, the assumption of specific liabilities.
The acquisition has been accounted for as a business combination and the Company valued all assets and liabilities acquired at their fair values on the date of acquisition. An independent valuation expert (Vantage Point Advisors) was hired to assist the Company in determining these fair values. Accordingly, the assets and liabilities of the acquired entity were recorded at their estimated fair values at the date of the acquisition.
The allocation of the purchase price to assets and liabilities based upon fair value determinations was as follows:
|
Cash
|
|
$
|
5,500
|
|
|
Accounts receivable
|
|
|
27,467
|
|
|
Contracts
|
|
|
813,000
|
|
|
Customer relationships
|
|
|
22,000
|
|
|
Developed technology
|
|
|
96,000
|
|
|
Non-compete agreement
|
|
|
124,000
|
|
|
Goodwill
|
|
|
1,574,325
|
|
|
Total assets acquired
|
|
|
2,662,292
|
|
|
Liabilities assumed
|
|
|
(162,886
|
)
|
|
Net assets acquired
|
|
$
|
2,499,406
|
|
The purchase price consists of the following:
|
Cash
|
|
$
|
100,000
|
|
|
Promissory note, net
|
|
|
1,365,096
|
|
|
Common stock
|
|
|
1,034,310
|
|
|
Total purchase price
|
|
$
|
2,499,406
|
|
The following information presents unaudited pro forma consolidated results of operations for the six months ended June 30, 2013 as if the FDI acquisition described above had occurred on January 1, 2013, and the results of operations for the year ended December 31, 2012 as if the FDI acquisition described above had occurred on January 1, 2012. The following unaudited pro forma financial information gives effect to certain adjustments, including the increase in compensation expense related to additional head-count and amortization of acquired intangible assets. The pro forma financial information is not necessarily indicative of the operating results that would have occurred if the acquisition been consummated as of the date indicated, nor are they necessarily indicative of future operating results.
Pro Forma Results of Operations for the Six Months Ended June 30, 2013
|
Mobivity Holdings Corp.
|
|
|
Consolidated Statements of Operations
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
Pro forma
|
|
|
|
|
Mobivity
|
|
|
FDI
|
|
|
adjustments
|
|
|
|
combined
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,113,603
|
|
|
$
|
162,280
|
|
|
$
|
-
|
|
|
|
$
|
2,275,883
|
|
|
Cost of revenues
|
|
|
596,012
|
|
|
|
54,371
|
|
|
|
-
|
|
|
|
|
650,383
|
|
|
Gross margin
|
|
|
1,517,591
|
|
|
|
107,909
|
|
|
|
-
|
|
|
|
|
1,625,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,320,323
|
|
|
|
71,720
|
|
|
|
-
|
|
|
|
|
1,392,043
|
|
|
Sales and marketing
|
|
|
1,798,341
|
|
|
|
4,888
|
|
|
|
229,258
|
|
(b)
|
|
|
2,032,487
|
|
|
Engineering, research, and development
|
|
|
251,239
|
|
|
|
87,994
|
|
|
|
-
|
|
|
|
|
339,233
|
|
|
Depreciation and amortization
|
|
|
92,129
|
|
|
|
-
|
|
|
|
68,469
|
|
(c)
|
|
|
160,598
|
|
|
Total operating expenses
|
|
|
3,462,032
|
|
|
|
164,602
|
|
|
|
297,727
|
|
|
|
|
3,924,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,944,441
|
)
|
|
|
(56,693
|
)
|
|
|
(297,727
|
)
|
|
|
|
(2,298,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
21
|
|
|
Interest expense
|
|
|
(6,346,553
|
)
|
|
|
(6,785
|
)
|
|
|
-
|
|
|
|
|
(6,353,338
|
)
|
|
Change in fair value of derivative liabilities
|
|
|
(3,813,598
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(3,813,598
|
)
|
|
Gain (loss) on adjustment in contingent consideration
|
|
|
(193,465
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(193,465
|
)
|
|
Total other income/(expense)
|
|
|
(10,353,595
|
)
|
|
|
(6,785
|
)
|
|
|
-
|
|
|
|
|
(10,360,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(12,298,036
|
)
|
|
|
(63,478
|
)
|
|
|
(297,727
|
)
|
|
|
|
(12,659,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,298,036
|
)
|
|
$
|
(63,478
|
)
|
|
$
|
(297,727
|
)
|
|
|
$
|
(12,659,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.42
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during the period - basic and diluted
|
|
|
29,224,981
|
|
|
|
|
|
|
|
|
|
|
|
|
34,630,537
|
|
Pro Forma Results of Operations for the Year ended December 31, 2012
|
|
|
Mobivity
|
|
|
FDI
|
|
|
Pro forma adjustments
|
|
|
|
Pro forma combined
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,079,745
|
|
|
$
|
347,797
|
|
|
$
|
-
|
|
|
|
$
|
4,427,542
|
|
|
Cost of revenues
|
|
|
1,300,325
|
|
|
|
183,819
|
|
|
|
-
|
|
|
|
|
1,484,144
|
|
|
Gross margin
|
|
|
2,779,420
|
|
|
|
163,978
|
|
|
|
-
|
|
|
|
|
2,943,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
2,984,531
|
|
|
|
155,568
|
|
|
|
-
|
|
|
|
|
3,140,099
|
|
|
Sales and marketing
|
|
|
1,562,520
|
|
|
|
45,292
|
|
|
|
1,541,050
|
|
(b)
|
|
|
3,148,862
|
|
|
Engineering, research, and development
|
|
|
562,459
|
|
|
|
199,953
|
|
|
|
-
|
|
|
|
|
762,412
|
|
|
Depreciation and amortization
|
|
|
549,151
|
|
|
|
-
|
|
|
|
178,509
|
|
(c)
|
|
|
727,660
|
|
|
Goodwill impairment
|
|
|
742,446
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
742,446
|
|
|
Intangible asset impairment
|
|
|
145,396
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
145,396
|
|
|
Total operating expenses
|
|
|
6,546,503
|
|
|
|
400,813
|
|
|
|
1,719,559
|
|
|
|
|
8,666,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,767,083
|
)
|
|
|
(236,835
|
)
|
|
|
(1,719,559
|
)
|
|
|
|
(5,723,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,833
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
2,833
|
|
|
Interest expense
|
|
|
(4,559,564
|
)
|
|
|
(4,105
|
)
|
|
|
(234,115
|
)
|
(a)
|
|
|
(4,797,784
|
)
|
|
Change in fair value of derivative liabilities
|
|
|
359,530
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
359,530
|
|
|
Gain on adjustment in contingent consideration
|
|
|
625,357
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
625,357
|
|
|
Total other income/(expense)
|
|
|
(3,571,844
|
)
|
|
|
(4,105
|
)
|
|
|
(234,115
|
)
|
|
|
|
(3,810,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(7,338,927
|
)
|
|
|
(240,940
|
)
|
|
|
(1,953,674
|
)
|
|
|
|
(9,533,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,338,927
|
)
|
|
$
|
(240,940
|
)
|
|
$
|
(1,953,674
|
)
|
|
|
$
|
(9,533,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during the period - basic and diluted
|
|
|
23,069,669
|
|
|
|
|
|
|
|
|
|
|
|
|
30,069,669
|
|
Pro Forma Adjustments
The following pro forma adjustments are based upon the value of the tangible and intangible assets acquired as determined by an outside, independent valuation firm.
|
(a)
|
Represents interest expense and note discount amortization for notes payable issued in conjunction with the transaction.
|
|
(b)
|
Represents salary, bonus and stock based compensation (year ended December 21, 2012) for headcount added in conjunction with the transaction.
|
|
(c)
|
Represents amortization of intangible assets for the period.
|
4. Goodwill and Purchased Intangibles
Goodwill
The carrying value of goodwill at June 30, 2013 and December 31, 2012 was $4,213,699 and $2,259,624, respectively. Goodwill at June 30, 2013 includes $1,954,075 recorded as a result of two acquisitions during the three months ended June 30, 2013. See Note 3.
Intangible assets
The following table presents details of the Company’s total purchased intangible assets as of June 30, 2013 and December 31, 2012:
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
December 31,
2012
|
|
|
Additions
|
|
|
Amortization
|
|
|
June 30,
2013
|
|
|
Patents and trademarks
|
|
$
|
111,620
|
|
|
$
|
-
|
|
|
$
|
(4,199
|
)
|
|
$
|
107,421
|
|
|
Customer contracts
|
|
|
78,765
|
|
|
|
813,000
|
|
|
|
(25,164
|
)
|
|
|
866,601
|
|
|
Customer and merchant relationships
|
|
|
29,056
|
|
|
|
203,000
|
|
|
|
(16,428
|
)
|
|
|
215,628
|
|
|
Trade name
|
|
|
30,588
|
|
|
|
76,000
|
|
|
|
(6,413
|
)
|
|
|
100,175
|
|
|
Acquired technology
|
|
|
193,458
|
|
|
|
167,000
|
|
|
|
(30,867
|
)
|
|
|
329,591
|
|
|
Non-compete agreement
|
|
|
625
|
|
|
|
124,000
|
|
|
|
(5,268
|
)
|
|
|
119,357
|
|
|
|
|
$
|
444,112
|
|
|
$
|
1,383,000
|
|
|
$
|
(88,339
|
)
|
|
$
|
1,738,773
|
|
The intangible assets are being amortized on a straight line basis over their estimated useful lives of one to twenty years.
During the six months ended June 30, 2013, the following intangibles were purchased with the following useful lives:
Sequence, LLC:
|
|
|
Fair value
|
|
Useful Lives
|
|
Merchant relationships
|
|
$
|
181,000
|
|
12 years
|
|
Trade name
|
|
|
76,000
|
|
5 years
|
|
Developed technology
|
|
|
71,000
|
|
5 years
|
Front Door Insights LLC:
|
|
|
Fair value
|
|
Useful Lives
|
|
Contracts
|
|
|
813,000
|
|
7 years
|
|
Customer relationships
|
|
|
22,000
|
|
12 years
|
|
Developed technology
|
|
|
96,000
|
|
5 years
|
|
Non-compete agreement
|
|
|
124,000
|
|
3 years
|
During the three months ended June 30, 2013 and 2012, the Company recorded amortization expense related to its purchased intangibles of $56,382 and $139,999, respectively, which is included in depreciation and amortization in the consolidated statement of operations.
During the six months ended June 30, 2013 and 2012, the Company recorded amortization expense related to its purchased intangibles of $88,339 and $287,999, respectively, which is included in depreciation and amortization in the consolidated statement of operations.
The estimated future amortization expense of purchased intangible assets as of June 30, 2013 is as follows:
|
Year ending December 31,
|
|
Amount
|
|
|
2013
|
|
$
|
174,162
|
|
|
2014
|
|
|
319,268
|
|
|
2015
|
|
|
319,268
|
|
|
2016
|
|
|
245,283
|
|
|
2017
|
|
|
190,064
|
|
|
Thereafter
|
|
|
490,728
|
|
|
Total
|
|
$
|
1,738,773
|
|
Beginning in 2011, the Company evaluated its purchased intangibles for possible impairment on an ongoing basis. When impairment indicators exist, the Company will perform an assessment to determine if the intangible asset has been impaired and to what extent. The assessment of purchased intangibles impairment is conducted by first estimating the undiscounted future cash flows to be generated from the use and eventual disposition of the purchased intangibles and comparing this amount with the carrying value of these assets. If the undiscounted cash flows are less than the carrying amounts, impairment exists and future cash flows are discounted at an appropriate rate and compared to the carrying amounts of the purchased intangibles to determine the amount of the impairment.
5.
Derivative Liabilities
Convertible notes payable and underlying warrants
As discussed in Note 6 under Bridge Financing, the Company issued convertible notes payable that provided for the issuance of warrants to purchase its common stock at a future date. The conversion term for the convertible notes was variable based on certain factors. The number of warrants to be issued was based on the future price of the Company’s common stock.
As of December 31, 2012 and through June 17, 2013, the number of warrants to be issued was indeterminate. Due to the fact that the number of warrants issuable was indeterminate, the equity environment was tainted and the fair value of all of the warrants underlying the convertible notes payable was recorded as a derivative liability. The fair values of the VMCO and the ASID were recorded as derivative liabilities on the issuance date pursuant to ASC 815-15 “Embedded Derivatives”.
On June 17, 2013, the Company converted all of the outstanding convertible notes payable into shares of its common stock, and issued the warrants underlying the convertible notes payable. At that time, the derivative liabilities related to the VMCO and ASID totaling $7,792,657 were converted into additional paid-in capital.
Private Placement Shares and Warrants
As discussed in Note 7 under Common Stock, the Company completed a private placement in September 2011 for the sale of units consisting of shares of common stock and warrants. Both the common shares and the warrants contain anti-dilutive, or down round, price protection. Pursuant to ASC 815-15 “Embedded Derivatives” and ASC 815-40 “Contracts in Entity’s Own Equity”, the Company recorded a derivative liability for the warrants issued in the transactions.
The down round price protection on the common shares expired in August 2012, and the down round price protection for the warrants terminates when the warrants expire or are exercised.
Allonge
As discussed in Note 6 under Bridge Financing, all note holders with convertible notes payable maturing in February 2012 extended the maturity date through May 2012. As consideration to the note holders for the extension of the maturity date, the Company provided allonges which consisted of the accrued interest on each convertible note payable as of January 31, 2012. The allonges were convertible into shares of common stock at the latest financing price. The value of the allonges was recorded as a derivative liability at the issuance date.
On June 17, 2013, the number of shares issuable under the allonges was determined, but the shares were not issued prior to June 30, 2013. The value of the allonges as of June 17, 2013 totaling $131,248 was recorded as equity payable, thus removing the derivative liability.
Non-employee Warrants
As discussed in Note 7 under Warrants, the Company accounts for warrants issued to non-employees as derivative liabilities. On June 17, 2013, the equity environment was no longer tainted and the derivative liabilities related to the non-employee warrants totaling $176,555 were converted into additional paid-in capital.
Summary
The fair values of the Company’s derivative liabilities are estimated at the issuance date and are revalued at each subsequent reporting date using a Monte Carlo simulation discussed below.
At June 30, 2013 and December 31, 2012, the Company recorded current derivative liabilities of $209,089 and $3,074,504, respectively.
The net change in fair value of the derivative liabilities for the three months ended June 30, 2013 and 2012 was a loss of $2,812,048 and a gain of $654,477, respectively, which were reported as other income/(expense) in the consolidated statements of operations.
The net change in fair value of the derivative liabilities for the six months ended June 30, 2013 and 2012 was a loss of $3,813,598 and a gain of $193,990, respectively, which were reported as other income/(expense) in the consolidated statements of operations.
The following table presents the derivative liabilities by instrument type as of June 30, 2013 and December 31, 2012:
|
Derivative Value by Instrument Type
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
Convertible Bridge Notes
|
|
$
|
-
|
|
|
$
|
2,850,085
|
|
|
Common Stock and Warrants
|
|
|
209,089
|
|
|
|
129,378
|
|
|
Non-employee Warrants
|
|
|
-
|
|
|
|
95,041
|
|
|
|
|
$
|
209,089
|
|
|
$
|
3,074,504
|
|
The following table presents details of the Company’s derivative liabilities from December 31, 2012 to June 30, 2013:
|
Balance December 31, 2012
|
|
$
|
3,074,504
|
|
|
Issuances in derivative value due to new security issuances of notes
|
|
|
4,614,714
|
|
|
Issuances in derivative value due to vesting of non-employee warrants
|
|
|
26,969
|
|
|
Adjustment to derivative liability due to note repayment
|
|
|
(40,511
|
)
|
|
Adjustment to derivative liability due to note conversion into new notes
|
|
|
(3,152,786
|
)
|
|
Adjustment to derivative liability due to note conversion into equity
|
|
|
(7,923,875
|
)
|
|
Adjustment to derivative liability due to non-employee warrant conversion
|
|
|
(176,555
|
)
|
|
Change in fair value of derivative liabilities
|
|
|
3,786,629
|
|
|
Balance June 30, 2013
|
|
$
|
209,089
|
|
The Company calculated the fair value of the compound embedded derivatives using a complex, customized Monte Carlo simulation model suitable to value path dependent American options. The model uses the risk neutral methodology adapted to value corporate securities. This model utilized subjective and theoretical assumptions that can materially affect fair values from period to period.
Key inputs and assumptions used in valuing the Company’s derivative liabilities are as follows:
For issuances of notes, common stock and warrants:
|
●
|
Stock prices on all measurement dates were based on the fair market value
|
|
●
|
Down round protection for dates prior to April 15, 2013 is based on the subsequent issuance of common stock at prices less than $0.50 per share and warrants with exercise prices less than $0.50 per share. Down round protection for dates between April 15, 2013 and June 17, 2013 is based on the subsequent issuance of common stock at prices less than $0.25 per share and warrants with exercise prices less than $0.25 per share. Thereafter, down round protection is based on the subsequent issuance of common stock at prices less than $0.20 per share and warrants with exercise prices less than $0.20 per share
|
|
●
|
The probability of a future equity financing event triggering the down round protection was estimated at 100% for dates prior to June 17, 2013 and 0% for subsequent measurement dates
|
|
●
|
Computed volatility ranging from 86.1% to 128.9%
|
|
●
|
Risk free rates ranging from 0.05% to1.41%
|
For issuances of non-employee warrants:
|
●
|
Computed volatility of 128.9%
|
|
●
|
Risk free rates ranging from 0.30% to 0.66%
|
|
●
|
Expected life (years) ranging from 2.48 to 3.27
|
See Note 9 for a discussion of fair value measurements.
6.
Bridge Financing, Notes Payable, Accrued Interest and Cash Payment Obligation
Bridge Financing
Summary
Prior to June 2013, the Company issued 10% Senior Secured Convertible Bridge Notes Payable to various accredited investors, and then extended the due dates on the majority of the convertible notes payable several times. These convertible notes payable are collectively referred to herein as “Bridge Notes”. In June 2013, the outstanding principal of the Bridge Notes totaling $4,984,720 was converted into 24,923,602 shares of the Company’s common stock at $0.20 per share. As of June 30, 2013, the Company has no Bridge Notes outstanding.
The Bridge Notes contained variable maturity dates and additional share issuance obligations. In accordance with ASC 470-20 “Debt with Conversion and Other Options”, the Company recorded discounts for the VMCO and ASID. The discounts were amortized to interest expense over the term of the convertible notes payable using the effective interest method. In accordance with ASC 815-15 “Embedded Derivatives”, the Company determined that the VMCO and the ASID represented embedded derivative features, and these were shown as derivative liabilities on the consolidated balance sheet. See Note 5.
The Company capitalized costs associated with the issuance of the Bridge Notes, and amortized these costs to interest expense over the term of the related Bridge Notes using the effective interest method.
The following table summarizes information relative to the outstanding new Bridge Notes at June 30, 2013 and December 31, 2012:
|
|
|
June 30,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
|
|
|
|
|
|
Less unamortized discounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bridge notes payable, net of discounts
|
|
|
|
|
|
|
|
|
Following is a detailed discussion of the Bridge Notes transactions.
2011 and Prior
From November 2010 through March 2011, the Company issued to a number of accredited investors a series of its Bridge Notes in the aggregate principal amount of $1,010,000. The Bridge Notes accrued interest at the rate of 10% per annum.
The entire principal amount evidenced by the Bridge Notes (the “Principal Amount”) plus all accrued and unpaid interest were due on the earlier of (i) the date the Company completed a financing transaction for the offer and sale of shares of common stock (including securities convertible into or exercisable for its common stock), in an aggregate amount of no less than 125% of the Principal Amount (a “Qualifying Financing”), and (ii) November 2, 2011. If the Bridge Notes were held to maturity, the Company would pay, at the option of the holder: i) in cash or ii) in securities to be issued by the Company in the Qualifying Financing at the same price paid by other investors. The Bridge Notes were secured by a first priority lien and security interest in all of the Company’s assets.
In November 2011, the Company entered into agreements with all holders of the then outstanding Bridge Notes. Under the terms of the agreements, holders of Bridge Notes totaling $800,000 agreed to extend the maturity due date of the Bridge Notes to February 2, 2012. For these note holders, no change occurred in their rights.
Holders of the balance of the Bridge Notes totaling $210,000 agreed to convert the entire principal amount plus all accrued and unpaid interest of $20,271 into units (each, a “Unit”), each of which consists of one share of common stock of the Company and a four-year warrant to purchase one share of the Company’s common stock at $2.00 per share. The conversion took place at a price of $1.50 per Unit. Accordingly, the Company issued an aggregate of 153,515 shares of common stock and 153,515 warrants.
As a result of the conversion, the holders of the converted Bridge Notes forfeited all rights there under, including the right to acquire warrants to purchase the Company’s common stock.
Also in November 2011, the Company issued additional Bridge Notes in the aggregate principal amount of $262,500. These Bridge Notes were due February 2, 2012 and contained the same rights and privileges as the previously issued Bridge Notes.
2012
In January 2012, the Company issued additional Bridge Notes in the principal amount of $520,000. These Bridge Notes were due February 2, 2012 and contained the same rights and privileges as the previously issued Bridge Notes.
In March 2012, the Company repaid Bridge Notes totaling $65,000.
In April 2012, all note holders with Bridge Notes maturing in February 2, 2012 extended the maturity date through May 2, 2012. As consideration to the note holders for the extension of the maturity date, the Company provided allonges which consisted of the accrued interest for each Bridge Note as of January 31, 2012, which are convertible into shares of common stock at the latest financing price. The value of the allonges was recorded as a derivative liability. See Note 4.
In March 2012 and April 2012, the Company issued additional Bridge Notes in the aggregate principal amount of $220,100 with a due date of May 2, 2012. In May 2012, theses notes were cancelled and converted into new Bridge Notes discussed below.
In May and June 2012, the Company issued to a number of accredited investors its new Bridge Notes in the principal amount of $4,347,419 (the “new Bridge Notes”), consisting of (i) $2,656,250 of new funds and (ii) $1,691,169 of principal amount plus accrued and unpaid interest outstanding under its previously issued Bridge Notes that were cancelled and converted into new Bridge Notes. The new Bridge Notes accrue interest at the rate of 10% per annum.
The entire principal amount under the new Bridge Notes (the “Principal Amount”) plus all accrued and unpaid interest is due on the earlier of (i) the date the Company completes a financing transaction for the offer and sale of shares of common stock (including securities convertible into or exercisable for its common stock), in an aggregate amount of no less than 125% of the Principal Amount (a “Qualifying Financing”), and (ii) October 15, 2012, which date, as described below, was later extended to April 15, 2013. Payments may be made in cash, or, at the option of the holder of the new Bridge Notes, in securities to be issued by the Company in the Qualifying Financing at the same price paid for such securities by other investors. The new Bridge Notes are secured by a first priority lien and security interest in all of the Company’s assets.
The Company also had the obligation to issue to the holders of the new Bridge Notes on the date that is the earlier of the repayment of the new Bridge Notes or the completion of the new Qualifying Financing, at their option:
|
●
|
five year warrants to purchase that number of shares of common stock equal to the Principal Amount plus all accrued and unpaid interest divided by the per share purchase price of the common stock offered and sold in the Qualifying Financing (the “Offering Price”) which warrants shall be exercisable at the Offering Price and shall include cashless exercise provisions commencing 18 months from the date of issuance of the warrants if there is not at that time an effective registration statement covering the shares of common stock exercisable upon exercise of the warrants, or
|
|
●
|
that number of shares of common stock equal to the product arrived at by multiplying (x) the Principal Amount plus all accrued and unpaid interest divided by the Offering Price and (y) 0.33.
|
The Company granted piggy-back registration rights with respect to the securities to be issued in connection with the new Bridge Notes.
The new Bridge Notes further provide that in the event of a change of control transaction, the proceeds from such transaction must be used by the Company to pay to the holders of the new Bridge Notes, pro rata based on the amount of new Bridge Notes owned by each holder, an amount equal to 1.5 times the amount of the aggregate principal amount outstanding under the new Bridge Notes, plus all accrued and unpaid interest due there under, plus all other fees, costs or other charges due there under.
The holders of the new Bridge Notes were also granted the right to appoint two designees to serve as members of the Company’s board of directors, which members will also serve as members of the Compensation Committee and the Audit Committee of the Company’s board of directors.
The Company used $184,081 from the proceeds of the sale of the new Bridge Notes to pay off existing principal balances under the Bridge Notes that were not cancelled and converted into the new Bridge Notes.
In October 2012 and continuing thereafter, the Company entered into amendments with the holders the new Bridge Notes. Under the terms of the amendments, the holders of new Bridge Notes in the aggregate principal amount of $4,342,419 agreed to extend the maturity date of the new Bridge Notes to April 15, 2013. In consideration of the new Bridge Note holders’ agreement to extend the maturity date, the amendment provides that the holder shall have the option to convert the principal and interest under the new Bridge Note into the securities offered by the Company in a qualifying equity financing at the lower of (a) the same price paid for such securities by other investors investing in the financing or (b) $0.50 per share (subject to adjustment in the event of a stock split, reclassification or the like). Prior to the amendment, the conversion option under the new Bridge Note entitled the holder to convert the principal and interest under the new Bridge Note into the securities offered by the Company in a qualifying equity financing at the same price paid for such securities by other investors investing in the financing. The conversion price of $0.50 in (b) above triggered the price protection guarantee contained in the warrants issued in the Company’s 2011 private placement, and the exercise price on the warrants changed from $2.00 per share to $0.50 per share.
In November 2012, the Company repaid a new Bridge Note totaling $5,000.
2013
In January 2013, the Company partially repaid a new Bridge Note totaling $21,040.
In March 2013, the Company issued new Bridge Notes totaling $200,000 that contain the same rights and privileges as the previously issued new Bridge Notes.
In April 2013, the Company issued new Bridge Notes totaling $75,000 that contain the same rights and privileges as the previously issued new Bridge Notes.
In April 2013, the Company repaid a new Bridge Note totaling $36,659.
In April 2013, the Company issued a new Bridge Note to its Chief Financial Officer totaling $20,000 that contains the same rights and privileges as the previously issued new Bridge Notes, the due date of which was extended to October 15, 2013.
In May 2013, a majority of the new Bridge Note holders agreed to extend the maturity date of the new Bridge Notes to October 15, 2013 from April 15, 2013. In consideration of the new Bridge Note holders’ agreement to extend the maturity date, the amendment provides that the new Bridge Note holders have the option to convert the principal and interest under the new Bridge Note into the securities offered by the Company in a qualifying equity financing at the lower of (a) the same price paid for such securities by other investors investing in the financing or (b) $0.25 per share (subject to adjustment in the event of a stock split, reclassification or the like). Prior to the amendment, the conversion option under the new Bridge Notes entitled the new Bridge Note holders to convert the principal and interest under the new Bridge Notes into the securities offered by the Company in a qualifying equity financing at the lower of (a) the same price paid for such securities by other investors investing in the financing or (b) $0.50 per share (subject to adjustment in the event of a stock split, reclassification or the like). As a result of this amendment and additional consideration given, the Bridge Note derivatives were revalued on April 15, 2013, at the fair value of $4,052,148, and the debt discount was recorded with the offset to derivative liabilities. During the period from April 15, 2013 through June 17, 2013, the entire balance of the note discounts was amortized to interest expense as the conversion on June 17, 2013, triggered the immediate recognition of the full value of the debt discount.
In May 2013, the Company issued new Bridge Notes totaling $387,500 that contain the same rights and privileges as the previously issued and amended new Bridge Notes.
In May 2013, the Company issued a new Bridge Note to its Chief Executive Officer totaling $17,500 that contains the same rights and privileges as the previously issued and amended new Bridge Notes.
In June 2013, the Company completed a qualifying equity financing at $0.20 per share. See Note 7. Pursuant to the terms of the new Bridge Notes, the Company converted note principal totaling $4,984,720 into 24,923,602 shares of the Company’s common stock at $0.20 per share. Also, in June 2013, the Company converted accrued interest on the Bridge Notes totaling $369,786 into 1,848,930 shares of the Company’s common stock at $0.20 per share.
Certain note holders elected to receive cash payment for their accrued interest, and the remaining accrued interest on the Bride Notes at June 30, 2013 totaled $95,404, which was paid in July 2013.
Discounts recorded related to the Bridge Notes
In accordance with ASC 470-20 “Debt with Conversion and Other Options”, the Company recorded discounts to the Bridge Notes for the VMCO and ASID. The discounts were amortized to interest expense over the term of the Bridge Notes using the effective interest method. As of June 30, 2013, all of the discounts related to the Bridge Notes were recognized as interest expense in conjunction with the conversion of the Bridge Notes into shares of the Company’s common stock.
In accordance with ASC 815-15 “Embedded Derivatives”, the Company determined that the VMCO and the ASID represented embedded derivative features, and these were shown as derivative liabilities on the balance sheet. See Note 5.
The Company calculated the fair value of the compound embedded derivatives associated with the Bridge Notes utilizing a complex, customized Monte Carlo simulation model suitable to value path dependent American options. The model uses the risk neutral methodology adapted to value corporate securities. This model utilized subjective and theoretical assumptions that can materially affect fair values from period to period.
The following table presents details of the Company’s discounts to its Bridge Notes from December 31, 2011 to June 30, 2013:
|
|
|
VMCO
|
|
|
ASID
|
|
|
Total
|
|
|
December 31, 2011
|
|
$
|
(12,031
|
)
|
|
$
|
(47,739
|
)
|
|
$
|
(59,770
|
)
|
|
Additions
|
|
|
(1,409,797
|
)
|
|
|
(3,942,607
|
)
|
|
|
(5,352,404
|
)
|
|
Amortization
|
|
|
940,438
|
|
|
|
2,986,987
|
|
|
|
3,927,425
|
|
|
December 31, 2012
|
|
|
(481,390
|
)
|
|
|
(1,003,359
|
)
|
|
|
(1,484,749
|
)
|
|
Additions
|
|
|
(1,936,191
|
)
|
|
|
(2,678,523
|
)
|
|
|
(4,614,714
|
)
|
|
Amortization
|
|
|
2,417,581
|
|
|
|
3,681,882
|
|
|
|
6,099,463
|
|
|
June 30, 2013
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
During the three months ended June 30, 2013 and 2012, the Company recorded note discount amortization related to the Bridge Notes to interest expense of $4,764,734 and $741,444, respectively.
During the six months ended June 30, 2013 and 2012, the Company recorded note discount amortization related to the Bridge Notes to interest expense of $6,099,463 and $1,014,813, respectively
Deferred financing costs related to the Bridge Notes
The Company capitalized deferred financing costs and amortized the capitalized amounts to interest expense over the term of the Bridge Notes using the effective interest method. The Company recorded interest expense related to the amortization of deferred financing costs for the three months ended June 30, 2013 and 2012 totaling $-0- and $65,703, respectively. The Company recorded interest expense related to the amortization of deferred financing costs for the six months ended June 30, 2013 and 2012 totaling $-0- and $100,857, respectively.
Digimark, LLC Notes
As partial consideration for the acquisition of Boomtext in 2011, the Company issued an unsecured subordinated promissory note in the principal amount of $194,658. The promissory note did not bear interest; was payable in installments (varying in amount) from August 2011 through October 2012; and was subordinated to the Company’s obligations under its Bridge Notes discussed above.
The $194,658 unsecured subordinated promissory note did not bear interest. Accordingly, the Company recorded the promissory note at the present value of the payments over the subsequent periods which amounted to $182,460. The Company used a discount rate of 6.25% in calculating the net present value of the unsecured promissory note. The discount rate was based on the Company’s estimated cost of debt capital. Under the effective interest method, the Company accreted the debt discount to the face amount of the promissory note.
Accretion of the debt discount for the three months ended June 30, 2013 and 2012 totaled $-0- and $2,466, respectively. Accretion of the debt discount for the six months ended June 30, 2013 and 2012 totaled $-0- and $4,422, respectively. Accretion of the debt discount was charged to interest expense in accordance with FASB ASC 480 “Distinguishing Liabilities from Equity”.
As of December 31, 2012, the outstanding balance on the note payable was $100,000, which was paid in June 2013.
Summary of Notes Payable and Accrued Interest
The following table summarizes the Company’s notes payable and accrued interest as of June 30, 2013 and December 31, 2012:
|
|
|
Notes Payable
|
|
|
Accrued Interest
|
|
|
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
Bridge notes, net, as discussed above
|
|
$
|
-
|
|
|
$
|
2,857,669
|
|
|
$
|
95,404
|
|
|
$
|
261,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable, net of discounts
|
|
|
-
|
|
|
|
2,857,669
|
|
|
|
95,404
|
|
|
|
261,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured (as amended) note payable due to our Company’s former Chief Executive Officer, interest accrues at the rate of 9% compounded annually, all amounts due and payable December 31, 2008. Currently past due.
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
15,310
|
|
|
|
13,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable due to a trust, interest accrues at the rate of 10% per annum, all amounts due and payable December 31, 2006. The Company is negotiating the terms of this note.
|
|
|
-
|
|
|
|
51,984
|
|
|
|
-
|
|
|
|
24,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digimark, LLC subordinated promissory note, net, as discussed above.
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
22,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
20,000
|
|
|
|
171,984
|
|
|
|
15,310
|
|
|
|
60,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
20,000
|
|
|
$
|
3,029,653
|
|
|
$
|
110,714
|
|
|
$
|
321,368
|
|
Interest Expense
The following table summarizes interest expense for the three months ended June 30, 2013 and 2012, and the six months ended June 30, 2013 and 2012:
|
|
|
Three months ended June30,
|
|
|
Six months ended June 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
Amortization of note discounts
|
|
$
|
4,799,638
|
|
|
$
|
743,400
|
|
|
$
|
6,134,367
|
|
|
$
|
1,020,749
|
|
|
Amortization of deferred financing costs
|
|
|
-
|
|
|
|
65,703
|
|
|
|
-
|
|
|
|
100,857
|
|
|
Other interest expense
|
|
|
99,555
|
|
|
|
71,218
|
|
|
|
212,186
|
|
|
|
116,893
|
|
|
|
|
$
|
4,899,193
|
|
|
$
|
880,321
|
|
|
$
|
6,346,553
|
|
|
$
|
1,238,499
|
|
The Company paid interest in cash during the three months ended June 30, 2013 and 2012 totaling $49,429 and $28,273, respectively.
The Company paid interest in cash during the six months ended June 30, 2013 and 2012 totaling $53,389 and $33,108, respectively.
7.
Stockholders’ Equity (Deficit)
Common Stock
In May 2013, the Company issued 750,000 shares of common stock valued based on the closing market price on the acquisition date at $183,750 as part of the purchase price in the Sequence acquisition, see Note 3.
In May 2013, the Company issued 7,000,000 shares of common stock valued based on the closing market price on the acquisition date at $1,034,310 as part of the purchase price in the FDI acquisition, see Note 3.
In June 2013, the Company issued 1,483,669 shares of common stock in satisfaction of the Boomtext earn-out payment. See Equity Payable below.
In June 2013, the Company issued 36,780,000 shares of common stock at $0.20 per share to accredited investors for net proceeds of $6,789,686. Transaction costs netted against the proceeds totaled $566,315. This transaction constituted a qualified financing, pursuant to which the Bridge Notes were converted into shares of common stock as noted below.
In June 2013, the Company issued 26,772,532 shares of common stock for the conversion of notes payable and accrued interest, see Note 6.
In June 2013, the Company issued 75,000 shares for services and recorded expense of $18,375 in general and administrative expenses.
At June 30, 2013, the Company had 96,079,318 shares of common stock outstanding.
Equity Payable
The Company had an earn-out commitment associated with the acquisition of Boomtext from Digimark, LLC. The earn-out payment (payable March 31, 2013) consists of a number of shares of common stock of the Company equal to (a) 1.5, multiplied by the Company’s net revenue from acquired customers and customer prospects for the twelve-month period beginning six months after the closing date, divided by (b) the average of the volume-weighted average trading prices of the Company’s common stock for the 25 trading days immediately preceding the earn-out payment (subject to a collar of $1.49 and $2.01 per share).
In June 2013, the final value of the earn-out payment of $2,210,667 was satisfied through the issuance of 1,483,669 shares of common stock. As of December 31, 2012, the estimated value of the earn-out payment of $2,032,881 was recorded as a current liability.
The change in the estimated value of the earn-out payable for the three months ended June 30, 2013 and 2012 was a loss of $499,177 and a gain of $16,131, respectively, which are recorded in other income/(expense) in the consolidated statements of operations.
The change in the estimated value of the earn-out payable for the three months ended June 30, 2013 and 2012 was a loss of $193,465 and a gain of $76,782, respectively, which are recorded in other income/(expense) in the consolidated statements of operations.
Stock-based Compensation
2010 Incentive Stock Option Plan
In December, 2010, the Company adopted the 2010 Incentive Stock Option Plan (“the 2010 Plan”), subject to shareholder approval within one year. Shareholder approval was not obtained within one year, therefore incentive stock options granted under the 2010 Plan converted to non-qualified stock options. The 2010 Plan permits the Company to grant up to 3,124,000 shares of common stock and options to purchase shares of common stock. The 2010 Plan is designed to retain directors, executives and selected employees and consultants and reward them for making major contributions to the success of the Company. These objectives are accomplished by making long-term incentive awards under the 2010 Plan thereby providing participants with a personal interest in the growth and performance of the Company.
The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price that equals the fair market value of the Company's stock at the date of grant. These option awards generally vest based on four years of continuous service and have five-year or 10-year contractual terms.
2013 Incentive Stock Option Plan
In June 2013, the Company adopted the 2013 Incentive Stock Option Plan (“the 2013 Plan”). The 2013 Plan permits the Company to grant up to 33,386,086 shares of common stock and options to purchase shares of common stock. The 2013 Plan is designed to retain directors, executives and selected employees and consultants and reward them for making major contributions to the success of the Company. These objectives are accomplished by making long-term incentive awards under the 2010 Plan thereby providing participants with a personal interest in the growth and performance of the Company.
The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price that equals the fair market value of the Company's stock at the date of grant. These option awards generally vest based on four years of continuous service and have five-year or 10-year contractual terms.
The exercise of options granted under the 2013 Plan is subject to the Company’s increase of the number of shares of common stock authorized for issuance.
Summary of Options and Related Expense
The following table summarizes stock option activity for the six months ended June 30, 2013:
|
|
|
|
|
|
|
|
|
Weighted -
|
|
|
|
|
|
|
|
|
|
|
Weighted -
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Outstanding
|
|
|
Per Share
|
|
|
Life (Years)
|
|
|
Value
|
|
|
Outstanding at January 1, 2013
|
|
|
1,955,000
|
|
|
$
|
0.77
|
|
|
|
4.44
|
|
|
$
|
-
|
|
|
Granted
|
|
|
30,387,825
|
|
|
$
|
0.31
|
|
|
|
9.86
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Canceled/forfeited/expired
|
|
|
(240,001
|
)
|
|
$
|
0.74
|
|
|
|
6.39
|
|
|
|
|
|
|
Outstanding at June 30, 2013
|
|
|
32,102,824
|
|
|
$
|
0.33
|
|
|
|
9.55
|
|
|
$
|
3,237,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and exercisable at June 30, 2013
|
|
|
4,467,511
|
|
|
$
|
0.40
|
|
|
|
8.49
|
|
|
$
|
423,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized expense at June 30, 2013
|
|
$
|
6,222,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average exercise price of stock options granted during the period was $0.31 and the related weighted average grant date fair value was $0.27 per share.
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing price at fiscal year-end and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the date indicated.
The following table summarizes information concerning options outstanding at June 30, 2013:
|
Awards Breakdown by Range as at June 30, 2013
|
|
|
|
|
|
Outstanding
|
|
|
Vested
|
|
|
Exercise Price
|
|
|
Outstanding Stock Options
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Outstanding Exercise Price
|
|
|
Vested Stock Options
|
|
|
Weighted Average Remaining Vested Contractual Life
|
|
|
Weighted Average Vested Stock Price
|
|
|
$
|
0.25 to $0.69
|
|
|
|
31,607,824
|
|
|
|
9.61
|
|
|
$
|
0.31
|
|
|
|
4,173,973
|
|
|
|
8.64
|
|
|
$
|
0.31
|
|
|
$
|
1.16 to $1.75
|
|
|
|
495,000
|
|
|
|
6.09
|
|
|
$
|
1.65
|
|
|
|
293,538
|
|
|
|
6.43
|
|
|
$
|
1.68
|
|
The following table summarizes information concerning options outstanding at December 31, 2012:
|
Awards Breakdown by Range as at December 31, 2012
|
|
|
|
|
|
Outstanding
|
|
|
Vested
|
|
|
Exercise Price
|
|
|
Outstanding Stock Options
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Outstanding Exercise Price
|
|
|
Vested Stock Options
|
|
|
Weighted Average Remaining Vested Contractual Life
|
|
|
Weighted Average Vested Stock Price
|
|
|
$
|
0.32 to $0.69
|
|
|
|
1,410,000
|
|
|
|
3.71
|
|
|
$
|
0.43
|
|
|
|
374,997
|
|
|
|
2.98
|
|
|
$
|
0.32
|
|
|
$
|
1.16 to $1.80
|
|
|
|
545,000
|
|
|
|
6.33
|
|
|
$
|
1.66
|
|
|
|
181,455
|
|
|
|
6.30
|
|
|
$
|
1.69
|
|
The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors based upon estimated fair values.
The Company recorded employee stock based compensation for the three months ended June 30, 2013 and 2012 of $1,184,045 and $95,568, respectively.
The Company recorded employee stock based compensation for the six months ended June 30, 2013 and 2012 of $1,277,794 and $210,429, respectively.
The Company expects to recognize $6,222,535 of stock based compensation to employees and directors over the next twelve months.
Valuation Assumptions
The Company calculated the fair value of each stock option award on the date of grant using the Black-Scholes option pricing model. The following ranges of assumptions were used for the six months ended June 30, 2013 and 2012.
|
|
|
Six months ended June 30,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Expected volatility
|
|
|
122% - 132%
|
|
|
65% to 73.4%
|
|
|
Risk-free interest rate
|
|
0.22% to 1.50%
|
|
|
0.39% to 0.51%
|
|
|
Forfeiture rate
|
|
|
16.0%
|
|
|
|
0.0%
|
|
|
Expected dividend rate
|
|
|
0.0%
|
|
|
|
0.0%
|
|
|
Expected life(years)
|
|
1.50 to 6.02
|
|
|
3.00 to 4.00
|
|
The expected volatility in 2013 is based on the historical publicly traded price of the Company’s common stock. The expected volatility prior to 2013 is based on the weighted average of the historical volatility of publicly traded surrogates in the Company’s peer group.
The risk-free interest rate assumption is based upon published interest rates appropriate for the expected life of the Company’s employee stock options.
The dividend yield assumption is based on the Company’s history of not paying dividends and no future expectations of dividend payouts.
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.
Warrants issued to non-employees
In December 2010, the Company issued 700,000 warrants for consulting services. The warrants vest over a 4 year term and vest as follows: the first installment equaling 25% of the grant is exercisable on the first anniversary of the date of the warrant; and additional installments are exercisable monthly at the rate of 1/36 of the 75% grant balance over the ensuing 36 months.
In January 2011, the Company issued 200,000 warrants for consulting services. The warrants vest over a 4 year term and vest as follows: the first installment equaling 25% of the grant is exercisable on the first anniversary of the date of the warrant; and additional installments shall become exercisable monthly at the rate of 1/36 of the 75% grant balance over the ensuing 36 months.
In July 2011, the Company issued 5,000 warrants for consulting services. The warrants vest over a 4 year term and vest as follows: the first installment equaling 25% of the grant is exercisable on the first anniversary of the date of the warrant; and additional installments are exercisable monthly at the rate of 1/36 of the 75% grant balance over the ensuing 36 months.
In February 2012, the Company issued 25,000 warrants for consulting services. The warrants vest over twelve months beginning on the first monthly anniversary of the grant. The Company terminated the services of said consultant during the year ended December 31, 2012 and the warrants were canceled in accordance with the warrant agreement.
As of June 30, 2013, vested warrants totaled 736,138 pursuant to the three non-employee warrant agreements.
The warrants issued to non-employees were accounted for as derivative liabilities through June 17, 2013 pursuant to the authoritative guidance for equity based payments to non-employees. The warrants were valued using a Monte Carlo Simulation. See Note 5 for assumptions used in the Monte Carlo simulation.
The fair values of the warrants were estimated at the vesting date and are revalued at each subsequent reporting date. At December 31, 2012, the Company recorded derivative liabilities for the non-employee warrants totaling $95,041. On June 17, 2013, the Company converted this derivative liability valued at $176,555 into additional paid-in capital due to the fact that on that date the number of possible issuances of common shares was no longer indeterminate thereby removing the tainted equity environment.
The change in fair value of the derivative liabilities for the three months ended June 30, 2013 and 2012 was a loss of $33,835 and a gain of $129,987, respectively, which was recorded in change in fair value of derivative liabilities in the consolidated statements of operations. The increase in value of the derivative liabilities related to warrant vesting during the three months ended June 30, 2013 and 2012 was $14,388 and $33,883, respectively.
The change in fair value of the derivative liabilities for the six months ended June 30, 2013 and 2012 was a loss of $54,545 and $190,957, respectively, which was recorded in change in fair value of derivative liabilities in the consolidated statements of operations. The increase in value of derivative liabilities related to warrant vesting during the six months ended June 30, 2013 and 2012 was $29,969 and $33,883, respectively.
A summary of non-employee warrant activity under the 2010 Plan from December 31, 2012 to June 30, 2013 is presented below:
|
|
|
|
|
|
Weighted -
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Outstanding
|
|
|
Per Share
|
|
|
Life (Years)
|
|
|
Value
|
|
|
Outstanding at December 31, 2012
|
|
|
905,000
|
|
|
$
|
0.33
|
|
|
|
4.10
|
|
|
$
|
-
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Canceled/forfeited/expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Outstanding at June 30, 2013
|
|
|
905,000
|
|
|
$
|
0.33
|
|
|
|
3.60
|
|
|
$
|
81,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants vested and exercisable at June 30, 2013
|
|
|
736,138
|
|
|
$
|
0.33
|
|
|
|
3.32
|
|
|
$
|
65,999
|
|
The following table summarizes information concerning warrants outstanding at June 30, 2013:
|
Awards Breakdown by Range as at June 30, 2013
|
|
|
|
|
|
Outstanding
|
|
|
Vested
|
|
|
Exercise Price
|
|
|
Outstanding Warrants
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Outstanding Exercise Price
|
|
|
Vested Warrants
|
|
|
Weighted Average Remaining Vested Contractual Life
|
|
|
Weighted Average Vested Stock Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information concerning warrants outstanding at December 31, 2012:
|
|
|
|
Outstanding
|
|
|
Vested
|
|
|
Exercise Price
|
|
|
Outstanding Warrants
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Weighted Average Outstanding Exercise Price
|
|
|
Vested Warrants
|
|
|
Weighted Average Remaining Vested Contractual Life
|
|
|
Weighted Average Vested Stock Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued to note holders and placement agent
During the year ended December 31, 2011, the Company issued warrants for the purchase of 688,669 shares of common stock at $2.00 per share in connection with its private placement discussed above under Common Stock. The warrants are exercisable for four years from the date of issuance, and contain anti-dilution, or down round, price protection as long as the warrant remains outstanding. In addition, the Company issued warrants for the purchase of 153,515 shares of common stock at $2.00 per share in connection with the conversion of its outstanding Bridge Notes with a principal amount of $210,000 discussed above in Note 5 under Bridge Financing. The warrants are exercisable for four years from the date of issuance. In October 2012, the exercise price of the warrants was reduced from $2.00 per share to $0.50 per share as a result of the price protection guarantee contained in the warrant agreement. In June 2013, the exercise price of the warrants was reduced from $0.50 per share to $0.20 per share as a result of the price protection guarantee contained in the warrant agreement.
In June 2013, the Company issued warrants for the purchase of 27,249,550 shares of common stock at $0.20 per share in connection with the conversion of the Bridge Notes into equity. The warrants are exercisable for five years from the date of issuance.
In June 2013, the Company issued warrants for the purchase of 3,602,558 shares of common stock at $0.20 to the placement agent connected with the Bridge Note conversions and equity placements. The warrants are exercisable for five years from the date of issuance.
8. Income Taxes
The Company maintains deferred tax assets that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These deferred tax assets include net operating loss carryforwards, deferred revenue and stock-based compensation. In assessing the potential realization of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. The Company considers projected future taxable income and planning strategies in making this assessment. Based on the level of historical operating results and projections for the taxable income for the future, the Company has determined that it is more likely than not that the deferred tax assets will not be realized. Accordingly, the Company has recorded a valuation allowance to reduce deferred tax assets to zero. There can be no assurance that the Company will ever be able to realize the benefit of some or all of the federal and state loss carryforwards, either due to ongoing operating losses or due to ownership changes, which limit the usefulness of the loss carryforwards.
The Company has determined that during 2010 it experienced a “change of ownership” as defined by Section 382 of the Internal Revenue Code. As such, utilization of net operating loss carryforwards and credits generated before the 2010 change in ownership will be limited to approximately $207,000 per year until such carryforwards are fully utilized. The pre change net operating loss carryforward was approximately $7,000,000.
9. 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 require the Company to develop its 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, the Company measures certain financial assets and liabilities at fair value, including its derivative liabilities.
At December 31, 2012 and June 30, 2013, the Company re-measured the derivative liability related to the common stock and warrants issued in 2011 (See Note 7 under Common Stock).
On May 13, 2013, the Company also recorded an earn-out payable related to the Sequence acquisition, see Note 3.
At December 31, 2012, the Company recorded a derivative liability related to the VMCO and the ASID in connection with its Bridge Notes (See Note 6), the common stock and warrants issued in 2011 (See Note 7 under Common Stock), and the non-employee warrants at the aggregate fair value of $3,074,504 utilizing unobservable inputs.
The change in fair value of these liabilities is included in other income (expense) in the consolidated statements of operations. The assumptions used in the Monte-Carlo simulation used to value the derivative liabilities involve expected volatility in the Company’s common stock, estimated probabilities related to the occurrence of a future financing, and interest rates. As all the assumptions employed to measure this liability are based on management’s judgment using internal and external data, this fair value determination is classified in Level 3 of the valuation hierarchy.
See Note 5 for a table that provides a reconciliation of the derivative liabilities from December 31, 2012 to June 30, 2013.
10. Commitments and Contingencies
Litigation
In September 2012, the Company initiated litigation against a former client (the “Defendant”) for failure to pay the Company’s invoices for services rendered under its Master License and Services Agreement. The complaint was filed in Superior Court of California, San Diego County. The litigation seeks to recover $67,795 in services and interest penalties. As of June 30, 2013, negotiations to settle the litigation with the Defendant have ceased, and the Company is seeking to obtain a judgment against the Defendant.
Operating Lease and Lease Exit Obligation
The Company has a lease agreement for 6,730 square feet, as amended, for its office facilities in Chandler Arizona through December 2015. Monthly rental payments, excluding common area maintenance charges, are $11,557 in 2013, $11,958 in 2014 and $12,357 in 2015.
The minimum lease payments required over the next five years is shown below.
|
Minimum Lease Payments
|
|
|
2013
|
|
$
|
71,136
|
|
|
2014
|
|
|
143,492
|
|
|
2015
|
|
|
148,281
|
|
|
2016
|
|
|
-
|
|
|
2017
|
|
|
-
|
|
|
Thereafter
|
|
|
-
|
|
|
|
|
$
|
362,909
|
|
The Company had a lease agreement for its office facilities in San Diego, California through September 2012. Upon signing a lease agreement for the facility in Chandler, the Company determined it no longer needed the San Diego facility. The property was vacated in November 2011 and returned to the owner. As of June 30, 2013, the Company has a Lease Exit Obligation which consists of unpaid rent totaling $24,615 for the period December 2011 through September 2012. The Company expects no further charges in relation to this lease exit obligation, aside from actual common area maintenance charges reconciled against the estimate.
Rent expense for both the San Diego, California, and Chandler, Arizona facilities (including related common area maintenance charges and lease abandonment charges) was $43,874 and $43,329, respectively, for the three months ended June 30, 2013 and 2012. Rent expense for the six months ended June 30, 2013 and 2012 was $86,669 and 92,617, respectively.
11. Employee Benefit Plan
The Company has an employee savings plan (the “Plan”) pursuant to Section 401(k) of the Internal Revenue Code (the “Code”), covering all of its employees. Participants in the Plan may contribute a percentage of compensation, but not in excess of the maximum allowed under the Code. The Company may make contributions at the discretion of its Board of Directors. During the six months ended June 30, 2013 and 2012, the Company made no contributions to the Plan.
12. Related Party Transactions
Prior to the reverse merger on November 2, 2010, Optimal Payments Corporation converted $570,534 of debt into $370,534 worth of Mobivity Inc. common stock and $200,000 of prepaid services to be rendered by Mobivity. A member of the Company's Board of Directors is currently President of Sterling Card Solutions, which has a minority ownership position in Optimal Payments Corporation. The Company recognized deferred revenue from this related party during the three months ended June 30, 2013 and 2012 totaling $-0- and $51,000, respectively. The Company recognized deferred revenue from this related party during the six months ended June 30, 2013 and 2012 totaling $-0- and $84,000, respectively. Optimal Payments Corporation ceased being a related party in June 2013.
In April 2013, the Company issued a new Bridge Note to its Chief Financial Officer totaling $20,000 that contains the same rights and privileges as the previously issued new Bridge Notes, the due date of which was extended to October 15, 2013. The note and accrued interest were converted into 189,812 shares of common stock and he received five-year warrants to purchase 189,812 shares of common stock exercisable at $0.20 per share.
In May 2013, the Company issued a new Bridge Note to its Chief Executive Officer totaling $17,500 that contains the same rights and privileges as the previously issued and amended new Bridge Notes. The note and accrued interest were converted into 88,243 shares of common stock and he received five-year warrants to purchase 88,243 shares of common stock exercisable at $0.20 per share.
13. Subsequent Events
In August, the Company sold 720,000 shares of common stock and received net proceeds of $137,428. The Company issued the placement agent five-year warrants to purchase 32,900 shares of common stock at $0.20 per share.