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MFON > SEC Filings for MFON > Form 10-K on 21-Mar-2013All Recent SEC Filings

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Form 10-K for MOBIVITY HOLDINGS CORP.


21-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes and other information that are included elsewhere in this Form 10-K. This discussion contains forward looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materials from those anticipated in these forward looking statements as a result of a number of factors, including those set forth under the cautionary note regarding "Forward Looking Statements" contained elsewhere in this Form 10-K. Additionally, you should read the "Risk Factors" sections of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a provider of technology that enables major brands and enterprises to engage consumers via their mobile phone. Interactive electronic communications with consumers is a complex process involving communication networks and software. We remove this complexity through our suite of services and technologies thereby enabling brands, marketers, and content owners to communicate with their customers and consumers in general. From Presidential elections to major broadcast events, we are pioneers in the deployment of the mobile channel as the ultimate direct connection to the consumer.

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Mobile phone users represent a large and captive audience. While televisions, radios, and even PCs are often shared by multiple consumers, mobile phones are personal devices representing a truly unique and individual address to the end user. We believe the future of digital media will be significantly influenced by mobile phones where a direct, personal conversation can be had with the world's largest audience. The future of mobile includes banking, commerce, advertising, video, games and just about every other aspect of both on and offline life. Over 4 million consumers have been engaged via their mobile device thanks to our technology.

We believe that our mobile marketing and advertising campaign platform is among the most advanced in the industry as it allows real time interactive communications with consumers. We generate revenue from licensing our software to clients in our software as a service (SaaS) model, per-message and per-minute transactional fees, and customized professional services.

Our "C4" Mobile Marketing and Customer Relationship Management (CRM) platform is a hosted solution enabling our clients to develop, execute, and manage a variety of engagements to a consumer's mobile phone. Short Messaging Service (SMS), Multi-Media Messaging (MMS), and Interactive Voice Response (IVR) interactions can all be facilitated via a set of Graphical User Interfaces (GUIs). Reporting and analytics capabilities are also available to our users through the C4 solution.

We believe mobile devices are emerging as an important interactive channel for brands to reach consumers since it is the only media platform that has access to the consumer virtually anytime and anywhere. Brands and advertising agencies are recognizing the unique benefits of the mobile channel and they are increasingly integrating mobile media within their overall advertising and marketing campaigns. Our objective is to become the industry leader in connecting brands and enterprises to consumers' mobile phones.

Recent Events

Txtstation Acquisition

In April 2011, we acquired substantially all of the assets of the Txtstation interactive mobile marketing platform and services business from Adsparq Limited ("Adsparq"). The purchase price for the acquisition was 2,125,000 shares of our common stock and $300,000 in cash. Of the cash portion, $50,000 was paid at closing, with an additional $25,000 payable on the 60th day following closing. The balance was payable in $25,000 installments at the end of each of the next nine 30-day periods thereafter. We assumed none of Adsparq's liabilities in the transaction. For a period of one year following the closing of the transaction, half of the shares of common stock issued to Adsparq were held in escrow as security for Adsparq's obligations under the agreement.

In connection with the transaction, we also issued 300,000 shares of our common stock to the controlling stockholder of Adsparq in consideration of certain indemnification obligations and other agreements. For one year following the closing of the transaction, the shareholder agreed not to, directly or indirectly, transfer, donate, sell, assign, pledge, hypothecate, grant a security interest in or otherwise dispose or attempt to dispose of all or any portion of shares issued to it (or any interest therein). As a result of the transaction, our headcount increased by seven full time employees and one part time employee on April 1, 2011.

Mobivity Acquisition

In April 2011, we entered into an acquisition agreement with Mobivity, LLC and Mobile Visions, Inc. to acquire the assets of their Mobivity interactive mobile marketing platform and services business.

The purchase price for the acquisition was 1,000,000 shares of our common stock, $64,969 in cash paid at closing and a secured subordinated promissory note of Mobivity, Inc. (our wholly owned subsidiary) in the principal amount of $606,054. The promissory note earned interest at 6.25% per annum; was payable in six quarterly installments of $105,526.42 (inclusive of interest) starting May 1, 2011; matured on August 1, 2012; was secured by the acquired assets of the Mobivity business; and was subordinated to our obligations under our outstanding 10% Senior Secured Convertible Bridge Notes Due November 3, 2011.

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BoomText Acquisition

In August 2011, the Company completed the transactions contemplated under an asset purchase agreement dated June 9, 2011 (the "Agreement") with Digimark, LLC ("Digimark") to acquire substantially all of the assets of its BoomText interactive mobile marketing services business. The effective date of the transaction was August 1, 2011. In accordance with the terms of the Agreement, as amended, the purchase price for the acquisition consisted of the following components:

(i) 519,540 shares of the Company's common stock issued at closing;

(ii) $120,514 in cash paid at closing;

(iii) a secured subordinated promissory note of Mobivity, Inc. in the principal amount of $175,000. This note earned interest at 6.25% per annum and was paid in full on May 31, 2012;

(iv) an unsecured subordinated promissory note in the principal amount of $194,658 issued by Mobivity, Inc. due and payable on October 1, 2012, of which $100,000 was payable as of the date of this report. This note does not bear interest; is payable in installments (varying in amount) from August 2011 through October 2012; and was subordinated to our obligations under the outstanding 10% Senior Secured Convertible Bridge Notes due November 3, 2011;

(v) an earn-out payment (payable 20 months after closing of the transaction) of a number of shares of our common stock equal to (a) 1.5, multiplied by our 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 our 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).

As of December 31, 2012, the dollar value of the earn-out payable is $2,032,881, which is recorded as a current liability on the accompanying consolidated balance sheet. The estimated number of common shares to be issued to settle the earn-out payable is 1,364,350. The purchase price also included the assumption of an office lease obligation and certain of Digimark's accounts payable.

Bridge Note Financing

In 2012, we issued additional 10% Senior Secured Convertible Bridge Notes in the aggregate of $3,533,999. (See discussion of Bridge Note Financing in Liquidity and Capital Resources, and Note 6 in Notes to Consolidated Financial Statements).

As of December 31, 2012, the outstanding principal amount of convertible notes payable totaled $4,342,418, and is due April 15, 2013. The original due date on these convertible notes payable was October 15, 2012, and was extended via amendment to the convertible note agreements.

In consideration of the note holders' agreement to extend the maturity date, the amendment provides that the note holders have the option to convert the principal and interest under the convertible note payable 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 convertible notes payable entitled the note holders to convert the principal and interest under the convertible notes payable 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.

Results of Operations

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenues

Revenues for the year ended December 31, 2012 were $4,079,745, an increase of $1,555,480, or 62%, compared to the year ended December 31, 2011. The increase is primarily attributable to the acquisitions of Mobivity and Txtstation in April 2011 and the acquisition of Boomtext in August 2011, each of which had partial year revenue recorded in 2011. Additionally we experienced 12% organic growth of Boomtext revenues over the annualized 2011 revenue, and a 49% increase in revenues from CommerceTel operations.

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Cost of Revenues

Cost of revenues for the year ended December 31, 2012 was $1,300,325, an increase of $313,471, or 32% compared to the same period in 2011. This increase is primarily attributable to the acquisitions of Mobivity, Txtstation and Boomtext; and the increased costs for SMS transmission, short code fees, marketing materials, sales commissions, co-location costs, and merchant fees resulting from the three acquisitions which had partial year expense in the prior year. Consolidation of vendors and volume pricing reductions contributed to a lower cost of revenues as a percentage of total revenue, decreasing from 39% in 2011 to 32% in 2012.

Gross Profit

Gross profit for the year ended December 31, 2012 was $2,779,420, an increase of $1,242,009, or 81%, compared to the year ended December 31, 2011. Gross profit as a percentage of revenue for the year ended December 31, 2012 increased to 68% compared to 61% for the year ended December 31, 2011. The increase is primarily attributable to the acquisitions of Mobivity, Txtstation, and Boomtext in 2011, and reduced costs related to message transmission through the consolidation of acquired vendors, negotiated volume discounts, and greater leverage of fixed costs.

General and Administrative

General and administrative expenses for the years ended December 31, 2012 and 2011 were $2,984,531 and $3,625,799, respectively. Such expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, consulting costs and other expenses. The decrease of $641,268 is primarily attributable to the following changes: decrease in stock-based compensation of $529,865 because fewer awards were granted in 2012; decrease in consulting related expenses of $238,543 due to reduced dependence on consultants for CFO, accounting services, and M&A activity in 2012; a decrease in legal expenses of $76,861 due to fewer acquisitions and other transactions requiring legal review in 2012; an increase in bad debt expense of $93,544 as the accounts receivable base grew in 2012; an increase in investor relations expense of $62,127 because we engaged additional resources in 2012; an increase in rent of $43,581 because we had only four months of expense for the Boomtext facility in 2011, and added additional space in 2012.

Sales and Marketing Expense

Sales and marketing expenses for the years ended December 31, 2012 and 2011 were $1,562,520 and $583,284, respectively. Such expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, sales travel, consulting costs and other expenses. The increase of $979,236 is primarily attributable to the following changes: an increase in payroll related expense of $737,725 because of the headcount added during our acquisitions in 2011; an increase in stock-based compensation of $36,145 because of the awards granted to the headcount added during our acquisitions in 2011; an increase in advertising expense of $57,215 because of increased budget for advertising and marketing activities; and increase in trade show expense of $16,632 because we attended more tradeshows in 2012.

Engineering, Research, and Development Expense

Engineering, research, and development expenses for the years ended December 31, 2012 and 2011 were $562,459 and $347,884, respectively. Such expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, consulting costs and other expenses. The increase of $214,575 is primarily attributable to the following changes: increase in engineering consulting expense of $167,754 because we used more consultants in 2012, primarily due to consultant resources acquired with our 2011 acquisitions; an increase in payroll related expenses of $48,050 because of the headcount added during our acquisitions in 2011; an increase in software expense of $15,731 because of increased use of outsourced software resources; and a decrease in stock-based compensation of $27,657 because options for a majority of these employees became fully vested during the year ended December 31, 2012.

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Depreciation and Amortization Expense

Depreciation and amortization expense for the year ended December 31, 2012 and 2011 were $549,151 and $751,072, respectively. Such expenses consist of depreciation on our equipment and amortization of our intangible assets. The decrease of $201,921 is primarily attributable to lower amortizable base of our intangible assets in 2012 after the impairment write-offs that we recorded in 2011 that are discussed below.

Goodwill Impairment and Intangible Asset Impairment

During the years ended December 31, 2012 and 2011, we recorded goodwill impairment charges of $742,446 and $10,435,170, respectively, related to our three acquisitions in 2011. During the years ended December 31, 2012 and 2011, we also recorded intangible asset impairment charges of $145,396 and $1,325,134, respectively, related to the same three acquisitions. The impairment charges were based on our valuation of these assets at December 31, 2012 and 2011.

Loss from Operations

Our loss from operations for the year ended December 31, 2012 was $3,767,083, a decrease of $11,763,849, or 76%, compared to the year ended December 31, 2011. The loss from operations for the years ended December 31, 2012 and 2011 include the non-cash impairment charges discussed above. Without the effect of the impairment discussed above the loss from operations would have been $2,879,241 and $3,770,628 respectively.

Interest Expense

Interest expense for the years ended December 31, 2012 and 2011 was $4,559,564 and $544,215, respectively. Interest expense consists of stated or implied interest expense on our notes payable, amortization of note discounts, and amortization of deferred financing costs.

As discussed in Note 6 in Notes to Consolidated Financial Statements, we extended our bridge notes several times during the year ended December 31, 2012. At each extension date, we fully amortized the applicable outstanding discounts, and recorded additional discounts as required by the applicable accounting literature. In addition, we issued new bridge notes for cash, resulting in the recording of additional discounts and deferred financing charges. As a result, we recorded interest expense related to amortization of the note discounts on the bridge notes of $3,927,425 during the year ended December 31, 2012 versus amortization of note discounts on the bridge notes of $358,254 during the year ended December 31, 2011. During the years ended December 31, 2012 and 2011, we also recorded interest expense related to amortization of note discounts on other notes of $7,683 and $12,556, respectively.

Amortization of deferred financing costs for the years ended December 31, 2012 and 2011 was $263,255 and $39,958. We capitalized costs associated with the note extensions and our new financing, and amortized these costs over the term of the related notes, resulting in higher amortization during the year ended December 31, 2012.

Stated interest for the years ended December 31, 2012 and 2011 was $361,201 and $133,447, respectively. The principal balance of our outstanding notes payable was higher in 2012 than in 2011, resulting in higher stated interest expense for the year ended December 31, 2012.

Change in Fair Market Value of Derivative Liabilities

The change in fair market value for derivative liabilities for the year ended December 31, 2012 was a gain of $359,530 compared to the year ended December 31, 2011 which was a loss of $1,234,145. The value of the derivative liabilities at any given date is based on the value of our common stock. In periods when our stock price rises, we expect to record a loss in the change in fair market value of the derivative liabilities. The increase in the value of our recorded derivative liabilities of $1,593,675 is primarily attributable to the value of our common stock being lower at December 31, 2012 than it was at previous reporting dates.

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Gain on Adjustment in Contingent Consideration The gain on adjustment in contingent consideration for the years ended December 31, 2012 and 2011 was $625,357 and $999,347, respectively. These gains represent a reduction in the estimated earn-out payable on the BoomText acquisition at each year end.

Net Loss

The net losses for the years ended December 31, 2012 and December 31, 2011 were $7,338,927 and $16,312,989, respectively. Factors affecting the change in net losses are discussed above, the most significant of which is the impairment charges recorded for goodwill and intangible assets.

Liquidity and Capital Resources

As of December 31, 2012, we had current assets of $445,043, including $363 in cash, and current liabilities of $9,740,026, resulting in negative working capital of $9,294,983.

Our current assets have decreased and our negative working capital position has increased as a result of continuing losses from operations. As of the date of this report, and assuming revenue projections for the 4th quarter 2012 and 1st quarter of 2013 are attained, we believe we have working capital on hand and projected cash equivalents sufficient to fund our current level of operations through June 2013.

We believe that we require approximately $500,000 of additional working capital in order to fund our current level of operations over the next 12 months. This estimate assumes that we can convince the holders of our investment notes, in the aggregate principal amount of $4,342,418, to convert the principal and accrued interest into shares of our equity securities. If we are unsuccessful in doing so, our working capital requirements will increase commensurately. While our priority is on generating additional working capital from operations through the sale of our services, we are also seeking to raise additional working capital through various financing sources, including the sale of our equity and debt securities and, subject to our commencement of profitable operations, the procurement of commercial debt financing. However, there can be no guarantees that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we will be unable to continue our business as desired and operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced and the new equity securities may have rights, preferences or privileges senior to those of the holders of our common stock.

The report of our independent registered public accounting firm for the fiscal year ended December 31, 2012, included herein, states that due to our recurring operating losses from operations, negative cash flows from operations and dependence on additional financing to fund operations, there is substantial doubt about our ability to continue as a going concern.

In addition, all of our assets are currently subject to a first priority lien in favor of the holders of our outstanding convertible notes payable in the current aggregate principal amount of $4,342,418. The notes are due on April 15, 2013, if we are unable to repay or refinance our obligations under those notes by April 15, 2013, the holders of the notes will have the right to foreclose on their security interests and seize our assets. To avoid such an event, we may be forced to seek bankruptcy protection, however a bankruptcy filing would, in all likelihood, materially adversely affect our ability to continue our current level of operations. In the event we are not able to refinance or repay the notes, but negotiate for a further extension of the maturity date of the notes, we may be required to pay significant extension fees in cash or shares of our equity securities or otherwise make other forms of concessions that may adversely impact the interests of our common stockholders.

Cash Flows from Operating Activities

Our operating activities resulted in net cash used by operations of $2,218,183 for the year ended December 31, 2012 compared to net cash used by operations of $890,685 for the year ended December 31, 2011.

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The net cash used in operating activities for the year ended December 31, 2012 reflects a net loss of $7,338,927 offset by bad debt expense of $115,059, common stock issued for services of $270,000, stock-based compensation of $391,410, stock issued for late payment of $160,468, depreciation and amortization expense of $549,151, gain on adjustment in contingent consideration of $625,357, change
(gain) in fair market value of derivative liabilities of $359,530, amortization of deferred financing costs of $263,255, amortization of note discounts of $3,935,108, goodwill impairment of $742,446 and intangible asset impairment $145,396. For the year ended December 31, 2012, the net benefit of the non-cash items totaled $5,587,570.

Changes in operating assets and liabilities for the year ended December 31, 2012 included a decrease in accounts receivable of $285,884, a decrease in accounts payable of $327,828, an increase in accrued interest of $335,035, an increase in accrued and deferred personnel compensation of $61,843, a decrease in deferred revenue - related party of $164,738, an increase in deferred revenue and customer deposits of $55,206 a decrease in other liabilities of $120,929, and other minor factors.

The net cash used in operating activities for the year ended December 31, 2011 reflects a net loss of $16,312,989 offset by bad debt expense of $21,514, common stock for services of $25,000, stock-based compensation of $1,380,256, depreciation and amortization of $751,072, gain on adjustment of contingent consideration of $999,347, change (loss) in fair market value of derivative liabilities of $1,234,145, amortization of deferred financing costs of $39,958, amortization of note discounts of $370,810, goodwill impairment of $10,435,170 and intangible asset impairment of $1,325,134. For the year ended December 31, 2011, the net benefit of the non-cash items totaled $14,583,712.

Changes in operating assets and liabilities for the year ended December 31, 2011 included a decrease in accounts receivable of $216,145, an increase in accounts payable of $576,305, an increase in accrued interest of $112,796, an increase in accrued and deferred personnel compensation of $118,050, an increase in deferred revenue - related party of $72,887, an increase in other liabilities of $151,168, and other minor factors.

Cash Flows from Investing Activities

Net cash used in investing activities for the years ended December 31, 2012 and 2011 was $11,112 and $299,022, respectively.

During the year ended December 31, 2012, we purchased equipment totaling $11,112.

During the year ended December 31, 2011, we purchased equipment totaling $12,189, we acquired intangible assets (patents and trademarks) totaling $77,000, and we paid $209,833 in cash for the three acquisitions.

Cash Flows from Financing Activities

Net cash provided by financing activities for the years ended December 31, 2012 and 2011 was $2,229,262 and $816,664, respectively.

During the year ended December 31, 2012, we received proceeds of $3,396,350 from the issuance of 10% Senior Secured Convertible Bridge Notes, offset by payments of $247,880 in deferred financing costs, for net proceeds of $3,148,470.

During the year ended December 31, 2012, we paid $254,081 against nine 10% Senior Secured Bridge Notes, we paid $577,627 against the principal balance of the notes issued in the Mobivity and Boomtext acquisitions, and we paid $87,500 against the cash payment obligation resulting from the Txtstation acquisition.

During the year ended December 31, 2011, we received proceeds of $1,033,003 from the sale of 688,669 shares of common stock and the issuance of warrants to purchase 688,669 shares at $2.00 per share, offset by payments of $21,800 in equity offering costs, and we received $272,500 from the issuance of our 10% Senior Secured Convertible Bridge Notes.

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During the year ended December 31, 2011, we paid $304,539 against the principal balance of the note issued in the Mobivity acquisition as well as $162,500 against the cash payment obligation from the Txtstation acquisition

Non Cash Financing Activities

During the year ended December 31, 2012, non-cash investing and financing activities totaling $8,982,282 consisted of $5,352,404 of discounts recorded on our notes payable, $69,332 in adjustments to our derivative liabilities due to debt repayment, $3,421,579 in adjustments to our derivative liabilities due to . . .

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