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MFON > SEC Filings for MFON > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for MOBIVITY HOLDINGS CORP.


15-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q contains "forward-looking statements" as defined in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, in connection with the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements Such forward-looking statements include statements about our expectations, beliefs or intentions regarding our potential product offerings, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made and are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," or "will," and similar expressions or variations. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those risks disclosed in this report, under the caption "Risk Factors" included in our 2012 annual report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 21, 2013 and in our subsequent filings with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

Overview

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.

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.

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Recent Events

Acquisition

In May 2013, we acquired the assets of Sequence, LLC ("Sequence") related to a mobile customer loyalty application. The acquired assets include all application software, URL's, websites, trademarks, brands, customers and customer lists. We assumed no liabilities of Sequence.

The purchase price consisted of: (1) $300,000 in cash which was paid prior to closing; (2) 750,000 shares of our common stock which were issued at closing; and (3) twenty-four monthly earn-out payments consisting of 10% of the eligible monthly revenue subsequent to closing.

Bridge Note Financing

In 2012 and 2013, we issued additional 10% Senior Secured Convertible Bridge Notes in the aggregate of $4,033,999. (See discussion of Bridge Note Financing in Liquidity and Capital Resources, and Note 5 in Notes to Consolidated Financial Statements).

As of March 31, 2013, the outstanding principal amount of convertible notes payable totaled $4,521,378, and the due date was April 15, 2013. As of the date of this report, the outstanding principal amount of convertible notes payable totaled $4,821,378, and the due date is October 15, 2013 as discussed below.

In May 2013, a majority of the note holders agreed to extend the due date to October 15, 2013. In consideration of the note holders' agreement to extend the maturity date, the amendment provides that the holders have the option to convert the principal and interest under the 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) $0.25 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 notes entitled the note holders to convert the principal and interest under the 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).

Results of Operations

Three Months March 31, 2013 Compared to Three Months ended March 31, 2012

Revenues

Revenues for the three months ended March 31, 2013 were $1,027,993, an increase of $14,787, or 1.5%, compared to the same period in 2012. The small net increase is primarily attributable to an increase of 49.5% in revenues from the operations of Boomtext, resulting from a substantial increase in subscriber-based licensing. This increase was offset by decreases of 35.5% and 61.0% in revenues derived from Mobivity (legacy acquisition) and CommerceTel business lines, respectively. The decrease in Mobivity (legacy acquisition) revenues were primarily due to the focus on small businesses within the Boomtext business line. CommerceTel revenues declined significantly due to the loss of several large-enterprise accounts that were not replaced with new sales in 2013.

Cost of Revenues

Cost of revenues for the three months ended March 31, 2013 was $284,622, a decrease of $83,417, or 23% compared to the same period in 2012. This decrease is primarily attributable to lower costs for messaging, messaging related fixed costs, and sales commission expenses. Messaging and related fixed costs have declined as we further assimilated the acquisitions of 2011, leveraged volume to obtain pricing discounts, and consolidated vendors. Sales commission expenses during the quarter ended March 31, 2013 decreased 34% as compared to the same period in 2012, due primarily to fewer closed sales of corporate accounts and a smaller inside sales staff.

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Gross Profit

Gross profit for the three months ended March 31, 2013 was $743,371, an increase of $97,934, or 15%, compared to the same period in 2012. Gross profit as a percentage of revenue for the three months ended March 31, 2013 increased to 72% compared to 64% for the same period in 2012. The increase is primarily attributable to reduced cost of sales resulting from further assimilation of the acquisitions of 2011, leveraged volume to obtain pricing discounts, and consolidation of vendors.

General and Administrative

General and administrative expenses for the three months ended March 31, 2013 and 2012 were $532,628 and $917,582, respectively. Such expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, consulting costs and other expenses. The decrease of $386,466 is primarily attributable to the following changes: decrease in stock-based compensation of $267,067 because we are at the end of the expense recognition period for many of our options; a decrease in bad debt expense of $59,156 due to favorable collection efforts and the establishment of an adequate reserve in prior periods; a decrease in payroll expense of $52,921 related to lower headcount; and an increase in consulting expenses of $27,993 related to lower employee headcount.

Sales and Marketing Expense

Sales and marketing expenses for the three months ended March 31, 2013 and 2012 were $362,896 and $347,251, 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 $15,645 is primarily attributable to a one-time charge of $20,400 related to reimbursement of client expenses.

Engineering, Research, and Development Expense

Engineering, research, and development expenses for the three months ended March 31, 2013 and 2012 were $94,055 and $160,213, respectively. Such expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, consulting costs and other expenses. The decrease of $66,158 is primarily attributable to the following changes: decrease in payroll expense of $29,355 due to lower headcount; and a decrease in stock-based compensation of $19,196 because we are at the end of the expense recognition period for many of our options.

Depreciation and Amortization Expense

Depreciation and amortization expense for the three months ended March 31, 2013 and 2012 were $33,813 and $154,617, respectively. Such expenses consist of depreciation on our equipment and amortization of our intangible assets. The decrease of $120,804 is primarily attributable to the lower amortizable base of our intangible assets in 2013 after the impairment write-offs that we recorded in 2012 and 2011.

Loss from Operations

Our loss from operations for the three months ended March 31, 2013 was $280,021, a decrease of $654,205, or 70%, compared to the same period in 2012. The decrease is a function of the increases and decreases discussed above.

Interest Expense

Interest expense for the three months ended March 31, 2013 and 2012 was $1,447,359 and $358,718, respectively. Interest expense consists of stated or implied interest expense on our notes payable, amortization of note discounts, and amortization of deferred financing costs.

Stated interest for the three months ended March 31, 2013 and 2012 was $112,630 and $45,675, respectively. The principal balance of our outstanding notes payable was higher in 2013 than in 2012, resulting in higher stated interest expense for the three months ended March 31, 2013.

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Amortization of note discounts recorded as interest expense for the three months ended March 31, 2013 and 2012 was $1,334,729 and $277,349, respectively. We issued additional notes payable in 2012 subsequent to March 31, 2012, resulting in increased VMCO and ASID discounts which are being amortized over future periods.

Amortization of deferred financing costs for the three months ended March 31, 2013 and 2012 was $-0- and $35,154, respectively. We capitalized costs associated with the issuance of our notes, and amortize these costs over the term of the related notes.

Change in Fair Value of Derivative Liabilities

The change in fair value for derivative liabilities for the three months ended March 31, 2013 and 2012 was a loss of $1,001,550 and $460,487, respectively. The value of the derivative liabilities at any given date is based primarily on the value and volatility of our common stock, among other less significant factors. In periods when our stock price or volatility rises, we expect to record a loss in the change in fair value of the derivative liabilities. During the three months ended March 31, 2013, the volatility assumptions input into the Monte Carlo models were updated with the Company's own stock (as two years of comparable data was now available), as compared to the use of guideline companies during previous periods, which increases the reliability of the underlying data in the models, but which also increased the value of the derivatives which in turn caused the increased losses in the current period.

Gain on Adjustment in Contingent Consideration

The gain on adjustment in contingent consideration for the three months ended March 31, 2013 and 2012 was $305,712 and $60,651, respectively. These gains represent a reduction in the estimated earn-out payable on the BoomText acquisition at each period end.

Net Loss

The net losses for the three months ended March 31, 2013 and 2012 were $2,423,215 and $1,692,240, respectively. Factors affecting the change in net losses are discussed above.

Liquidity and Capital Resources

As of March 31, 2013, we had current assets of $540,324, including $44,182 in cash, and current liabilities of $10,250,994, resulting in negative working capital of $9,710,670.

The negative working capital balance at March 31, 2013 includes $4,602,374 of net principal and interest on our Bridge Notes and $4,194,373 of derivative liabilities related to the Bridge Note investments. If we are able to convince the holders to convert the principal and interest on the Bridge Notes into equity, and assuming all derivative liabilities are reduced to zero upon conversion of the Bridge Notes, our pro-forma negative working capital at March 31, 2013 would be $913,923.

As of the date of this report, and assuming revenue projections for the second and third quarters 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 September 2013. Assuming our Bridge Notes and related accrued interest are converted into equity and our derivative liabilities are reduced to zero in October 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. If we are unsuccessful in convincing our note holders to convert the principal and interest on the Bridge Notes into equity, 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.

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The report of our independent registered public accounting firm for the fiscal year ended December 31, 2012, 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 $4,521,378. The notes are due on October 15, 2013, if we are unable to repay or refinance our obligations under those notes by October 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 provided by operations of $60,489 for the three months ended March 31, 2013 compared to net cash used by operations of $328,347 for the same period in 2012.

The net cash used in operating activities for the three months ended March 31, 2013 reflects a net loss of $2,423,215 offset by a reversal of bad debt expense of $12,772, stock-based compensation of $93,502, depreciation and amortization expense of $33,813, gain on adjustment in contingent consideration of $305,712, change (loss) in fair value of derivative liabilities of $1,001,550, and amortization of note discounts of $1,334,729. For the three months ended March 31, 2013, the net benefit of the non-cash items totaled $2,145,110.

Increases and decreases in cash resulting from changes in operating assets and liabilities for the three months ended March 31, 2013 included an increase from accounts receivable of $216,165, a decrease from other current assets of $59,225, an increase from accounts payable of $93,165, an increase from accrued interest of $108,031, and other minor factors.

The net cash used in operating activities for the three months ended March 31, 2012 reflects a net loss of $1,692,240 offset by bad debt expense of $46,384, common stock issued for services of $270,000, stock-based compensation of $113,861, depreciation and amortization of $154,617, gain on adjustment of contingent consideration of $60,650, change (loss) in fair value of derivative liabilities of $460,487, amortization of deferred financing costs of $35,154, and amortization of note discounts of $277,349. For the three months ended March 31, 2012, the net benefit of the non-cash items totaled $1,297,202.

Increases and decreases in cash resulting from changes in operating assets and liabilities for the three months ended March 31, 2012 included a decrease from other current assets of $324,119, an increase from accounts payable of 225,636, an increase from accrued compensation of $106,077, an increase from other liabilities of $67,303, and other minor factors.

Cash Flows from Investing Activities

Cash flows from investing activities for the three months ended March 31, 2013 consist of the acquisition deposit of $195,630.

Cash flows from investing activities for the three months ended March 31, 2012 consist of equipment purchases of $5,515.

Cash Flows from Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2013 and 2012 was $178,960 and $333,706, respectively.

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During the three months ended March 31, 2013, we received proceeds of $200,000 from the issuance of 10% Senior Secured Convertible Bridge Notes, and we paid $21,040 on the 10% Senior Secured Convertible Bridge Notes.

During the three months ended March 31, 2012, we received proceeds of $585,100 from the issuance of 10% Senior Secured Convertible Bridge Notes. We paid $65,000 on the $10% Senior Secured Bridge Notes, $123,894 on the principal balance of the notes issued in the Mobivity and Boomtext acquisitions, and $62,500 on the cash payment obligation resulting from the Txtstation acquisition.

Non Cash Financing Activities

During the three months ended March 31, 2013, non-cash investing and financing activities totaling $2,013,938 consisting of $133,725 of discounts recorded on our notes payable, $15,406 in adjustments to our derivative liabilities due to note repayments, $1,711,490 recorded as common stock payable for the earn out payment related to the Boomtext acquisition, and $153,317 for the settlement of the working capital asset related to the Boomtext acquisition.

During the three months ended March 31, 2012, non-cash investing and financing activities totaling $370,285 consisting of $320,557 of discounts recorded on our notes payable and $49,728 in adjustments to our derivative liabilities due to note repayments.

Critical Accounting Policies and Estimates

Refer to Note 2, "Summary of Significant Accounting Polices," in the accompanying notes to the condensed consolidated financial statements for a discussion of recent accounting pronouncements.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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