Quarterly Report (10-q)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to __________

Commission file number 000-53851

Mobivity Holdings Corp.

(Exact Name of Registrant as Specified in Its Charter)


Nevada		26-3439095
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

55 N. Arizona Place, Suite 310

Chandler, Arizona 85225

(Address of Principal Executive Offices & Zip Code)

(877) 282-7660

(Registrant’s Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),

and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 9, 2018 , the registrant had 45,904,948 shares of common stock issued and outstanding.

MOB IVITY HOLDINGS CORP.

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		Page
PART I	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017	1
	Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 (Unaudited)	2
	Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2018 (Unaudited) and the year ended December 31, 2017	3
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (Unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 6.	Exhibits	25
Signature Page		26

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P ART I – FINANCIAL INFORMATION

It em 1. Financial Statements

Mo bivity Holdings Corp.

Condensed Consolidated Balance Sheets



	September 30,		December 31,
	2018		2017
	(Unaudited)		(Audited)
ASSETS
Current assets
Cash	$	5,119,562	$	460,059
Accounts receivable, net of allowance for doubtful accounts of $9,828 and $2,280, respectively		2,445,292		885,743
Other current assets		215,699		209,536
Total current assets		7,780,553		1,555,338
Goodwill		803,118		803,118
Intangible assets, net		771,991		676,436
Accounts receivable, long term		2,410,130		-
Other assets		92,179		88,916
TOTAL ASSETS	$	11,857,971	$	3,123,808
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	1,118,287	$	1,096,003
Accrued interest		6,100		1,168
Accrued and deferred personnel compensation		554,137		590,500
Deferred revenue and customer deposits		3,418,025		1,429,266
Notes payable, net - current maturities		332,312		2,236,224
Other current liabilities		731,421		226,355
Total current liabilities		6,160,282		5,579,516

Non-current liabilities
Notes payable, net - long term		205,786		180,810
Other long term liabilities		1,509,662		-
Total non-current liabilities		1,715,448		180,810
Total liabilities		7,875,730		5,760,326
Commitments and Contingencies (See Note 9)
Stockholders' equity
Common stock, $0.001 par value; 100,000,000 shares authorized; 45,904,948 and 37,025,140, shares issued and outstanding		45,905		37,025
Equity payable		100,862		100,862
Additional paid-in capital		87,500,045		77,910,842
Accumulated other comprehensive loss		(46,846)		(65,764)
Accumulated deficit		(83,617,725)		(80,619,483)
Total stockholders' equity		3,982,241		(2,636,518)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	11,857,971	$	3,123,808

See accompanying notes to these unaudited condensed consolidated financial statements.

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Mob ivity Holdings Corp.

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Revenues
Revenues	$	4,561,368	$	2,083,987	$	9,620,935	$	6,436,072
Cost of revenues		1,021,285		786,385		2,570,804		1,943,534
Gross profit		3,540,083		1,297,602		7,050,131		4,492,538
Operating expenses
General and administrative		857,095		652,762		2,876,029		2,516,249
Sales and marketing		792,678		836,767		3,046,521		2,673,087
Engineering, research, and development		1,683,738		1,177,318		3,637,996		3,080,037
Depreciation and amortization		87,526		105,510		283,224		273,716
Total operating expenses		3,421,037		2,772,357		9,843,770		8,543,089
Income (loss) from operations		119,046		(1,474,755)		(2,793,639)		(4,050,551)
Other income/(expense)
Interest income		279		962		881		2,878
Interest expense		(25,913)		(62,748)		(193,036)		(115,363)
Gain on sale of fixed assets		-		-		(8,722)		-
Foreign currency (loss) gain		(2,106)		(931)		(3,726)		(4,120)
Total other income/(expense)		(27,740)		(62,717)		(204,603)		(116,605)
Income (loss) before income taxes		91,306		(1,537,472)		(2,998,242)		(4,167,156)
Income tax expense		-		-		-		-
Net Income (loss)		91,306		(1,537,472)		(2,998,242)		(4,167,156)
Other comprehensive income (loss), net of income tax
Foreign currency translation adjustments		38,179		(20,294)		18,918		(36,158)
Comprehensive income (loss)	$	129,485	$	(1,557,766)	$	(2,979,324)	$	(4,203,314)
Net income (loss) per share:
Basic	$	0.00	$	(0.04)	$	(0.07)	$	(0.11)
Diluted	$	0.00	$	(0.04)	$	(0.07)	$	(0.11)
Weighted average number of shares:
Basic		45,719,664		36,683,122		41,325,443		36,488,448
Diluted		53,394,242		36,683,122		41,325,443		36,488,448

See accompanying notes to these unaudited condensed consolidated financial statements.

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Mob ivity Holdings Corp.

Consolidated Statement of Stockholders’ Equity




	Common Stock			Equity		Additional		Accumulated Other		Accumulated		Total Stockholders'
	Shares	Dollars		Payable		Paid-in Capital		Comprehensive Loss		Deficit		Equity (Deficit)
Balance, December 31, 2016	36,388,997	$	36,389	$	100,862	$	76,698,383	$	(32,999)	$	(74,673,471)		2,129,164
Issuance of common stock for options exercised	152,085		152		-		82,646		-		-		82,798
Issuance of common stock for restricted stock awards	484,058		484		-		(484)		-		-		-
Stock based compensation	-		-		-		1,130,297		-		-		1,130,297
Foreign currency translation adjustment	-		-		-		-		(32,765)		-		(32,765)
Net loss	-		-		-		-		-		(5,946,012)		(5,946,012)
Balance, December 31, 2017	37,025,140	$	37,025	$	100,862	$	77,910,842	$	(65,764)	$	(80,619,483)	$	(2,636,518)
Issuance of common stock for cash	5,775,000		5,775		-		5,769,225		-		-		5,775,000
Issuance of common stock for warrant conversion	2,018,125		2,018		-		2,151,829		-		-		2,153,847
Issuance of common stock for debt conversion	1,047,583		1,047		-		1,088,439		-		-		1,089,486
Issuance of common stock for cashless warrant conversion	1,808		2		-		(2)		-		-		-
Issuance of common stock for options exercised	37,292		37		-		21,458		-		-		21,495
Stock based compensation	-		-		-		558,254		-		-		558,254
Foreign currency translation adjustment	-		-		-		-		18,918		-		18,918
Net loss	-		-		-		-		-		(2,998,242)		(2,998,242)
Balance, September 30, 2018	45,904,948	$	45,905	$	100,862	$	87,500,045	$	(46,846)	$	(83,617,725)	$	3,982,241

See accompanying notes to these unaudited condensed consolidated financial statements.

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Mob ivity Holdings Corp.

Consolidated Statements of Cash Flows

(Unaudited)



	Nine Months Ended
	September 30,
	2018		2017
OPERATING ACTIVITIES
Net loss	$	(2,998,242)	$	(4,167,156)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense		9,878		(7,277)
Loss on conversion of debt		41,903		-
Amortization of deferred financing costs		-		20,245
Stock-based compensation		558,254		855,738
Loss on disposal of fixed assets		8,722		-
Depreciation and amortization expense		283,224		273,716
Adjustments due to ASC 606		(1,495,290)		-
Increase (decrease) in cash resulting from changes in:
Accounts receivable		(348,260)		(159,958)
Other current assets		(6,347)		(106,813)
Other assets		-		10,957
Accounts payable		27,371		351,089
Accrued interest		(62,615)		1,040
Accrued and deferred personnel compensation		(36,340)		(252,394)
Other liabilities - non-current		4,705		-
Other liabilities - current		(19,176)		(19,787)
Deferred revenue and customer deposits		1,989,098		1,963,429
Net cash provided by (used in) operating activities		(2,043,115)		(1,237,171)
INVESTING ACTIVITIES
Purchases of equipment		(20,306)		(4,989)
Cash paid for patent		-		(16,810)
Capitalized software development costs		(356,865)		(382,023)
Net cash used in investing activities		(377,171)		(403,822)
FINANCING ACTIVITIES
Payments on notes payable		(2,984,472)		-
Deferred financing costs		-		(15,000)
Net borrowings under line of credit agreement		-		1,999,531
Proceeds from notes payable		2,095,000		114,749
Proceeds from issuance of common stock, net of issuance costs		7,950,343		59,797
Net cash provided by financing activities		7,060,871		2,159,077

Effect of foreign currency translation on cash flow		18,918		2,560

Net change in cash		4,659,503		520,644
Cash at beginning of period		460,059		1,188,485
Cash at end of period	$	5,119,562	$	1,709,129
Supplemental disclosures:
Cash paid during period for:
Interest	$	25,913	$	115,363
Non cash investing and financing activities:
Issuance of common stock for cashless exercise	$	2	$	-
Issuance of common stock for debt conversion	$	1,047,584	$	-
Issuance of common stock from restricted stock awards	$	-	$	264

See accompanying notes to these unaudited condensed consolidated financial statements.

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Mo bivity Holdings Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and disclosures required by GAAP for annual financial statements. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on April 11, 2018.

In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of our condensed consolidated financial statements as of September 30, 2018 , and for the three and nine months ended September 30, 2018 and 2017 . The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the operating results for the full year ending December 31, 2018.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates used are those related to stock-based compensation, asset impairments, the valuation and useful lives of depreciable tangible and certain intangible assets, the fair value of common stock used in acquisitions of businesses, the fair value of assets and liabilities acquired in acquisitions of businesses, and the valuation allowance of deferred tax assets. Management believes that these estimates are reasonable; however, actual results may differ from these estimates.

Accounts Receivable, Allowance for Doubtful Accounts and Concentrations

Accounts receivable are carried at their estimated collectible amounts. We grant unsecured credit to substantially all of our customers. Ongoing credit evaluations are performed and potential credit losses are charged to operations at the time the account receivable is estimated to be uncollectible. Since we cannot necessarily predict future changes in the financial stability of our customers, we cannot guarantee that our reserves will continue to be adequate.

As of September 30, 2018, and December 31, 2017, we recorded an allowance for doubtful accounts of $9,828 and $2,280 respectively.

Goodwill and Intangible Assets

Goodwill is tested for impairment at a minimum on an annual basis. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit's carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted cash flow approaches. Goodwill is

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considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit.

Intangible assets consist of patents and trademarks, purchased customer contracts, purchased customer and merchant relationships, purchased trade names, purchased technology, non-compete agreements, and software development costs. Intangible assets are amortized over the period of estimated benefit using the straight-line method and estimated useful lives ranging from one to twenty years. No significant residual value is estimated for intangible assets.

Software Development Costs

Software development costs include direct costs incurred for internally developed products and payments made to independent software developers and/or contract engineers. The Company accounts for software development costs in accordance with the FASB guidance for the costs of computer software to be sold, leased, or otherwise marketed (“ASC Subtopic 985-20”). Software development costs are capitalized once the technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses technical design documentation and integration documentation, or the completed and tested product design and working model. Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable against future revenues. Technological feasibility is evaluated on a project-by-project basis. Amounts related to software development that are not capitalized are charged immediately to the appropriate expense account. Amounts that are considered ‘research and development’ that are not capitalized are immediately charged to engineering, research, and development expense.

Capitalized costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation. Commencing upon product release, capitalized software development costs are amortized to “Amortization Expense - Development” based on the straight-line method over a twenty-four month period.

The Company evaluates the future recoverability of capitalized software development costs on an annual basis. For products that have been released in prior years, the primary evaluation criterion is ongoing relations with the customer.

Impairment of Long-Lived Assets

We evaluate long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. An asset is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset is expected to generate.

Foreign Currency Translation

The Company translates the financial statements of its foreign subsidiary from the local (functional) currency into US Dollars using the year or reporting period end or average exchange rates in accordance with the requirements of Accounting Standards Codification subtopic 830-10, Foreign Currency Matters (“ASC 830-10”) . Assets and liabilities of these subsidiaries were translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average rates in effect for the periods presented. The cumulative translation adjustment is included in the accumulated other comprehensive gain (loss) within shareholders’ equity. Foreign currency transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the unaudited Condensed Consolidated Statements of Income and Comprehensive Income.

Revenue Recognition and Concentrations

Our re•ceipt and re•ach and customer relationship management are hosted solutions. We generate revenue from licensing our software to clients in our software as a service model, per-message and per-minute transactional fees, and customized professional services. We recognize license/subscription fees over the period of the contract, service fees as the services are performed, and per-message or per-minute transaction revenue when the transaction takes place. We recognize revenue at the time that the services are rendered, the selling price is fixed, and collection is reasonably assured, provided no significant obligations remain. We consider authoritative guidance on multiple deliverables in determining whether each deliverable represents a separate unit of accounting. Some customers are billed on a month-to-month basis with no contractual term and are collected by credit card. Revenue is recognized at the time that the services are rendered and the selling price is fixed with a set range of plans. Cash received in advance of the performance of services is recorded as deferred revenue.

During the nine months ended September 30, 2018 , three customers accounted for 73% of our revenues. During the nine months ended September 30, 2017 , two customer s accounted for 69% of our revenues.

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Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. We are required to record all components of comprehensive income (loss) in the consolidated financial statements in the period in which they are recognized. Net income (loss) and other comprehensive income (loss), including foreign currency translation adjustments and unrealized gains and losses on investments, are reported, net of their related tax effect, to arrive at comprehensive income (loss). For the three and nine months ended September 30, 2018 , the comprehensive income ( loss ) was $129,485 and $(2,979,324) respectively.

Net Loss Per Common Share

Basic net loss per share excludes any dilutive effects of options, shares subject to repurchase and warrants. Diluted net loss per share includes the impact of potentially dilutive securities. During the three and nine months ended September 30, 2018 and 2017 , we had securities outstanding which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share, as their effect would have been anti-dilutive.

Reclassifications

Certain amounts from prior periods have been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements

Accounting standards promulgated by the FASB are subject to change. Changes in such standards may have an impact on the Company’s future financial statements. The following are a summary of recent accounting developments.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”. Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard will have on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company elected to early adopt the new guidance in the second quarter of fiscal year 2016 which requires us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The primary impact of adoption was the recognition of additional stock compensation expense and paid-in capital for all periods in fiscal year 2016. Additional amendments to the recognition of excess tax benefits, accounting for income taxes and minimum statutory withholding tax requirements had no impact to retained earnings as of January 1, 2016, where the cumulative effect of these changes are required to be recorded. We have elected to account for forfeitures as they occur to determine the amount of compensation cost to be recognized in each period.

In May 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2014-09 provides principles for recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 to defer the effective date by one year with early adoption permitted as of the original effective date. ASU 2014-09 will be effective for our fiscal year beginning January 1, 2018 unless we elect the earlier date of January 1, 2017. In addition, the FASB issued ASU 2016-08, ASU 2016-10, and ASU 2016-12 in March 2016, April 2016, and May 2016, respectively, to help provide interpretive clarifications on the new guidance in ASC Topic 606. The Company is currently evaluating the accounting, transition, and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes the second step of the two-step goodwill impairment test. Under ASU 2017-04, an entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019; early adoption is permitted for interim or annual goodwill impairment tests performed

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on testing dates after January 1, 2017. The Company is currently in the process of evaluating the impact of adopting ASU 2017-04 and cannot currently estimate the financial statement impact of adoption.

3. New Accounting Standards

Revenue from Contracts with Customers.

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”) , which creates a single source of revenue guidance under U.S. GAAP for all companies in all industries and replaces most existing revenue recognition guidance in U.S. GAAP. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services.

Our transition to ASC 606 represents a change in accounting principle. ASC 606 eliminates industry-specific guidance and provides a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of ASC 606 is that a reporting entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the reporting entity expects to be entitled for the exchange of those goods or services.

The Company adopted the new standard in the first quarter of its fiscal 2018, using the modified retrospective method. The Company implemented internal controls and key system functionality to enable the preparation of financial information on adoption. The most significant impact of the adoption of ASC 606 to the Company relate s to the acceleration of revenue recognition for sale of custom products subject to non-cancellable customer purchase orders.

The new standard will primarily impact the Company’s revenue recognition for software arrangements. In this area, the new standard will accelerate the recognition of revenue. The table below details both the current and expected revenue recognition timing in these areas:


Software arrangements:	Past revenue standard	New ASC 606 revenue standard
Perpetual software licenses	Upfront	Upfront
Enterprise license agreements	Ratable	Upfront
Software support	Ratable	Ratable
SaaS	Ratable	Ratable

The adoption of ASC 606 has an impact on the Company’s Consolidated Statements of Operations and Consolidated Balance Sheets but has no impact on cash provided by or used in operating, financing, or investing activities on the Consolidated Statements of Cash Flows.

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Financial Statement Impact of Transition to ASC 606

As noted above, we transitioned to ASC 606 using the modified retrospective method on January 1, 2018. The cumulative effect of this transition to applicable contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to stockholders’ equity as of that date. As a result of applying the modified retrospective method to transition to ASC 606, the following adjustments were made to the consolidated balance sheet as of January 1, 2018:



	December 31,				Adjusted
	2017		Adjustments		January 1,
	As Reported		due to ASC 606		2018
ASSETS
Current assets
Cash	$	460,059	$	-	$	460,059
Accounts receivable, net of allowance for doubtful accounts of $2,280 and $2,280, respectively		885,743		544,599		1,430,342
Other current assets		209,536		-		209,536
Total current assets		1,555,338		544,599		2,099,937
Goodwill		803,118		-		803,118
Intangible assets, net		676,436		-		676,436
Accounts receivable, long term		-		424,023		424,023
Other assets		88,916		-		88,916
TOTAL ASSETS	$	3,123,808	$	968,622	$	4,092,430
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	1,096,003	$	-	$	1,096,003
Accrued interest		1,168		-		1,168
Accrued and deferred personnel compensation		590,500		-		590,500
Deferred revenue and customer deposits		1,429,266		-		1,429,266
Notes payable, net - current maturities		2,236,224		-		2,236,224
Other current liabilities		226,355		191,121		417,476
Total current liabilities		5,579,516		191,121		5,770,637

Non-current liabilities
Notes payable, net - long term		180,810		-		180,810
Other long term liabilities		-		150,477		150,477
Total non-current liabilities		180,810		150,477		331,287
Total liabilities		5,760,326		341,598		6,101,924
Commitments and Contingencies (See Note 9)
Stockholders' equity
Common stock, $0.001 par value; 100,000,000 shares authorized; 37,025,140 and 37,025,140, shares issued and outstanding		37,025		-		37,025
Equity payable		100,862		-		100,862
Additional paid-in capital		77,910,842		-		77,910,842
Accumulated other comprehensive loss		(65,764)		-		(65,764)
Accumulated deficit		(80,619,483)		627,024		(79,992,459)
Total stockholders' equity		(2,636,518)		627,024		(2,009,494)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	3,123,808	$	968,622	$	4,092,430

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The following tables reflect the impact of adoption of ASC 606 on our condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and our condensed consolidated balance sheet as of September 30, 2018 and the amounts as if the Previous Standards were in effect (“Amounts Under Previous Standards”):

Condensed Consolidated Statement of Operations


	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
	As reported			Total Adjustments Under ASC 606	Amounts Under Previous Standards		As reported			Total Adjustments Under ASC 606	Amounts Under Previous Standards
Revenues
Revenues	$	4,561,368	$	2,188,590	$	2,372,778	$	9,620,935	$	3,631,206	$	5,989,729
Cost of revenues		1,021,285		-		1,021,285		2,570,804		-		2,570,804
Gross profit		3,540,083		2,188,590		1,351,494		7,050,131		3,631,206		3,418,926

Operating expenses
General and administrative		857,095		130,366		726,729		2,876,029		213,607		2,662,422
Sales and marketing		792,678		-		792,678		3,046,521		-		3,046,521
Engineering, research, and development		1,683,738		1,173,295		510,443		3,637,996		1,922,465		1,715,531
Depreciation and amortization		87,526		-		87,526		283,224		-		283,224
Total operating expenses		3,421,037		1,303,661		2,117,376		9,843,770		2,136,072		7,707,698
Income (loss) from operations		119,046		884,929		(765,883)		(2,793,639)		1,495,134		(4,288,773)
Other income/(expense)
Interest income		279		-		279		881		-		881
Interest expense		(25,913)		-		(25,913)		(193,036)		-		(193,036)
Gain on sale of fixed assets		-		-		-		(8,722)		-		(8,722)
Foreign currency (loss) gain		(2,106)		-		(2,106)		(3,726)		-		(3,726)
Total other income/(expense)		(27,740)		-		(27,740)		(204,603)		-		(204,604)
Income (loss) before income taxes		91,306		884,929		(793,623)		(2,998,242)		1,495,134		(4,493,376)
Income tax expense		-		-		-		-		-		-
Net income (loss)		91,306		884,929		(793,623)		(2,998,242)		1,495,134		(4,493,376)
Other comprehensive income (loss), net of income tax
Foreign currency translation adjustments		38,179		-		38,179		18,918		-		18,918
Comprehensive income (loss)	$	129,485	$	884,929	$	(755,444)	$	(2,979,324)	$	1,495,134	$	(4,474,458)

Net income (loss) per share:
Basic	$	0.00	$	0.02	$	(0.01)	$	(0.07)	$	0.04	$	(0.11)
Diluted	$	0.00	$	0.02	$	(0.01)	$	(0.07)	$	0.04	$	(0.11)

Weighted average number of shares outstanding:
Basic		45,719,664		45,719,664		45,719,664		41,325,443		41,325,443		41,325,443
Diluted		53,394,242		53,394,242		53,394,242		41,325,443		41,325,443		41,325,443

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Condensed Consolidated Balance Sheet


	September 30, 2018 As Reported		Total Adjustments Under ASC 606		Amounts Under Previous Standards
ASSETS
Current assets
Cash	$	5,119,562	$	-	$	5,119,562
Accounts receivable, net of allowance for doubtful accounts of $9,828		2,445,292		(1,221,076)		1,224,216
Other current assets		215,699		-		215,699
Total current assets		7,780,553		(1,221,076)		6,559,477
Goodwill		803,118		-		803,118
Intangible assets, net		771,991		-		771,991
Accounts receivable, long term		2,410,130		(2,410,130)		-
Other assets		92,179		-		92,179
TOTAL ASSETS	$	11,857,971	$	(3,631,206)	$	8,226,765
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	1,118,287	$	-	$	1,118,287
Accrued interest		6,100		-		6,100
Accrued and deferred personnel compensation		554,137		-		554,137
Deferred revenue and customer deposits		3,418,025		-		3,418,025
Notes payable, net - current maturities		332,312		-		332,312
Other current liabilities		731,421		(672,340)		59,081
Total current liabilities		6,160,282		(672,340)		5,487,942

Non-current liabilities
Notes payable, net - long term		205,786		-		205,786
Other long term liabilities		1,509,662		(1,463,732)		45,930
Total non-current liabilities		1,715,448		(1,463,732)		251,716
Total liabilities		7,875,730		(2,136,072)		5,739,658

Commitments and Contingencies (See Note 9)

Stockholders' equity
Common stock, $0.001 par value; 100,000,000 shares authorized; 45,904,948 and 45,904,948, shares issued and outstanding		45,905		-		45,905
Equity payable		100,862		-		100,862
Additional paid-in capital		87,500,045		-		87,500,045
Accumulated other comprehensive loss		(46,846)		-		(46,846)
Accumulated deficit		(83,617,725)		(1,495,134)		(85,112,859)
Total stockholders' equity		3,982,241		(1,495,134)		2,487,107
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	11,857,971	$	(3,631,206)	$	8,226,765

4. Goodwill and Purchased Intangibles

Goodwill

The carrying value of goodwill at September 30, 2018 and December 31, 2017 was $803,118.

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Intangible assets

The following table presents details of our purchased intangible assets as of September 30, 2018 and December 31, 2017:



	Balance at December 31, 2017		Additions		Impairments		Amortization		Fx and Other		Balance at September 30, 2018
Patents and trademarks	$	118,178	$	-	$	-	$	(8,460)	$	(1,277)	$	108,441
Customer and merchant relationships		153,448		-		-		(18,414)		-		135,034
Trade name		41,033		-		-		(4,867)		(117)		36,049
	$	312,659	$	-	$	-	$	(31,741)	$	(1,394)	$	279,524

The intangible assets are being amortized on a straight-line basis over their estimated useful lives of one to twenty years.

Amortization expense for intangible assets was $9,976 and $10,796 for the three months ended September 30, 2018 and 2017 , respectively.

Amortization expense for intangible assets was $ 31,741 and $ 32,297 for the nine months ended September 30, 2018 and 2017, respectively.

The estimated future amortization expense of our intangible assets as of September 30, 2018 is as follows:



Year ending December 31,	Amount
2018	$	11,604
2019		43,963
2020		42,201
2021		40,148
2022		40,148
Thereafter		101,460
Total	$	279,524

5. Software Development Costs

The Company has capitalized certain costs for software developed or obtained for internal use during the application development stage as it relates to specific contracts. The amounts capitalized include external direct costs of services used in developing internal-use software and for payroll and payroll-related costs of employees directly associated with the development activities.

The following table presents details of our software development costs as of September 30, 2018 and December 31, 2017:



	Balance at December 31, 2017		Additions		Amortization		Balance at September 30, 2018
Software Development Costs	$	363,777	$	356,865	$	(228,175)	$	492,467
	$	363,777	$	356,865	$	(228,175)	$	492,467

Software development costs are being amortized on a straight-line basis over their estimated useful life of two years.

Amortization expense for software development costs was $ 68,788 and $ 87,821 for the three months ended September 30, 2018 and 2017 , respectively.

Amortization expense for software development costs was $ 228,175 and $ 220,691 for the nine months ended September 30, 2018 and 2017, respectively.

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The estimated future amortization expense of software development costs as of September 30, 2018 is as follows:



Year ending December 31,	Amount
2018	$	97,953
2019		249,594
2020		144,920
2021		-
2022		-
Thereafter		-
Total	$	492,467

6. Notes Payable and Interest Expense

The following table presents details of our notes payable as of September 30, 2018 and December 31, 2017:


Facility	Maturity	Interest Rate	Balance at September 30, 2018		Balance at December 31, 2017
BDC Term Loan	December 15, 2018	12%	$	304,829	$	358,466
ACOA Note	May 1, 2021	-		153,269		175,632
SVB Working Capital Line of Credit Facility	March 30, 2018	Variable		-		1,882,936
Bridge Loan Promissory Note		24%		-		-
Related Party Note	March 31, 2020	15%		80,000		-
Total Debt				538,098		2,417,034
Debt discount				-		7,786
Less current portion				(332,312)		(2,244,010)
Long-term debt, net of current portion			$	205,786	$	180,810

BDC Term Loan

On January 8, 2016, Livelenz, a wholly-owned subsidiary of the Company, entered into an amendment of their original loan agreement dated August 26, 2011 with the Business Development Bank of Canada (“BDC”). Under this agreement the loan will mature, and the commitments will terminate on December 15, 2018.

ACOA Note

On April 29, 2016, Livelenz, a wholly-owned subsidiary of the Company, entered into an amendment of the original agreement dated December 2, 2014 with the Atlantic Canada Opportunities Agency (“ACOA”). Under this agreement the note will mature, repayments began on June 1, 2016, and the commitments will terminate on May 1, 2021.

Bridge Loan Promissory Note

On April 19, 2018, the Company entered into a bridge financing agreement (“Promissory Note”) for up to $1,000,000. The Promissory Note carries an interest rate of 2% per thirty days and a facility fee of 1% of the maximum loan amount. Under this agreement the note automatically renews every thirty days until paid in full. As of September 30, 2018, th is Promissory Note has been paid off and closed.

Related Party Not e

During February 2018, we conducted a private placement of Unsecured Promissory Notes (individually, a “ Note ” and collectively, the “ Notes ”). Each Note bears interest on the unpaid balance at the rate of fifteen percent (15%) per annum and the principal and accrued interest is due and payable no later than March 31, 2020. The Company may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty. We sold Notes in the aggregate principal amount of $1,080,000, including $880,000 of Notes purchased by certain officers and directors of the Company. The Note offer was conducted by our management and there were no commissions paid by us in connection with the solicitation. In June 2018, the holders of Notes in the principal amount of $1,000,000, including $800,000 of Notes held by certain officers and directors, canceled $1,000,000 of principal and $47,583 of accrued interest for 1,047,583 shares of our common stock at the rate of $1.00 per share.

SVB Working Capital Line of Credit Facility

In March 2016, we entered into a Working Capital Line of Credit Facility (the “Facility”) with Silicon Valley Bank (“SVB”) to provide up to $2 million to finance our general working capital needs. The Facility is funded based on cash on deposit balances and advances

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against our accounts receivable based on customer invoicing. Interest on Facility borrowings is calculated at rates between the prime rate minus 1.75% and prime rate plus 3.75% based on the borrowing base formula used at the time of borrowing. The Facility contains standard events of default, including payment defaults, breaches of representations, breaches of affirmative or negative covenants, and bankruptcy. As of March 31, 2018, this Facility was paid off and closed.

Under the terms of the Facility, the Company is obligated to pay a commitment fee on the available unused amount of the Facility commitments equal to 0.5% per annum.

The Company capitalized debt issuance costs of $42,287 related to the Facility, which have been amortized on a straight-line basis to interest expense over the two-year term of the Facility. As of March 31, 2018, the Company has fully amortized these costs.

Interest Expense

Interest expense was $25,913 and $62,748 during the three months ended September 30, 2018 and 2017 , respectively.

Interest expense was $ 193,036 and $ 115,363 during the nine months ended September 30, 2018 and 2017, respectively.

7. Stockholders’ Equity

Common Stock

The total number of shares of common stock, $0.001 par value, that the Company is authorized to issue is 100,000,000 .

The Company issued shares of common stock of 0 and 636,143 related to restricted stock awards during the nine months ended September 30, 2018 and the year ended December 31, 2017, respectively . The Company issued 152,085 shares related to exercises of stock options and 484,058 restricted stock awards in the year ended December 31, 2017.

On February 7, 2018, the Company issued 12,500 shares of our common stock, at a price of $0.78 per share, for the gross proceeds of $9,595 in conjunction with one employee that exercised vested stock options.

On February 23, 2018, the Company issued 1,808 shares of our common stock in a cashless transaction related to a 25,000 warrant exercise.

During the three months ended March 31, 2018, the Company issued 2,018,125 shares of common stock for $2,018,125 related to the exercise of certain warrants.

In June 2018, the Company commenced a private placement of its common shares at an offering price of $1.00 per share. As of September 30, 2018, the Company had sold 5,775,000 shares of its common stock for gross proceeds of $5,775,000 . In addition the Company issued 1,047,583 shares of its common stock associated with the cancellation of $1,000,000 of principal, $47,583 of accrued interest , and a loss on conversion of $41,902 under its February 2018 private placement Notes (See Note 6).

On August 29, 2018, the Company issued 24,792 shares of our common stock, at a price of $0.48 per share, for the gross proceeds of $11,875 in conjunction with one employee that exercised vested stock options.

As of September 30, 2018 and December 31, 2017, we had an equity payable balance of $100,862 and $100,862 , respectively.

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Stock-based Plans

Stock Option Activity

The following table summarizes stock option activity for the year ended December 31, 2017 and for the nine months ended September 30, 2018:



	Options
Outstanding at December 31, 2016	5,757,880
Granted	3,027,500
Exercised	(152,085)
Forfeit/canceled	(1,451,053)
Expired	(363,294)
Outstanding at December 31, 2017	6,818,948
Granted	550,000
Exercised	(12,500)
Forfeit/canceled	(1,162,319)
Expired	(1,308,786)
Outstanding at September 30, 2018	4,885,343

The weighted average exercise price of stock options granted during the period was $0.72 and the related weighted average grant date fair value was $0.52 per share.

2018

On March 26, 2018, the Company granted one employee a total of 300,000 options to purchase shares of the Company common stock at the closing price as of March 26, 2018 of $1.10 per share. The Option Shares will vest ratably over forty-eight (48) months. and are exercisable until March 26, 2028. The total estimated value using the Black-Scholes Model, based on a volatility rate of 102% and an option fair value of $.88 was $265,575 .

In the three months ended June 30, 2018, the Company granted seven employees a total of 250,000 options to purchase shares of the Company common stock at prices ranging from $0.90 to $1.40 per share. The options vest 25% on the first anniversary of the grant, then equally in 36 monthly installments thereafter and are exercisable until 2028. The total estimated value using the Black-Scholes Model, based on a volatility rate of 84% and an option value of $0.82 was $235,452 .

Stock-Based Compensation Expense from Stock Options and Warrants

The impact on our results of operations of recording stock-based compensation expense for the three and nine months ended September 30, 2018 and 2017 were as follows:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
General and administrative	$	111,003	$	137,395	$	328,854	$	432,322
Sales and marketing		4,982		51,686		129,079		115,290
Engineering, research, and development		34,525		53,294		100,321		130,688
	$	150,510	$	242,375	$	558,254	$	678,300

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Valuation Assumptions

The fair value of each stock option award was calculated on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the nine months ended September 30, 2018 and 2017.



	Nine Months Ended
	September 30,
	2018	2017
Risk-free interest rate	2.65%	1.96%
Expected life (years)	6.00	6.00
Expected dividend yield	-	-
Expected volatility	104.06%	84.94%

The risk-free interest rate assumption is based upon published interest rates appropriate for the expected life of our employee stock options.

The expected life of the stock options represents the weighted-average period that the stock options are expected to remain outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

The dividend yield assumption is based on our history of not paying dividends and no future expectations of dividend payouts.

The expected volatility in 2018 and 2017 is based on the historical publicly traded price of our common stock.

Restricted stock units

The following table summarizes restricted stock unit activity under our stock-based plans for the year ended December 31, 2017 and for the nine months ended September 30, 2018:



	Shares		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2016		994,417	$	0.72		0.08	$	731,845
Awarded		199,513	$	0.73		0.70	$	-
Released		(484,058)	$	-		-	$	-
Canceled/forfeited/expired		(47,072)	$	0.72		-	$	-
Outstanding at December 31, 2017		662,800	$	0.72		0.70	$	795,360
Awarded		-	$	-		-	$	-
Released		-	$	-		-	$	-
Canceled/forfeited/expired		-	$	-		-	$	-
Outstanding at September 30, 2018		662,800	$	0.72		-	$	516,984

Expected to vest at September 30, 2018		662,800	$	-		-	$	516,984
Vested at September 30, 2018		662,800	$	-		-	$	516,984
Unvested at September 30, 2018		-	$	-		-	$	-
Unrecognized expense at September 30, 2018	$	-

Stock Based Compensation from Restricted Stock

The impact on our results of operations of recording stock-based compensation expense for restricted stock units for the three and nine months ended September 30, 2018 and 2017 was as follows:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
General and administrative	$	-	$	(93,935)	$	30,546	$	177,438
	$	-	$	(93,935)	$	30,546	$	177,438

As of September 30, 2018, there was unearned restricted stock unit compensation as described in the tables above. If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel all or a portion of the remaining unearned restricted unit compensation expense. Future unearned restricted unit compensation will increase to the extent we grant additional equity awards.

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Warrants Issued to Investors and Placement Agents

There were no warrants issued during the year ended December 31, 2017 or during the nine months ended September 30, 2018.

At September 30, 2018, we had warrants to purchase 1,546,250 shares of common stock at $1.20 per share and 580,185 at $1.00 per share, respectively, which are outstanding. Of this amount, warrants to purchase 1,384,435 shares expire in 2019, and warrants to purchase 742,000 shares expire in 2020.

8. Fair Value Measurements

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions. This hierarchy requires companies to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, we measure certain financial assets and liabilities at fair value.

The following table presents assets that are measured and recognized at fair value as of September 30, 2018 on a recurring and non-recurring basis:



Description	Level 1		Level 2		Level 3		Gains (Losses)
Goodwill (non-recurring)	$	-	$	-	$	803,118	$	-
Intangibles, net (non-recurring)	$	-	$	-	$	771,991	$	-

The following table presents assets that are measured and recognized at fair value as of December 31, 2017 on a recurring and non-recurring basis:



Description	Level 1		Level 2		Level 3		Gains (Losses)
Goodwill (non-recurring)	$	-	$	-	$	803,118	$	-
Intangibles, net (non-recurring)	$	-	$	-	$	676,436	$	-

9. Commitments and Contingencies

Litigation

On July 2, 2018, a former employee of ours filed an action against us in the Superior Court of the State of Arizona in and for Maricopa County ( Armstrong v. Mobivity Holdings Corp ., et al . Case No. CV-2018-052706). The lawsuit generally alleges that we failed to pay the plaintiff a bonus and commissions totaling $284,350. The complaint seeks treble damages, totaling $853,050, and plaintiff’s attorneys’ fees and costs . The parties to the lawsuit participated in a private mediation held on September 25, 2018 that resulted in a settlement of the matter. The lawsuit was formally dismissed with prejudice on October 8, 2018 in consideration of our agreement to pay the plaintiff $200,000 .

10. Related Party Transactions

As discussed in Note 7, we conducted the private placement of our securities during the nine months ended September 30, 2017 for the gross proceeds of $1,953,600. One officer and one director of the Company participated in the private placement investing a total of $1,025,000 in exchange for 1,708,333 shares of our common stock.

As discussed in Note 6, we conducted the private placement of Notes in February 2018. Certain officers and directors purchased Notes in the aggregate principal amount of $880,000. In connection our private placement of common stock commenced in June 2018 (see Note 7), those officers and directors converted all principal and interest under the Notes in June 2018 into common shares at the rate of $1.00 per share.

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11. Subsequent Events

There were no subsequent events through the date that the financial statements were issued, except as provided below.

On November 14, 2018, we entered into an Asset Purchase Agreement with Belly, Inc., a Delaware corporation, pursuant to which we have agreed to purchase from Belly, and Belly has agreed to sell to us, certain operating assets relating to Belly’s proprietary digital customer loyalty platform, including client contracts, accounts receivable and intellectual property, in exchange for our payment of $3,000,000, subject to working capital adjustments. Belly was founded in 2001 and was originally funded by Andreessen Horowitz, Lightbank, NEA, DAG Ventures, Cisco and 7-Ventures, LLC (a subsidiary of 7-Eleven, Inc). Belly is a platform-first technology company enabling businesses of all sizes to create digital connections that result in personal relationships with their customers. Belly’s platform has been deployed to more than 5,000 merchant locations and 7 million consumers. Our acquisition of the Belly assets is expected to be accretive to our top and bottom line revenue figures. The Asset Purchase Agreement contains customary representations, warranties and indemnities on the part of Belly. The closing of the acquisition is expected to take place on or about November 14, 2018, subject to usual and customary closing conditions. We intended to finance the acquisition through our cash on hand.

In connection with our acquisition of the Belly assets, on November 14, 2018, we entered into a Loan and Security Agreement with Wintrust Bank. The Loan and Security Agreement provides for a single-term loan to us in the original principal amount of $1,000,000. Interest accrues on the unpaid principal amount at the rate of prime plus 1.5%. The loan is a three-year loan and is interest-only payable for the first six months of the loan. Commencing on May 1, 2019, we will commence monthly payments of principal in the amount of $33,333.33 in addition to the monthly payment of accrued interest. The loan is secured by all of our assets other than our intellectual property.

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It em 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, in connection with the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements Such forward-looking statements include statements about our expectations, beliefs or intentions regarding our potential product offerings, business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made and are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” or “will,” and similar expressions or variations. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those risks disclosed under the caption “Risk Factors” included in our 2017 annual report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on April 11, 2018 and in our subsequent filings with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

Overview

Mobivity Holdings Corp. (the “Company” or “we”) is in the business of developing and operating proprietary platforms over which brands and enterprises can conduct national and localized, data-driven marketing campaigns. Our proprietary platforms, consisting of software available to phones, tablets, PCs, and Point-of-Sale (“POS”) systems, allow resellers, brands and enterprises to market their products and services to consumers through text messages sent directly to the consumers via mobile phones, mobile smartphone applications, and dynamically printed receipt content. We generate revenue by charging the resellers, brands and enterprises a per-message transactional fee, through fixed or variable software licensing fees, or via advertising fees. We help personal care, restaurant and retail brands realize their strategy of growing their business by increasing customer frequency, engagement and spend. Mobivity's analytics services and products provide solutions that allow brands to take validated marketing actions across all channels, based on real customer behavior to create personalized, relevant, localized and targeted campaigns. With national clients such as Subway, Sonic, Chick-fil-A, and Baskin-Robbins, Mobivity's goal is to unlock the power of internal and external customer data to create a system that provides data driven insight to continually adapt and enhance communications with customers.

According to the U.S. Census Bureau, only 7% of commerce in the US occurs online which means 93% is still happening in the physical world. We believe that brands, and in particular restaurant and retail brands, need a better way to tie marketing activities to customer purchases, and then use the information to build a more relevant, personal experience for each customer, at a local and national level. Mobivity is giving brands the ability to connect (and measure) marketing communications in the physical world by unlocking POS and mobile data and marrying it with other traditional tactics to create a closed loop: in some cases increasing response rates from 0.05% to 5% (or greater); improving online advertising conversion by 10X; and increasing revenue per ad by more than 2.5X.

Mobivity’s solution addresses the offline marketing problem and makes personalized marketing automation possible for offline commerce. Digital marketing is highly dynamic and personally targeted. According to studies published by McKinsey & Company, Point Drive, and the National Advertising Institute, targeted advertising generates conversion rates more than eleven times higher than non-targeted advertising, more than double the revenue per advertisement, and is 250% more efficient than non-targeted advertising. Combined with purchase data and analytics gathered by Mobivity’s products and platforms, Mobivity customers are able to quickly transform traditionally low marketing campaign response rates to exponentially higher response rates.

re•currency

Mobivity's re•currency platform (formerly “SmartSuite”) unlocks valuable POS and mobile data to help transform customer transactions into actionable and attributable marketing insights. Our technology provides transactional data, in real-time, that uncovers market-basket information and attributes both online and traditional promotions. The re•currency platform is comprised of re•capture, re•cognition (formerly “SmartAnalytics”), re•ceipt (formerly “SmartReceipt”), re•ach (formerly “SmartMessenger”), and re•up (formerly “SmartScore”).

re•capture

Mobivity’s re•currency begins with re•capture, which can capture, normalize, integrate, and store transaction data for almost any POS system. This provides a clean useful dataset upon which to predict and influence your customers’ buying behavior and deliver basket-level insights to your business.

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re•cognition

Mobivity’s re•cognition is comprised of various reporting and analytics tools to uncover patterns in the buying behaviors of consumers and leverages that data to suggest pricing optimizations, and guide marketing campaigns.

re•ceipt

Mobivity’s re•ceipt unlocks the power of transactional data to create relevant and timely customer messages. Both clients and agencies are using re•ceipt to drive better results and make decisions around offers, promotions, and customer engagement through the medium of the printed receipt. Our re•ceipt solution enables our customers with the ability to control the content on receipts printed from their point of sale, or POS system. re•ceipt is a software application that is installed on the POS, or directly onto receipt printer platforms, such as Epson’s OmniLink product, which dynamically controls what is printed on receipts such as coupons, announcements, or other calls-to-action, such as invitations to participate in a survey. re•ceipt includes a web-based interface where users can design receipt content and implement business rules to dictate what receipt content is printed in particular situations. All receipt content is also transmitted to re•ceipt’s server back-end for storage and analysis via re•cognition.

re•ach

Mobivity’s re•ach transforms standard SMS messaging into a data-driven marketing medium. Mobivity’s re•ach tracks and measures offer effectiveness at a more granular level than anything available in the industry, allowing clients to create smarter offers and drive higher redemption rates. Our proprietary platform connects to all wireless carriers so that any consumer, on any wireless service (for example, Verizon), can join our customer’s SMS mobile marketing campaign. Once the consumer has subscribed to our customer’s SMS mobile marketing campaign, our Web-based software solution serves as a tool by which our customers can initiate messages and other communications back to their subscribed consumers, as well as configure and administer their mobile marketing campaigns.

re•up

Mobivity’s re•up aids marketing to align focusing its attention on engaging the customer and trying to change their buying behavior. re•up allows clients to begin including, and rewarding, employee behavior as a key method to effect customer behavior and drive more revenue. By focusing on small changes - upsizing drinks, adding desserts, and promoting limited time offers - employees can have a dramatic impact on sales.

Company Strategy

Our objective is to build an industry-leading Software-as-a-Service (SaaS) product that connects consumers to merchants and brands. The key elements to our strategy are:

Exploit the competitive advantages and operating leverage of our technology platform.

The core of our business is our proprietary re•capture POS technology. Several years of development went into designing re•capture such that the process of intercepting POS data and performing actions, such as controlling the receipt printer with receipt is scalable, portable to a wide variety of POS platforms, and does not impact performance factors including the print speed of a typical receipt printer. Furthermore, we believe the transmission of POS data to Mobivity’s cloud-based data stores presents a very competitive and innovative method of enabling POS data access. Additionally, we believe that our re•ach platform is more advanced than technologies offered by our competitors and provides us with a significant competitive advantage. With more than ten years of development, we believe that our platform operates SMS text messaging transactions at a “least cost” relative to competitors while also being capable of supporting SMS text messaging transactional volume necessary to support our goal of several thousand end users. Leveraging our re•cognition platform with re•ach allows for full attribution of SMS offers, which we believe is a unique combination of both SMS text messaging and POS data.

Evolve our sales and customer support infrastructure to uniquely serve very large customer implementations such as franchise-based brands who operate a large number of locations.

Over the past few years we have focused our efforts on the development of our technology and solutions with the goal of selling and supporting small and medium-sized businesses. Going forward, we intend to increase significantly our investments in sales and customer support resources tailored to selling to customers that operate franchise brands. Today we support more than 30,000 merchant locations globally.

Acquire complementary businesses and technologies.

We intend to continue to search and identify unique opportunities which we believe will enhance our product features and functionality, revenue goals, and technology. We intend to target companies with some or all of the following characteristics: (1) an established revenue base; (2) strong pipeline and growth prospects; (3) break-even or positive cash flow; (4) opportunities for substantial expense

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reductions through integration into our platform; (5) strong sales teams; and (6) technology and services that further build out and differentiate our platform. Our acquisitions have historically been consummated through the issuance of a combination of our common stock and cash.

Build our intellectual property portfolio .

We currently have seven issued patents that we believe have significant potential application in the technology industry. We plan to continue our investment in building a strong intellectual property portfolio.

While these are the key elements of our current strategy, there can be no guarantees that our strategy will not change or that our strategy will be successful.

Recent Events

2018 Warrant Exercise

Between January 19, 2018 and March 31, 2018, we conducted an offer to the holders of our outstanding common stock purchase warrants pursuant to which our warrant holders w ere permitted to exercise their warrants at a reduced exercise price for a period expiring on March 31, 2018. At the commencement of the warrant offer, there were warrants outstanding that entitled their holders to purchase 5,134,349 shares of our common stock at exercise prices of $1.00 and $1.20 per share. Pursuant to the offer, warrant holders exercised warrants to purchase 2,018,125 shares of our common stock, resulting in additional capital of $ 2,018,125 . We undertook this limited-time warrant exercise price reduction in order to raise additional capital without incurring further potential dilution to our stockholders. In addition, through the warrant holders’ acceptance of our offer, we significantly reduce d the number of outstanding warrants and thereby simplif ied our capital structure. The warrant offer was conducted by our management and there were no commissions paid by us in connection with the solicitation.

Unsecured Promissory Note Investments in 2018

During February 2018, we conducted a private placement of Unsecured Promissory Notes (individually, a “ Note ” and collectively, the “ Notes ”) in the aggregate principal amount of $1,080,000 to certain investors, officers, and directors of the Company. Each Note bears interest on the unpaid balance at the rate of fifteen percent (15%) per annum and the principal and accrued interest is due and payable no later than March 30, 2020. We may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty. The Note offer was conducted by our management and there were no commissions paid by us in connection with the solicitation.

June 2018 Private Placement

In June and July 2018, we conducted a private placement of our common shares at an offering price of $1.00 per shares. We had sold a total of 6,822,583 shares of our common stock for gross proceeds of $6,822,583 including $5,775,000 of cash and the cancellation of $1,000,000 of principal $47,583 of accrued interest under our February 2018 private placement Notes.

November 2018 Acquisition of Belly

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Results of Operations

Revenues

Revenues consist primarily of a suite of products under the re•currency platform (formerly “SmartSuite”). The re•currency platform is comprised of re•capture, re•cognition (formerly “SmartAnalytics”), re•ceipt (formerly “SmartReceipt”), re•ach (formerly “SmartMessenger”), re•up (formerly “SmartScore”), advertising model revenues which are paid on a per coupon redemption basis, and other revenues.

Revenues for the three months ended September 30, 2018 were $4,561,368, an increase of $2,477,381, or 119%, compared to the same period in 2017. This increase is primarily due to our adoption of ASC 606 as of January 1, 2018. The adoption of ASC 606 resulted in our realization of $2,188,590 of revenue in the third quarter of 2018 that we would not have realized in period under the revenue recognition standards prior to the adoption of ASC 606.

Revenues for the nine months ended September 30, 2018 were $9,620,935, an increase of $3,184,843, or 49%, compared to the same period in 2017. This increase is primarily due to our adoption of ASC 606 as of January 1, 2018. The adoption of ASC 606 resulted in our realization of $3,631,206 of revenue in the nine months ended September 30, 2018 that we would not have realized in the nine months ended September 30, 2018 under the revenue recognition standards prior to the adoption of ASC 606.

Cost of Revenues

Cost of revenues consist primarily of cloud-based software licensing fees, short code maintenance expenses, personnel related expenses, and other expenses.

Cost of revenues for the three months ended September 30, 2018 was $1,021,285 , an increase of $234,900 , or 30% , compared to the same period in 2017 . This increase is primarily due to higher SMS and application costs associated with messaging fees and surcharges charged by text messaging carriers.

Cost of revenues for the nine months ended September 30, 2018 was $ 2,570,804 , an increase of $ 627,270 , or 32 %, compared to the same period in 2017. This increase is primarily due to higher SMS and application costs associated with messaging fees and surcharges charged by text messaging carriers.

General and Administrative

General and administrative expenses consist primarily of salaries and personnel related expenses, consulting costs and other expenses.

General and administrative expenses increased $ 204,333 , or 31% , during the three months ended September 30, 2018 compared to the same period in 2017 . The increase in general and administrative expense was primarily due to the recognition of $130,366 in expenses related to the adoption of ASC 606.

General and administrative expenses in creased $ 359,780 , or 14 %, during the nine months ended September 30, 2018 compared to the same period in 2017. The increase in general and administrative expense was primarily due to the recognition of $213,607 in expenses related to the adoption of ASC 606.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, consulting costs and other expenses

Sales and marketing expenses decreased $44,089 , or 5% , during the three months ended September 30, 2018 compared to the same period in 2017 . The decrease was primarily due to lower personnel and related stock based compensation expenses.

Sales and marketing expenses in creased $ 373,434, or 14 % , during the nine months ended September 30, 2018 compared to the same period in 2017 . The increase was primarily due to higher personnel and related stock based compensation expenses.

Engineering, Research & Development

Engineering, research & development costs include salaries, stock based compensation expenses, travel, consulting costs, and other expenses.

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Engineering, research & development expenses increased $ 506,420 , or 43% , during the three months ended September 30, 2018 compared to the same period in 2017 . The increase in e ngineering, research & development expenses was primarily due to the recognition of $1,173,295 in expenses in the period related to the adoption of ASC 606 offset by a de crease in personnel related costs as compared to 2017 to support the Company’s growth.

Engineering, research & development expenses increased $ 557,959 , or 18 %, during the nine months ended September 30, 2018 compared to the same period in 2017. The increase in e ngineering, research & development expenses was primarily due to the recognition of $1,922,465 in expenses in the period related to the adoption of ASC 606 offset by a de crease in personnel related costs as compared to 2017 to support the Company’s growth.

Depreciation and Amortization

Depreciation and amortization expense consists of depreciation on our equipment and amortization of our intangible assets. Depreciation and amortization expense decreased $17,984 or 17% , during the three months ended September 30, 2018 compared to the same period in 2017 . Depreciation and amortization expense in creased $ 9,508 or 3 % , during the nine months ended September 30, 2018 compared to the same period in 2017 .

Interest Expense

Interest expense consists of stated or implied interest expense on our notes payable, amortization of note discounts, and amortization of deferred financing costs. Interest expense decreased $36,835 , or 59% , during the three months ended September 30, 2018 compared to the same period in 2017 . Interest expense increased $ 77,674, or 67 % , during the nine months ended September 30, 2018 compared to the same period in 2017 . The increase in interest expense for the three and nine months ended September 30, 2018 is primarily related to interest on notes payable for the Livelenz subsidiary and borrowings against the Facility.

Foreign Currency

The Company’s financial results are impacted by volatility in the Canadian/U.S. Dollar exchange rate. The average U.S. Dollar exchange rate for three and nine months ended September 30, 2018 was $1 Canadian equals $0.78 and $0.75 U.S. Dollars, respectively. The Company’s functional or measurement currency is the U.S. Dollar. Based on a U.S. Dollar functional currency, the following are the key areas impacted by foreign currency volatility:

The Company sells products primarily in U.S. Dollars; therefore, reported revenues are not highly impacted by foreign currency volatility.

A portion of the Company’s expenses are incurred in Canadian Dollars and therefore fluctuate in U.S. Dollars as the U.S. Dollar varies. A weaker U.S. Dollar results in an increase in translated expenses, and a stronger U.S. Dollar results in a decrease.

Changes in foreign currency rates also impact the translated value of the Company’s working capital that is held in Canadian Dollars. Foreign exchange rate fluctuations result in foreign exchange gains or losses based upon movement in the translated value of Canadian working capital into U.S. Dollars.

The change in foreign currency was a loss of $2,106 and $3,726 for the three and nine months ended September 30, 2018 , respectively.

Net Income (Loss)

The income (loss) for the three and nine months ended September 30, 2018 was $91,306 and $(2,998,243), respectively.

Liquidity and Capital Resources

As discussed above, during the nine months ended September 30, 2018, we conducted (i) a warrant solicitation at $1.00 per share resulting in additional capital of $2,018,125, (ii) sold unsecured promissory notes (in the aggregate principal amount of $1,080,000 and (iii) commenced a private placement of our common shares at an offering price of $1.00 per shares, of which we had sold as of June 30, 2018, 5,047,583 shares of common stock for gross proceeds of $5,047,583 including $4,000,000 of cash and the cancellation of $1,000,000 of principal and $47,583 of accrued interest under the aforementioned notes. B etween July 1, 2018 and July 30, 2018, we sold an additional 1,775,000 shares of common stock for cash of $1,775,000 .

As of September 30, 2018, we had current assets of $7,780,553, including $5,119,562 in cash, and current liabilities of $6,160,283, resulting in working capital of $1,620,270.

We believe a s of the date of this report, we have the working capital on hand, along with our expected cash flow from operations, to fund our current level of operations at least through the end of the next fiscal year. However, there can be no assurance that we will not require additional capital. If we require additional capital, we will seek to obtain additional working capital through the sale of our

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securities and, if available, bank lines of credit. However, there can be no assurance we will be able to obtain access to capital as and when needed and, if so, the terms of any available financing may not be subject to commercially reasonable terms.

Cash Flows



	Nine Months Ended
	September 30,
	2018		2017
Net cash provided by (used in):
Operating activities	$	(2,043,115)	$	(1,237,171)
Investing activities		(377,171)		(403,822)
Financing activities		7,060,871		2,159,077
Effect of foreign currency translation on cash flow		18,918		2,560
Net change in cash	$	4,659,503	$	520,644

Operating Activities

We used cash from operating activities totaling $2,043,115 during the nine months ended September 30, 2018 and used cash of $1,237,171 during the nine months ended September 30, 2017 . The operating activities included non-cash items related to the stock based compensation of $558,253 and the adjustments related to ASC 606 of $1,495,290.

Investing Activities

We used $377,171 for investing activities during the nine months ended September 30, 2018 consisted of $20,306 in purchased equipment and $ 356,865 of capitalized software development costs.

Financing Activities

Financing activities provided $7,060,871 for the nine months ended September 30, 2018 includes payments on notes payable of $2,984,472, net proceeds from notes payable of $2,095,000, and proceeds from the issuance of common stock of $7,950,343.

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.

Ite m 3. Quantitative and Qualitative Disclosures about Market Risk.

We are a smaller reporting company as defined by section 10(f)(1) of Regulation S-K. As such, we are not required to provide the information set forth in this item.

Ite m 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that as of September 30, 2018 our disclosure controls and procedures were not effective.

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Changes in Internal Control

There were no changes in our internal control over financial reporting during the three months ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Pro ceedings

From time to time, we are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. Other than the action mentioned above, there are currently no such pending proceedings to which we are a party that our management believes will have a material adverse effect on the Company’s consolidated financial position or results of operations. However, future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.

Item 1A. Risk Fact ors

Our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on April 11, 2018 includes detailed discussions of our risk factors under the headings “Part I, Item 1A. Risk Factors” and “Part II, Item 1A. Risk Factors” respectively. You should carefully consider the risk factors discussed in our Annual Report on Form 10-K and Quarterly Report on Form 10-Q, as well as the other information in this report, which could materially harm our business, financial condition, results of operations, or the value of our common shares.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Between July 1, 2018 and July 30, 2018, the Company sold 1,775,000 shares of common stock for cash of $1,775,000 as part of the private placement commenced in June 2018. See Note 7.

All of the aforementioned shares were issued pursuant to section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 thereunder.

Ite m 6. Exhibits


Exhibit No.	Description
31.1	Certification by Chief Executive Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002 *
31.2	Certification by Chief Financial Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002 *
32.1	Certification Pursuant to 18 U.S.C. Section 1350 *
101.INS	XBRL Instance Document *
101.SCH	XBRL Taxonomy Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document *
101.DEF	XBRL Taxonomy Definition Linkbase Document *
101.LAB	XBRL Taxonomy Label Linkbase Document*
101.PRE	XBRL Taxonomy Presentation Linkbase Document *

* Filed electronically herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized


		Mobivity Holdings Corp.

Date: November 14, 2018	By:	/s/ Dennis Becker
		Dennis Becker
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

Date: November 14, 2018	By:	/s/ Charles B. Mathews
		Charles B. Mathews
		Chief Financial Officer (Principal Accounting Officer)