Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Basis of Presentation
Mobivity Holdings Corp. (the “Company” or “we”) is in the business of developing and operating proprietary platforms over which brands and enterprises can conduct national and localized, data-driven mobile marketing campaigns. Our proprietary platforms, consisting of software available to phones, tablets, PCs, and Point of Sale (“POS”) systems, allow resellers, brands and enterprises to market their products and services to consumers through text messages sent directly to consumers via mobile phones, mobile smartphone applications, and dynamically printed receipt content. On November 14, 2018, we completed the acquisition of certain operating assets relating to Belly, Inc.’s proprietary digital customer loyalty platform, including client contracts, accounts receivable and intellectual property. We generate revenue by charging the resellers, brands and enterprises a per-message transactional fee, through fixed or variable software licensing fees, or via advertising fees.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and disclosures required by GAAP for annual financial statements. The accompanying unaudited condensed 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, 2021filed with the SEC on March 30, 2022.
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 June 30, 2022, and for the three and six months ended June 30, 2022 and 2021. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 2022.
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, the fair value of options issued with related party debt, and the valuation allowance of deferred tax assets. Management believes that these estimates are reasonable; however, actual results may differ from these estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’s presentation. The reclassifications had no effect on previously reported net loss.
Acquisitions
We account for acquired businesses using the purchase method of accounting. Under the purchase method, our consolidated financial statements reflect the operations of an acquired business starting from the completion of the acquisition. In addition, the assets acquired and liabilities assumed are recorded at the date of acquisition at their respective estimated fair values, with any excess of the purchase price over the estimated fair values of the net assets acquired recorded as goodwill.
Cash and Cash Equivalents
We minimize our credit risk associated with cash by periodically evaluating the credit quality of our primary financial institution. Our balances at times may exceed federally insured limits. We have not experienced any losses on our cash accounts.
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 June 30, 2022, and December 31, 2021, we recorded an allowance for doubtful accounts of $46,512 and $56,340, 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 it’s carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted cash flow approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit.
We conducted our annual impairment tests of goodwill as of December 31, 2021. As a result of these tests, we had a total impairment charges of $85,169.
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 year to twenty years. No significant residual value is estimated for intangible assets.
The Company’s evaluation of its long-lived assets resulted in $0 and $8,286 of intangible impairment expense during the quarters ended June 30, 2022 and June 30, 2021.
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 Financial Accounting Standards Board guidance for the costs of computer software to be sold, leased, or otherwise marketed (Accounting Standards Codification subtopic 985-20, Costs of Software to Be Sold, Leased, or Marketed, or “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. The Company’s evaluation of its capitalized software development assets resulted in impairment charges of $0 for the quarter ended June 30, 2022 and $0 for the year ended December 31, 2021.
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 ASC 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 Recurrency platform is a hosted solution. We generate revenue from licensing our software to clients in our software as a service model, per-message and per-minute transactional fees, and customized professional services. We recognize license/subscription fees over the period of the contract, service fees as the services are performed, and per-message or per-minute transaction revenue when the transaction takes place. Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We consider authoritative guidance on multiple deliverables in determining whether each deliverable represents a separate unit of accounting. Some customers are billed on a month-to-month basis with no contractual term and fees are collected by credit card. Revenue is recognized at the time that the services are rendered, and the selling price is fixed with a set range of plans. Cash received in advance of the performance of services is recorded as deferred revenue.
Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASC 606”), is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition guidance. The Company adopted this standard effective January 1, 2018, applying the modified retrospective method. Upon adoption, the Company discontinued revenue deferral under the sell-through model and commenced recording revenue upon delivery to distributors, net of estimated returns. Generally, the new standard results in earlier recognition of revenues.
We determine revenue recognition under ASC 606 through the following steps:
| | ● | identification of the contract, or contracts, with a customer; |
| | ● | identification of the performance obligations in the contract; |
| | ● | identification of the transaction price; |
| | ● | allocation of the transaction price to the performance obligations in the contract; and |
| | ● | recognition of revenue when, or as, we satisfy a performance obligation. |
During the six months ended June 30, 2022 and 2021, two customers accounted for 49% and 66% of our revenues, respectively.
Comprehensive Income (Loss)
Comprehensive 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 loss in the consolidated financial statements in the period in which they are recognized. Net loss and other comprehensive 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 loss. For the six months ended June 30, 2022 and 2021, the comprehensive loss was $3,885,467, and $3,145,238 respectively.
Stock-based Compensation
We primarily issue stock-based awards to employees in the form of stock options. We determine compensation expense associated with stock options based on the estimated grant date fair value method using the Black-Scholes valuation model. We recognize compensation expense using a straight-line amortization method over the respective vesting period.
Research and Development Expenditures
Research and development expenditures are expensed as incurred, and consist primarily of compensation costs, outside services, and expensed materials.
Advertising Expense
Direct advertising costs are expensed as incurred and consist primarily of E-commerce advertisements, sales enablement, content creation, and other direct costs. Advertising expense was $188,825 and $368,219 for the six months ended June 30, 2022 and 2021, respectively. We also include the cost of attending trade shows under marketing expense. We recorded $12,300 and $4698 of expense related to those activities for the six months ended June 30, 2022 and 2021, respectively.
Income Taxes
We account for income taxes using the assets and liability method, which recognizes deferred tax assets and liabilities determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets when, based on available objective evidence, it is more likely than not that the benefit of such assets will not be realized. We recognize in the consolidated financial statements only those tax positions determined to be more likely than not of being sustained.
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 six months ended June 30, 2022 and 2021, we had securities outstanding which could potentially dilute basic earnings per share in the future. Those were excluded from the computation of diluted net loss per share when their effect would have been anti-dilutive.
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 August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity (“ASU 2020-06”). ASU 2020-06 requires that the if-converted method of computing diluted Earnings per Share. The Company adopted ASU 2020-06 on January 1, 2022.
3. Going Concern
We have $1,091,460 of cash as of June 30, 2022. We had a net loss of $2.0 million for the period then ended, and we used $3.5 million of cash in our operating activities during the period ended June 30, 2022. In 2021, we had a net loss of $8.3 million and used $4.5 million of cash in our operating expenses. We raised $2,550,553 in cash from the exercise of warrants in February 2022. There is substantial doubt that our additional cash from our warrant conversion along with our expected cash flow from operations, will be sufficient to fund our 12-month plan of operations. There can be no assurance that we will not require significant additional capital within 12 months.
As shown in the accompanying financial statements, the Company has incurred net losses from operations resulting in an accumulated deficit of $111,720,120 as of June 30, 2022. Further losses are anticipated in the development of the Company’s business raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with proceeds from the sale of securities, and/or revenues from operations. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
4. Goodwill and Purchased Intangibles
Goodwill
The carrying value of goodwill at each of June 30, 2022 and December 31, 2021 was $411,183.
The following table presents details of our purchased intangible assets as of June 30, 2022 and December 31, 2021:
Intangible assets
| | | Balance at December 31, 2021 | | | Additions | | | Impairments | | | Amortization | | | Fx and Other | | | Balance at June 30, 2022 | |
| Patents and trademarks | | $ | 57,595 | | | $ | — | | | $ | — | | | $ | (48,426 | ) | | $ | 3 | | | $ | 9,172 | |
| Customer and merchant relationships | | | 545,533 | | | | — | | | | — | | | $ | (4,521 | ) | | | — | | | | 541,012 | |
| Trade names | | | 32,393 | | | | — | | | | — | | | $ | (8,150 | ) | | | — | | | | 24,243 | |
| Acquired technology | | | 112,191 | | | | — | | | | — | | | $ | (7,930 | ) | | | — | | | | 104,261 | |
| Non-compete agreements | | | 29,212 | | | | — | | | | — | | | $ | (2,451 | ) | | | — | | | | 26,761 | |
| | | $ | 776,924 | | | $ | — | | | $ | — | | | $ | (71,478 | ) | | $ | 3 | | | $ | 705,449 | |
The intangible assets are being amortized on a straight-line basis over their estimated useful lives of one year to twenty years.
Amortization expense for intangible assets was $32,590 and $35,736 for the three months ended June 30, 2022 and 2021, respectively.
Amortization expense for intangible assets was $71,478 and $71,740 for the six months ended June 30, 2022 and 2021, respectively.
The estimated future amortization expense of our intangible assets as of June 30, 2022 is as follows:
| Year ending December 31, |
|
Amount |
|
| 2022 |
|
$ |
74,059 |
|
| 2023 |
|
|
145,606 |
|
| 2024 |
|
|
109,009 |
|
| 2025 |
|
|
101,261 |
|
| 2026 |
|
|
101,261 |
|
| Thereafter |
|
|
174,253 |
|
| Total |
|
$ |
705,449 |
|
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 June 30, 2022 and December 31, 2021:
| | | Balance at December 31, 2021 | | | Additions | | | Amortization | | | Balance at June 30, 2022 | |
| Software Development Costs | | $ | 347,796 | | | $ | — | | | $ | (145,263 | ) | | $ | 202,533 | |
| | | $ | 347,796 | | | $ | — | | | $ | (145,263 | ) | | $ | 202,533 | |
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 $71,974 and $105,539 for the three months ended June 30, 2022 and 2021, respectively.
Amortization expense for software development costs was $145,263 and $204,748 for the six months ended June 30, 2022 and 2021, respectively.
The estimated future amortization expense of software development costs as of June 30, 2022 is as follows:
| Year ending December 31, | | Amount | |
| 2022 | | $ | 110,238 | |
| 2023 | | | 92,288 | |
| 2024 | | | 7 | |
| 2025 | | | — | |
| 2026 | | | — | |
| Thereafter | | | — | |
| Total | | $ | 202,533 | |
6. Operating Lease Assets
The Company entered into a lease agreement on February 1, 2021 for 8,898 square feet, for its office facilities in Chandler, AZ through January 2027. Monthly rental payments, excluding common area maintenance charges, are $25,953 to $28,733. The first twelve months of the lease included a 50% abatement period and a deposit for $110,000 was required. The lessor contributed $110,000 towards the purchase of office furniture as part of the lease agreement. As of June 30, 2022, we have an operating lease asset balance of $1,081,388 and an operating lease liability balance of $1,305,219 recorded in accordance with ASC 842, Leases (ASC "842").
The following are additional details related to leases recorded on our balance sheet as of June 30, 2022:
| Leases | Classification | | Balance at June 30, 2022 | |
| Assets | | | | | |
| Current | | | | | |
| Operating lease assets | Operating lease assets | | $ | — | |
| Noncurrent | | | | | |
| Operating lease assets | Noncurrent operating lease assets | | $ | 1,081,388 | |
| Total lease assets | | $ | 1,081,388 | |
| | | | | | |
| Liabilities | | | | | |
| Current | | | | | |
| Operating lease liabilities | Operating lease liabilities | | $ | 240,064 | |
| Noncurrent | | | | | |
| Operating lease liabilities | Noncurrent operating lease liabilities | | $ | 1,065,155 | |
| Total lease liabilities | | $ | 1,305,219 | |
The maturity analysis below summarizes the remaining future undiscounted cash flows for our operating leases, a reconciliation to operating lease liabilities reported on the Condensed Consolidated Balance Sheet, our weighted-average remaining lease term and weighted average discount rate:
| Year ending December 31, | | | | |
| 2022 | | $ | 159,052 | |
| 2023 | | | 324,221 | |
| 2024 | | | 330,894 | |
| 2025 | | | 337,568 | |
| 2026 | | | 344,241 | |
| Thereafter | | | 28,733 | |
| Total future lease payments | | | 1,524,709 | |
| Less: imputed interest | | | (219,490 | ) |
| Total | | $ | 1,305,219 | |
| Weighted Average Remaining Lease Term (years) | | | | |
| Operating leases | | | 5.6 | |
| | | | | |
| Weighted Average Discount Rate | | | | |
| Operating leases | | | 6.75 | % |
7. Notes Payable and Interest Expense
The following table presents details of our notes payable as of June 30, 2022 and December 31, 2021:
| Facility | | Maturity | | Interest Rate | | | Balance at June 30, 2022 | | | Balance at December 31, 2021 | |
| ACOA Note | | February 1, 2024 | | | — | | | | 59,860 | | | | 76,642 | |
| TD Bank | | December 31, 2022 | | | — | | | | 31,072 | | | | 31,496 | |
| Related Party Note | | various | | | 15 | % | | | 3,814,283 | | | | 3,318,242 | |
| Total Debt | | | | | | | 3,905,215 | | | | 3,426,380 | |
| Less current portion | | | | | | | (1,222,810 | ) | | | (888,583 | ) |
| Long-term debt, net of current portion | | | | | | $ | 2,682,405 | | | $ | 2,537,797 | |
ACOA Note
On November 6, 2017, 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, and the commitments will terminate on February 1, 2024. The monthly principal payment amount of $3,000 CAD increased to $3,500 CAD beginning on November 1, 2019, $4,000 CAD on August 1, 2021, $4,500 CAD on August 1, 2022, and $2,215 CAD during the remaining term of the agreement. Payments from April- December of 2020 were voluntarily deferred by ACOA due to COVID-19. During the six months ended June 30, 2022 we repaid $16,783 USD of principal.
TD Bank Loan
On April 22, 2020, we entered into a commitment loan with TD Bank under the Canadian Emergency Business Account (“CEBA”), in the principal aggregate amount of $40,000 CAD, which is due and payable on December 31, 2022. This note bears interest on the unpaid balance at the rate of zero percent (0%) per annum during the initial term. Under this note no interest or principal payments are due until January 1, 2023. Under the conditions of the loan, twenty-five percent (25%) of the loan will be forgiven if seventy-five percent (75%) is repaid prior to the initial term date.
Related Party Notes
On February 26, 2020, we issued an unsecured note (the "Initial Note") in the principle aggregate amount of $200,000, which becomes due two years after the date of issuance. This Initial Note bears interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay this Initial Note without notice, subject to a two percent (2%) pre-payment penalty.
On November 18, 2020, we issued two additional unsecured notes (the "Additional Notes)" in the principle aggregate amount of $500,000, together with the Initial Note, the "Notes" become due two years after the date of issuance. These additional Notes bears interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay these Additional Notes without notice, subject to a two percent (2%) pre-payment penalty.
On December 31, 2020 $1,200,000 of the Notes and the accrued interest of $192,208 was settled into equity and we recorded a loss on settlement of debt of $668,260 for the year ended December 31, 2020. In summary, as of December 31, 2020, we have a principal balance of $580,000 and accrued interest of $42,492 outstanding.
On June 30, 2021, we entered into a Credit Facility Agreement (the “Credit Agreement”) with one of the Company’s directors. The Company can borrow up to $4,550,000 under this Credit Agreement. On November 19, 2021, a payment of $200,000 was paid toward the principal balance of the loan. The loan is secured by all of our tangible and intangible assets including intellectual property. We will begin repaying the principal amount, plus accrued interest, in 24 equal monthly installments commencing on June 30, 2022, and ending on June 30, 2024. This loan bears interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay this loan without notice, penalty or charge. In consideration of the lender’s agreement to provide the facility, the Company issued warrants to purchase shares of its common stock at an exercise price of $1.67 per share in connection with the issuance of funds under this Credit Agreement. The warrants are exercisable for a period commencing upon issuance of the notes and ending 36 months after issuance of the financing. In addition, the Company has agreed to issue to the lender additional warrants entitling the lender to purchase a number of shares of the Company's common stock equal to twenty percent (20%) of the amount of the advances made divided by the volume weighted average price over the 30 trading days preceding the advance ( the "VWAP"). Each warrant will be exercisable over a three year period at an exercise price equal to the VWAP.
During the
twelve month period ending
December 31, 2021, the Company issued warrants to purchase an aggregate of
600,570 shares of its common stock at the stated exercise price per share in connection with the issuance of funds under this Credit Agreement. The estimated aggregate fair value of the warrants issued is
$262,758 using the Black-Scholes option valuation model as of
December 31, 2021
.
On
July
1,
2021 we entered into Unsecured Promissory Notes (each individually, a “UP Note” and collectively, the “UP Notes”) in the aggregate principal amount of
$271,875 to certain investors, officers and directors of the Company. Each UP 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
July
1,
2023. We
may prepay any of the UP Notes without notice, subject to a
two percent (
2%) pre-payment penalty. The UP Note offer was conducted by our management and there were
no commissions paid by us in connection with the solicitation. The Company issued warrants to purchase an aggregate of
33,017 shares of its common stock at the stated exercise price per share in connection with the issuance of funds under this Credit Agreement.
On June 10, 2022, The Company took a draw of an additional $500,000 under the Credit Agreement. As of June 30, 2022, the company has drawn a total of $3,978,125 including cash in the amount of $3,706,250 and $271,875 of principal and accrued interest under the above-described UP Notes which were rolled into the credit facility, and we have accrued interest of $439,968.
Interest Expense
Interest expense was $167,126 and $23,867 during the three months ended June 30, 2022 and 2021, respectively.
Interest expense was $326,953 and $56,383 during the six months ended June 30, 2022 and 2021, respectively.
8. Stockholders’ Equity
Common Stock
2021
During the year ended December 31, 2021, the Company did not issue any shares but, recorded stock-based compensation expense of $260,005 related to restricted stock units for members of our board of directors. The company recorded stock-based compensation expense of $187,501 related to restricted stock units for employee compensation.
2022
On February 9, 2022 17 warrant holders exercised their common stock purchase warrant for 3,188,190 shares at the exercise price of $0.80 per share, resulting in additional capital of $2,550,552. As an inducement for the holders' exercise of the warrants, we issued the holders 3,188,190 new warrants to purchase common stock at $1.50 per share over a three year period expiring in February 2025. We have recorded additional stock-based expense of $382,048.
On June 29, 2022 the Company received private investment funds to purchase 1,062,500 shares of its common stock at a price of $0.80 per share, resulting in additional capital of $849,999.and issued the holders 1,062,500 new warrants to purchase common stock at $1.50 per share over a three year period expiring in June 2025.
During the six months ended June 30, 2022 the Company recorded stock-based compensation expense of $ 130,004related to restricted stock units for members of our board of directors. The company recorded stock-based compensation expense of $289,373 related to stock units for employee compensation.
As of June 30, 2022 we had an equity payable balance of $100,862.
Stock-based Plans
Stock Option Activity
The following table summarizes stock option activity for the six months ended June 30, 2022.
| | | Options | |
| Outstanding at December 31, 2020 | | | 6,007,552 | |
| Granted | | | 637,500 | |
| Exercised | | | — | |
| Forfeited/canceled | | | (272,029 | ) |
| Expired | | | (126,557 | ) |
| Outstanding at December 31, 2021 | | | 6,246,466 | |
| Granted | | | 195,000 | |
| Exercised | | | — | |
| Forfeited/canceled | | | (224,375 | ) |
| Expired | | | (10,250 | ) |
| Outstanding at June 30, 2022 | | | 6,206,841 | |
The weighted average exercise price of stock options granted during the period was $0.83 and the related weighted average grant date fair value was $0.54 per share.
2021
On March 26, 2021, the Company granted five employees a total of 67,500 options to purchase shares of the Company common stock at the closing price as of March 26, 2021 of $1.80 per share. The option shares will vest 25% on the first anniversary of the grant, then equally in 36 monthly installments thereafter and are exercisable until March 26, 2031. The total estimated value using the Black-Scholes Model, based on a volatility rate of 73.97% and an option fair value of $1.16 was $78,492.
On May 2, 2021, the Company granted one employee a total of 20,000 options to purchase shares of the Company common stock at the closing price as of May 2, 2021, of $1.48 per share. The option shares will vest 25% on the first anniversary of the grant, then equally in 36 monthly installments thereafter and are exercisable until May 2, 2031. The total estimated value using the Black-Scholes Model, based on a volatility rate of 74.79% and an option fair value of $0.93 was $18,628.
On August 11, 2021, the Company granted one employee a total of 5,000 options to purchase shares of the Company common stock at the closing price as of August 11, 2021, of $1.75 per share. The option shares will vest 25% on the first anniversary of the grant, then equally in 36 monthly installments thereafter and are exercisable until August 11, 2031. The total estimated value using the Black-Scholes Model, based on a volatility rate of 73.29% and an option fair value of $1.12 was $5,606.
2022
On March 29, 2022, the Company granted one employee 150,000 options to purchase shares of the Company common stock at the closing price as of March 29, 2022, of $0.8289 per share. The option shares will vest 25% on the first anniversary of the grant, then equally in 36 monthly installments thereafter and are exercisable until March 29, 2032. The total estimated value using the Black-Scholes Model, based on a volatility rate of 72.33% and an option fair value of $0.54 was $81,035.
On May 16, 2022, the Company granted three employees 45,000 options to purchase shares of the Company common stock at the closing price as of May 16, 2022, of $0.97 per share. The option shares will vest 25% on the first anniversary of the grant, then equally in 36 monthly installments thereafter and are exercisable until March 29, 2032. The total estimated value using the Black-Scholes Model, based on a volatility rate of 73.45% and an option fair value of $0.642608 was $28,917.
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 six months ended June 30, 2022 and 2021 were as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| General and administrative | | $ | 377,415 | | | $ | 79,758 | | | $ | 505,661 | | | $ | 163,888 | |
| Sales and marketing | | | 22,344 | | | | 31,068 | | | | 35,211 | | | | 63,813 | |
| Engineering, research, and development | | | 64,059 | | | | 43,606 | | | | 130,549 | | | | 86,658 | |
| | | $ | 463,818 | | | $ | 154,432 | | | $ | 671,421 | | | $ | 314,359 | |
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 six months ended June 30, 2022 and 2021.
| | | Six Months Ended | |
| | | June 30, | |
| | | 2022 | | | 2021 | |
| Risk-free interest rate | | | 2.55 | % | | | 1.01 | % |
| Expected life (years) | | | 6.00 | | | | 6.00 | |
| Expected dividend yield | | | — | % | | | — | % |
| Expected volatility | | | 72.59 | % | | | 74.16 | % |
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 the Company's 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 2022 and 2021 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, 2021 and for the six months ended June 30, 2022:
| | | Shares | |
| Outstanding at December 31, 2020 | | | 1,436,728 | |
| Awarded | | | 654,663 | |
| Released | | | — | |
| Canceled/forfeited/expired | | | (406,250 | ) |
| Outstanding at December 31, 2021 | | | 1,685,141 | |
| Awarded | | | 132,588 | |
| Released | | | — | |
| Canceled/forfeited/expired | | | — | |
| Outstanding at June 30, 2022 | | | 1,817,729 | |
| | | | | |
| Expected to vest at June 30, 2022 | | | 1,817,729 | |
| Vested at June 30, 2022 | | | 1,817,729 | |
| Unvested at June 30, 2022 | | | — | |
| Unrecognized expense at June 30, 2022 | | $ | — | |
2021
On March 26, 2021, the Company issued to four independent directors a total of 36,112 restricted stock units. These restricted stock units were issued for the $65,000 of board compensation earned for the first quarter of 2021. The units were valued at $65,002 or $1.80 per share, based on the closing stock price on the date of grant. All units vested immediately. The shares of common stock associated with the restricted stock Unit evidenced by this Agreement will be issued to each director upon the earliest to occur of (A) March 26, 2024, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.
On March 26, 2021, the Company granted to one employee 1,000,000 restricted shares of the Company’s common stock at $1.80, the closing price as of March 26, 2021. The restricted stock will vest as follows (a) 50% of the restricted shares will vest ratably over forty eight months; (b) 15% of the restricted shares will vest upon the Company achieving $25,000,000 in annualized recurring revenues as reported by totaling all contracted revenues for the trailing 12 months following the end of a reporting quarter; (c) the final 35% of the restricted shares will vest upon the Company achieving $50,000,000 in annualized recurring revenues as reported by totaling all contracted revenues for the trailing 12 months following the end of a reporting quarter. Vesting is dependent on the employee’s continued employment with the Company. All of the 1,000,000 restricted shares will include a single trigger accelerated vesting should the Company undergo a change of control after August 1, 2021. If the Company undergoes a change of control prior to August 1, 2021, 300,000 of the restricted shares would be eligible for single trigger accelerated vesting.
On May 12, 2021, the Company issued to four independent directors a total of 38,924 restricted stock units. These restricted stock units were issued for the $65,000 of board compensation earned for the second quarter of 2021. The units were valued at $65,002 or $1.67 per share, based on the closing stock price on the date of grant. All units vested immediately. The shares of common stock associated with the restricted stock unit evidenced by this Agreement will be issued to each director upon the earliest to occur of (A) May 2, 2024, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.
On August 11, 2021, the Company issued to four independent directors a total of 37,143 restricted stock units. These restricted stock units were issued for the $65,000 of board compensation earned for the third quarter of 2021. The units were valued at $65,000 or $1.75 per share, based on the closing stock price on the date of grant. All units vested immediately. The shares of common stock associated with the restricted stock unit evidenced by this Agreement will be issued to each director upon the earliest to occur of (A) , August 11, 2024, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.
On December 15, 2021, the Company granted four independent directors a total of 42,484 restricted stock units. The units were valued at $65,000 or $1.53 per share, based on the closing stock price on the date of grant. All units vested immediately. The shares of common stock associated with the restricted stock unit evidenced by this Agreement will be issued to each director upon the earliest to occur of (A) December 15, 2024, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.
2022
On March 29, 2022 the company grated granted four independent directors a total of 78,420 restricted stock units. The units were valued at $65,002 or $0.829 per share, based on the closing stock price on the date of grant. All units vested immediately. The shares of common stock associated with the restricted stock unit evidenced by this Agreement will be issued to each director upon the earliest to occur of (A) December 15, 2024, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.
On May 16, 2022 the company grated granted four independent directors a total of 54,168 restricted stock units. The units were valued at $65,002 or $1.20 per share, based on the closing stock price on the date of grant. All units vested immediately. The shares of common stock associated with the restricted stock unit evidenced by this Agreement will be issued to each director upon the earliest to occur of (A) December 15, 2024, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.
In the six months ended June 30, 2022, the company recorded $ 130,004 in restricted stock units as board compensation.
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 six months ended June 30, 2022 and 2021 was as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| General and administrative | | $ | 65,002 | | | $ | 65,003 | | | $ | 130,004 | | | $ | 130,005 | |
| Sales and marketing | | $ | — | | | $ | 56,018 | | | $ | — | | | $ | 59,712 | |
| | | $ | 65,002 | | | $ | 121,021 | | | $ | 130,004 | | | $ | 189,717 | |
As of June 30, 2022, there was no unearned restricted stock unit compensation.
Warrants
The following table summarizes investor warrants as of June 30, 2022 and the years ended for the years ended December 31, 2021 and 2020:
| | | Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (Years) | |
| Outstanding at December 31, 2020 | | | 2,691,459 | | | $ | 1.99 | | | | 2.94 | |
| Granted | | | 580,231 | | | $ | — | | | | — | |
| Exercised | | | — | | | $ | — | | | | — | |
| Canceled/forfeited/expired | | | (25,000 | ) | | $ | — | | | | — | |
| Outstanding at December 31, 2021 | | | 3,246,690 | | | $ | 2.26 | | | | 3.59 | |
| Granted | | | 4,368,905 | | | $ | — | | | | — | |
| Exercised | | | (3,188,190 | ) | | $ | — | | | | — | |
| Canceled/forfeited/expired | | | — | | | $ | — | | | | — | |
| Outstanding at June 30, 2022 | | | 4,427,405 | | | $ | 2.72 | | | | 2.02 | |
2020
On March 2, 2020 one warrant holder exercised their common stock purchase warrant for 234,500 shares at the exercise price of $1.00 per share, resulting in additional capital of $234,500. In December 2020, warrant holders exercised warrants to purchase common stock at $1.25 per share. At the commencement of the December warrant exercise, there were warrants outstanding that entitled their holders to purchase 2,691,459 shares of our common stock at exercise prices of $1.25 per share. Pursuant to the offer, warrant holders exercised warrants to purchase 2,666,459 shares of our common stock, resulting in additional capital of $3,333,074. As part of the exercise, 2,666,459 new warrants were issued to purchase common stock at $2.00 per share within three years.
2021
On June 30, 2021, the company issued warrants to purchase an aggregate of 227,994 shares of its common stock at an exercise price of $1.67 per share for 119,760 inducement warrants and VWAP for 108,234 additional warrants in connection with the issuance of a loan by a related party. The warrants are exercisable for a period commencing upon issuance of the notes and ending 36 months after issuance of the financing. The estimated aggregate fair value of the warrants issued is $119,103 using the Black-Scholes option valuation model.
On August 11, 2021 the company issued warrants of in connection with loan by related party VWAP for 10,072 additional warrants in connection with the issuance of a loan by a related party. The warrants are exercisable for a period commencing upon issuance of the notes and ending 36 months after issuance of the financing. The estimated aggregate fair value of the warrants issued is $5,285 using the Black-Scholes option valuation model
As of September 30, 2021, we had outstanding warrants to purchase 2,666,459 shares of common stock at $2.06 per share. These warrants expire in 2023. We also have outstanding warrants to purchase 238,066 shares of common stock at stated price per share in connection with the issuance of a loan with a related party. These warrants expire in 2024.
2022
On February 9, 2022 17 warrant holders exercised their common stock purchase warrant for 3,188,190 shares at the exercise price of $0.80 per share, resulting in additional capital of $2,550,553. As an inducement for the holder’s exercise of the warrants, we issued the holders 3,188,190 new warrants to purchase common stock at $1.50 per share over a three year period expiring in February 2025. The company recorded $382,048 of stock-based expense related to warrants issued during the warrant conversion offer on February 9, 2022.
On June 29, 2022 six private investors purchased 1,062,500 new warrants to purchase common stock at $1.50 per share over a three year period expiring in February 2025, and 1,062,500 shares at the exercise price of $0.80 per share, resulting in additional capital of $850,000.
During the six month period ending June 30, 2022, The Company issued warrants to purchase an aggregate of 118,215 shares of its common stock at the stated exercise price per share in connection with the issuance of funds under the Credit Agreement. The estimated aggregate fair value of the warrants issued is $55,855 using the Black-Scholes option valuation model as of June 30, 2022
9. Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which 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 June 30, 2022 on a recurring and non-recurring basis:
| Description | | Level 1 | | | Level 2 | | | Level 3 | | | Gains (Losses) | |
| Goodwill (non-recurring) | | $ | — | | | $ | — | | | $ | 411,183 | | | $ | — | |
| Intangibles, net (non-recurring) | | $ | — | | | $ | — | | | $ | 907,982 | | | $ | — | |
The following table presents assets that are measured and recognized at fair value as of December 31, 2021 on a recurring and non-recurring basis:
| Description | | Level 1 | | | Level 2 | | | Level 3 | | | Gains (Losses) | |
| Goodwill (non-recurring) | | $ | — | | | $ | — | | | $ | 411,183 | | | $ | — | |
| Intangibles, net (non-recurring) | | $ | — | | | $ | — | | | $ | 1,124,720 | | | $ | — | |
10. Commitments and Contingencies
Litigation
As of the date of this report, there are no pending legal proceedings to which we or our properties are subject, except for routine litigation incurred in the normal course of business.
Operating Lease
As described in Note 6, the Company has a lease agreement for 8,898 square feet, for its office facilities in Chandler, AZ through January 2027. Monthly rental payments, excluding common area maintenance charges, are $25,953 to $28,733. The first 12 months of the lease includes a 50% abatement period. As of June 30, 2022, we have an operating lease asset balance for this lease of $1,081,388and an operating lease liability balance for this lease of $1,305,219recorded in accordance with ASC 842.
11. Related Party Transactions
Unsecured Promissory Note Investments
2021
On July 1, 2021 we entered into an Unsecured Promissory Notes (each, individually, a “UP Note” and collectively, the “UP Notes”) in the aggregate principal amount of $271,875 to certain investors, officers and directors of the Company. Each UP 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 July 1, 2023. We may prepay any of the UP Notes without notice, subject to a two percent (2%) pre-payment penalty. The UP Note offer was conducted by our management and there were no commissions paid by us in connection with the solicitation. The Company issued warrants to purchase an aggregate of 33,017 shares of its common stock at the stated exercise price per share in connection with the issuance of funds under the Credit Agreement.
Secured Promissory Note Investments
2021
On June 30, 2021, we entered into a Credit Facility Agreement (the “Credit Agreement”) with one of the Company’s directors. The Company can borrow up to $3,500,000 under this Credit Agreement. On November 19, 2021, a payment of $200,000 was paid toward the principal balance of the note. On November 19, 2021, a payment of $200,000 was paid toward the principal balance of the note. As of June 30, 2022, the company has drawn a total of $3,978,125 including cash in the amount of $3,706,250 and $271,875 of principal and accrued interest under the above-described UP Notes which were rolled into the credit facility. The loan is secured by all of our tangible and intangible assets, including intellectual property. We will repay the principal amount, plus accrued interest in 24 equal monthly installments commencing on December 31, 2022 and ending on December 31, 2024. This loan bears interest on unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay this loan without notice, penalty or charge. In consideration of the lender’s agreement to provide the facility, the Company issued warrants to purchase shares of its common stock at an exercise price of $1.67 per share in connection with the issuance of funds under this Credit Agreement. The warrants are exercisable for a period commencing upon issuance of the notes and ending 36 months after issuance of the financing. In addition, the Company has agreed to issue to the lender additional warrants entitling the lender to purchase a number of shares of the Company's common stock equal to twenty percent (20%) of the amount of the advances made divided by the volume weighted average price over the 30 trading days preceding the advance (VWAP). Each warrant will be exercisable over a three year period at an exercise price equal to the VWAP.
2022
On June 10, 2022 the Company took a draw of an additional $500,000 under the Credit Agreement As of June 30, 2022, the Company has drawn a total of $3,978,125 including cash in the amount of $3,706,250 and $271,875 of principal and accrued interest under the above-described UP Notes that was rolled into the credit facility, we have accrued interest of $439,968.
12. Subsequent Events
On August 3, 2022 a Credit Agreement Amendment was created to increase the amount on our open line of credit under the current Credit Agreement originally signed in June of 2021. The Credit Agreement Amendment amended section 2.1 and increased the maximum advance to $6,000,000. On August 9, 2022 the Company drew an additional $300,000 under the Credit Agreement.