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, 2022filed 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 March 31, 2023, and for the three months ended March 31, 2023 and 2022. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the operating results for the full year ending December 31, 2023.
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. 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 did not affect previously reported net losses.
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
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 March 31, 2023, and December 31, 2022, we recorded an allowance for doubtful accounts of $10,820 and $34,446 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 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, 2022. As a result of these tests, we had a total impairment charge of $963,659.
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 goodwill and intangible assets resulted in no impairment charges for the three months ended ended March 31, 2023 and 2022, respectively.
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 ("FASB") 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. The 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 the 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 canceled or abandoned are charged to product development expenses 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 no impairment charges for the three months ended March 31, 2023 and 2022, respectively
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 three months ended March 31, 2023 and 2022, two customers accounted for 51% and 53% 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 a comprehensive loss. For the three months ended March 31, 2023 and 2022, the comprehensive loss was $2,446,673, and $1,945,994 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 trade shows, sales enablement, content creation, paid engagement and other direct costs. Advertising expense was $54,248 and $163,734 for the three months ended March 31, 2023 and 2022, 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 months ended March 31, 2023 and 2022, we had securities outstanding which could potentially dilute basic earnings per share in the future. Stock based compensation, stock options and warrants 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 is 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 had $2,581,597 of cash as of March 31, 2023. We had a net loss of $2,478,175 for the three months ended March 31, 2023, and we used $1,443,464 of cash in our operating activities during that time. In the three months ended March 31, 2022 we had a net loss of $1,933,099 and used $1,813,845 of cash in our operating expenses. We raised $3.6 million in cash from the exercise of warrants in February of 2023. 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 $120.4 million as of March 31, 2023. 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 12 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 March 31, 2023 and December 31, 2022 was $0.
The following table presents details of our purchased intangible assets as of March 31, 2023 and December 31, 2022:
Intangible assets
| | Balance at December 31, 2022 | | | Additions | | | Impairments | | | Amortization | | | Fx and Other | | | Balance at March 31, 2023 | |
Patents and trademarks | | $ | 52,698 | | | $ | — | | | $ | — | | | $ | (1,223 | ) | | $ | 3 | | | $ | 51,475 | |
Customer and merchant relationships | | | 30,690 | | | | — | | | | — | | | $ | (6,138 | ) | | | — | | | | 24,552 | |
Trade names | | | 8,050 | | | | — | | | | — | | | $ | (1,609 | ) | | | — | | | | 6,441 | |
| | $ | 91,438 | | | $ | — | | | $ | — | | | $ | (8,970 | ) | | $ | 3 | | | $ | 82,468 | |
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 $8,970 and $38,888 for the three months ended March 31, 2023 and 2022, respectively.
The estimated future amortization expense of our intangible assets as of March 31, 2023 is as follows:
Year ending December 31, | | Amount | |
2023 | | $ | 26,913 | |
2024 | | | 12,639 | |
2025 | | | 4,891 | |
2026 | | | 4,891 | |
2027 | | | 4,891 | |
Thereafter | | | 28,243 | |
Total | | $ | 82,468 | |
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 March 31, 2023 and December 31, 2022:
| | Balance at December 31, 2022 | | | Additions | | | Amortization | | | Balance at March 31, 2023 | |
Software Development Costs | | $ | 103,334 | | | $ | — | | | $ | (41,945 | ) | | $ | 61,389 | |
| | $ | 103,334 | | | $ | — | | | $ | (41,945 | ) | | $ | 61,389 | |
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 $41,945 and $73,289 for the three months ended March 31, 2023 and 2022, respectively.
The estimated future amortization expense of software development costs as of March 31, 2023 is as follows:
Year ending December 31, | | Amount | |
2023 | | $ | 56,884 | |
2024 | | | 4,505 | |
2025 | | | — | |
2026 | | | — | |
2027 | | | — | |
Thereafter | | | — | |
Total | | $ | 61,389 | |
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 of $110,000 was required. The lessor contributed $110,000 towards the purchase of office furniture as part of the lease agreement. As of March 31, 2023, we have an operating lease asset balance of $930,658 and an operating lease liability balance of $1,127,671 recorded in accordance with ASC 842, Leases (ASC "842").
The following are additional details related to leases recorded on our balance sheet as of March 31, 2023:
Leases | Classification | | Balance at March 31, 2023 | |
Assets | | | | | |
Current | | | | | |
Operating lease assets | Operating lease assets | | $ | — | |
Noncurrent | | | | | |
Operating lease assets | Noncurrent operating lease assets | | $ | 930,658 | |
Total lease assets | | $ | 930,658 | |
| | | | | |
Liabilities | | | | | |
Current | | | | | |
Operating lease liabilities | Operating lease liabilities | | $ | 257,614 | |
Noncurrent | | | | | |
Operating lease liabilities | Noncurrent operating lease liabilities | | $ | 870,057 | |
Total lease liabilities | | $ | 1,127,671 | |
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, | | | | |
2023 | | $ | 243,583 | |
2024 | | | 330,894 | |
2025 | | | 337,568 | |
2026 | | | 344,241 | |
2027 | | | 28,733 | |
Thereafter | | | — | |
Total future lease payments | | | 1,285,019 | |
Less: imputed interest | | | (157,348 | ) |
Total | | $ | 1,127,671 | |
Weighted Average Remaining Lease Term (years) | | | | |
Operating leases | | | 3.83 | |
| | | | |
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 March 31, 2023 and December 31, 2022:
Facility | | Maturity | | Interest Rate | | | Balance at March 31, 2023 | | | Balance at December 31, 2022 | |
ACOA Note | | February 1, 2024 | | | — | | | | 24,354 | | | | 34,231 | |
TD Bank | | December 31, 2023 | | | — | | | | 29,565 | | | | 29,478 | |
Related Party Note | | various | | | 15 | % | | | 5,224,028 | | | | 5,192,461 | |
Total Debt | | | | | | | 5,277,947 | | | | 5,256,170 | |
Less current portion | | | | | | | (1,351,619 | ) | | | (2,743,788 | ) |
Long-term debt, net of current portion | | | | | | $ | 3,926,328 | | | $ | 2,512,382 | |
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 three months ended March 31, 2023 we repaid $9,878 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, 2023. 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 December 31, 2023. Under the conditions of the loan, thirty-three percent (33%) of the loan will be forgiven if sixty-seven percent (67%) is repaid prior to the initial term date.
Related Party Notes
Secured Promissory Notes
On June 30, 2021, we entered into a Credit Facility Agreement (the “Credit Agreement”) with Thomas Akin, one of the Company’s directors (the "Lender"). The Credit Agreement was amended on November 11, 2022. The Company can borrow up to $6,000,000 under the Credit Agreement ("the "Credit Facility").
The Credit Facility is secured by all of our tangible and intangible assets including intellectual property. 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 Credit 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 the Credit Agreement. The warrants are exercisable for a period commencing upon issuance of the corresponding 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.
Under the original terms of the Credit Agreement, the Company was to begin repaying the principal amount, plus accrued interest, in 24 equal monthly installments commencing on June 30, 2022, and ending on June 30, 2024. On November 11, 2022, an amendment to the Credit Agreement was signed. The amendment updated the payment terms to the following: "Without limiting the foregoing Section 2.3(a), Borrower shall repay the principal amount of all Advances, plus accrued interest thereon, in 24 equal monthly installments commencing on January 31, 2023 and continuing thereafter on the last day of each month (or, if such last day is not a Business Day, on the Business Day immediately preceding such last day. Interest on the unpaid Advances will accrue from the date of each Advance at a rate equal to fifteen percent (15%) per annum. Interest will be calculated on the basis of 365 days in a year." The amendment raised the maximum amount of the Credit Facility to $6,000,000. In addition, the interest which is accrued monthly between July 1, 2022, and December 31, 2022, will be settled into equity. Common Stock will be issued at the end of each month at a rate of $1.08 per share of common stock in the amount of the interest accrued for each month.
On January 31, 2023, the Company entered into Amendment No. 1 (the “Amendment”) to the Amended and Restated Credit Facility Agreement and Convertible Notes which amends our existing Amended and Restated Credit Facility Agreement, dated as of November 11, 2022, between the Company and Thomas B. Akin, a director of the Company (the “Existing Credit Agreement” and as amended by the Amendment, the “Credit Agreement”) and any convertible notes issued thereunder. The Amendment amends the Existing Credit Agreement to extend the maturity of the Credit Agreement and related convertible notes thereunder until December 1, 2025. Principal payments have been deferred to a period beginning on January 1, 2024 and ending December 1, 2025, and further provides that any accrued interest on unpaid advances under the Credit Agreement is to be paid quarterly in shares of our common stock, at a price per share equal to the volume-weighted average price of our common stock quoted on the OTCQB® Venture Market operated by OTC Markets Group Inc. over the ninety (90) trading days immediately preceding such date. The Amendment provides for corresponding amendments to the form of convertible note to be issued under the Credit Agreement in the future and any outstanding convertible notes issued under the Existing Credit Agreement.
During the three months ended March 31, 2023, a total of $195,171 of interest was accrued and settled to equity payable for the issuance of 180,715 shares of common stock. The company recorded a loss of settlement of interest payable of $10,315 . The company issued 154,106 shares from equity payable related to accrued interest settled during the fourth quarter of 2022.
As of March 31, 2023, the Company had drawn a total of $5,173,125 and we have accrued interest of $387,918.
Unsecured Promissory Note
On July 1, 2021, we entered into UP Notes in the aggregate principal amount of $271,875 with Talkot Fund, LP and investor in 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 are due and payable no later than December 31, 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 to Talkot Fund LP 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 UP Note.
On January 31, 2023, the Lender agreed to postpone the 24-month repayment period to a later period commencing on January 31, 2024, and further agreed that interest accrued on the loan between July 1, 2022 and December 01, 2025 is to be settled in shares of the Company’s common stock quarterly.
During the three months ended March 31, 2023, a total of $10,196 of interest was accrued and settled to equity payable for the issuance of 9,441 shares of common stock. The company recorded a loss of settlement of interest payable of $542 . The company issued 9,651 shares from equity payable related to accrued interest settled during the fourth quarter of 2022.
As of March 31,2023, the Company had a principal balance of $271,875, and accrued interest of $54,351.
Interest Expense
Interest expense was $238,446 and $159,827 during the three months ended March 31, 2023 and 2022, respectively.
8. Stockholders’ Equity
Common Stock and Equity Payable
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 an additional stock-based expense of $382,048 in 1st quarter of 2022.
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 $850,000, 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.
On August 24, 2022, the Company received private investment funds to purchase 1,500,000 shares of its common stock at a price of $0.80 per share, resulting in additional capital of $1,200,000, and issued the holders 1,500,000 new warrants to purchase common stock at $1.50 per share over a three year period expiring in August 2025.
On November 13, 2022 a total of 140,185 shares of common stock were issued from equity payable to Thomas Akin as settlement of $151,398 of interest payable. The Company recorded a loss on settlement of interest payable of $2,259.
On November 13, 2022 a total of 9,585 shares of common stock were issued from equity payable to Talkot Fund LP as settlement of $10,352 of interest payable. The Company recorded a loss on settlement of interest payable of $162.
On December 31, 2022 a total of $166,432 of interest was accrued and settled to equity payable for the issuance of 154,106 shares of common stock. The company recorded a loss of settlement of interest payable of $44,325.
On December 31, 2022 a total of $10,423 of interest was accrued and settled to equity payable for the issuance of 9,651 shares of common stock. The company recorded a loss of settlement of interest payable of $2,757,
2023
On January 31, 2023 a total of 545,012 shares were issued to John Harris, a former director. The shares were issued based on the total Restricted Stock Units earned by Mr. Harris as director compensation that were fully vested as of March 29, 2022. Restricted stock expense is recorded on the date it vests and no expense was recognized during the three months ended March 31, 2023.
On March 27, 2023 a total of 154,106 shares of common stock were granted from equity payable to Thomas Akin as settlement of $166,432 of interest payable. The Company recorded a loss on settlement of interest payable of $44,325 on December 31, 2022.
On March 27, 2023 a total of 9,651 shares of common stock were granted from equity payable to Talkot Fund LP as settlement of $10,423 of interest payable. The Company recorded a loss on settlement of interest payable of $2,757 on December 31, 2022.
On March 31, 2023 a total of $195,171 of interest was accrued and settled to equity payable for the issuance of 180,715 shares of common stock. The company recorded a loss of settlement of interest payable of $10,315.
On March 31, 2023 a total of $10,196 of interest was accrued and settled to equity payable for the issuance of 9,441 shares of common stock. The company recorded a loss of settlement of interest payable of $542.
During March, 15 warrant holders exercised their common stock purchase warrant for 3,587,487 shares at the exercise price of $1.00 per share, resulting in additional capital of $3,557,487. As an inducement for the holder’s exercise of the warrants, we issued the holders' 1,793,745 new warrants to purchase common stock at $2.00 per share over a three-year period expiring in February 2025. The Company recorded $577,000 of stock-based expense related to warrants issued during the warrant conversion offer on February 14, 2023. The total estimated value of the warrants using the Black-Scholes Model is based on a volatility rate of 63% and an option fair value of $0.3216.
During the three months ended March 31, 2023 a total of 163,757 shares were issued from stock payable related to related party accrued interest settled during the fourth quarter of 2022.
As of the March 31, 2023 we had an equity payable balance of $317,086.
Stock-based Plans
Stock Option Activity
The following table summarizes stock option activity for the three months ended March 31, 2023.
| | Options | |
Outstanding at December 31, 2021 | | | 6,246,466 | |
Granted | | | 1,375,000 | |
Exercised | | | — | |
Forfeited/canceled | | | (330,623 | ) |
Expired | | | (599,627 | ) |
Outstanding at December 31, 2022 | | | 6,691,216 | |
Granted | | | — | |
Exercised | | | — | |
Forfeited/canceled | | | (72,916 | ) |
Expired | | | (29,030 | ) |
Outstanding at March 31, 2023 | | | 6,589,270 | |
2022
On March 29, 2022, the Company granted one employee 150,000 options to purchase shares of the Company's 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's 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 May 16, 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.
On September 22, 2022, the Company granted one employee 1,000,000 options to purchase shares of the Company's common stock at the closing price as of September 2022, of $0.98 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 September 29, 2032. The total estimated value using the Black-Scholes Model, based on a volatility rate of 76.15% and an option fair value of $0.697499 was $697,499.
2023
During the three months ended March 31, 2023 no options were granted.
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 months ended March 31, 2023 and 2022 were as follows:
| | Three Months Ended | |
| | March 31, | |
| | 2023 | | | 2022 | |
General and administrative | | $ | 65,032 | | | $ | 128,246 | |
Sales and marketing | | | 68,646 | | | | 12,867 | |
Engineering, research, and development | | | 34,475 | | | | 66,490 | |
| | $ | 168,153 | | | $ | 207,603 | |
Valuation Assumptions
The fair value of each stock option award was calculated on the date of the grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the three months ended March 31, 2023 and 2022.
| | Three Months Ended | |
| | March 31, | |
| | 2023 | | | 2022 | |
Risk-free interest rate | | | — | % | | | 2.47 | % |
Expected life (years) | | | — | | | | 6.00 | |
Expected dividend yield | | | — | % | | | — | % |
Expected volatility | | | — | % | | | 72.33 | % |
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 the 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 2023 and 2022 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, 2022 and for the three months ended March 31, 2023:
| | Shares | |
Outstanding at December 31, 2021 | | | 1,685,141 | |
Awarded | | | 244,792 | |
Released | | | — | |
Canceled/forfeited/expired | | | — | |
Outstanding at December 31, 2022 | | | 1,929,933 | |
Awarded | | | 61,324 | |
Released | | | (545,012 | ) |
Canceled/forfeited/expired | | | — | |
Outstanding at March 31, 2023 | | | 1,446,245 | |
| | | | |
Expected to vest at March 31, 2023 | | | 1,446,245 | |
Vested at March 31, 2023 | | | 1,446,245 | |
Unvested at March 31, 2023 | | | — | |
Unrecognized expense at March 31, 2023 | | $ | — | |
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 the grant. All units vested immediately. The shares of common stock associated with the restricted stock units 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 the grant. All units vested immediately. The shares of common stock associated with the restricted stock units 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 September 30, 2022, the company grated granted four independent directors a total of 65,100 restricted stock units. The units were valued at $65,002 or $ per share, based on the closing stock price on the date of the grant. All units vested immediately. The shares of common stock associated with the restricted stock units 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 December 31, 2022 the Company granted four independent directors a total of 47,104 restricted stock units. The units were valued at $65,004 or $1.38 per share, based on the closing stock price on the date of the grant. All units vested immediately. The shares of common stock associated with the restricted stock units will be issued to each director upon the earliest to occur of (A) December 31, 2025, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.
During the three months ended March 31, 2022, the Company recorded $65,002 in restricted stock expense as board compensation.
2023
On March 31, 2023, the company grated granted four independent directors a total of 61,342 restricted stock units. The units were valued at $65,002 or $1.05 per share, based on the closing stock price on the date of the grant. All units vested immediately. The shares of common stock associated with the restricted stock units 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 three months ended March 31, 2023, the Company recorded $65,003 in restricted stock expense 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 months ended March 31, 2023 and 2022 was as follows:
| | Three Months Ended | |
| | March 31, | |
| | 2023 | | | 2022 | |
General and administrative | | $ | 65,003 | | | $ | 65,002 | |
Sales and marketing | | $ | — | | | $ | — | |
| | $ | 65,003 | | | $ | 65,002 | |
As of March 31, 2023, there was no unearned restricted stock unit compensation.
Warrants
The following table summarizes investor warrants as of March 31, 2023 and the years ended December 31, 2022 and 2021:
| | Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (Years) | |
Outstanding at December 31, 2021 | | | 3,246,690 | | | $ | 2.26 | | | | 3.59 | |
Granted | | | 6,089,398 | | | $ | — | | | | — | |
Exercised | | | (3,188,190 | ) | | $ | — | | | | — | |
Canceled/forfeited/expired | | | — | | | $ | — | | | | — | |
Outstanding at December 31, 2022 | | | 6,147,898 | | | $ | 1.45 | | | | 2.27 | |
Granted | | | 1,793,745 | | | $ | — | | | | — | |
Exercised | | | (3,587,487 | ) | | $ | — | | | | — | |
Canceled/forfeited/expired | | | — | | | $ | — | | | | — | |
Outstanding at March 31, 2023 | | | 4,354,156 | | | $ | 1.83 | | | | 2.37 | |
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 June 2025, and 1,062,500 shares at the exercise price of $0.80 per share, resulting in additional capital of $850,000.
On August 24, 2022, five private investors purchased 1,500,000 new warrants to purchase common stock at $1.50 per share over a three-year period expiring in August 2025, and 1,500,000 shares at the exercise price of $0.80 per share, resulting in additional capital of $1,200,000.
During the three months ended March 31, 2023, the Company issued warrants to purchase an aggregate of 177,571 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 $73,469 using the Black-Scholes option valuation model as of March 31, 2023.
2023
During the three months ended March 30, 2023, 15 warrant holders exercised their common stock purchase warrant for 3,587,487 shares at the exercise price of $1.00 per share, resulting in additional capital of $3,557,487. As an inducement for the holder’s exercise of the warrants, we issued the holders 1,793,745 new warrants to purchase common stock at $2.00 per share over a three-year period expiring in February 2025. The Company recorded $577,000 of stock-based expense related to warrants issued during the warrant conversion offer on February 14, 2023. The total estimated value of the warrants using the Black-Scholes Model is based on a volatility rate of 63% and an option fair value of $0.3216.
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 March 31, 2023 on a recurring and non-recurring basis:
Description | | Level 1 | | | Level 2 | | | Level 3 | | | Gains (Losses) | |
Goodwill (non-recurring) | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Intangibles, net (non-recurring) | | $ | — | | | $ | — | | | $ | 143,857 | | | $ | — | |
The following table presents assets that are measured and recognized at fair value as of December 31, 2022 on a recurring and non-recurring basis:
Description | | Level 1 | | | Level 2 | | | Level 3 | | | Gains (Losses) | |
Goodwill (non-recurring) | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Intangibles, net (non-recurring) | | $ | — | | | $ | — | | | $ | 194,772 | | | $ | — | |
10. Commitments and Contingencies
Litigation
As of the date of this report, the company has one pending legal proceeding related to TCPA (Telephone Consumer Protection Act) Violation. This is a putative class action complaint alleging that Defendant initiated telephone solicitations through text messages in violation of the Florida Telephone Solicitation Act, Fla. Stat. §501.059 (“FTSA”). The defense of the matter was tendered to the Company by its client, Sonic Industries, Inc., and our firm is managing the defense of the matter. The Company intends to seek an individual settlement of the matter, and if one cannot be reached, the Company intends to vigorously defend the matter. The discovery process has not begun so it is not possible at this time to calculate an accurate assessment of the Company’s exposure. No settlement loss has been accrued as it is too early in the proceedings estimate what it if any settlement loss will occur.
During the three months ended March 31, 2023 the Company has settled three TCPA claims for a total settlement loss of $10,000.
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 included a 50% abatement period. As of March 31, 2023, we have an operating lease asset balance for this lease of $930,658 and an operating lease liability balance for this lease of $1,127,671 recorded in accordance with ASC 842.
11. Related Party Transactions
Secured Notes
On June 30, 2021, we entered into a Credit Facility Agreement (the “Credit Agreement”) with Thomas Akin, one of the Company’s directors (the "Lender"). The Credit Agreement was amended on November 11, 2022. The Company can borrow up to $6,000,000 under the Credit Agreement ("the "Credit Facility").
The Credit Facility is secured by all of our tangible and intangible assets including intellectual property. 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 Credit 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 the Credit Agreement. The warrants are exercisable for a period commencing upon issuance of the corresponding 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.
Under the original terms of the Credit Agreement, the Company was to begin repaying the principal amount, plus accrued interest, in 24 equal monthly installments commencing on June 30, 2022, and ending on June 30, 2024. On November 11, 2022, an amendment to the Credit Agreement was signed. The amendment updated the payment terms to the following: "Without limiting the foregoing Section 2.3(a), Borrower shall repay the principal amount of all Advances, plus accrued interest thereon, in 24 equal monthly installments commencing on January 31, 2023 and continuing thereafter on the last day of each month (or, if such last day is not a Business Day, on the Business Day immediately preceding such last day. Interest on the unpaid Advances will accrue from the date of each Advance at a rate equal to fifteen percent (15%) per annum. Interest will be calculated on the basis of 365 days in a year." The amendment raised the maximum amount of the Credit Facility to $6,000,000. In addition, the interest which is accrued monthly between July 1, 2022, and December 31, 2022, will be settled into equity. Common Stock will be issued at the end of each month at a rate of $1.08 per share of common stock in the amount of the interest accrued for each month.
On January 31, 2023, the Company entered into Amendment No. 1 (the “Amendment”) to the Amended and Restated Credit Facility Agreement and Convertible Notes which amends our existing Amended and Restated Credit Facility Agreement, dated as of November 11, 2022, between the Company and Thomas B. Akin, a director of the Company (the “Existing Credit Agreement” and as amended by the Amendment, the “Credit Agreement”) and any convertible notes issued thereunder. The Amendment amends the Existing Credit Agreement to extend the maturity of the Credit Agreement and related convertible notes thereunder until December 1, 2025. Principal payments have been deferred to a period beginning on January 1, 2024 and ending December 1, 2025, and further provides that any accrued interest on unpaid advances under the Credit Agreement is to be paid quarterly in shares of our common stock, at a price per share equal to the volume-weighted average price of our common stock quoted on the OTCQB® Venture Market operated by OTC Markets Group Inc. over the ninety (90) trading days immediately preceding such date. The Amendment provides for corresponding amendments to the form of convertible note to be issued under the Credit Agreement in the future and any outstanding convertible notes issued under the Existing Credit Agreement.
During the three months ended March 31, 2023, a total of $195,171 of interest was accrued and settled to equity payable for the issuance of 180,715 shares of common stock. The company recorded a loss of settlement of interest payable of $10,315. The company issued 154,106 shares from equity payable related to accrued interest settled during the fourth quarter of 2022.
As of March 31, 2023, the Company had drawn a total of $5,173,125 and we have accrued interest of $387,918.
Unsecured Promissory Note
On July 1, 2021, we entered into UP Notes in the aggregate principal amount of $271,875 with Talkot Fund, LP and investor in 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 are due and payable no later than December 31, 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 to Talkot Fund LP 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 January 31, 2023, the Lender agreed to postpone the 24-month repayment period to a later period commencing on January 31, 2024, and further agreed that interest accrued on the loan between July 1, 2022 and December 01, 2025 is to be settled in shares of the Company’s common stock quarterly.
During the three months ended March 31, 2023, a total of $10,196 of interest was accrued and settled to equity payable for the issuance of 9,441 shares of common stock. The company recorded a loss of settlement of interest payable of $542 . The company issued 9,651 shares from equity payable related to accrued interest settled during the fourth quarter of 2022.
As of March 31,2023, the Company had a principal balance of $271,875, and accrued interest of $54,351.
Related Party Warrant Exercise
On March 2, 2023, Thomas Akin exercised his common stock purchase warrant for 749,987 shares at the exercise price of $1.00 per share, resulting in additional capital of $749,237. As an inducement for the holder’s exercise of the warrants, we issued the holders 374,994 new warrants to purchase common stock at $2.00 per share over a three-year period expiring in March 2026. The Company recorded $120,598 of stock-based expense related to warrants issued during the warrant conversion offer on February 14, 2023. The total estimated value of the warrants using the Black-Scholes Model is based on a volatility rate of 63% and an option fair value of $0.3216.
On February 7, 2022, Talkot Fund LP exercised his common stock purchase warrant for 750,000 shares at the exercise price of $1.00 per share, resulting in additional capital of $749,250. As an inducement for the holder’s exercise of the warrants, we issued the holders 375,000 new warrants to purchase common stock at $2.00 per share over a three-year period expiring in March 2026. The Company recorded $120,600 of stock-based expense related to warrants issued during the warrant conversion offer on February 14, 2023. The total estimated value of the warrants using the Black-Scholes Model is based on a volatility rate of 63% and an option fair value of $0.3216.
12. Subsequent Events
On May 8, 2023 a total of 180,715 shares of common stock were issued to Thomas Akin as settlement of interest payable.
On May 8, 2023 a total of 9,441 shares were issued to Talkot Fund, LP as settlement of interest payable.