MOBIVITY HOLDINGS CORP. - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-K



[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the fiscal year ended December 31, 2020

Or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ 



Commission file number 000-53851

Mobivity Holdings Corp.

(Exact Name of Registrant as Specified in Its Charter)





3133 West Frye Road,  # 215

Chandler,  Arizona 85226

(Address of Principal Executive Offices and Zip Code)



(877)  282-7660

(Telephone Number)



Securities registered pursuant to Section 12 (b) of the Act:

None



Securities registered pursuant to section 12 (g) of the Act:

Common Stock, $.001 par value



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes ☐    No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes ☐    No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒    No ☐

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

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

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes  No ☒

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2020 was $26,270,789.

As of March 23, 2021, the registrant had 55,410,695 shares of common stock issued and outstanding. 

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MOBIVITY HOLDINGS CORP.

ANNUAL REPORT ON FORM 10-K

FISCAL YEAR ENDED DECEMBER 31, 2020

TABLE OF CONTENTS



 

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FORWARD-LOOKING STATEMENTS



This Annual Report on Form 10-K, or Form 10-K, contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially and adversely from those expressed or implied by such forward-looking statements. The forward-looking statements are contained principally in Item 1—“Business,” Item 1.A—“Risk Factors” and Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations” but appear throughout the Form 10-K. Examples of forward-looking statements include, but are not limited to our expectations, beliefs or intentions regarding our potential product offerings, business, financial condition, results of operations, strategies or prospects and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “opportunity,” “plan,” “potential,” “predicts,” “seek,” “should,” “will,” or “would,” and similar expressions and variations or negatives of these words. These forward-looking statements are based on the expectations, estimates, projections, beliefs and assumptions of our management based on information currently available to management, all of which are subject to change. Such forward-looking statements are subject to risks, uncertainties and other factors that are difficult to predict and could cause our actual results and the timing of certain events to differ materially and adversely from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below in Item 1.A – “Risk Factors”. Furthermore, such forward-looking statements speak only as of the date of this Form 10-K. We undertake no obligation to update or revise publicly any forward-looking statements to reflect events or circumstances after the date of such statements for any reason, except as otherwise required by law.

 

Part I



Item 1.    Business



General Information



Mobivity Holdings Corp. (the “Company” or “we”) is in the business of developing and operating proprietary platforms over which brands and enterprises can conduct national and localized, data-driven marketing campaigns. 



Mobivity’s Recurrency platform enables multi-unit retailers to leverage the power of their own data to yield maximum customer spend, frequency and loyalty while achieving the highest Return on Marketing Spend (ROMS) possible. Mobivity’s customers use Recurrency to:

 

 

Mobivity’s Recurrency, delivered as a Software-as-a-Service (“SaaS”) platform, is used by leading brands including Subway, Sonic Drive-In, Chick-fil-A,  Checkers/Rally’s and Circle K’s across more than 40,000 retail locations globally.

 

We’re living in a data-driven economy. In fact, by 2003 — when the concept of “big data” became common vernacular in marketing - as much data was being created every two day as had been created in all of time prior to 2003. Today, Big Data has grown at such a rate that 90% of the world’s data has been created in the past two years. Unfortunately, despite there being so much data accumulated, only one percent of data is being utilized today by most businesses.



The challenge for multi-unit retailers isn’t that they don’t have enough data; in fact, national retailers are collecting millions of detailed transactions daily from thousands of points of sale around the world. The challenge is being able to make sense of this transaction data, which is riddled with data entry errors, collected by multiple POS systems and complicated by a taxonomy compiled by thousands of different franchisee owners. To normalize such an overwhelming amount of data into usable intelligence and then leverage it to optimize media investment and promotion strategy requires numerous teams of data analysts and data scientists that many retailers and restaurant operators simply don’t have. Which is why so many technology and data companies, that can help solve these challenges, have been invested in and acquired by brands including, McDonald’s, Starbucks and Yum Brands.



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Mobivity’s Recurrency platform fills this need with a self-service SaaS offering, enabling operators to intelligently optimize their promotions, media and marketing spend. Recurrency drives system-wide sales producing on average a 13% increase in guest spend and a 26% improvement in frequency, ultimately delivering an average Return on Marketing Spend of 10X. In other words, for every dollar invested in marketing, retailers using Recurrency to manage, optimize and deliver multi-channel consumer promotions generate an average of ten dollars in incremental revenue from their customers.

   

The Recurrency Platform

Mobivity's Recurrency™ platform unlocks valuable POS and mobile data to help transform customer transactions into actionable and attributable marketing insights. Our technology provides transactional data, in real-time, that uncovers market-basket information and attributes both online and traditional promotions.  Recurrency is comprised of seven components.



POS Data Capture

Recurrency captures, normalizes, integrates, and stores transaction data and is compatible with most POS systems  used by restaurants and retailers today. The result is a clean useful dataset upon which to predict and influence customers’ buying behavior and deliver basket-level insights.



Analytics Powered by Machine Learning 

Recurrency uses Machine Learning (“ML”) to uncover patterns in the buying behaviors of consumers and leverages that data to suggest pricing optimizations, and guide marketing campaigns.



Offers and Promotions

Recurrency provides a digital wallet system for creating and managing dynamic offers and promotions, enabling accurate and complete closed-loop attribution across all channels, media and marketing efforts. Retailers can deploy one-time, limited-use and multi-use promotions across all online and offline marketing channels that are scannable at the POS or redeemable online, enabling fraud-free, controllable promotion delivery and attribution at scale. Marketing teams can use the comprehensive attribution analysis and insights to optimize media mix and spend for maximum Return on Marketing Spend (“ROMS”).



Predictive Offers

Recurrency leverages the normalized data captured at the POS and applies Artificial Intelligence (“AI”) to build profiles of both known and anonymous customers, analyzes pre and post-redemption behavior and then predicts offers that will drive the highest increases in customer spend and frequency at the lowest discount possible. The result is optimized, personalized promotions that produce the highest ROMS possible.



Personalized Receipt Promotions

Recurrency unlocks the power of transactional data to create relevant and timely customer messages printed on the receipts already being generated at the POS. Both clients and agencies are using Recurrency to drive better results and make decisions around offers, promotions, and customer engagement through the medium of the printed receipt. Software integrated with leading POS systems, such as Oracle, MICROS, or installed directly onto receipt printer platforms, such as Epson’s OmniLink product, dynamically controls what is printed on receipts including images, coupons, announcements, or other calls-to-action, such as invitations to participate in a survey. Recurrency offers a Web-based interface where users can design receipt content and implement business rules to dictate what receipt content is printed in particular situations. All receipt content is also transmitted to cloud-based Recurrency for storage and analysis.



Customized Mobile Messaging

Recurrency transforms standard short message service (“SMS”), multimedia messaging service (“MMS”), and rich communication services (“RCS”) into a data-driven marketing medium. Recurrency tracks and measures offer effectiveness at a more granular level than other solutions, allowing clients to create smarter offers and drive higher redemption rates. Our proprietary platform connects to all wireless carriers so that any consumer, on any wireless service (for example, Verizon), can join our customer’s SMS/MMS mobile marketing campaign. Our customers use Recurrency’s self-service interface to build, segment, target and optimize mobile messaging campaigns to drive increased guest frequency and spend. Recurrency is an industry leader in RCS messaging and has an industry leading broadcast reach.



Belly Loyalty

Mobivity’s Belly Loyalty solution drives increased customer engagement and freqency with a customer-facing digital rewards platform via an app and digital pad. Using Belly, customers can customize rewards and leverage pre-built email campaigns and triggers to encourage greater frequency as well as identify and reactivate lapsed customers.



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Company Strategy



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





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



Recent Developments



We have entered into the following material transactions since January 1, 2019.



Unsecured Promissory Note Investments in 2019



During the year ended December 31, 2019, we conducted a private placement of Unsecured Promissory Notes (individually, a “Note” and collectively, the “Notes”) to one of our directors, in the principal aggregate amount of $3,500,000, which are due and payable two years after issuance. These Notes bear interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty. We conducted the private placement of our securities in July 2019. The Note holder participated in the private placement described below, by settling principal of $2,500,000 and accrued interest under the notes totaling  $82,916,  into 2,582,916 units of our securities.  The remaining 2019 Notes for $1,000,000 aggregated principal were settled with the December 2020 private placement described below.



2019 Private Placement



In July 2019, we commenced a private placement of 7,000,000 units of our securities, at a price of $1.00 per unit. Each unit consists of one share of our common stock and a common stock purchase warrant to purchase one-half share of our common stock, over a two- year period, at an exercise price of $1.25 per share. The offering was conducted by our management and no commission or other selling fees were paid by us.  During the year ended December 31, 2019 we issued 5,382,916 units under this placement, of which 2,582,916 units were issued in connection with a conversion of $2,582,916 of principal and accrued interest under the unsecured promissory Notes described in the preceding paragraph.



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Unsecured Promissory Note Investments in 2020



During the year ended December 31, 2020, we issued to one of our directors, unsecured Notes in the principal aggregate amount of $700,000, which are due and payable two years after issuance.  These Notes bear interest on the unpaid balance at the rate of fifteen percent (15%) per annum.  The Company may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty.  We conducted the private placement of our securities in December 2020. The Note holder participated in the warrant exercise described below and settled principal of $1,200,000 of principal under our 2019 and 2020 private placement Notes in addition to accrued interest under the notes totaling $192,208, into 1,113,767 shares of our common stock.  As of December 31, 2020, we have $500,000 as a remaining balance of these 2020 Notes and accrued interest of $8,958.



On April 10, 2020, we entered into a commitment loan with Chase Bank, N.A. under the CARES act and SBA Paycheck Protection Program, in the principal aggregate amount of $891,103, which is due and payable two years after issuance.  This note bears interest on the unpaid balance at the rate of one percent (1%) per annum.  The note contains a deferral period of six months, for which no interest or principal payments are due.  Forgiveness of the loan may be obtained by meeting certain SBA requirements.



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.



2020 Warrant Exercises 



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 an inducement for the holder’s exercise of the warrants, we issued the holders 2,666,459 new warrants to purchase common stock at $2.00 per share over a three-year period expiring in December 2023.     



Industry Background



Traditionally only sophisticated e-commerce brands, such as Amazon, were capable of personalizing and targeting their marketing to consumers as they navigated online shopping experiences that tracked their every move, all the way to check out. But despite the scale and success of e-commerce, it still accounts for just around 10% of commerce conducted in the U.S. The other 90% of “offline” merchants struggle to leverage data to combine with digital marketing channels and replicate the same personalized marketing tactics employed by successful e-commerce operators. Particularly, merchants are challenged with connecting purchase data collected by traditional point-of-sale terminals and mapping those transactions back to consumers to ensure that follow on marketing messages are personalized to the consumers purchase history.



Offline marketers will increasingly invest in technologies that leverage data to power personalized, digital consumer experiences and mimic how e-commerce marketers operate. This is a trend that has growing support from various industry analysts as well. McKinsey recently reported that “data activated marketing” can boost sales 15%-20% and significantly improve the ROI on marketing spend across marketing channels. While the upside of data driven marketing may seem obvious, marketers are also converging their digital and offline worldviews when it comes to thinking about how they allocate their marketing budgets. Gartner’s 2015–2016 Chief Marketing Officer (CMO) Spend Survey reported that 98 percent of CMOs no longer make a clear distinction between marketing online and offline and say the disciplines are merging. We believe that these trends reveal a material insight into how the market is converging towards our value proposition and will further propel our growth; as the market increasingly convinces itself of the upside of targeting its marketing based off of consumer data, as suggested by the McKinsey study, and the Gartner study suggests that offline and digital marketing disciplines are merging, then our unique approach to merging offline point-of-sale data with digital channels.



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Data driven marketing will also leverage the rapidly emerging field of “cognitive computing,” where computers are becoming intelligent – often referred to as “artificial intelligence”. Google CEO, Sundar Pichai, has described how Google is shifting from a mobile first world, to an AI first world; and actions speak louder than words - Google has acquired more artificial intelligence startups than Facebook and Microsoft combined. A recent forecast by Tractica (a market intelligence firm that focuses on human interaction with technology) suggests that annual worldwide AI revenue will grow at a combined annual growth rate of more than 49% to $36.8 billion by 2025. One of the key drivers to progress in this field is called “machine learning,” which aims to give computers the ability to learn without being explicitly programmed. This could open up entirely new possibilities where marketing becomes not just automated, but autonomous and entirely free of human intervention. Machine learning is powered by collecting massive amounts of data that can “train” machines to think on their own; an article in Fortune last year went as far as calling “data the new oil”. Jim Hare, research vice president at Gartner, proclaimed "As AI accelerates up the Hype Cycle, many software providers are looking to stake their claim in the biggest gold rush in recent years.”



The Mobivity Solution



Our Recurrency platform is designed to leverage point-of-sale data, along with cognitive computing, to increase visits, spend, and loyalty from consumers. We do this by capturing transaction detail, analyzing the data, and motivating customers and employees to take actions that improve business performance.





In the future, we intend to develop additional platform features with the goal of driving additional value by helping brick and mortar brands leverage POS data to drive business growth.



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Marketing and Sales



We market and sell the services offered over our proprietary platform directly through our own sales force, via resellers, and in some cases through agents.





Our services are predominantly marketed and sold in the form of a recurring software licensing fee that is determined by desired features and the number of physical locations our customers would like to deploy the services in. For example, a customer who exclusively utilizes our SMS/MMS feature for one location will pay a much lower recurring licensing fee than a marketer who desires our full breadth of product features and needs to drive localized marketing campaigns across 500 locations in various cities or locales.



In addition to license fees, we also arrange for a transaction fee in special cases where our customers require greater bandwidth or throughput to process large volumes of mobile messaging transactions. For example, a customer may want to utilize our services for a major sporting event when there may be tens of thousands of fans who are expecting a “score alert” sent to their mobile phone via a SMS/MMS text message. In this case, the required resources to facilitate a large number of SMS/MMS messages in a short period of time is much higher and therefore we may charge an additional per-SMS/MMS text message fee to our customer.



Research and Development



We have developed an internal and external software development team with many years of experience in the mobile advertising and marketing industries. Our research and development activities are focused on enhancements to our platform, including extending our technology into payment processing, location-based services, application analytics, and other technical opportunities in the evolving mobile industry.



Our total engineering, research and development expenditures in 2020 and 2019 were $3,535,742 and $3,609,968, respectively.



Competition



Combining POS data, cognitive computing, and various marketing applications is relatively new. The majority of our competitors are start-ups or early stage growth companies helping to pioneer the technology necessary to extract POS data and integrate that data with technology channels such as mobile messaging, e-mail, social media, and others. Competitors in this arena include Punchh, Fishbowl Marketing, Bridg, Sparkfly, Paytronix and PosIQ.



We also believe that POS manufacturers could also pose a competitive threat by vertically integrating similar features and capabilities into their core products. Leading vendors in the POS space include Oracle/Micros, NCR, IBM, Square, First Data/Clover, and others.



We believe that the key competitive factors that differentiate us from our competitors include:





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Seasonality



Our business, as is typical of companies in our industry, is highly seasonal. This is primarily due to traditional marketing and advertising spending being heaviest during the holiday season while brands, advertising agencies, mobile operators and media companies often close out annual budgets towards the end of the calendar year. Seasonal trends have historically contributed to, and we anticipate, will continue to contribute to fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.



Intellectual Property- 



We regard the protection of our developed technologies and intellectual property rights as an important element of our business operations and crucial to our success. We rely primarily on a combination of patent laws, trademark laws, copyright laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technology. We require our employees, consultants and advisors to enter into confidentiality agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with us is to be kept confidential and not disclosed to third parties except under specific circumstances. In the case of our employees, the agreements provide that all of the technology which is conceived by the individual during the course of employment is our exclusive property. The development of our technology and many of our processes are dependent upon the knowledge, experience and skills of key scientific and technical personnel.



As of the date of this report we own eight patents. U.S. Patent numbers 7,991,388 B1 and 8,244,216 B1 were issued on August 2, 2011 and August 14, 2012, respectively. These patents cover a geo-bio-metric personal identification number, a service that authenticates a

user from a feature phone or smart phone using a number of mobile attainable attributes: geolocation, facial image, accelerometer (which measures the physical orientation or movement of the device itself), and text messaging. The purpose of the geo-bio-metric PIN service is to authenticate a user while verifying the following: the user is currently using his or her other phone; the user is at the location that their phone is at; the user is not at another location and using their phone through a proxy; and an impostor is not using the phone.



In March 2011, we acquired US Patent number 6,788,769 B1 which covers a method and system for using telephone numbers as a key to address email and online content without the use of a look-up database. Using this system, a phone number is used to access a website or an email address in exactly the same way it is used to dial a telephone.    The patent expires in March of 2021.



U.S. Patent numbers 8,463,306 and 8,818,434 were issued on June 11, 2013 and August 26, 2014, respectively. U.S. Patent 9,307,430 was issued on April 5, 2016. These patents cover a method and system for testing a SMS/MMS text messaging network. The method and system allows for real-time testing of the initiation and completion of SMS/MMS text messages and any delivery delays across the major American mobile phone carriers, and accurately measures the progress on SMS/MMS broadcasts and records when a broadcast has been completed.



U.S Patent number 9,495,671 was granted on November 15, 2016. U.S. Patent 9,727,853 was issued on August 8, 2017.  These patents cover a system to generate value added messages on receipts printed by point-of-sale (POS) systems based on various rules determined by information conveyed on the purchase receipt such as location, time of day, or other purchase data. The patent application claims priority to a patent application filed in 2006.



U.S. Patent number 10,475,017 B2 was granted on November 12, 2019. This patent covers a point-of-sale terminal and a computer-readable storage medium that generates transaction information for a commercial transaction, the transaction information including customer information and purchase information. The point-of-sale terminal may generate nutritional information based on the purchase information. The point-of-sale terminal may send the customer information, the purchase information, and location information identifying a location of the POS terminal to an advertising server and may receive responsive advertising content from the advertising server. The point-of-sale terminal may print a receipt including the transaction information, the nutritional information, and the advertising content.



Our issued and any future patents that we may issue may not survive a legal challenge to their scope, validity or enforceability, or provide significant protection for us. The failure of our patents, or the failure of our copyright and trade secret laws to adequately protect our technology, might make it easier for our competitors to offer similar products or technologies. In addition, patents may not issue from any of our current or any future applications.



As of the date of this report we own trademarks for Boomtext, SmartReceipt, Livelenz, and several trademarks from the Belly acquisition.



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Government Regulation



The growth and development of the mobile messaging market and the market for electronic storage of personal information has resulted in a variety of stringent consumer protection laws, many of which impose significant burdens on companies that store personal information. Depending on the products and services that they offer, mobile data service providers may be subject to regulations and laws applicable to providers of mobile, Internet and VOIP services, including domestic and international laws and regulations relating to user privacy and data protection, defamation, pricing, advertising, taxation, gambling, sweepstakes, promotions, billing, real estate, consumer protection, accessibility, content regulation, quality of services, telecommunications, mobile, television and intellectual property ownership and infringement. We expect that the regulation of our industry generally will continue to increase and that we will be required to devote increasing amounts of legal and other resources to address this regulation. In addition, the application of existing domestic and international laws and regulations relating to issues such as user privacy and data protection, marketing, advertising, consumer protection and mobile disclosures in many instances is unclear or unsettled.



In addition to its regulation of wireless telecommunications providers generally, the U.S. Federal Communications Commission, or FCC, has examined, or is currently examining, how and when consumers enroll in mobile services, what types of disclosures consumers receive, what services consumers are purchasing and how much consumers are charged. In addition, the Federal Trade Commission, or FTC, has been asked to regulate how mobile marketers can use consumers' personal information. Consumer advocates claim that many consumers do not know when their information is being collected from cell phones and how such information is retained, used and shared with other companies. Consumer groups have asked the FTC to identify practices that may compromise privacy and consumer welfare; examine opt-in procedures to ensure consumers are aware of what data is at issue and how it will be used; investigate marketing tactics that target children; and create policies to halt abusive practices. The FTC has expressed interest, in particular, in the mobile environment and services that collect sensitive data, such as location-based information.



The principal laws and regulations that pertain to us and our customers in connection with their utilization of our platform, include:



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Employees



As of March 19, 2021, we had 44 employees, consisting of 23 full-time and one part-time in research and development, 15 full-time in sales and marketing, and five full-time in general and administrative.

  

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Item 1A.    Risk Factors.



Risks Relating to Our Business



We may need additional financing to execute our business plan and fund operations, which additional financing may not be available on reasonable terms or at all. As of December 31, 2020, we had working capital of $771,834.  While we  believe that our working capital on hand, 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. Also, we expect that we may require additional capital beyond the next 12 months unless we are able to achieve and maintain a profitable operation. In the event we require additional capital we will endeavor to raise additional funds through various financing sources, including the sale of our equity and debt securities and the procurement of commercial debt financing. However, there can be no guarantees that such funds will be available on commercially reasonable terms, if at all. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected. Any debt financing will increase expenses and must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced, and our stockholders may experience additional dilution in net book value per share.



Our ability to obtain needed financing may be impaired by such factors as the capital markets, both generally and specifically in our industry, and the fact that we are not yet profitable, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, we may be required to reduce or even cease operations.



Our business may be adversely affected by the COVID-19 outbreak. In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China.  During 2020, this coronavirus spread to other countries, including the United States, and efforts to contain the spread of COVID-19 intensified. The United States and other countries had a series of lock-downs and self-isolation procedures, which have significantly limited business operations and restricted internal and external meetings. Further, the outbreak and any preventative or protective actions that we or our customers may take in respect of COVID-19 may result in a period of disruption to other work in progress. Our customers’ businesses could be disrupted, and our future costs and potential revenues and technology evaluations could be negatively affected. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect our business and financial condition. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted.  New information may emerge concerning the severity and variants of COVID-19 along with the development of vaccines and the actions to contain COVID-19 or treat its impact, among others.



Our sales efforts to large enterprises require significant time and effort and could hinder our ability to expand our customer base and increase revenue. Attracting new customers to our large enterprise division requires substantial time and expense, especially in an industry that is so heavily dependent on personal relationships with executives. We cannot assure that we will be successful in establishing new relationships or maintaining or advancing our current relationships. For example, it may be difficult to identify, engage and market to customers who do not currently perform mobile marketing or advertising or are unfamiliar with our current services or platform. Further, many of our customers typically require input from one or more internal levels of approval. As a result, during our sales effort, we must identify multiple people involved in the purchasing decision and devote a sufficient amount of time to presenting our products and services to those individuals. The complexity of our services often requires us to spend substantial time and effort assisting potential customers in evaluating our products and services including providing demonstrations and benchmarking against other available technologies. We expect that our sales process will become less burdensome as our products and services become more widely known and used. However, if this change does not occur, we will not be able to expand our sales effort as quickly as anticipated and our sales will be adversely affected.



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We may not be able to enhance our platform to keep pace with technological and market developments, or to remain competitive against potential new entrants in our markets. The market for mobile marketing and advertising services is emerging and is characterized by rapid technological change, evolving industry standards, frequent new product introductions and short product life cycles. Our current platform and services may not in the future be acceptable to marketers and advertisers. To keep pace with technological developments, satisfy increasing customer requirements and achieve acceptance of our marketing and advertising campaigns, we will need to enhance our current mobile marketing solutions and continue to develop and introduce on a timely basis new, innovative mobile marketing services offering compatibility, enhanced features and functionality on a timely basis at competitive prices. Our inability, for technological or other reasons, to enhance, develop, introduce and deliver compelling mobile marketing services in a timely manner, or at all, in response to changing market conditions, technologies or customer expectations could have a material adverse effect on our operating results or could result in our mobile marketing services platform becoming obsolete. Our ability to compete successfully will depend in large measure on our ability to maintain a technically skilled development and engineering staff and to adapt to technological changes and advances in the industry, including providing for the continued compatibility of our mobile marketing services platform with evolving industry standards and protocols. In addition, as we believe the mobile marketing market is likely to grow substantially, other companies which are larger and have significantly more capital to invest than us may emerge as competitors.  For example, in August of 2019 Attentive Mobile raised $40M in private venture financing. Similarly, in November of 2019, Punchh raised $40M in private venture funding. New entrants could seek to gain market share by introducing new technology or reducing pricing. This may make it more difficult for us to sell our products and services, and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share or expected market share, any of which may significantly harm our business, operating results and financial condition.



Our services are provided on mobile communications networks that are owned and operated by third parties who we do not control and the failure of any of these networks would adversely affect our ability to deliver our services to our customers. Our mobile marketing and advertising platform is dependent on the reliability of mobile operators who maintain sophisticated and complex mobile networks. Such mobile networks have historically, and particularly in recent years, been subject to both rapid growth and technological change. If the network of a mobile operator with which we are integrated should fail, including because of new technology incompatibility, the degradation of network performance under the strain of too many mobile consumers using it, or a general failure from natural disaster or political or regulatory shut-down, we will not be able provide our services to our customers through such mobile network. This in turn, would impair our reputation and business, potentially resulting in a material, adverse effect on our financial results.



If our platform does not scale as anticipated, our business will be harmed. We must be able to continue to scale to support potential ongoing substantial increases in the number of users in our actual commercial environment and maintain a stable service infrastructure and reliable service delivery for our mobile marketing and advertising campaigns. In addition, we must continue to expand our service infrastructure to handle growth in customers and usage. If our mobile marketing services platform does not efficiently and effectively scale to support and manage a substantial increase in the number of users while maintaining a high level of performance, the quality of our services could decline and our business will be seriously harmed. In addition, if we are unable to secure data center space with appropriate power, cooling and bandwidth capacity, we may not be able to efficiently and effectively scale our business to manage the addition of new customers and overall mobile marketing campaigns.



The success of our business depends, in part, on wireless carriers continuing to accept our customers' messages for delivery to their subscriber base. We depend on wireless carriers to deliver our customers' messages to their subscriber base. Wireless carriers often impose standards of conduct or practice that significantly exceed current legal requirements and potentially classify our messages as "spam," even where we do not agree with that conclusion. In addition, the wireless carriers use technical and other measures to attempt to block non-compliant senders from transmitting messages to their customers; for example, wireless carriers block short codes or Internet Protocol addresses associated with those senders. There can be no guarantee that we, or short codes registered to us, will not be blocked or blacklisted or that we will be able to successfully remove ourselves from those lists. Although our services typically require customers to opt-in to a campaign, minimizing the risk that our customers' messages will be characterized as spam, blocking of this type could interfere with our ability to market products and services of our customers and communicate with end users and could undermine the effectiveness of our customers' marketing campaigns. To date we have not experienced any material blocking of our messages by wireless carriers, but any such blocking could have an adverse effect on our business and results of operations.



We depend on third party providers for a reliable Internet infrastructure and the failure of these third parties, or the Internet in general, for any reason would significantly impair our ability to conduct our business. We outsource all of our data center facility management to third parties who host the actual servers and provide power and security in multiple data centers in each geographic location. These third-party facilities require uninterrupted access to the Internet. If the operation of our servers is interrupted for any reason, including natural disaster, financial insolvency of a third-party provider, or malicious electronic intrusion into the data center, our business would be significantly damaged. As has occurred with many Internet-based businesses, on occasion in the past, we have been subject to "denial-of-service" attacks in which unknown individuals bombarded our computer servers with requests for data, thereby degrading the servers' performance. While we have historically been successful in relatively quickly identifying and neutralizing these attacks, we cannot be certain that we will be able to do so in the future. If either a third-party facility failed, or our ability to access the Internet was interfered with because of the failure of Internet equipment in general or we become subject to malicious attacks of computer intruders, our business and operating results will be materially adversely affected.

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Failure to adequately manage our growth may seriously harm our business. We operate in an emerging technology market and have experienced, and may continue to experience, significant growth in our business. If we do not effectively manage our growth, the quality of our products and services may suffer, which could negatively affect our brand and operating results. Our growth has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational and financial resources and our infrastructure. Our future success will depend, in part, upon the ability of our senior management to manage growth effectively. This will require us to, among other things:





Moreover, as our sales increase, we may be required to concurrently deploy our services infrastructure at multiple additional locations or provide increased levels of customization. As a result, we may lack the resources to deploy our mobile marketing services on a timely and cost-effective basis. Failure to accomplish any of these requirements would seriously harm our ability to deliver our mobile marketing services platform in a timely fashion, fulfill existing customer commitments or attract and retain new customers.



The gathering, transmission, storage and sharing or use of personal information could give rise to liabilities or additional costs of operation as a result of governmental regulation, legal requirements, civil actions or differing views of personal privacy rights. We transmit and store a large volume of personal information in the course of providing our services. Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we receive from our customers and their users. Any failure, or perceived failure, by us to comply with U.S. federal, state, or international privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business, operating results and financial condition. Additionally, we may also be contractually liable to indemnify and hold harmless our customers from the costs or consequences of inadvertent or unauthorized disclosure of their customers' personal data which we store or handle as part of providing our services.



The interpretation and application of privacy, data protection and data retention laws and regulations are currently unsettled in the U.S. and internationally, particularly with regard to location-based services, use of customer data to target advertisements and communication with consumers via mobile devices. Such laws may be interpreted and applied inconsistently from country to country and inconsistently with our current data protection policies and practices. Complying with these varying international requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business, operating results or financial condition.



As privacy and data protection have become more sensitive issues, we may also become exposed to potential liabilities as a result of differing views on the privacy of personal information. These and other privacy concerns, including security breaches, could adversely impact our business, operating results and financial condition.



In the U.S., we have voluntarily agreed to comply with wireless carrier technological and other requirements for access to their customers' mobile devices, and also trade association guidelines and codes of conduct addressing the provision of location-based services, delivery of promotional content to mobile devices and tracking of users or devices for the purpose of delivering targeted advertising. We could be adversely affected by changes to these requirements, guidelines and codes, including in ways that are inconsistent with our practices or in conflict with the rules or guidelines in other jurisdictions.



We currently rely on a small concentration of customers to use our products to generate our revenues, and the loss or change in any of these significant relationships could materially reduce our revenues.  Although we believe we have a good relationship with these customers, our contracts with these customers are short-term in nature.  Should these customers choose to terminate their contracts with us or if material events occur that are detrimental to these customers or their operations, it could have a significant negative impact on our financial performance.  



We currently operate in limited vertical markets. Our customers primarily operate in the quick serve restaurant (“QSR”) industry and we expanded to the convenience store market. Should this industry be impacted by economical or other unforeseen events, it could have a significant negative impact on our financial performance.



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Risks Related to our Common Stock



There has been a limited trading market for our common stock. There has been a limited trading market for our common stock on the Over-the-Counter Bulletin Board. The lack of an active market may impair the ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies or technologies by using common stock as consideration.



The market price of our common stock may be, and is likely to continue to be, highly volatile and subject to wide fluctuations. The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including:





Some of these factors are beyond our control, and the impact of these risks, singly or in the aggregate, may result in material adverse changes to the market price of our common stock and/or our results of operations and financial condition.



We do not expect to pay dividends in the foreseeable future. We do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest any future earnings in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their common stock, and stockholders may be unable to sell their shares on favorable terms or at all. Investors cannot be assured of a positive return on investment or that they will not lose the entire amount of their investment in the common stock.



Our common stock may be considered to be a “penny stock” and, as such, any the market for our common stock may be further limited by certain SEC rules applicable to penny stocks. To the extent the price of our common stock remains below $5.00 per share or we have net tangible assets of $2,000,000 or less, our common shares will be subject to certain “penny stock” rules promulgated by the SEC. Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000). For transactions covered by the penny stock rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices and disclosure of the compensation to the brokerage firm and disclosure of the sales person working for the brokerage firm. These rules and regulations adversely affect the ability of brokers to sell our common shares and limit the liquidity of our securities.



We are a “smaller reporting company” and, as such are allowed to provide less disclosure than larger public companies. We are currently a “smaller reporting company,” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company and have a public float of less than $75 million and annual revenues of less than $50 million during the most recently completed fiscal year. As a “smaller reporting company”, we are able to provide simplified executive compensation disclosures in our SEC filings, are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting, and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports. Decreased disclosures in our SEC filings due to our status as a “smaller reporting company” may make it harder for investors to analyze our results of operations and financial prospects.

  

Item 1B.  Unresolved Staff Comments.



Not applicable.

  

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Item 2.  Properties.



We have a lease through January 2021 for 10,395 square feet of office space located at 55 N. Arizona Ave., Suite 310, Chandler, Arizona. Monthly rental payments, excluding common area maintenance charges, are $20,140.  We have entered into a new lease starting in February of 2021 for 8,898 square feet of office space located at 3133 W. Frye Road, Suite 215, Chandler, Arizona.  Monthly rental payments, excluding common area maintenance charges, will be $25,953 to $28,733.  The first twelve months of the lease includes a 50% abatement period. 



We have a lease through April 2022 for 3,248 square feet of office space located in Halifax, Nova Scotia, at a monthly rental expense of $3,371 per month, excluding common area maintenance charges.

 

Item 3.  Legal Proceedings.



None.

 

Item 4.  Not applicable.

 

Part II



Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matter and Issuer Purchases of Equity Securities



Our common stock is quoted on the OTC Bulletin Board under the stock symbol “MFON”.



Our common stock trades only sporadically and has experienced in the past, and is expected to experience in the future, significant price and volume volatility.



The following table shows the reported high and low closing bid quotations per share for our common stock based on information provided by the OTC Bulletin Board for the periods indicated. Quotations reflect inter-dealer prices, without markup, markdown or commissions and may not represent actual transactions.











Holders of Record



As of March 19, 2021, there were 161 holders of record of our common stock, not including shares held in street name.



Dividend Policy



We have not paid any cash dividends since our inception and do not contemplate paying dividends in the foreseeable future. It is anticipated that earnings, if any, will be retained for the operation of our business.



Stock Repurchases



We did not repurchase any of our common stock in 2020 or 2019.



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Securities Authorized for Issuance Under Equity Compensation Plans



The following table sets forth additional information as of December 31, 2020 with respect to the shares of common stock that may be issued upon the exercise of options and other rights under our existing equity compensation plans and arrangements in effect as of December 31, 2020. The information includes the number of shares covered by, and the weighted average exercise price of, outstanding options and the number of shares remaining available for future grant, excluding the shares to be issued upon exercise of outstanding options.







(1)Comprised of our 2010 and 2013 Incentive Stock Plans.

 

Item 6.  Selected Financial Data



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

  

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations



The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes and other information that are included elsewhere in this Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward looking statements as a result of a number of factors, including those set forth under the cautionary note regarding “Forward Looking Statements” contained in Item 1.A – “Risk Factors”.



Overview



Mobivity Holdings Corp. (the “Company” or “we”) is in the business of developing and operating proprietary platforms over which brands and enterprises can conduct national and localized, data-driven marketing campaigns. 



Mobivity’s Recurrency platform enables multi-unit retailers to leverage the power of their own data to yield maximum customer spend, frequency and loyalty while achieving the highest Return on Marketing Spend (ROMS) possible. Mobivity’s customers use Recurrency to:

 

 

Mobivity’s Recurrency, delivered as a SaaS platform, is used by leading brands including Subway, Sonic Drive-In, Chick-fil-A,  Checkers/Rally’s and Circle K’s across more than 40,000 retail locations globally.

 

We’re living in a data-driven economy. In fact, by 2003 — when the concept of “big data” became common vernacular in marketing - as much data was being created every two day as had been created in all of time prior to 2003. Today, Big Data has grown at such a rate that 90% of the world’s data has been created in the past two years. Unfortunately, despite there being so much data accumulated, only one percent of data is being utilized today by most businesses.



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The challenge for multi-unit retailers isn’t that they don’t have enough data; in fact, national retailers are collecting millions of detailed transactions daily from thousands of points of sale around the world. The challenge is being able to make sense of this transaction data, which is riddled with data entry errors, collected by multiple POS systems and complicated by a taxonomy compiled by thousands of different franchisee owners. To normalize such an overwhelming amount of data into usable intelligence and then leverage it to optimize media investment and promotion strategy requires numerous teams of data analysts and data scientists that many retailers and restaurant operators simply don’t have. Which is why so many technology and data companies, that can help solve these challenges, have been invested in and acquired by brands including, McDonald’s, Starbucks and Yum Brands.



Mobivity’s Recurrency platform fills this need with a self-service SaaS offering, enabling operators to intelligently optimize their promotions, media and marketing spend. Recurrency drives system-wide sales producing on average a 13% increase in guest spend and a 26% improvement in frequency, ultimately delivering an average Return on Marketing Spend of 10X. In other words, for every dollar invested in marketing, retailers using Recurrency to manage, optimize and deliver multi-channel consumer promotions generate an average of ten dollars in incremental revenue from their customers.

 

Recent Events



Unsecured Promissory Note Investments in 2019



During the year ended December 31, 2019, we conducted a private placement of Unsecured Promissory Notes (individually, a “Note” and collectively, the “Notes”) to one of our directors in the principal aggregate amount of $3,500,000, which are due and payable two years after issuance. These Notes bear interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty. We conducted the private placement of our securities in July 2019. The Note holder participated in the private placement described below, by settling principal of $2,500,000 and accrued interest under the notes totaling  $82,916,  into 2,582,916 units of our securities.  The remaining 2019 Notes for $1,000,000 aggregated principal were settled with the December of 2020 private placement described below.



2019 Private Placement



In July 2019, we commenced a private placement of 7,000,000 units of our securities, at a price of $1.00 per unit. Each unit consists of one share of our common stock and a common stock purchase warrant to purchase one-half share of our common stock, over a two- year period, at an exercise price of $1.25 per share. The offering was conducted by our management and no commission or other selling fees were paid by us.  During the year ended December 31, 2019 we issued 5,382,916 units under this placement, of which 2,582,916 units were issued in connection with a settlement of $2,582,916 of principal and accrued interest under the unsecured promissory Notes described in the preceding paragraph.



Unsecured Promissory Note Investments in 2020



During the year ended December 31, 2020, we issued to one of our directors, unsecured Notes in the principal aggregate amount of $700,000, which are due and payable two years after issuance.  These Notes bear interest on the unpaid balance at the rate of fifteen percent (15%) per annum.  The Company may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty.  We conducted the private placement of our securities in December 2020. The Note holder participated in the warrant exercise described below and settled principal of $1,200,000 principal under our 2019 and 2020 private placement Notes in addition to accrued interest under the notes totaling $192,208, into 1,113,767 shares of our common stock. As of December 31, 2020, we have $500,000 as a remaining balance of these 2020 Notes and accrued interest of $8,958.



On April 10, 2020, we entered into a commitment loan with Chase Bank, N.A. under the CARES act and SBA Paycheck Protection Program, in the principal aggregate amount of $891,103, which is due and payable two years after issuance.  This note bears interest on the unpaid balance at the rate of one percent (1%) per annum.  The note contains a deferral period of six months, for which no interest or principal payments are due.  Forgiveness of the loan may be obtained by meeting certain SBA requirements.



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.



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2020 Warrant Exercises 



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, we conducted an offer to the holders of our outstanding common stock purchase warrants pursuant to which our warrant holders will be permitted to exercise their warrants at a reduced exercise price for a period expiring on December 18, 2020.  At the commencement of the December warrant offer, 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 an inducement for the holders’ exercise of the warrants, we issued the holders 2,666,459 new warrants to purchase common stock at $2.00 per share over a three-year period expiring in December 2023.  The warrant offer was conducted by our management and there were no commissions paid by us in connection with the solicitation.



Results of Operations



Year Ended December 31, 2020 Compared to Year Ended December 31, 2019



Revenues



Revenues consist primarily of a suite of products under the Recurrency platform.  The Recurrency platform is comprised of POS Data Capture,  Analytics,  Offers and Promotions,  Predictive Offers,  Personalized Receipt Promotions,  Customized Mobile Messaging, Belly Loyalty, and other revenues.



Revenues for the twelve months ended December 31, 2020 were $13,255,887, an increase of $3,198,965, or 32%, compared to $10,056,922 for the twelve months ended December 31, 2019. This increase is primarily due to the addition of $3,061,931 of revenue from non-recurring engineering fees paid by a large customer to accelerate expanded capabilities of our Offers and Promotions solution. 



Cost of Revenues



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



Cost of revenues for the twelve months ended December 31, 2020 was $4,748,444, a decrease of $1,189,854, or 20%, compared to $5,938,298 for the twelve months ended December 31, 2019. This decrease is primarily due to lower MMS messaging volume and decreased application costs associated with cost reduction initiatives by the Company, along with new revenues during the year that yielded higher margin. The gross profit margin was 64% and 41% for the for the twelve months ended December 31, 2020 and 2019, respectively.



General and Administrative



General and administrative expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, consulting costs and other expenses.



General and administrative expenses for the twelve months ended December 31, 2020 were $3,917,935, a decrease of $1,670,394, or 30%, compared to $5,588,329 for the twelve months ended December 31, 2019. The decrease in general and administrative expense was primarily due to an decrease in personnel, legal fees related to a one-time non-recurring legal charge incurred in 2019, and stock-based compensation expenses. 



Sales and Marketing Expense



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



Sales and marketing expenses for the twelve months ended December 31, 2020 were $2,325,709, a decrease of $381,647, or 14%, compared to $2,707,356 for the twelve months ended December 31, 2019. The decrease was primarily due to lower personnel and share based compensation expenses.



Engineering, Research, and Development Expense



Engineering, research, and development expenses consist primarily of salaries and personnel related expenses, stock-based compensation expense, consulting costs and other expenses.



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Engineering, research, and development expenses for the twelve months ended December 31, 2020 were $3,535,742, a decrease of $74,226, or 2%, compared to $3,609,968 for the twelve months ended December 31, 2019. The decrease in engineering, research, and development expense was primarily due to the company proactively reducing vendor costs.



Depreciation and Amortization Expense



Depreciation and amortization expense consist of depreciation on our equipment and amortization of our intangible assets.



Depreciation and amortization expenses for the twelve months ended December 31, 2020 were $674,942, an increase of $74,876, or 12%, compared to $600,066 for the twelve months ended December 31, 2019. This increase is primarily attributable to the increased amortization of our developed and acquired technologies.



Interest Income



Interest income consists of stated interest income on our cash balances. 



Interest income for the twelve months ended December 31, 2020 was $1,221, compared to $28,160 for the twelve months ended December 31, 2019.  This decrease of $26,939, or 96%, related to lower earnings on cash positions held throughout the year as compared to the prior year.



Interest Expense



Interest expense consists of stated or implied interest expense on our notes payable, amortization of note discounts, and amortization of deferred financing costs.



Interest expense for the twelve months ended December 31, 2020  was  $286,896, an increase of $50,190, or 21%, compared to $236,706 for the twelve months ended December 31, 2019. The increase is primarily attributable to the interest on short- and long-term borrowings during the year.



Loss on Disposal of Fixed Assets



Loss on disposal of fixed assets consists of an asset being disposed of for less than its carrying value.



Loss on disposal of fixed assets for the twelve months ended December 31, 2020  was  $8,808, an increase of 100%, compared to the twelve months ended December 31, 2019.  



Impairment on Intangible Assets



Impairment of intangible assets consists of an intangible asset valued at less than its carrying value. 



Loss on the impairment of intangible assets for the twelve months ended December 31, 2020  was  $8,886, an increase of 100%, compared to the twelve months ended December 31, 2019.  



Loss on Settlement of Debt



Loss on settlement of debt consists of loss recognized with the conversion of related party notes that were converted to equity.



The loss on settlement for the twelve months ended December 31, 2020  was  $668,260, an increase of $435,798, or 187%, compared to $232,462 for the twelve months ended December 31, 2019.  



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Foreign Currency



The Company’s financial results are impacted by volatility in the Canadian/U.S. Dollar exchange rate. The average U.S. Dollar exchange rate for the year ended December 31, 2020 and 2019 was $1 Canadian equals $0.75 and $0.75 U.S. Dollars, respectively.  The Company’s functional or measurement currency is the U.S. Dollar. Based on a U.S. Dollar functional currency, the following are the key areas impacted by foreign currency volatility:





The change in foreign currency was a gain of $117 and $6,129 for the years ended December 31, 2020 and 2019, respectively.

 

Liquidity and Capital Resources



We have $3,282,820 of cash as of December 31, 2020. We had a net loss of $2.9 million for the year then ended, and we used $1.3 million of cash in our operating activities during 2020.  Based on our projected 2021 results and, if necessary, our ability to reduce certain variable operating expenses, we believe that our existing capital, and operations, will be sufficient to finance our operations through 2021.



If our cash reserves prove insufficient to sustain operations, we plan to raise additional capital by selling shares of capital stock or other equity or debt securities. However, there are no commitments or arrangements for future financings in place at this time, and we can give no assurance that such capital will be available on favorable terms or at all. We may need additional financing thereafter until we can achieve profitability. If we cannot, we will be forced to curtail our operations or possibly be forced to evaluate a sale or liquidation of our assets. Any future financing may involve substantial dilution to existing investors.



Although we are actively pursuing financing opportunities, we may not be able to raise cash on terms acceptable to us or at all. There can be no assurance that we will be successful in obtaining additional funding. Financings, if available, may be on terms that are dilutive to our shareholders, and the prices at which new investors would be willing to purchase our securities may be lower than the current price of our ordinary shares. The holders of new securities may also receive rights, preferences or privileges that are senior to those of existing holders of our ordinary shares. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations in the short term.



Cash Flows







Operating Activities



We used cash in operating activities totaling $1,329,111 in 2020 and $5,749,595 in 2019, respectively. The decrease in cash used in operating activities in 2020 compared to 2019 was due primarily to a decrease in net loss by $5,903,577 offset by non-cash adjustments related to contracts receivable of ($572,441) and changes in accounts payable of ($1,321,012). 



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Investing Activities



Investing activities during 2020 included  $266,365 of capitalized software development costs, $17,505 of purchases related to securing new patents and $13,325 of equipment purchases. Investing activities during 2019 included $539,931 of capitalized software development costs, $5,025 of purchases related to securing new patents, and $12,277 of equipment purchases.



Financing Activities



Financing activities for 2020 include net proceeds from the sale of common stock units of $3,574,775, proceeds from related party notes payable of $700,000 and $920,990 from other notes payable, offset by payments on notes payable of $473,586 and payments of related party notes payable of $60,700. Financing activities for 2019 include net proceeds from the sale of common stock units of $2,800,000, proceeds from related party notes payable of $3,500,000 offset by payments on notes payable of $305,345. 



Critical Accounting Policies and Estimates



We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made, including those related to share-based compensation and valuation of the derivative liability. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.



The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.



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.



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 are collected by credit card or electronic funds transfer. 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 (Accounting Standards Codification 606 (“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 through the following steps:





During the years ended December 31, 2020 and 2019, two customers accounted for 77% and 70% of our revenues, respectively.

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Share-based compensation expense



Share-based compensation cost is measured at the date of grant, based on the calculated fair value of the stock-based award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the award). We estimate the fair value of employee stock options granted using the Black-Scholes Option Pricing Model. Key assumptions used to estimate the fair value of stock options include the exercise price of the award, the fair value of our common stock on the date of grant, the expected option term, the risk-free interest rate at the date of grant, the expected volatility and the expected annual dividend yield on our Company’s common stock. We have elected to account for forfeitures as they occur to determine the amount of compensation cost to be recognized in each period.



Derivative Financial Instruments



We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.



We review the terms of the common stock, warrants and convertible debt we issue to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.



Off-Balance Sheet Arrangements



We have no off-balance sheet arrangements.

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Item 8.  Financial Statements 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and

Stockholders of Mobivity Holdings Corp.



Opinion on the Consolidated Financial Statements



We have audited the accompanying consolidated balance sheets of Mobivity Holdings Corp. (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.



Basis for Opinion



These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.



We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.



Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.



Critical Audit Matters



The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.



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Revenue and Improper Revenue Recognition



As discussed in Note 1, the Company recognizes revenue upon transfer of control of promised services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.



Auditing management’s evaluation of agreements with customers involves significant judgment, given the fact that some agreements require management’s evaluation and allocation of the standalone transaction prices to the performance obligations.



To evaluate the appropriateness and accuracy of the assessment by management, we evaluated management’s assessment in relationship to the relevant agreements.   



M&K CPAS, PLLC



We have served as the Company’s auditor since 2012.



Houston, TX

March 30, 2021

 

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Mobivity Holdings Corp.

Consolidated Balance Sheets







See accompanying notes to consolidated financial statements.

 

 

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Mobivity Holdings Corp.

Consolidated Statements of Operations and Comprehensive Loss







See accompanying notes to consolidated financial statements.

 



 

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Mobivity Holdings Corp.

Consolidated Statement of Stockholders' Equity (Deficit)







See accompanying notes to consolidated financial statements.

 



 

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Mobivity Holdings Corp.

Consolidated Statements of Cash Flows







See accompanying notes to consolidated financial statements.

 



 

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Mobivity Holdings Corp.

Notes to Consolidated Financial Statements

 

1. The Company and Summary of Significant Accounting Policies



The Company



Mobivity Holdings Corp. (the “Company” or “we”) is in the business of developing and operating proprietary platforms over which brands and enterprises can conduct national and localized, data-driven marketing campaigns. 



Mobivity’s Recurrency platform enables multi-unit retailers to leverage the power of their own data to yield maximum customer spend, frequency and loyalty while achieving the highest Return on Marketing Spend (ROMS) possible. Mobivity’s customers use Recurrency to:

 

 

Mobivity’s Recurrency, delivered as a SaaS platform, is used by leading brands including Subway, Sonic Drive-In, Chick-fil-A, Checkers/Rally’s and Circle K’s across more than 40,000 retail locations globally.

 

We’re living in a data-driven economy. In fact, by 2003 — when the concept of “big data” became common vernacular in marketing - as much data was being created every two day as had been created in all of time prior to 2003. Today, Big Data has grown at such a rate that 90% of the world’s data has been created in the past two years. Unfortunately, despite there being so much data accumulated, only one percent of data is being utilized today by most businesses.



The challenge for multi-unit retailers isn’t that they don’t have enough data; in fact, national retailers are collecting millions of detailed transactions daily from thousands of points of sale around the world. The challenge is being able to make sense of this transaction data, which is riddled with data entry errors, collected by multiple POS systems and complicated by a taxonomy compiled by thousands of different franchisee owners. To normalize such an overwhelming amount of data into usable intelligence and then leverage it to optimize media investment and promotion strategy requires numerous teams of data analysts and data scientists that many retailers and restaurant operators simply don’t have. Which is why so many technology and data companies, that can help solve these challenges, have been invested in and acquired by brands including, McDonald’s, Starbucks and Yum Brands.



Mobivity’s Recurrency platform fills this need with a self-service SaaS offering, enabling operators to intelligently optimize their promotions, media and marketing spend. Recurrency drives system-wide sales producing on average a 13% increase in guest spend and a 26% improvement in frequency, ultimately delivering an average Return on Marketing Spend of 10X. In other words, for every dollar invested in marketing, retailers using Recurrency to manage, optimize and deliver multi-channel consumer promotions generate an average of ten dollars in incremental revenue from their customers.



We generate revenue by charging the resellers, brands and enterprises a per-message transactional fee, or through fixed or variable software licensing fees.



Liquidity



We have $3,282,820 of cash as of December 31, 2020. We had a net loss of $2.9 million for the year then ended, and we used $1.3 million of cash in our operating activities during 2020.  In 2019, we had a net loss of $8.8 million and used $5.7 million of cash in our operating expenses.  Based on our projected results for the 12 month period from the date of this report and, if necessary, our ability to reduce certain variable operating expenses, we believe that our existing capital, and operations, will be sufficient to finance our operations through 2021.



Principles of Consolidation and Basis of Presentation



The accompanying financial statements are consolidated and include the financial statements of Mobivity Holdings Corp., and our wholly-owned subsidiary. Intercompany transactions are eliminated.



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Use of Estimates



Preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management's best knowledge of current events and actions we may undertake in the future. Significant estimates used are those related to: stock-based compensation; valuation of acquired assets, intangible assets and liabilities; useful lives for depreciation and amortization of long-lived assets; future cash flows associated with impairment testing for goodwill, indefinite-lived intangible assets and other long-lived assets; valuation of derivative liabilities; valuation allowance for deferred tax assets; and contingencies.



Actual results may ultimately differ from estimates, although management does not generally believe such differences would materially affect the consolidated financial statements in any individual year. However, in regard to ongoing impairment testing of goodwill and indefinite-lived intangible assets, significant deterioration in future cash flow projections or other assumptions used in estimating fair values versus those anticipated at the time of the initial valuations, could result in impairment charges that materially affect the consolidated financial statements in a given year.



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 December 31, 2020 and 2019, we recorded an allowance for doubtful accounts of $33,848 and $88,071, respectively.



From time to time, we may have a limited number of customers with individually large amounts due. Any unanticipated change in one of the customer’s credit worthiness could have a material effect on the results of operations in the period in which such changes or events occurred.



As of December 31, 2020, we had two customer whose balance represented 75% of total accounts receivable. As of December 31, 2019, we had two customers whose balance represented 53% of total accounts receivable.



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, 2020 and 2019. As a result of these tests, we did not record impairment charges.



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



The Company’s evaluation of its long-lived assets completed resulted in no impairment charges during the years ended December 31, 2020 and December 31, 2019.



Software Development Costs

 

Software development costs include direct costs incurred for internally developed products and payments made to independent software developers and/or contract engineers. The Company accounts for software development costs in accordance with the FASB guidance for the costs of computer software to be sold, leased, or otherwise marketed (“ASC Subtopic 985-20”). Software development costs are capitalized once the technological feasibility of a product is established and such costs are determined to be recoverable. Technological feasibility of a product encompasses technical design documentation and integration documentation, or the completed and tested product design and working model. 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 impairment 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 asset resulted in impairment charges of $8,886 for the year ended December 30, 2020 and $0 for the year ended December 31, 2019.



Derivative Financial Instruments



We do not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.



We review the terms of the common stock, warrants and convertible debt we issue to determine whether there are embedded derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.



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 are collected by credit card. Revenue is recognized at the time that the services are rendered, and the selling price is fixed with a set range of plans. Cash received in advance of the performance of services is recorded as deferred revenue.



During the years ended December 31, 2020 and 2019,  two customers accounted for 77% and 70% of our revenues, 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. 



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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 $399,266 and $40,993 for years ended December 31, 2020 and 2019, respectively. We also include the cost of attending trade shows under marketing expense. We recorded $81,852 and $139,392 of expense related to those activities for the years ended December 31, 2020 and 2019, 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.



Computation of Net Loss per Common Share



Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all potential common stock equivalents (convertible notes payable, stock options, and warrants) are converted or exercised. The calculation of diluted net loss per share excludes potential common stock equivalents if the effect is anti-dilutive. Our weighted average common shares outstanding for basic and diluted are the same because the effect of the potential common stock equivalents is anti-dilutive.



We had the following dilutive common stock equivalents as of December 31, 2020 and 2019 which were excluded from the calculation because their effect was 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 February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”. Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company adopted this standard as of January 1, 2019.



In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230).” ASU No. 2016-18 requires that restricted cash be included with cash and cash equivalents when reconciling the change in cash flow.    The Company adopted this standard as of January 1, 2019. 

 

2. Acquisitions



We did not have any acquisitions in 2020 or 2019.

 

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3.  Goodwill and Intangible Assets



Goodwill



The following table presents goodwill and impairment for the years ended December 31, 2020 and 2019:







We conducted our annual impairment test of goodwill as of December 31, 2020 and 2019, which resulted in no impairment charges.  During the year ended December 31, 2019, there was an adjustment for $41,198 to correct the goodwill recorded related to the acquisition of Belly.



Intangible assets



The following table presents components of identifiable intangible assets for the years ended December 31, 2020 and 2019:







During the years ended December 31, 2020 and 2019, we recorded amortization expense related to our intangible assets of $150,701 and $178,653, respectively, which is included in depreciation and amortization in the consolidated statement of operations.



During the years ended December 31, 2020 and 2019, we recorded no impairment charges related to our intangible assets.



Expected future intangible asset amortization as of December 31, 2020 is as follows:











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4.  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 for the years ended December 31, 2020 and 2019:







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



During the years ended December 31, 2020 and 2019,  we capitalized $266,365 and 539,932 respectively of software development.  We recorded amortization expense for software development costs of $518,087 and $309,736, respectively which is included in depreciation and amortization in the consolidated statement of operations.



During the years ended December 31, 2020 and 2019, we recorded impairment charges of $8,886 and $0, respectively related to our software development costs.



The estimated future amortization expense of software development costs as of December 31, 2020 is as follows:





 

5.  Operating Lease Assets



Adoption of Accounting Standards Codification (“ASC”) Topic 842, “Leases." The Company adopted Topic 842 on January 1, 2019, using the modified retrospective method and the optional transition method to record the adoption impact through a cumulative adjustment to equity. Results for reporting periods beginning after January 1, 2019, are presented under Topic 842, while prior periods are not adjusted and continue to be reported under the accounting standards in effect for those periods.



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The following are additional details related to leases recorded on our balance sheet as of December 31, 2020:





During the year ended December 31, 2020, we recorded a credit to amortization expense of $17,214 and during the year ended December 31, 2019, we recorded expenses of $4,419 related to the accretion of the lease liability, which is included in depreciation and amortization in the consolidated statement of operations.



Rent expense was $317,774 and $320,496 for the years ended December 31, 2020 and 2019, respectively.



We have entered into a new lease starting in February of 2021 for 8,898 square feet of office space located at 3133 W. Frye Road, Suite 215, Chandler, Arizona.  Monthly rental payments, excluding common area maintenance charges, will be $25,953 to $28,733.  The first twelve months of the lease includes a 50% abatement period.  An operating lease asset and liability will be recorded when the lease commences in accordance with ASC 842.



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:









 

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6.   Notes Payable and Interest Expense



Notes Payable



The following table presents details of our notes payable as of December 31, 2020 and 2019:







Principal payments on notes payables are due as follows:







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BDC Term Loan



On January 8, 2016, Livelenz, a wholly-owned subsidiary of the Company (“Livelenz”), entered into an amendment of their original loan agreement dated August 26, 2011 with the Business Development Bank of Canada (“BDC”). Under this agreement the loan would have matured, and the commitments would have terminated on September 15, 2019.

 

On July 26, 2019, Livelenz, entered into an amendment of their original loan agreement dated August 26, 2011 with the Business Development Bank of Canada (“BDC”). Under this agreement the loan will mature, and the commitments will terminate on October 15, 2021. In accordance with the amendment, the Company will commence monthly payments beginning on August 15, 2019 of principal in the amount of $8,500 CAD in addition to the monthly payment of accrued interest at 23.5%. These payments increased to $10,000 CAD on November 15, 2019, $12,000 CAD on May 15, 2020, and will increase to $14,000 CAD on March 15, 2021 with the final payments of $16,000 CAD on September 15, 2021 and $80,000 CAD on October 15, 2021 in addition to the monthly interest. During the twelve months ended December 31, 2020 we repaid $88,000 CAD of principal.



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 without interest and repayments began on June 1, 2016, while 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, and will increase to $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.  During the twelve months ended December 31, 2020, we repaid $10,485 CAD of principal.  Nine months of payments were voluntarily deferred by ACOA due to COVID-19. 



Wintrust Loan



On November 14, 2018, we entered into a Loan and Security Agreement with Wintrust Bank. The Loan and Security Agreement provides for a single-term loan to us in the original principal amount of $1,000,000.  Interest accrues on the unpaid principal amount at the rate of prime plus 1.5%. The loan is a three-year loan and was interest-only payable for the first six months of the loan. Commencing on May 1, 2019, we made monthly payments of principal in the amount of $33,333 in addition to the monthly payment of accrued interest. The loan is secured by all of our assets other than our intellectual property. We used the proceeds of the loan to re-finance a loan in the principal amount of $1,000,000 we assumed as part of the acquisition of the Belly assets.



On August 7, 2020, the Company entered into an amendment of their original loan agreement dated November 14, 2018 with Wintrust Bank.  Under this agreement, the covenant calculation was amended to calculate covenants under a borrowing base methodology.  The Company had defaulted under the March 31, 2020 and June 30, 2020 covenants, which were waived upon execution of the amendment and there were no defaults after the amendment.  During the twelve months ended December 31, 2020, we repaid $400,000 of principal.



Chase Loan

 

On April 10, 2020, we entered into a commitment loan with Chase Bank, N.A. under the CARES act and SBA Paycheck Protection Program, in the principal aggregate amount of $891,102, which is due and payable two years after issuance. This note bears interest on the unpaid balance at the rate of one percent (1%) per annum. The note contains a deferral period of six months, for which no interest or principal payments are due. Forgiveness of the loan may be obtained by meeting certain SBA requirements.

 

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 December 31, 2022. 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



During February 2018, we conducted a private placement of Unsecured Promissory Notes (individually, a “Note” and collectively, the “Notes”) in the aggregate principal amount of $1,080,000 to certain investors, officers and directors of the Company.  Each Note bears interest on the unpaid balance at the rate of fifteen percent (15%) per annum and the principal and accrued interest is due and payable no later than December 1, 2018. We may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty.  The Note offer was conducted by our management and there were no commissions paid by us in connection with the solicitation. During 2019, we repaid $1,000,000 and had $80,000 as a remaining balance of these Notes plus accrued interest.



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During the year ended December 31, 2019 we issued unsecured Notes in the principle aggregate amount of $3,500,000, which become due two years after the date of issuance.  These Notes bear interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty.



On July 2, 2019, $2,500,000 of this Note and the accrued interest of $82,916 was settled into equity and we recorded a loss on conversion of debt of $232,462 for the year ended December 31, 2019. As of December 31, 2019, we had a principal balance of $1,080,000 as a remaining balance of these Notes plus accrued interest.



On February 26, 2020, we issued an unsecured Note in the principle aggregate amount of $200,000, which becomes due two years after the date of issuance. This Note bears interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay this Note without notice, subject to a two percent (2%) pre-payment penalty.



On November 18, 2020, we issued two additional unsecured Notes in the principle aggregate amount of $500,000, which becomes due two years after the date of issuance. This Note bears interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay this Note without notice, subject to a two percent (2%) pre-payment penalty.



On December 31, 2020 $1,200,000 of these 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.



Interest Expense



The following table summarizes interest expense for the years ended December 31, 2020 and 2019:





 



7.  Common Stock and Equity Payable



Common Stock



2019



In July 2019, the Company commenced a private placement of its common stock units, with each unit consisting of one share of our common stock and a warrant to purchase to one-half share of our common stock at an exercise price of $1.25 per share at an offering price of $1.00 per unit. As of December 31, 2019, the Company had sold 2,800,000 units of its common stock for gross proceeds of $2,800,000. In addition, the Company issued 2,582,916 units of its common stock associated with the settlement of $2,500,000 of principal, $82,916 of accrued interest, and a loss on settlement of $232,462 (See Note 6).



On December 31, 2019, the Company recorded stock-based compensation expense of $263,378 related to restricted stock units for members of our board of directors.



As of December 31, 2019 we had an equity payable balance of $100,862.



2020

 

On March 2, 2020, the Company issued 234,500 shares of common stock in exchange for cash in conjunction with a warrant exercise. The shares were exercised at the strike price of $1.00 per share.

 

On September 17, 2020, the Company issued 15,000 shares of common stock in exchange for cash in conjunction with a stock option exercise. The shares were exercised at the strike price of $0.48 per share.



In December of 2020, the Company commenced a private placement of its common stock with warrant exercises for one unit of our common stock at an exercise price of $1.25 per share to receive a new warrant to purchase to one share of our common stock at an exercise price of $2.00 per share. As of December 31, 2020, the Company had sold 2,666,459 units of its common stock for gross proceeds of $3,333,074. In addition, the Company issued 1,113,767 units of its common stock associated with the settlement of $1,200,000 of principal, $192,208 of accrued interest, and a loss on settlement of $668,260 (See Note 6). 



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On December 31, 2020, the Company recorded stock-based compensation expense of $260,003 related to restricted stock units for members of our board of directors.



 As of December 31, 2020 we had an equity payable balance of $100,862.

 

8.  Stock-based Plans and Stock-based Compensation



Stock-based Plans



We have the 2010 Incentive Stock Option Plan and the 2013 Incentive Stock Option Plan under which we have granted stock options to our directors, officers and employees. At December 31, 2020,  3,477,356 shares were authorized under the plans and 33,032,730 shares were available for future grant.



We believe that such awards better align the interests of our directors, officers and employees with those of our shareholders. Option awards are generally granted with an exercise price that equals the fair market value of our stock at the date of grant. These option awards generally vest based on four years of continuous service and have 10-year contractual terms.



The following table summarizes stock option activity under our stock-based plans as of and for the years ended December 31, 2020 and 2019:







The aggregate intrinsic value of options was calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock. At December 31, 2020, options to purchase 5,990,884 shares of common stock were in-the-money.



The weighted average grant-date fair value of options granted during the years 2020 and 2019 was $0.79 and $0.71, respectively.



2019



On January 7, 2019, the Company granted one employee a total of 10,000 options to purchase shares of the Company common stock at the closing price as of January 7, 2019  of $1.17 per share. The Option Shares will vest ratably over forty-eight (48) months and are exercisable until January 7, 2029.  The total estimated value using the Black-Scholes Model, based on a volatility rate of 90.82% and an option fair value of $.88 was $8,821.



On January 21, 2019, the Company granted one employee a total of 15,000 options to purchase shares of the Company common stock at the closing price as of January 21, 2019 of $1.17 per share. The option shares will vest ratably over forty-eight (48) months and are exercisable until January 21, 2029.  The total estimated value using the Black-Scholes Model, based on a volatility rate of 90.75% and an option fair value of $0.88 was $13,239.



On February 12, 2019, the Company granted one employee a total of 150,000 options to purchase shares of the Company common stock at the closing price as of February 12, 2019  of $1.00 per share. The option shares will vest ratably over forty-eight (48) months and are exercisable until February 12, 2029.  The total estimated value using the Black-Scholes Model, based on a volatility rate of 90.79% and an option fair value of $0.75 was $113,046.

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On February 18, 2019, the Company granted one employee a total of 15,000 options to purchase shares of the Company common stock at the closing price as of February 18, 2019  of $1.05 per share. The option shares will vest ratably over forty-eight (48) months and are exercisable until February 18, 2029.  The total estimated value using the Black-Scholes Model, based on a volatility rate of 90.88% and an option fair value of $0.84 was $12,537.



On February 25, 2019, the Company granted one employee a total of 50,000 options to purchase shares of the Company common stock at the closing price as of February 25, 2019  of $1.00 per share. The option shares will vest ratably over forty-eight (48) months and are exercisable until February 25, 2029.  The total estimated value using the Black-Scholes Model, based on a volatility rate of 90.88% and an option fair value of $0.75 was $37,697.



On March 11, 2019, the Company granted one employee a total of 50,000 options to purchase shares of the Company common stock at the closing price as of March 11, 2019  of $1.00 per share. 775,000 option shares will vest ratably over forty-eight (48) months and are exercisable until March 11, 2029.    500,000 option shares will vest immediately, and 500,000 option shares will vest on May 17, 2023. The total estimated value using the Black-Scholes Model, based on a volatility rate of 90.90% and an option fair value of $0.75 was $37,688.



On May 17, 2019, the Company granted three employees a total of 1,775,000 options to purchase shares of the Company common stock at the closing price as of May 17, 2019  of $1.04 per share. The option  shares will vest ratably over forty-eight (48) months and are exercisable until May 17, 2029.  The total estimated value using the Black-Scholes Model, based on a volatility rate of 80.17% and an option fair value of $0.72 was $1,283,178.



On August 21, 2019, the Company granted four employees a total of 140,000 options to purchase shares of the Company common stock at the closing price as of August 21, 2019  of $0.95 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 21, 2029. The total estimated value using the Black-Scholes Model, based on a volatility rate of 80.17% and an option fair value of $0.65 was $91,537.



On October 21, 2019, the Company granted one employee 150,000 options to purchase shares of the Company common stock at the closing price as of October 21, 2019  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 October 21, 2029. The total estimated value using the Black-Scholes Model, based on a volatility rate of 74.18% and an option fair value of $0.64 was $96,165.



On November 19, 2019, the Company granted twelve employees a total of 237,500 options to purchase shares of the Company common stock at the closing price as of November 19, 2019  of $0.88 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 November 19, 2029. The total estimated value using the Black-Scholes Model, based on a volatility rate of 78.70% and an option fair value of $0.60 was $142,409.



2020



On March 24, 2020, the Company granted one employee a total of 15,000 options to purchase shares of the Company common stock at the closing price as of March 24, 2020 of $0.65 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 24, 2030. The total estimated value using the Black-Scholes Model, based on a volatility rate of 77.56% and an option fair value of $0.43 was $6,472.



On April 6, 2020, the Company granted four employees a total of 700,000 options to purchase shares of the Company common stock at the closing price as of April 6, 2020 of $0.70 per share. 500,000 option shares will vest 25% on the first anniversary of the grant, then equally in 36 monthly installments thereafter and are exercisable until April 6, 2030. 200,000 option shares will vest ratably over forty-eight (48) months and are exercisable until April 6, 2030. The total estimated value using the Black-Scholes Model, based on a volatility rate of 78.21% and an option fair value of $0.47 was $326,752.



On November 5, 2020, 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 November 5, 2020 of $0.96 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 November 5, 2030. The total estimated value using the Black-Scholes Model, based on a volatility rate of 77.36% and an option fair value of $0.63 was $12,689.



On December 7, 2020, the Company granted one employee a total of 600,000 options to purchase shares of the Company common stock at the closing price as of December 7, 2020 of $1.55 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 December 7, 2030. The total estimated value using the Black-Scholes Model, based on a volatility rate of 77.35% and an option fair value of $1.03 was $615,495.



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On December 17, 2020, the Company granted six employees a total of 210,000 options to purchase shares of the Company common stock at the closing price as of December 17, 2020 of $1.83 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 December 17, 2030. The total estimated value using the Black-Scholes Model, based on a volatility rate of 77.41% and an option fair value of $1.21 was $254,373.



Stock-based Compensation Expense



The impact on our results of operations of recording stock-based compensation expense for the years ended December 31, 2020 and 2019 was as follows:







As of December 31, 2020, there was approximately $1,734,104 of unearned stock-based compensation that will be expensed from 2021 through 2025. If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel all or a portion of the remaining unearned stock-based compensation expense. Future unearned stock-based compensation will increase to the extent we grant additional equity awards.



Stock Option Valuation Assumptions



We calculated the fair value of each stock option award on the date of grant using the Black-Scholes option pricing model. The ranges of assumptions were used for the years ended December 31, 2020 and 2019:









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



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



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



The expected volatility in 2020 and 2019 is based on the historical publicly traded price of our common stock.



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Restricted stock units



The following table summarizes restricted stock unit activity under our stock-based plans as of and for the years ended December 31, 2020 and 2019:







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2019



On January 1, 2019, the Company issued to four independent directors a total of 222,224 restricted stock units. These restricted stock units were issued for the $260,000 of board compensation earned in 2018. The units were valued at $260,000 or $1.17 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 the director upon the earliest to occur of (A) January 1, 2022, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.



On March 31, 2019, the Company granted four independent directors a total of 72,224 restricted stock units. The units were valued at $65,001 or $0.90 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 the director upon the earliest to occur of (A) March 31, 2022, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.



On December 31, 2019, the Company granted four independent directors a total of 195,000 restricted stock units. The units were valued at $195,000 or $1.00 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 the director upon the earliest to occur of (A) December 31, 2022, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.



2020



On March 24, 2020, the Company issued to four independent directors a total of 100,000 restricted stock units. These restricted stock units were issued for the $65,000 of board compensation earned for the first quarter of 2020. The units were valued at $65,000 or $0.65 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 the director upon the earliest to occur of (A) March 24, 2023, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.



On August 7, 2020, the Company granted four independent directors a total of 81,252 restricted stock units. The units were valued at $65,000 or $0.80 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 the director upon the earliest to occur of (A) August 7, 2023, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.



On November 5, 2020, the Company granted four independent directors a total of 67,708 restricted stock units. The units were valued at $65,000 or $0.96 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 the director upon the earliest to occur of (A) November 5, 2023, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.



On December 17, 2020, the Company granted four independent directors a total of 35,520 restricted stock units. The units were valued at $65,000 or $1.83 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 the director upon the earliest to occur of (A) December 17, 2023, (B) a change in control of the Company, and (C) the termination of the director’s service with the Company.



In the twelve months ended December 31, 2020 and 2019, the company recorded $260,003 and $263,378, respectively, in restricted stock units as board compensation.



Restricted Stock Unit Compensation Expense



The impact on our results of operations of recording stock-based compensation expense for years ended December 31, 2020 and 2019 was as follows:





 

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9.  Warrants to Purchase Common Stock



The following table summarizes investor warrant activity as of and for the years ended December 31, 2020 and 2019:





 

We did not  record any stock-based compensation expense for the years ended December 31, 2020 and 2019, respectively in connection with the exercise of investor-based warrants.



Warrants Exercised in 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.      

 



10.  Income Taxes



On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was enacted and signed into law in response to the market volatility and instability resulting from the COVID-19 pandemic. It includes a significant number of tax provisions and lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (the 2017 Act). The changes are mainly related to: (1) the business interest expense disallowance rules for 2019 and 2020; (2) net operating loss rules; (3) charitable contribution limitations; (4) employee retention credit; and (5) the realization of corporate alternative minimum tax credits. The Company does not anticipate the application of the CARES Act provisions to materially impact the overall Consolidated Financial Statements.



For the years ended December 31, 2020 and 2019 the provisions for income taxes were as follows:







Under ASC 740, deferred income tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.



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Significant components of our net deferred tax assets and liabilities as of December 31, 2020 and 2019 are as follows:







The Company has provided a valuation allowance against deferred tax assets recorded as of December 31, 2020 and 2019 due to uncertainties regarding the realization of such assets.



The net change in the total valuation allowance for the year ended December 31, 2020 was an increase of approximately $568,000. The net change in the total valuation allowance for the year ended December 31, 2019 was an increase of approximately $2,326,000. In assessing the valuation of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. The Company considers projected future taxable income and planning strategies in making this assessment. Based on the level of historical operating results and projections for the taxable income for the future, the Company has determined that it is more likely than not that the deferred tax assets will not be realized. Accordingly, the Company has recorded a valuation allowance to reduce deferred tax assets to zero. There can be no assurance that the Company will ever be able to realize the benefit of some or all of the federal and state loss carryforwards, either due to ongoing operating losses or due to ownership changes, which limit the usefulness of the loss carryforwards.



As of December 31, 2020, the Company has available net operating loss carryforwards of approximately $53,000,000 for federal income tax purposes, which will start to expire in 2026. The net operating loss carryforwards for state purposes are approximately $53,000,000 and will start to expire in 2028.



The difference between the provision for income taxes and income taxes computed using the U.S. federal income tax rate for the years ended December 31, 2020 and 2019 was as follows:







The Company has determined that during 2010 it experienced a “change of ownership” as defined by Section 382 of the Internal Revenue Code. As such, utilization of net operating loss carryforwards and credits generated before the 2010 change in ownership will be limited to approximately $207,000 per year until such carryforwards are fully utilized. The pre change net operating loss carryforward was approximately $6,000,000. Since 2010 the Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since 2010, utilization of the net operating loss carryforwards tax credit carryforwards would be subject to further annual limitation under Section 382. Any limitation may result in expiration of a portion of the net operating loss carryforwards before utilization.



The Company files income tax returns in the U.S. federal jurisdiction, Arizona, and California. Because the Company is carrying forward federal and state net operating losses from 2006, the Company is subject to U.S. federal and state income tax examinations by tax authorities for all years since 2006. The Company does not have a liability for any uncertain tax positions. As of December 31, 2020,  no accrued interest or penalties are recorded in the financial statements.

 

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11.  Fair Value Measurements of Financial Instruments



The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2020:







The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019:







The Company recorded goodwill, intangible assets and an earn-out payable as a result its business combinations, and these assets were valued with the assistance of a valuation consultant and consisted of Level 3 valuation techniques.



The Company’s financial instruments consist of cash, accounts receivable, accounts payable, and accrued liabilities. The estimated fair value of cash, accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the short-term nature of these instruments. None of these instruments are held for trading purposes.

 

12.  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 through January 2021 for 10,395 square feet of office space located at 55 N. Arizona Ave., Suite 310, Chandler, Arizona. Monthly rental payments, excluding common area maintenance charges, are $20,140.    As of December 31, 2020, we have an operating lease asset balance for this lease of $17,449 and an operating lease liability balance for this lease of $20,028 recorded in accordance with ASC 842.  



We have entered into a new lease starting in February of 2021 for 8,898 square feet of office space located at 3133 W. Frye Road, Suite 215, Chandler, Arizona.  Monthly rental payments, excluding common area maintenance charges, will be $25,953 to $28,733.  The first twelve months of the lease includes a 50% abatement period.  An operating lease asset and liability will be recorded when the lease commences in accordance with ASC 842. 



The Company also has a lease through April 2022 for 3,248 square feet of office space located in Halifax, Nova Scotia, at a monthly rental expense of $3,371 per month, excluding common area maintenance charges. As of December 31, 2020, we have an  operating lease asset balance for this lease of $17,449 and an operating lease liability balance for this lease of $20,028 recorded in accordance with ASC 842.

 

13.  Employee Benefit Plan



The Company has an employee savings plan (the “Plan”) pursuant to Section 401(k) of the Internal Revenue Code (the “Code”), covering all of its employees. Participants in the Plan may contribute a percentage of compensation, but not in excess of the maximum allowed under the Code. The Company may make contributions at the discretion of its Board of Directors. During the years ended December 31, 2020 and 2019, the Company made no contributions to the Plan.

 

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14.  Related Party Transactions



Unsecured Promissory Note Investments in 2019



During the year ended December 31, 2018, we commenced an offer to certain investors, officers and directors of the Company  Unsecured Promissory Notes (individually, a “Note” and collectively, the “Notes”). In 2019, we issued to one of our directors, unsecured Notes in the principal aggregate amount of $3,500,000, which are due and payable two years after issuance. These notes bear interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay any of the Notes without notice, subject to a two percent (2%) pre-payment penalty. We conducted the private placement of our securities in July 2019. The Note holder participated in the private placement by settling principal of $2,500,000 and accrued interest under the notes totaling $82,916,  for 2,582,916 units of our securities.    The remaining 2019 Notes for $1,000,000 aggregated principal were settled with the December of 2020 private placement. As of December 31, 2020, we have $80,000 as a remaining balance of these Notes and accrued interest of $33,533. 



Unsecured Promissory Note Investments in 2020



On February 26, 2020, we issued an unsecured Note in the principle aggregate amount of $200,000, which becomes due two years after the date of issuance. This Note bears interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay this Note without notice, subject to a two percent (2%) pre-payment penalty.



On November 18, 2020, we issued two additional unsecured Notes in the principle aggregate amount of $500,000, which becomes due two years after the date of issuance. This Note bears interest on the unpaid balance at the rate of fifteen percent (15%) per annum. The Company may prepay this Note without notice, subject to a two percent (2%) pre-payment penalty.



On December 31, 2020 $1,200,000 of these 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.

 

15. Subsequent Events



Office Relocation



We have entered into a six-year office lease starting in February of 2021 for 8,898 square feet of office space located at 3133 W. Frye Road, Suite 215, Chandler, Arizona.  Monthly rental payments, excluding common area maintenance charges, will be $25,953 to $28,733.  The first twelve months of the lease includes a 50% abatement period.



Intellectual Property



U.S. Patent number 10,949,868 B1 was granted on March 16, 2021.  This patent covers the single use of electronic retailer coupons and referral program.  The method and system prevents fraud, is specific to geolocation and provides an audit trail of the customer, cashier and marketing platform.  A user can also earn a subsequent coupon by referring a friend.