SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-Q



(Mark One)



 

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

 

For the quarterly period ended September 30, 2018





 

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



For the transition period from ___________ to __________

 

Commission file number 000-53851



Mobivity Holdings Corp.

(Exact Name of Registrant as Specified in Its Charter)





 

 

Nevada

   

26-3439095

(State or Other Jurisdiction of

   

(I.R.S. Employer

Incorporation or Organization)

   

Identification No.)



55 N. Arizona Place, Suite 310

Chandler, Arizona 85225

 (Address of Principal Executive Offices & Zip Code)



(877) 282-7660

(Registrant’s Telephone Number)



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

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



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



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





 

 

 

 

Large accelerated filer

   

Accelerated filer

Non-accelerated filer 

 

   

Smaller reporting company 



 

 

Emerging Company



 

 

 

 



 

 

 

 

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



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



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





 



 

 


 

 

MOBIVITY HOLDINGS CORP.



TABLE OF CONTENTS





 

 



 

Page

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements



Condensed Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017



Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 (Unaudited)



Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2018 (Unaudited) and the year ended December 31, 2017



Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (Unaudited)



Notes to Condensed Consolidated Financial Statements (Unaudited)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24 

Item 4.

Controls and Procedures

24 



 

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

25 

Item 1A.

Risk Factors

25 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25 

Item 6.

Exhibits

25 

Signature Page

26 







 

 



 

 


 

Table of Contents

 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

Mobivity Holdings Corp.

Condensed Consolidated Balance Sheets







 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2018

 

2017



 

(Unaudited)

 

(Audited)

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash

 

$

5,119,562 

 

$

460,059 

Accounts receivable, net of allowance for doubtful accounts of $9,828 and $2,280, respectively

 

 

2,445,292 

 

 

885,743 

Other current assets

 

 

215,699 

 

 

209,536 

Total current assets

 

 

7,780,553 

 

 

1,555,338 

Goodwill

 

 

803,118 

 

 

803,118 

Intangible assets, net

 

 

771,991 

 

 

676,436 

Accounts receivable, long term

 

 

2,410,130 

 

 

 -

Other assets

 

 

92,179 

 

 

88,916 

TOTAL ASSETS

 

$

11,857,971 

 

$

3,123,808 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

1,118,287 

 

$

1,096,003 

Accrued interest

 

 

6,100 

 

 

1,168 

Accrued and deferred personnel compensation

 

 

554,137 

 

 

590,500 

Deferred revenue and customer deposits

 

 

3,418,025 

 

 

1,429,266 

Notes payable, net - current maturities

 

 

332,312 

 

 

2,236,224 

Other current liabilities

 

 

731,421 

 

 

226,355 

Total current liabilities

 

 

6,160,282 

 

 

5,579,516 



 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

Notes payable, net - long term

 

 

205,786 

 

 

180,810 

Other long term liabilities

 

 

1,509,662 

 

 

 -

Total non-current liabilities

 

 

1,715,448 

 

 

180,810 

Total liabilities

 

 

7,875,730 

 

 

5,760,326 

Commitments and Contingencies (See Note 9)

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized; 45,904,948 and 37,025,140, shares issued and outstanding

 

 

45,905 

 

 

37,025 

Equity payable

 

 

100,862 

 

 

100,862 

Additional paid-in capital

 

 

87,500,045 

 

 

77,910,842 

Accumulated other comprehensive loss

 

 

(46,846)

 

 

(65,764)

Accumulated deficit

 

 

(83,617,725)

 

 

(80,619,483)

Total stockholders' equity

 

 

3,982,241 

 

 

(2,636,518)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

11,857,971 

 

$

3,123,808 



See accompanying notes to these unaudited condensed consolidated financial statements.



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Table of Contents

 

Mobivity Holdings Corp.

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

4,561,368 

 

$

2,083,987 

 

$

9,620,935 

 

$

6,436,072 

Cost of revenues

 

 

1,021,285 

 

 

786,385 

 

 

2,570,804 

 

 

1,943,534 

Gross profit

 

 

3,540,083 

 

 

1,297,602 

 

 

7,050,131 

 

 

4,492,538 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

857,095 

 

 

652,762 

 

 

2,876,029 

 

 

2,516,249 

Sales and marketing

 

 

792,678 

 

 

836,767 

 

 

3,046,521 

 

 

2,673,087 

Engineering, research, and development

 

 

1,683,738 

 

 

1,177,318 

 

 

3,637,996 

 

 

3,080,037 

Depreciation and amortization

 

 

87,526 

 

 

105,510 

 

 

283,224 

 

 

273,716 

Total operating expenses

 

 

3,421,037 

 

 

2,772,357 

 

 

9,843,770 

 

 

8,543,089 

Income (loss) from operations

 

 

119,046 

 

 

(1,474,755)

 

 

(2,793,639)

 

 

(4,050,551)

Other income/(expense)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

279 

 

 

962 

 

 

881 

 

 

2,878 

Interest expense

 

 

(25,913)

 

 

(62,748)

 

 

(193,036)

 

 

(115,363)

Gain on sale of fixed assets

 

 

 -

 

 

 -

 

 

(8,722)

 

 

 -

Foreign currency (loss) gain

 

 

(2,106)

 

 

(931)

 

 

(3,726)

 

 

(4,120)

Total other income/(expense)

 

 

(27,740)

 

 

(62,717)

 

 

(204,603)

 

 

(116,605)

Income (loss) before income taxes

 

 

91,306 

 

 

(1,537,472)

 

 

(2,998,242)

 

 

(4,167,156)

Income tax expense

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Net Income (loss)

 

 

91,306 

 

 

(1,537,472)

 

 

(2,998,242)

 

 

(4,167,156)

Other comprehensive income (loss), net of income tax

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

38,179 

 

 

(20,294)

 

 

18,918 

 

 

(36,158)

Comprehensive income (loss)

 

$

129,485 

 

$

(1,557,766)

 

$

(2,979,324)

 

$

(4,203,314)

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.00 

 

$

(0.04)

 

$

(0.07)

 

$

(0.11)

Diluted

 

$

0.00 

 

$

(0.04)

 

$

(0.07)

 

$

(0.11)

Weighted average number of shares:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,719,664 

 

 

36,683,122 

 

 

41,325,443 

 

 

36,488,448 

Diluted

 

 

53,394,242 

 

 

36,683,122 

 

 

41,325,443 

 

 

36,488,448 



 

 

 

 

 

 

 

 

 

 

 

 



See accompanying notes to these unaudited condensed consolidated financial statements.

 

2 


 

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Mobivity Holdings Corp.

Consolidated Statement of Stockholders’ Equity







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Common Stock

 

Equity

 

Additional

 

Accumulated Other

 

Accumulated

 

Total Stockholders'



 

Shares

 

Dollars

 

Payable

 

Paid-in Capital

 

Comprehensive Loss

 

Deficit

 

Equity (Deficit)

Balance, December 31, 2016

 

36,388,997 

 

$

36,389 

 

$

100,862 

 

$

76,698,383 

 

$

(32,999)

 

$

(74,673,471)

 

 

2,129,164 

Issuance of common stock for options exercised

 

152,085 

 

 

152 

 

 

 -

 

 

82,646 

 

 

 -

 

 

 -

 

 

82,798 

Issuance of common stock for restricted stock awards

 

484,058 

 

 

484 

 

 

 -

 

 

(484)

 

 

 -

 

 

 -

 

 

 -

Stock based compensation

 

 -

 

 

 -

 

 

 -

 

 

1,130,297 

 

 

 -

 

 

 -

 

 

1,130,297 

Foreign currency translation adjustment

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(32,765)

 

 

 -

 

 

(32,765)

Net loss

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(5,946,012)

 

 

(5,946,012)

Balance, December 31, 2017

 

37,025,140 

 

$

37,025 

 

$

100,862 

 

$

77,910,842 

 

$

(65,764)

 

$

(80,619,483)

 

$

(2,636,518)

Issuance of common stock for cash

 

5,775,000 

 

 

5,775 

 

 

 -

 

 

5,769,225 

 

 

 -

 

 

 -

 

 

5,775,000 

Issuance of common stock for warrant conversion

 

2,018,125 

 

 

2,018 

 

 

 -

 

 

2,151,829 

 

 

 -

 

 

 -

 

 

2,153,847 

Issuance of common stock for debt conversion

 

1,047,583 

 

 

1,047 

 

 

 -

 

 

1,088,439 

 

 

 -

 

 

 -

 

 

1,089,486 

Issuance of common stock for cashless warrant conversion

 

1,808 

 

 

 

 

 -

 

 

(2)

 

 

 -

 

 

 -

 

 

 -

Issuance of common stock for options exercised

 

37,292 

 

 

37 

 

 

 -

 

 

21,458 

 

 

 -

 

 

 -

 

 

21,495 

Stock based compensation

 

 -

 

 

 -

 

 

 -

 

 

558,254 

 

 

 -

 

 

 -

 

 

558,254 

Foreign currency translation adjustment

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

18,918 

 

 

 -

 

 

18,918 

Net loss

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,998,242)

 

 

(2,998,242)

Balance, September 30, 2018

 

45,904,948 

 

$

45,905 

 

$

100,862 

 

$

87,500,045 

 

$

(46,846)

 

$

(83,617,725)

 

$

3,982,241 



See accompanying notes to these unaudited condensed consolidated financial statements.

 

3 


 

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Mobivity Holdings Corp.

Consolidated Statements of Cash Flows

(Unaudited)







 

 

 

 

 

 



 

 

 

 

 

 



 

Nine Months Ended



 

September 30,



 

2018

 

2017

OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(2,998,242)

 

$

(4,167,156)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Bad debt expense

 

 

9,878 

 

 

(7,277)

Loss on conversion of debt

 

 

41,903 

 

 

 -

Amortization of deferred financing costs

 

 

 -

 

 

20,245 

Stock-based compensation

 

 

558,254 

 

 

855,738 

Loss on disposal of fixed assets

 

 

8,722 

 

 

 -

Depreciation and amortization expense

 

 

283,224 

 

 

273,716 

Adjustments due to ASC 606

 

 

(1,495,290)

 

 

 -

Increase (decrease) in cash resulting from changes in:

 

 

 

 

 

 

Accounts receivable

 

 

(348,260)

 

 

(159,958)

Other current assets

 

 

(6,347)

 

 

(106,813)

Other assets

 

 

 -

 

 

10,957 

Accounts payable

 

 

27,371 

 

 

351,089 

Accrued interest

 

 

(62,615)

 

 

1,040 

Accrued and deferred personnel compensation

 

 

(36,340)

 

 

(252,394)

Other liabilities - non-current

 

 

4,705 

 

 

 -

Other liabilities - current

 

 

(19,176)

 

 

(19,787)

Deferred revenue and customer deposits

 

 

1,989,098 

 

 

1,963,429 

Net cash provided by (used in) operating activities

 

 

(2,043,115)

 

 

(1,237,171)

INVESTING ACTIVITIES

 

 

 

 

 

 

Purchases of equipment

 

 

(20,306)

 

 

(4,989)

Cash paid for patent

 

 

 -

 

 

(16,810)

Capitalized software development costs

 

 

(356,865)

 

 

(382,023)

Net cash used in investing activities

 

 

(377,171)

 

 

(403,822)

FINANCING ACTIVITIES

 

 

 

 

 

 

Payments on notes payable

 

 

(2,984,472)

 

 

 -

Deferred financing costs

 

 

 -

 

 

(15,000)

Net borrowings under line of credit agreement

 

 

 -

 

 

1,999,531 

Proceeds from notes payable

 

 

2,095,000 

 

 

114,749 

Proceeds from issuance of common stock, net of issuance costs

 

 

7,950,343 

 

 

59,797 

Net cash provided by financing activities

 

 

7,060,871 

 

 

2,159,077 



 

 

 

 

 

 

Effect of foreign currency translation on cash flow

 

 

18,918 

 

 

2,560 



 

 

 

 

 

 

Net change in cash

 

 

4,659,503 

 

 

520,644 

Cash at beginning of period

 

 

460,059 

 

 

1,188,485 

Cash at end of period

 

$

5,119,562 

 

$

1,709,129 

Supplemental disclosures:

 

 

 

 

 

 

Cash paid during period for:

 

 

 

 

 

 

Interest

 

$

25,913 

 

$

115,363 

Non cash investing and financing activities:

 

 

 

 

 

 

Issuance of common stock for cashless exercise

 

$

 

$

 -

Issuance of common stock for debt conversion

 

$

1,047,584 

 

$

 -

Issuance of common stock from restricted stock awards

 

$

 -

 

$

264 



See accompanying notes to these unaudited condensed consolidated financial statements.









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Mobivity Holdings Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)



1.  Nature of Operations and Basis of Presentation



Mobivity Holdings Corp. (the “Company” or “we”) is in the business of developing and operating proprietary platforms over which brands and enterprises can conduct national and localized, data-driven mobile marketing campaigns. Our proprietary platforms, consisting of software available to phones, tablets, PCs, and Point of Sale (“POS”) systems, allow resellers, brands and enterprises to market their products and services to consumers through text messages sent directly to consumers via mobile phones, mobile smartphone applications, and dynamically printed receipt content. We generate revenue by charging the resellers, brands and enterprises a per-message transactional fee, through fixed or variable software licensing fees, or via advertising fees.



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



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

 

2.  Summary of Significant Accounting Policies



Principles of Consolidation



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



Use of Estimates



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



Accounts Receivable, Allowance for Doubtful Accounts and Concentrations



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



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



Goodwill and Intangible Assets



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

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



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



Software Development Costs

 

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

 

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

 

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



Impairment of Long-Lived Assets



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



Foreign Currency Translation



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



Revenue Recognition and Concentrations



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



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



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Comprehensive Income (Loss)



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



Net Loss Per Common Share



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



Reclassifications



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



Recent Accounting Pronouncements



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



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



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









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



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

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

 

3.  New Accounting Standards



Revenue from Contracts with Customers.



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



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



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



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





 

 

 

Software arrangements:

Past revenue standard

 

New ASC 606 revenue standard

Perpetual software licenses

Upfront

 

Upfront

Enterprise license agreements

Ratable

 

Upfront

Software support

Ratable

 

Ratable

SaaS

Ratable

 

Ratable



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



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Financial Statement Impact of Transition to ASC 606



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





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

December 31,

 

 

 

 

Adjusted



 

2017

 

Adjustments

 

January 1,



 

As Reported

 

due to ASC 606

 

2018

ASSETS

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash

 

$

460,059 

 

$

 -

 

$

460,059 

Accounts receivable, net of allowance for doubtful accounts of $2,280 and $2,280, respectively

 

 

885,743 

 

 

544,599 

 

 

1,430,342 

Other current assets

 

 

209,536 

 

 

 -

 

 

209,536 

Total current assets

 

 

1,555,338 

 

 

544,599 

 

 

2,099,937 

Goodwill

 

 

803,118 

 

 

 -

 

 

803,118 

Intangible assets, net

 

 

676,436 

 

 

 -

 

 

676,436 

Accounts receivable, long term

 

 

 -

 

 

424,023 

 

 

424,023 

Other assets

 

 

88,916 

 

 

 -

 

 

88,916 

TOTAL ASSETS

 

$

3,123,808 

 

$

968,622 

 

$

4,092,430 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,096,003 

 

$

 -

 

$

1,096,003 

Accrued interest

 

 

1,168 

 

 

 -

 

 

1,168 

Accrued and deferred personnel compensation

 

 

590,500 

 

 

 -

 

 

590,500 

Deferred revenue and customer deposits

 

 

1,429,266 

 

 

 -

 

 

1,429,266 

Notes payable, net - current maturities

 

 

2,236,224 

 

 

 -

 

 

2,236,224 

Other current liabilities

 

 

226,355 

 

 

191,121 

 

 

417,476 

Total current liabilities

 

 

5,579,516 

 

 

191,121 

 

 

5,770,637 



 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

Notes payable, net - long term

 

 

180,810 

 

 

 -

 

 

180,810 

Other long term liabilities

 

 

 -

 

 

150,477 

 

 

150,477 

Total non-current liabilities

 

 

180,810 

 

 

150,477 

 

 

331,287 

Total liabilities

 

 

5,760,326 

 

 

341,598 

 

 

6,101,924 

Commitments and Contingencies (See Note 9)

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized; 37,025,140 and 37,025,140, shares issued and outstanding

 

 

37,025 

 

 

 -

 

 

37,025 

Equity payable

 

 

100,862 

 

 

 -

 

 

100,862 

Additional paid-in capital

 

 

77,910,842 

 

 

 -

 

 

77,910,842 

Accumulated other comprehensive loss

 

 

(65,764)

 

 

 -

 

 

(65,764)

Accumulated deficit

 

 

(80,619,483)

 

 

627,024 

 

 

(79,992,459)

Total stockholders' equity

 

 

(2,636,518)

 

 

627,024 

 

 

(2,009,494)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

3,123,808 

 

$

968,622 

 

$

4,092,430 



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



Condensed Consolidated Statement of Operations









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30, 2018

 

Nine Months Ended September 30, 2018



 

As reported

 

 

Total Adjustments Under ASC 606

 

Amounts Under Previous Standards

 

As reported

 

 

Total Adjustments Under ASC 606

 

Amounts Under Previous Standards

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

4,561,368 

 

$

2,188,590 

 

$

2,372,778 

 

$

9,620,935 

 

$

3,631,206 

 

$

5,989,729 

Cost of revenues

 

 

1,021,285 

 

 

 -

 

 

1,021,285 

 

 

2,570,804 

 

 

 -

 

 

2,570,804 

Gross profit

 

 

3,540,083 

 

 

2,188,590 

 

 

1,351,494 

 

 

7,050,131 

 

 

3,631,206 

 

 

3,418,926 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

857,095 

 

 

130,366 

 

 

726,729 

 

 

2,876,029 

 

 

213,607 

 

 

2,662,422 

Sales and marketing

 

 

792,678 

 

 

 -

 

 

792,678 

 

 

3,046,521 

 

 

 -

 

 

3,046,521 

Engineering, research, and development

 

 

1,683,738 

 

 

1,173,295 

 

 

510,443 

 

 

3,637,996 

 

 

1,922,465 

 

 

1,715,531 

Depreciation and amortization

 

 

87,526 

 

 

 -

 

 

87,526 

 

 

283,224 

 

 

 -

 

 

283,224 

Total operating expenses

 

 

3,421,037 

 

 

1,303,661 

 

 

2,117,376 

 

 

9,843,770 

 

 

2,136,072 

 

 

7,707,698 

Income (loss) from operations

 

 

119,046 

 

 

884,929 

 

 

(765,883)

 

 

(2,793,639)

 

 

1,495,134 

 

 

(4,288,773)

Other income/(expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

279 

 

 

 -

 

 

279 

 

 

881 

 

 

 -

 

 

881 

Interest expense

 

 

(25,913)

 

 

 -

 

 

(25,913)

 

 

(193,036)

 

 

 -

 

 

(193,036)

Gain on sale of fixed assets

 

 

 -

 

 

 -

 

 

 -

 

 

(8,722)

 

 

 -

 

 

(8,722)

Foreign currency (loss) gain

 

 

(2,106)

 

 

 -

 

 

(2,106)

 

 

(3,726)

 

 

 -

 

 

(3,726)

Total other income/(expense)

 

 

(27,740)

 

 

 -

 

 

(27,740)

 

 

(204,603)

 

 

 -

 

 

(204,604)

Income (loss) before income taxes

 

 

91,306 

 

 

884,929 

 

 

(793,623)

 

 

(2,998,242)

 

 

1,495,134 

 

 

(4,493,376)

Income tax expense

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Net income (loss)

 

 

91,306 

 

 

884,929 

 

 

(793,623)

 

 

(2,998,242)

 

 

1,495,134 

 

 

(4,493,376)

Other comprehensive income (loss), net of income tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

38,179 

 

 

 -

 

 

38,179 

 

 

18,918 

 

 

 -

 

 

18,918 

Comprehensive income (loss)

 

$

129,485 

 

$

884,929 

 

$

(755,444)

 

$

(2,979,324)

 

$

1,495,134 

 

$

(4,474,458)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.00 

 

$

0.02 

 

$

(0.01)

 

$

(0.07)

 

$

0.04 

 

$

(0.11)

Diluted

 

$

0.00 

 

$

0.02 

 

$

(0.01)

 

$

(0.07)

 

$

0.04 

 

$

(0.11)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,719,664 

 

 

45,719,664 

 

 

45,719,664 

 

 

41,325,443 

 

 

41,325,443 

 

 

41,325,443 

Diluted

 

 

53,394,242 

 

 

53,394,242 

 

 

53,394,242 

 

 

41,325,443 

 

 

41,325,443 

 

 

41,325,443 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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Condensed Consolidated Balance Sheet







 

 

 

 

 

 

 

 

 



 

September 30, 2018 As Reported

 

Total Adjustments Under ASC 606

 

Amounts Under Previous Standards

ASSETS

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash

 

$

5,119,562 

 

$

 -

 

$

5,119,562 

Accounts receivable, net of allowance for doubtful accounts of $9,828

 

 

2,445,292 

 

 

(1,221,076)

 

 

1,224,216 

Other current assets

 

 

215,699 

 

 

 -

 

 

215,699 

Total current assets

 

 

7,780,553 

 

 

(1,221,076)

 

 

6,559,477 

Goodwill

 

 

803,118 

 

 

 -

 

 

803,118 

Intangible assets, net

 

 

771,991 

 

 

 -

 

 

771,991 

Accounts receivable, long term

 

 

2,410,130 

 

 

(2,410,130)

 

 

 -

Other assets

 

 

92,179 

 

 

 -

 

 

92,179 

TOTAL ASSETS

 

$

11,857,971 

 

$

(3,631,206)

 

$

8,226,765 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,118,287 

 

$

 -

 

$

1,118,287 

Accrued interest

 

 

6,100 

 

 

 -

 

 

6,100 

Accrued and deferred personnel compensation

 

 

554,137 

 

 

 -

 

 

554,137 

Deferred revenue and customer deposits

 

 

3,418,025 

 

 

 -

 

 

3,418,025 

Notes payable, net - current maturities

 

 

332,312 

 

 

 -

 

 

332,312 

Other current liabilities

 

 

731,421 

 

 

(672,340)

 

 

59,081 

Total current liabilities

 

 

6,160,282 

 

 

(672,340)

 

 

5,487,942 



 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

Notes payable, net - long term

 

 

205,786 

 

 

 -

 

 

205,786 

Other long term liabilities

 

 

1,509,662 

 

 

(1,463,732)

 

 

45,930 

Total non-current liabilities

 

 

1,715,448 

 

 

(1,463,732)

 

 

251,716 

Total liabilities

 

 

7,875,730