Bridge Financing

From November 2010 through March 2011, the Company issued to a number of accredited investors a series of its 10% Senior Secured Convertible Bridge Note (the “Notes”) in the aggregate principal amount of $1,010,000 (the “Financing”).  The Notes accrue interest at the rate of 10% per annum.  The entire principal amount evidenced by the Notes (the “Principal Amount”) plus all accrued and unpaid interest is due on the earlier of (i) the date the Company completes a financing transaction for the offer and sale of shares of common stock (including securities convertible into or exercisable for its common stock), in an aggregate amount of no less than 125% of the principal amounts evidenced by the Notes (a “Qualifying Financing”), and (ii) November 2, 2011. If the Notes are held to maturity, the Company pays, at the option of the holder: i) cash or ii) in securities to be issued by the Company in the Qualifying Financing at the same price paid by other investors.  The Notes are secured by a first priority lien and security interest in all of the Company’s assets.

In November 2011, the Company entered into agreements with all holders of the then outstanding Notes.  Under the terms of the agreements, holders of Notes totaling $800,000 agreed to extend the maturity due date of the Notes to February 2, 2012.  For these note holders, no change occurred in their rights.  Holders of the balance of the Notes totaling $210,000 agreed to convert the entire principal amount plus all accrued and unpaid interest of $20,271 into units (each, a “Unit”), each of which consists of one share of common stock of the Company and a four-year warrant to purchase one share of the Company’s common stock at $2.00 per share. The conversion took place at a price of $1.50 per Unit.  Accordingly, the Company issued an aggregate of 153,515 shares of common stock and 153,515 warrants. As a result of the conversion, the holders of the converted Notes forfeited all rights there under, including the right to acquire warrants to purchase the Company’s common stock.

Also in November 2011, the Company issued additional Notes in the aggregate principal amount of $262,500.  These Notes were due February 2, 2012 and contain the same rights and privileges as the previously issued Notes.  In January, 2012, the Company issued additional Notes in the principal amount of $520,000.  As of April 11, 2012, all note holders with maturity dates of February 2, 2012 extended the maturity through May 2, 2012.   As consideration to the note holders for the extension of the maturity date to May 2, 2012, the Company provided Allonges which consisted of the accrued interest as of January 31, 2012 for each note, which is convertible into common shares at the latest financing price.  The Allonges were valued using a Monte Carlo Simulation; the fair value of the Allonges were estimated at the January 31, 2012 creating an additional share issuance derivative liability totaling $118,633.  The Allonge derivative liability is revalued at each subsequent reporting date and as of September 30, 2012 totaled $114,873.  The subsequent decrease in the derivative liability during the nine months ended September 30, 2012 of $3,760 was recorded as a decrease to the derivative liability and an increase to change in fair market value of derivative liabilities in the statement of operations.

In March 2012, one note holder was repaid a partial principal balance of $65,000.

In March and April 2012, the Company issued additional 10% Senior Secured Convertible Bridge Notes in the aggregate principal amount of $220,100 due May 2, 2012.   In May 2012 theses notes were cancelled and converted into the New Notes below.

In May and June 2012, (the “Company”) issued to a number of accredited investors its 10% Senior Secured Convertible Promissory Notes in the principal amount of $4,347,419 (the “New Notes”), consisting of (i) $2,656,250 of new funds and (ii) $1,691,168 principal amount plus accrued but unpaid interest outstanding under previously issued 10% Senior Secured Convertible Bridge Notes (the “Old Notes”) that were cancelled and converted into the New Notes.  The New Notes accrue interest at the rate of 10% per annum.  The entire principal amount under the New Notes (the “Principal Amount”) plus all accrued and unpaid interest is due on the earlier of (i) the date the Company completes a financing transaction for the offer and sale of shares of common stock (including securities convertible into or exercisable for its common stock), in an aggregate amount of no less than 125% of the principal amounts evidenced by the Notes (a “Qualifying Financing”), and (ii) October 15, 2012, which date, as described below, was later extended to April 15, 2013. Payments may be made in cash, or, at the option of the holder of the New Notes in securities to be issued by the Company in the Qualifying Financing at the same price paid for such securities by other investors.  The New Notes are secured by a first priority lien and security interest in all of the Company’s assets.

The Company will also issue to the holders of the New Notes on the date that is the earlier of the repayment of the New Notes or the completion of the Qualifying Financing, at their option:

The Company has granted piggy-back registration rights with respect to the securities to be issued in connection with the New Notes.

The New Notes contain embedded derivatives that on their inception date were valued with a Monte Carlo simulation as discussed in Note 6.  The embedded derivatives, as they represent additional consideration given to the New Notes holders, were treated as a discount on the debt that is being amortized over the life of the New Notes which ends on October 15, 2012.   The debt discounts booked as reductions to the New Notes during May 2012 were $478,544 and $1,852,713 for the variable maturity conversion option and the additional security issuance derivative.  During the three months ended September 30, 2012, $1,528,438 was amortized from the debt discount into interest expense.  The remaining debt discount amounts as of September 30, 2012, for the variable maturity conversion option and additional security issuance derivatives are $51,150 and $198,053, respectively, and will be amortized during the subsequent life ending on October 15, 2012.

The New Notes further provide that in the event of a change of control transaction, the proceeds from such transaction must be used by the Company to pay to the holders of the New Notes, pro rata based on the amount of New Notes owned by each holder, an amount equal to 1.5 times the amount of the aggregate principal amount outstanding under the New Notes, plus all accrued and unpaid interest due there under, plus all other fees, costs or other charges due there under.

The holders of the New Notes were also granted the right to appoint two designees to serve as members of the Company’s board of directors, which members will also serve as members of the Compensation Committee and the Audit Committee of the Company’s board of directors.

The Company used $201,322 from the proceeds of the sale of the New Notes to pay off existing balances under the Old Notes that were not cancelled and converted into the New Notes.

Commencing on October 12, 2012 and continuing thereafter, Mobivity Holdings Corp. (the “Company”) has entered into amendments with the holders the New Notes. Under the terms of the amendments, the holders of New Notes in the aggregate principal amount of $4,209,720 have agreed to extend the maturity date of the New Notes to April 15, 2013.  In consideration of the New Note holders’ agreement to extend the maturity date, the amendment provides that the holder shall have the option to convert the principal and interest under the New Note into the securities offered by the Company in a qualifying equity financing at the lower of (a) the same price paid for such securities by other investors investing in the financing or (b) $.50 per share (subject to adjustment in the event of a stock split, reclassification or the like). Prior to the amendment, the conversion option under the New Note entitled the holder to convert the principal and interest under the Note into the securities offered by the Company in a qualifying equity financing at the same price paid for such securities by other investors investing in the financing.

On November 2, 2012 one new Note holder was repaid $5,000 in principal.

As of November 9, 2012, the Company is pursuing the execution of similar amendments by the holders of the remaining Notes in the aggregate principal amount of $132,699.  While these Notes are considered past due as of October 15, 2012, no notice of default has been issued by the Note holders as of November 9, 2012.

The Company’s obligations under the New Notes are secured by all of the assets of the Company, including all shares of Mobivity, Inc., its wholly owned subsidiary.

The Company paid $200,630 in placement agent fees in connection with the sale and issuance of the New Notes.  WFG Investments, Inc. and Emerging Growth Equities, Ltd., both registered broker dealers, cumulatively have been paid placement agent fees related to the Notes in the amount of $40,000 and $252,737, respectively, which were capitalized as deferred financing costs, and are being amortized over the term of the Notes using the effective interest method.  The Company recorded deferred financing amortization expense for the three months ended September 30, 2012 and 2011, totaling $65,703 and $20,000, respectively.  The Company also recorded deferred financing amortization expense for the nine months ended September 30, 2012 and 2011, totaling $100,857 and $20,000, respectively

The following table summarizes information relative to all of the outstanding Notes at September 30, 2012 and December 31, 2011:

In accordance with ASC 470-20 Debt with Conversion and Other Options, the Company recorded a discount of $560,662 for the variable conversion feature and a discount of $2,172,750 for the warrants / shares to be issued.  The discounts will be amortized to interest expense over the term of the Notes using the effective interest method.  The Company recorded $2,543,979 of interest expense for the amortization of the note discounts associated with derivative liabilities during the year ended September 30, 2012.

In accordance with ASC 815-15, the Company determined that the variable conversion feature and the warrants / shares to be issued represented embedded derivative features, and these are shown as derivative liabilities on the balance sheet.  See Note 5.

The Company calculated the fair value of the compound embedded derivatives associated with the convertible notes payable utilizing a complex, customized Monte Carlo simulation model suitable to value path dependant American options. The model uses the risk neutral methodology adapted to value corporate securities. This model utilized subjective and theoretical assumptions that can materially affect fair values from period to period.

Mobivity Note

As partial consideration for the acquisition of Mobivity, the Company issued a secured subordinated promissory note in the principal amount of $606,000.  The promissory note accrued interest at 6.25% per annum; was payable in six quarterly installments of $105,526 (inclusive of interest) starting May 1, 2011; matured on August 1, 2012; is secured by the acquired assets of the Mobivity business; and is subordinated to the Company’s obligations under its Notes discussed above.  Mobivity, LLC was granted a security interest in the acquired assets, subordinated only to the Company's Notes, and a majority of the Bridge Financing lenders consented to the junior security interest.  On May 18, 2012 and May 25, 2012, late payment penalties were paid in the amount of 235,441 common shares valued at $160,468 based on the closing market price on the date granted; which were expensed through share based compensation.

During the nine months ended September 30, 2012, the Company made principal and interest payments totaling $316,579 on the promissory note, and the note was paid in full on May 31, 2012.

Digimark, LLC Notes

As partial consideration for the acquisition of Boomtext, the Company issued a secured subordinated promissory note in the principal amount of $175,000. The promissory note accrues interest at 6.25% per annum; is payable in full on May 25, 2012 (original maturity March 31, 2012 was extended); is secured by all of the assets of Mobivity, Inc. and is subordinated to the Company’s obligations under its Notes discussed above.

During the nine months ended September 30, 2012, the Company made principal and interest payments totaling $184,266 on the promissory note, and the note was paid in full on May 31, 2012.

As partial consideration for the acquisition of Boomtext, the Company also issued an unsecured subordinated promissory note in the principal amount of $195,000.  The promissory note does not bear interest; is payable in installments (varying in amount) from August 2011 through October 2012; and is subordinated to the Company’s obligations under its Notes discussed above.  The $195,000 unsecured subordinated promissory note does not bear interest; accordingly, the Company recorded the promissory note at the present value of the $195,000 payments over the subsequent periods.  The Company used a discount rate of 6.25% in calculating the net present value of the unsecured promissory note.  The discount rate was based on the Company’s estimated cost of debt capital. Under the effective interest method, the Company accretes the debt discount to the face amount of the promissory note. Accretion of the debt discount totaled $4,422 for the nine months ended September 30, 2012. Accretion of the debt discount was charged to interest expense in accordance with ASC 480.

Summary of Notes Payable and Accrued Interest

The following table summarizes the Company’s notes payable and accrued interest as of September 30, 2012 and December 31, 2011:

Interest expense, including amortization of note discounts, totaled $1,781,125 and $133,055 for the three months ended September 30, 2012 and 2011, respectively.  Interest expense, including amortization of note discounts, totaled $3,019,625 and $376,548 for the nine months ended September 30, 2012 and 2011, respectively.

Cash Payment Obligation

As partial consideration for the acquisition of Txtstation, the Company agreed to a $250,000 of scheduled cash payments.  The $250,000 of scheduled cash payments is due as follows:  $25,000 payable on the 60th day following closing and the balance is payable in $25,000 installments at the end of each of the next nine 30-day periods thereafter.  The $250,000 cash payment obligation does not bear interest; accordingly, the Company recorded the cash payment obligation at the present value of the $250,000 payments over the subsequent periods.  The Company used a discount rate of 6.25% in calculating the net present value of the cash payment obligation.  The discount rate was based on the Company’s estimated cost of debt capital. Under the effective interest method, the Company accretes the debt discount to the face amount of the promissory note. Accretion of the debt discount totaled $786 for the nine months ended September 30, 2012. Accretion of the debt discount was charged to interest expense in accordance with FASB ASC 480.

During the nine months ended September 30, 2012, the Company made payments totaling $87,500 on the cash payment obligation, and the obligation was paid in full on April 11, 2012