MobileSmith, Inc. - Quarter Report: 2014 September (Form 10-Q)

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

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

Delaware	95-4439334
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

5400 Trinity Road, Suite 208 Raleigh, North Carolina	27607
(Address of principal executive offices)	(Zip Code)

Large accelerated filer	o		Accelerated filer o
Non-accelerated filer	o		Smaller reporting company þ

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		Page No.
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013	1
	Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2014 and 2013	2
	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2014 and 2013	3
	Condensed Consolidated Statement of Stockholders' Deficit  for the period ended  September 30, 2014 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4.	Controls and Procedures	16
PART II – OTHER INFORMATION
Item 6.	Exhibits	17
	Signatures	18

 

ASSETS
		September 30,				December, 31
		2014				2013
		(unaudited)
Current Assets
Cash and Cash Equivalents		$	415,815			$	223,514
Restricted Cash			112,490				131,757
Trade Accounts Receivable, Net of Allowance for Doubtful Accounts of $11,500 and Zero, Respectively			78,268				48,885
Prepaid Expenses and Other Current Assets			36,401				97,957
Total Current Assets			642,974				502,113
Property & Equipment, Net			123,528				140,383
Capitalized Software, Net			535,625				636,061
Intangible Assets, Net			100,916				138,992
Other Assets			83,804				15,370
Total Other Assets			843,873				930,806
Total Assets		$	1,486,847			$	1,432,919
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Trade Accounts Payable		$	37,983			$	58,901
Accrued Expenses			146,824				267,425
Accrued Interest			312,625				290,560
Capital Lease Obligations and Bank Loans			27,786				5,026,113
Deferred Revenue			401,639				163,868
Total Current Liabilities			926,857				5,806,867
Long-Term Liabilities
Bank Loan			5,000,000				-
Convertible Notes Payable, Related Parties, Net of Discount			24,447,102				23,512,836
Convertible Notes Payable, Net of Discount			680,640				730,770
Capital Lease Obligations			121,958				142,986
Deferred Rent			62,241				25,314
Total Long-Term Liabilities			30,311,941				24,411,906
Total Liabilities			31,238,798				30,218,773
Commitments and Contingencies (Note 3)
Stockholders' Deficit
Preferred Stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at September 30, 2014 and December 31, 2013			-				-
Common Stock, $0.001 par value, 45,000,000 shares authorized, 19,827,542 shares issued and outstanding at September 30, 2014 and December 31, 2013			19,828				19,828
Additional Paid-in Capital			97,454,657				93,059,983
Accumulated Deficit			(127,226,436	)			(121,865,665	)
Total Stockholders' Deficit			(29,751,951	)			(28,785,854	)
Total Liabilities and Stockholders' Deficit		$	1,486,847			$	1,432,919

 

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2014				2013				2014				2013
REVENUES:
Subscription and Support		$	157,675			$	102,326			$	540,403			$	227,534
Professional Services and Other			20,000				-				20,000				-
Total Revenue			177,675				102,326				560,403				227,534
COST OF REVENUES:
Subscription and Support			137,523				120,939				397,792				396,166
Professional Services and Other			9,790				-				9,790				-
Total Cost of Revenue			147,313				120,939				407,582				396,166
GROSS PROFIT (LOSS)			30,362				(18,613	)			152,821				(168,632	)
OPERATING EXPENSES:
Sales and Marketing			247,214				214,428				702,998				766,881
Research and Development			294,818				195,660				825,432				585,876
General and Administrative			325,229				317,049				1,007,798				1,081,558
Impairment of Long Lived Assets, Net			24,952				72,016				41,248				110,952
Total Operating Expenses			892,213				799,153				2,577,476				2,545,267
LOSS FROM OPERATIONS			(861,851	)			(817,766	)			(2,424,655	)			(2,713,899	)
OTHER INCOME (EXPENSE):
Other Income			3,537				-				5,425				-
Interest Expense, Net			(1,239,846	)			(611,082	)			(3,161,531	)			(1,592,780	)
Gain on Reversal of a Liability			-				-				169,861				-
Gain on Legal Settlements and Insurance Claims			-				51,030				-				56,265
Gain (Loss) On Debt Extinguishment			-				-				50,129				(21,793,055	)
Change in the Market Value of Settlement Related Financial Instrument			-				147,500				-				147,500
Total Other Expense			(1,236,309	)			(412,552	)			(2,936,116	)			(23,182,070	)
LOSS FROM CONTINUING OPERATIONS		$	(2,098,160	)		$	(1,230,318	)		$	(5,360,771	)		$	(25,895,969	)
Income (Loss) from Discontinued Operations			-				(14,941	)			-				(14,778	)
Impairment of Assets of Discontinued Operations			-				-				-				(14,654	)
NET LOSS		$	(2,098,160	)		$	(1,245,259	)		$	(5,360,771	)		$	(25,925,401	)
NET LOSS PER COMMON SHARE:
Basic and Fully Diluted from Continuing Operations		$	(0.11	)		$	(0.07	)		$	(0.27	)		$	(1.41	)
Basic and Fully Diluted from Discontinued Operations		$	-			$	-			$	-			$	-
WEIGHTED-AVERAGE NUMBER OF SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE:
Basic And Fully Diluted			19,827,542				18,352,542				19,827,542				18,352,542

 

 

		Nine Months Ended
		September 30,				September 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss		$	(5,360,771	)		$	(25,925,401	)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation and Amortization			124,358				113,308
Bad Debt Expense			11,500				-
Amortization of Debt Discount			1,310,833				72,364
Share Based Compensation			78,108				35,624
Impairment of Long Lived Assets			41,248				125,606
Loss (Gain) on Debt Extinguishment			(50,129	)			21,793,055
Changes in Assets and Liabilities:
Accounts Receivable			(40,883	)			(42,849	)
Prepaid Expenses and Other Current Assets			(6,878	)			(3,085	)
Accounts Payable			(20,918	)			(146,169	)
Deferred Revenue			237,771				55,206
Accrued and Other Expenses			(61,611	)			155,708
Net Cash Used in Operating Activities			(3,737,372	)			(3,766,633	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to Acquire Property, Plant and Equipment			(10,239	)			(21,834	)
Investment in Internally Developed Software			-				(302,068	)
Net Cash Used in Investing Activities			(10,239	)			(323,902	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted Cash Used to Pay Interest Expense			144,267				135,566
Deposit of Cash to Restricted Account			(125,000	)			(202,886	)
Repayment of Bank Loan			(5,000,000	)			-
Proceeds from Bank Loan			5,000,000				-
Proceeds from Issuance of Long Term Debt			3,940,000				4,375,000
Repayments of Debt Borrowings			(19,355	)			(38,858	)
Net Cash Provided by Financing Activities			3,939,912				4,268,822
NET INCREASE IN CASH AND CASH EQUIVALENTS			192,301				178,287
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			223,514				58,458
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	415,815			$	236,745
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for Interest		$	1,823,617			$	1,525,682
Financed  Purchase of Office Furniture		$	-			$	40,000
Non-Cash Investing and Financing Activities
The Company Recorded Debt Discount Associated with Beneficial Conversion Feature		$	4,316,567			$	1,334,804

 

 

		Common Stock								Additional
						0.001				Paid-In				Accumulated
		Shares				Par Value				Capital				Deficit				Totals
BALANCES, DECEMBER 31, 2013			19,827,542			$	19,828			$	93,059,983			$	(121,865,665	)		$	(28,785,854	)
Equity-Based Compensation											78,108								78,108
Beneficial Conversion Feature Recorded as a Result of Issuance of June 27, 2013 Debt Modification and Subsequent Issuance of Convertible Debt											2,695,714								2,695,714
Non-Cash Capital Contribution from Related Parties from the Extinguishment of Related Party Debt Resulting from May 12, 2014 Debt Modification											1,620,852								1,620,852
Net Loss															(5,360,771	)			(5,360,771	)
BALANCES, SEPTEMBER 30, 2014			19,827,542			$	19,828			$	97,454,657			$	(127,226,436	)		$	(29,751,951	)

 

 

●	Subscription to its Software as a Service (“SaaS”) cloud based mobile app development platform to  customers who design and build their own apps;

●	Dedicated internal and secure mobile development platform for the U.S. Department of Defense and related contractors;

●	Custom mobile application design and development services;

●	Mobile application marketing services; and

●	Mobile strategy implementation consulting.

 

Debt Description		September 30,			December 31,
		2014			2013			Maturity		Rate
Bank Loan		$	5,000,000		$	5,000,000		June 2016		3.85	%
Capital lease obligations - Noteholder lease			118,045			132,321		August 2019		8.00	%
Capital lease obligations - Office furniture			31,699			36,778		September 2016		9.80	%
Convertible notes - related parties, net of discount of $4,927,129 and $1,921,394, respectively			24,447,102			23,512,836		November 2016		8.00	%
Convertible notes, net of discount of $50,129 and zero, respectively			680,640			730,770		November 2016		8.00	%
Total debt			30,277,486			29,412,705
Less:  current portion of long term debt
Capital lease obligations			27,786			26,113
Bank Loan			-			5,000,000
Total current portion of long term debt			27,786			5,026,113
Debt - long term		$	30,249,700		$	24,386,592

 

●	a maturity date of the earlier of (i) November 14, 2016, (ii) a Change of Control (as defined in the Note Purchase Agreement), or (iii) when, upon or after the occurrence of an Event of Default (as defined in the Note Purchase Agreement) such amounts are declared due and payable by a Noteholder or made automatically due and payable in accordance with the terms of the Note Purchase Agreement;
●	an interest rate of 8% per year;
●	a total borrowing commitment of $33.3 million;
●	a conversion price that is fixed at $1.43; and
●	optional conversion upon Noteholder request, provided that, if at the time of any such request, the Company does not have a sufficient number of shares of common stock authorized to allow for such conversion as well as the issuance of the maximum amount of common stock permitted under the Company’s 2004 Equity Compensation Plan, the Noteholder may request that the Company call a special meeting of its stockholders specifically for the purpose of increasing the number of shares of common stock authorized to cover the remaining portion of the Notes outstanding as well as the maximum issuances permitted under the 2004 Equity Compensation Plan.

 

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volatility of stock price was determined to be 47% and was based on the Company’s historical volatility;

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risk free rate of 1.41%;

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credit spread over the risk free rate was determined to be approximately 20%, which was derived from a combination of the credit spread of CCC rated bonds with added premium for lack of marketability of the convertible instrument;

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nodes of the binomial model were extended for 2.5 years, which approximates the  time period until maturity of the convertible instrument; the model included 5 nodes; and

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conversion price was fixed at $1.43 per share.

	●		a maturity date of June 9, 2016;
	●		a variable interest rate at prime plus 0.6% (3.85% on the date of execution) payable quarterly;
	●		secured by substantially all of the assets of the Company, including the Company’s intellectual property;
	●		secured by an extended irrevocable SBLC issued by UBS AG (Geneva, Switzerland) (“UBS AG”) with an initial term expiring on May 31, 2015, which term shall be automatically renewed for one year periods, unless notice of non-renewal is given by UBS AG at least 45 days prior to the then current expiration date; and
	●		acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, including but not limited to, failure by the Company to perform its obligations and observe the covenants made by it under the LSA and insolvency of the Company.

  

Year:
2014		$	9,452
2015			39,259
2016			39,259
2017			39,259
2018			34,189
Thereafter			19,412
			180,830
Less amount representing interest			(31,086	)
Capital lease obligations		$	149,744

 

Year:
2014		$	27,267
2015			162,528
2016			165,678
2017			167,786
2018			172,418
Thereafter			44,082
Total		$	739,759

 

							Weighted
				Weighted			Average			Aggregate
	Number of			Average			Remaining			Intrinsic
	Shares			Exercise Price			Contractual Term			Value
Outstanding, December 31, 2013		530,378		$	1.99
Cancelled		(99,708)			4.29
Issued		-			-
Outstanding, September 30, 2014		430,670		$	1.46			4.64		$	11,020
Vested and exercisable, September 30, 2014		215,058		$	1.33			5.34		$	10,540

 

 

 

 

 

 

●	a maturity date of the earlier of (i) November 14, 2016, (ii) a Change of Control (as defined in the Note Purchase Agreement), or (iii) when, upon or after the occurrence of an Event of Default (as defined in the Note Purchase Agreement) such amounts are declared due and payable by a Noteholder or made automatically due and payable in accordance with the terms of the Note Purchase Agreement;
●	an interest rate of 8% per year;
●	a total borrowing commitment of $33.3 million;
●	a conversion price that is fixed at $1.43; and
●	optional conversion upon Noteholder request, provided that, if at the time of any such request, we do not have a sufficient number of shares of common stock authorized to allow for such conversion as well as the issuance of the maximum amount of common stock permitted under our 2004 Equity Compensation Plan, the Noteholder may request that we call a special meeting of our stockholders specifically for the purpose of increasing the number of shares of common stock authorized to cover the remaining portion of the Notes outstanding as well as the maximum issuances permitted under the 2004 Equity Compensation Plan.

	●		a maturity date of June 9, 2016;
	●		a variable interest rate at prime plus 0.6% (3.85% on the date of execution) payable quarterly;
	●		secured by substantially all of our assets, including our intellectual property;
	●		secured by an SBLC issued by UBS AG with an initial term expiring on May 31, 2015, which term shall be automatically renewed for one year periods, unless notice of non-renewal is given by UBS AG at least 45 days prior to the then current expiration date; and
	●		acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, including but not limited to, our failure to perform our obligations and observe the covenants made by us under the LSA and our insolvency.

 

 

Exhibit No.		Description
3.1		Amended and Restated Certificate of Incorporation, dated January 4, 2005, as amended to date (incorporated herein by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2013)
3.2		Seventh Amended and Restated Bylaws, effective July 1, 2013 (incorporated herein by reference to Exhibit 3.3 to our Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2013)
31.1		Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) (Filed herewith)
31.2		Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) (Filed herewith)
32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 (Furnished herewith)
32.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (Furnished herewith)
101.1		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Statement of Stockholders’ Deficit and (v) related notes to these financial statements, tagged as blocks of text and in detail  (Filed herewith)

	MOBILESMITH, INC.
November 10, 2014	By:	/s/ Amir Elbaz
		Amir Elbaz
		Chief Executive Officer

November 10, 2014	By:	/s/ Gleb Mikhailov
		Gleb Mikhailov
		Chief Financial Officer

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