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MobileSmith, Inc. - Annual Report: 2019 (Form 10-K)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2019
 
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 001-32634
 
MOBILESMITH, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-4439334
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
5400 Trinity Road, Suite 208
Raleigh, North Carolina
 
27607
(Address of principal executive offices)
 
(Zip Code)
 
(855) 516-2413
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, $0.001 par value
(Title of Class)
 
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 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, if any, every Interactive Data File required to be submitted and posted 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
 
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. (Check one):
 
Large accelerated filer
Accelerated filer
Non-accelerated filer

Smaller reporting company
 
 
Emerging growth 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 Act). Yes ☐·No ☑
 
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2019 was approximately $16.0 million (based on the closing sale price of $1.85 per share on such date).
 
The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of March 23, 2020 was 28,320,489.
 

 
2
 
 
 TABLE OF CONTENTS
 
PART I
 
 
 
Item 1.
Business
 
4
 
 
 
 
Item 1A.
Risk Factors
 
7
 
 
 
 
Item 1B.
Unresolved Staff Comments
 
11
 
 
 
 
Item 2.
Properties
 
11
 
 
 
 
Item 3.
Legal Proceedings
 
11
 
 
 
 
Item 4.
Mine Safety Disclosures
 
11
 
PART II
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
12
 
 
 
 
Item 6.
Selected Financial Data
 
12
 
 
 
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
13
 
 
 
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
19
 
 
 
 
Item 8.
Financial Statements and Supplementary Data
 
F-1
 
 
 
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
20
 
 
 
 
Item 9A.
Controls and Procedures
 
20                          


 
 
Item 9B.
Other Information
 
20
 
 
PART III
 
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
21
 
    
Item 11.
Executive Compensation
21
 
    
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
21
 
    
Item 13.
Certain Relationships and Related Transactions, and Director Independence
21
 
    
Item 14.
Principal Accounting Fees and Services
21
 
 
PART IV
 
 
    
Item 15.
Exhibits, Financial Statement Schedules
22
 
 
    
Item 16.             
Summary
24
   
 

SIGNATURES 
 
25
 
    
EXHIBIT INDEX
26
 
3
 
 
 PART I
 
Special Note Regarding Forward-Looking Statements
 
Information set forth in this Annual Report on Form 10-K contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and other laws. Forward-looking statements consist of, among other things, trend analyses, statements regarding future events, future financial performance, our plan to build our business and the related expenses, our anticipated growth, trends in our business, our ability to continue as a going concern, and the sufficiency of our capital resources including funds that we may be able to raise under our convertible note facility, our ability to raise financing from other sources and/or ability to defer expenditures, the impact of the liens on our assets securing amounts owed to third parties, expectation regarding competitors as more and larger companies attempt to market products/services competitive to our products, market acceptance of our new product offerings, including updates to our Platform, rate of new user subscriptions, market penetration of our products and  expectations regarding our revenues and expenses,  all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “project,” “intend,” “plan,” “estimate,” variations of such words, and similar expressions also are intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified under Part I, Item 1A, “Risk Factors,” and elsewhere in this report for factors that may cause actual results to be different than those expressed in these forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
 
ITEM 1. BUSINESS
 
General
 
MobileSmith, Inc. (referred to herein as, “MobileSmith,” the “Company,” “us,” “we,” or “our”) was incorporated in Delaware in August 1993 and became a public company through a self-registration in February 2005.
 
Principal Products and Services
 
MobileSmith provides  procedure management assistance and  operational improvement patient/member-facing mobile application services to the healthcare industry.  
 
During 2018 we refined our healthcare offering and redefined our product - a suite of e-health mobile solutions, that consists of a catalog of ready to deploy mobile app solutions (App Blueprints) and support services. 
 
In 2019 we consolidated our current solutions under a single integrated offering branded Peri™. Peri™ is a cloud-based surgical and clinical procedure application architected to accomplish the following :
 
- Run on a platform integrated with future MobileSmith applications;
 
- Incorporate MobileSmith developed or licenses healthcare service applications;
 
- Securely link those services to Electronic Medical Records (EMR) platforms;
 
- Produce a mobile app based set of pre and postoperative instructions (which we refer to as Clinical Pathways), that establishes a direct two-way clinical procedure management process between a patient and a healthcare provider and by doing so improves patient engagement for the benefit of the patient and improves clinical outcomes measured in procedure cancellations and  post procedure readmissions for the benefit of a provider.
 
From time to time we have provided custom software development services.  Such services are not core to our business model and will likely decrease in significance in the future. 
 

 
4
 
 
Target Market and Sales Channels
 
During 2017 we completed a strategic shift and focused our business and research and development activities primarily on the Healthcare industry in the United States. In 2018 we refined our healthcare focus by identifying two target markets: (i) healthcare providers (including hospitals, hospital systems and the United States Veterans Health Administration) and (ii) healthcare payer market (including insurance companies and insurance brokers).
 
Both markets are targeted with a diversified sales workforce that includes direct sales and resellers, such as channel partners. 
 
Principal Customers
 
In 2018 no single customer of ours comprised more than 10% of our recognized aggregate revenue.  During 2019 we increased our services to a government agency and the revenue from that relationship comprised 17% of our recognized aggregate revenue.  Such services are not core to our business model and will likely decrease in significance in the future.
 
Research and Development
  
During 2017 and 2018 we focused our technological and design efforts on our Blueprint features, that dominated our offering to healthcare providers in 2019  (Blueprint is a fully customizable pre-built app targeting specific healthcare related business function or health condition).
 
During 2019 we invested heavily in development of our Peri™ solution, which was introduced to the market during the year.

 
 
5
 
 
Competition
 
We have been successful in penetrating the healthcare provider technology market and developed extensive expertise in the industry.  With many of our customers we enjoy five-plus year relationships.  However, the healthcare provider technology industry is highly competitive.  Our competitors include a number of successful, independent companies, such as Vivify Health, mPulse, and AMC Health.  Many of these companies have significantly greater financial, personnel, and other resources than we do.  Moreover, more companies enter the industry and market every year.  As a result of this, we expect the competition we face to grow stronger in the next five years.
 
Intellectual Property
 
During 2014, we stopped pursuing the majority of our patent applications as we determined that the cost of pursuing them is greater than the potential protection provided by them.  Since then we have been granted one patent associated with our technology.
 
We also have several trademarks registered and pending with the U.S. Patent and Trademark Office. These trademarks cover certain brand names of our offerings.
 
Employees
 
As of December 31, 2019, we had 26 full time employees and no part-time employees. None of our employees are subject to collective bargaining agreements.
 
Available Information
 
Our corporate information is accessible through our main web portal at www.MobileSmith.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. Although we endeavor to keep our website current and accurate, there can be no guarantees that the information on our website is up to date or correct. We make available, free of charge, access to all reports filed with the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and amendments to these reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The Company’s reports filed with, or furnished to, the SEC are also available on the SEC’s website www.sec.gov
 
6
 
 
ITEM 1A. RISK FACTORS
 
You should carefully consider the risks described below and elsewhere in this Annual Report on Form 10-K before making an investment decision. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. Our common stock is considered speculative and the trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. The following risk factors are not the only risk factors facing the Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.
 
 
A default by us in respect of the amounts outstanding on the notes outstanding under the note facilities and the commercial bank loans when due in 2020 would enable these creditors to foreclose on our assets.
 
Our currently outstanding convertible promissory notes issued under the convertible note facilities (collectively, the "Notes") and subordinated promissory note, as of the date of this Annual Report on Form 10-K  (this "Form 10-K") aggregate approximately $47.4 million, come due in November 2020.  In addition, we have an outstanding Loan and Security Agreement (the “LSA”) with Comerica Bank in the amount of $5,000,000, which matures in June of 2020 and is secured by an extended irrevocable letter of credit issued by UBS AG (Geneva, Switzerland) (“UBS AG”) with a renewed term expiring on May 31, 2020, which term is renewable 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.  The provision of any such notice by UBS will constitute an event of default under the LSA, at which time all amounts outstanding under the LSA will become due and payable. As of the filing date of this Form 10-K, no such notice has been provided to us nor have we been provided with any indication that we are to receive notice of non-renewal of the letter of credit.
 
Unless we can defer payment on the notes or such notes are converted into our common stock, of which no assurance can be provided, we will need to find other sources of funding to pay the amounts that are scheduled to come due in November 2020. We also have no commitment from any other funding source should UBS elect to not renew the letter of credit.
 
Furthermore, the amounts under the LSA as well as approximately $20.5 million under the Notes, are secured by a lien on our assets. A default by us under these Notes or the LSA would enable these creditors to foreclose on our assets. Additionally, the non-renewal of the letter of credit securing the UBS note, which is currently scheduled to expire on May 31, 2020, would also trigger an event of default under the LSA as well as the outstanding notes. Any foreclosure could force us to substantially curtail or cease our operations.
 
Historically, we have operated at a loss, and we continue to do so.
 
We have had recurring losses from operations and continue to have negative cash flows. If we do not become cash flow positive through additional financing or growth, we may have to cease operations and liquidate our business.
 
We are dependent on existing and other investors for the financing of our operations and their inability or unwillingness to fund our operations can have a material adverse effect on our operations.
 
We have not yet achieved positive cash flows from operations, and our main source of operating funds is the sale of notes under two convertible note facilities that we implemented and through issuance of subordinated promissory notes. See Item 7, “Management’s Discussion and Analysis “Liquidity and Capital Resources”. Since November 2007 and through the date of this Form 10-K, we have raised approximately $61.7 million through these note facilities and we have the ability to raise up to an additional $15.4 million under such facilities from existing note holders and others upon request and with the consent of the noteholders. However, no assurance can be provided that we will in fact be able to raise needed amounts through the facilities or through any other sources on commercially reasonable terms. If financing through the note facilities becomes unavailable, we will need to seek other sources of funding.  The inability to raise additional funds when needed on terms acceptable to us, whether through the note facilities or otherwise, may have a material adverse effect on our operations.
  
Our independent registered public accounting firm indicates that it has substantial doubt that we can continue as a going concern. Our independent registered public accounting firm’s opinion may negatively affect our ability to raise additional funds, among other things. If we fail to raise sufficient capital, we will not be able to implement our business plan, we may have to liquidate our business, and you may lose your investment.
 
Cherry Bekaert LLP, our independent registered public accounting firm, has expressed substantial doubt in its report included within this Form 10-K about our ability to continue as a going concern given our recurring losses from operations and deficiencies in working capital and equity, which are described in the first risk factor above. This report could materially limit our ability to raise additional funds by issuing new debt or equity securities or otherwise. If we fail to raise sufficient capital, we will not be able to implement our business plan and, we may have to liquidate our business, which may result in the loss of your entire investment. You should consider our independent registered public accounting firm’s report when determining if an investment in us is suitable.
 
 
7
 
  
The delivery of software via the SaaS business model is more vulnerable to cyber-crime than the sale of pre-packaged software.
  
Our service involves the storage and transmission of customers’ proprietary information. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result, unauthorized access is obtained to our customers’ data or our data, our reputation could be damaged, our business may suffer, and we could incur significant liability. In addition, third parties may attempt to fraudulently induce employees or customers to disclose sensitive information such as user names, passwords, or other information in order to gain access to our customers’ data or our data, which could result in significant legal and financial exposure and a loss of confidence in the security of our service that would harm our future business prospects. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers.
 
Our business is currently dependent on the success of a single product, Peri® offering.
 
Our business model is dependent on the commercial success of Peri™. Our future financial performance and revenue growth will depend on acceptance by the market of our product.  If the market does not accept Peri™ as a viable product to address the market’s needs, it will have a materially adverse impact on our business.
 
Government regulation may subject us to liability or require us to change the way we do business.
 
The laws and regulations that govern our business change rapidly. Evolving areas of law that are relevant to our business include privacy and security laws, proposed encryption laws, content regulation, information security accountability regulation, sales and use tax laws and regulations and attempts to regulate activities on the Internet. In addition to being directly subject to certain requirements of the HIPAA privacy and security regulations, we are required through contracts with our customers known as “business associate agreements” to protect the privacy and security of certain personal and health related information. We are required to comply with revised requirements under the HIPAA privacy and security regulations. The rapidly evolving and uncertain regulatory environment could require us to change how we do business or incur additional costs. Further, we cannot predict how changes to these laws and regulations might affect our business. Failure to comply with applicable laws and regulations could subject us to civil and criminal penalties, subject us to contractual penalties, including termination of our customer agreements, damage our reputation and have a detrimental impact on our business.
 
We may be found to infringe on intellectual property rights of others.
 
Third parties, including customers, may in the future assert claims or initiate litigation related to exclusive patent, copyright, trademark, and other intellectual property rights to technologies and related standards that are relevant to us. Because of the existence of a large number of patents in the mobile apps field, the secrecy of some pending patents, and the rapid rate of issuance of new patents, it is not economically practical or even possible to determine in advance whether a product or any of its components infringes or will infringe on the patent rights of others. The asserted claims and/or initiated litigation can include claims against us or our manufacturers, suppliers, or customers, alleging infringement of their proprietary rights with respect to our existing or future products or components of those products. Regardless of the merit of these claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to develop a non-infringing technology or enter into license agreements. Where claims are made by customers, resistance even to unmeritorious claims could damage customer relationships. There can be no assurance that licenses will be available on acceptable terms and conditions, if at all, or that our indemnification by our suppliers will be adequate to cover our costs if a claim were brought directly against us or our customers. Furthermore, because of the potential for high court awards that are not necessarily predictable, it is not unusual to find even arguably unmeritorious claims settled for significant amounts. If any infringement or other intellectual property claim made against us by any third party is successful, if we are required to indemnify a customer with respect to a claim against the customer, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and adversely affected.
 
Our exposure to risks associated with the use of intellectual property may be increased as a result of acquisitions, as we have a lower level of visibility into the development process with respect to such technology or the care taken to safeguard against infringement risks.
 
 
8
 
 
Officers, directors, principal stockholders and other related parties control us. This might lead them to make decisions that do not align with interests of minority stockholders.
 
Our principal stockholders beneficially own or control a large percentage of our outstanding common stock. Certain of these principal stockholders hold Notes, which may be exercised or converted into additional shares of our common stock under certain conditions. The noteholders have designated a representative to act as their agent. We have agreed that the representative shall be granted access to our facilities and personnel during normal business hours, shall have the right to attend all meetings of the Board of Directors and its committees, and shall receive all materials provided to the Board of Directors or any committee. In addition, so long as the Notes are outstanding, we have agreed that we will not take certain material corporate actions without approval of the representative.
 
Our principal stockholders, acting together, would have the ability to control substantially all matters submitted to our stockholders for approval (including the election and removal of directors and any merger, consolidation, or sale of all or substantially all of our assets) and to control our management and affairs. Accordingly, this concentration of ownership may have the effect of delaying, deferring, or preventing a change in control of us; impeding a merger, consolidation, takeover, or other business combination involving us; or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could materially and adversely affect the market price of our common stock.
 
Mr. Avy Lugassy controls Grasford Investments Ltd. (“Grasford”). As of December 31, 2019, Grasford holds 10,054,045 , or 35.6%, of the Company’s issued and outstanding common stock and approximately $12.1 million in aggregate principal amount of our promissory notes, which are currently convertible at the election of the holder into additional 8,444,952 shares of common stock. Being a significant owner of our company, Mr. Lugassy may exercise significant influence on our operations through his ability to vote his shares.
 
In addition, as of the date of this report, Union Bancaire Privée (“UBP”) holds 7,167,832, or 25.4% of  the Company’s issued and outstanding common stock and approximately $28.6 million in aggregate principal amount of the Notes convertible into additional 20,012,013 shares of common stock . Because UBP may convert its Notes upon request, if UBP so converts, it would acquire a significant percentage of our shares of common stock and, like Grasford, would be able to exercise significant influence on the Company’s operations as a result.
 
Future utilization of net operating loss carryforwards may be limited.
 
In accordance with Section 382 of the Internal Revenue Code of 1986, as amended, a change in equity ownership of greater than 50% of the Company within a three-year period can result in an annual limitation on the Company’s ability to utilize its net operating loss carryforwards that were created during tax periods prior to the change in ownership. A change in ownership may result from the issuance of shares of the Company’s common stock pursuant to conversion of the Notes or any other event that would result in the issuance of common or preferred shares of the Company, among other events.
 
Any future issuance of our shares of common stock could have a dilutive effect on the value of our existing shares of common stock.
 
The conversion price on our outstanding convertible promissory notes is fixed at $1.43 per share and on March 23, 2020 the closing price of our stock was $2.70 per share.  As of the date of this report, we have $43,080,000 of face value Notes outstanding convertible into 30,125,874 shares of common stock, which would more than double our current number of shares of common stock outstanding.  As we continue to issue more of the Notes, the number of conversion shares will increase.
 
 
9
 
 
The ability of our Board of Directors to issue additional stock may prevent or make more difficult certain transactions, including a sale or merger of the Company.
 
Our Board of Directors is authorized to issue up to 5,000,000 shares of preferred stock with powers, rights and preferences designated by it.  Shares of voting or convertible preferred stock could be issued, or rights to purchase such shares could be issued, to create voting impediments or to frustrate persons seeking to effect a takeover or otherwise gain control of the Company.  The ability of the Board of Directors to issue such additional shares of preferred stock, with rights and preferences it deems advisable, could discourage an attempt by a party to acquire control of the Company by tender offer or other means.  Such issuances could therefore deprive stockholders of benefits that could result from such an attempt, such as the realization of a premium over the market price for their shares in a tender offer or the temporary increase in market price that such an attempt could cause.  Moreover, the issuance of such additional shares of preferred stock to persons friendly to the Board of Directors could make it more difficult to remove incumbent officers and directors from office even if such change were to be favorable to stockholders generally.
 
There currently is very limited public market for our common stock and there can be no assurance that a more active public market will ever develop. Failure to develop or maintain a trading market could negatively affect the value of our common stock and make it difficult or impossible for you to sell your shares.
 
There is currently a very limited public market for shares of our common stock and a more active one may never develop. Our Common Stock is quoted on the OTC Markets, QB Tier. The OTC Markets is a thinly traded market and lacks the liquidity of certain other public markets with which some investors may have more experience. Our shares of common stock are traded infrequently and even an insignificant investment in our shares of common stock may be illiquid.
 
We may not ever be able to satisfy the listing requirements for our common stock to be listed on a national securities exchange, which is often a more widely-traded and liquid market. Some, but not all, of the factors which may delay or prevent the listing of our common stock on a more widely-traded and liquid market include the following: our stockholders’ equity may be insufficient; the market value of our outstanding securities may be too low; our net income from operations may be too low; our common stock may not be sufficiently widely held; we may not be able to secure market makers for our common stock; and we may fail to meet the rules and requirements mandated by the several exchanges and markets to have our common stock listed. Should we fail to satisfy the initial listing standards of the national exchanges, or our common stock is otherwise rejected for listing, and remains listed on the OTC Markets or is suspended from the OTC Markets, the trading price of our common stock could suffer and the trading market for our common stock may be less liquid and our common stock price may be subject to increased volatility, making it difficult or impossible to sell shares of our common stock.
 
Penny Stock Regulations are applicable to investment in shares of our common stock.
 
Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges, provided that current prices and volume information with respect to transactions in such securities are provided by the exchange or system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to penny stock rules. Many brokers will not deal with penny stocks, restricting the market for our shares of common stock.
 
We do not intend to pay any cash dividends on our shares of common stock; thus our stockholders will not be able to receive a return on their shares unless they sell them.
 
We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them.
 
 
10
 
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
We do not own any real property. The Company's corporate office in Raleigh North Carolina consists of approximately 7,000 square feet. The lease term for the premises commenced in July 2013 with an initial term that expires in March 2019.  The Company has extended the lease through April 2024.  As a result of the amendment the Company has received an incentive from the landlord valued at approximately $100,000. 
 
Accounting principles generally accepted in the United States of America require that the total rent expense to be incurred over the term of the lease be recognized on a straight-line basis.   The average annual rent expense over the term of the lease is approximately $189,000.
 
ITEM 3. LEGAL PROCEEDINGS
 
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating result.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.
 
 
11
 
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock is currently quoted on the OTC Market (OTC.QB) under the symbol “MOST.” Although trading in our common stock has occurred on a relatively consistent basis, the volume of shares traded has been sporadic and very low. There can be no assurance that an established trading market will develop, that the current market will be maintained or that a liquid market for our Common Stock will be available in the future. Investors should not rely on historical stock price performance as an indication of future price performance.
 
The following table shows the quarterly high and low bid prices for our Common Stock over the last two completed fiscal years as quoted on the OTC Market (OTC.QB). The prices represent quotations by dealers without adjustments for retail mark-ups, mark-downs or commission and may not represent actual transactions.

Year Ended December 31, 2018:
 High 
 Low 
First Quarter
 $4.01 
 $1.00 
Second Quarter
 $2.50 
 $1.50 
Third Quarter
 $2.50 
 $1.30 
Fourth Quarter
 $2.50 
 $0.75 
 
    
    
 
    
    
Year Ended December 31, 2019:
    
    
First Quarter
 $1.90 
 $1.10 
Second Quarter
 $1.91 
 $1.01 
Third Quarter
 $1.90 
 $1.05 
Fourth Quarter
 $4.69 
 $1.00 
 
As of March 23, 2020 there were 160 holders of record of shares of our common stock.
 
Dividend Policy
 
We have never declared or paid any cash dividends on shares of our common stock and do not intend to declare or pay dividends for the foreseeable future. As long as the Notes are outstanding, we must receive approval from the bond representative designated by the Noteholders in order to pay any dividend on shares of our common stock.
 
Issuer Repurchases of Equity Securities
 
We do not have a stock repurchase program for our common stock and have not otherwise purchased any shares of our common stock.
 
 
ITEM 6. SELECTED FINANCIAL DATA
 
Not applicable.
 
 
12
 
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This discussion summarizes significant factors affecting the operating results, financial condition and liquidity of MobileSmith for the two-year period ended December 31, 2019. This discussion should be read in conjunction with the financial statements and notes thereto included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K and the more detailed discussion and analysis of our financial condition and results of operations in conjunction with the risks described in Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K.
 
Overview of Financing Activities and Sources of Cash
 
From November 14, 2007 and through the date of this Form 10-K, we have financed our working capital deficiency primarily through the issuance of convertible promissory notes under two convertible note facilities and subordinated promissory notes to related parties. The first, established in November 2007, is evidenced by the Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, as amended (as so amended, the “2007 NPA”) and the second, established in December 2014, is evidenced by the unsecured Convertible Subordinated Note Purchase Agreement (the “2014 NPA”); together with the 2007 NPA, (the “Convertible Note Facilities”) with Union Bancaire Privée, UBP SA ("UBP").   All references in this filing to “2007 NPA Notes” will mean notes issued under the  2007 NPA and all references to “2014 NPA Notes" will mean notes issued under the 2014 NPA.  All references to the Convertible Notes will mean any convertible note or notes issued either under 2007 or 2014 NPAs.  All references to Subordinated Promissory Notes will mean any subordinated note or notes, as defined under Subordinated Promissory Notes, Related Parties in "Debt" footnote in ITEM 8. Financial Statements and Supplementary Data.
 
From November 14, 2007 and through December 10, 2014, we have financed our working capital deficiency primarily with the issuance of Notes under the 2007 NPA.   On December 11, 2014 the Company entered into the 2014 NPA and issued its first 2014 NPA Note to UBP.  We intend to primarily use our 2014 NPA for future issuances of convertible notes.
 
 
13
 
  
In June of 2018 we extended maturity of both the 2007 and 2014 NPA Notes from November of 2018 to November of 2020, which lengthened the period over which the debt discount is amortized.  
 
During 2019, we borrowed a total of $3,160,000 under the 2014 NPA.  The aggregate balance of the amounts outstanding under the Convertible Notes Facilities as of December 31, 2019 was $39,841,172, net of $1,238,828 discount.
 
Amounts outstanding under the 2007 NPA are secured by a lien on all our assets.
  
The table below summarizes the amounts outstanding under the Convertible Notes Facilities issued as of December 31, 2019 by NPA type:
 
Convertible Notes Type:
 
Balance
 
 2007 NPA notes, net of discount
 $20,405,588  
 2014 NPA notes, net of discount
  19,435,584  
 Total convertible notes
 $39,841,172
 
In addition, during 2019 we also borrowed a total of $2,993,250 through issuance of Subordinated Promissory Notes to related parties to finance our working capital shortfalls.  As of December 31, 2019 the total of such notes payable is $3,518,250.
 
Comerica LSA
 
We have an outstanding Loan and Security Agreement (the "LSA") with Comerica Bank pursuant to which $5,000,000 is outstanding with an original maturity date of June 9, 2016.  On June 8, 2018, the Company and Comerica Bank entered into Second Amendment to the LSA, which extended the maturity of the LSA to June 9, 2020.
 
The LSA is secured by an extended irrevocable letter of credit issued by UBS AG (Geneva, Switzerland) with a renewed term expiring on May 31, 2020, which term is automatically renewable 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.  The provision of any such notice by UBS will constitute an event of default under the LSA, at which time all amounts outstanding under the LSA will become due and payable. As of the date of this Form 10-K, no such notice has been provided to us and we have not we been provided with any indication that we are to receive notice of non-renewal of the letter of credit.
 

 
 
14
 
 
 
 
Comparison of Operating Results
 
Results of Operations
 
Highlights

In both 2018 and 2019 the Company granted a significant number of stock options to its employees and the board of directors, 5,057,758 and 7,533,980, respectively .  As a result, our share based compensation increased from $1,370,890 during the year ended December 31, 2018  to $3,471,568 during the year ended December 31, 2019.  This stock based compensation impacted every operating expense category of the Company. 
 
 
   
   
 Increase (Decrease) 
Category
 Year ended
December 31,
2019
 
 Year ended
December 31,
2018
 
 $ 
 % 
Revenue
 $2,801,708 
 $2,323,121 
  478,587 
  21%
Cost of Revenue
  1,068,983 
  803,712 
  265,271 
  33%
Gross Profit
  1,732,725 
  1,519,409 
  213,316 
  14%
 
    
    
    
    
 Sales and Marketing
  1,445,246 
  1,647,602 
  (202,356)
  (12)%
 Research and Development
  2,771,003 
  1,693,970 
  1,077,033 
  64%
 General and Administrative
  3,629,622 
  2,378,381 
  1,251,241 
  53%
 
    
    
    
    
 Interest Expense
  4,894,233 
  4,138,030 
  756,203 
  18%
 
Revenue increased by $478,587, or 21%.  The increase in revenues is primarily attributable to increase in revenue from a single customer to who we provided custom development services.
 
Cost of Revenue increased by $265,271, or 33%.  An increase of $58,000 is attributable to increased license and use fees paid to our service partners, whose technology is integrated into our service offerings.  An increase of $188,000 is attributable to outsourced development costs associated with delivery of custom development services.  The remainder of the increase is attributable to the stock based compensation component of our delivery team personnel expense, offset by a decrease in amortization expense.
 
Gross Profit increased by $213,316, or 14%.  This increase is primarily attributed to increase in revenue as mentioned above, offset by increases in service delivery expenses.
 
Sales and Marketing expense decreased by $202,356, or 12%.  A reorganization of the sales and marketing team resulted in a decrease in personnel expense of $211,000 and a decrease in travel related expenses by approximately $100,000.  Expenses related to campaigns and tradeshows decreased by approximately $122,000. Stock based compensation for sales and marketing employees increased by approximately $240,000. 
 
Research and Development expense increased by $1,077,033, or 64%.  An increase of approximately $554,000 is attributable to increase in stock based compensation.  Payroll expense increased by approximately $364,000 as we invested heavily in development of Peri®, and recruiting expenses increased by $95,000 as we compete for top talent in a highly competitive labor market for software engineers and developers.  Additional increases are due to increase in technology related expenses and travel.
 
General and Administrative expense increased by $1,251,241, or 53%. An increase of approximately $1,220,000 is attributable to increased stock based compensation of the executive team and board of directors.   Rent expense increased by approximately $26,000.  Travel costs associated with the executive team and board of directors travel activities increased by approximately $25,000.  The expenses were offset by decreases in payroll expenses and other minor expense categories.
 
Interest expense increased by $756,203 or 18%.  The cash portion of interest expense increased by $324,000 due to an increase in average face value of our debt.  The non-cash portion of interest expense increased by approximately $434,000 due to debt discount amortization as a result of increases in the beneficial conversion feature discount associated with debt issuances.
15
 
 
Liquidity and Capital Resources
 
We have not yet achieved positive cash flows from operations, and our main source of funds for our operations are the sale of our convertible promissory notes issued under our convertible note facilities and subordinated promissory notes to related parties. We need to continue to rely on these sources until we are able to generate sufficient cash from revenues to fund our operations or obtain alternate sources of financing. We believe that anticipated cash flows from operations, and additional issuances of Notes, together with cash on hand, will provide sufficient funds to finance our operations at least for the next 12 months from the date of this report.  Changes in our operating plans, lower than anticipated sales, increased expenses, or other events may cause us to seek additional equity or debt financing in future periods. There can be no guarantee that financing will be available to us on acceptable terms, if at all. Additional equity and convertible debt financing could be dilutive to the holders of shares of our common stock, and additional debt financing, if available, could impose greater cash payment obligations and more covenants and operating restrictions.

During 2019, the Company raised gross proceeds of $3,160,000 from the private placement to UBP under 2014 NPA and $2,993,250 through issuance of subordinated promissory notes to related parties.  Subsequent to December 31, 2019 and through the date of this report, the Company issued additional 2014 NPA Notes to in the amount of $2,000,000 and $1,045,000 of subordinated promissory notes to related parties.

Nonetheless, there are factors that can impact our ability to continue to fund our operating the next twelve months. These include:
 
Our ability to expand revenue volume during the COVID-19 pandemic, when healthcare systems concentrate their efforts on emergency services and may postpone other initiatives;
 
 
Our ability to maintain product pricing as expected, particularly in light of increased competition and its unknown effects on market dynamics;
 
 
Our continued need to reduce our cost structure while simultaneously expanding the breadth of our business, enhancing our technical capabilities, and pursing new business opportunities;
 
 
 ●
 Our ability to raise capital amidst global economic downturn associated with COVID-19 pandemic.
 
In addition, if UBS were to elect to not renew the irrevocable letter of credit beyond May 31, 2020, the currently scheduled expiration date, then such non-renewal will result in an event of default under the LSA, at which time all amounts outstanding under the LSA of approximately $5 million will become due and payable. Currently, the letter of credit is automatically extended 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.  As of the filing date of this report on Form 10-K, no such notice has been provided to us nor have we been provided with any indication that we are to receive notice of non-renewal of the letter of credit.
 
Additionally, all notes issued under the 2007 and 2014 NPAs and subordinated promissory notes mature on November 14, 2020 and the Comerica LSA matures on June 9, 2020.  The Company is actively working with the debt holders to extend the maturity of both Notes and the LSA. 
 
 
16
 
 
Uses of Cash
 
During the year ended December 31, 2019, we used in operating activities approximately $8.6 million of cash, which was offset by $2.3 million in cash collected from our customers, netting approximately $6.3 million of net cash used in operating activities.  Approximately $3.5 million of this amount was used to pay interest payments on the convertible promissory notes, subordinated promissory notes and bank debt; approximately $3.4 million for personnel, benefits and related costs; approximately $278,000 was used for non-payroll related sales and marketing efforts, such as tradeshows, marketing campaigns, industry research, public relations consulting and other outsourced sales enablement activities, approximately $677,000 was used for outsourced delivery and for software development contractors,   approximately $860,000 was used for other non-payroll general and administrative expenses, which included among other things: infrastructure costs, rent, insurance, legal, professional, compliance, and other expenditures.
 
During the year ended December 31, 2018, we used in operating activities approximately $7.5 million of cash, which was offset by $2.6 million in cash collected from our customers, netting approximately $4.9 million of net cash used in operating activities.  Approximately $2.6 million of this amount was used to pay interest payments on the convertible notes and bank debt; approximately $3.3 million for personnel, benefits and related costs; approximately $687,000 was used for non-payroll related sales and marketing efforts, such as tradeshows, marketing campaigns, industry research, PR consulting and other outsourced sales enablement activities  and approximately $872,000 was used for other non-payroll development and general and administrative expenses, which included among other things: infrastructure costs, rent, insurance, legal, professional, compliance, and other expenditures.
 
 
Capital Expenditures and Investing Activities
 
Our capital expenditures are limited to the purchase of new office equipment and new mobile devices that are used for testing.  Cash used for investing activities was not significant and we do not plan any significant capital expenditures.
 
Going Concern
 
Our independent registered public accounting firm has issued an emphasis of matter paragraph in their report included in this Form 10-K in which they express substantial doubt as to our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts or classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern depends on our ability to generate sufficient cash flows to meet our obligations on a timely basis, extend payment terms, to obtain additional financing that is currently required, and ultimately to attain profitable operations and positive cash flows. There can be no assurance that our efforts to raise capital or increase revenue will be successful. If our efforts are unsuccessful, we may have to cease operations and liquidate our business.
 
Critical accounting policies and estimates
 
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, bad debts, intangible assets and income taxes. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
 
We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.
 
 
17
 
 
Revenue Recognition and Deferred Revenue
 
Revenue Recognition: General Overview and Performance Obligations to Customers
The Company derives revenue primarily from contracts for subscription to the suite of e-health mobile solutions and, to a much lesser degree, ancillary services provided in connection with subscription services.
 
The Company’s contracts include the following performance obligations:
 
Access to the content available on the App Blueprint Catalog, including hosting of the deployed apps;
App Build and Managed Services;
Custom development work.
 
The majority of the Company’s contracts are for subscription to a catalog of mobile App Blueprints, hosting of the deployed apps and related services. Custom work for specific deliverables is documented in the statements of work. Customers may enter into subscription and various statements of work concurrently or consecutively. Most of the Company’s performance obligations are not considered to be distinct from the subscription to Blueprints, hosting of deployed apps and related services and are combined into a single performance obligation except for some custom development work which is capable of being distinct. New statements of work and modifications of contracts are reviewed each reporting period and significant judgment is applied as to nature and characteristics of the new or modified performance obligations on a contract by contract basis.
 
Revenue Recognition: Transaction Price of the Contract and Satisfaction of Performance Obligations
The transaction price of the contract is an aggregate amount of consideration payable by customer for delivery of contracted services. Transaction price is impacted by the terms of a contracted agreement with the customer. Such terms range from one to three years.  The transaction price may include a significant financing component in instances where Company offers discounts for accelerated payments on the long-term contracts.  A significant financing component is recorded in other assets and is amortized as interest expense in the Company’s statement of operations over the term of the contract. 
 
The transaction price is predominantly allocated to the single performance obligation of access to the Blueprints, hosting and related services and, to a lesser degree, allocated between the access and other distinct performance obligations based on the stand-alone selling price. The subscription revenue is then recognized over the term of the contract, using the output method of time elapsed. Other performance obligations identified are evaluated based on the specific terms of the agreement are usually recognized at a point in time upon delivery of a specific documented output. Management believes that such chosen methods faithfully depict satisfaction of Company performance obligations and transfer of benefit to the customers.
 
The full transaction price of the contract may be billed in its entirety or in agreed upon installments.  Billed transaction price in excess of revenue recognized results in the recording of a contract liability.  Unbilled portion of transaction price represents contracted consideration receivable by the Company that was not yet billed. 
 
18
 
 
Incremental Costs of Obtaining a Contract
The Company’s incremental costs of obtaining a contract include sales commissions and are recognized as other assets on the balance sheet for the contracts with a term exceeding 12 months. These costs are amortized through the term of the contract and are recorded as sales and marketing expense. As of December 31, 2019 the Company’s other assets include approximately $25,000 of such costs. 
 
Contract Liabilities
A new contract liability is created every time the Company records receivables due from its customers and has not satisfied the requirements to recognize revenue. Contract liability represents Company’s obligation to transfer services for which the Company has already invoiced.  Most of the contract liabilities will be recognized in revenue over a period of 12 to 36 months.
 
Share-Based Compensation
The Company measures share-based compensation cost at the grant date based on the fair value of the award. The Company recognizes compensation cost on a straight-line basis over the requisite service period. The requisite service period is generally three years.  The Company accounts for forfeitures as they occur.  The Company uses the simplified method allowed by SAB 107 for estimating expected term of the options in calculating the fair value of the awards that have a term of more than 7 years because the Company does not have reliable historical data on exercise of its options.  
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.
 
 
19
 
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
INDEX TO FINANCIAL STATEMENTS
 
 
 
Page
 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
F-2
 
 
 
CONSOLIDATED BALANCE SHEETS
 
F-3
 
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
F-4
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
F-5
 
 
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
 
F-6
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
F-7

 
 
 
 
 
 
 
 
 
 
F-1
 

 
    Report of Independent Registered Public Accounting Firm
 
    To the Board of Directors and Stockholders MobileSmith, Inc.
Raleigh, North Carolina
 
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MobileSmith, Inc. (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years then ended, 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, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
Changes in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases. See Note 2 for additional information.
 
Going Concern Uncertainty
These financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a working capital deficiency as of December 31, 2019. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans concerning these matters are described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
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 audits 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.
 
/s/ Cherry Bekaert LLP
 
We have served as the Company’s auditor since 2009. Raleigh, North Carolina
 
March 24, 2020
 
 
 
F-2
 
 
 MOBILESMITH, INC.
 CONSOLIDATED BALANCE SHEETS
 
 
 
December 31
 
 
December 31,
 
 
 
2019
 
 
2018
 
ASSETS
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
Cash And Cash Equivalents
 $71,482 
 $267,290 
Restricted Cash And Cash Equivalents
  243,485 
  239,611 
Accounts Receivable, Net of Allowance for Doubtful Accounts of $5,250 and $10,000, respectively
  109,187 
  271,387 
Prepaid Expense and Other Current Assets
  75,489 
  125,798 
Total Current Assets
  499,643 
  904,086 
 
    
    
Property and Equipment, Net
  29,368 
  45,012 
Capitalized Software, Net
  5,470 
  64,352 
Operating Lease Right-of-Use Asset
  674,338 
  - 
Total Assets
 $1,208,819 
 $1,013,450 
 
    
    
LIABILITIES AND STOCKHOLDERS’ DEFICIT
    
    
Current Liabilities
    
    
Accounts Payable
 $242,249 
 $166,681 
Interest Payable
  1,834,694 
  1,584,794 
Other Liabilities And Accrued Expenses
  263,889 
  307,811 
Operating Lease Liability Current
  149,525 
  - 
Contract  With Customer Liability Current
  1,051,271 
  1,476,725 
Bank Loan
  5,000,000 
  - 
Subordinated Promissory Notes, Related Parties
  3,518,250 
  - 
Convertible Notes Payable, Related Parties, Net of Discount
  39,230,432 
  - 
Convertible Notes Payable, Net of Discount
  610,740 
  - 
Total Current Liabilities
  51,901,050 
  3,536,011 
 
    
    
 
    
    
Bank Loan
  - 
  5,000,000 
Subordinated Promissory Notes, Related Parties
  - 
  525,000 
Convertible Notes Payable, Related Parties, Net of Discount
  - 
  35,740,085 
Convertible Notes Payable, Net of Discount
  - 
  610,740 
Deferred Rent
  - 
  35,287 
Operating Lease Liability Noncurrent
  593,994 
  - 
Contract  with Customer Liability Noncurrent
  28,100 
  226,270 
Total Liabilities
  52,523,144 
  45,673,393 
 
    
    
Commitments and Contingencies (Notes 4, 5, 11)
    
    
Stockholders' Deficit
    
    
Preferred Stock Value, $0.001 Par Value, 5,000,000 Shares Authorized, No Shares Issued and Outstanding at December 31, 2019 or 2018
  - 
  - 
Common Stock Value, $0.001 Par Value, 100,000,000 Shares Authorized at December 31, 2019 and 2018; 28,271,598 Shares Issued and Outstanding at December 31, 2019 and 2018
  28,272 
  28,272 
Additional Paid-in Capital
  118,431,878 
  114,082,897 
Accumulated Deficit
  (169,774,475)
  (158,771,112)
Total Stockholders' Deficit
  (51,314,325)
  (44,659,943)
Total Liabilities and Stockholders' Deficit
 $1,208,819 
 $1,013,450 
The accompanying notes are an integral part of these consolidated financial statements.
                                                                                                         
 
F-3
 
 
MOBILESMITH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
 
 
 
Year Ended
 
 
 
December 31,
2019
 
 
December 31,
2018
 
REVENUES:
 
 
 
 
 
 
Subscription and Support
 $2,319,514 
 $2,198,519 
Services and Other
  482,194 
  124,602 
Total Revenues
  2,801,708 
  2,323,121 
 
    
    
COST OF REVENUES:
    
    
Subscription and Support
  754,743 
  751,285 
Services and Other
  314,240 
  52,427 
Total Cost of Revenues
  1,068,983 
  803,712 
 
    
    
GROSS PROFIT
  1,732,725 
  1,519,409 
 
    
    
OPERATING EXPENSES:
    
    
Sales and Marketing
  1,445,246 
  1,647,602 
Research and Development
  2,771,003 
  1,693,970 
General and Administrative
  3,629,622 
  2,378,381 
Total Operating Expenses
  7,845,871 
  5,719,953 
LOSS FROM OPERATIONS
  (6,113,146)
  (4,200,544)
 
    
    
OTHER INCOME (EXPENSE):
    
    
Other Income
  1,843 
  3,827 
Interest Expense, Net
  (4,894,233)
  (4,138,030)
Total Other Expense
  (4,892,390)
  (4,134,203)
 
    
    
NET LOSS
 $(11,005,536)
 $(8,334,747)
 
    
    
NET LOSS PER COMMON SHARE:
    
    
Basic and Fully Diluted from Continuing Operations
 $(0.39)
 $(0.29)
 
    
    
Weighted-Average Number Of Shares Used In Computing Net Loss Per Common Share:
  28,271,598 
  28,271,598 
 
  The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-4
 
 
MOBILESMITH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Year Ended
 
 
 
December 31,
 
 
December 31
 
 
 
2019
 
 
2018
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net Loss
 $(11,005,536)
 $(8,334,747)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
    
    
Depreciation and Amortization
  74,526 
  161,424 
Provision for Doubtful Accounts
  4,750 
  10,000 
Amortization of Debt Discount
  1,207,760 
  773,877 
Share Based Compensation
  3,471,568 
  1,370,890 
Changes in Assets and Liabilities:
    
    
Accounts Receivable
  157,450 
  (20,984)
Prepaid Expenses and Other Assets
  50,309 
  61,509 
Accounts Payable
  75,568 
  44,912 
Contract with Customer Liability
  (623,624)
  264,454 
Operating Lease Right-of-use Asset
  174,133 
  - 
Operating Lease Liability
  (138,066)
  - 
Accrued and Other Expenses
  228,569 
  801,074 
Net Cash Used in Operating Activities
  (6,322,593)
  (4,867,591)
 
    
    
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
Payments to Acquire Property and Equipment
  - 
  (9,499)
Net Cash Used in Investing Activities
  - 
  (9,499)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
Proceeds From Issuance of Subordinated Promissory Notes, Related Parties
  2,993,250 
  525,000 
Proceeds From Issuance of Convertible Notes Payable, Related Parties
  3,160,000 
  4,715,000 
Repayments of Financing Lease Obligations
  (22,591)
  (34,865)
Net Cash Provided by Financing Activities
  6,130,659 
  5,205,135 
 
    
    
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
  (191,934)
  328,045 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
  506,901 
  178,856 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
 $314,967 
 $506,901 
 
    
    
Composition of Cash, Cash Equivalents and Restricted Cash Balance:
    
    
Cash and Cash Equivalents
 $71,482 
 $267,290 
Restricted Cash
  243,485 
  239,611 
Total Cash, Cash Equivalents and Restricted Cash
 $314,967 
 $506,901 
 
    
    
Supplemental Disclosures of Cash Flow Information:
    
    
Operating Lease Payments
 $172,809 
 $- 
Cash Paid During the Period for Interest
 $3,451,266 
 $2,629,518 
 
    
    
Non-Cash Investing and Financing Activities:
    
    
Adoption of ASC 842 - Operating Lease Right-Of-Use Asset and Lease Obligations
 $883,634 
 $- 
Recorded Debt Discount Associated with Beneficial Conversion Feature
 $877,413 
 $1,850,035 
Conversion of Note Payable into Common Shares
 $- 
 $5,075,000 
 
The accompanying notes are an integral part of these consolidated financial statements.
  
 
F-5
 
 
MOBILESMITH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
 
 
 
  Common Stock       
 
   
   
   
 
 Shares 
 $0.001 Par Value 
 Additional Paid-In Capital 
 Accumulated Deficit 
 Totals 
BALANCES, DECEMBER 31, 2017
  24,722,647 
 $24,723 
 $105,795,621 
 $(150,501,642)
 $(44,681,298)
Equity-Based Compensation
    
    
  1,370,890 
  - 
  1,370,890 
Beneficial Conversion Feature Recorded as a Result Of Issuance Of Convertible Debt
    
    
  1,850,035 
  - 
  1,850,035 
Conversion of Notes Payable to Common Stock
  3,548,951 
  3,549 
  5,066,351 
  - 
  5,069,900 
Cumulative Adjustment Related To Adoption Of Topic 606 Revenue With Customers
    
    
  - 
  65,277 
  65,277 
Net Loss
    
    
  - 
  (8,334,747)
  (8,334,747)
BALANCES, DECEMBER 31, 2018
  28,271,598 
 $28,272 
 $114,082,897 
 $(158,771,112)
 $(44,659,943)
 
    
    
    
    
    
Equity-Based Compensation
    
    
  3,471,568 
  - 
  3,471,568 
Beneficial Conversion Feature Recorded as a Result Of Issuance Of Convertible Debt
    
    
  877,413 
  - 
  877,413 
Cumulative Adjustment Related To Adoption Of ASC842 Guidance On Accounting For Leases 
    
  - 
  2,173 
  2,173 
Net Loss
    
    
  - 
  (11,005,536)
  (11,005,536)
BALANCES, DECEMBER 31, 2019
  28,271,598 
 $28,272 
 $118,431,878 
 $(169,774,475)
 $(51,314,325)
  
The accompanying notes are an integral part of these consolidated financial statements.
   
 
F-6
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
 
1. SUMMARY OF BUSINESS AND DESCRIPTION OF GOING CONCERN
  
Description of Business and Going Concern
 
MobileSmith, Inc. (referred to herein as the “Company,” “us,” “we,” or “our”) was incorporated as Smart Online, Inc. in the State of Delaware in 1993. The Company changed its name to MobileSmith, Inc. effective July 1, 2013.  The same year the Company focused exclusively on development of do-it-yourself customer facing platform that enabled organizations to rapidly create, deploy, and manage custom, native smartphone and tablet apps deliverable across iOS and Android mobile platforms without writing a single line of code.  During 2017 the Company concluded that it had its highest rate of success with clients within the Healthcare industry and concentrated its development and sales and marketing efforts in that industry.  During 2018 we further refined our Healthcare offering and redefined our product - a suite of e-health mobile solutions that consist of a catalog of ready to deploy mobile app solutions (App Blueprints) and support services.  In 2019 we consolidated our  current solutions under a single offering branded Peri™. Peri™ is a cloud-based surgical and clinical procedure  application architected to accomplish the following :
 
- Run on a platform integrated with future MobileSmith applications;
- Incorporate MobileSmith developed or licensed healthcare service applications;
- Securely link those services to Electronic Medical Records ("EMR") platforms; and
- Produce a mobile app based set of pre and postoperative instructions (which we refer to as Clinical Pathways), that establish a direct two-way clinical procedure management process between a patient and a healthcare provider and by doing so improves patient engagement for the benefit of the patient and improves clinical outcomes measured in procedure cancellations and  post procedure readmissions for the benefit of a provider.
 
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the years ended December 31, 2019 and 2018, the Company incurred net losses, as well as negative cash flows from operations, and at December 31, 2019 and 2018, had deficiencies in working capital.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts or classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
The Company’s continuation as a going concern depends upon its ability to generate sufficient cash flows to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations and positive cash flows. Since November 2007, the Company has been funding its operations, in part, from the proceeds of the issuance of notes under a convertible secured subordinated note purchase agreement facility which was established in 2007 (the "2007 NPA"), an unsecured convertible subordinated note purchase agreement facility established in 2014 (the "2014 NPA") and subordinated promissory notes to related parties.
 
As of December 31, 2019, the Company had $41,080,000 of combined face value outstanding under the 2007 and 2014 NPAs.  The Company is entitled to request additional notes in an amount not exceeding $17,945,000, subject to the terms and conditions specified in these facilities. There can be no assurance that the Company will in fact be able to raise additional capital through these facilities or even from other sources on commercially acceptable terms if at all.     The Notes under 2007 and 2014 NPA and subordinated promissory notes to related parties mature in November of 2020 and the Comerica LSA matures in June of 2020. The Company management is actively negotiating extension of maturity on the 2007 and 2014 NPAs and  subordinated promissory notes with related parties by at least two years and refinancing of Comerica LSA by extending its maturity.  As such, there is substantial doubt about the Company's ability to continue as a going concern.
 
Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. 
 

 
 
F-7
 
   
2. SIGNIFICANT ACCOUNTING POLICIES
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”) requires management to make estimates and assumptions in the Company’s financial statements and notes thereto. Significant estimates and assumptions made by management include the determination of performance obligations and the allocation of consideration among performance obligations, and the determination of when the Company has met the requirements to recognize revenue related to the performance obligations, share-based compensation, allowance for accounts receivable, estimated useful lives of property and equipment, recoverability of capitalized software asset and other long lived assets. Actual results could differ from those estimates.
 
Cash and Cash Equivalents 
All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents.  The Federal Deposit Insurance Corporation ("FDIC") covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits.

Revenue Recognition: General Overview and Performance Obligations to Customers
The Company derives revenue primarily from contracts for subscription to the suite of e-health mobile solutions and, to a much lesser degree, ancillary services provided in connection with subscription services.
 
The Company’s contracts include the following performance obligations:
 
Access to the content available on the App Blueprint Catalog, including hosting of the deployed apps;
 
App Build and Managed Services; and
 
Custom development work.
 
The majority of the Company’s contracts are for a subscription to a catalog of mobile App Blueprints, and hosting of the deployed apps and related services. Custom work for specific deliverables is documented in statements of work or separate contracts. Customers may enter into subscription and various statements of work concurrently or consecutively. Most of the Company’s performance obligations are not considered to be distinct from the subscription to Blueprints, hosting of deployed apps and related services and are combined into a single performance obligation except for certain custom development work which is capable of being distinct. New statements of work and modifications of contracts are reviewed each reporting period and significant judgment is applied as to nature and characteristics of the new or modified performance obligations on a contract by contract basis.
 
 
F-8
 
 
Revenue Recognition: Transaction Price of the Contract and Satisfaction of Performance Obligations
The transaction price of the contract is an aggregate amount of consideration payable by customer for delivery of contracted services. The transaction price is impacted by the terms of a contracted agreement with the customer. Such terms range from one to three years.  The transaction price excludes  any marketing or sales discounts or  any future renewal periods, unless the renewal periods represent a material right given to customer to extend the agreement. The transaction price may include a significant financing component in instances where the Company offers discounts for accelerated payments on the long-term contracts.  Significant financing components are recorded in other assets and amortized as interest expense in the Company’s Statement of Operations over the term of the contract. 
 
The transaction price is predominantly allocated to a single performance obligation of access to the Blueprints, hosting and related services and, to a lesser degree, allocated between the access and other distinct performance obligations based on the stand-alone selling price. The subscription revenue is then recognized over time over the term of the contract, using the output method of time elapsed. Other performance obligations identified are evaluated based on the specific terms of the agreement are usually recognized at a point in time upon delivery of a specific documented output. Management believes that such chosen methods faithfully depict satisfaction of the Company performance obligations and transfer of benefit to the customers.
 
The full transaction price of the contract may be billed in its entirety or in agreed upon installments.  Billed transaction price in excess of revenue recognized results in the recording of a contract liability.  The unbilled portion of transaction price related to revenue earned represents contracted consideration receivable by the Company that was not yet billed. 
 
Incremental Costs of Obtaining a Contract
The Company’s incremental costs of obtaining a contract include sales commissions.  Sales commissions are recognized as other assets on the balance sheet for the contracts with a term exceeding 12 months. These costs are amortized through the term of the contract and are recorded as sales and marketing expense. As of December 31, 2019 the Company’s other assets include approximately $25,000 of such costs. 
 
Contract Liabilities
A new contract liability is created every time the Company records receivables due from its customers. The contract liability represents the Company’s obligation to transfer services for which the Company has already invoiced.  Most of the contract liabilities will be recognized in revenue over a period of 12 to 36 months.
 
Customer Credit Risk
Most of the Company's receivables (billings) are collected within 30-45 days.  The majority of the Company's customers are healthcare organizations, which historically have had low credit risk. 
 
Use of practical expedients in application of the Topic 606
The newly adopted recognition standard prescribes the application of accounting standards to individual contracts with customers, but allows for the application of the guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the effect of such application is immaterial.  The Company applies practical expedients in following instances:
 
The Company does not adjust the promised amount of consideration for the effects of a significant financing component if, at contract inception, the period between when the Company transfers its services to a customer and when the customer pays services will be one year or less.
 
The Company recognizes incremental costs of obtaining a contract as expenses when incurred if the amortization period of the asset that the Company otherwise would have recognized is one year or less.
 
In instances where a customer had been granted a material option which in essence is a right to renew under the terms of the original contract, the Company uses a practical alternative to estimating the standalone selling price of the option: the alternative includes allocation of the transaction price to the optional goods or services by reference to the goods or services expected to be provided and the corresponding expected consideration
 
 
F-9
 
 
 
Cost of Revenues
Cost of revenues includes salaries of customer support teams, costs of infrastructure, expenses for outsourced work to fulfill the contracted work, and amortization charges for capitalized software.
 
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability or failure of its customers to make required payments. The need for an allowance for doubtful accounts is evaluated based on specifically identified amounts that management believes to be potentially uncollectible. If actual collections experience changes, revisions to the allowance may be required.
   
Property and Equipment
The Company records property and equipment at cost and provides for depreciation and amortization using the straight-line method for financial reporting purposes over the estimated useful lives. The estimated useful lives by asset classification are as follows:
 
Computer hardware and office equipment
5 years
Computer software
5 years
Furniture and fixtures
5 years
Leasehold improvements
Shorter of the estimated useful life or the lease term
 
Software Development Costs
The Company capitalized certain costs of development and subsequent enhancement of our platform that supports the deployment of mobile apps created from Blueprints (the "Platform") through the middle of 2013. The Company started capitalizing software development costs when technological feasibility of the Platform or its enhancements had been established. The Company expensed costs associated with the preliminary project stage and research activities. The Company’s policy provided for the capitalization of certain payroll, benefits, and other payroll-related costs for employees who were directly associated with development.
 
During 2012, the Platform was substantially completed. During 2013, the Company’s development efforts became more driven by market requirements and rapidly changing customers’ needs. As a result, the Company’s development team adopted iterative approach to software development (the "agile methodology"). Due to agile methodology short development cycles and focus on rapid production, the Company ceased capitalizing software development costs mid-way through 2013 as the documentation produced under the agile methodology did not meet requirements necessary to establish technological feasibility. No development costs were capitalized in 2019 or 2018 and the Company does not expect to capitalize substantial development costs in the future.
 
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets every reporting period or whenever events and circumstances indicate that the value may be impaired.
 
Advertising Costs
Advertising costs consist primarily of industry related tradeshows and marketing campaigns. Advertising costs are expensed as incurred, or the first time the advertising takes place, applied consistently based on the nature of the advertising activity. The amounts related to advertising during the years ended December 31, 2019 and 2018 were $234,203 and $404,882, respectively.
 
 
F-10
 
 
Share-Based Compensation
The Company measures share-based compensation cost at the grant date based on the fair value of the award. The Company recognizes compensation cost on a straight-line basis over the requisite service period. The requisite service period is generally three years.  The Company accounts for forfeitures as they occur.
 
The Company uses the simplified method allowed by SAB 107 for estimating expected term of the options in calculating the fair value of the awards that have a term of more than 7 years because the Company does not have reliable historical data on exercise of its options.  The simplified method was used for options granted in 2018 and 2019.
 
The fair value of option grants under the Company’s equity compensation plan during the years ended December 31, 2019 and 2018 was estimated using Black-Scholes pricing model using the following weighted-average assumptions :
 
 
 
2019
 
 
2018
 
Dividend yield
  0.00%
  0.00%
Expected volatility
  112%
  108.48%
Risk-free interest rate
  2.12%
  2.75%
Expected lives (years)
  6 
  6.5 
  
Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the periods. Diluted net loss per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Shares of common stock issuable upon conversion of Convertible Subordinated Promissory Notes (the “Notes”) and exercise of share-based awards are excluded from the calculation of the weighted average number, because the effect of the conversion and exercise would be anti-dilutive.
 

 
 
F-11
 
 
Recently Issued Accounting Pronouncements
 
In June 2018, the Financial Accounting Standards Board ("FASB") announced Accounting Standards Update ("ASU") 2018-07 Compensation-Stock Compensation ("Topic 718"): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. ASU 2018-07 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company elected to adopt ASU 2018-07 as of January 1, 2018.
 
In August 2018, the FASB announced ASU 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.  This amendment removes, modifies or adds certain disclosure requirements for Fair Value Measurements.   For all entities, amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  The Company doesn't expect that the ASU will have material impact on its financial statements.
 
In February 2016, the  FASB established Topic 842, Leases, by issuing ASU 2016-02, which requires companies to recognize leases the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model ("ROU") that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are to be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.
 
The new standard was effective and adopted by us on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application.
 
 As a result we did not restate the prior period presented in the Financial Statements.
 
The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.  
 
The most significant judgments and impacts upon adoption of the standard include the following:
 
We recognized right-of-use asset and operating lease liability for our corporate office operating lease that have not previously been recorded. The lease liability for operating lease is based on the net present value of future minimum lease payments.

Financing lease right-of-use assets (formerly capital lease assets) have been and will continue to be included within Property and Equipment.  Capital lease liabilities previously included in Short-term capital lease obligations and Long-term capital lease obligations were reclassified to Other Liabilities and Accrued Expenses in our Balance Sheet.
  
The right-of-use asset for operating lease is based on the lease liability adjusted for the reclassification of deferred rent, which we remeasured at adoption due to the application of hindsight to our lease term estimates. Deferred rent will no longer be presented separately.

Certain line items in the Statements of Cash Flows and  have been renamed to align with the new terminology presented in the new standard; “Repayment of capital lease obligations” is now presenting as “Repayments of financing lease obligations”. In the “Operating Activities” section of the Statements of Cash Flows we have added “Operating lease right-of-use asset” and “Operating lease liability” which represent the change in the operating lease asset and liability, respectively. Additionally, in the “Supplemental disclosure of cash flow information” section of the Statements of Cash Flows we have added “Operating lease payments,” and in the “Noncash investing and financing activities” section we have added “Operating lease right-of-use assets obtained in exchange for lease obligations.”

In determining the discount rate used to measure the right-of-use asset and lease liability, we use rates implicit in the lease, or if not readily available, we use our incremental borrowing rate. Our incremental borrowing rate of 8% is based on the rate on our debt.
 
The following tables summarize the current period impacts of adopting Topic 842  on our Financial Statements as of January 1, 2019:
 
 
 Beginning Balance 
 Cumulative Effect Adjustment 
 Beginning Balance, As Adjusted 
Assets
   
   
   
Operating Lease Right-of-Use Asset
 $- 
 $883,634 
 $883,634 
 
    
    
    
Liabilities and Stockholders' Deficit
    
    
    
Operating Lease Liabilities
  - 
  881,585 
  881,585 
Accumulated Deficit
 $(158,771,112)
 $2,173 
 $(158,768,939)
 
  F-12
 
 
Fair Value Measurements
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by the accounting literature contains three levels as follows:
 
Level 1 – Quoted prices in active markets for identical assets or liabilities.
 
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimations.
 
As of December 31, 2019 and 2018, we believe that the fair value of our financial instruments other than cash and cash equivalents, such as, accounts receivable, our bank loan, notes payable, and accounts payable approximate their carrying amounts. 
 
3. PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE
 
Property and equipment:
 
 
 December 31, 2019 
 December 31, 2018 
 
   
   
Equipment
 $124,915 
 $162,799 
Furniture and fixtures
  89,580 
  89,580 
Leasehold improvements
  34,162 
  34,162 
 
  248,657 
  286,541 
Less accumulated depreciation
  (219,289)
  (241,529)
Property and equipment, net
 $29,368 
 $45,012 
 
Capitalized software:
 
 
 December 31, 2019 
 December 31, 2018 
 
   
   
Capitalized software
 $736,678 
 $736,678 
Less accumulated amortization
  (731,208)
  (672,326)
Capitalized software, net
 $5,470 
 $64,352 
 
 
 
During the years ended December 31, 2019 and 2018, the Company recorded depreciation and amortization expense related to its property and equipment and capitalized software of $74,526 and $161,424, respectively.
 
 
F-13
 
 
 
 
4. DEBT
 
The table below summarizes the Company’s debt at December 31, 2019 and December 31, 2018:
 
Debt Description
 December 31, 
 December 31, 
 
   
 
 2019 
 2018 
Maturity
 Rate 
 
   
   
 
   
Bank Loan
 $5,000,000 
 $5,000,000 
June 2020
  6.10%
Convertible Notes - Related Parties, net of discount of $1,193,799 and $1,527,146, respectively
  39,230,432 
  35,740,085 
November 2020
  8.00%
Convertible notes, net of discount of $45,029
  610,740 
  610,740 
November 2020
  8.00%
Subordinated Promissory Notes, Related Parties
  3,518,250 
  525,000 
November 2020
  8.00%
Total debt
  48,359,422 
  41,875,825 
 
    
 
    
    
 
    
Less: current portion of long term debt
  48,359,422 
  - 
 
    
 
    
    
 
    
Debt - long term
 $- 
 $41,875,825 
 
    
 
 
Bank Loan
 
The Company has an outstanding Loan and Security Agreement with Comerica Bank ("Comerica") dated June 9, 2014 (the "LSA") in the amount of $5,000,000, with original maturity of June 9, 2016.  On June 8, 2018, the Company and Comerica Bank entered into Second Amendment to the LSA, which extended the maturity of the LSA to June 9, 2020.  The LSA is secured by an irrevocable letter of credit ("SBLC") issued by UBS AG (Geneva, Switzerland) ("UBS AG") with a renewed term expiring on May 31, 2020, which term is renewable 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. 
 
The LSA with Comerica has the following additional terms:
 
a variable interest rate at prime plus 0.6% payable quarterly;
secured by substantially all of the assets of the Company, including the Company’s intellectual property;
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, observe the covenants made by it under the LSA, failure to renew the UBS AG SBLC, and insolvency of the Company.
 
Convertible Notes Overview
 
Since November 14, 2007 and through December 10, 2014, the Company financed its working capital deficiency primarily through the issuance of its notes of up to $33,300,000 in principal (the “2007 NPA Notes”) under the Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, as amended (the “2007 NPA”).   On December 11, 2014 the Company entered into an unsecured Convertible Subordinated Note Purchase Agreement, as amended (the “2014 NPA”) with Union Bancaire Privée, UBP SA ("UBP") a related party, for the sum of notes up to $40,000,000 in principal ("2014 NPA Notes").  At the request of the noteholder any amounts borrowed under the 2007 NPA and the 2014 NPA allow the principal amount to be converted to common shares at a conversion price of $1.43 per share.
 
 
F-14
 
 
On May 25, 2018, the Company and the holders of the majority of the aggregate outstanding principal amount of the 2014 NPA Notes and holders of the majority of the aggregate outstanding principal amount of the 2007 NPA Notes agreed to extend the maturity dates of these notes to November 14, 2020.  All other terms relating to the outstanding 2007 NPA Notes and the 2014 NPA Notes were not modified. The Company is entitled to utilize the amounts available for future borrowing under each of the 2007 NPA and the 2014 NPA through November 14, 2020.
 
As a result of the modification, any unamortized discount will be amortized into interest expense through the new maturity date of November 14, 2020.
 
During 2019, the Company borrowed an additional $3,160,000 under the 2014 NPA from UBP.    The market value of the Company’s common stock on the date of each issuance of the 2014 NPA Notes to UBP was higher than the conversion price, which resulted in a beneficial conversion feature totaling an aggregate $877,413 and a corresponding debt discount, which is being amortized into interest expense through the maturity date of the Notes.
 
During the year ended December 31, 2018 a total of $5,075,000 of notes were converted into 3,548,951 shares of Company's common stock at the stated conversion price of $1.43 per share.  Related party debt was $5,000,000 of the converted amount.
 
On October 30, 2018 following request from UBP, the Company simultaneously repaid $2,000,000 of  2014 NPA Notes and borrowed $2,000,000 by issuing  2007 NPA Notes in a cashless note exchange with UBP.
 
During 2019 the Company sold $2,993,250 of unsecured subordinated short term notes to related parties.  The notes mature in November of 2020 and have an interest rate of 8%.
 
In September of 2018 the Company changed the frequency of interest payments on its 2007 NPA Notes, 2014 NPA Notes and other subordinated related party notes payable from quarterly to twice per year in January and July of each year until maturity.
 
 
Convertible notes issued under 2014 NPA
 
The aggregate principal amount of  2014 NPA Notes that may be issued under the 2014 NPA is $40 million, of which $20,600,000 had been borrowed as of December 31, 2019.  The 2014 NPA Notes are convertible into shares of the Company’s common stock, par value $0.001 per share, and are subordinated to the $5 million outstanding under the LSA with Comerica and to any promissory notes outstanding under the 2007 NPA.  
 
The 2014 NPA Notes have the following terms:
 
a maturity date of the earlier of (i) November 14, 2020, (ii) a Change of Control (as defined in the 2014 NPA), or (iii) when, upon or after the occurrence of an Event of Default (as defined in the 2014 NPA), other than for a bankruptcy related, such amounts are declared due and payable by at least two-thirds of the aggregate outstanding principal amount of the 2014 NPA Notes;
an interest rate of 8% per year, with accrued interest payable in cash in semi-annual installments with the final installment payable on the maturity date of the note;
a conversion price per share that is fixed at $1.43 per share;
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, the noteholder may only convert that portion of their Notes outstanding for which the Company has a sufficient number of authorized shares of common stock. To the extent multiple noteholders under the 2014 NPA, the 2007 NPA, or both, request conversion of its notes on the same date, any limitations on conversion shall be applied on a pro rata basis. In such case, 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 conversions of the remaining portion of the notes outstanding as well as the maximum issuances contemplated pursuant to the Company’s 2004 Equity Compensation Plan, within 90 calendar days after the Company’s receipt of such request; and
may not be prepaid without the consent of holders of at least two-thirds of the aggregate outstanding principal amount of 2014 NPA Notes.

 
F-15
 
 
Convertible notes issued under 2007 NPA
 
The aggregate principal amount of  2007 NPA Notes that may be issued under the 2007 NPA is $33,300,000, of which $20,480,000 had been borrowed as of December 31, 2019.  The 2007 NPA Notes are convertible into shares of the Company’s common stock, par value $0.001 per share, and are subordinated to the $5 million outstanding under the LSA with Comerica.
 
As amended, the 2007 NPA Notes have the following terms:
 
a maturity date of the earlier of (i) November 14, 2020, (ii) a Change of Control (as defined in the amended 2007 NPA), or (iii) when, upon or after the occurrence of an Event of Default (as defined in the amended 2007 NPA) such amounts are declared due and payable by a 2007 NPA Noteholder or made automatically due and payable in accordance with the terms of the 2007 NPA;
an interest rate of 8% per year, with accrued interest payable in cash in semi-annual installments with the final installment payable on the maturity date of the note;
a conversion price that is fixed at $1.43 per share; and
optional conversion upon 2007 NPA 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 2007 NPA 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.
  
 
The table below  summarizes convertible notes issued as of December 31, 2019 and 2018 by type:
 
 
2019
 
 
2018
 
 2007 NPA notes, net of discount
 $20,405,588 
 $20,374,668 
 2014 NPA notes, net of discount
  19,435,584 
  15,976,157 
Total convertible notes, net of discount
 $39,841,172 
 $36,350,825 

 
Related Party Convertible Notes under 2007 and 2014 NPAs
 
Grasford Investments, Ltd. ("Grasford"), the Company’s largest stockholder, owns $12,076,282 in face value amount of 2007 NPA Notes as of December 31, 2019. Grasford is controlled by Avy Lugassy, one of the Company’s principal shareholders.
 
UBP owns $27,617,180 in combined face value of 2007 and 2014 NPA Notes as of December 31, 2019 and is considered a significant beneficial owner.
 
Crystal Management owns $730,769 in face value of 2007 NPA Notes as of December 31, 2019. Crystal Management is controlled by Doron Rotler, the third largest shareholder of the Company.

 
Subordinated Promissory Notes, Related Parties

The Company has issued subordinated notes to related parties to finance its shortfall in working capital.  The subordinated notes carry interest rate of 8% per year, which is paid twice a year.  The subordinated notes are unsecured and are subordinated to all other Company debt.  The subordinated notes mature in November of 2020.   
 
Avy Lugassy, one of the Company's principal shareholders is a beneficial owner of the related parties holding the subordinated notes.   
 
 
Interest
 
Interest expense for the year ended December 31, 2019 for convertible notes was $4,576,896, including amortization of discount of $1,207,759.
 
Interest expense for the year ended December 31, 2018 convertible notes was $3,818,657, including amortization of discount of $773,877. 
 
Interest expense for subordinated promissory notes to related parties was $155,627 and $31,194  for the years ended December 31, 2019 and December 31, 2018, respectively.

 
 
 
 
 
F-16
 
 
 
5. COMMITMENTS AND CONTINGENCIES
 
Legal Proceedings
 
From time to time, the Company may be subject to routine litigation, claims or disputes in the ordinary course of business. The Company defends itself vigorously in all such matters. In the opinion of management, no pending or known threatened claims, actions or proceedings against the Company are expected to have a material adverse effect on its financial position, results of operations or cash flows. However, the Company cannot predict with certainty the outcome or effect of any such litigation or investigatory matters or any other pending litigations or claims. There can be no assurance as to the ultimate outcome of any such lawsuits and investigations. The Company will record a liability when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated.  The Company periodically evaluates developments in its legal matters that could affect the amount of liability that it has previously accrued, if any, and makes adjustments as appropriate. Significant judgment is required to determine both the likelihood of there being, and the estimated amount of, a loss related to such matters, and the Company’s judgment may be incorrect. The outcome of any proceeding is not determinable in advance. Until the final resolution of any such matters that the Company may be required to accrue for, there may be an exposure to loss in excess of the amount accrued, and such amounts could be material.  
 
6. STOCKHOLDERS’ DEFICIT
 
Common Stock
 
The Company is authorized to issue 100,000,000 shares of common stock, $0.001 par value per share. As of December 31, 2019, the Company had 28,271,598 shares of common stock outstanding. Holders of the Company’s shares of common stock are entitled to one vote for each share held.
 
Preferred Stock
 
The Board of Directors is authorized, without further stockholder approval, to issue up to 5,000,000 shares of $0.001 par value preferred stock in one or more series and to fix the rights, preferences, privileges, and restrictions applicable to such shares, including dividend rights, conversion rights, terms of redemption, and liquidation preferences, and to fix the number of shares constituting any series and the designations of such series. There were no shares of preferred stock outstanding at December 31, 2019 and 2018.
 
 
F-17
 
 
Equity Compensation Plans
 
2004 Equity Compensation Plan
 
The Company adopted its 2004 Equity Compensation Plan (the “2004 Plan”) as of March 31, 2004. The 2004 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock, and other direct stock awards to employees (including officers) and directors of the Company as well as to certain consultants and advisors. The total number of shares of common stock reserved for issuance under the 2004 Plan is 5,000,000 shares, subject to adjustment in the event of a stock split, stock dividend, recapitalization, or similar capital change. The Company can’t make any new grants under the plan.
 
2016 Equity Compensation Plan  
 
In May 2016, the Company’s shareholders authorized adoption of the approved MobileSmith Inc. 2016 Equity Compensation Plan for officers, directors, employees and consultants, initially reserving for issuance thereunder 15,000,000 shares of Common Stock.
 
The exercise price for incentive stock options granted under the above plans is required to be no less than the fair market value of the common stock on the date the option is granted, except for options granted to 10% stockholders, which are required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option is granted. Incentive stock options typically have a maximum term of 10 years, except for option grants to 10% stockholders, which are subject to a maximum term of five years. Non-statutory stock options have a term determined by either the Board of Directors or the Compensation Committee of the Board of Directors. Options granted under the plans are not transferable, except by will and the laws of descent and distribution.
  
A summary of the status of the stock option issuances as of December 31, 2019 and 2018, and changes during the periods ended on these dates is as follows: 
 
 
 Number of Shares 
 Weighted Average Exercise Price 
 Weighted Average Remaining Contractual Term 
 Aggregate Intrinsic Value 
Outstanding, December 31, 2017
  2,658,247 
 $1.54 
  4.29 
 $654,701 
Cancelled
  (1,011,289)
  1.70 
    
    
Issued
  5,057,758 
  1.95 
    
    
Outstanding, December 31, 2018
  6,704,716 
 $1.83 
  7.41 
 $765,927 
Cancelled
  (1,892,900)
  1.52 
    
    
Issued
  7,533,980 
  1.66 
    
    
Outstanding, December 31, 2019
  12,345,796 
  1.73 
  8.3 
 $13,823,410 
Vested and exercisable, December 31, 2019
  4,120,173 
 $1.69 
  6.6 
 $4,776,994 
 
Weighted-average grant-date fair values of options issued during 2019 and 2018 were $1.42 and $1.95, respectively.
 
At December 31, 2019, $12,318,525 of expense remains to be recorded related to all options outstanding.
 
Exercise prices for options outstanding as of December 31, 2019 ranged between $.90 and $2.00.
 
 
F-18
 
 
7. INCOME TAXES
 
The Company accounts for income taxes under the asset and liability method in accordance with the requirements of US GAAP. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.
 
The balances of deferred tax assets and liabilities are as follows:
 

 December 31,
2019
 
 December 31,
2018
 
Net current deferred income tax assets related to:
Allowance for doubtful accounts
 $1,000 
 $59,000 
Depreciation and amortization
  104,000 
  114,000 
Deferred revenue
  41,000 
  99,000 
Stock-based compensation
  53,000 
  60,000 
Other
  9,325 
  9,325 
Net operating loss carryforwards
  22,719,000 
  23,022,000 
Total
  22,927,325 
  23,333,325 
Less valuation allowance
  (22,927,325)
  (23,333,325)
Net current deferred income tax
 $- 
 $- 
 
   
Under US GAAP, a valuation allowance is provided when it is more likely than not that the deferred tax asset will not be realized.
 
Total income tax expense differs from expected income tax expense (computed by applying the U.S. federal corporate income tax rate of 21% in 2019 and 2018) to loss before taxes as follows:
 
Tax benefit computed at statutory rate of 21%
 $(2,311,162)
 $(1,750,297)
State income tax benefit, net of federal effect
  (132,066)
  (100,017)
 Permanent differences 
    
Stock based compensation
  770,688 
  304,339 
Debt discount amortization
  268,123 
  181,464 
Other
  (52,583)
  2,323 
 Impact of change in state tax rate 
  3,317,028 
Expiration of NOLs
  1,863,000 
    
Change in valuation allowance
  (406,000)
  (1,954,535)
Totals
 $- 
 $- 
 
   
As of December 31, 2019, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately $104.7 million, of which $12.2 million will never expire and approximately $89.5 million will expire between 2020 and 2039. For state tax purposes, the NOL carryforwards expire between 2020 and 2034. In accordance with Section 382 of the Internal Revenue Code of 1986, as amended, a change in equity ownership of greater than 50% of the Company within a three-year period can result in an annual limitation on the Company’s ability to utilize its NOL carryforwards that were created during tax periods prior to the change in ownership.
 
The Company has reviewed its tax positions and has determined that it has no significant uncertain tax positions at December 31, 2019.

 
F-19
 
 
8. MAJOR CUSTOMERS AND CONCENTRATIONS
  
A customer that individually generates more than 10% of revenue is considered a major customer.
 
For the year ended December 31, 2019, one customer accounted for 16% of the Company’s revenue. Three customers accounted for 81% of the net accounts receivable balance as of December 31, 2019.  One vendor accounted for 30% of the accounts payable balance as of December 31, 2019. 
 
For the year ended December 31, 2018, no customer accounted for more than 10% of the Company’s revenue. Four customers accounted for 76% of the net accounts receivable balance as of December 31, 2018.  Two vendors accounted for 22% of the accounts payable balance as of December 31, 2018. 
 
9. EMPLOYEE BENEFIT PLAN
 
All full-time employees who meet certain age and length of service requirements are eligible to participate in the Company’s 401(k) Plan. The plan provides for contributions by the Company in such amounts as the Board of Directors may annually determine, as well as a 401(k) option under which eligible participants may defer a portion of their salaries. The Company contributed a total of approximately $36,453 and $41,477 to the plan during 2019 and 2018, respectively. 
 
10. DISAGGREGATED PRESENTATION OF REVENUE AND OTHER RELEVANT INFORMATION 
 
The tables below depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, such as type of customer and type of contract.
 
Customer size impact on billings and revenue:
 
 
 Year Ended
December 31, 2019
 
 Year Ended
December 31, 2018
 
 
 Billings 
 GAAP Revenue 
 Billings 
 GAAP Revenue 
Top 5 Customers (Measured By Amounts Billed)
 $877,030 
 $787,386 
 $815,691 
 $356,871 
All Other Customers
 $1,344,054 
 $2,014,322 
 $1,790,387 
 $1,966,250 
 
 $2,221,084 
 $2,801,708 
 $2,606,078 
 $2,323,121 
 
As of December 31, 2019 the aggregate amount of the transaction price allocated to unsatisfied (or partially satisfied) performance obligations was $2,400,326 of which $1,079,371 had been billed to the customers and recorded as a contract liability and $1,320,955 remained unbilled as of December 31, 2019.   The following table describes the timing of when the Company expects to recognize the revenue from the unsatisfied performance obligations. 
 
 
 Billed (Contract Liability as of December 31, 2019) 
 Unbilled 
 Total 
2020
 $1,051,271 
 $731,044 
 $1,782,315 
2021
  28,100 
  469,709 
  497,809 
2022
  - 
  120,202 
  120,202 
 
 $1,079,371 
 $1,320,955 
 $2,400,326 
 
At January 1, 2019 the total contract liability balance was $1,673,521 (net of the Topic 606 adoption adjustment), of which $1,487,907 was recognized in revenue during the twelve months ended December 31, 2019.
 
11. LEASES 
 
Leases (Topic 842) Disclosures
 
We are a lessee for a non-cancellable operating lease for our corporate office in Raleigh, North Carolina. We are also a lessee for a non-cancellable finance lease for a corporate vehicle and office furniture.  See Note 4 for disclosures regarding financing leases.  The operating lease for the corporate office expires on April 30, 2024. 
  
The following table summarizes the information about operating lease:
 
 
 Year Ended December 31, 2019 
The following table summarizes the information about operating lease:
   
Operating lease expense
 $203,974 
Weighted Average Remaining Lease Term (Years)
  4.25 years  
Weighted Average Discount Rate
  8%
 
 
Future maturities of operating lease liability as of December 31, 2019, were as follows:
 
Years Ended December 31,
 Operating Lease Expense 
 Variable Lease Expense 
 Total Lease Expense 
2020
  190,365 
  13,238 
  203,603 
2021
  189,994 
  13,609 
  203,603 
2020
  189,615 
  13,988 
  203,603 
2023
  189,225 
  14,378 
  203,603 
2024
  63,074 
  4,793 
  67,867 
Total lease payments
 $822,273 
 $60,006 
  882,279 
Less imputed interest
    
    
  (138,760)
Total
    
    
 $743,519 
   
12. SUBSEQUENT EVENTS
 
Subsequent to December 31, 2019, the Company issued two 2014 NPA Notes for a total amount of $2,000,000 on the same terms as the currently outstanding 2014 NPA Notes. The notes mature on November 14, 2020.  In addition, the Company borrowed $1,045,000 through related party subordinated promissory notes on the same terms and with similar entities as the currently outstanding subordinated promissory notes from related parties described in Note 4.
 
 F-20
 
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Not applicable.
 
ITEM 9A. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of our disclosure controls and procedures for the quarter ended December 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019, our disclosure controls and procedures were effective at the reasonable assurance level.
 
Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements.
 
Our internal control over financial reporting includes those policies and procedures that:
 
(i)
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
 
 
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
 
 
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
 
In making the assessment of adequate internal control over financial reporting, our management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on that assessment and those criteria, management believes that our internal control over financial reporting were effective as of December 31, 2019. 
 
During our fourth quarter ended December 31, 2019, there were no changes made in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION
 
None.
 
 
20
 
 
PART III
 

 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Information required by Item 10 is incorporated by reference from our definitive Proxy Statement relating to our Annual Meeting of Stockholders, to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2019.
 
ITEM 11. EXECUTIVE COMPENSATION
 
Information required by Item 11 is incorporated by reference from our definitive Proxy Statement relating to our Annual Meeting of Stockholders, to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2019. 
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Information required by Item 12 is incorporated by reference from our definitive Proxy Statement relating to our Annual Meeting of Stockholders, to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2019. 
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
Information required by Item 13 is incorporated by reference from our definitive Proxy Statement relating to our Annual Meeting of Stockholders, to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2019. 
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
Information required by Item 14 is incorporated by reference from our definitive Proxy Statement relating to our Annual Meeting of Stockholders, to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2019. 
 
 
21
 
 
PART IV
ITEM 15. EXHIBITS
 
(a) 
(1)
Financial Statements:
     
Report of Independent Registered Public Accounting Firm  
 
FINANCIAL STATEMENTS:
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of December 31, 2019 and 2018
 
 
 
 
 
 
 
 
 
Consolidated Statements of Operations for the Years Ended December 31, 2019 and 2018
 
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018
 
 
 
 
 
 
 
 
 
Consolidated Statements of Stockholders’ Deficit for the Years Ended December 31, 2019 and 2018
 
 
 
 
 
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 
(b)   Exhibits
 
Exhibit                                 Description
No.
 
 
 
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, as 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, as filed with the SEC on August 14, 2013)
 
 
 
4.1
 
Specimen Common Stock Certificate (filed herewith)
 
4.2
 
Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, by and among Smart Online, Inc. and certain investors (incorporated herein by reference to Exhibit 4.1 to our Quarterly Report on Form 10-Q, as filed with the SEC on November 14, 2007)
 
 
 
4.3
 
Form of Convertible Secured Subordinated Promissory Note (incorporated herein by reference to Exhibit 4.2 to our Quarterly Report on Form 10-Q, as filed with the SEC on November 14, 2007)
 
 
 
4.4
 
First Amendment to Convertible Secured Subordinated Note Purchase Agreement, dated August 12, 2008, by and among Smart Online, Inc. and certain investors (incorporated herein by reference to Exhibit 4.1 to our Quarterly Report on Form 10-Q, as filed with the SEC on November 12, 2008)
 
 
 
4.5
 
Second Amendment and Agreement to Join as a Party to Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement, dated November 21, 2008, by and among Smart Online, Inc. and certain investors (incorporated herein by reference to Exhibit 4.5 to our Annual Report on Form 10-K, as filed with the SEC on March 30, 2009)
 
 
 
4.6
 
Third Amendment to Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement and Amendment to Convertible Secured Subordinated Promissory Notes, dated February 24, 2009, by and among Smart Online, Inc. and certain investors (incorporated herein by reference to Exhibit 4.6 to our Annual Report on Form 10-K, as filed with the SEC on March 30, 2009)
 
 
 
4.7
 
Form of Convertible Secured Subordinated Promissory Note to be issued post January 2009 (incorporated herein by reference to Exhibit 4.7 to our Annual Report on Form 10-K, as filed with the SEC on March 30, 2009)
 
 
 
4.8
 
Fourth Amendment to Convertible Secured Subordinated Note Purchase Agreement, Second Amendment to Convertible Secured Subordinated Promissory Notes and Third Amendment to Registration Rights Agreement, dated March 5, 2010, by and among Smart Online, Inc. Atlas Capital S.A. and Crystal Management Ltd. (incorporated herein by reference to Exhibit 99.1 to our Current Report on Form 8-K, as filed with the SEC on March 8, 2010).
 
 
 
4.9
 
Form of Convertible Secured Subordinated Promissory Note to be issued post March 5, 2010 (incorporated herein by reference to Exhibit 99.1 to our Current Report on Form 8-K, as filed with the SEC on March 8, 2010).
 
 
 
4.10
 
Fifth Amendment to Convertible Secured Subordinated Note Purchase Agreement, Third Amendment to Convertible Secured Subordinated Promissory Notes and Fourth Amendment to Registration Rights Agreement, dated June 13, 2012, by and among Smart Online, Inc., Atlas Capital S.A. and Crystal Management Ltd. (incorporated herein by reference to Exhibit 99.1 to Form 8-K, as filed with the SEC on June 19, 2012)
 
 
 
4.11
 
Sixth Amendment and Agreement to Join as a Party to Convertible Secured Subordinated Note Purchase Agreement, Fourth Amendment to Convertible Secured Subordinated Promissory Notes and Fifth Amendment and Agreement to Join as a Party to Registration Rights Agreement, dated June 26, 2013, by and among Smart Online, Inc., Grasford Investments Ltd., Atlas Capital S.A. and Crystal Management Ltd. (incorporated herein by reference to Exhibit 10.1 to Form 8-K, as filed with the SEC on July 2, 2013)
 
 
 
4.12
 
Seventh Amendment to Convertible Secured Subordinated Note Purchase Agreement and Fifth Amendment to Convertible Secured Subordinated Promissory Notes (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q, as filed with the SEC on May 5, 2015
 
 
 
4.13
 
Eighth Amendment to Convertible Secured Subordinated Note Purchase Agreement and Sixth Amendment to Convertible Secured Subordinated Promissory Note (incorporated herein by reference to Form 8-K, as filed with the SEC on June 13, 2014)
 
 
22
 
 
10.1*
 
2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.1 to our Registration Statement on Form SB-2, as filed with the SEC on September 30, 2004)
 
 
 
10.2*
 
Form of Incentive Stock Option Agreement under 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.2 to our Annual Report on Form 10-K, as filed with the SEC on July 11, 2006)
 
 
 
10.3*
 
Form of Incentive Stock Option Agreement under Smart Online, Inc.’s 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.7 to our Quarterly Report on Form 10-Q, as filed with the SEC on May 15, 2007)
 
 
 
10.4*
 
Form of Non-Qualified Stock Option Agreement under 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.3 to our Annual Report on Form 10-K, as filed with the SEC on July 11, 2006)
 
10.5*
 
Form of Non-Qualified Stock Option Agreement under Smart Online, Inc.’s 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.8 to our Quarterly Report on Form 10-Q, as filed with the SEC on May 15, 2007)
 
 
 
10.6*
 
Form of revised Non-Qualified Stock Option Agreement under Smart Online, Inc.’s 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.6 to our Annual Report on Form 10-K, as filed with the SEC on April 15, 2010)
 
 
 
10.7*
 
Form of Restricted Stock Agreement under Smart Online, Inc.’s 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q, as filed with the SEC on May 15, 2007)
 
 
 
10.8*
 
Form of Restricted Stock Award Agreement (for Employees) under Smart Online, Inc.’s 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on August 21, 2007)
 
 
 
10.9*
 
Form of Restricted Stock Agreement for Employees (incorporated herein by reference to Exhibit 10.1 to Amendment No. 1 to our Current Report on Form 8-K, as filed with the SEC on February 11, 2008)
 
 
 
10.10*
 
Form of Restricted Stock Agreement (Non-Employee Director) under Smart Online, Inc.’s 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K, as filed with the SEC on May 31, 2007)
 
 
 
10.11*
 
Form of Restricted Stock Agreement (Non-Employee Directors) (incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K, as filed with the SEC on December 3, 2007)
 
 
 
10.12*
 
Form of revised Restricted Stock Agreement under Smart Online, Inc.’s 2004 Equity Compensation Plan (Non-Employee Director) (incorporated herein by reference to Exhibit 10.12 to our Annual Report on Form 10-K, as filed with the SEC on April 15, 2010)
 
 
 
10.13
 
Registration Rights Agreement, dated November 14, 2007, by and among Smart Online, Inc. and certain investors (incorporated herein by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q, as filed with the SEC on November 14, 2007)
 
 
 
10.14
 
Security Agreement, dated November 14, 2007, among Smart Online, Inc. and Doron Roethler, as agent for certain investors (incorporated herein by reference to Exhibit 10.7 to our Quarterly Report on Form 10-Q, as filed with the SEC on November 14, 2007)
 
10.15
 
Letter Agreement for $6,500,000.00 Term Facility dated December 6, 2010, by Israel Discount Bank of New York, and agreed and accepted by Smart Online, Inc. (incorporated herein by reference to Form 8-K, as filed with the SEC on December 6, 2010)
 
 
 
10.16
 
First Amendment to Office Lease Agreement dated April 28, 2011, between Smart Online, Inc. and Nottingham Hall LLC (incorporated herein by reference to our Annual Report on Form 10-K, as filed with the SEC on March 20, 2012)
  
10.17
 
Promissory Note dated June 6, 2013, made by Smart Online, Inc. for the benefit of Israel Discount Bank of New York, as lender (incorporated herein by reference to Exhibit 10.2 to Form 8-K, as filed with the SEC on July 2, 2013)
 
 
 
10.18
 
Guaranty dated June 6, 2013, made by Atlas Capital, SA for the benefit of Israel Discount Bank of New York (incorporated by reference to Exhibit 10.3 to Form 8-K, as filed with the SEC on July 2, 2013)
 
 
23
 
 
10.19*
 
Professional Services Agreement, effective as of May 1, 2013, by and between Smart Online, Inc. and Entre-Strat Consulting, LLC (portions of this exhibit have been omitted pursuant to a request for confidential treatment) (incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q, as filed with the SEC on August 14, 2013)
 
 
 
10.20*
 
Partner Agreement, dated May 24, 2013, by and between Smart Online, Inc. and Jon Campbell (incorporated by reference herein to Exhibit 10.1 to our Quarterly Report on Form 10-Q, as filed with the SEC on November 14, 2013)
 
 
 
10.21
 
Amendment to Security Agreement, dated November 14, 2007, among Smart Online, Inc. and Doron Roethler, as agent for certain investors (incorporated herein by reference to Exhibit 10.7 to our Quarterly Report on Form 10-Q, as filed with the SEC on November 14, 2007), effective as of June 9, 2014 (incorporated by reference herein to Exhibit 10.2 to our Quarterly Report on Form 10-Q, as filed with the SEC on August 13, 2014)
 
 
 
10.22
 
Loan and Security Agreement dated June 9, 2014 by and between Comerica Bank and MobileSmith, Inc. (incorporated by reference herein to Exhibit 10.1 to our Quarterly Report on Form 10-Q, as filed with the SEC on August 13, 2014)
 
 
 
10.23
 
Convertible Subordinated Note Purchase Agreement dated December 11, 2014 (incorporated herein by reference to Exhibit 4.1 to form 8-K, as filed with the SEC on December 12, 2014)
 
 
 
10.24
 
Form of Convertible Subordinated Promissory Note (incorporated herein by reference to Exhibit 4.1 to form 8-K, as filed with the SEC on December 12, 2014)
 
 
 
10.25*
 
Employment Agreement between Smart Online, Inc. and Bob Dieterle dated April 1, 2010   (incorporated herein by reference to Exhibit 10.25 to annual report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on December 12, 2014)
 
 
 
10.26*
 
  Letter Agreement dated as of October 11, 2017 between MobileSmith, Inc. and Robert Smith (incorporated herein by reference to Exhibit 10.1 to form 8­ K, as filed with the SEC on November 6, 2017) .
 
 
 
10.27*
 
  Letter Agreement dated as of August 11, 2017 between MobileSmith, Inc. and Ray Hemmig (incorporated herein by reference to Exhibit 10.1 to form 8­ K, as filed with the SEC on August 17, 2017).
 
 
 
10.28*
 
  Letter Agreement dated as of July 1, 2016 between MobileSmith, Inc. and Randy Tomlin (incorporated herein by reference to Exhibit 10.1 to form 8­ K, as filed with the SEC on August 10, 2016).
 
 
      
10.29* 
 
 Executive Employment Agreement dated as of March 18, 2020 between MobileSmith, Inc. and Jerry Lepore (incorporated herein by reference to Exhibit 10.1 to Form 8- K, as filed with the SEC on March 23, 2020)  
 
 
   
23.1
 
Consent of Independent Registered Public Accounting Firm (filed herewith)
 
 
 
31.1
 
Certification of Principal Executive Officer Pursuant to Rule 13a-14/15d-14 (filed herewith)
 
 
 
31.2
 
Certification of Principal Financial Officer Pursuant to Rule 13a-14/15d-14 (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 Annual Report on Form 10-K for the year ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows, (iv) the Statements of Stockholders’ Deficit and (v) related notes to these financial statements, tagged as blocks of text and in detail (filed herewith)
_________________
* Management contract or compensatory plan.
 
 
ITEM 16. SUMMARY
 
Registrants may voluntarily include a summary of information required by Form 10-K under this Item 16. We have elected not to include such summary.
 
 
 
24
 
 
SIGNATURES 
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
MOBILESMITH INC.
(Registrant)
 
 
 
 
 
 
/s/ Jerry Lepore
 
 
/s/ Gleb Mikhailov
 
Jerry Lepore
 
 
Gleb Mikhailov,
 
Chief Executive Officer (Principal Executive Officer)
 
 
Chief Financial Officer (Principal Financial Officer and Accounting Officer)
 
 
 
 
 
 
Date: March 24, 2020
 
 
Date: March 24, 2020
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
March  24, 2020
By:
/s/  Jerry Lepore
 
 
 
Jerry Lepore
 
 
 
Chief Executive Officer
 
 
 
(principal executive officer)
 
 
 
 
 
March 24, 2020
By:
/s/ Gleb Mikhailov
 
 
 
Gleb Mikhailov
 
 
 
Chief Financial Officer
 
 
 
(principal financial and accounting officer)
 
 
 
 
 
March 24, 2020
 By:
 /s/ Amir Elbaz
 
 
 
Amir Elbaz
 
 
 
Director
 
 
 
 
 
March 24, 2020
By:
 /s/ Ronen Shviki
 
 
 
Ronen Shviki
 
 
 
 Director
 
 
 
 
 
March 24, 2020
By:
/s/ Robert Smith
 
 
 
Robert Smith
 
 
 
Director, Chairman of the Board
 
 
 
 
 
March 24, 2020  
By:
 /s/ Chanan Epstein
 
 
 
Chanan Epstein
 
 
 
Director
 
 
 
 
 
March 24, 2020
By
/s/ Randy J. Tomlin
 
 
 
Randy J. Tomlin
 
 
 
Director
 
 
 
 
 
 
 
25
 
 
EXHIBIT INDEX
 
Exhibit No.
 
Description
 
 
 
 
 
 
 
 
 
 
 
4.1
 
Specimen Common Stock Certificate (filed herewith)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
26
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
27
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
 
 
 
 
 
 
 
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.1
 
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in XBRL (eXtensible Business Reporting language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows, (iv) the Statements of Stockholders’ Deficit and (v) related notes to these financial statements, tagged as blocks of text and in detail (filed herewith)
_________________
* Management contract or compensatory plan.
 
 
28