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MobileSmith, Inc. - Quarter Report: 2021 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2021

 

OR

 

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

 

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)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

(Do not check if a 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 Exchange Act). Yes ☐    No ☒

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

None

 

None

 

None

 

As of November 9, 2021, there were 28,389,493 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

  

 

 

   

MOBILESMITH, INC.

 

FORM 10-Q

For the Quarterly Period Ended September 30, 2021

 

TABLE OF CONTENTS

 

 

 

 

Page No.

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020

 

3

 

 

 

 

 

 

 

Condensed Statements of Operations (unaudited) for the three and nine months ended September 30, 2021 and 2020

 

4

 

 

 

 

 

 

 

Condensed Statements of Cash Flows (unaudited) for the nine months ended September 30, 2021 and 2020

 

5

 

 

 

 

 

 

 

Condensed Statements of Stockholders’ Deficit (unaudited) for the three and nine months periods ended September 30, 2021 and September 30, 2020

 

6

 

 

 

 

 

 

 

Notes to Condensed Financial Statements (unaudited)

 

7

 

 

 

 

 

 

Item 2.

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

 

14

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

19

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

19

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1.

Legal Proceedings

 

20

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Security and Use of Proceeds

 

20

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

20

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

20

 

 

 

 

 

 

Item 5.

Other Information

 

20

 

 

 

 

 

 

Item 6.

Exhibits

 

21

 

 

 

 

 

 

 

Signatures

 

22

 

  

 

2

 

   

PART I – FINANCIAL INFORMATION

 

MOBILESMITH, INC.

CONDENSED BALANCE SHEETS

 

     

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

ASSETS

 

(unaudited)

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and Cash Equivalents

 

$782,642

 

 

$161,744

 

Restricted Cash and Cash Equivalents

 

 

200,482

 

 

 

189,179

 

Accounts Receivable, Net of Allowance for Doubtful Accounts of $0 and $30,000 respectively

 

 

111,391

 

 

 

113,906

 

Prepaid Expenses and Other Current Assets

 

 

39,692

 

 

 

43,286

 

Total Current Assets

 

 

1,134,207

 

 

 

508,115

 

 

 

 

 

 

 

 

 

 

Operating Lease Right-of-Use Asset

 

 

385,674

 

 

 

512,124

 

Total Assets

 

$1,519,881

 

 

$1,020,239

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts Payable

 

$58,301

 

 

$155,850

 

Interest Payable

 

 

16,040

 

 

 

271,868

 

Other Liabilities And Accrued Expenses

 

 

237,105

 

 

 

237,750

 

Operating Lease Liability Current

 

 

149,525

 

 

 

161,936

 

Contract With Customer Liability

 

 

640,621

 

 

 

649,789

 

First PPP Loan, Current

 

 

-

 

 

 

423,067

 

Bank Loan

 

 

5,000,000

 

 

 

-

 

Total Current Liabilities

 

 

6,101,592

 

 

 

1,900,260

 

 

 

 

 

 

 

 

 

 

First PPP Loan, Long-Term

 

 

-

 

 

 

119,033

 

Operating Lease Liability

 

 

324,236

 

 

 

432,058

 

Convertible Notes Payable, Net of Discount

 

 

-

 

 

 

972,108

 

Bank Loan

 

 

-

 

 

 

5,000,000

 

Total Liabilities

 

 

6,425,828

 

 

 

8,423,459

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 3)

 

 

 

 

 

 

 

 

Stockholders’ Deficit

 

 

 

 

 

 

 

 

Preferred Stock, $0.001 Par Value, 5,000,000 Shares Authorized, Including 1,750,000 Authorized and Designated for Series A Convertible Preferred Shares: 1,379,966 Issued and Outstanding as of September 30, 2021 and 1,166,297 Issued and Outstanding as of December 31, 2020.

 

 

126,162,277

 

 

 

103,649,344

 

Common Stock, $0.001 Par Value, 100,000,000 Shares Authorized at September 30, 2021 and December 31, 2020; 28,389,493 Shares Issued and Outstanding at September 30, 2021 and 28,389,493 Shares Issued and Outstanding at December 31, 2020.

 

 

28,390

 

 

 

28,390

 

Additional Paid-in Capital - Common Stock

 

 

122,351,798

 

 

 

130,103,361

 

Accumulated Deficit

 

 

(253,448,412)

 

 

(241,184,315)

Total Stockholders’ Deficit

 

 

(4,905,947)

 

 

(7,403,220)

Total Liabilities and Stockholders’ Deficit

 

$1,519,881

 

 

$1,020,239

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 
3

Table of Contents

   

MOBILESMITH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

3 Months

Ended

 

 

3 Months

Ended

 

 

9 Months

Ended

 

 

9 Months

Ended

 

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and Support

 

$387,051

 

 

$464,809

 

 

$1,203,394

 

 

$1,475,575

 

Services and Other

 

 

-

 

 

 

46,602

 

 

 

-

 

 

 

268,180

 

Total Revenue

 

 

387,051

 

 

 

511,411

 

 

 

1,203,394

 

 

 

1,743,755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and Support

 

 

189,948

 

 

 

196,031

 

 

 

595,195

 

 

 

542,653

 

Services and Other

 

 

-

 

 

 

3,000

 

 

 

9,000

 

 

 

96,162

 

Total Cost of Revenues

 

 

189,948

 

 

 

199,031

 

 

 

604,195

 

 

 

638,815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

 

197,103

 

 

 

312,380

 

 

 

599,199

 

 

 

1,104,940

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and Marketing

 

 

571,122

 

 

 

249,565

 

 

 

1,575,563

 

 

 

917,931

 

Research and Development

 

 

964,557

 

 

 

719,043

 

 

 

2,698,794

 

 

 

2,097,276

 

General and Administrative

 

 

716,902

 

 

 

835,775

 

 

 

2,328,275

 

 

 

2,485,093

 

Total Operating Expenses

 

 

2,252,581

 

 

 

1,804,383

 

 

 

6,602,632

 

 

 

5,500,300

 

LOSS FROM OPERATIONS

 

 

(2,055,478)

 

 

(1,492,003)

 

 

(6,003,433)

 

 

(4,395,360)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

 

 

17

 

 

 

5,387

 

 

 

616

 

 

 

17,073

 

Interest Expense, Net

 

 

(49,195)

 

 

(1,118,422)

 

 

(240,333)

 

 

(4,728,698)

Gain on Debt Extinguishment - PPP Loan Forgiveness

 

 

542,000

 

 

 

-

 

 

 

1,084,100

 

 

 

-

 

Losses on Debt Extinguishments

 

 

(607,285)

 

 

-

 

 

 

(7,114,422)

 

 

(4,864,750)

Other gains (losses)

 

 

9,375

 

 

 

-

 

 

 

9,375

 

 

 

-

 

Total Other Expense

 

 

105,088

 

 

 

(1,113,035)

 

 

(6,260,664)

 

 

(9,576,375)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$(2,160,566)

 

$(2,605,038)

 

$(12,264,097)

 

$(13,971,735)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Plus: Dividend on Series A Convertible Preferred Stock

 

 

(10,315,099)

 

 

-

 

 

 

(10,315,099)

 

 

-

 

Plus: Deemed Dividend on Series A Convertible Preferred Stock

 

 

(2,762,014)

 

 

-

 

 

 

(9,031,415)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS

 

$(15,237,679)

 

$(2,605,038)

 

$(31,610,611)

 

$(13,971,735)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Fully Diluted from Continuing Operations

 

$(0.54)

 

$(0.09)

 

$(1.11)

 

$(0.49)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED-AVERAGE NUMBER OF SHARES USED IN

COMPUTING NET LOSS PER COMMON SHARE:

Basic And Fully Diluted

 

 

28,389,493

 

 

 

28,389,493

 

 

 

28,389,493

 

 

 

28,389,493

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 
4

Table of Contents

   

MOBILESMITH, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

9 Months

Ended

 

 

9 Months

Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net Loss

 

$(12,264,097 )

 

$(13,971,735 )

Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

-

 

 

 

15,730

 

Amortization of Debt Discount

 

 

78,120

 

 

 

2,417,888

 

Amortization of Debt Premium

 

 

-

 

 

 

(775,615 )

Share Based Compensation

 

 

2,563,536

 

 

 

2,290,363

 

Gain of Debt Extinguishment (PPP Loan Forgiveness)

 

 

(1,084,100 )

 

 

-

 

Losses on Debt Extinguishments

 

 

7,114,421

 

 

 

4,864,750

 

Changes in Assets and Liabilities:

 

 

 

 

 

 

 

 

Accounts Receivable

 

 

2,515

 

 

 

(65,041 )

Prepaid Expenses and Other Assets

 

 

3,594

 

 

 

29,130

 

Accounts Payable

 

 

(97,549 )

 

 

(162,714 )

Contract Liability

 

 

(9,168 )

 

 

(228,404 )

Operating Lease Right-of-use Asset

 

 

126,450

 

 

 

120,772

 

Operating Lease Liability

 

 

(120,233 )

 

 

(111,018 )

Accrued and Other Expenses

 

 

15,012

 

 

 

(743,427 )

Net Cash Used in Operating Activities

 

 

(3,671,499 )

 

 

(6,319,321 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds From Issuance of Subordinated Promissory Notes, Related Party

 

 

-

 

 

 

1,610,000

 

Proceeds From Issuance of Convertible Notes Payable, Related Party

 

 

-

 

 

 

1,400,000

 

Proceeds From Issuance of Convertible Notes Payable

 

 

-

 

 

 

2,900,000

 

Repayments of Financing Lease Obligations

 

 

-

 

 

 

(6,378)

Proceeds From First PPP Loan

 

 

-

 

 

 

542,100

 

Proceeds From Second PPP Loan

 

 

542,000

 

 

 

-

 

Proceeds From Issuance of Shares of Series A Preferred Stock

 

 

3,761,700

 

 

 

-

 

Net Cash Provided by Financing Activities

 

 

4,303,700

 

 

 

6,445,722

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

632,201

 

 

 

126,401

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD

 

 

350,923

 

 

 

314,967

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD

 

$983,124

 

 

$441,368

 

 

 

 

 

 

 

 

 

 

Composition of Cash, Cash Equivalents and Restricted Cash Balance:

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$782,642

 

 

$253,452

 

Restricted Cash

 

 

200,482

 

 

 

187,916

 

Total Cash, Cash Equivalents and Restricted Cash

 

$983,124

 

 

$441,368

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Operating Lease Payments

 

$154,053

 

 

$127,601

 

Cash Paid During the Period for Interest

 

$146,514

 

 

$3,825,607

 

 

 

 

 

 

 

 

 

 

Non-Cash Investing and Financing Activities:

 

 

 

 

 

 

 

 

Recorded Debt Discount Associated with Beneficial Conversion Feature

 

$-

 

 

$8,235,278

 

Recorded Discount Associated with Beneficial Conversion Feature on Issuance of Series A Convertible Preferred Shares

 

$9,031,415

 

 

$-

 

Issued Series A Preferred Shares Fair Valued At $7,660,970 in Exchange for Carrying Value of Debt (Including Accrued Interest, Premiums And Discounts) of $1,153,833

 

$6,507,137

 

 

$-

 

Issued 55,057 Shares of Series A Preferred Shares Fair Valued at $4,815,280 as dividend paid in kind

 

$10,315,099

 

 

$-

 

Issued 3,912Shares of Series A Preferred Shares Fair Valued at $775,164 to Settle Accrued And Unpaid Interest

 

$775,164

 

 

$-

 

Conversion of Notes Payable into Common Shares

 

$-

 

 

$156,980

 

 

The accompanying notes are an integral part of these condensed financial statements.

 

 
5

Table of Contents

   

MOBILESMITH, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(unaudited)

 

 

 

Series A Convertible Preferred Stock, Shares

 

 

Series A Convertible Preferred Stock, $0.001

Par Value

 

 

Additional

Paid-In Capital, Series A Convertible Preferred Stock

 

 

Common Stock,

Shares

 

 

Common Stock, $0.001

Par Value

 

 

Additional

Paid-In Capital, Common Stock

 

 

Accumulated Deficit

 

 

Totals

 

BALANCES, JANUARY 1, 2020

 

 

-

 

 

$-

 

 

$-

 

 

 

28,271,598

 

 

$28,272

 

 

$118,431,878

 

 

$(169,774,475)

 

$(51,314,325)

Equity-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

721,681

 

 

 

-

 

 

 

721,681

 

Beneficial Conversion Feature Recorded as a Result Of Issuance Of Convertible Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,000,000

 

 

 

 

 

 

 

2,000,000

 

Conversion of Notes Payable to Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48,951

 

 

 

49

 

 

 

65,191

 

 

 

 

 

 

 

65,240

 

Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

(3,299,000)

 

$(3,299,000)

BALANCES, MARCH 31, 2020

 

 

-

 

 

$-

 

 

$-

 

 

 

28,320,549

 

 

$28,321

 

 

$121,218,750

 

 

$(173,073,475)

 

 

(51,826,404)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

780,776

 

 

 

 

 

 

 

780,776

 

Beneficial Conversion Feature Recorded as a Result Of Issuance Of Convertible Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,035,278

 

 

 

 

 

 

 

6,035,278

 

Conversion of Notes Payable to Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

68,944

 

 

 

69

 

 

 

91,671

 

 

 

 

 

 

 

91,740

 

Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,067,697)

 

 

(8,067,697)

BALANCES, JUNE 30, 2020

 

 

-

 

 

$-

 

 

$-

 

 

 

28,389,493

 

 

$28,390

 

 

$128,126,475

 

 

$(181,141,172)

 

$(52,986,307)

Equity-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

787,906

 

 

 

 

 

 

 

787,906

 

Beneficial Conversion Feature Recorded as a Result Of Issuance Of Convertible Debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

200,000

 

 

 

 

 

 

 

200,000

 

Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,605,038)

 

 

(2,605,038)

BALANCES, SEPTEMBER 30, 2020

 

 

-

 

 

$-

 

 

$-

 

 

 

28,389,493

 

 

$28,390

 

 

$129,114,381

 

 

$(183,746,210)

 

$(54,603,439)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, JANUARY 1, 2021

 

 

1,166,297

 

 

$1,166

 

 

$103,648,178

 

 

 

28,389,493

 

 

$28,390

 

 

$130,103,361

 

 

$(241,184,315)

 

$(7,403,220)

Equity-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

886,935

 

 

 

 

 

 

 

886,935

 

Exchange of Debt for Series A Convertible Preferred Shares on January 28, 2021

 

 

70,014

 

 

 

70

 

 

 

7,660,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,660,970

 

Issuance of Series A Convertible Preferred for Cash

 

 

41,066

 

 

 

41

 

 

 

1,761,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,761,700

 

Beneficial Conversion Feature Recorded as a Result Of Issuance Of Series A Convertible Preferred Shares

 

 

 

 

 

 

 

 

 

 

5,269,401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,269,401

 

Deemed Dividend to the Holders of Series A Preferred Shares Resulting From Amortization of Discount Associated with the Beneficial Conversion Feature

 

 

 

 

 

 

 

 

 

 

(5,269,401)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,269,401)

Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,213,663)

 

 

(8,213,663)

BALANCES, MARCH 31, 2021

 

 

1,277,377

 

 

$1,277

 

 

$113,070,737

 

 

 

28,389,493

 

 

$28,390

 

 

$130,990,296

 

 

$(249,397,978)

 

$(5,307,278)

Equity-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

806,673

 

 

 

 

 

 

 

806,673

 

Issuance of Series A Convertible Preferred for Cash

 

 

23,310

 

 

 

23

 

 

 

999,977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,000,000

 

Beneficial Conversion Feature Recorded as a Result Of Issuance Of Series A Convertible Preferred Shares

 

 

 

 

 

 

 

 

 

 

1,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,000,000

 

Deemed Dividend to the Holders of Series A Preferred Shares Resulting From Amortization of Discount Associated with the Beneficial Conversion Feature

 

 

 

 

 

 

 

 

 

 

(1,000,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,000,000)

Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,889,868)

 

 

(1,889,868)

BALANCES, JUNE 30, 2021

 

 

1,300,687

 

 

$1,300

 

 

$114,070,714

 

 

 

28,389,493

 

 

$28,390

 

 

$131,796,969

 

 

$(251,287,846)

 

$(5,390,473)

Equity-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

869,928

 

 

 

 

 

 

 

869,928

 

Issuance of Series A Convertible Preferred Shares for Cash

 

 

23,310

 

 

 

23

 

 

 

999,977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,000,000

 

Issuance of Series A Convertible Preferred Shares to Settle Accrued and Unpaid Interest

 

 

3,912

 

 

 

4

 

 

 

775,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

775,164

 

Issuance of Dividend on Series A Convertible Preferred Shares

 

 

52,057

 

 

 

52

 

 

 

10,315,047

 

 

 

 

 

 

 

 

 

 

 

(10,315,099)

 

 

 

 

 

 

-

 

Beneficial Conversion Feature Recorded as a Result Of Issuance Of Series A Convertible Preferred Shares

 

 

 

 

 

 

 

 

 

 

2,762,014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,762,014

 

Deemed Dividend to the Holders of Series A Preferred Shares Resulting From Amortization of Discount Associated with the Beneficial Conversion Feature

 

 

 

 

 

 

 

 

 

 

(2,762,014)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,762,014)

Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,160,566)

 

 

(2,160,566)

BALANCES, SEPTEMBER 30, 2021

 

 

1,379,966

 

 

$1,379

 

 

$126,162,277

 

 

 

28,389,493

 

 

$28,390

 

 

$122,351,798

 

 

$(253,488,412)

 

$(4,905,947)

 

The accompanying notes are an integral part of these condensed financial statements.

 

 
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MOBILESMITH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

For the Nine Months’ Period Ended September 30, 2021

(unaudited)

 

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

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 and 2020, we consolidated our current solutions under a single offering branded Peri™. Peri™ is a cloud-based collection of applications that run of our architected healthcare technology ecosystem. The architecture is designed to do the following:

 

 

improve experience of healthcare patients and consumers, who are often at the same time members of various medical insurance networks

 

 

 

 

optimize delivery of healthcare and relationship between members and insurance networks

 

 

 

 

increase adoption, utilization and intelligence of EMRs (electronic medical records), extend EMR’s usability to patients and consumers of healthcare Peri™ is designed to bridge the gap between healthcare industry system tools and healthcare consumer’s mobile device.

  

Our flagship PeriOp offering is an EMR integrated 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 and procedural adherence.

 

The Company prepared the accompanying unaudited condensed financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its audited annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its financial position, results of operations, cash flows, and stockholders’ deficit as of September 30, 2021. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These condensed financial statements and accompanying notes should be read in conjunction with the audited annual financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 on file with the SEC (the “Annual Report”).

 

Except as otherwise noted, there have been no material changes to the Company’s significant accounting policies as compared to the significant accounting policies described in the Annual Report. The accompanying condensed 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 nine months ended September 30, 2021, the Company incurred net losses as well as negative cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed 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.

 

 
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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 from the issuance of notes under a convertible secured subordinated note purchase agreement facility which was established in 2007 (the "2007 NPA"), and an unsecured convertible subordinated note purchase agreement facility established in 2014 (the "2014 NPA"), and subordinated promissory notes to related parties. In December of 2020 and January of 2021, we exchanged all our non-bank debt, including the debt issued under the 2007 NPA and the 2014 NPA, into Series A Convertible Preferred Stock (the "Series A Preferred Stock") with the same investors. We expect to finance our operations through the issuance of Series A Preferred Stock going forward. If financing through issuance of Series A Preferred Stock becomes unavailable, we will need to seek other sources of funding, although there is no guarantee that we would be able to secure such funding or that the terms of the funding would be acceptable to us. As such, there is substantial doubt about the Company's ability to continue as a going concern.

 

Recently Issued Accounting Pronouncements and Their Impact on Significant Accounting Policies

 

The Company’s significant accounting policies are detailed in “Note 2: Significant Accounting Policies” of the Company’s Annual Report.

 

On August 5, 2020, the FASB issued ASU 2020-06 “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is not expected to have a material impact on the financial statements of the Company. For the Company the ASU is not effective until fiscal year 2024, but early adoption is permitted as early as current fiscal year ending December 31, 2021.

 

2. DEBT

 

The table below summarizes the Company’s debt outstanding on September 30, 2021 and December 31, 2020:

 

Debt Description

 

September 30,

 

 

December 31,

 

 

 

 

 

 

2021

 

 

2020

 

 

Maturity

 

Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

Comerica Bank Loan and Security Agreement

 

$5,000,000

 

 

$5,000,000

 

 

June 2022

 

 

3.85%

First PPP Loan

 

 

-

 

 

 

542,100

 

 

April 2022

 

 

1.00%

Convertible notes, net of discount of $1,927,892

 

 

-

 

 

 

972,108

 

 

November 2022

 

 

8.00%

Total debt

 

 

5,000,000

 

 

 

6,514,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: current portion of long term debt

 

 

5,000,000

 

 

 

423,067

 

 

 

 

 

 

 

Debt - long term

 

$-

 

 

$6,091,141

 

 

 

 

 

 

 

 

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 an extended maturity of June 9, 2022. The LSA 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, 2022, 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.

 

 
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Convertible Notes and January 2021 Debt Exchange

 

On January 28, 2021 the Company exchanged its remaining unsecured Convertible Subordinated Notes (the “2014 NPA Notes”) under its existing unsecured Convertible Subordinated Note Purchase Agreement dated December 10, 2014 (the “2014 NPA”) for our Series A Preferred Stock. The carrying value of 2014 NPA Notes of $1,075,713 consisting of face value of $2,900,000 net of unamortized discount of $1,849,773 plus accrued interest of $103,605 was exchanged for 70,014 shares of Series A Preferred Stock (the “January 2021 Debt Exchange”). The January 2021 Debt Exchange was accounted for as debt extinguishment and the newly issued shares of Series A Preferred Stock were recorded at fair value in accordance with ASC 470 “Debt”. The issued shares were fair valued at $7,660,970. The difference between the carrying amount of extinguished debt and fair value of the Series A Preferred Stock issued resulted in loss recorded on the statement of operations of $6,507,137.

 

Forgiveness of Second PPP Loan

 

On August 4, 2021 our second PPP Loan was forgiven by the SBA in its entirety. The forgiveness was accounted for as debt extinguishment which resulted in a gain of $542,000 recorded in our statement of operations.

 

Forgiveness of First PPP Loan

 

On February 18, 2021 our first PPP Loan was forgiven by the SBA in its entirety. The forgiveness was accounted for as debt extinguishment which resulted in a gain of $542,100 recorded in our statement of operations.

 

3. 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.

 

 
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4. STOCKHOLDERS DEFICIT

 

Preferred Stock

 

On January 28, 2021 and as a result of the January 2021 Debt Exchange transaction the Company issued 70,014 shares of Series A Preferred Stock. On the date of the January 2021 Debt Exchange the market value of the common stock was above the Series A Preferred Stock conversion price of $1.43, which resulted in the conversion feature that was beneficial to the holder on the date of the exchange. The resulting beneficial conversion feature was recorded as a discount and amortized in its entirety as a deemed dividend on the date of the January 2021 Debt Exchange and charged to loss attributable to common shareholders on the Company’s Statement of Operations in the amount of $3,507,701.

 

On August 31, 2021 the Company issued a total of 55,969 shares of Series A Preferred Stock as payment in kind for dividends declared by the board of directors and to settle accrued and unpaid interest in the amount of $167,000. Of the 55,969 shares issued, 3,912 shares were issued to settle the interest and 52,057 shares were issued as paid in kind dividends. The issuance of the Series A Preferred Stock was recorded at fair value determined on August 31, 2021:

 

 

The value of the 52,057 shares of Series A Convertible Preferred Stock dividend was recorded at $10,315,099. In absence of retained earnings, the dividend resulted in a charge to additional paid in capital for Common Stock. In addition, on August 31, 2021 the market value of the common stock was above the Series A Preferred Stock conversion price of 1.43, which resulted in the conversion feature that was beneficial to the holder. The resulting beneficial conversion feature was recorded as a discount and amortized in its entirety as a deemed dividend and charged to loss attributable to common shareholders on the Company’s Statement of Operations in the amount of $2,451,888.

 

 

 

 

In a similar manner, the value of the shares of Series A Preferred Stock issued to settle the interest was determined at $775,164. The transaction has also resulted in a conversion feature beneficial to the holder, which resulted in a deemed dividend charge of $184,616.

  

In addition, during the nine month period ended September 30, 2021 the Company issued 87,686 shares of Series A Preferred Stock in exchange for $3,761,700 in cash funding. The shares were issued with beneficial conversions feature discount and resulted in a deemed dividend with charge to loss attributable to common shareholders of $2,887,573.

 

Our Series A Preferred Stock has the following standard terms:

 

 

Each share of Series A Preferred Stock shall have a par value of $0.001 per share and a stated value equal to $42.90 (the “Stated Value “);

 

 

 

 

Each share of the Series A Preferred Stock then outstanding shall be entitled to receive an annual dividend equal to $3.43, subject to proration related to the timing of issuance. Such dividend is designed to have an effective yield of 8% on the Stated Value;

 

 

 

 

Each dividend shall be paid either in shares of Series A Preferred Stock or in cash, at the option of the Company, on the respective dividend date;

 

 

 

 

The holders of Series A Preferred Stock shall have no voting rights with respect to any matters to be voted on by the stockholders of the Company;

 

 

 

 

The holders of Series A Preferred Stock shall have certain Board observation and inspection rights administered through a designated agent;

 

 

 

 

Each share of Series A Preferred Stock shall be convertible, at any time and from time to time, at the option of the Holder into 30 shares of Common Stock, which results in conversion ratio of $1.43 of the Stated Value of Series A Preferred Stock into one share of common stock;

 

 

 

 

The shares are subject to automatic conversion immediately prior to the occurrence of a Fundamental Transaction, as defined in the Series A Preferred Stock Certificate of Designation. A Fundamental Transaction includes, but is not limited to, a sale, merger or similar change in ownership.

 

 
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Table of Contents

 

Equity Compensation Plan

 

The following is a summary of the stock option activity for the nine months ended September 30, 2021:

 

 

 

Number

of Shares

 

 

Weighted

Average

Exercise

Price ($)

 

 

Weighted

Average

Remaining Contractual

Term

(Years)

 

 

Aggregate

Intrinsic

Value ($)

 

Outstanding, December 31, 2020

 

10,683,300

 

 

$1.85

 

 

 

7.58

 

 

$17,060,533

 

Cancelled

 

 

(1,433,706 )

 

 

1.71

 

 

 

 

 

 

 

 

 

Issued

 

 

2,539,000

 

 

 

2.71

 

 

 

 

 

 

 

 

 

Outstanding, September 30, 2021

 

11,788,594

 

 

 

2.05

 

 

 

7.9

 

 

 

17,073,455

 

Vested and exercisable, September 30, 2021

 

5,683,496

 

 

$1.87

 

 

 

7.2

 

 

$9,266,678

 

 

Aggregate intrinsic value represents the difference between the closing price of the Company’s common stock on September 30, 2021, and the exercise price of outstanding, in-the-money stock options. The closing price of the common stock on September 30, 2021, as reported on the OTCQB, was $3.50 per share.

 

On September 30, 2021, an amount of $11,686,998 unvested expense related to outstanding stock options has yet to be recorded over a weighted average period of 3.3 years.

 

5. FAIR VALUE MEASUREMENTS

 

We are required to provide financial statement users with information about assets and liabilities measured at fair value in the balance sheet or disclosed in the notes to the financial statements regarding (1) the valuation techniques and inputs used to develop fair value measurements, including the related judgments and assumptions made, (2) the uncertainty in the fair value measurements as of the reporting date, and (3) how changes in the measurements impact the performance and cash flows of the entity.

 

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.

 

The January 2021 Debt Exchange resulted in transaction which required the Company to recognize debt extinguishment and to record newly issued financing instrument at fair value at the date of the transaction on a non-recurring basis. Fair value measurement was categorized as Level 3 fair value measurement due to use of various unobservable inputs to the pricing model. A single most significant factor included in pricing models was the Level 1 input of observable market value of MobileSmith common stock on the date of the transaction, as quoted on the OTCQB. Despite the thinly traded nature of the Company stock, the quoted market value could not be ignored in determination of fair value in the transaction.

 

 
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The Company used the income (discounted cash flow) approach to arrive at the fair value of the Series A Stock on January 28, 2021 - the date of the exchange. Using this approach the value of Series A Preferred Stock is equal to the present value of the cash flow streams that can be expected to be generated by the holder in a combination of dividends and conversion of preferred shares into common and subsequent sale of the common shares. The Company used the Monte Carlo model to simulate future movement of our common stock and discounted the results back to January 28, 2021 transaction date. The model used the following notable inputs:

 

 

the market price of the Company common stock on January 28, 2021 of $3.10 as a starting point of simulation

 

the risk free rate and discount rate of 1.35%;

 

volatility of 80%;

 

term of simulation extended to 15 years;

 

the model also considered the probability of a Fundamental Transaction (as defined in Series A Preferred Stock certificate of designation), probabilities of payment of dividend in cash or in additional preferred shares and discount for the lack of marketability.

 

Issuance of Series A Preferred shares for paid in kind dividend and settlement of accrued and unpaid interest on August 31, 2021 required the Company to record newly issued financing instrument at fair value at the date of the transaction on a non-recurring basis. Fair value measurement was categorized as Level 3 fair value measurement due to use of various unobservable inputs to the pricing model. A single most significant factor included in pricing models was the Level 1 input of observable market value of MobileSmith common stock on the date of the transaction, as quoted on the OTCQB. Despite the thinly traded nature of the Company stock, the quoted market value could not be ignored in determination of fair value in the transaction.

 

The Company used the income (discounted cash flow) approach to arrive at the fair value of the Series A Stock on August 31, 2021. Using this approach, the value of Series A Preferred Stock is equal to the present value of the cash flow streams that can be expected to be generated by the Company in the future. The Company used the Geometric Browinian Motion/Monte Carlo model to simulate future movement of equity securities and discounted the results back to the August 31, 2021 transaction date. The model used the following notable inputs:

 

 

the market price of the Company common stock on August 31, 2021 of $3.00 as a starting point of simulation

 

the risk free rate and discount rate of 1.58%;

 

volatility of 67.5%;

 

term of simulation is 15 years;

 

the model also considered the probability of a Fundamental Transaction (as defined in Series A Preferred Stock certificate of designation), probabilities of payment of dividend in cash or in additional preferred shares and discount for the lack of marketability. The probability of payment of dividend in additional shares was increased to 90% and probability of dividend paid in cash was reduced to 10%.

 

6. 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:

 

 

 

9 Months Ended September 30, 2021

9 Months Ended September 30, 2020

Billings

GAAP

Revenue

Billings

GAAP

Revenue

Top 5 Customers (Measured By Amounts Billed)$374,000$359,756$527,160$611,026
All Other Customers

 

 

820,225

 

 

 

843,637

 

 

 

993,869

 

 

 

1,132,729

 

 

 

$1,194,225

 

 

$1,203,394

 

 

$1,521,029

 

 

$1,743,755

 

    

For the nine months ended September 30, 2021, two customers accounted for 88% of the accounts receivable balance and no customer accounted for more than 10% of total revenue.

 

For the nine months ended September 30, 2020, one customer accounted for 16% of total revenue and two customers accounted for 67% of accounts receivable balance.

 

Below is a summary of new customer acquisition impact on billings and revenue:

 

 

 

9 Months Ended September 30, 2021

 

 

9 Months Ended September 30, 2020

 

 

 

Billings

 

 

GAAP

Revenue

 

 

Billings

 

 

GAAP

Revenue

 

Customers In Existence As Of The Beginning Of The Period (Including Upgrades)

 

$1,194,225

 

 

$1,203,394

 

 

$1,387,693

 

 

$1,711,012

 

Customers Acquired During The Period

 

 

-

 

 

 

-

 

 

 

133,336

 

 

 

32,743

 

 

 

$1,194,225

 

 

$1,203,394

 

 

$1,521,029

 

 

$1,743,755

 

 

 
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7. LEASES

 

Leases (Topic 842) Disclosures

 

We are a lessee for a non-cancellable operating lease for our corporate office in Raleigh, North Carolina. Financing leases are not significant in terms of both balances and period expenses. The operating lease for the corporate office expires on April 30, 2024.

 

The following table summarizes the information about operating lease:

 

Nine Months

Ended

September 30,

2021

 

Operating lease expense

 

$154,053

 

Remaining Lease Term (Years)

 

 

 2.5 Years

 

Discount Rate

 

 

8%

 

Maturities of operating lease liability as of September 30, 2021 were as follows:

 

Operating

Lease

Expense

 

 

Variable

Lease

Expense

 

 

Total

Lease

Expense

 

2021 (remaining 3 months)

 

 

47,769

 

 

 

3,422

 

 

 

51,190

 

2022

 

 

191,074

 

 

 

14,096

 

 

 

205,170

 

2023

 

 

191,074

 

 

 

14,519

 

 

 

205,593

 

2024

 

 

63,691

 

 

 

4,840

 

 

 

68,531

 

Total lease payments

 

$493,608

 

 

$36,877

 

 

$530,484

 

Less imputed interest

 

 

 

 

 

 

 

 

 

 

(56,723)

Total

 

 

 

 

 

 

 

 

 

$473,761

 

 

8. SUBSEQUENT EVENTS

 

Subsequent to September 30, 2021 the Company issued 23,310 shares of Series A Convertible Preferred stock in exchange for $1,000,000 of cash investment.

 

 
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Information set forth in this Quarterly Report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, 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 through our Series A Preferred Stock, 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 company, 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 expense, 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,” in the Annual Report on Form 10-K for the year ended December 31, 2020 and our subsequent periodic reports filed with the SEC 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.

 

The following discussion is designed to provide a better understanding of our unaudited condensed financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. The following discussion should be read in conjunction with the unaudited condensed financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the audited annual financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on the Form 10-K. Historical results and percentage relationships among any amounts in the condensed financial statements are not necessarily indicative of trends in operating results for any future periods.

 

Overview

 

MobileSmith is a developer of software applications for the healthcare industry. Our software products include a cloud-based collection of applications that run on our architected healthcare technology ecosystem. The architecture is designed to do the following:

 

 

improve experience of healthcare patients and consumers, who are often at the same time members of various medical insurance networks

 

 

optimize delivery of healthcare and relationship between members and insurance networks

 

 

increase adoption, utilization and intelligence of EMRs (electronic medical records), extend EMR’s usability to patients and consumers of healthcare

 

 
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Since 2013 the Company focused exclusively on the 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 and 2020 we consolidated our current solutions under a single offering branded Peri™. Peri™ is designed to bridge the gap between healthcare industry system tools and healthcare consumer’s mobile device.

   

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.

 

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.

 

Significance of Human Capital in Our Operations.

 

Our success depends on the performance of employees and contractors that make up our team of about 30 individuals. The team is by far our largest investment and cost. We make significant investments in technical skills and knowledge of healthcare industry. As such, expansion of the team often comes with additional recruiting expenses. All of our employees are currently based in the United States, but our contractors may be located in jurisdictions outside of the United States. During 2020 we invested in remote work environment, which allowed us to expand our employee hiring practices geographically from local markets to include the entire United States.

 

RESULTS OF OPERATIONS

 

Comparison of the Three Months Ended September 30, 2021 (the “2021 Period”) to the Three Months Ended September 30, 2020 (the “2020 Period”).

 

 

 

Three months

ended

September 30,

2021

 

 

Three months

ended

September 30,

2020

 

 

Increase

(Decrease)

%

 

 

Increase

Decrease

%

 

Revenue

 

$387,051

 

 

$511,411

 

 

$(124,360 )

 

 

-24%

Cost of Revenue

 

 

189,948

 

 

 

199,031

 

 

 

(9,083 )

 

 

-5%

Gross Profit

 

 

197,103

 

 

 

312,380

 

 

 

(115,277 )

 

 

-37%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and Marketing

 

 

571,122

 

 

 

249,565

 

 

 

321,557

 

 

 

129%

Research and Development

 

 

964,557

 

 

 

719,043

 

 

 

245,514

 

 

 

34%

General and Administrative

 

 

716,902

 

 

 

835,775

 

 

 

(118,873 )

 

 

-14%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

49,195

 

 

 

1,118,422

 

 

 

(1,069,227 )

 

 

-96%

Loss on Debt Extinguishment

 

 

607,285

 

 

 

-

 

 

 

607,285

 

 

 

-

 

Gain on Debt Extinguishment - PPP Loan Forgiveness

 

$542,000

 

 

 

-

 

 

$542,000

 

 

 

-

 

 

 
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Revenue decreased by $124,360 or 24%. A decrease of $46,000 accounted for completion of a large contract with a government agency, which ended September 20, 2020. The remainder of the decrease is associated with loss of healthcare customers due to non-renewals of contracts, renewals for smaller value and new sales below target.

 

Cost of Revenue decreased by $9,083 or 5%. The decrease is attributed to completion of the governmental contract mentioned above.

 

Gross Profit decreased by $115,277 or 37%. The decrease is attributable to a decrease in revenue.

 

Selling and Marketing expense increased by $321,557 or 129%. During 2020 we kept certain sales positions unfilled, as we evaluated the impact of COVID-19 on the healthcare industry. In last quarter of 2020 and during the first quarter of 2021 we started expanding our sales and marketing team, which resulted in an increase in payroll costs of $197,000 and increase in stock based compensation of $65,000. During the same period, we incurred an increase of $37,000 in marketing campaigns, PR and marketing outsourced services. The remainder of the increase, $17,000, is due to various software applications purchased during the period ending September 30, 2021.

 

Research and Development expense increased by $245,514 or 34%. In 2021 we invested in our product development team by expanding it and the team spent less time on efforts associated with delivery of services revenue. As a result, payroll and related expenses increased by approximately $34,000 and stock based compensation increased by $138,000. We augmented our internal team with outsourced contractors, which resulted in additional increase of $52,000. The remainder of the increase, $16,000, is due to various software applications purchased during the period ending September 30, 2021.

   

General and Administrative expense decreased by $118,873 or 14% predominantly due to decrease in stock based compensation of $107,000.

 

Interest Expense decreased by $1,069,227 or 96%. Decrease in interest expense is associated with the debt elimination transactions.

 

Loss on Debt Extinguishments of $607,284 was recorded upon issuance of Series A Preferred shares to settle accrued and unpaid interest on August 31, 2021.

 

Gain on Debt Extinguishments - PPP Loan Forgiveness of $542,000 due to the Company’s second PPP loan being forgiven on August 18, 2021.

 

Comparison of the Nine Months Ended September 30, 2021 (the “2021 Period”) to the Nine Months Ended September 30, 2020 (the “2020 Period”).

 

 

 

Nine months

ended

September 30,

2021

 

 

Nine months

ended

September 30,

2020

 

 

Increase

(Decrease)

$

 

 

Increase

Decrease

%

 

Revenue

 

$1,203,394

 

 

$1,743,755

 

 

$(540,361 )

 

 

-31%

Cost of Revenue

 

 

604,195

 

 

 

638,815

 

 

 

(34,620 )

 

 

-5%

Gross Profit

 

 

599,199

 

 

 

1,104,940

 

 

 

(505,741 )

 

 

-46%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and Marketing

 

 

1,575,563

 

 

 

917,931

 

 

 

657,632

 

 

 

72%

Research and Development

 

 

2,698,794

 

 

 

2,097,276

 

 

 

601,518

 

 

 

29%

General and Administrative

 

 

2,328,275

 

 

 

2,485,093

 

 

 

(156,818 )

 

 

-6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense

 

 

240,333

 

 

 

4,728,698

 

 

 

(4,488,365 )

 

 

-95%

Loss on Debt Extinguishment

 

 

7,114,422

 

 

 

4,864,750

 

 

 

2,249,672

 

 

 

46%

Gain on Debt Extinguishment - PPP Loan Forgiveness

 

$1,084,100

 

 

 

-

 

 

$1,084,100

 

 

 

-

 

 

 
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Revenue decreased by $540,361 or 31%. A decrease of $268,000 accounted for completion of a large government agency contract, which ended in September 2020.  The remainder of the decrease is associated with loss of healthcare customers due to non-renewals of contracts, renewals for smaller value and new sales below target.

 

Cost of Revenue decreased by $34,620 or 5%. The decrease is attributed to completion of the governmental contract mentioned above.

 

Gross Profit decreased by $505,741 or 46%. The decrease is primarily attributable to a decrease in revenue.

 

Selling and Marketing expense increased by $657,632 or 72%. During 2020 we kept certain sales positions unfilled, as we evaluated the impact of COVID-19 on the healthcare industry. In last quarter of 2020 and during the first quarter of 2021 we started expanding our sales and marketing team, which resulted in an increase in payroll costs of $429,000, increase in related recruiting costs of $41,000 and increase in stock based compensation of $199,000.

 

Research and Development expense increased by $601,518 or 29%. In 2021 we invested in our product development team by expanding it and the team spent less time on efforts associated with delivery of services revenue. As a result, payroll and related expenses increased by approximately $218,000 and stock based compensation increased by$284,000. We augmented our internal team with outsourced contractors, which resulted in additional increase of $58,000. Lastly, during the second and third quarter 2021, we created a Product Advisory Board and added four members to that board, which resulted in a $28,000 expense in those quarters.

 

General and Administrative expense decreased by $156,818 or 6%. The decrease is primarily made up of reduction in Equity Based Compensation of $217,000, offset by increases in wages of $69,000.

 

Interest Expense decreased by $4,488,365 or 95%. Decrease in interest expense is associated with the debt elimination transactions.

   

Gain on Debt Extinguishment - PPP Loan Forgiveness of $1,084,100 due to The Company’s first PPP loan being forgiven during the first quarter of 2021 and the second PPP loan being forgiven on August 18, 2021.

 

Losses on Debt Extinguishments increased by $2,249,672  due to variability in size and nature of the debt and equity transactions and debt modifications in 2020 Period and 2021 Period. Refer to specific disclosures on such transactions in footnotes 4 and 5 to our financial statements above for more detail.

 

 
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Liquidity and Capital Resources

 

We have not yet achieved positive cash flows from operations, and our main source of funds for our operations continues to be the sale of our Series A Preferred Stock. We will continue to rely on this source 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 funding under the Series A Preferred Stock, of which no assurance can be provided, together with cash on hand, will provide sufficient funds to finance our operations for the next 12 months. Changes in our operating plans, lower than anticipated sales, increased expenses, impact of COVID-19 pandemic (as described in “Risk Factors” of our Annual Report on Form 10-K for the period ending December 31, 2020 filed with the SEC) or other events may cause us to seek additional equity or debt financing in future periods. There can be no guarantee that financing will continue to be available to us through the sale of our Series A Preferred Stock or otherwise on acceptable terms or at all. Additional equity and convertible debt financing will be dilutive to the holders of shares of our common stock.

 

Nonetheless, there are factors that can impact our ability to continue to fund our operating activities for the next twelve months. These include:

 

 

Our ability to expand revenue volume;

 

 

 

 

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 predict and offset the extended impact COVID-19 will have to our primary market’s financial outcome, and our business.

 

In addition, we have an outstanding Loan and Security Agreement (the “LSA”) with Comerica Bank in the amount of $5 million, which matures in June of 2022 and is secured by an extended irrevocable letter of credit issued by UBS AG (Geneve, Switzerland) (“UBS AG”) with a renewed term expiring on May 31, 2022.

 

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 in the near future.

 

Going Concern

 

Our independent registered public accounting firm has issued an emphasis of matter paragraph in their report included in the Annual Report on Form 10-K for the year ended December 31, 2020 in which they express substantial doubt as to our ability to continue as a going concern. The condensed 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, 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.

 

 
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Table of Contents

    

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable for smaller reporting companies.

 

ITEM 4. 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 three months ended September 30, 2021. 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 for 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 and the identification of the material weakness in our internal control over financial reporting as described below under “Management’s Report on Internal Control over Financial Reporting", our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2021, our disclosure controls and procedures were not 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). We have identified material weaknesses in our internal control over financial reporting related to the proper valuation of dividends with respect to our Series A Preferred Stock. Based on that assessment and those criteria, management believes that our internal control over financial reporting were not effective as of September 30, 2021. As a result of the identified material weakness we have put together a remediation plan which includes additional Finance department staff time allocated to review of financing documents and valuation reports for non-recurring and unusual transactions.

 

Changes in Internal Control over Financial Reporting

 

During the quarter ended September 30, 2021, there were no changes made in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

 
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PART II – OTHER INFORMATION

 

ITEM 1. 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.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following paragraph sets forth certain information with respect to all securities sold by us during the three months ended September 30, 2021 without registration under the Securities Act of 1933, as amended (the “Securities Act”):

 

Between July 1, 2021 and September 30, 2021, we issued to an accredited investor 23,310 shares of our Series A Preferred Stock for an aggregate purchase price of $1,000,000. The proceeds were used to finance shortfalls in working capital.

 

All of the securities issued in the transactions described above were issued without registration under the Securities Act in reliance upon the exemptions provided in Section 4(2) of the Securities Act. The recipient of securities in such transaction acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof. Appropriate legends were affixed to the share certificates issued in all of the above transactions. The recipient represented that it was an “accredited investor” within the meaning of Rule 501(a) of Regulation D under the Securities Act, or had such knowledge and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in its common stock. The recipient had adequate access, through their relationships with the Company and its officers and directors, to information about the Company. None of the transactions described above involved general solicitation or advertising.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 
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ITEM 6. EXHIBITS

 

Exhibit No.

 

Description

 

 

 

31.1

 

Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) (Filed herewith)

 

31.2

 

Certification of Principal Financial and Accounting Officer Pursuant to Rule 13a-14(a) (Filed herewith)

 

32.1

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 (Furnished herewith)

 

32.2

 

Certification of Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section 1350 (Furnished herewith)

 

101.1

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Balance Sheets, (ii) the Condensed Statements of Operations, (iii) the Condensed Statements of Cash Flows, (iv) the Condensed Statement of Stockholders’ Deficit and (v) related notes to these condensed financial statements, tagged as blocks of text and in detail (Filed herewith).

 

 
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SIGNATURES

 

Pursuant to the requirements 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.

 

 

 

 

 

November 12, 2021

By:

/s/ Jerry Lepore

 

 

 

Jerry Lepore

 

 

 

Chief Executive Officer (Principal Executive Officer)

 

 

November 12, 2021

By:

/s/ Gleb Mikhailov

 

 

 

Gleb Mikhailov

 

 

 

Chief Financial Officer (Principal Financial and Accounting Officer)

 

  

 
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