Document_and_Entity_Informatio
Document and Entity Information | 9 Months Ended | |
Sep. 30, 2013 | Nov. 14, 2013 | |
Document And Entity Information | ' | ' |
Entity Registrant Name | 'MobileSmith, Inc. | ' |
Entity Central Index Key | '0001113513 | ' |
Document Type | '10-Q | ' |
Document Period End Date | 30-Sep-13 | ' |
Amendment Flag | 'true | ' |
Amendment Description | 'This amendment is being filed to comply with regulations. | ' |
Current Fiscal Year End Date | '--12-31 | ' |
Is Entity a Well-known Seasoned Issuer? | 'No | ' |
Is Entity a Voluntary Filer? | 'No | ' |
Is Entity's Reporting Status Current? | 'Yes | ' |
Entity Filer Category | 'Smaller Reporting Company | ' |
Entity Common Stock, Shares Outstanding | ' | 18,352,542 |
Document Fiscal Period Focus | 'Q3 | ' |
Document Fiscal Year Focus | '2013 | ' |
CONDENSED_BALANCE_SHEETS
CONDENSED BALANCE SHEETS (USD $) | Sep. 30, 2013 | Dec. 31, 2012 |
ASSETS | ' | ' |
Cash and cash equivalents | $236,745 | $58,458 |
Restricted cash | 198,423 | 131,103 |
Accounts receivable, net | 78,899 | 36,050 |
Prepaid expenses and other current assets | 65,331 | 96,670 |
Total current assets | 579,398 | 322,281 |
Property and equipment, net | 87,288 | 149,107 |
Capitalized software, net | 818,387 | 618,557 |
Intangible assets, net | 132,868 | 130,057 |
Other assets | 53,864 | 19,440 |
Assets of discontinued operations | ' | 15,834 |
TOTAL ASSETS | 1,671,805 | 1,255,276 |
LIABILITIES AND STOCKHOLDERS' DEFICIT | ' | ' |
Accounts payable | 71,005 | 217,174 |
Notes payable | 5,025,142 | 5,041,741 |
Deferred revenue | 144,178 | 82,308 |
Settlement related financial instrument liability | 1,917,500 | 2,065,000 |
Accrued interest | 288,502 | 221,404 |
Other accrued liabilities | 385,046 | 148,936 |
Liabilities of discontinued operations | ' | 5,638 |
Total current liabilities | 7,831,373 | 7,782,201 |
Long-term liabilities: | ' | ' |
Notes payable - Related Party | 14,557,051 | 14,557,051 |
Notes payable - other | 9,205,570 | 6,075,267 |
Deferred revenue | ' | 1,028 |
Total long-term liabilities | 23,762,621 | 20,633,346 |
Total liabilities | 31,593,994 | 28,415,547 |
Commitments and contingencies | ' | ' |
Stockholders' deficit: | ' | ' |
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at September 30, 2013 and December 31, 2012 | ' | ' |
Common stock, $0.001 par value, 45,000,000 shares authorized, 18,352,542 shares issued and outstanding at September 30, 2013 and December 31, 2012 | 18,353 | 18,353 |
Additional paid-in capital | 90,321,324 | 67,157,841 |
Accumulated deficit | -120,261,866 | -94,336,465 |
Total stockholders' deficit | -29,922,189 | -27,160,271 |
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $1,671,805 | $1,255,276 |
CONDENSED_BALANCE_SHEETS_Paren
CONDENSED BALANCE SHEETS (Parenthetical) (USD $) | Sep. 30, 2013 | Dec. 31, 2012 |
Stockholders' equity: | ' | ' |
Preferred stock, par value | $0.00 | $0.00 |
Preferred stock, authorized | 5,000,000 | 5,000,000 |
Preferred stock, issued | 0 | 0 |
Preferred stock, outstanding | 0 | 0 |
Common stock, par value | $0.00 | $0.00 |
Common stock, authorized | 45,000,000 | 45,000,000 |
Common stock, issued | 18,352,542 | 18,352,542 |
Common stock, outstanding | 18,352,542 | 18,352,542 |
CONDENSED_STATEMENTS_OF_OPERAT
CONDENSED STATEMENTS OF OPERATIONS (unaudited) (USD $) | 3 Months Ended | 9 Months Ended | ||
Sep. 30, 2013 | Sep. 30, 2012 | Sep. 30, 2013 | Sep. 30, 2012 | |
REVENUES: | ' | ' | ' | ' |
Mobile Platform License and Services Fees | $102,326 | $29,405 | $227,534 | $94,328 |
Total revenues | 102,326 | 29,405 | 227,534 | 94,328 |
COST OF REVENUES | 120,939 | 44,976 | 396,166 | 90,585 |
GROSS PROFIT (LOSS) | -18,613 | -15,571 | -168,632 | 3,743 |
OPERATING EXPENSES: | ' | ' | ' | ' |
Sales and marketing | 214,428 | 206,287 | 766,881 | 599,638 |
Research and development | 195,660 | 40,363 | 585,876 | 73,625 |
General and administrative | 317,049 | 427,398 | 1,081,558 | 968,749 |
Loss on disposal of fixed assets | 72,016 | ' | 110,952 | ' |
Total operating expenses | 799,153 | 674,048 | 2,545,267 | 1,642,012 |
LOSS FROM OPERATIONS | -817,766 | -689,619 | -2,713,899 | -1,638,269 |
OTHER (EXPENSE): | ' | ' | ' | ' |
Interest expense, net | -611,082 | -428,726 | -1,592,780 | -1,203,037 |
(Gain) on legal settlements and insurance claims | 51,030 | 3,713 | 56,265 | 3,815 |
Loss on debt extinguishment | ' | ' | -21,793,055 | ' |
Change in market value of settlement related financial instrument | 147,500 | ' | 147,500 | -442,500 |
Total other expense | -412,552 | -425,013 | -23,182,070 | -1,641,722 |
LOSS FROM CONTINUING OPERATIONS | -1,230,318 | -1,114,632 | -25,895,969 | -3,279,991 |
Income (loss) from discontinued operations | -14,941 | 46,207 | -14,778 | 110,726 |
Impairment of assets of discontinued operations | ' | ' | -14,654 | ' |
NET LOSS | ($1,245,259) | ($1,068,425) | ($25,925,401) | ($3,169,265) |
NET LOSS PER COMMON SHARE: | ' | ' | ' | ' |
Basic and fully diluted from continuing operations | ($0.07) | ($0.06) | ($1.41) | ($0.18) |
Basic and fully diluted from discontinued operations | $0 | $0 | $0 | $0.01 |
WEIGHTED-AVERAGE NUMBER OF SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE: | ' | ' | ' | ' |
Basic and fully diluted | 18,352,542 | 18,352,542 | 18,352,542 | 18,352,542 |
CONDENSED_STATEMENT_OF_STOCKHO
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT (USD $) | Common Stock | Additional Paid-In Capital | Retained Earnings / Accumulated Deficit | Total |
Beginning balance, amount at Dec. 31, 2012 | $18,353 | $67,157,841 | ($94,336,465) | ($27,160,271) |
Beginning balance, shares at Dec. 31, 2012 | 18,352,542 | ' | ' | ' |
Equity-based compensation | ' | 12,181 | ' | 12,181 |
Net loss | ' | ' | -1,427,804 | -1,427,804 |
Ending balance, amount at Mar. 31, 2013 | 18,353 | 67,170,022 | -95,764,269 | -28,575,894 |
Ending balance, shares at Mar. 31, 2013 | 18,352,542 | ' | ' | ' |
Equity-based compensation | ' | 11,917 | ' | 11,917 |
Beneficial conversion feature recorded as a result of June 27, 2013 debt modification | ' | 22,218,055 | ' | 22,218,055 |
Net loss | ' | ' | -23,252,338 | -23,252,338 |
Ending balance, amount at Jun. 30, 2013 | 18,353 | 89,399,994 | -119,016,607 | -29,598,260 |
Ending balance, shares at Jun. 30, 2013 | 18,352,542 | ' | ' | ' |
Equity-based compensation | ' | 11,526 | ' | 11,526 |
Beneficial conversion feature recorded as a result of June 27, 2013 debt modification | ' | 909,804 | ' | 909,804 |
Net loss | ' | ' | -1,245,259 | -1,245,259 |
Ending balance, amount at Sep. 30, 2013 | $18,353 | $90,321,324 | ($120,261,866) | ($29,922,189) |
Ending balance, shares at Sep. 30, 2013 | 18,352,542 | ' | ' | ' |
CONDENSED_STATEMENTS_OF_CASH_F
CONDENSED STATEMENTS OF CASH FLOWS (unaudited) (USD $) | 9 Months Ended | |
Sep. 30, 2013 | Sep. 30, 2012 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | ' | ' |
Net loss | ($25,925,401) | ($3,169,265) |
Adjustments to reconcile net loss to net cash used in operating activities: | ' | ' |
Depreciation and amortization | 113,308 | 76,425 |
Loss on disposal of assets | 125,606 | ' |
Non cash amortization of debt discount | 72,364 | ' |
Equity-based compensation expense | 35,624 | 26,109 |
Loss on debt extinguishment | 21,793,055 | ' |
Changes in assets and liabilities: | ' | ' |
Accounts receivable | -42,849 | -91,408 |
Contracts receivable | ' | -6,200 |
Prepaid expenses | 31,339 | -85,706 |
Other assets | -34,424 | -168 |
Accounts Payable | -146,169 | 92,351 |
Deferred revenue | 55,206 | 217,806 |
Accrued and other expenses | 155,708 | 394,385 |
Net cash used in operating activities | -3,766,633 | -2,545,671 |
CASH FLOWS FROM INVESTING ACTIVITIES: | ' | ' |
Purchases of furniture and equipment | -21,834 | -25,530 |
Purchase of software license | ' | -75,000 |
Capitalized patent development costs | -14,440 | -17,248 |
Capitalized software | -287,628 | -749,160 |
Net cash used in investing activities | -323,902 | -866,938 |
CASH FLOWS FROM FINANCING ACTIVITIES: | ' | ' |
Restricted cash used to pay IDB interest expense | 135,566 | 152,904 |
Deposit of cash to IDB restricted account | -202,886 | -281,341 |
Proceeds from debt borrowings | 4,375,000 | 3,639,253 |
Repayments of debt borrowings | -38,858 | -12,172 |
Net cash provided by financing activities | 4,268,822 | 3,498,644 |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 178,287 | 86,035 |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 58,458 | 165,139 |
CASH AND CASH EQUIVALENTS, END OF PERIOD | 236,745 | 251,174 |
Supplemental disclosures of cash flow information: | ' | ' |
Cash paid during the period for: Interest | 1,525,682 | 748,778 |
Financed purchase of office furniture | 40,000 | ' |
Recorded debt discount associated with beneficial conversion feature | $1,334,804 | ' |
1_DESCRIPTION_OF_BUSINESS_AND_
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION | 9 Months Ended | |
Sep. 30, 2013 | ||
Accounting Policies [Abstract] | ' | |
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION | ' | |
MobileSmith, Inc. (the “Company”) 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 Company develops and markets software products and services tailored to users of mobile devices. The Company’s flagship product is The MobileSmith™ Platform. The MobileSmith™ Platform is an innovative, patents pending mobile app development platform that enables organizations to rapidly create, deploy, and manage custom, native smartphone apps deliverable across iOS and Android mobile platforms. | ||
The Company’s principal products and services include: | ||
● | Licensing of our SaaS (“Software as a Service”) Mobile App Development Platform to our customers who design and build their own apps; | |
● | Custom mobile application design and development services provided by the Company; | |
● | Mobile application marketing services; | |
● | Mobile strategy implementation consulting; and | |
● | Cloud-based software hosting and management services. | |
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, we have condensed or omitted certain information and footnote disclosures we normally include in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations, cash flows and stockholder deficit as of September 30, 2013. Our 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 financial statements and accompanying notes should be read in conjunction with the audited financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as amended, on file with the SEC (our “Annual Report”). | ||
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report. | ||
The accompanying 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, 2013 and 2012, the Company incurred net losses as well as negative cash flows and had deficiencies in working capital. These factors indicate that the Company may be unable to continue as a going concern. | ||
Certain prior year balances were reclassified in connection with the presentation of discontinued operations of legacy domain hosting operations and the presentation of debt balances as of September 30, 2013. |
2_BALANCE_SHEET_ACCOUNTS
2. BALANCE SHEET ACCOUNTS | 9 Months Ended | ||||||||
Sep. 30, 2013 | |||||||||
Notes to Financial Statements | ' | ||||||||
2. BALANCE SHEET ACCOUNTS | ' | ||||||||
Capitalized software consists of the following: | |||||||||
September 30, | December 31, | ||||||||
2013 | 2012 | ||||||||
Capitalized software | $ | 952,139 | $ | 672,359 | |||||
Less accumulated amortization | (133,752 | ) | (53,802 | ) | |||||
Capitalized software, net | $ | 818,387 | $ | 618,557 | |||||
Office furniture and equipment: | |||||||||
During the quarter ended September 30, 2013, the Company finalized its plans to move to a new office location. During the nine month period then ended the Company purchased $21,834 of new equipment and tradeshow furniture, in addition to purchasing $40,000 of new office furniture, which was financed. | |||||||||
As a result of the office move, the Company disposed of $125,606 of certain undepreciated assets which were not moved to the new location. | |||||||||
Financial instruments: | |||||||||
The fair value of the financial liability related to issuance of 1,475,000 shares of our common stock, par value $0.001 per share (the “Common Stock”), resulting from the settlement of the Class Action lawsuit on July 1, 2011 was $1,917,500 and $2,065,000 at September 30, 2013 and December 31, 2012, respectively. | |||||||||
The Company recognized a gain of $147,500 and a loss of $442,500 in relation to the change in value of the financial liability during the nine-month periods ended September 30, 2013 and 2012, respectively. |
3_DEBT
3. DEBT | 9 Months Ended | |||||||||||||
Sep. 30, 2013 | ||||||||||||||
Debt Disclosure [Abstract] | ' | |||||||||||||
3. DEBT | ' | |||||||||||||
The table below summarizes the Company’s debt at September 30, 2013 and December 31, 2012: | ||||||||||||||
Note Description | September 30, | December 31, | ||||||||||||
2013 | 2012 | Maturity | Rate | |||||||||||
IDB Bank | $ | 5,000,000 | $ | 5,000,000 | 14-May | 4 | % | |||||||
Insurance premium note | - | 23,987 | 13-Jun | 6.9 | % | |||||||||
Capital lease obligations - Noteholder lease | 136,893 | 150,072 | 19-Aug | 8 | % | |||||||||
Capital lease obligations - Office furniture | 38,310 | - | 18-Sep | 9.8 | % | |||||||||
Convertible notes - Related parties | 14,557,051 | 14,557,051 | 16-Nov | 8 | % | |||||||||
Convertible notes, net of discount | 9,055,509 | 5,942,949 | 16-Nov | 8 | % | |||||||||
Total debt | 28,787,763 | 25,674,059 | ||||||||||||
Less: current portion of long term debt | ||||||||||||||
Capital lease obligations | 25,142 | 17,754 | ||||||||||||
IDB Bank | 5,000,000 | 5,000,000 | ||||||||||||
Insurance premium note | - | 23,987 | ||||||||||||
Total current portion of long term debt | 5,025,142 | 5,041,741 | ||||||||||||
Debt - long term | $ | 23,762,621 | $ | 20,632,318 | ||||||||||
Convertible Notes | ||||||||||||||
On June 26, 2013, the Company entered into the 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 (the “Sixth Amendment”), with the holders of a majority of the aggregate outstanding principal amount of the Convertible Secured Subordinated Promissory Notes (the “Notes”), issued by the Company under the Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, as amended (as so amended, the “Note Purchase Agreement”), and an additional purchaser of the Notes, Grasford Investments Ltd (“Grasford”) (together, the “Noteholders”). The modification to our convertible instrument applied to $23,075,000 of Notes outstanding as of the date of modification and to all future Notes. As amended by the Sixth Amendment, the convertible instrument has the following characteristics: | ||||||||||||||
● | a maturity date of November 16, 2016; | |||||||||||||
● | an interest rate of 8% per year; | |||||||||||||
● | optional conversion at a Noteholders’ request; | |||||||||||||
● | the borrowing commitment was increased by $10 million to $33.3 million; | |||||||||||||
● | a conversion price that is the greater of (i) 80% of the lowest closing price of the Common Stock in the twelve-month period immediately preceding the date of conversion or (ii) $0.50; and | |||||||||||||
● | if at the time any particular requested conversion the Company does not have the number of authorized shares of Common Stock sufficient to allow for such particular conversion, the Noteholders may request that the Company call a special meeting of the stockholders specifically for the purpose of increasing the number of the authorized shares of Common Stock to cover the remaining portion of the Notes outstanding. | |||||||||||||
The modification of the Note Purchase Agreement was accounted for as debt extinguishment. The total value of the convertible instrument immediately after the modification was determined to be $44,868,055, of which $21,793,055 was allocated to the intrinsic value of the embedded conversion feature of the instrument immediately after the modification (beneficial conversion feature) in accordance with ASC 470 “Debt” and recorded as part of additional paid-in capital. | ||||||||||||||
The difference between the fair value of the new convertible instrument and the carrying value of the old convertible notes in the amount of $21,793,055 was recognized as loss on extinguishment of debt in the statement of operations. | ||||||||||||||
Subsequent to modification and through September 30, 2013 the Company sold $1,800,000 in additional Notes to Union Bancaire Privée (“UBP”) under the amended Note Purchase Agreement at conversion prices ranging between $0.72 and $0.82 on the date of sale. The Company recorded a beneficial conversion feature of $1,334,804 and corresponding debt discount, which will be amortized into interest expense through the maturity of the Notes. | ||||||||||||||
During the nine-month period ended September 30, 2013, the Company sold Notes to UBP totaling $4,375,000 (including the $1,800,000 in Notes described above) under the same terms as previously-sold Notes under the convertible instrument. | ||||||||||||||
Fair Value of Modified Convertible Notes | ||||||||||||||
The modified convertible debt instrument was recorded at fair value of $44,868,055. The Company used a binomial model to determine the fair value of the instrument. The binomial model method uses significant unobservable inputs and falls within Level III measurement method under Fair Value Hierarchy under ASC 820 “Fair Value Measurements” | ||||||||||||||
The significant unobservable inputs and information used to develop those inputs include the following: | ||||||||||||||
● | volatility of stock price was determined to be 47% and was based on the volatility of the Company’s stock price as quoted on the Over-the-Counter Bulletin Board (the “OTCBB”) for the period of 3.4 years, which approximates the period remaining until maturity of the convertible instrument; | |||||||||||||
● | the risk free rate of 1.41%; | |||||||||||||
● | the credit spread over the risk free rate was determined to be approximately 20%, which was derived from a combination of the credit spread of CCC rated bonds with added premium for lack of marketability of the convertible instrument; | |||||||||||||
● | the nodes of the binomial model were extended for 3 years, which approximates the time period until maturity of the convertible instrument; and | |||||||||||||
● | the conversion ratio varied from approximately 1.39 to .56 shares per dollar, depending on the node of the conversion tree. The conversion ratio varied due to projected change in value of the stock driven by historical volatility of 47%. | |||||||||||||
IDB Credit Facility | ||||||||||||||
On June 28, 2013, the Company extended its secured credit facility (the “IDB Credit Facility”), with Israel Discount Bank of New York (“IDB”), as lender, effective as of May 31, 2013, for an additional one-year period for the $5,000,000 already outstanding, and we maintain $250,000 in a Restricted Cash Account held at IDB for future interest payments. All other terms remained unchanged. To date, the Company has borrowed $5,000,000 under the IDB Credit Facility. Borrowings under the IDB Credit Facility are guaranteed by Atlas Capital SA (“Atlas”), a majority Noteholder and a related party, and further secured by an extended irrevocable standby letter of credit issued by UBS Private Bank (“UBS”) with an expiration date of November 30, 2015. |
4_COMMITMENTS_AND_CONTINGENCIE
4. COMMITMENTS AND CONTINGENCIES | 9 Months Ended | ||||
Sep. 30, 2013 | |||||
Commitments and Contingencies Disclosure [Abstract] | ' | ||||
4. COMMITMENTS AND CONTINGENCIES | ' | ||||
Aggregate future lease commitments | |||||
The Company leases computers, office equipment and office furniture under capital lease agreements that expire through August 2019. Total amounts financed under these capital leases were $175,203 and $150,072 at September 30, 2013 and December 31, 2012, respectively. These obligations are included within the Company’s total debt. | |||||
The table below summarizes Company’s future obligations under its capital leases: | |||||
Year: | |||||
2013 | $ | 9,818 | |||
2014 | 39,259 | ||||
2015 | 39,259 | ||||
2016 | 39,259 | ||||
2017 | 39,259 | ||||
Thereafter | 53,601 | ||||
220,455 | |||||
Less amount representing interest | (45,252 | ) | |||
Capital lease obligations | $ | 175,203 | |||
The Company rents its office space pursuant to a lease that expires on November 15, 2013. | |||||
On July 29, 2013, the Company signed a sixty-five month lease for new office space in Raleigh, North Carolina, effective October 30, 2013. The landlord built the space to the Company’s specifications and provided the Company with five months free rent, as an incentive. Rent expense will be recognized over the entire sixty-five month term of the lease on a straight-line basis. The lease contains an option to renew for two three-year terms. Monthly rent is approximately $13,000 per month. | |||||
In addition, on July 17, 2013, the Company leased a vehicle for a period of thirty-six months with monthly payments of $300. The vehicle is mostly used for transporting equipment to and from tradeshows that often take place within reasonable driving distance from the Company’s office. | |||||
The table below summarizes the Company’s future obligations under the new office and vehicle leases: | |||||
Year: | |||||
2013 | $ | 897 | |||
2014 | 119,775 | ||||
2015 | 162,528 | ||||
2016 | 165,678 | ||||
2017 | 167,786 | ||||
Thereafter | 216,500 | ||||
Total | $ | 833,164 | |||
Legal Proceedings | |||||
The Company may be subject to legal proceedings and litigation arising in the ordinary course of business, including, but not limited to, certain pending patent and privacy matters, including class action lawsuits, as well as inquiries investigations, audits and other regulatory proceedings. | |||||
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. | |||||
On June 18, 2010, the Company entered into a Stipulation and Agreement of Settlement (the "Stipulation") with the lead plaintiff in the securities class action involving the Company in the case captioned Mary Jane Beauregard vs. Smart Online, Inc., et al., filed in the District Court (the “Class Action”). The Stipulation provides for the settlement of the Class Action on the terms described below. The District Court issued an order preliminarily approving the settlement on January 13, 2011. The final settlement hearing was held on May 11, 2011. As of the date of this report, the 1,475,000 shares of Common Stock had not been issued and, according to GAAP, the Company now carries the obligation as a financial instrument on its balance sheet. | |||||
The Stipulation provides for the certification of a class consisting of all persons who purchased the Company's publicly traded securities between May 2, 2005 and September 28, 2007, inclusive. As per the terms of the Stipulation, the settlement class has received total consideration of a cash payment of $350,000 made by the Company, and a cash payment of $112,500 made by Maxim Group. In addition, Henry Nouri is required to transfer 25,000 shares of Company Common Stock to the settlement class and the Company is required to issue 1,475,000 shares of Company Common Stock to the class. Under the terms of the Stipulation, counsel for the settlement class may sell some or all of the Common Stock received in the settlement before distribution to the class, subject to the limitation that it cannot sell more than 10,000 shares in one day or 50,000 shares in 30 calendar days. Subject to the terms of the Stipulation, we paid the lead plaintiff $75,000 on July 14, 2010, $100,000 on September 15, 2010, $100,000 on December 14, 2010 and $75,000 on March 14, 2011. On July 1, 2011, the District Court issued the Final Judgment and Order of Partial Dismissal with Prejudice in the Class Action case. The Court approved the Stipulation and directed the terms of how the Stipulation should be consummated. On July 1, 2011, the Company recorded the Class Action obligation as a financial instrument liability. | |||||
On January 13, 2011 (the "Effective Date"), the District Court issued the Order Preliminarily Approving Settlement and Providing Notice. Based upon the Settlement Agreement and the January 13, 2011 District Court Order Preliminarily Approving Settlement and Providing Notice, we paid for the benefit of Dennis Michael Nouri, Reza Eric Nouri, Henry Nouri and Ronna Loprete Nouri, collectively, the Nouri Parties, a total of $1,332,773 between January 2011 and February 2012. The Company was ordered by a court of proper jurisdiction to withhold $67,227 for future payment of adjudicated debt owed by the Nouri Parties’. Under the terms of the Settlement Agreement, to the extent the Nouri Parties’ legal costs are less than $300,000, the Company is owed the difference. The Settlement Agreement also provides for the exchange of mutual releases by the parties. |
5_EQUITY_COMPENSATION
5. EQUITY COMPENSATION | 9 Months Ended | ||||||||||||||||
Sep. 30, 2013 | |||||||||||||||||
Equity [Abstract] | ' | ||||||||||||||||
5. EQUITY COMPENSATION | ' | ||||||||||||||||
The following is a summary of the stock option activity for the nine-months period ended September 30, 2013: | |||||||||||||||||
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual | Aggregate | ||||||||||||||
Term | Intrinsic | ||||||||||||||||
value | |||||||||||||||||
Outstanding, December 31, 2012 | 450,900 | $ | 2.02 | ||||||||||||||
Cancelled | (164,900 | ) | 1.53 | ||||||||||||||
Issued | 249,370 | 1.62 | |||||||||||||||
Outstanding, September 30, 2013 | 535,370 | $ | 1.96 | 5.2 | 24,300 | ||||||||||||
Vested and exercisable, September 30, 2013 | 191,750 | $ | 2.76 | 4.9 | 17,825 | ||||||||||||
Aggregate intrinsic value represents the difference between the closing stock price at September 30, 2013 of the Company’s Common Stock and the exercise price of outstanding, in-the-money options. The Company’s closing stock price as reported on the OTCBB as of September 30, 2013 was $1.30. | |||||||||||||||||
At September 30, 2013, there remains $329,219 of unvested expense yet to be recorded related to all options outstanding. |
6_MAJOR_CUSTOMERS_AND_CONCENTR
6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK | 9 Months Ended |
Sep. 30, 2013 | |
Notes to Financial Statements | ' |
6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK | ' |
During the nine-month period ended September 30, 2013, two major customers accounted for 27% of total revenues. For the nine-month period ended September 30, 2012, six major customers accounted for 82% of total revenues. |
7_DISCONTINUED_OPERATIONS
7. DISCONTINUED OPERATIONS | 9 Months Ended |
Sep. 30, 2013 | |
Accounting Policies [Abstract] | ' |
DISCONTINUED OPERATIONS | ' |
In May 2013, the Company’s management agreed to discontinue the Company’s legacy business of domain hosting and e-commerce effective as of July 31, 2013. Results of legacy operations are presented as discontinued operations in the Condensed Statements of Operations. The Company has impaired all remaining assets associated with the legacy business, which included a number of servers, and recorded an impairment charge in the amount of approximately $15,000. Remaining liabilities of $6,600 include deferred revenue for the recently renewed subscriptions. |
8_SUBSEQUENT_EVENTS
8. SUBSEQUENT EVENTS | 9 Months Ended |
Sep. 30, 2013 | |
Subsequent Events [Abstract] | ' |
8. SUBSEQUENT EVENTS | ' |
Subsequent to September 30, 2013, the Company sold four Notes totaling $840,000 to UBP on the same terms as previously sold Notes. The Notes will mature on November 14, 2016. | |
Effective November 1, 2013 Atlas transferred all of its interest in the Notes to Grasford Investments, Ltd. (“Grasford”). Grasford is an entity controlled by Avy Lugassy, beneficial owner of both Company equity and the Notes interests formerly held by Atlas. As a result of the transaction, Avy Lugassy continues to control those interests through control of Grasford in the same manner that he used to control the same interests through control of Atlas. |
2_BALANCE_SHEET_ACCOUNTS_Table
2. BALANCE SHEET ACCOUNTS (Tables) | 9 Months Ended | ||||||||
Sep. 30, 2013 | |||||||||
Notes to Financial Statements | ' | ||||||||
Capitalized software | ' | ||||||||
Capitalized software consists of the following: | |||||||||
September 30, | December 31, | ||||||||
2013 | 2012 | ||||||||
Capitalized software | $ | 952,139 | $ | 672,359 | |||||
Less accumulated amortization | (133,752 | ) | (53,802 | ) | |||||
Capitalized software, net | $ | 818,387 | $ | 618,557 |
3_DEBT_Tables
3. DEBT (Tables) | 9 Months Ended | |||||||||||||
Sep. 30, 2013 | ||||||||||||||
Debt Disclosure [Abstract] | ' | |||||||||||||
Company's debt | ' | |||||||||||||
The table below summarizes the Company’s debt at September 30, 2013 and December 31, 2012: | ||||||||||||||
Note Description | September 30, | December 31, | ||||||||||||
2013 | 2012 | Maturity | Rate | |||||||||||
IDB Bank | $ | 5,000,000 | $ | 5,000,000 | 14-May | 4 | % | |||||||
Insurance premium note | - | 23,987 | 13-Jun | 6.9 | % | |||||||||
Capital lease obligations - Noteholder lease | 136,893 | 150,072 | 19-Aug | 8 | % | |||||||||
Capital lease obligations - Office furniture | 38,310 | - | 18-Sep | 9.8 | % | |||||||||
Convertible notes - Related parties | 14,557,051 | 14,557,051 | 16-Nov | 8 | % | |||||||||
Convertible notes, net of discount | 9,055,509 | 5,942,949 | 16-Nov | 8 | % | |||||||||
Total debt | 28,787,763 | 25,674,059 | ||||||||||||
Less: current portion of long term debt | ||||||||||||||
Capital lease obligations | 25,142 | 17,754 | ||||||||||||
IDB Bank | 5,000,000 | 5,000,000 | ||||||||||||
Insurance premium note | - | 23,987 | ||||||||||||
Total current portion of long term debt | 5,025,142 | 5,041,741 | ||||||||||||
Debt - long term | $ | 23,762,621 | $ | 20,632,318 |
4_COMMITMENTS_AND_CONTINGENCIE1
4. COMMITMENTS AND CONTINGENCIES (Tables) | 9 Months Ended | ||||
Sep. 30, 2013 | |||||
Commitments and Contingencies Disclosure [Abstract] | ' | ||||
Company's future obligations under its capital leases | ' | ||||
The table below summarizes Company’s future obligations under its capital leases: | |||||
Year: | |||||
2013 | $ | 9,818 | |||
2014 | 39,259 | ||||
2015 | 39,259 | ||||
2016 | 39,259 | ||||
2017 | 39,259 | ||||
Thereafter | 53,601 | ||||
220,455 | |||||
Less amount representing interest | (45,252 | ) | |||
Capital lease obligations | $ | 175,203 | |||
Company's future obligation under the new office and vehicle leases | ' | ||||
Table below summarizes Company’s future obligation under the new office and vehicle leases: | |||||
Year: | |||||
2013 | $ | 897 | |||
2014 | 119,775 | ||||
2015 | 162,528 | ||||
2016 | 165,678 | ||||
2017 | 167,786 | ||||
Thereafter | 216,500 | ||||
Total | $ | 833,164 |
5_EQUITY_COMPENSATION_Tables
5. EQUITY COMPENSATION (Tables) | 9 Months Ended | ||||||||||||||||
Sep. 30, 2013 | |||||||||||||||||
Equity Compensation Tables | ' | ||||||||||||||||
Schedule of Stock Options Outstanding | ' | ||||||||||||||||
The following is a summary of the stock option activity for the nine-months period ended September 30, 2013: | |||||||||||||||||
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual | Aggregate | ||||||||||||||
Term | Intrinsic | ||||||||||||||||
value | |||||||||||||||||
Outstanding, December 31, 2012 | 450,900 | $ | 2.02 | ||||||||||||||
Cancelled | (164,900 | ) | 1.53 | ||||||||||||||
Issued | 249,370 | 1.62 | |||||||||||||||
Outstanding, September 30, 2013 | 535,370 | $ | 1.96 | 5.2 | 24,300 | ||||||||||||
Vested and exercisable, September 30, 2013 | 191,750 | $ | 2.76 | 4.9 | 17,825 |
2_BALANCE_SHEET_ACCOUNTS_Detai
2. BALANCE SHEET ACCOUNTS (Details) (USD $) | Sep. 30, 2013 | Dec. 31, 2012 |
Balance Sheet Accounts Details | ' | ' |
Capitalized software | $952,139 | $672,359 |
Less accumulated amortization | -133,752 | -53,802 |
Capitalized software, net | $818,387 | $618,557 |
3_DEBT_Details
3. DEBT (Details) (USD $) | Sep. 30, 2013 | Dec. 31, 2012 |
Debt Details | ' | ' |
IDB credit facility | $5,000,000 | $5,000,000 |
Insurance premium note | ' | 23,987 |
Capital leases obligations - Noteholder lease | 136,893 | 150,072 |
Capital lease obligations - Office furniture | 38,310 | ' |
Convertible notes - related parties | 14,557,051 | 14,725,000 |
Convertible notes, net of discount | 9,055,509 | 5,975,000 |
Total debt | 28,787,763 | 25,674,059 |
Less: current portion of long term debt | ' | ' |
Capital lease obligations | 25,142 | 17,754 |
IDB Bank | 5,000,000 | 5,000,000 |
Insurance premium note | ' | 23,987 |
Total current portion of long term debt | 5,025,142 | 5,041,741 |
Debt - long term | $23,762,621 | $20,633,346 |
4_COMMITMENTS_AND_CONTINGENCIE2
4. COMMITMENTS AND CONTINGENCIES (Details) (USD $) | Sep. 30, 2013 |
Commitments and Contingencies Disclosure [Abstract] | ' |
2013 | $9,818 |
2014 | 39,259 |
2015 | 39,259 |
2016 | 39,259 |
2017 | 39,259 |
Thereafter | 53,601 |
Capital Leases, Future Minimum Payments Due | 220,455 |
Less amount representing interest | -45,252 |
Capital lease obligations | $175,203 |
4_COMMITMENTS_AND_CONTINGENCIE3
4. COMMITMENTS AND CONTINGENCIES (Details 1) (USD $) | Sep. 30, 2013 |
Commitments and Contingencies Disclosure [Abstract] | ' |
2013 | $897 |
2014 | 119,775 |
2015 | 162,528 |
2016 | 165,678 |
2017 | 167,786 |
Thereafter | 216,500 |
Total | $833,164 |
5_EQUITY_COMPENSATION_Details
5. EQUITY COMPENSATION (Details) (USD $) | 9 Months Ended |
Sep. 30, 2013 | |
Equity Compensation Details | ' |
Number of Shares Outstanding, Beginning | 450,900 |
Number of Shares Cancelled | -164,900 |
Number of Shares Issued | 249,370 |
Number of Shares Outstanding, Ending | 535,370 |
Stock Options Vested and Exercisable Number of Shares | 191,750 |
Weighted Average Exercise Price Outstanding, Beginning | $2.02 |
Weighted Average Exercise Price Cancelled | $1.53 |
Weighted Average Exercise Price Issued | $1.62 |
Weighted Average Exercise Price Outstanding, Ending | $1.96 |
Weighted Average Exercise Price Vested and exercisable, Ending | $2.76 |
Weighted Average Remaining Contractual Life (in years) Outstanding | '5 years 2 months 12 days |
Weighted Average Remaining Contractual Life (in years) Vested and expected to vest | '4 years 10 months 24 days |
Aggregate Intrinsic Value Outstanding | $24,300 |
Aggregate Intrinsic Value vested and expected to vest | $17,825 |
6_MAJOR_CUSTOMERS_AND_CONCENTR1
6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK (Details Narrative) | 9 Months Ended | |
Sep. 30, 2013 | Sep. 30, 2012 | |
Customer A | ' | ' |
% of Total Revenues (Three customers in 2013; Two customers in 2012) | 27.00% | 82.00% |
Customer B | ' | ' |
% of Total Revenues (Three customers in 2013; Two customers in 2012) | 27.00% | 82.00% |
Customers C | ' | ' |
% of Total Revenues (Three customers in 2013; Two customers in 2012) | ' | 82.00% |
Customers D | ' | ' |
% of Total Revenues (Three customers in 2013; Two customers in 2012) | ' | 82.00% |
Customers E | ' | ' |
% of Total Revenues (Three customers in 2013; Two customers in 2012) | ' | 82.00% |
CustomersF | ' | ' |
% of Total Revenues (Three customers in 2013; Two customers in 2012) | ' | 82.00% |