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, 2019
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 | ☐ (Do not check if a smaller reporting company) | 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 11, 2019, there were 28,271,598 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, 2019
TABLE OF CONTENTS
Page No. | ||
PART I – FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | |
Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 | 3 | |
Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2019 and 2018 | 4 | |
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2019 and 2018 | 5 | |
Condensed Consolidated Statements of Stockholders' Deficit (unaudited) for the three and nine months ended September 30, 2019 and September 30, 2018 | 6 | |
Notes to Condensed Consolidated Financial Statements (unaudited) | 7 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 14 |
Item 4. | Controls and Procedures | 14 |
PART II – OTHER INFORMATION | ||
Item 2. | Unregistered Sales of Equity Security and Use of Proceeds | 15 |
Item 6. | Exhibits | 15 |
Signatures | 16 | |
2
PART I – FINANCIAL INFORMATION
MOBILESMITH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |
2019 | 2018 | |
ASSETS | (unaudited) | |
Current Assets | ||
Cash and Cash Equivalents | $311,789 | $267,290 |
Restricted Cash | 243,976 | 239,611 |
Trade Accounts Receivable | 392,045 | 271,387 |
Prepaid Expenses and Other Current Assets | 81,428 | 125,798 |
Total Current Assets | 1,029,238 | 904,086 |
Property and Equipment, Net | 33,118 | 45,012 |
Capitalized Software, Net | 11,310 | 64,352 |
Operating Lease Right-of-Use Asset - Corporate Office | 714,145 | - |
Total Assets | $1,787,811 | $1,013,450 |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||
Current Liabilities | ||
Trade Accounts Payable | $163,147 | $166,681 |
Accrued Interest | 947,588 | 1,584,794 |
Other Liabilities And Accrued Expenses | 205,405 | 307,811 |
Operating Lease Liability, Current | 146,574 | - |
Contract Liability, Current | 1,294,021 | 1,476,725 |
Bank Loan | 5,000,000 | - |
Total Current Liabilities | 7,756,735 | 3,536,011 |
Bank Loan | - | 5,000,000 |
Subordinated Promissory Notes, Related Party | 2,841,250 | 525,000 |
Convertible Notes Payable, Related Parties, Net of Discount | 38,878,423 | 35,740,085 |
Convertible Notes Payable, Net of Discount | 610,740 | 610,740 |
Deferred Rent | - | 35,287 |
Operating Lease Liability | 632,501 | - |
Contract Liability | 269,589 | 226,270 |
Total Liabilities | 50,989,238 | 45,673,393 |
Commitments and Contingencies (Note 3) | ||
Stockholders' Deficit | ||
Preferred Stock, $0.001 Par Value, 5,000,000 Shares Authorized, No Shares Issued and Outstanding at September 30, 2019 and December 31, 2018 | - | - |
Common Stock, $0.001 Par Value, 100,000,000 Shares Authorized At September 30, 2019 and December 31, 2018; 28,271,598 Shares Issued and Outstanding at September 30, 2019 and December 31, 2018 | 28,272 | 28,272 |
Additional Paid-in Capital | 117,493,417 | 114,082,897 |
Accumulated Deficit | (166,723,116) | (158,771,112) |
Total Stockholders' Deficit | (49,201,427) | (44,659,943) |
Total Liabilities and Stockholders' Deficit | $1,787,811 | $1,013,450 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
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, | |
2019 | 2018 | 2019 | 2018 | |
REVENUES: | ||||
Subscription and Support | $528,145 | $525,659 | $1,819,464 | $1,543,400 |
Services and Other | 118,110 | - | 360,834 | - |
Total Revenue | 646,255 | 525,659 | 2,180,298 | 1,543,400 |
COST OF REVENUES: | ||||
Subscription and Support | 153,733 | 200,616 | 582,862 | 546,036 |
Services and Other | 120,766 | - | 226,561 | - |
Total Cost of Revenue | 274,499 | 200,616 | 809,423 | 546,036 |
GROSS PROFIT | 371,756 | 325,043 | 1,370,875 | 997,364 |
OPERATING EXPENSES: | ||||
Sales and Marketing | 257,947 | 426,620 | 1,064,851 | 1,110,350 |
Research and Development | 747,528 | 471,486 | 2,055,797 | 1,238,977 |
General and Administrative | 927,315 | 618,811 | 2,630,953 | 1,816,216 |
Total Operating Expenses | 1,932,790 | 1,516,917 | 5,751,601 | 4,165,543 |
LOSS FROM OPERATIONS | (1,561,034) | (1,191,874) | (4,380,726) | (3,168,179) |
OTHER INCOME (EXPENSE): | ||||
Other Income | 788 | 1,590 | 1,600 | 3,189 |
Interest Expense, Net | (1,294,461) | (986,956) | (3,575,051) | (3,092,379) |
Total Other Expense | (1,293,673) | (985,366) | (3,573,451) | (3,089,190) |
NET LOSS | $(2,854,707) | $(2,177,240) | $(7,954,177) | $(6,257,369) |
NET LOSS PER COMMON SHARE: | ||||
Basic and Fully Diluted from Continuing Operations | $(0.10) | $(0.08) | $(0.28) | $(0.22) |
WEIGHTED-AVERAGE NUMBER OF SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE: | ||||
Basic And Fully Diluted | 28,271,598 | 28,271,598 | 28,271,598 | 28,271,598 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MOBILESMITH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
9 Months Ended | 9 Months Ended | |
September 30, | September 30, | |
2019 | 2018 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | ||
Net Loss | $(7,954,177) | $(6,257,369) |
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | ||
Depreciation and Amortization | 64,936 | 120,805 |
Bad Debt Expense | 14,000 | - |
Amortization of Debt Discount | 855,751 | 569,794 |
Share Based Compensation | 2,533,107 | 1,039,507 |
Changes in Assets and Liabilities: | ||
Accounts Receivable | (134,658) | (36,754) |
Prepaid Expenses and Other Assets | 44,370 | (39,422) |
Accounts Payable | (3,534) | 46,598 |
Contract Liability | (139,385) | 398,802 |
Operating Lease Right-of-use Asset | 134,326 | - |
Operating Lease Liability | (102,510) | - |
Accrued and Other Expenses | (717,978) | (126,790) |
Net Cash Used in Operating Activities | (5,405,752) | (4,284,829) |
CASH FLOWS FROM INVESTING ACTIVITIES: | ||
Payments to Acquire Property and Equipment | - | (9,499) |
Net Cash Used in Investing Activities | - | (9,499) |
CASH FLOWS FROM FINANCING ACTIVITIES: | ||
Proceeds From Issuance of Subordinated Promissory Notes, Related Party | 2,316,250 | 525,000 |
Proceeds From Issuance of Convertible Notes Payable, Related Party | 3,160,000 | 4,115,000 |
Repayments of Financing Lease Obligations | (21,634) | (27,148) |
Net Cash Provided by Financing Activities | 5,454,616 | 4,612,852 |
NET INCREASE IN CASH AND CASH EQUIVALENTS | 48,864 | 318,524 |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 506,901 | 178,856 |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $555,765 | $497,380 |
Composition of Cash, Cash Equivalents and Restriced Cash Balance: | ||
Cash and Cash Equivalents | $311,789 | $349,969 |
Restricted Cash | 243,976 | 147,411 |
Total Cash, Cash Equivalents and Restricted Cash | $555,765 | $497,380 |
Supplemental Disclosures of Cash Flow Information: | ||
Operating Lease Payments | $126,057 | $- |
Cash Paid During the Period for Interest | $3,375,856 | $2,626,399 |
Non-Cash Investing and Financing Activities: | ||
Operating Lease Right-Of-Use Asset Obtained In Exchange For Lease Obligations | $883,634 | $- |
Recorded Debt Discount Associated with Beneficial Conversion Feature | $877,413 | $1,673,811 |
The Company Converted $5,075,000 of its Convertible Notes into Common Shares | $- | $5,075,000 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
MOBILESMITH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(unaudited)
Common Stock, Shares | Common Stock, $0.001 Par Value | Additional Paid-In Capital | Accumulated Deficit | Totals | |
BALANCES, JANUARY 1, 2018 | 24,722,647 | $24,723 | $105,795,621 | $(150,501,642) | $(44,681,298) |
Equity-Based Compensation | 163,264 | - | 163,264 | ||
Beneficial Conversion Feature Recorded as a Result Of Issuance Of Convertible Debt | 524,825 | - | 524,825 | ||
Conversion of Notes Payable to Common Stock | - | ||||
Cumulative Adjustment Related To Adoption Of Topic 606 Revenue With Customers | - | 65,277 | 65,277 | ||
Net Loss | - | (1,819,696) | (1,819,696) | ||
BALANCES, MARCH 31, 2018 | 24,722,647 | 24,723 | 106,483,710 | (152,256,061) | (45,747,628) |
Equity-Based Compensation | 343,278 | - | 343,278 | ||
Beneficial Conversion Feature Recorded as a Result Of Issuance Of Convertible Debt | 834,301 | - | 834,301 | ||
Conversion of Notes Payable to Common Stock | 3,513,986 | 3,514 | 5,021,486 | - | 5,025,000 |
Cumulative Adjustment Related To Adoption Of Topic 606 Revenue With Customers | - | - | - | ||
Net Loss | - | (2,260,433) | (2,260,433) | ||
BALANCES, JUNE 30, 2018 | 28,236,633 | 28,237 | 112,682,775 | (154,516,494) | (41,805,482) |
Equity-Based Compensation | 532,965 | 532,965 | |||
Beneficial Conversion Feature Recorded as a Result Of Issuance Of Convertible Debt | 314,685 | 314,685 | |||
Conversion of Notes Payable to Common Stock | 34,965 | 35 | 44,865 | �� | 44,900 |
Cumulative Adjustment Related To Adoption Of Topic 606 Revenue With Customers | - | - | |||
Net Loss | (2,177,240) | (2,177,240) | |||
BALANCES, SEPTEMBER 30, 2018 | 28,271,598 | $28,272 | $113,575,290 | $(156,693,734) | $(43,090,172) |
BALANCES, JANUARY 1, 2019 | 28,271,598 | $28,272 | $114,082,897 | $(158,771,112) | $(44,659,943) |
Equity-Based Compensation | 504,461 | - | 504,461 | ||
Beneficial Conversion Feature Recorded as a Result Of Issuance Of Convertible Debt | 375,175 | - | 375,175 | ||
Cumulative Adjustment Related To Adoption Of ASC842 Guidance On Accounting For Leases | - | 2,173 | 2,173 | ||
Net Loss | - | (2,176,493) | (2,176,493) | ||
BALANCES, MARCH 31, 2019 | 28,271,598 | 28,272 | 114,962,533 | (160,945,432) | (45,954,627) |
Equity-Based Compensation | 1,099,995 | - | 1,099,995 | ||
Net Loss | - | (2,922,977) | (2,922,977) | ||
BALANCES, JUNE 30, 2019 | 28,271,598 | 28,272 | 116,062,528 | (163,868,409) | (47,777,609) |
Equity-Based Compensation | 928,651 | 928,651 | |||
Beneficial Conversion Feature Recorded as a Result Of Issuance Of Convertible Debt | 502,238 | 502,238 | |||
Net Loss | (2,854,707) | (2,854,707) | |||
BALANCES, SEPTEMBER 30, 2019 | 28,271,598 | $28,272 | $117,493,417 | $(166,723,116) | $(49,201,427) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
MOBILESMITH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months' Period Ended September 30, 2019
(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 a 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, which consists of:
●
access to a catalog of ready to deploy mobile app solutions (App Blueprint Catalog) with focus on three operational areas: patient acquisition, perioperative surgery care and in-network coordination
●
related deployment, support and integration services (App Build and Managed Services and custom development, where applicable), and
●
hosting of the deployed mobile apps.
Our flagship MobileSmith® Platform has transformed from a do-it-yourself customer facing platform into an internally used engine that supports the deployment of mobile apps created from Blueprints, integration of various third-party code and services into the mobile apps produced from Blueprints and the hosting of deployed apps and design of new Blueprints.
The Company prepared the accompanying unaudited condensed consolidated 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 consolidated 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, 2019. 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 consolidated financial statements and accompanying notes should be read in conjunction with the audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 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 consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the nine months ended September 30, 2019 and 2018, 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 consolidated 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.
Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
7
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 Form 10-K for the year ended December 31, 2018.
In February 2016, the Financial Accounting Standards Board ("FASB") established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires companies to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model ("ROU") that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are to be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.
The new standard was effective for us on January 1, 2019, and we adopted the standard on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application.
As a result we did not restate the prior periods presented in the Condensed Consolidated Financial Statements .
The new standard provides a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.
The most significant judgments and impacts upon adoption of the standard include the following:
●
We recognized right-of-use asset and operating lease liability for our corporate office operating lease that have not previously been recorded. The lease liability for operating lease is based on the net present value of future minimum lease payments.
●
Financing lease right-of-use assets (formerly capital lease assets) have been and will continue to be included within Property and Equipment. Capital lease liabilities previously included in Short-term capital lease obligations and Long-term capital lease obligations were reclassified to Other Liabilities and Accrued Expenses in our Condensed Consolidated Balance Sheet.
●
The right-of-use asset for operating lease is based on the lease liability adjusted for the reclassification of deferred rent, which we remeasured at adoption due to the application of hindsight to our lease term estimates. Deferred rent will no longer be presented separately.
●
Certain line items in the Condensed Consolidated Statements of Cash Flows have been renamed to align with the new terminology presented in the new standard; “Repayment of capital lease obligations” is now presenting as “Repayments of financing lease obligations”. In the “Operating Activities” section of the Condensed Consolidated Statements of Cash Flows we have added “Operating lease right-of-use asset” and “Operating lease liability” which represent the change in the operating lease asset and liability, respectively. Additionally, in the “Supplemental disclosure of cash flow information” section of the Condensed Consolidated Statements of Cash Flows we have added “Operating lease payments,” and in the “Noncash investing and financing activities” section we have added “Operating lease right-of-use assets obtained in exchange for lease obligations.”
●
In determining the discount rate used to measure the right-of-use asset and lease liability, we use rates implicit in the lease, or if not readily available, we use our incremental borrowing rate. Our incremental borrowing rate of 8% is based on the rate on our debt.
The following tables summarize the current period impacts of adopting Topic 842 on our Condensed Consolidated Financial Statements as of January 1, 2019:
Beginning Balance | Cumulative Effect Adjustment | Beginning Balance, As Adjusted | |
Assets | |||
Operating Lease Right-of-Use Asset - Corporate Office | $- | $883,634 | $883,634 |
Liabilities and Stockholders' Deficit | |||
Operating Lease Liabilities | - | 881,585 | 881,585 |
Accumulated Deficit | $(158,771,112) | $2,173 | $(158,768,939) |
8
2. DEBT
The table below summarizes the Company's debt outstanding at September 30, 2019 and December 31, 2018:
Debt Description | September, 30 | December 31, | ||
2019 | 2018 | Maturity | Rate | |
Comerica Bank Loan and Security Agreement | $5,000,000 | $5,000,000 | June 2020 | 6.10% |
Convertible notes - related parties, net of discount of $1,545,808 and $1,527,146, respectively | 38,878,423 | 35,740,085 | November 2020 | 8.00% |
Convertible notes, net of discount of $45,029 | 610,740 | 610,740 | November 2020 | 8.00% |
Subordinated Promissory Note, Related Party | 2,841,250 | 525,000 | November 2020 | 8.00% |
Total debt | 47,330,413 | 41,875,825 | ||
Less: current portion of long term debt | 5,000,000 | - | ||
Debt - long term | $42,330,413 | $41,875,825 |
Convertible Notes
During the nine months ended September 30, 2019, the Company issued through a private placement $3,160,000 in principal amount of additional unsecured Convertible Subordinated Notes (the “2014 NPA Notes”) to Union Bancaire Privée (“UBP”) under its existing unsecured Convertible Subordinated Note Purchase Agreement dated December 10, 2014 (the “2014 NPA”). The 2014 NPA Notes are convertible by the holder into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a per share conversion price of $1.43.
The table below summarizes our convertible notes issued as of September 30, 2019 by type:
Convertible Notes Type: | Balance |
2007 NPA notes, net of discount | $20,397,816 |
2014 NPA notes, net of discount | 19,091,347 |
Total convertible notes, net of discount | $39,489,163 |
Subordinated Promissory Notes, Related Party
During the nine months ended September 30, 2019, the Company issued several subordinated notes to a related party totaling $2,316,250. These notes have an interest rate of 8% payable twice a year and mature on November 14, 2020.
Comerica LSA
The Company has an outstanding Loan and Security Agreement with Comerica Bank dated June 9, 2014 (the "LSA") in the amount of $5,000,000, with original maturity of June 9, 2016.
On June 8, 2018, the Company and Comerica Bank entered into Second Amendment to the LSA, which extended the maturity of the LSA to June 9, 2020. The LSA is secured by an extended irrevocable letter of credit issued by UBS AG (Geneva, Switzerland) ("UBS AG") with a renewal term expiring on May 31, 2020, which term is renewable for one year periods, unless notice of non-renewal is given by UBS AG at least 45 days prior to the then current expiration date.
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.
4. EQUITY AND EQUITY BASED COMPENSATION
The following is a summary of the stock option activity for the nine months ended September 30, 2019:
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |
Outstanding, December 31, 2018 | $6,704,716 | $1.83 | 7.4 | $765,927 |
Cancelled | (1,482,555) | 1.80 | ||
Issued | 6,478,980 | 1.62 | ||
Outstanding, September 30, 2019 | 11,701,141 | 1.72 | 8.5 | $1,552,803 |
Vested and exercisable, September 30, 2019 | $3,628,480 | $1.69 | 6.7 | $591,483 |
Aggregate intrinsic value represents the difference between the closing price of the Company’s common stock at September 30, 2019 and the exercise price of outstanding, in-the-money stock options. The closing price of the common stock at September 30, 2019, as reported on the OTCQB Venture Marketplace, was $1.85 per share.
At September 30, 2019, an amount of $11,871,341 unvested expense has yet to be recorded related to outstanding stock options.
9
5. 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, 2019 | 9 Months Ended September 30, 2018 | |||
Billings | GAAP Revenue | Billings | GAAP Revenue | |
Top 5 Customers (Measured By Amounts Billed) | $1,002,040 | $596,210 | $619,780 | $156,995 |
All Other Customers | $1,045,873 | $1,584,088 | $1,290,887 | $1,386,405 |
$2,047,913 | $2,180,298 | $1,910,667 | $1,543,400 | |
For the nine months ended September 30, 2019, one customer accounted for 17% of total revenue and one customer accounted for 89% of accoutns receivable balance.
As of September 30, 2018, four customers accounted for 68% of the accounts receivable balance.
New customer acquisition impact on billings and revenue:
9 Months Ended September 30, 2019 | 9 Months Ended September 30, 2018 | |||
Billings | GAAP Revenue | Billings | GAAP Revenue | |
Customers In Existence As Of The Beginning Of The Period (Including Upgrades) | $1,476,663 | $2,175,245 | $1,330,361 | $1,450,031 |
Customers Acquired During The Period | $571,250 | $5,053 | $580,306 | $93,369 |
$2,047,913 | $2,180,298 | $1,910,667 | $1,543,400 |
6. LEASES
Leases (Topic 842) Disclosures
We are a lessee for a non-cancellable operating lease for our corporate office in Raleigh, North Carolina. We are also a lessee for a non-cancellable finance lease for a corporate vehicle and office furniture. 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, 2019 | |
Operating lease expense | $152,981 |
Weighted Average Remaining Lease Term (Years) | 5 years |
Weighted Average Discount Rate | 8% |
Maturities of operating lease liability as of September 30, 2019, were as follows:
Operating Lease Expense | Variable Lease Expense | Total Lease Expense | |
Remainder of 2019 | $47,682 | 3,219 | $50,901 |
2020 | 190,365 | 13,238 | 203,603 |
2021 | 189,994 | 13,609 | 203,603 |
2020 | 189,615 | 13,988 | 203,603 |
2023 | 189,225 | 14,378 | 203,603 |
2024 | 63,074 | 4,793 | 67,867 |
Total lease payments | $869,955 | $63,225 | 933,180 |
Less imputed interest | (154,105) | ||
Total | $779,075 |
7. SUBSEQUENT EVENTS
Subsequent to September 30, 2019, the Company borrowed $77,000 through issuance of two subordinated promissory notes to a related party that has the same term of those described in Note 2.
10
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 under our convertible note facility, our ability to raise financing from other sources and/or ability to defer expenditures, the impact of the liens on our assets securing amounts owed to third parties, expectation regarding competitors as more and larger companies attempt to market products/services competitive to our 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, 2018 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 consolidated 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 consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the audited annual consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report. Historical results and percentage relationships among any amounts in the condensed consolidated financial statements are not necessarily indicative of trends in operating results for any future periods.
Overview
MobileSmith provides operational improvement, member-facing mobile application services to the healthcare industry. Our suite of e-health mobile solutions and related services provide a catalog of vetted mobile app tools that can be rapidly customized to fit the needs of a specific healthcare organization with goals of addressing many key pain points of the industry. Apps built from our base app architecture ("Blueprints") focus on the following:
● Patient Perioperative Care with deployment of our "Encounter" solution. Encounter targets reduction of same-day cancellations and preventable re-admissions, which results in direct savings to the hospitals; and
● In Network Patient Retention with deployment of our "Navigate" solution. Navigate makes it easy for patients to stay within their insurance plan network, connects the patient to the appropriate care at appropriate time in accordance with their symptoms. Staying in-network and avoiding unnecessary ER visits when other options are available, result in direct savings to the patient, patient's employer, insurance company and health system overall; and
● Patient's Access with deployment of our "Healthcare Wayfinding" solution. Easy to use Wayfinding contributes to improvements in hospital's HCAHPS scores (the Hospital Consumer Assessment of Healthcare Providers and Systems score) through increased customer satisfaction from improvements in patient engagement.
Our services offering include the following:
●
access to a catalog of ready to deploy mobile app solutions (App Blueprint Catalog);
●
related deployment, support and integration services (App Build and Managed Services and custom development, where applicable) and
●
hosting of the deployed mobile apps.
Our flagship MobileSmith® Platform (the "Platform") has transformed from customer facing into an internal platform that supports the deployment of mobile apps created from Blueprints. We also integrate various third-party code and services into the mobile apps produced from our Blueprints, host the deployed apps, and design new Blueprints that can be rapidly deployed by the Healthcare industry.
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 (hospitals, hospital systems and the United States Veterans Health Administration) and (ii) healthcare payer market (insurance companies and insurance brokers). In 2019 we further refined our two products (Encounter and Navigate) to align with our two target markets and focused our development efforts on integration with two major Electronic Medical Records providers - Cerner and EPIC.
Both markets are targeted with a diversified sales workforce that includes direct sales and resellers ("channel partners").
11
RESULTS OF OPERATIONS
Highlights
In both May of 2018 and 2019 the Company granted significant number of stock options to its employees, 4,690,778 and 6,193,980, respectively . As a result, our share based compensation increased from $1,039,507 in the nine month period ended September 30 2018 Period to $2,533,107 in the nine month period ended September 30 2019. Stock based compensation impacted every operating expense category.
Comparison of the three Months Ended September 30, 2019 (the "2019 Period") to the three Months Ended September 30, 2018 (the "2018 Period).
Three Months ended September 30, 2019 | Three months ended September 30, 2018 | Increase (Decrease) $ | Increase (Decrease) % | |
Revenue | $646,255 | $525,659 | $120,596 | 23% |
Cost of Revenue | 274,499 | 200,616 | 73,883 | 37% |
Gross Profit | 371,756 | 325,043 | 46,713 | 14% |
Sales and Marketing | 257,947 | 426,620 | (168,673) | -40% |
Research and Development | 747,528 | 471,486 | 276,042 | 59% |
General and Administrative | 927,315 | 618,811 | 308,504 | 50% |
Interest Expense | $1,294,461 | $986,956 | $307,505 | 31% |
Revenue increased by $120,596 or 23%. The increase in revenue is primarily attributable to new customers acquired during 2018 and 2019.
Cost of Revenue increased by $73,883 or 37%. The increase is predominantly due to work on a services contract with a U.S. government agency.
Gross Profit increased by $46,713 or 14% driven by increase in revenue.
Sales and Marketing expense decreased by $168,673 or 40%. This decrease is primarily attributable to decrease in personnel costs of $109,0000 due to decrease in the size of the internal sales team, in favor of expansion of a channel sales strategy. A decrease of $33,000 is attributable to decrease in marketing campaigns and $12,000 decrease in professional services.
Research and Development expense increased by $276,042 or 59%. This increase is largely attributable to the following:
(i) our personnel and recruiting fees increased by approximately $180,000 as we have been expanding our team's ability to develop new Blueprints.
(ii) our share based compensation increased by approximately $117,000.
General and Administrative expense increased by $308,504 or 50%. The increase is primarily attributable to $269,000 increase in share based compensation, and minor increases in rent expense and board member compensation.
Interest Expense increased by $307,505 or 31%. The increase is due to increase in face value of the debt and increase in amortization of debt discount from newly issued convertible debt.
Comparison of the nine Months Ended September 30, 2019 (the “2019 Period”) to the nine Months Ended September 30, 2018 (the “2018 Period”).
Nine months ended September 30, 2019 | Nine months ended September 30, 2018 | Increase (Decrease) $ | Increase (Decrease) % | |
Revenue | $2,180,298 | $1,543,400 | $636,898 | 41% |
Cost of Revenue | 809,423 | 546,036 | 263,387 | 48% |
Gross Profit | 1,370,875 | 997,364 | 373,511 | 37% |
Sales and Marketing | 1,064,851 | 1,110,350 | (45,499) | -4% |
Research and Development | 2,055,797 | 1,238,977 | 816,820 | 66% |
General and Administrative | 2,630,953 | 1,816,216 | 814,737 | 45% |
Interest Expense | $3,575,051 | $3,092,379 | $482,672 | 16% |
Revenue increased by $636,898 or 41%. The increase in revenue is primarily attributable to new customers acquired during 2018 and 2019.
Cost of Revenue increased by $263,387 or 48%. The increase is predominantly due to work on a services contract with a U.S. government agency.
Gross Profit increased by $373,511 or 37% driven by increase in revenue.
Sales and Marketing expense decreased by $45,499 or 4%. An increase of $165,000 is attributable to an increase in share based compensation, offset by decrease of $176,000 attributable to decrease in size of our internal sales team and associated sales travel in favor of expansion of channel sales strategy. A decrease of $40,000 is attributable to decrease in marketing tradeshow and campaign expense.
Research and Development expense increased by $816,820 or 66%. This increase is largely attributable to the following:
(i)
personnel expense, including outsourced contractors and recruiting, increased by approximately $345,000, as we have been expanding our team's ability to develop functionality in Encounter and Navigate solutions.
(ii)
our share based compensation increased by $408,000.
General and Administrative expense increased by $814,737 or 45%. The increase is attributable to:
(i)
increase of $846,000 was due to increase in share based compensation.
(ii)
increase of $32,000 was due to increase in rent expense due to renewal of our office lease for another 5 year period.
(iii)
offsetting decrease in personnel compensation of approximately $80,000. During the 2018 period we incurred $100,000 expense related to severance payments to former CEO.
Interest Expense increased by $482,672 or 16%. The increase is due to increase in non-cash interest component resulting from amortization of debt discount by approximately $285,000. Remainder of the increase is attributable to increase in face value of debt.
12
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 notes under our convertible note facilities. 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 convertible note facilities, 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, 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 under the convertible note facilities or otherwise on acceptable terms or at all. Additional equity and convertible debt financing could be dilutive to the holders of shares of our common stock, and additional debt financing, if available, could impose greater cash payment obligations and more covenants and operating restrictions.
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.
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 2020 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, 2020.
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, 2018 in which they express substantial doubt as to our ability to continue as a going concern. The condensed consolidated 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.
13
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, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow 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, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019, our disclosure controls and procedures were effective at a reasonable assurance.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2019, we engaged a third party consultant to assist us with our non-operational accounting functions as well as engaged an accounting firm to assist us with technical accounting issues. We believe these efforts have remediated any weaknesses that may have existed in prior periods resulting for limited resources being devoted to and segregation of duties around evaluation of complex and infrequent accounting matters. Except as set forth in the preceding sentence, 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) during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
14
PART II – OTHER INFORMATION
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, 2019 without registration under the Securities Act:
Between July 1, 2019 and September 30, 2019 we issued several subordinated notes to a related party in the amount of $830,000. These notes have an interest rate of 8% and mature on November 14, 2020.
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 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 period ended September 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statement of Stockholders’ Deficit and (v) related notes to these condensed consolidated financial statements, tagged as blocks of text and in detail (Filed herewith). |
15
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, 2019 | By: | /s/ Randy Tomlin | |
Randy J. Tomlin | |||
Chief Executive Officer and Chairman of the Board (Principal Executive Officer) |
November 12, 2019 | By: | /s/ Gleb Mikhailov | |
Gleb Mikhailov | |||
Chief Financial Officer (Principal Financial and Accounting Officer) | |
16