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 March 31, 2020
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 May 12, 2020, there were 28,320,549 shares of the registrant’s common stock, par value $0.001 per share, outstanding.
MOBILESMITH, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2020
TABLE OF CONTENTS
| | | Page No. |
| PART I – FINANCIAL INFORMATION |
| | | |
| Item 1. | Financial Statements | |
| | | |
| | Condensed Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019 | 3 |
| | | |
| | Condensed Statements of Operations (unaudited) for the three months ended March 31, 2020 and 2019 | 4 |
| | | |
| | Condensed Statements of Cash Flows (unaudited) for the three months ended March 31, 2020 and 2019 | 5 |
| | | |
| | Condensed Statements of Stockholders' Deficit for the periods ended March 31, 2020 and March 31, 2019 (unaudited) | 6 |
| | | |
| | Notes to Condensed 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 | 16 |
| | | |
| | Signatures | 17
|
| | | |
PART I – FINANCIAL INFORMATION
MOBILESMITH, INC.
CONDENSED BALANCE SHEETS
| ASSETS | | |
| | March 31, | December 31, |
| | 2020 | 2019 |
| | (unaudited) | |
| Current Assets | | |
| Cash and Cash Equivalents | $327,324 | $71,482 |
| Restricted Cash and Cash Equivalents | 238,262 | 243,485 |
| Accounts Receivable, Net of Allowance for Doubtful Accounts of $5,250 at March 31, 2020 and December 31, 2019 | 251,500 | 109,187 |
| Prepaid Expenses and Other Current Assets | 55,072 | 75,489 |
| Total Current Assets | 872,158 | 499,643 |
| | | |
| Property and Equipment, Net | 25,711 | 29,368 |
| Capitalized Software, Net | - | 5,470 |
| Operating Lease Right-of-Use Asset | 634,189 | 674,338 |
| Total Assets | $1,532,058 | $1,208,819 |
| | | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | | |
| Current Liabilities | | |
| Accounts Payable | $285,792 | $242,249 |
| Interest Payable | 995,050 | 1,834,694 |
| Other Liabilities And Accrued Expenses | 191,599 | 263,889 |
| Operating Lease Liability Current | 152,535 | 149,525 |
| Contract With Customer Liability Current | 943,053 | 1,051,271 |
| Bank Loan | 5,000,000 | 5,000,000 |
| Subordinated Promissory Notes, Related Parties | 3,718,250 | 3,518,250 |
| Convertible Notes Payable, Related Parties, Net of Discount | 39,830,227 | 39,230,432 |
| Convertible Notes Payable, Net of Discount | 797,113 | 610,740 |
| Total Current Liabilities | 51,913,619 | 51,901,050 |
| | | |
| | | |
| Operating Lease Liability Noncurrent | 554,714 | 593,994 |
| Contract with Customer Liability Noncurrent | 45,129 | 28,100 |
| Subordinated Promissory Notes, Related Parties | 845,000 | - |
| Total Liabilities | 53,358,462 | 52,523,144 |
| | | |
| Commitments and Contingencies (Note 3) | | |
| Stockholders' Deficit | | |
| Preferred Stock, $0.001 Par Value, 5,000,000 Shares Authorized, No Shares Issued and Outstanding at March 31, 2020 and December 31, 2019 | - | - |
| Common Stock, $0.001 Par Value, 100,000,000 Shares Authorized At March 31, 2020 and December 31, 2019; 28,320,549 Shares Issued and Outstanding at March 31, 2020 and28,271,598 Shares Issued and Outstanding at December 31, 2019 | 28,321 | 28,272 |
| Additional Paid-in Capital | 121,218,750 | 118,431,878 |
| Accumulated Deficit | (173,073,475) | (169,774,475) |
| Total Stockholders' Deficit | (51,826,404) | (51,314,325) |
| Total Liabilities and Stockholders' Deficit | $1,532,058 | $1,208,819 |
The accompanying notes are an integral part of these condensed financial statements.
MOBILESMITH, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
| | 3 Months Ended | 3 Months Ended |
| | March 31, | March 31, |
| | 2020 | 2019 |
| REVENUES: | | |
| Subscription and Support | $519,399 | $616,117 |
| Services and Other | 105,173 | 124,602 |
| Total Revenue | 624,572 | 740,719 |
| | | |
| COST OF REVENUES: | | |
| Subscription and Support | 165,401 | 193,081 |
| Services and Other | 93,162 | 38,840 |
| Total Cost of Revenue | 258,563 | 231,921 |
| | | |
| GROSS PROFIT | 366,009 | 508,798 |
| | | |
| OPERATING EXPENSES: | | |
| Selling and Marketing | 367,314 | 359,781 |
| Research and Development | 627,795 | 499,872 |
| General and Administrative | 824,801 | 713,661 |
| Total Operating Expenses | 1,819,910 | 1,573,314 |
| LOSS FROM OPERATIONS | (1,453,901) | (1,064,516) |
| | | |
| OTHER INCOME (EXPENSE): | | |
| Other Income | 6,004 | 807 |
| Interest Expense, Net | (1,851,103) | (1,112,784) |
| Total Other Expense | (1,845,099) | (1,111,977) |
| | | |
| NET LOSS | $(3,299,000) | $(2,176,493) |
| | | |
| NET LOSS PER COMMON SHARE: | | |
| Basic and Fully Diluted from Continuing Operations | $(0.12) | $(0.08) |
WEIGHTED-AVERAGE NUMBER OF SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE: |
| Basic And Fully Diluted | 28,320,549 | 28,271,598 |
The accompanying notes are an integral part of these condensed financial statements.
MOBILESMITH, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
| | 3 Months Ended | 3 Months Ended |
| | March 31, | March 31, |
| | 2020 | 2019 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | |
| Net Loss | $(3,299,000) | $(2,176,493) |
| Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities: | | |
| Depreciation and Amortization | 9,127 | 30,442 |
| Amortization of Debt Discount | 851,408 | 251,606 |
| Share Based Compensation | 721,681 | 504,461 |
| Changes in Assets and Liabilities: | | |
| Accounts Receivable | (142,313) | 121,864 |
| Prepaid Expenses and Other Assets | 20,417 | (50,058) |
| Accounts Payable | 43,543 | 47,973 |
| Contract Liability | (91,189) | (253,908) |
| Operating Lease Right-of-use Asset | 40,149 | 37,300 |
| Operating Lease Liability | (36,270) | (33,491) |
| Accrued and Other Expenses | (910,964) | (757,106) |
| Net Cash Used in Operating Activities | (2,793,411) | (2,277,410) |
| | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| Proceeds From Issuance of Subordinated Promissory Notes, Related Party | 1,045,000 | 600,000 |
| Proceeds From Issuance of Convertible Notes Payable, Related Party | 1,000,000 | 1,450,000 |
| Proceeds From Issuance of Convertible Notes Payable | 1,000,000 | - |
| Repayments of Financing Lease Obligations | (970) | (7,867) |
| Net Cash Provided by Financing Activities | 3,044,030 | 2,042,133 |
| | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 250,619 | (235,277) |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 314,967 | 506,901 |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $565,586 | $271,624 |
| | | |
| Composition of Cash, Cash Equivalents and Restriced Cash Balance: | | |
| Cash and Cash Equivalents | $327,324 | $103,063 |
| Restricted Cash | 238,262 | 168,561 |
| Total Cash, Cash Equivalents and Restricted Cash | $565,586 | $271,624 |
| | | |
| Supplemental Disclosures of Cash Flow Information: | | |
| Operating Lease Payments | $46,741 | $51,887 |
| Cash Paid During the Period for Interest | $1,834,694 | $1,577,846 |
| | | |
| 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 | $2,000,000 | $375,175 |
| Conversion Of Notes Payable Into Common Shares | $65,240 | $ - |
The accompanying notes are an integral part of these condensed financial statements.
MOBILESMITH, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(unaudited)
| | Common Stock, Shares | Common Stock, $0.001 Par Value | Additional Paid-In Capital | Accumulated Deficit | Totals |
| BALANCES, DECEMBER 31, 2018 | 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 Topic 606 Revenue With Customers | | | - | 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) |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| BALANCES, DECEMBER 31, 2019 | 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) |
The accompanying notes are an integral part of these condensed financial statements.
MOBILESMITH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
For the Three Months' Period Ended March 31, 2020
(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 selling and marketing efforts in that industry. During 2018 we further refined our Healthcare offering and redefined our product - a suite of e-health mobile solutions, that consist of a catalog of ready to deploy mobile app solutions (App Blueprints) and support services. In 2019, we consolidated our current solutions under a single initial offering branded Peri™. Peri™ is a cloud-based surgical and clinical procedure application architected to accomplish the following:
- Run on a platform integrated with future MobileSmith applications;
- Incorporate MobileSmith developed or licensed healthcare service applications;
- Securely link those services to Electronic Medical Records ("EMR") platforms; and
- Produce a mobile app based set of pre and postoperative instructions (which we refer to as Clinical Pathways), that establish a direct two-way clinical procedure management process between a patient and a healthcare provider and by doing so improves patient engagement for the benefit of the patient and improves clinical outcomes measured in procedure cancellations and post procedure readmissions for the benefit of a provider.
The 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 March 31, 2020. 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, 2019 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 three months ended March 31, 2020 and 2019, the Company incurred net losses as well as negative cash flows from operations and has negative working capital of $51,041,461 as of March 31, 2020. 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.
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.
As of March 31, 2020, the Company had $43,010,000 of combined face value outstanding under the 2007 and 2014 NPAs. The Company is entitled to request additional notes in an amount not exceeding $15,945,000, subject to the terms and conditions specified in these facilities. The Notes under 2007 and 2014 NPA and subordinated promissory notes to related parties mature in November of 2020 and the Comerica LSA matures in June of 2020. The Company management is actively negotiating an extension of maturity on the 2007 and 2014 NPAs and subordinated promissory notes with related parties by at least two years and refinancing of Comerica LSA by extending its maturity. However, there can be no assurance that the Company will in fact be able to raise additional capital through these facilities or even from other sources on commercially accepted terms, if at all. 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.
2. DEBT
The table below summarizes the Company's debt outstanding at March 31, 2020 and December 31, 2019:
| Debt Description | March 31, | December 31, | | |
| | 2020 | 2019 | Maturity | Rate |
| | | | | |
| Comerica Bank Loan and Security Agreement | $5,000,000 | $5,000,000 | June 2020 | 4.68% |
| Convertible notes - related parties, net of discount of $1,594,004 and $1,193,799, respectively | 39,830,227 | 39,230,432 | November 2020 | 8.00% |
| Convertible notes, net of discount of $788,656 and $45,029, respectively | 797,113 | 610,740 | November 2020 | 8.00% |
| Subordinated Promissory Note, Related Party | 4,563,250 | 3,518,250 | November 2020 | 8.00% |
| Total debt | $50,190,590 | $48,359,422 | | |
| | | | | |
| Less: Current Portion | 845,000 | - | | |
| Long Term Debt | $49,345,590 | $48,359,422 | | |
Convertible Notes
During the three months ended March 31, 2020, the Company issued through a private placement $2,000,000 in principal amount of additional unsecured Convertible Subordinated Notes (the “2014 NPA Notes”) under its existing unsecured Convertible Subordinated Note Purchase Agreement dated December 10, 2014 (the “2014 NPA”), of which $1,000,000 2014 NPA Note was issued to Union Bancaire Privée (“UBP”) and $1,000,000 2014 NPA Note was issued to an unrelated institutional investor. 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 March 31, 2020 by type:
| Convertible Notes Type: | |
| | |
| 2007 NPA notes, net of discount | $20,348,036 |
| 2014 NPA notes, net of discount | 20,279,304 |
| Total convertible notes, net of discount | $40,627,340 |
| | |
Subordinated Promissory Notes, Related Party
During the three months ended March 31, 2020, the Company issued several subordinated notes to entities whose beneficial owner is a related party totaling $1,045,000. These notes have an interest rate of 8% and mature on November 14, 2020.
Comerica Bank Loan
The Company has an outstanding Loan and Security Agreement with Comerica Bank ("Comerica") dated June 9, 2014 (the "LSA") in the amount of $5,000,000, with original maturity of June 9, 2016. On June 8, 2018, the Company and Comerica Bank entered into Second Amendment to the LSA, which extended the maturity of the LSA to June 9, 2020. The LSA is secured by an irrevocable letter of credit ("SBLC") issued by UBS AG (Geneva, Switzerland) ("UBS AG") with a renewed term expiring on May 31, 2021, 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.
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 three months ended March 31, 2020:
| | Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value |
| | | | | |
| Outstanding, December 31, 2019 | 12,345,796 | $1.73 | 8.3 | $13,823,410 |
| Cancelled | (2,117,824) | 1.75 | | |
| Issued | 65,000 | 2.51 | | |
| Outstanding, March 31, 2020 | 10,292,972 | 1.73 | 8.0 | $13,053,248 |
| Vested and exercisable, March 31, 2020 | 4,505,975 | $1.70 | 6.7 | $5,855,367 |
Aggregate intrinsic value represents the difference between the closing price of the Company’s common stock at March 31, 2020 and the exercise price of outstanding, in-the-money stock options. The closing price of the common stock at March 31, 2020, as reported on the OTCQB, was $3.00 per share.
At March 31, 2020, an amount of $8,712,864 unvested expense has yet to be recorded related to outstanding stock options.
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:
| | 3 Months Ended March 31, 2020 | 3 Months Ended March 31, 2019 |
| | Billings | GAAP Revenue | Billings | GAAP Revenue |
| Top 5 customers (measured by amounts billed) | $338,173 | $171,535 | $355,500 | $246,529 |
| All other Customers | $195,211 | $453,037 | $131,311 | $494,190 |
| | $533,384 | $624,572 | $486,811 | $740,719 |
For the three months ended March 31, 2020, two customers accounted for 46% of the accounts receivable balance and one customer accounted for 17% of total revenue.
For the three months ended March 31, 2019, three customers accounted for 73% of the accounts receivable balance and two customers accounted for 27% of total revenue.
Below is a summary of new customer acquisition impact on billings and revenue:
| | 3 Months Ended March 31, 2020 | 3 Months Ended March 31, 2019 |
| | Billings | GAAP Revenue | Billings | GAAP Revenue |
| Customers in existence as of the beginning of the period (including upgrades) | $533,384 | $624,572 | $486,811 | $740,719 |
| Customers acquired during the period | $- | $- | $- | $- |
| | $533,384 | $624,572 | $486,811 | $740,719 |
6. SUBSEQUENT EVENTS
Subsequent to March 31, 2020, the Company borrowed $205,000 through issuance of two subordinated promissory notes to a related party. The notes carry interest rate of 8% per year and mature on November 14, 2020.
Subsequent to March 31, 2020, the Company borrowed $500,000 from an unrelated party through issuance of 2014 NPA Notes under the same terms of those described in Note 2.
Conditions caused by the COVID-19 pandemic significantly impacted our main customer base - healthcare providers in the United States. Healthcare providers in many states are overwhelmed with COVID-19 patients. Many hospitals halted elective and critical surgical procedures, which are the main target of our primary Peri™ offering. Many hospitals furloughed their non-essential staff or re-assigned their staff to intensive care units. We have experienced difficulties in our selling process in engaging decision makers within hospital organizations. Travel limitations have also restricted access to our current and potential customers.
Elective surgeries are a significant component of hospital revenues. Without such revenue healthcare systems may incur significant losses from operations and reduced cashflows. We may experience increase in non-renewals for subscription to our software products or adverse changes to the payment terms under existing contracts.
If the COVID-19 pandemic has an extended substantial impact on our employees and customers, our results of operations, our liquidity and access to financing may be negatively impacted.
On April 29, 2020 the Company borrowed $542,100 through issuance of a promissory note in accordance with the Paycheck Protection Program ("PPP") established by Section 1102 of the CARES Act and implemented and administered by the Small Business Administration (the "PPP loan"). The PPP loan matures on April 29, 2022. The PPP loan carries interest at 1% per year and is payable in 18 monthly installments of $30,513 with first installment due on November 29, 2020. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. The PPP loan contains events of default and other provisions customary for a loan of this type. Pursuant to the PPP rules, all or portion of this loan may be forgiven. The actual amount of the loan forgiveness will depend, in part, on the total amount of payroll costs, certain allowed rent and utility costs. Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs. The Company intends to use the proceeds from the PPP loan for qualifying expenses and to apply for forgiveness of the PPP loan in accordance with the terms of the CARES Act. However, the Company cannot completely assure at this time that such forgiveness of the PPP loan will occur.
On April 30, 2020, we amended both 2007 NPA and 2014 NPA. As a result of the amendments the maturities of 2007 NPA Notes and 2014 NPA Notes were extended to November 14, 2022. In addition, the amendment to 2014 NPA allows the Company to issue 2014 NPA Notes as a consideration of cancellation of other indebtedness.
On May 6,2020 the Company and holders of $4,063,250 in subordinated promissory notes exchanged the notes for the 2014 NPA Notes issued under 2014 NPA. Avy Lugassy, one of Company's principal shareholders is a beneficial owner of the entities holding newly issued 2014 NPA Notes.
The newly issued 2014 NPA Notes have the following terms:
●
a maturity date of the earlier of (i) November 14, 2022, (ii) a Change of Control (as defined in the 2014 NPA), or (iii) when, upon or after the occurrence of an Event of Default (as defined in the 2014 NPA), other than for a bankruptcy related, such amounts are declared due and payable by at least two-thirds of the aggregate outstanding principal amount of the 2014 NPA Notes;
●
an interest rate of 8% per year, with accrued interest payable in cash in semi-annual installments with the final installment payable on the maturity date of the note;
●
a conversion price per share that is fixed at $1.43 per share;
●
optional conversion upon noteholder request; provided that, if at the time of any such request, the Company does not have a sufficient number of shares of common stock authorized to allow for such conversion, the noteholder may only convert that portion of their Notes outstanding for which the Company has a sufficient number of authorized shares of common stock. To the extent multiple noteholders under the 2014 NPA, the 2007 NPA, or both, request conversion of its notes on the same date, any limitations on conversion shall be applied on a pro rata basis. In such case, the noteholder may request that the Company call a special meeting of its stockholders specifically for the purpose of increasing the number of shares of common stock authorized to cover conversions of the remaining portion of the notes outstanding as well as the maximum issuances contemplated pursuant to the Company’s 2004 Equity Compensation Plan, within 90 calendar days after the Company’s receipt of such request; and
●
may not be prepaid without the consent of holders of at least two-thirds of the aggregate outstanding principal amount of 2014 NPA Notes.
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, 2019 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. 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.
Additional Risk Factors
Overview
MobileSmith provides procedure management assistance and operational improvement patient/member-facing mobile application services to the healthcare industry.
During 2018 we refined our healthcare offering and redefined our product - a suite of e-health mobile solutions, that consists of a catalog of ready to deploy mobile app solutions (App Blueprints) and support services.
In 2019 we consolidated our current solutions under a single integrated initial offering branded Peri™. Peri™ is a cloud-based surgical and clinical procedure application architected to accomplish the following :
- Run on a platform integrated with future MobileSmith applications;
- Incorporate MobileSmith developed or licenses healthcare service applications;
- Securely link those services to Electronic Medical Records (EMR) platforms;
- Produce a mobile app based set of pre and postoperative instructions (which we refer to as Clinical Pathways), that establishes a direct two-way clinical procedure management process between a patient and a healthcare provider and by doing so improves patient engagement for the benefit of the patient and improves clinical outcomes measured in procedure cancellations and post procedure readmissions for the benefit of a provider.
From time to time we have provided custom software development services. Such services are not core to our business model and will likely decrease in significance in the future.
As noted below in Item 1A “Risk Factors” of Part II “Other Information” below, conditions caused by the COVID-19 pandemic significantly impacted our main customer base - healthcare providers in the United States. Healthcare providers in many states are overwhelmed with COVID-19 patients. Many hospitals halted elective and critical surgical procedures, which are the main target of our primary Peri™ offering. Many hospitals furloughed their non-essential staff or re-assigned their staff to intensive care units. We have experienced difficulties in our selling process in engaging decision makers within hospital organizations. Travel limitations have also restricted access to our current and potential customers. Elective surgeries are a significant component of hospital revenues. Without such revenue healthcare systems may incur significant losses from operations and reduced cashflows. We may experience increase in non-renewals for subscription to our software products or adverse changes to the payment terms under existing contracts. If the COVID-19 pandemic has an extended substantial impact on our employees and customers, our results of operations, our liquidity and access to financing may be negatively impacted.
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.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2020 (the “2020 Period”) to the Three Months Ended March 31, 2019 (the “2019 Period”).
| | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Increase (Decrease)
$ |
Increase (Decrease)
%
|
| Revenue | $624,572 | $740,719 | $(116,147) | -16% |
| Cost of Revenue | 258,563 | 231,921 | 26,642 | 11% |
| Gross Profit | 366,009 | 508,798 | (142,789) | -28% |
| | | | | |
| Selling and Marketing | 367,314 | 359,781 | 7,533 | 2% |
| Research and Development | 627,795 | 499,872 | 127,923 | 26% |
| General and Administrative | 824,801 | 713,661 | 111,140 | 16% |
| | | | | |
| Interest Expense | $1,851,103 | $1,112,784 | $738,319 | 66% |
Revenue decreased by $116,147 or 16%. The decrease in revenue is attributable to loss of customers offset by new customer revenue and existing client upgrades.
Cost of Revenue increased by $26,642 or 11%. The increase is predominantly due to work on a services contract with a U.S. government agency.
Gross Profit decreased by $142,789 or 28%. The decrease is primarily attributable to decrease in revenue.
Selling and Marketing expense remained flat with an increase of $7,533 or 2%.
Research and Development expense increased by $127,923 or 26%. An increase of $89,000 is due to increase in stock based compensation. An increase of $121,000 is attributable to increase in payroll expense as we invested heavily in the development of Peri. Such increases are offset by decreases in outsourced development costs and recruiting fees.
General and Administrative expense increased by $111,140 or 16%. An increase of $130,000 is due to increase in stock based compensation. Executive compensation increased by $15,400, offset by decrease in travel expense and decreases in other minor expense categories.
Interest Expense increased by $738,319 or 66%. Approximately $151,000 of this increase is due to increase in cash interest portion due to increase in face value of debt. The remaining increase is due to increase in non-cash interest component resulting from amortization of debt discount.
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, impact of COVID-19 pandemic (as described in "Risk Factors") 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.
●
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 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, 2021.
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, 2019 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.
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 March 31, 2020. 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 March 31, 2020, our disclosure controls and procedures were effective at a reasonable assurance.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2020, 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.
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 1A. RISK FACTORS
The effects of the COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.
Conditions caused by the COVID-19 pandemic significantly impacted our main customer base - healthcare providers in the United States. Healthcare providers in many states are overwhelmed with COVID-19 patients. Many hospitals halted elective and critical surgical procedures, which are the main target of our primary Peri™ offering. Many hospitals furloughed their non-essential staff or re-assigned their staff to intensive care units. We have experienced difficulties in our selling process in engaging decision makers within hospital organizations. Travel limitations have also restricted access to our current and potential customers.
Elective surgeries are a significant component of hospital revenues. Without such revenue healthcare systems may incur significant losses from operations and reduced cashflows. We may experience increase in non-renewals for subscription to our software products or adverse changes to the payment terms under existing contracts.
If the COVID-19 pandemic has an extended substantial impact on our employees and customers, our results of operations, our liquidity and access to financing may be negatively impacted.
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 March 31, 2020 without registration under the Securities Act:
Between January 1, 2020 and March 31, 2020, we issued to two accredited investors $2,000,000 in principal amount of our convertible notes under the 2014 Note Purchase Agreement. The notes are convertible into shares of our Common Stock at a per share conversion rate of $1.43. All notes issued under this facility are scheduled to mature on November 14, 2020.
In addition, between January 1, 2020 and March 31, 2020 we issued several subordinated notes to a related party in the amount of $1,045,000. These notes have an interest rate of 8% and mature between November 14, 2020 and November 14, 2022.
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.
ITEM 6. EXHIBITS
| Exhibit No. | Description |
| |
10.1
| Executive Employment Agreement between MobileSmith, Inc. and Jerry Lepore dated March 18, 2020 (incorporated by reference to Exhibit 10.1 to MobileSmith, Inc.’s Current Report on Form 8-K filed with the SEC on March 23, 2020) |
| |
10.2
| Third Amendment to Convertible Subordinated Note Purchase Agreement and Second Amendment to Convertible Subordinated Promissory Notes, dated April, 2020, by and among MobileSmith, Inc., UBP and Grasford Investments Limited (incorporated by reference to Exhibit 10.2 to MobileSmith Inc.'s Current Report on Form-8 filed with the SEC on May 6, 2020) |
| |
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 March 31, 2020, 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). |
| |
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. | |
| | | | |
May 12, 2020
| By:
| /s/ Jerry Lepore
| |
| | | Jerry Lepore
| |
| | | Chief Executive Officer (Principal Executive Officer) | |
| | | | |
| May 12, 2020 | By: | /s/ Gleb Mikhailov | |
| | | Gleb Mikhailov | |
| | | Chief Financial Officer (Principal Financial and Accounting Officer)
|
|
