UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

☑

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

 

For the fiscal year ended December 31, 2021

 

or

 

☐

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

 

For the transition period from __________ to __________

 

Commission file number 001-32634

 

 MOBILESMITH, INC.

 (Exact name of registrant as specified in its charter)

 

Delaware

 

95-4439334

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

5400 Trinity Road, Suite 208

Raleigh, North Carolina

 

27607

(Address of principal executive offices)

 

(Zip Code)

 

(855) 516-2413

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Name of each exchange on which registered

None

 

None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.001 par value

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated Filer

☐

Smaller reporting company

☒

 

 

Emerging growth company

☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

 

The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2021 was approximately $30 million (based on the closing sale price of $3.50 per share on such date).

 

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of March 25, 2022 was 28,389,493.

 

 

 

 

TABLE OF CONTENTS

 

PART I

 

 

 

 

 

 

Item 1.

Business

 

3

 

 

 

 

 

Item 1A.

Risk Factors

 

6

 

 

 

 

 

Item 1B.

Unresolved Staff Comments

 

10

 

 

 

 

 

Item 2.

Properties

 

10

 

 

 

 

 

Item 3.

Legal Proceedings

 

10

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

10

 

PART II

 

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

11

 

 

 

 

 

Item 6.

Selected Financial Data

 

11

 

 

 

 

 

Item 7.

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

 

12

 

 

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

18

 

 

 

 

 

Item 8.

Financial Statements and Supplementary Data

 

F-1

 

 

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

19

 

 

 

 

 

Item 9A.

Controls and Procedures

 

19

 

 

 

 

 

Item 9B.

Other Information

 

19

 

PART III

 

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

20

 

 

 

 

 

Item 11.

Executive Compensation

 

22

 

 

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

25

 

 

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

27

 

 

 

 

 

Item 14.

Principal Accounting Fees and Services

 

28

 

PART IV

 

 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

 

29

 

 

 

 

 

Item 16.

Summary

 

29

 

 

 

 

 

SIGNATURES 

 

30

 

 

 

 

 

EXHIBIT INDEX

 

 31

 

 

 
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Table of Contents

 

PART I

 

Special Note Regarding Forward-Looking Statements

 

Information set forth in this Annual Report on Form 10-K contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and other laws. Forward-looking statements consist of, among other things, trend analyses, statements regarding future events, future financial performance, our plan to build our business and the related expenses, our anticipated growth, trends in our business, our ability to continue as a going concern, and the sufficiency of our capital resources including funds that we may be able to raise under our convertible note facility, our ability to raise financing from other sources and/or ability to defer expenditures, the impact of the liens on our assets securing amounts owed to third parties, expectation regarding competitors as more and larger companies attempt to market products/services competitive to our products, market acceptance of our new product offerings, including updates to our Platform, rate of new user subscriptions, market penetration of our products and expectations regarding our revenues and expenses, all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “project,” “intend,” “plan,” “estimate,” variations of such words, and similar expressions also are intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified under Part I, Item 1A, “Risk Factors,” and elsewhere in this report for factors that may cause actual results to be different than those expressed in these forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

 

ITEM 1. BUSINESS

 

General

 

MobileSmith, Inc. (referred to herein as, “MobileSmith,” the “Company,” “us,” “we,” or “our”) was incorporated in Delaware in August 1993 and became a public company through a self-registration in February 2005.

 

Principal Products and Services

 

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

 

·

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

·

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

 

Since 2013 the Company focused exclusively on the development of do-it-yourself customer facing platform that enabled organizations to rapidly create, deploy, and manage custom, native smartphone and tablet apps deliverable across iOS and Android mobile platforms without writing a single line of code. 

 

During 2017 the Company concluded that it had its highest rate of success with clients within the Healthcare industry and concentrated its development and sales and marketing efforts in that industry. During 2018 we further refined our Healthcare offering and redefined our product - a suite of e-health mobile solutions that consist of a catalog of ready to deploy mobile app solutions (App Blueprints) and support services. In 2019 and 2020 we consolidated our current solutions under a single offering branded Peri™. Peri™ is a cloud-based collection of applications that run of our architected healthcare technology ecosystem. Peri™ is designed to bridge the gap between healthcare industry system tools and healthcare consumer while using our proprietary platform behind apps placed on consumer’s mobile device.

 

During 2021 we advanced our flagship PeriOp offering to be market ready. PeriOp is an EMR integrated mobile app based set of pre and postoperative instructions (which we refer to as Clinical Pathways), that establishes a direct two-way clinical procedure management process between a patient and a healthcare provider and, by doing so, improves patient engagement and procedural adherence and also removes manual paper based pre and post procedural processes. PeriOp digitizes and streamlines for both patients and providers “the last mile of healthcare delivery” between scheduled procedure and day of surgery with emphasis on patient’s readiness. PeriOp digitizes and streamlines “the first mile” of post-surgery recovery journey with a focus on maintaining positive surgical outcomes and avoidance of readmissions.

 

 
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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).

 

In 2021 we further refined our focus within the healthcare providers. We concentrated our efforts on hospital systems with large employed physician groups who use either Cerner or Epic Systems as their primary EMRs (electronic medical records). Additionally we are investigating ambulatory surgery centers (ASC) market for feasibility.

 

Both markets are targeted with a diversified sales workforce that includes direct sales and resellers, such as channel partners. 

 

Principal Customers

 

Our principal customers are hospitals in the United States. We don’t have significant concentrations of relationship with any single customer.

 

Research and Development

 

During 2017 and 2018 we focused our technological and design efforts on our Blueprint features, that dominated our offering to healthcare providers in 2019 (Blueprint is a fully customizable pre-built app targeting specific healthcare related business function or health condition).

 

During 2019 we invested heavily in development of our Peri™ solution, which was introduced to the market during that year and in 2020 we continued to refine the product and add features. During 2021 we advanced our flagship PeriOp offering to be market ready. We continuously invest in new features and security of our products.

 

 
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Competition

 

We have been successful in penetrating the healthcare provider technology market and developed extensive expertise in the industry. With many of our customers we enjoy five-plus year relationships. However, the healthcare provider technology industry is highly competitive. Our competitors range from successful established companies to emerging start-ups. Many of these companies have significantly greater financial, personnel, and other resources than we do. Moreover, more companies enter the industry and market every year. As a result of this, we expect the competition we face to grow stronger in the next five years. The market for our and similar products is highly fragmented. No leader has yet emerged in the area of pre and post-surgery process optimization through application of mobile technology.

   

Intellectual Property

 

During 2014, we stopped pursuing the majority of our patent applications as we determined that the cost of pursuing them is greater than the potential protection provided by them. Since then we have been granted one patent associated with our technology.

 

We also have several trademarks registered and pending with the U.S. Patent and Trademark Office. These trademarks cover certain brand names of our offerings.

 

Employees

 

As of December 31, 2021, we had 24 full time employees and no part-time employees. None of our employees are subject to collective bargaining agreements.

 

Available Information

 

Our corporate information is accessible through our main web portal at www.MobileSmith.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. Although we endeavor to keep our website current and accurate, there can be no guarantees that the information on our website is up to date or correct. We make available, free of charge, access to all reports filed with the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and amendments to these reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The Company’s reports filed with, or furnished to, the SEC are also available on the SEC’s website www.sec.gov. 

 

 
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ITEM 1A. RISK FACTORS

 

You should carefully consider the risks described below and elsewhere in this Annual Report on Form 10-K before making an investment decision. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. Our common stock is considered speculative and the trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. The following risk factors are not the only risk factors facing the Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.

 

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 were overwhelmed with COVID-19 patients during 2020 and 2021. 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 cash flows. We may experience an increase in non-renewals for subscription to our software products or adverse changes to the payment terms under existing contracts if hospitals do not have sufficient resources to spend on our offerings.

 

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.

 

The effects of the 2022 war in Ukraine on European nations is currently unknown.  

 

Our main investors are physically located in Switzerland. The economic impact of the current war between Russia and Ukraine on various European nations, banking systems, interconnected investments and relationships is still unknown. The effects of the war may have negative impact on our current investors and our funding, which as noted below, is the primary way we currently finance our business operations.

 

A default by us in respect to the amounts outstanding on the notes outstanding under the commercial bank loan when due in 2022 would enable the bank to foreclose on our assets.

 

The Company has an outstanding Loan and Security Agreement (the “LSA”) with Comerica Bank in the amount of $5,000,000, which matures in June of 2022 and is secured by an extended irrevocable letter of credit issued by UBS AG (Geneva, Switzerland) (“UBS AG”) with a renewed term expiring on May 31, 2022, which term is renewable for one year periods, unless notice of non-renewal is given by UBS AG at least 45 days prior to the then current expiration date. The provision of any such notice by UBS will constitute an event of default under the LSA, at which time all amounts outstanding under the LSA will become due and payable. As of the filing date of this Form 10-K, no such notice has been provided to us nor have we been provided with any indication that we are to receive notice of non-renewal of the letter of credit. We also have no commitments of funding should UBS elect to not renew the letter of credit.

 

Any foreclosure efforts under the LSA could force us to substantially curtail or cease our operations.

 

Historically, we have operated at a loss, and we continue to do so.

 

We have had recurring losses from operations and continue to have negative cash flows. If we do not become cash flow positive through additional financing or growth, we may have to cease operations and liquidate our business.

 

We are dependent on existing and other investors for the financing of our operations and their inability or unwillingness to fund our operations can have a material adverse effect on our operations.

 

Since inception, we have not yet achieved positive cash flows from operations, and our main source of operating funds since 2007 was the sale of notes under two convertible note facilities that we implemented and through issuance of subordinated promissory notes. See Item 7, “Management’s Discussion and Analysis “Liquidity and Capital Resources”. In December of 2020 and January of 2021 we exchanged all non-bank debt into Series A Convertible Preferred Stock (the “Series A Preferred Stock”) with the same investors. We expect to finance our operations through issuance of Series A Preferred Stock going forward. If financing through issuance of Series A Preferred Stock becomes unavailable, we will need to seek other sources of funding. The inability to raise additional funds when needed on terms acceptable to us may have a material adverse effect on our operations.

 

The fact that there is substantial doubt about our ability to continue as a going concern may negatively affect our ability to raise additional funds, among other things. If we fail to raise sufficient capital, we will not be able to implement our business plan, we may have to liquidate our business, and you may lose your investment.

 

Our audited financial statements underscore doubt about our ability to continue as a going concern. Such disclosure could materially limit our ability to raise additional funds by issuing new equity or debt securities or otherwise. If we fail to raise sufficient capital, we will not be able to implement our business plan and, we may have to liquidate our business, which may result in the loss of your entire investment. You should consider disclosures related to the going concern that we have made in our financial statements when determining if an investment in us is suitable.

 

 
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The delivery of software via the SaaS business model is more vulnerable to cyber-crime than the sale of pre-packaged software.

 

Our service involves the storage and transmission of customers’ proprietary information. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result, unauthorized access is obtained to our customers’ data or our data, our reputation could be damaged, our business may suffer, and we could incur significant liability. In addition, third parties may attempt to fraudulently induce employees or customers to disclose sensitive information such as user names, passwords, or other information in order to gain access to our customers’ data or our data, which could result in significant legal and financial exposure and a loss of confidence in the security of our service that would harm our future business prospects. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers.

 

Our business is currently dependent on the success of a single product, our Peri® offering.

 

Our business model is dependent on the commercial success of Peri™. Our future financial performance and revenue growth will depend on acceptance by the market of our product. If the market does not accept Peri™ as a viable product to address the market’s needs, it will have a materially adverse impact on our business.

 

Government regulation may subject us to liability or require us to change the way we do business.

 

The laws and regulations that govern our business change rapidly. Evolving areas of law that are relevant to our business include privacy and security laws, proposed encryption laws, content regulation, information security accountability regulation, sales and use tax laws and regulations and attempts to regulate activities on the Internet. In addition to being directly subject to certain requirements of the HIPAA privacy and security regulations, we are required through contracts with our customers known as “business associate agreements” to protect the privacy and security of certain personal and health related information. We are required to comply with revised requirements under the HIPAA privacy and security regulations. The rapidly evolving and uncertain regulatory environment could require us to change how we do business or incur additional costs. Further, we cannot predict how changes to these laws and regulations might affect our business. Failure to comply with applicable laws and regulations could subject us to civil and criminal penalties, subject us to contractual penalties, including termination of our customer agreements, damage our reputation and have a detrimental impact on our business.

 

We may be found to infringe on intellectual property rights of others.

 

Third parties, including customers, may in the future assert claims or initiate litigation related to exclusive patent, copyright, trademark, and other intellectual property rights to technologies and related standards that are relevant to us. Because of the existence of a large number of patents in the mobile apps field, the secrecy of some pending patents, and the rapid rate of issuance of new patents, it is not economically practical or even possible to determine in advance whether a product or any of its components infringes or will infringe on the patent rights of others. The asserted claims and/or initiated litigation can include claims against us or our manufacturers, suppliers, or customers, alleging infringement of their proprietary rights with respect to our existing or future products or components of those products. Regardless of the merit of these claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to develop a non-infringing technology or enter into license agreements. Where claims are made by customers, resistance even to unmeritorious claims could damage customer relationships. There can be no assurance that licenses will be available on acceptable terms and conditions, if at all, or that our indemnification by our suppliers will be adequate to cover our costs if a claim were brought directly against us or our customers. Furthermore, because of the potential for high court awards that are not necessarily predictable, it is not unusual to find even arguably unmeritorious claims settled for significant amounts. If any infringement or other intellectual property claim made against us by any third party is successful, if we are required to indemnify a customer with respect to a claim against the customer, or if we fail to develop non-infringing technology or license the proprietary rights on commercially reasonable terms and conditions, our business, operating results, and financial condition could be materially and adversely affected.

 

 
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Officers, directors, principal stockholders and other related parties control us. This might lead them to make decisions that do not align with interests of minority stockholders.

 

Our principal stockholders beneficially own or control a large percentage of our outstanding common stock. Certain of these principal stockholders hold Series A Preferred Stock, which may be exercised or converted into additional shares of our common stock under certain conditions. The holders of Series A Preferred Stock have designated a representative to act as their agent (the "Agent"). We have agreed that the representative shall be granted access to our facilities and personnel during normal business hours, shall have the right to attend all meetings of the Board of Directors and its committees, and shall receive all materials provided to the Board of Directors or any committee. In addition, so long as shares of the Series A Preferred Stock are outstanding, we have agreed that we will not take certain material corporate actions without approval of the Agent.

   

Our principal stockholders, acting together, would have the ability to control substantially all matters submitted to our stockholders for approval (including the election and removal of directors and any merger, consolidation, or sale of all or substantially all of our assets) and to control our management and affairs. Accordingly, this concentration of ownership may have the effect of delaying, deferring, or preventing a change in control of us; impeding a merger, consolidation, takeover, or other business combination involving us; or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could materially and adversely affect the market price of our common stock.

 

Mr. Avy Lugassy controls Grasford Investments Ltd. (“Grasford”) and other entities of which he is either a beneficial owner or exercises significant influence or control. As of the date of this report , Grasford holds 10,054,045 , or 35%, of the Company’s issued and outstanding common stock. In addition, Avy Lugassy holds or controls approximately 514,722 shares of Series A Preferred Stock, which are convertible at the election of the holder into additional 15,441,660 shares of common stock. Being a significant owner of our company, Mr. Lugassy may exercise significant influence on our operations through his ability to vote his shares.

 

In addition, as of the date of this report, Union Bancaire Privée (“UBP”) holds 7,167,832, or 25% of the Company’s issued and outstanding common stock and approximately 875,222 in Series A Preferred Stock convertible into additional 26,256,660 shares of common stock . Because UBP may convert its Series A Preferred Stock, if UBP so converts, it would acquire a significant percentage of our shares of common stock and, like Grasford, would be able to exercise significant influence on the Company’s operations as a result.

 

Future utilization of net operating loss carryforwards may be limited.

 

In accordance with Section 382 of the Internal Revenue Code of 1986, as amended, a change in equity ownership of greater than 50% of the Company within a three-year period can result in an annual limitation on the Company’s ability to utilize its net operating loss carryforwards that were created during tax periods prior to the change in ownership. A change in ownership may result from the issuance of shares of the Company’s common stock pursuant to conversion of the Series A Preferred or any other event that results in the issuance of common or preferred shares of the Company, among other events.

 

Any future issuance of our shares of common stock could have a dilutive effect on the value of our existing shares of common stock. 

 

The conversion price on our outstanding Series A Preferred stock is 30 shares of common for one share of preferred, which equates to purchase price of one share of common stock for every $1.43 of investment into Series A Preferred Stock and on March 15, 2022 the closing price of our stock was $3.00 per share. As of the date of this report, we have 1,497,869 of Series A Preferred outstanding convertible into 44,936,070 shares of common stock, which would more than double our current number of shares of common stock outstanding. As we continue to issue more of the Series A Preferred Stock, the number of conversion shares will increase.

   

 
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The ability of our Board of Directors to issue additional stock may prevent or make more difficult certain transactions, including a sale or merger of the Company.

 

Our Board of Directors is authorized to issue up to 5,000,000 shares of preferred stock with powers, rights and preferences designated by it, of which it designated 1,750,000 for Series A Preferred Stock. Shares of voting or convertible preferred stock could be issued, or rights to purchase such shares could be issued, to create voting impediments or to frustrate persons seeking to affect a takeover or otherwise gain control of the Company. The ability of the Board of Directors to issue such additional shares of preferred stock, with rights and preferences it deems advisable, could discourage an attempt by a party to acquire control of the Company by tender offer or other means. Such issuances could therefore deprive stockholders of benefits that could result from such an attempt, such as the realization of a premium over the market price for their shares in a tender offer or the temporary increase in market price that such an attempt could cause. Moreover, the issuance of such additional shares of preferred stock to persons friendly to the Board of Directors could make it more difficult to remove incumbent officers and directors from office even if such change were to be favorable to stockholders generally.

 

There currently is very limited public market for our common stock and there can be no assurance that a more active public market will ever develop. Failure to develop or maintain a trading market could negatively affect the value of our common stock and make it difficult or impossible for you to sell your shares.

 

There is currently a very limited public market for shares of our common stock and a more active one may never develop. Our common stock is quoted on the OTC Markets, QB Tier. The OTC Markets is a thinly traded market and lacks the liquidity of certain other public markets with which some investors may have more experience. Our shares of common stock are traded infrequently and even an insignificant investment in our shares of common stock may be illiquid.

 

We may not ever be able to satisfy the listing requirements for our common stock to be listed on a national securities exchange, which is often a more widely traded and liquid market. Some, but not all, of the factors which may delay or prevent the listing of our common stock on a more widely-traded and liquid market include the following: our stockholders’ equity may be insufficient; the market value of our outstanding securities may be too low; our net income from operations may be too low; our common stock may not be sufficiently widely held; we may not be able to secure market makers for our common stock; and we may fail to meet the rules and requirements mandated by the several exchanges and markets to have our common stock listed. Should we fail to satisfy the initial listing standards of the national exchanges, or our common stock is otherwise rejected for listing, and remains listed on the OTC Markets or is suspended from the OTC Markets, the trading price of our common stock could suffer and the trading market for our common stock may be less liquid and our common stock price may be subject to increased volatility, making it difficult or impossible to sell shares of our common stock.

 

Penny Stock Regulations are applicable to investment in shares of our common stock.

 

Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges, provided that current prices and volume information with respect to transactions in such securities are provided by the exchange or system). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to penny stock rules. Many brokers will not deal with penny stocks, restricting the market for our shares of common stock.

 

We do not intend to pay any cash dividends on our shares of common stock; thus our stockholders will not be able to receive a return on their shares unless they sell them.

 

We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them.

 

 
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ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

We do not own any real property. The Company’s corporate office in Raleigh North Carolina consists of approximately 7,000 square feet. The lease term for the premises commenced in July 2013 with an initial term that expired in March 2019. The Company has extended the lease through April 2024. As a result of the amendment the Company has received an incentive from the landlord valued at approximately $100,000. 

 

Accounting principles generally accepted in the United States of America require that the total rent expense to be incurred over the term of the lease be recognized on a straight-line basis. The average annual rent expense over the term of the lease is approximately $190,000.

 

ITEM 3. LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating result.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 
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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is currently quoted on the OTC Market (OTC.QB) under the symbol “MOST.” Although trading in our common stock has occurred on a relatively consistent basis, the volume of shares traded has been sporadic and very low. There can be no assurance that an established trading market will develop, that the current market will be maintained or that a liquid market for our Common Stock will be available in the future. Investors should not rely on historical stock price performance as an indication of future price performance.

 

The following table shows the quarterly high and low bid prices for our Common Stock over the last two completed fiscal years as quoted on the OTC Market (OTC.QB). The prices represent quotations by dealers without adjustments for retail mark-ups, mark-downs or commission and may not represent actual transactions.

 

Year Ended December 31, 2020:

 

High

 

 

Low

 

First Quarter

 

$5.50

 

 

$2.40

 

Second Quarter

 

$3.10

 

 

$1.30

 

Third Quarter

 

$4.15

 

 

$1.36

 

Fourth Quarter

 

$6.23

 

 

$1.51

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2021:

 

 

 

 

 

 

 

 

First Quarter

 

$5.85

 

 

$2.01

 

Second Quarter

 

$4.95

 

 

$1.82

 

Third Quarter

 

$5.20

 

 

$1.01

 

Fourth Quarter

 

$3.98

 

 

$1.16

 

 

As of March 25, 2022 there were 158 holders of record of shares of our common stock.

 

Dividend Policy

 

We have never declared or paid any cash dividends on shares of our common stock and do not intend to declare or pay dividends for the foreseeable future.

 

The holders of Series A Preferred Stock are entitled to dividend that yields 8% on the stated value invested. The dividend is payable in cash or in additional shares of Series A Preferred Stock, at the option of the Company. 

 

Issuer Repurchases of Equity Securities

 

We do not have a stock repurchase program for our common stock and have not otherwise purchased any shares of our common stock.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable.

 

 
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This discussion summarizes significant factors affecting the operating results, financial condition and liquidity of MobileSmith for the two-year period ended December 31, 2021. This discussion should be read in conjunction with the financial statements and notes thereto included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K and the more detailed discussion and analysis of our financial condition and results of operations in conjunction with the risks described in Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K.

 

Overview of Financing Activities and Sources of Cash

 

From November 14, 2007 and through November of 2020, we have financed our working capital deficiency primarily through the issuance of convertible promissory notes under two convertible note facilities and subordinated promissory notes to related parties. (Refer to “Debt” footnote for more information on the notes).

 

 
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On December 23, 2020, the Company and all but one debt investor entered into a debt exchange transaction where the Company exchanged its convertible debt and promissory notes plus accrued but unpaid interest into Series A Preferred Stock. 

 

On such date, a total of 1,158,141 shares of Series A Preferred Stock were issued in exchange for $49,684,127 of face value of debt that also included accrued interest. On January 28, 2021 the Company exchanged remaining face value of $2,900,000 of convertible debt for 70,014 shares of Series A Preferred Stock.

 

Starting in December of 2020, we have entered into Series A Preferred Stock purchase agreements for our Series A Preferred Stock and started financing our shortfall in operations by issuance of Series A Preferred Stock under the agreement. 

 

In 2020, we issued 8,158 of Series A Preferred Stock in exchange for $350,000 in cash. In 2021, we issued 110,996 of Series A Preferred Stock in exchange for $4,761,700 in cash.

 

Each share of our Series A Preferred Stock is convertible at any time into 30 shares of our common stock (subject to adjustment as set forth in the Certificate of Designation), which equates to the same conversion rate that existed under our 2007 and 2014 Notes (as defined in “Debt” footnote). Each share of Series A Preferred Stock is entitled to an annual dividend equal to $3.43, which equates to an annual dividend rate of 8% which is the same as annual interest rate that existed under the 2007 and 2014 Notes. The dividend is payable in January and July of each year and may, at the Company’s discretion, be paid either in cash or in additional shares of Series A Preferred Stock based on the formula set forth in the Certificate of Designations.

 

A summary of the terms of the Series A Preferred Stock are as follows:

 

·

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

·

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

·

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

·

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

·

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

·

Each share of Series A Preferred Stock shall be convertible, at any time and from time to time, at the option of the Holder into 30 shares of common stock, which results in conversion ratio of $1.43 of stated value of Series A Preferred Stock into one share of common stock (the “Series A Preferred Conversion Price”);

·

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

 

Comerica LSA

 

We have an outstanding Loan and Security Agreement (the “LSA”) with Comerica Bank pursuant to which $5,000,000 is outstanding with an original maturity date of June 9, 2016. On June 9, 2020, the Company and Comerica Bank entered into Third Amendment to the LSA, which extended the maturity of the LSA to June 9, 2022.

 

The LSA is secured by an extended irrevocable letter of credit issued by UBS AG (Geneva, Switzerland) with a renewed term expiring on May 31, 2022, which term is automatically renewable for one year periods, unless notice of non-renewal is given by UBS AG at least 45 days prior to the then current expiration date. The provision of any such notice by UBS will constitute an event of default under the LSA, at which time all amounts outstanding under the LSA will become due and payable. As of the date of this Form 10-K, no such notice has been provided to us and we have not we been provided with any indication that we are to receive notice of non-renewal of the letter of credit.

 

 
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Significance of Human Capital in Our Operations.

 

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

 

Comparison of Operating Results for Fiscal Years Ended December 31, 2021 and 2020

 

General Overview.

Due to COVID-19 pandemic 2020 was a year of significant uncertainty for the entire healthcare industry; activities were put on hold as the society was going through the acute phase. By the end of 2020 and the beginning of 2021, we regrouped and focused on building our team.

 

Results of Operations

 

 

 

Year ended

December 31,

2021

 

 

Year ended

December 31,

2020

 

 

Increase

(Decrease) $

 

 

Increase

Decrease %

 

Revenue

 

$1,572,884

 

 

$2,197,079

 

 

$(624,195)

 

 

-28%

Cost of Revenue

 

 

751,684

 

 

 

833,945

 

 

 

(82,261)

 

 

-10%

Gross Profit

 

 

821,200

 

 

 

1,363,134

 

 

 

(541,934)

 

 

-40%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Selling and Marketing

 

 

2,134,265

 

 

 

1,328,246

 

 

 

806,019

 

 

 

61%

 Research and Development

 

 

3,531,935

 

 

 

2,820,222

 

 

 

711,713

 

 

 

25%

 General and Administrative

 

 

2,972,422

 

 

 

3,325,366

 

 

 

(352,944)

 

 

-11%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Interest Expense

 

 

290,597

 

 

 

6,040,630

 

 

 

(5,750,033)

 

 

-95%

 Loss on Debt Extinguishment

 

 

7,114,422

 

 

 

59,353,584

 

 

 

(52,239,162)

 

 

-88%

 Gain on Debt Extinguishment - PPP Loan Forgiveness

 

$1,084,100

 

 

$-

 

 

$1,084,100

 

 

 

-

 

 

Revenue decreased by $624,195, or 28%. The decrease is associated with loss of customers due to non-renewals of contracts and re-negotiated fees.

 

Cost of Revenue decreased by $82,261, or 10%. This decrease is mostly attributable to decrease in outsourced and internal development costs associated with delivery of custom development services. 

 

Gross Profit decreased by $541,934, or 40%. Contract non-renewals resulted in loss of customers who predominantly had purchased subscription services that carry higher margins than services revenue or contracts with integrations with service partners.

 

Selling and Marketing expense increased by $806,019, or 61%. Personnel expense, which includes both employees and contractors, increased by approximately $500,000. Marketing campaigns and various outreach software tools increased by approximately $137,000 as sales and marketing activities accelerated. Recruiting decreased by $45,000. Stock based compensation increased by $222,000 as new stock options were issued to new members of the sales team.

 

Research and Development expense increased by $711,713, or 25%. Personnel expense, which includes both employees and contractors, increased by $382,000 as we expanded our product team, intensified product development and kept up with inflationary pressures on compensation. Recruiting costs decreased by $24,000. IT and software costs increased by $17,000. Stock based compensation increased by approximately $314,000, as we added new members to our product team.

 

General and Administrative expense decreased by $352,944, or 11%. Stock based compensation decreased by $411,000, as we reissued certain incentive stock options that had previously expired. Travel expense and software and IT related costs increased by approximately $32,000 and $47,000, respectively. Personnel costs , which includes the Board of Directors and consultants, increased by approximately $28,000. Legal expenses decreased by $21,000. Depreciation expense decreased by $30,000.

 

Interest Expense decreased by $5,750,033 or 95% as we exchanged all but debt bank into equity. Loss of $59,353,584 in 2020 resulted from two debt exchange transactions, which took place in May and December of 2020. In August of 2021, dividends and interest payable were settled with the issuance of Series A Preferred Stock, totaling $7,114,422. For more information about the transactions refer to "Debt" and "Stockholders' Deficit" footnotes of the financial statements included in this Form 10K.

 

Gain on Debt Extinguishments of $1,084,100 resulted from the forgiveness of two PPP loans received. PPP Loan #1 was received in April of 2020 and forgiven in February 2021. PPP Loan #2 was received in February 2021 and forgiven in August of 2021.

 

 
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Liquidity and Capital Resources

 

We have not yet achieved positive cash flows from operations, and historically our main source of funds for our operations had been the sale of our convertible promissory notes issued under our convertible note facilities and subordinated promissory notes to related parties. Subsequent to the exchange of debt for Series A Preferred Stock that was completed on January 28, 2021, our source of funding is expected to be issuance of Series A Preferred Stock. We need to continue to rely on outside funding until we are able to generate sufficient cash from revenues to fund our operations. We believe that anticipated cash flows from operations, and additional issuances of Series A Preferred Stock, together with cash on hand, will provide sufficient funds to finance our operations at least for the next 12 months from the date of this report. Changes in our operating plans, lower than anticipated sales, increased expenses, or other events may cause us to seek additional equity or debt financing in future periods. There can be no guarantee that financing will be available to us on acceptable terms, if at all. Additional equity and convertible debt financing could be dilutive to the holders of shares of our common stock, and additional debt financing, if available, could impose greater cash payment obligations and more covenants and operating restrictions.

 

During 2021 we issued 110,996 shares of our Series A Preferred Stock in exchange for $4,761,700 in cash financing and we received $542,000 from proceeds from a second PPP loan.

 

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

 

 

·

Our ability to expand revenue volume during and post the COVID-19 pandemic, when healthcare systems have been concentrating their efforts on emergency services and recovery from pandemic and they may postpone other initiatives;

 

 

 

 

·

Our ability to maintain product pricing as expected, particularly in light of increased competition and its unknown effects on market dynamics;

 

 

 

 

·

Our continued need to reduce our cost structure while simultaneously expanding the breadth of our business, enhancing our technical capabilities, and pursing new business opportunities;

 

 

 

 

·

Our ability to raise capital amidst global economic downturn in the wake of COVID-19 pandemic and increased geopolitical risks in Europe related to the conflict between Russia and Ukraine, since our main investors are located in Europe.

 

In addition, if UBS were to elect not to renew the irrevocable letter of credit beyond May 31, 2022, the currently scheduled expiration date, then such non-renewal will result in an event of default under the LSA, at which time all amounts outstanding under the LSA of approximately $5 million will become due and payable. Currently, the letter of credit is automatically extended for one year periods, unless notice of non-renewal is given by UBS AG at least 45 days prior to the then current expiration date. As of the filing date of this report on Form 10-K, no such notice has been provided to us nor have we been provided with any indication that we are to receive notice of non-renewal of the letter of credit.

 

 
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Capital Expenditures and Investing Activities

 

Our capital expenditures are limited to the purchase of new office equipment and new mobile devices that are used for testing. Cash used for investing activities was not significant and we do not plan any significant capital expenditures.

 

Going Concern

 

Our independent registered public accounting firm has issued an emphasis of matter paragraph in their report included in this Form 10-K in which they express substantial doubt as to our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts or classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern depends on our ability to generate sufficient cash flows to meet our obligations on a timely basis, extend payment terms, to obtain additional financing that is currently required, and ultimately to attain profitable operations and positive cash flows. There can be no assurance that our efforts to raise capital or increase revenue will be successful. If our efforts are unsuccessful, we may have to cease operations and liquidate our business.

 

Critical accounting policies and estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, stock based compensation and fair value measurements of certain debt and equity transactions. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

 

We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.

 

 
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Revenue Recognition and Deferred Revenue

 

Revenue Recognition: General Overview and Performance Obligations to Customers

 

The Company derives revenue primarily from contracts for subscription to the suite of e-health mobile solutions and, to a much lesser degree, ancillary services provided in connection with subscription services.

 

The Company’s contracts include the following performance obligations:

 

·

Access to the content available on the App Blueprint Catalog, including hosting of the deployed apps;

·

App Build and Managed Services;

·

Custom development work.

 

The majority of the Company’s contracts are for subscription to a catalog of mobile App Blueprints, hosting of the deployed apps and related services. Custom work for specific deliverables is documented in the statements of work. Customers may enter into subscription and various statements of work concurrently or consecutively. Most of the Company’s performance obligations are not considered to be distinct from the subscription to Blueprints, hosting of deployed apps and related services and are combined into a single performance obligation except for some custom development work which is capable of being distinct. New statements of work and modifications of contracts are reviewed each reporting period and significant judgment is applied as to nature and characteristics of the new or modified performance obligations on a contract by contract basis.

 

Revenue Recognition: Transaction Price of the Contract and Satisfaction of Performance Obligations

The transaction price of the contract is an aggregate amount of consideration payable by customer for delivery of contracted services. Transaction price is impacted by the terms of a contracted agreement with the customer. Such terms range from one to three years. The transaction price may include a significant financing component in instances where Company offers discounts for accelerated payments on the long-term contracts. A significant financing component is recorded in other assets and is amortized as interest expense in the Company’s statement of operations over the term of the contract. 

 

The transaction price is predominantly allocated to the single performance obligation of access to the Blueprints, hosting and related services and, to a lesser degree, allocated between the access and other distinct performance obligations based on the stand-alone selling price. The subscription revenue is then recognized over the term of the contract, using the output method of time elapsed. Other performance obligations identified are evaluated based on the specific terms of the agreement are usually recognized at a point in time upon delivery of a specific documented output. Management believes that such chosen methods faithfully depict satisfaction of Company performance obligations and transfer of benefit to the customers.

 

The full transaction price of the contract may be billed in its entirety or in agreed upon installments. Billed transaction price in excess of revenue recognized results in the recording of a contract liability. Unbilled portion of transaction price represents contracted consideration receivable by the Company that was not yet billed. 

 

 
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Incremental Costs of Obtaining a Contract

The Company’s incremental costs of obtaining a contract include sales commissions and are recognized as other assets on the balance sheet for the contracts with a term exceeding 12 months. These costs are amortized through the term of the contract and are recorded as sales and marketing expense. As of December 31, 2021 the Company’s other assets include approximately $3,000 of such costs.

 

Contract Liabilities

A new contract liability is created every time the Company records receivables due from its customers and has not satisfied the requirements to recognize revenue. Contract liability represents Company’s obligation to transfer services for which the Company has already invoiced. All of the contract liabilities will be recognized in revenue over a period of 12 to 36 months.

 

Share-Based Compensation

The Company measures share-based compensation cost at the grant date based on the fair value of the award. The Company recognizes compensation cost on a straight-line basis over the requisite service period. The requisite service period is generally three years. The Company accounts for forfeitures as they occur. The Company uses the simplified method allowed by SAB 107 for estimating expected term of the options in calculating the fair value of the awards that have a term of more than 7 years because the Company does not have reliable historical data on exercise of its options.

 

Fair Value Measurements

Certain debt and equity transactions require the Company to record newly issued financing instruments at fair value at the time of issuance. The Company follows guidance in ASC 820 Fair Value Measurements to determine fair value of such instruments. We use Level 3 from the fair value hierarchy prescribed by ASC 820. Level 3 inputs require us to use significant judgements and unobservable inputs when determining fair value of financing instruments. Such judgements and inputs are described in detail in footnote 6 in the financial statements that accompany this report.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

 
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO FINANCIAL STATEMENTS

 

 

 

Page

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID 00677)

 

F-2

 

 

 

 

 

BALANCE SHEETS

 

F-4

 

 

 

 

 

STATEMENTS OF OPERATIONS

 

F-5

 

 

 

 

 

STATEMENTS OF CASH FLOWS

 

F-6

 

 

 

 

 

STATEMENTS OF STOCKHOLDERS’ DEFICIT

 

F-7

 

 

 

 

 

NOTES TO FINANCIAL STATEMENTS

 

F-8

 

 

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Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders MobileSmith, Inc.

Raleigh, North Carolina

 

Opinion on the Financial Statements

We have audited the accompanying balance sheets of MobileSmith, Inc. (the “Company”) as of December 31, 2021 and 2020, and the related statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Explanatory Paragraph – Going Concern

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As more fully discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a working capital deficiency as of December 31, 2021. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Fair Value Measurement of Certain Debt and Equity Transactions

As disclosed in Notes 3 and 6 to the financial statements, the Company has entered into convertible note agreements with individuals including related parties as well. The Company also had a deemed dividend associated with the exchange of debt to Preferred Series A shares. The accounting for the transactions were complex, as it required assessment as to whether features, other than the conversion feature, required bifurcation and separate valuation. Additionally, the transactions were complex as they required valuation of the conversion feature in the debt instrument, which involved estimation of the fair value of the debt instrument absent of any conversion feature, and evaluation of the appropriate classification of the conversion feature in the financial statements.

 

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Our audit procedures included the following:

 

·

We obtained an understanding of the internal controls and processes in place over management’s valuation assessments.

·

We obtained and read the underlying convertible note agreements.

·

We evaluated the Company’s selection of the valuation methodology and significant assumptions used by the Company, and evaluated the completeness and accuracy of the underlying data supporting the significant assumptions. Specifically, when assessing the key assumptions, we evaluated the appropriateness of the Company’s estimates of its credit risk, volatility, dividend yield, and the market risk free rate for stock compensation.

·

We evaluated the Company’s selection of the valuation methodology and significant assumptions used by the Company, and evaluated the completeness and accuracy of the underlying data supporting the significant assumptions over debt and equity transactions.

·

We tested a sample of convertible debt and equity transactions to ensure they are properly recorded in accordance with US GAAP.

·

We verified proper approval of equity transactions.

·

We tested management’s application of the relevant accounting guidance.

 

Revenue from Contracts with Customers

The Company had approximately $1,573,000 in revenue for the year ended December 31, 2021. As disclosed in Note 2 to the financial statements, the Company derives revenue primarily from contracts with custom work for specific deliverables and multiple performance obligations.

 

Due to the nature of the Company’s contracts including multiple performance obligations, management exercises significant judgment in the following areas in determining appropriate revenue recognition:

 

·

Identification of the contract with the customer

·

Determination of which products and services are considered distinct performance obligations that should be accounted for separately or combined

·

Determination of stand-alone selling prices for each performance obligation

·

Estimation of contract transaction price and allocation of the transaction price to the performance obligations

·

The pattern of delivery for each distinct performance obligation

 

As a result, a high degree of auditor judgement was required in performing audit procedures to evaluate the reasonableness of management’s judgments. Changes in these judgments can have a material effect on the amount of revenue recognized on these contracts. Based on our knowledge of the Company, we determined the nature and extent of procedures to be performed over revenue, including the determination of the revenue streams over which those procedures were performed. Our audit procedures included the following for each revenue stream where procedures were performed:

 

·

Obtained an understanding of the internal controls and processes in place over the Company’s revenue recognition processes.

·

Analyzed the significant assumptions and estimates made by management as discussed above.

·

Assessed the recorded revenue by selecting a sample of transactions, analyzing the related contract, testing management’s identification of distinct performance obligations, and comparing the amounts recognized for consistency with underlying documentation.

 

 /s/ Cherry Bekaert LLP

 

We have served as the Company’s auditor since 2009.

 

Raleigh, North Carolina

March 25, 2022

 

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MOBILESMITH, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and Cash Equivalents

 

$372,581

 

 

$161,744

 

Restricted Cash and Cash Equivalents

 

 

202,761

 

 

 

189,179

 

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

 

 

80,875

 

 

 

113,906

 

Prepaid Expenses and Other Current Assets

 

 

50,304

 

 

 

43,286

 

Total Current Assets

 

 

706,521

 

 

 

508,115

 

 

 

 

 

 

 

 

 

 

Operating Lease Right-of-Use Asset

 

 

342,383

 

 

 

512,124

 

Total Assets

 

$1,048,904

 

 

$1,020,239

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts Payable

 

$83,942

 

 

$155,850

 

Interest Payable

 

 

17,646

 

 

 

271,868

 

Other Liabilities And Accrued Expenses

 

 

156,986

 

 

 

237,750

 

Operating Lease Liability Current

 

 

149,525

 

 

 

161,936

 

Contract With Customer Liability

 

 

464,162

 

 

 

649,789

 

First PPP Loan, Current

 

 

-

 

 

 

423,067

 

Bank Loan

 

 

5,000,000

 

 

 

-

 

Total Current Liabilities

 

 

5,872,261

 

 

 

1,900,260

 

 

 

 

 

 

 

 

 

 

First PPP Loan, Long-Term

 

 

-

 

 

 

119,033

 

Operating Lease Liability

 

 

282,534

 

 

 

432,058

 

Convertible Notes Payable, Net of Discount

 

 

-

 

 

 

972,108

 

Bank Loan

 

 

-

 

 

 

5,000,000

 

Total Liabilities

 

 

6,154,795

 

 

 

8,423,459

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 3)

 

 

 

 

 

 

 

 

Stockholders’ Deficit

 

 

 

 

 

 

 

 

Preferred Stock, $0.001 Par Value, 5,000,000 Shares Authorized, Including 1,750,000 Authorized and Designated for Series A Convertible Preferred Shares: 1,403,276 Issued and Outstanding as of December 31, 2021 and 1,166,297 Issued and Outstanding as of December 31, 2020.

 

 

127,162,277

 

 

 

103,649,344

 

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

 

 

28,390

 

 

 

28,390

 

Additional Paid-in Capital - Common Shares

 

 

123,015,819

 

 

 

130,103,361

 

Accumulated Deficit

 

 

(255,312,377 )

 

 

(241,184,315 )

Total Stockholders’ Deficit

 

 

(5,105,891 )

 

 

(7,403,220 )

Total Liabilities and Stockholders’ Deficit

 

$1,048,904

 

 

$1,020,239

 

 

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

 

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Table of Contents

  

MOBILESMITH, INC.

 STATEMENTS OF OPERATIONS

 

 

 

Year Ended

 

 

Year Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

REVENUES:

 

 

 

 

 

 

Subscription and Support

 

$1,572,884

 

 

$1,928,899

 

Services and Other

 

 

-

 

 

 

268,180

 

Total Revenue

 

 

1,572,884

 

 

 

2,197,079

 

 

 

 

 

 

 

 

 

 

COST OF REVENUE:

 

 

 

 

 

 

 

 

Subscription and Support

 

 

742,684

 

 

 

737,783

 

Services and Other

 

 

9,000

 

 

 

96,162

 

Total Cost of Revenues

 

 

751,684

 

 

 

833,945

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

 

821,200

 

 

 

1,363,134

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

Selling and Marketing

 

 

2,134,265

 

 

 

1,328,246

 

Research and Development

 

 

3,531,935

 

 

 

2,820,222

 

General and Administrative

 

 

2,972,422

 

 

 

3,325,366

 

Total Operating Expenses

 

 

8,638,622

 

 

 

7,473,834

 

LOSS FROM OPERATIONS

 

 

(7,817,422 )

 

 

(6,110,700 )

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

Other Income

 

 

904

 

 

 

95,074

 

Interest Expense, Net

 

 

(290,597 )

 

 

(6,040,630 )

Gain on Debt Extinguishment - PPP Loan Forgiveness

 

 

1,084,100

 

 

 

-

 

Losses on Debt Extinguishments

 

 

(7,114,422 )

 

 

(59,353,584 )

Other gains (losses)

 

 

9,375

 

 

 

-

 

Total Other Expense

 

 

(6,310,640 )

 

 

(65,299,140 )

 

 

 

 

 

 

 

 

 

NET LOSS

 

$(14,128,062 )

 

$(71,409,840 )

 

 

 

 

 

 

 

 

 

Plus: Dividend on Series A Convertible Preferred Stock

 

 

(10,315,099 )

 

 

-

 

Plus: Deemed Dividend on Series A Convertible Preferred Stock

 

 

(10,031,415 )

 

 

(37,438,180 )

 

 

 

 

 

 

 

 

 

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS

 

$(34,474,576 )

 

$(108,848,020 )

 

 

 

 

 

 

 

 

 

NET LOSS PER COMMON SHARE:

 

 

 

 

 

 

 

 

Basic and Fully Diluted from Continuing Operations

 

$(1.21 )

 

$(3.83 )

 

 

 

 

 

 

 

 

 

WEIGHTED-AVERAGE NUMBER OF SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE:

Basic And Fully Diluted

 

 

28,389,493

 

 

 

28,389,493

 

 

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

 

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Table of Contents

  

MOBILESMITH, INC.

 STATEMENTS OF CASH FLOWS

 

 

 

 Year Ended

 

 

 Year Ended

 

 

 

 December 31,

 

 

 December 31,

 

 

 

2021

 

 

 2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net Loss

 

$(14,128,062 )

 

$(71,409,840 )

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

 

 

 

 

 

 

 

 

Depreciation and Amortization

 

 

-

 

 

 

34,838

 

Bad Debt Expense

 

 

-

 

 

 

30,000

 

Amortization of Debt Discount

 

 

78,119

 

 

 

3,184,641

 

Amortization of Debt Premium

 

 

-

 

 

 

(1,218,824 )

Share Based Compensation

 

 

3,227,557

 

 

 

3,109,763

 

Gain of Debt Extinguishment (PPP Loan Forgiveness)

 

 

(1,084,100 )

 

 

-

 

Losses on Debt Extinguishments

 

 

7,114,422

 

 

 

59,353,584

 

Changes in Assets and Liabilities:

 

 

 

 

 

 

 

 

Accounts Receivable

 

 

33,031

 

 

 

(34,719 )

Prepaid Expenses and Other Assets

 

 

(7,018 )

 

 

32,203

 

Accounts Payable

 

 

(71,908 )

 

 

(86,399 )

Contract Liability

 

 

(185,627 )

 

 

(429,582 )

Operating Lease Right-of-use Asset

 

 

169,741

 

 

 

162,214

 

Operating Lease Liability

 

 

(161,935 )

 

 

(149,525 )

Accrued and Other Expenses

 

 

(63,501 )

 

 

111,880

 

Net Cash Used in Operating Activities

 

 

(5,079,281 )

 

 

(7,309,766 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds From Issuance of Subordinated Promissory Notes, Related Party

 

 

-

 

 

 

1,910,000

 

Proceeds From Issuance of Convertible Notes Payable, Related Party

 

 

-

 

 

 

1,650,000

 

Proceeds From Issuance of Convertible Notes Payable

 

 

-

 

 

 

2,900,000

 

Repayments of Financing Lease Obligations

 

 

-

 

 

 

(6,378 )

Proceeds From First PPP Loan

 

 

-

 

 

 

542,100

 

Proceeds From Second PPP Loan

 

 

542,000

 

 

 

-

 

Proceeds From Issuance of Shares of Series A Preferred Stock

 

 

4,761,700

 

 

 

350,000

 

Net Cash Provided by Financing Activities

 

 

5,303,700

 

 

 

7,345,722

 

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

224,419

 

 

 

35,956

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD

 

 

350,923

 

 

 

314,967

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD

 

$575,342

 

 

$350,923

 

 

 

 

 

 

 

 

 

 

Composition of Cash, Cash Equivalents and Restricted Cash Balance:

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$372,581

 

 

$161,744

 

Restricted Cash

 

 

202,761

 

 

 

189,179

 

Total Cash, Cash Equivalents and Restricted Cash

 

$575,342

 

 

$350,923

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Operating Lease Payments

 

$205,243

 

 

$191,805

 

Cash Paid During the Period for Interest

 

$146,514

 

 

$3,919,183

 

 

 

 

 

 

 

 

 

 

Non-Cash Investing and Financing Activities:

 

 

 

 

 

 

-

 

Recorded Debt Discount Associated with Beneficial Conversion Feature

 

$-

 

 

$8,404,858

 

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

 

$10,031,415

 

 

$37,438,180

 

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

 

$6,507,137

 

 

$103,299,344

 

Issued 52,057 Shares of Series A Preferred Shares Fair Valued at $4,815,280 as Dividend Paid in Kind

 

$10,315,099

 

 

$-

 

Issued 3,912 Shares of Series A Preferred Shares Fair Valued at $361,866 to Settle Accrued And Unpaid Interest

 

$361,866

 

 

$-

 

Conversion of Notes Payable into Common Shares

 

$-

 

 

$156,980

 

 

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

 

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Table of Contents

  

MOBILESMITH, INC.

 STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020

 

 

 

Series A Convertible Preferred Stock, Shares

 

 

Series A Convertible Preferred Stock, $0.001

Par Value

 

 

 Additional

Paid-In Capital, Series A Convertible Preferred Stock

 

 

 Common Stock,

Shares

 

 

 Common Stock, $0.001

Par Value

 

 

 Additional

Paid-In Capital, Common Stock

 

 

 Accumulated Deficit

 

 

 Totals

 

BALANCES, DECEMBER 31, 2019

 

 

-

 

 

$-

 

 

$-

 

 

 

28,271,598

 

 

$28,272

 

 

$118,431,878

 

 

$(169,774,475 )

 

$(51,314,325 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity-Based Compensation

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,109,763

 

 

 

 

 

 

 

3,109,763

 

Conversion of Notes Payable to Common Stock

 

 

-

 

 

 

 

 

 

 

 

 

 

 

117,895

 

 

 

118

 

 

 

156,862

 

 

 

 

 

 

 

156,980

 

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

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,404,858

 

 

 

 

 

 

 

8,404,858

 

Exchange of Debt for Series A Convertible Preferred Shares on December 23, 2020

 

 

1,158,141

 

 

 

1,158

 

 

 

103,298,186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

103,299,344

 

Issuance of Series A Convertible Preferred for Cash

 

 

8,156

 

 

 

8

 

 

 

349,992

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

350,000

 

Beneficial Conversion Feature Recorded as a Result Of Issuance Of Series A Convertible Preferred Shares of $37,438,180

 

 

-

 

 

 

 

 

 

 

37,438,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

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

 

 

 

 

 

 

 

 

 

 

(37,438,180 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(71,409,840 )

 

 

(71,409,840 )

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, DECEMBER 31, 2020

 

 

1,166,297

 

 

$1,166

 

 

$103,648,178

 

 

 

28,389,493

 

 

$28,390

 

 

$130,103,361

 

 

$(241,184,315 )

 

$(7,403,220 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,227,557

 

 

 

 

 

 

 

3,227,557

 

Exchange of Debt for Series A Convertible Preferred Shares

 

 

70,014

 

 

 

70

 

 

 

7,660,900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,660,970

 

Issuance of Series A Convertible Preferred Shares for Cash

 

 

110,996

 

 

 

110

 

 

 

4,761,590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,761,700

 

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

 

 

3,912

 

 

 

4

 

 

 

775,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

775,164

 

Issuance of Dividend on Series A Convertible Preferred Shares

 

 

52,057

 

 

 

52

 

 

 

10,315,047

 

 

 

 

 

 

 

 

 

 

 

(10,315,099 )

 

 

 

 

 

 

-

 

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

 

 

-

 

 

 

-

 

 

 

10,031,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,031,415

 

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

 

 

-

 

 

 

-

 

 

 

(10,031,415 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,031,415 )

Net Loss

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,128,062 )

 

 

(14,128,062 )

BALANCES, DECEMBER 31, 2021

 

 

1,403,276

 

 

$1,402

 

 

$127,160,875

 

 

 

28,389,493

 

 

$28,390

 

 

$123,015,819

 

 

$(255,312,377 )

 

$(5,105,891 )

 

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

 

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Table of Contents

  

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020

 

1. SUMMARY OF BUSINESS AND DESCRIPTION OF GOING CONCERN

 

Description of Business and Going Concern

 

MobileSmith, Inc. (referred to herein as the “Company,” “us,” “we,” or “our”) was incorporated as Smart Online, Inc. in the State of Delaware in 1993. The Company changed its name to MobileSmith, Inc. effective July 1, 2013. The same year the Company focused exclusively on development of do-it-yourself customer facing platform that enabled organizations to rapidly create, deploy, and manage custom, native smartphone and tablet apps deliverable across iOS and Android mobile platforms without writing a single line of code. During 2017 the Company concluded that it had its highest rate of success with clients within the Healthcare industry and concentrated its development and sales and marketing efforts in that industry. During 2018 we further refined our Healthcare offering and redefined our product - a suite of e-health mobile solutions that consist of a catalog of ready to deploy mobile app solutions (App Blueprints) and support services. In 2019 and 2020 we consolidated our current solutions under a single offering branded Peri™. Peri™ is a cloud-based collection of applications that run of our architected healthcare technology ecosystem. The architecture is designed to:

 

·

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

·

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

 

During 2021 we advanced our flagship PeriOp offering to be market ready. PeriOp is an EMR integrated mobile app based set of pre and postoperative instructions (which we refer to as Clinical Pathways), that establishes a direct two-way clinical procedure management process between a patient and a healthcare provider and by doing so improves patient engagement and procedural adherence. PeriOp digitizes and streamlines for both patients and providers “the last mile of healthcare delivery” between scheduled procedure and day of surgery with emphasis on patient’s readiness. PeriOp digitizes and streamlines “the first mile” of post-surgery recovery journey with a focus on maintaining positive surgical outcomes and avoidance of readmissions.

 

PeriOp has not yet generated significant revenue. Most of our revenue is generated from App Blueprint solutions and related supporting services, where applicable

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the years ended December 31, 2021 and 2020, the Company incurred net losses, as well as negative cash flows from operations, and at December 31, 2021 and 2020, had deficiencies in working capital. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts or classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

The Company’s continuation as a going concern depends upon its ability to generate sufficient cash flows to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations and positive cash flows. Since November 2007, the Company has been funding its operations, in part, from the proceeds of the issuance of notes under a convertible secured subordinated note purchase agreement facility which was established in 2007 (the “2007 NPA”), an unsecured convertible subordinated note purchase agreement facility established in 2014 (the “2014 NPA”) and subordinated promissory notes to related parties. In December 2020 and January 2021 the Company exchanged all of its non-bank debt for Series A Convertible Preferred Stock (“Series A Preferred Stock”) and terminated both 2007 and 2014 NPAs.

 

The Company is authorized to issue up to 1,750,000 in Series A Preferred Stock at a price of $42.90 per share. The Company management expects that Series A Preferred Stock will remain it main source of funding in foreseeable future.

 

Based on the above, there is substantial doubt about the Company’s ability to continue as a going concern.

 

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Table of Contents

  

  

2. SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”) requires management to make estimates and assumptions in the Company’s financial statements and notes thereto. Significant estimates and assumptions made by management include the determination of performance obligations and the allocation of consideration among performance obligations, and the determination of when the Company has met the requirements to recognize revenue related to the performance obligations, share-based compensation and allowance for accounts receivable. Actual results could differ from those estimates.

 

Cash and Cash Equivalents 

All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for nearly all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. Restricted cash balances represent cash held with Comerica  Bank restricted for the repayment of interest on the Loan and Security Agreement with Comerica Bank dated June 9, 2014 (the "LSA").

 

Revenue Recognition: General Overview and Performance Obligations to Customers

The Company derives revenue primarily from contracts for subscription to the suite of e-health mobile solutions and, to a much lesser degree, ancillary services provided in connection with subscription services.

 

The Company’s contracts include the following performance obligations:

 

·

Access to the content available on the App Blueprint Catalog, including hosting of the deployed apps;

·

App Build and Managed Services; and

·

Custom development work.

 

The majority of the Company’s contracts are for a subscription to a catalog of mobile App Blueprints, and hosting of the deployed apps and related services. Custom work for specific deliverables is documented in statements of work or separate contracts. Customers may enter into subscription and various statements of work concurrently or consecutively. Most of the Company’s performance obligations are not considered to be distinct from the subscription to Blueprints, hosting of deployed apps and related services and are combined into a single performance obligation except for certain custom development work which is capable of being distinct. New statements of work and modifications of contracts are reviewed each reporting period and significant judgment is applied as to nature and characteristics of the new or modified performance obligations on a contract by contract basis.

 

Revenue Recognition: Transaction Price of the Contract and Satisfaction of Performance Obligations

The transaction price of the contract is an aggregate amount of consideration payable by customer for delivery of contracted services. The transaction price is impacted by the terms of a contracted agreement with the customer. Such terms range from one to three years. The transaction price excludes any marketing or sales discounts or any future renewal periods, unless the renewal periods represent a material right given to customer to extend the agreement. The transaction price may include a significant financing component in instances where the Company offers discounts for accelerated payments on the long-term contracts. Significant financing components are recorded in other assets and amortized as interest expense in the Company’s Statement of Operations over the term of the contract. 

 

The transaction price is predominantly allocated to a single performance obligation of access to the Blueprints, hosting and related services and, to a lesser degree, allocated between the access and other distinct performance obligations based on the stand-alone selling price. The subscription revenue is then recognized over time over the term of the contract, using the output method of time elapsed. Other performance obligations identified are evaluated based on the specific terms of the agreement are usually recognized at a point in time upon delivery of a specific documented output. Management believes that such chosen methods faithfully depict satisfaction of the Company performance obligations and transfer of benefit to the customers.

 

The full transaction price of the contract may be billed in its entirety or in agreed upon installments. Billed transaction price in excess of revenue recognized results in the recording of a contract liability. The unbilled portion of transaction price related to revenue earned represents contracted consideration receivable by the Company that was not yet billed. 

 

Incremental Costs of Obtaining a Contract

The Company’s incremental costs of obtaining a contract include sales commissions. Sales commissions are recognized as other assets on the balance sheet for the contracts with a term exceeding 12 months. These costs are amortized through the term of the contract and are recorded as sales and marketing expense.

 

Contract Liabilities

A new contract liability is created every time the Company records receivables due from its customers. The contract liability represents the Company’s obligation to transfer services for which the Company has already invoiced. Most of the contract liabilities will be recognized in revenue over a period of 12 months.

 

Customer Credit Risk

Most of the Company’s receivables (billings) are collected within 30-45 days. The majority of the Company’s customers are healthcare organizations, which historically have had low credit risk. 

 

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Table of Contents

  

Cost of Revenues

Cost of revenues includes salaries of customer support teams, costs of infrastructure, expenses for outsourced work to fulfill the contracted work, and amortization charges for capitalized software.

 

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability or failure of its customers to make required payments. The need for an allowance for doubtful accounts is evaluated based on specifically identified amounts that management believes to be potentially uncollectible. If actual collections experience changes, revisions to the allowance may be required.

 

Impairment of Long-Lived Assets

The Company evaluates the recoverability of its long-lived assets every reporting period or whenever events and circumstances indicate that the value may be impaired.

 

Advertising Costs

Advertising costs consist primarily of industry related trade shows and marketing campaigns. Advertising costs are expensed as incurred, or the first time the advertising takes place, applied consistently based on the nature of the advertising activity. The amounts related to advertising during the years ended December 31, 2021 and 2020 were $267,884 and $248,261, respectively. 

 

Net Loss Per Share

Basic net loss per share is computed by dividing net loss attributable to common shareholders by the weighted average number of shares of common stock outstanding during the periods. Diluted net loss per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Shares of common stock issuable upon conversion of Convertible Subordinated Promissory Notes (the “Notes”), conversion of Series A Preferred Stock and exercise of share-based awards are excluded from the calculation of the weighted average number, because the effect of the conversion and exercise would be anti-dilutive.

 

Recently Issued Accounting Pronouncements

The Company evaluates new significant accounting pronouncements at each reporting period. For the year ended December 31, 2021, the Company did not identify any new pronouncement that had or is expected to have a material effect on Company’s presentation of its financial statements. 

 

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Table of Contents

  

3. DEBT

 

The table below summarizes the Company’s debt at December 31, 2021 and December 31, 2020:

 

Debt Description

 

December 31,

 

 

December 31,

 

 

 

 

 

 

2021

 

 

2020

 

 

Maturity

 

Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

Comerica Bank Loan and Security Agreement 

 

$5,000,000

 

 

$5,000,000

 

 

June 2022

 

 

3.85%

First PPP Loan

 

 

-

 

 

 

542,100

 

 

April 2022

 

 

1.00%

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

 

 

-

 

 

 

972,108

 

 

November 2022

 

 

8.00%

Total debt

 

 

5,000,000

 

 

 

6,514,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: current portion of long term debt

 

 

5,000,000

 

 

 

423,067

 

 

 

 

 

 

 

Debt - long term

 

$-

 

 

$6,091,141

 

 

 

 

 

 

 

 

Bank Loan

 

The Company has an outstanding LSA in the amount of $5,000,000, with an extended maturity date of June 9, 2022. The LSA is secured by an extended irrevocable letter of credit issued by UBS AG (Geneva, Switzerland) (“UBS AG”) with a renewed term expiring on May 31, 2022, which term is renewable for one year periods, unless notice of non-renewal is given by UBS AG at least 45 days prior to the then current expiration date.

 

The LSA with Comerica has the following additional terms:

 

·

a variable interest rate at prime plus 0.6% payable monthly;

·

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.

 

The Company is in compliance with its LSA covenants as of December 31, 2021.

 

Paycheck Protection Program Loans

 

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 was scheduled to mature on April 29, 2022. The Company used the proceeds from the PPP loan for qualifying expenses, applied for forgiveness of the PPP loan in accordance with the terms of the CARES Act. Such forgiveness was granted to the Company on February 18, 2021.

 

On February 26, 2021 the Company entered into second PPP loan by borrowing additional $542,000. The Company used the proceeds from the second PPP loan for qualifying expenses, applied for forgiveness of the PPP loan in accordance with the terms of the CARES Act. Such forgiveness was granted to the Company on August 4, 2021. 

 

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Convertible Notes under 2007 and 2014 NPAs Overview

 

Since November 14, 2007 and through December 10, 2014, the Company financed its working capital deficiency primarily through the issuance of its notes of up to $33,300,000 in principal (the “2007 NPA Notes”) under the Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, as amended (the “2007 NPA”). On December 11, 2014 the Company entered into 2014 NPA for the sum of notes up to $40,000,000 in principal (“2014 NPA Notes”). At the request of the note holder any amounts borrowed under the 2007 NPA and the 2014 NPA allow the principal amount to be converted to common shares at a conversion price of $1.43 per share.

 

Maturity of 2014 and 2007 NPA Notes had been extended several times. The most recent such extension moved maturity date to November 14, 2022. Notes under both 2014 and 2007 NPAs were issued with identical terms. Such main terms are as follows: (a) allow for optional conversion into common stock upon request of a noteholder at a price of $1.43 (b) pay 8 %nterest twice per year in January and July (c) subordinated to the Bank Loan.

 

Majority of 2007 and 2014 NPA notes were related party notes and all of the 2007 and 2014 NPA notes were exchanged for Series A Preferred Stock during December 2020 Debt Exchange and January 2021 Debt Exchange, as further described below.

 

May 2020 Note Exchange

 

On May 6, 2020,  the Company and related party holders of $4,063,250 in subordinated promissory notes exchanged those notes for the 2014 NPA Notes issued under 2014 NPA (the "May 2020 Note Exchange").  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 mature on November 14, 2022 and have the terms identical to other 2014 NPA Notes.  The May 2020 Note Exchange was accounted for as debt extinguishment and the newly issued 2014 NPA Notes were recorded at fair value in accordance with ASC 470 "Debt".  The total fair value of the 2014 NPA Notes issued as a result of the May 2020 Note Exchange was determined to be $8,928,000.  The May 2020 Note Exchange transaction resulted in loss recorded on the statement of operations of $4,864,750 and a premium on the newly issued convertible debt of $4,864,750.  The embedded beneficial conversion feature present in the newly issued debt in the amount of $4,063,250 resulted in a debt discount and a charge to paid-in capital.

 

December 2020 Debt Exchange

 

On December 23, 2020, the Company and all but one debt investor entered into a debt exchange transaction where the Company exchanged its convertible and non-convertible debt plus accrued but unpaid interest into Series A Preferred Stock. The December 2020 Debt Exchange transaction was accounted for as debt extinguishment and the newly issued shares of Series A Preferred Stock were recorded at fair value in accordance with ASC 470 “Debt”. The total of 1,158,141 shares Series A Preferred Stock were issued in December 2020 Debt Exchange fair valued at $103,299,344. The combined face value of debt exchanged was $47,989,660 in addition to accrued but unpaid interest of $1,694,467 for a total of $49,684,127. The carrying value of the debt exchanged was $48,810,508 due to inclusion of unamortized debt discounts and debt premiums in the amounts of $4,519,542 and $3,645,924, respectively. The difference between the carrying amount of extinguished debt and fair value of the shares of Series A Preferred Stock issued resulted in loss recorded on the statement of operations of $54,488,834 for the year ended December 31, 2020.

 

January 2021 Debt Exchange

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

 

As a result of the December 2020 and January 2021 Debt Exchanges, the original 2007 and 2014 NPAs and related notes with participating investors were cancelled.

 

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Table of Contents

  

4. 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.

 

5. STOCKHOLDERS’ DEFICIT

 

Common Stock

 

The Company is authorized to issue 100,000,000 shares of common stock, $0.001 par value per share. As of December 31, 2021, the Company had 28,389,493 shares of common stock outstanding. Holders of the Company’s shares of common stock are entitled to one vote for each share held.

 

Preferred Shares

 

The Board of Directors is authorized, without further stockholder approval, to issue up to 5,000,000 shares of $0.001 par value preferred stock in one or more series and to fix the rights, preferences, privileges, and restrictions applicable to such shares, including dividend rights, conversion rights, terms of redemption, and liquidation preferences, and to fix the number of shares constituting any series and the designations of such series.

 

On December 10, 2020 the Board of Directors authorized to designate 1,750,000 of 5,000,000 as Series A Preferred Stock with the following terms: 

 

·

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

·

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

·

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

·

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

·

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

·

Each share of Series A Preferred Stock shall be convertible, at any time and from time to time, at the option of the Holder into 30 shares of common stock, which results in conversion ratio of $1.43 of stated value of Series A Preferred Stock into one share of common stock (the “Series A Preferred Conversion Price”);

·

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

 

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Table of Contents

 

December 2020 Debt Exchange transaction 

 

On December 23, 2020 the Company issued 1,158,141 of Series A Preferred Stock in the December 2020 Debt Exchange transaction (refer to “Debt” footnote for more detail on the transaction). The December 2020 Debt Exchange resulted in a debt extinguishment treatment and the Series A Preferred Stock was recorded at its fair value of $103,299,344. On the date of the December 2020 Debt Exchange the market value of the common stock was above the Series A Preferred Stock conversion price of $1.43, which resulted in the conversion feature that was beneficial to the holder on the date of the exchange. The resulting beneficial conversion feature was recorded as a discount and amortized in its entirety as a deemed dividend on the date of the December 2020 Debt Exchange and charged to loss attributable to common shareholders on the Company’s Statement of Operations in the amount of $37,176,330. 

 

January 2021 Debt Exchange transaction 

 

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

 

Series A Preferred Stock issued in exchange for cash financing

 

During the period ended December 31, 2020 the Company issued 8,156 shares of Series A Preferred Stock in exchange of $350,000 in cash funding. The shares were issued with a beneficial conversion feature discount and resulted in a deemed dividend with charge to loss attributable to common shareholders of $261,850. 

 

In addition, during the twelve month period ended December 31, 2021 the Company issued 110,996 shares of Series A Preferred Stock in exchange for $4,761,700 in cash funding. The shares were issued with beneficial conversion feature discount and resulted in a deemed dividend with charge to loss attributable to common shareholders of $3,887,573.

 

Series A Preferred Stock issued for paid in kind dividend and settlement of accrued and unpaid interest

 

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

 

 

·

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

 

 

 

 

·

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

 

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Table of Contents

  

Equity Compensation Plans

 

2016 Equity Compensation Plan

 

In May 2016, the Company’s shareholders authorized adoption of the approved MobileSmith Inc. 2016 Equity Compensation Plan for officers, directors, employees and consultants, initially reserving for issuance thereunder 15,000,000 shares of Common Stock.

 

The exercise price for incentive stock options granted under the above plans is required to be no less than the fair market value of the common stock on the date the option is granted, except for options granted to 10% stockholders, which are required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option is granted. Incentive stock options typically have a maximum term of 10 years, except for option grants to 10% stockholders, which are subject to a maximum term of five years. Non-statutory stock options have a term determined by either the Board of Directors or the Compensation Committee of the Board of Directors. Options granted under the plans are not transferable, except by will and the laws of descent and distribution.

 

A summary of the status of the stock option issuances as of December 31, 2021 and 2020, and changes during the periods ended on these dates is as follows:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise Price

 

 

 Weighted

Average

Remaining

Contractual Term

 

 

 Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2019

 

 

12,345,796

 

 

$1.73

 

 

 

8.3

 

 

$13,823,410

 

Cancelled

 

 

(3,102,496 )

 

 

1.73

 

 

 

 

 

 

 

 

 

Issued

 

 

1,440,000

 

 

 

2.64

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2020

 

 

10,683,300

 

 

 

1.85

 

 

 

7.6

 

 

 

17,060,533

 

Cancelled

 

 

(2,439,000 )

 

 

1.82

 

 

 

 

 

 

 

 

 

Issued

 

 

2,639,000

 

 

 

2.70

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2021

 

 

10,883,300

 

 

 

2.06

 

 

 

7.6

 

 

 

9,553,832

 

Vested and exercisable, December 31, 2021

 

 

5,729,750

 

 

$1.89

 

 

 

7.0

 

 

$6,013,566

 

 

Weighted-average grant-date fair values of options issued during 2021 and 2020 were $1.70 and $2.27, respectively.

 

At December 31, 2021, $8,540,483 of expense remains to be recorded related to all options outstanding over next five years.

 

Exercise prices for options outstanding as of December 31, 2021 ranged between $1.63 and $3.97.

 

The Company measures share-based compensation cost at the grant date based on the fair value of the award. The Company recognizes compensation cost on a straight-line basis over the requisite service period. The requisite service period is generally between three and five years. The Company accounts for forfeitures as they occur. 

 

The Company uses the simplified method allowed by SAB 107 for estimating expected term of the options in calculating the fair value of the awards that have a term of more than 7 years because the Company does not have reliable historical data on exercise of its options. The simplified method was used for options granted in 2021 and 2020.

 

The fair value of option grants under the Company’s equity compensation plan during the years ended December 31, 2021 and 2020 was estimated using Black-Scholes pricing model using the following weighted-average assumptions : 

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

Dividend yield

 

 

0.00%

 

 

0.00%

Expected volatility

 

 

72%

 

 

115%

Risk-free interest rate

 

 

1.0%

 

 

.4%

Expected lives (years)

 

 

6.0

 

 

 

6.5

 

 

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Table of Contents

  

6. FAIR VALUE MEASUREMENTS

 

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

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by the accounting literature contains three levels as follows:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimations.

 

The May 2020 Note Exchange, December 2020 Debt Exchange resulted in transactions which required the Company to recognize debt extinguishments in both instances and to record newly issued financing instruments at fair value at the dates of the transactions on a non-recurring basis. Fair value measurements in both transactions were categorized as Level 3 fair value measurements due to use of various unobservable inputs to the pricing models. A single most significant factor included in pricing models was the Level 1 input of observable market value of MobileSmith common stock on the date of the transactions, as quoted on the OTCQB. Despite the thinly traded nature of the Company stock, the quoted market value could not be ignored in determination of fair value in the transactions.

 

Fair value measurements in the May 2020 Note Exchange transaction (refer to "Debt" footnote for the description of the transaction)

 

The Company used a binomial model to determine the fair value of the newly issued instrument. 

 

The significant unobservable inputs and information used to develop those inputs include the following:

 

 

·

the volatility of stock price was determined to be 86% and was based on the volatility of the Company’s stock price as quoted on the Over-the-Counter Bulletin Board (the “OTCBB”) for the period of 2.5 years, which approximated the period remaining until maturity of the convertible instrument at the time of the transaction;

 

 

 

 

·

the risk free rate of .24%;

 

 

 

 

·

the credit spread over the risk free rate of approximately 8%;

 

 

 

 

·

the nodes of the binomial model were extended for two and a half years, which approximates the time period until maturity of the convertible instrument; and

 

 

 

 

·

the conversion ratio of $1.43 per share of common stock

 

Fair value measurements in December 2020 Debt Exchange transaction (refer to “Stockholder’s deficit” footnote for the description of the transaction)

 

The Company used income (discounted cash flow) approach to arrive at the fair value of the Series A Preferred Stock on December 23, 2020 - the date of the exchange. Using this approach the value of Series A Preferred Stock holding is equal to the present value of the cash flow streams that can be expected to be generated by the holder in a combination of dividends and conversion of preferred shares into common and subsequent sale of the common shares. The Company used Monte Carlo model to simulate future movement of our common stock and discounted the results back to December 23, 2020 transaction date. The model used the following notable inputs:

 

 

·

the market price of the Company common stock on December 23, 2020 of $2.50 as a starting point of simulation

 

 

 

 

·

the risk free rate and discount rate of 1.23%;

 

 

 

 

·

volatility of 80%;

 

 

 

 

·

term of simulation extended to 15 years;

 

 

 

 

·

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

 

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Table of Contents

 

Fair value measurements in January 2021 Debt Exchange transaction (refer to “Stockholder’s deficit” footnote for the description of the transaction) 

 

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

 

 

·

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

 

 

 

 

·

the risk free rate and discount rate of 1.35%;

 

 

 

 

·

volatility of 80%;

 

 

 

 

·

term of simulation extended to 15 years;

 

 

 

 

·

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

 

Fair value measurements in August 2021 Issuance of Series A Preferred Stock for paid in kind dividend and settlement of accrued and unpaid interest transaction (refer to “Stockholder’s deficit” footnote for the description of the transaction)

 

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

 

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

 

 

·

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

 

 

 

 

·

the risk free rate and discount rate of 1.58%;

 

 

 

 

·

volatility of 67.5%;

 

 

 

 

·

term of simulation is 15 years;

 

 

 

 

·

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

 

 As of December 31, 2021 and 2020, we believe that the fair value of our financial instruments other than cash and cash equivalents, such as, accounts receivable, our bank loan, notes payable, and accounts payable approximate their carrying amounts.

 

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Table of Contents

  

7. INCOME TAXES

 

The Company accounts for income taxes under the asset and liability method in accordance with the requirements of US GAAP. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.

 

The balances of deferred tax assets and liabilities are as follows:

 

 

 

December 31, 2021

 

 

December 31, 2020

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

$-

 

 

$(5,000 )

Depreciation, amortization and impairment

 

 

8,000

 

 

 

84,000

 

Deferred revenue

 

 

-

 

 

 

41,000

 

Stock-based expenses

 

 

-

 

 

 

53,000

 

Net operating loss carryforwards

 

 

22,384,000

 

 

 

21,433,000

 

Total

 

 

22,392,000

 

 

 

21,606,000

 

Less valuation allowance

 

 

(22,392,000 )

 

 

(21,606,000 )

Net current deferred income tax

 

$-

 

 

$-

 

 

Under US GAAP, a valuation allowance is provided when it is more likely than not that the deferred tax asset will not be realized.

 

Total income tax expense differs from expected income tax expense (computed by applying the U.S. federal corporate income tax rate of 21% in 2021 and 2020) to loss before taxes as follows:

 

 

 

 

December 31, 2021

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

Tax benefit computed at statutory rate of 21%

 

$(2,966,893)

 

$(14,996,067 )

State income tax benefit, net of federal effect

 

 

(169,537)

 

 

(856,918 )

Permanent differences:

 

 

 

 

 

 

 

 

Stock based compensation

 

 

716,518

 

 

 

690,367

 

Debt discount amortization

 

 

17,343

 

 

 

436,411

 

Loss on debt extinguishment

 

 

1,336,650

 

 

 

13,176,496

 

Other

 

 

(6,288 )

 

 

145,036

 

Expiration of NOLs

 

 

286,207

 

 

 

2,726,000

 

Change in valuation allowance - continuing operations

 

 

786,000

 

 

 

(1,321,325 )

Totals

 

$-

 

 

$-

 

 

As of December 31, 2021, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately $100.0 million, of which $24.1 million will never expire and approximately $76 million will expire between 2022 and 2039. For state tax purposes, the NOL carryforwards expire between 2022 and 2034. In accordance with Section 382 of the Internal Revenue Code of 1986, as amended, a change in equity ownership of greater than 50% of the Company within a three-year period can result in an annual limitation on the Company’s ability to utilize its NOL carryforwards that were created during tax periods prior to the change in ownership.

 

The Company has reviewed its tax positions and has determined that it has no significant uncertain tax positions at December 31, 2021.

 

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Table of Contents

  

8. MAJOR CUSTOMERS AND CONCENTRATIONS

 

A customer that individually generates more than 10% of revenue is considered a major customer.

 

For the year ended December 31, 2021, no one customer accounted for more than 10% of the Company’s revenue. Two customers accounted for 93% of the net accounts receivable balance as of December 31, 2021. Two vendors accounted for 66% of the accounts payable balance as of December 31, 2021.

 

For the year ended December 31, 2020, one customer accounted for 12% of the Company’s revenue. Two customers accounted for 91% of the net accounts receivable balance as of December 31, 2020. Four vendors accounted for 60% of the accounts payable balance as of December 31, 2020.

 

9. EMPLOYEE BENEFIT PLAN

 

All full-time employees who meet certain age and length of service requirements are eligible to participate in the Company’s 401(k) Plan. The plan provides for contributions by the Company in such amounts as the Board of Directors may annually determine, as well as a 401(k) option under which eligible participants may defer a portion of their salaries. The Company contributed a total of approximately $48,000 and $34,000 to the plan during 2021 and 2020, respectively.

 

10. DISAGGREGATED PRESENTATION OF REVENUE AND OTHER RELEVANT INFORMATION 

 

The tables below depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, such as type of customer and type of contract.

 

Customer size impact on billings and revenue:

 

 

 

12 Months Ended

December 31, 2021

 

 

12 Months Ended

December 31, 2020

 

 

 

Billings

 

 

GAAP

Revenue

 

 

Billings

 

 

GAAP

Revenue

 

Top 5 Customers (Measured By Amounts Billed)

 

$386,500

 

 

$433,470

 

 

$588,169

 

 

$589,858

 

All Other Customers

 

 

998,378

 

 

 

1,139,414

 

 

 

1,237,247

 

 

 

1,607,221

 

 

 

$1,384,878

 

 

$1,572,884

 

 

$1,825,416

 

 

$2,197,079

 

 

New customer acquisition impact on billings and revenue: 

 

 

 

12 Months Ended

December 31, 2021

 

 

12 Months Ended

December 31, 2020

 

 

 

Billings

 

 

GAAP

Revenue

 

 

Billings

 

 

GAAP

Revenue

 

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

 

$1,384,878

 

 

$1,572,884

 

 

$1,620,831

 

 

$2,108,289

 

Customers Acquired During The Period

 

 

-

 

 

 

-

 

 

 

204,585

 

 

 

88,790

 

 

 

$1,384,878

 

 

$1,572,884

 

 

$1,825,416

 

 

$2,197,079

 

 

As of December 31, 2021 the aggregate amount of the transaction price allocated to unsatisfied (or partially satisfied) performance obligations was $861,686 of which $464,162 had been billed to the customers and recorded as a contract liability and $397,524 remained unbilled as of December 31, 2021. The following table describes the timing of when the Company expects to recognize the revenue from the unsatisfied performance obligations. 

 

 

 

 Billed

(Contract Liability as of

December 31, 2021) 

 

 

 Unbilled 

 

 

 Total 

 

 

 

 

 

 

 

 

 

 

 

2022

 

$464,162

 

 

$159,307

 

 

$623,469

 

2023

 

 

-

 

 

 

188,914

 

 

 

188,914

 

2024

 

 

-

 

 

 

49,303

 

 

 

49,303

 

 

 

$464,162

 

 

$397,524

 

 

$861,686

 

 

At January 1, 2021 the total contract liability balance was $649,789, of which all was recognized in revenue during the twelve months ended December 31, 2021.

 

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11. LEASES 

 

We are a lessee for a non-cancellable operating lease for our corporate office in Raleigh, North Carolina. The operating lease for the corporate office expires on April 30, 2024. 

 

The following table summarizes the information about operating lease:

 

 

 Year Ended

 

 

 

December 31,

 

 

 

2021 

 

Operating lease expense

 

$205,243

 

Remaining Lease Term (Years)

 

 2.3 year 

 

Discount Rate

 

 

8%

 

Future maturities of operating lease liability as of December 31, 2021, were as follows:

 

 

 

Operating

Lease Expense

 

 

Variable

Lease Expense

 

 

Total

Lease Expense

 

2022

 

 

191,074

 

 

 

14,096

 

 

 

205,170

 

2023

 

 

191,074

 

 

 

14,519

 

 

 

205,593

 

2024

 

 

63,691

 

 

 

4,840

 

 

 

68,531

 

Total lease payments

 

$445,839

 

 

$33,455

 

 

 

479,294

 

Less imputed interest

 

 

 

 

 

 

 

 

 

 

(47,235 )

Total

 

 

 

 

 

 

 

 

 

$432,059

 

 

12. SUBSEQUENT EVENTS

 

Subsequent to December 31, 2021 the Company issued a total of 39,627 shares of Series A Preferred Stock in exchange for $1,700,000 of cash investment.

 

On February 24, 2022 the Company issued a total of 54,966 shares of Series A Preferred Stock as payment in kind for dividends declared by the board of directors.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Not applicable.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of our disclosure controls and procedures for the quarter ended December 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Based on such evaluation and the identification of the material weakness in our internal control over financial reporting as described below under “Management’s Report on Internal Control over Financial Reporting", our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures were not effective at the reasonable assurance level.

  

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control system was designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements.

 

Our internal control over financial reporting includes those policies and procedures that:

 

 

(i)

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

 

 

 

(ii)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

 

 

 

(iii)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

In making the assessment of adequate internal control over financial reporting, our management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). We have identified material weaknesses in our internal control over financial reporting related to the proper valuation of dividends with respect to our Series A Preferred Stock. Based on that assessment and those criteria, management believes that our internal control over financial reporting were not effective as of December 31, 2021. As a result of the identified material weakness we have put together a remediation plan which includes additional Finance department staff time allocated to review of financing documents and valuation reports for non-recurring and unusual transactions.

 

During our fourth quarter ended December 31, 2021, there were no changes made in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

 
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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. 

 

The following table sets forth certain information concerning the Company’s current executive officers and directors, their ages, their offices with the Company, if any, their principal occupations or employment for the past five years.

 

Name

 

Age

 

Position

 

Officer Since

 

 

 

 

 

 

 

 

 

EXECUTIVE OFFICERS:

 

 

 

 

 

 

 

Chris Caramanico

 

56

 

Chief Executive Officer, Director

2022

Gleb Mikhailov

 

42

 

Chief Financial Officer

2013

 

Name

 

Age

 

Position

 

Director Since

 

 

 

 

 

 

 

 

 

DIRECTORS:

 

 

 

 

 

 

 

Ronen Shviki

 

50

 

Director

 

2013

 

Robert Smith

 

70

 

Director, Chairman of the Board

 

2017

 

Amir Elbaz 

 

45

 

Director

 

2010

*

Jerry Lepore 

 

65

 

Director

 

 2020

**

 

* Mr. Elbaz was our Chief Executive Officer through January 17, 2017, a position he had held since May 2013.

** Mr. Lepore has held a director position since March 18, 2018. On January 17, 2020 Mr. Lepore also assumed the role of President and Chief Executive Officer, leaving the position January 31, 2022. Mr. Lepore will remain on the Board of Directors.

*** Mr. Caramanico joined MobileSmith on January 31, 2022, assuming the role of President and Chief Executive Officer.

 

Chris Caramanico, Director, Chief Executive Officer

 

Mr. Caramanico assumed the role of President and Chief Executive Officer on January 31, 2022.

 

Mr. Caramanico, 56, is an experienced senior executive, whose focus is strategic oversight, growth, and business operations. Mr. Caramanico has spent over 20 years in the Healthcare Information Technology (HIT) space partnering with top companies like Cerner, IDX/GE and EPIC Systems. 

Previously Mr. Caramanico lead Orthus Health as its Chief Executive Officer and President. Mr. Caramanico has served in senior leadership positions with Eclipsys/Allscripts and was responsible for new business sales and enterprise revenue cycle product development. Previously at McKesson, Mr. Caramanico led the Managed Services Group (MSG), including remote hosting, IT outsourcing, and technology sales. Mr. Caramanico began his HIT career in imaging and software consulting sales.

Mr. Caramanico received his BS degree in Business Administration, Marketing and Management from University of Rhode Island.

 

Gleb Mikhailov, Chief Financial Officer

 

Mr. Mikhailov has been our Chief Financial Officer since April 2013. From January 2013 to March 2013, Mr. Mikhailov served as the Manager of Financial Reporting and SEC Consulting in the SEC Solutions Group of Citrin Cooperman, LLP, an accounting firm providing business solutions and accounting services to middle market companies. From January 2005 until December 2012, Mr. Mikhailov was employed by EisnerAmper LLP, a full-service advisory and public accounting firm, in its Private Business Services Group and Audit and Assurance Group. He was a Manager at EisnerAmper LLP since 2010. Mr. Mikhailov holds a B.A. in Accounting from Rutgers, The State University of New Jersey and an M.B.A. from Rutgers Business School. Mr. Mikhailov holds a CPA license issued by the State of New Jersey.

 

Mr. Mikhailov also provides consulting services in the area of corporate finance, financial reporting and compliance.

 

 
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Ronen Shviki, Director

 

Mr. Shviki has served on the Board since February 2013. Since January 2013, Mr. Shviki has served as the Vice President for Business Development of Mendelssohn Ltd., an Israeli distribution company. Prior to this, Mr. Shviki served in the Israel Defense Forces as a Colonel in the Army branch. Mr. Shviki holds a B.A. in Business Administration from Interdisciplinary Center Herzliya and an LLB from Interdisciplinary Center Herzliya.

 

The Board believes Mr. Shviki’s extensive marketing and management experience, in addition to his knowledge of the international marketplace, contributes to the strategic composition of the Board.

 

Robert Smith, Director, Chairman of the Board

 

On October 31, 2017, the Board of Directors (the “Board”) appointed Robert L. Smith to the Board. On March 18, 2020, Mr. Smith was appointed as the Chairman of the Board after the resignation of Randy J. Tomlin from the Board and as the Chairman. Mr. Tomlin was also the Company’s former Chief Executive Officer.

 

Robert Smith is an experienced multi-facility health care executive with varied background in complex urban and rural health care settings. During his 40-year career in the industry he has held CEO and other executive positions of various for profit and non-profit hospitals and health care organizations, where he demonstrated ability to turnaround, create, and grow business units in complex and competitive environments. Mr. Smith’s broad business experience includes reorganization, restructuring and public company experience at the CEO and Board of Directors level. Mr. Smith has served on the boards of various healthcare organizations. He currently serves on the board of Parkland Center for Clinical Innovation. He is a 2011 recipient of the Texas Hospital Associations Earl N. Collier Award for Distinguished Health Care Administration. Mr. Smith received his Master of Health Administration Degree from Washington University School of Medicine, St. Louis, MO and his Bachelor of Science Degree in Psychology from University of Missouri in St. Louis, MO.

 

The Board believes that Mr. Smith’s background in healthcare will provide the Company management with insights regarding market penetration and enhance management’s and Board’s ability to interpret healthcare industry changes.

 

Amir Elbaz, Director

 

Until January of 2017 Mr. Elbaz held positions of Chief Executive Officer since May 2013 and Chairman of the Company’s Board of Directors since November of 2012. During his tenure as a member of the Board, and its Chairman and Company CEO, Mr. Elbaz has been actively involved in the Company operations and played significant role in ensuring that the Company’s products and strategy had continued backing of investors and shareholders. Mr. Elbaz continues in the employ of the Company primarily focusing on investor and public relations and regulatory and operational compliance.

 

The Board believes Mr. Elbaz’s significant experience in the technology sector, coupled with this extensive financial and economic background and his deep knowledge of our company provide invaluable insight with respect to the Company’s business and technologies.

 

Jerry Lepore, Director,

 

On March 21, 2018, the Board of Directors appointed Jerry Lepore to the Board. On January 17, 2020, subsequent to Randy Tomlin’s announcement of a leave of absence from responsibilities as President and Chief Executive Officer, Mr. Lepore assumed the role of President and Chief Executive Officer. On January 31, 2022, Mr. Lepore resigned as Chief Executive Officer, but will remain on the Board of Directors.

 

Mr. Lepore is an experienced business and technology executive with strong background in healthcare, insurance, financial services, education, and software industries. In his 40 year career he has held CEO, COO and CTO positions in public and private companies. He has also provided transitional leadership in turnaround and/or growth situations. Mr. Lepore has founded and operated several companies in the software and strategic services industries. He has experience in capital raises, public offerings, strategic sales, corporate acquisitions, and mergers.

 

Mr. Lepore has served on boards of healthcare and software organizations. He received a Bachelor of Science Degree in Mathematics from the University of Connecticut in Storrs, CT.

 

 
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Section 16(a) Beneficial Ownership Reporting Compliance

 

The members of the Board, its executive officers, and persons who hold more than 10% of the Company’s outstanding shares of common stock, $0.001 par value per share, or common stock, are subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), which requires them to file reports with respect to their ownership of the Company’s common stock and their transactions in such common stock. Based upon the Company’s review of the Section 16(a) reports in its records for fiscal year 2021 transactions in the Company’s common stock, the Company believes that all reporting requirements under Section 16(a) for fiscal year 2021 were met in a timely manner by its directors, executive officers, and greater than 10% beneficial owners, except that Union Bancaire Privée, or UBP, has not filed a Form 3 or any subsequent reports in respect of its ownership of 7,167,832 shares of Company common stock and of 820,171 shares of Series A convertible preferred stock (the "Series A Preferred Stock") , which Series A Preferred Stock may be converted into 24,605,130 shares of the Company’s common stock by UBP at any time

 

Code of Ethics

 

The Company has adopted a Code of Ethics applicable to its executives, including the principal executive officer, principal financial officer, and principal accounting officer, as defined by applicable rules of the SEC. The Company will promptly deliver free of charge, upon request, a copy the Code of Ethics to any stockholder requesting a copy. Requests should be directed to the Company’s Chief Financial Officer at 5400 Trinity Rd., Suite 208, Raleigh, NC, 27607. If the Company makes any amendments to the Code of Ethics other than technical, administrative, or other non-substantive amendments, or grants any waivers, including implicit waivers, from a provision of the Code of Ethics to the Company’s Chief Executive Officer, Chief Financial Officer, Chief Operating Officer or certain other finance executives, the Company will disclose the nature of the amendment or waiver, its effective date, and to whom it applies in a Current Report on Form 8-K.

 

The Board

 

The size of the Board is currently comprised of four members. The Board believes that the current number of directors is appropriate at this time; however, the Board will consider adding members in the future with additional skills and professional connections that will be of benefit to the Company.

 

We do not have any defined policy or procedure requirements for stockholders to submit recommendations or nominations for directors. The board of directors believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our company does not currently have any specific or minimum criteria for the election of nominees to the board of directors and we do not have any specific process or procedure for evaluating such nominees. The board of directors will assess all candidates, whether submitted by management or stockholders, and make recommendations for election or appointment. A shareholder who wishes to communicate with our board of directors may do so by directing a written request addressed to our Chief Executive Officer, Christopher Caramanico, at the address appearing on the first page of this report.

 

Audit Committee and Compensation Committee

 

Effective April 3, 2020, the Board approved the dissolution of the Audit Committee and Compensation Committee of the Board. From that date moving forward, the entire Board has and will address all audit and compensation matters that would otherwise have been addressed by the Audit Committee and Compensation Committee. Mr. Smith shall act as the lead Board member with respect to all audit matters and Mr. Elbaz shall act as the lead Board member with respect to all compensation matters. Messrs. Lepore and Caramanico shall recuse themselves from any vote on audit or compensation matters at the request of Messrs. Smith or Elbaz, as applicable. The Board has determined the following members of the Board are deemed to be independent in accordance with the rules promulgated by the Securities and Exchange Commission: (i) Mr. Elbaz, (ii) Mr. Shviki and (iii) Mr. Smith.

 

ITEM 11. EXECUTIVE COMPENSATION.

 

The following table summarizes the compensation earned during the years ended December 31, 2021 and December 31, 2020 by our principal executive officer, our former principal executive officer, the two other most highly paid executive officers who were serving as executive officers on December 31, 2021:

 

 
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Table of Contents

 

SUMMARY COMPENSATION TABLE.

 

Name and Principal Position

 

 Year

 

Salary ($)

 

 

Bonus ($)

 

 

Stock

Awards ($)

 

 

Option

Awards ($) (1)

 

 

Non-Equity Incentive Plan Compensation ($)

 

 

Change In Pension Value And Nonqualified Deferred Compensation Earnings ($)

 

 

All Other Compensation ($)

 

 

Total ($)

 

Jerry Lepore

 

2021

 

$300,000

 

 

$-

 

 

 

-

 

 

$1,087,500

 

 

 

-

 

 

 

-

 

 

 

-

 

 

$1,387,500

 

Chief Executive Officer

 

2020

 

 

225,000

 

 

 

-

 

 

 

-

 

 

 

1,030,232

 

 

 

-

 

 

 

-

 

 

 

62,972

 

 

 

1,318,204

 

Gleb Mikhailov

 

2021

 

 

200,000

 

 

 

4,225

 

 

 

-

 

 

 

184,950

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

389,175

 

Chief Financial Officer

 

2020

 

$195,367

 

 

$6,460

 

 

 

-

 

 

$-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

$201,827

 

 

Name and Principal Position

 

(1)

Amounts in this column reflect the aggregate grant date fair value computed in accordance with FASB ASC 718 with respect to employee stock options granted under our 2016 Equity Incentive Plan. The assumptions used to calculate the fair value of stock option grant are set forth in Note 2 (Significant Accounting Policies) to our financial statements, which are included in the Original Filing. The grant-date fair value does not necessarily reflect the value of shares which may be received in the future with respect to these awards. The fair value of the stock options will likely vary from the actual value the holder receives because the actual value depends on the number of options exercised and the market price of our Common Stock on the date of exercise.

 

Grants of Plan--Based Awards for Year Ended December 31, 2021

 

There were two grants of plan-based awards in 2021, issued to Jerry Lepore (i), our Chief Executive Officer, and Gleb Mikhailov (ii), our Chief Financial Officer. The awards were granted as follows: (i) on January 1, 2021 an option to purchase up to 375,000 shares of common stock at an exercise price of $3.45 and (ii) on August 3, 2021, an option to purchase up to 135,000 shares of common stock at an exercise price of $1.63.

 

Outstanding Equity Awards

 

 

 

Option awards  

 

 

 Option awards 

 

 

 

 

 

 

 

number of 

 

 

 number of 

 

 

 

 

 

 

 

 securities 

 

 

  securities

 

 

 

 

 

 

 

underlying  

 

 

  underlying

 

 

 

 

 

 

 

unexercised  

 

 

 unexercised

 

 

Option 

 

 

Option

 

Name

 

 options (#)

Exercisable 

 

 

 option (#) 

Unexercisable 

 

 

  exercise 

price ($/Sh) 

 

 

expiration

date

 

Jerry Lepore

 

 

366,980

 

 

 

-

 

 

$2.00

 

 

3/20/2028

 

Jerry Lepore

 

 

151,250

 

 

 

123,750

 

 

 

1.60

 

 

5/15/2029

 

Jerry Lepore

 

 

26,000

 

 

 

39,000

 

 

 

2.51

 

 

1/23/2030

 

Jerry Lepore

 

 

131,250

 

 

 

243,750

 

 

 

2.75

 

 

4/29/2030

 

Jerry Lepore

 

 

74,030

 

 

 

300,970

 

 

 

3.45

 

 

1/1/2031

 

Gleb Mikhailov

 

 

275,000

 

 

 

225,000

 

 

 

1.95

 

 

5/25/2028

 

Gleb Mikhailov

 

 

308,525

 

 

 

121,975

 

 

 

1.60

 

 

5/15/2029

 

Gleb Mikhailov

 

 

11,250

 

 

 

123,750

 

 

$1.63

 

 

8/3/2031

 

 

 
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Option Exercises and Stock Vested in 2021

 

None of our named executive officers acquired shares upon exercise of options during the year ended 2021. During 2021, options to purchase up to 444,962 shares previously granted to the named executive officers vested.

 

Compensation of Directors

 

The following table summarizes the compensation paid to the directors for the fiscal year ended December 31, 2021, not covered in the tables above.

 

 2021 DIRECTOR COMPENSATION

 

Name

 

Fees Earned or

Paid in Cash ($)

 

 

Stock

Awards ($)

 

 

Option

Awards ($)

 

 

All Other

Compensation ($)

 

 

Total ($)

 

Ronen Shviki

 

$30,000

 

 

$-

 

 

$-

 

 

$-

 

 

$30,000

 

Amir Elbaz

 

$100,000

 

 

$-

 

 

$261,000

 

 

$-

 

 

$361,000

 

Robert Smith

 

$60,000

 

 

$-

 

 

$-

 

 

$-

 

 

$60,000

 

 

 
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Table of Contents

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

Principal Stockholders and Share Ownership by Management

 

The following table sets forth information regarding beneficial ownership of the Company’s common stock as of March 25, 2022, by (i) each person who is known by the Company to beneficially own more than 5% of the Company’s common stock; (ii) each person who served as a named executive officer of the Company in fiscal year 2020 (iii) each person serving as a director or nominated for election as a director; and (iv) all current executive officers and directors as a group. Except as otherwise indicated by footnote, to the Company’s knowledge, the persons named in the table below have sole voting and investment power with respect to all shares of the Company’s common stock shown as beneficially owned by them.

 

Name and Address of Beneficial Owner(1)

 

Shares

Beneficially

Owned (2)

 

 

%of Shares

Beneficially

Owned

 

Avy Lugassy (3)

 

 

25,495,705

 

 

 

58.17%

 

 

 

 

 

 

 

 

 

Union Bancaire Privee, UBP SA (4)

 

 

33,424,491

 

 

 

61.17%

 

 

 

 

 

 

 

 

 

Doron Rotler (5)

 

 

2,993,093

 

 

 

10.33%

 

 

 

 

 

 

 

 

 

Directors and Named Executive Officers:

 

 

 

 

 

 

 

 

Jerry Lepore, Director

 

 

815,971

 

 

 

2.79%

Gleb Mikhailov, Chief Financial Officer

 

 

659,275

 

 

 

2.27%

Amir Elbaz, Director

 

 

271,033

 

 

 

0.95%

Ronen Shviki, Director

 

 

501,980

 

 

 

1.74%

Robert Smith, Director

 

 

531,980

 

 

 

1.84%

 Christopher Caramanico, Chief Executive Officer and Director

 

 

31,111

 

 

 

.11%

 

 

 

 

 

 

 

 

 

All executive officers and directors as a group (6) persons

 

 

2,569,415

 

 

 

9.70%

* Less than 2%.

 

(1)

Unless otherwise indicated, the address of such individual is c/o MobileSmith, Inc., 5400 Trinity Road, Suite 208, Raleigh, North Carolina 27607.

(2)

In computing the number of shares beneficially owned by a person and the percentage ownership of a person, shares of our common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of March 25, 2022 are deemed outstanding. Such shares, however, are not deemed outstanding for purposes of computing the percentage ownership of each other person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock.

(3)

Beneficial ownership is comprised of 10,054,045 shares of the Company’s common stock and 15,441,660 shares issuable upon conversion of the Company’s Series A Preferred Stock. Unless otherwise indicated, the address of such individual is 126 Chemin des Hauts, Crets 1253 Vandeeuvres, Geneva. Switzerland.

(4)

Comprised of 7,167,831 shares issued and 26,256,660 shares issuable upon conversion of Series A Preferred Stock. Unless otherwise indicated, the address of such individual is Rue du Rhone 9698 | CP | CH1211 Geneva 1, Switzerland.

(5)

Comprised of 2,332,807 shares of Common Stock held as of record by Mountain Top LTD., a British Anguilla company (an entity controlled by Mr. Rotler), 85,900 shares held in the name of Mr. Rotler and 574,740 shares issuable upon conversion of the Company’s Series A Preferred Stock by Crystal Management Ltd., a company registered in British Anguilla (entity controlled by Mr. Rotler). Unless otherwise indicated, the address of such individual is c/o S. Rotler, 134 Aluf David Street Ramat Gan 52236, Israel.

 

 
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Table of Contents

 

Equity Compensation Plans

 

The following table provides information, as of December 31, 2021, regarding the Company’s compensation plans (including individual compensation arrangements) under which the Company is authorized to issue equity securities.

 

2016 EQUITY COMPENSATION PLAN INFORMATION.

 

 

 

 

 

 

 

Number of

 

 

 

 

 

 

 

securities

 

 

 

 

 

 

 

remaining

 

 

 

 

 

 

 

available for

 

 

 

Number of

 

 

 

 

future issuance

 

 

 

securities to be

 

 

Weighted

 

 

under equity

 

 

 

issued upon

 

 

average

 

 

compensation

 

 

 

exercise of

 

 

exercise price

 

 

plans

 

 

 

outstanding

 

 

of outstanding

 

 

(excluding

 

 

 

options,

 

 

options,

 

 

securities

 

 

 

warrants and

 

 

warrants and

 

 

reflected in

 

Plan Category

 

rights (a)

 

 

rights (b)

 

 

column (a)(c))

 

 

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

 

10,883,300(1)

 

$2.06

 

 

 

4,116,700(2)

Equity compensation plans not approved by security holders

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

 

10,883,300

 

 

$2.06

 

 

 

4,116,700

 

 

(1)

Consists of shares issuable upon exercise of outstanding options under the Company’s 2016 Equity Compensation Plans.

(2)

All of the shares remaining for future issuance under the 2016 Equity Compensation Plan are available for issuance as options or cove stock awards.

 

 
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Table of Contents

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

Certain Relationships and Related Transactions

 

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

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

 

On January 28, 2021, the Company entered into a debt exchange transaction where the Company exchanged remainder of its convertible and non- convertible debt plus accrued but unpaid interest into Series A Convertible Preferred Stock. On that date Avy Lugassy, as beneficial owner, exchanged $3,000,000 in debt and accrued interest for 70,014 shares of Series A Preferred Stock. UBP SA has entered into following financing transactions throughout 2021:

 

UBP SA has entered into following financing transactions throughout 2021:

 

(a)

On February 16, 2021 purchased 23,000 shares of Series A Preferred Stock for $986,700 in cash;

 

 

(b)

On June 10, 2021 purchased 23,310 shares of Series A Preferred Stock for $1,000,000 in cash;

 

 

(c)

On August 18, 2021 purchased 23,3100 shares of Series A Preferred Stock for $1,000,000 in cash;

 

 

(d)

On November 10, 2021 purchased 23,3100 shares of Series A Preferred Stock for $1,000,000 in cash.

 

Policy for Approval of Related Party Transactions

 

The Company requires that any related party transactions must be approved by the full Board of Directors with any interested member of the Board relating to the transaction recusing her or himself from the vote.

 

 
27

Table of Contents

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

Audit and Non-Audit Fees

 

Aggregate fees for professional services rendered for the Company by Cherry Bekaert LLP, our independent registered public accounting firm, for the fiscal years ended December 31, 2021 and 2020 are set forth below.

 

 

 

Twelve months ended December 31, 2021

 

 

Twelve months ended December 31, 2020 

 

Audit Fees

 

$137,500

 

 

$142,000

 

Audit-Related Fees

 

 

-

 

 

 

-

 

Tax Fees

 

 

-

 

 

 

-

 

All Other Fees

 

 

3,188

 

 

 

 

 

Total Fees

 

$137,500

 

 

$145,188

 

 

Audit Fees and audit related fees were for professional services rendered for the audits of our financial statements, quarterly review of the financial statements included in Quarterly Reports on Form 10-Q, consents, and other assistance required to complete the year-end audit of the financial statements.

 

Our full Board pre-approves all audit and permissible non-audit services to be provided by our independent registered public accountants and the estimated fees for these services. None of the services provided by the independent registered public accountants that are described above were approved by the Audit Committee pursuant to a waiver of the pre-approval requirements of the SEC’s rules and regulations.

 

 
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Table of Contents

 

PART IV

ITEM 15. EXHIBITS

 

(a) (1) Financial Statements: 

  

Report of Independent Registered Public Accounting Firm  

 

FINANCIAL STATEMENTS:

 

 

 

 

 

 

 

 

 

Balance Sheets as of December 31, 2021 and 2020

 

 

 

 

 

 

 

 

 

Statements of Operations for the Years Ended December 31, 2021 and 2020

 

 

 

 

 

 

 

 

 

Statements of Cash Flows for the Years Ended December 31, 2021 and 2020

 

 

 

 

 

 

 

 

 

Statements of Stockholders’ Deficit for the Years Ended December 31, 2021 and 2020

 

 

 

 

 

 

 

 

 

Notes to Financial Statements

 

 

 

 

 

(b) Exhibits

 

Exhibit No.

 

Description

3.1

 

Amended and Restated Certificate of Incorporation, dated January 4, 2005, as amended to date (incorporated herein by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q, as filed with the SEC on August 14, 2013)

 

 

 

3.2

 

Seventh Amended and Restated Bylaws, effective July 1, 2013 (incorporated herein by reference to Exhibit 3.3 to our Quarterly Report on Form 10-Q, as filed with the SEC on August 14, 2013)

 

 

 

3.3

 

Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.1 to Form 8-K, as filed with the SEC on December 31, 2020)

 

 

 

10.1

 

Loan and Security Agreement dated June 9, 2014 by and between Comerica Bank and MobileSmith, Inc. (incorporated by reference herein to Exhibit 10.1 to our Quarterly Report on Form 10-Q, as filed with the SEC on August 13, 2014)

 

 

 

10.2*

 

Letter Agreement dated as of October 11, 2017 between MobileSmith, Inc. and Robert Smith (incorporated herein by reference to Exhibit 10.1 to form 8- K, as filed with the SEC on November 6, 2017) .

 

 

 

10.3* 

 

Executive Employment Agreement dated as of January 1, 2021 between MobileSmith, Inc. and Jerry Lepore (incorporated herein by reference to Exhibit 10.1 to Form 8- K, as filed with the SEC on January 5, 2021)

 

 

 

10.4 

 

Form of Series A Exchange Agreement between MobileSmith Inc. and various entities (incorporated herein by reference to Exhibit 10.1 to Form 8- K, as filed with the SEC on December 31, 2021)

 

 

 

23.1

 

Consent of Independent Registered Public Accounting Firm (filed herewith)

 

 

 

31.1

 

Certification of Principal Executive Officer Pursuant to Rule 13a-14/15d-14 (filed herewith)

 

 

 

31.2

 

Certification of Principal Financial Officer Pursuant to Rule 13a-14/15d-14 (filed herewith)

 

 

 

32.1

 

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

 

 

 

32.2

 

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

 

 

 

101.1

 

The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in XBRL (eXtensible Business Reporting language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows, (iv) the Statements of Stockholders’ Deficit and (v) related notes to these financial statements, tagged as blocks of text and in detail (filed herewith)

_________________

* Management contract or compensatory plan.

 

ITEM 16. SUMMARY

 

Registrants may voluntarily include a summary of information required by Form 10-K under this Item 16. We have elected not to include such summary.

 

 
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Table of Contents

  

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MOBILESMITH INC.

(Registrant)

 

/s/ Chris Caramanico

 

/s/ Gleb Mikhailov

 

Chris Caramanico

 

Gleb Mikhailov,

 

Chief Executive Officer

(Principal Executive Officer)

 

Chief Financial Officer

(Principal Financial Officer and Accounting Officer)

 

 

 

 

 

Date: March 25, 2022

 

Date: March 25, 2022

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

March 25, 2022

By:

/s/ Chris Caramanico

 

 

 

Chris Caramanico

 

 

 

Chief Executive Officer

 

 

 

(principal executive officer)

 

 

 

 

 

March 25, 2022

By:

/s/ Gleb Mikhailov

 

 

 

Gleb Mikhailov

 

 

 

Chief Financial Officer

 

 

 

(principal financial and accounting officer)

 

 

 

 

 

March 25, 2022

By:

 /s/ Amir Elbaz

 

 

 

Amir Elbaz

 

 

 

Director

 

 

 

 

 

March 25, 2022

By:

 /s/ Ronen Shviki

 

 

 

Ronen Shviki

 

 

 

Director

 

 

 

 

 

March 25, 2022

By:

/s/ Robert Smith

 

 

 

Robert Smith

 

 

 

Director, Chairman of the Board

 

 

 

 

 

March 25, 2022

By:

/s/ Jerry Lepore

 

 

 

Jerry Lepore

 

 

 

Director

 

 

 
30

Table of Contents

  

EXHIBIT INDEX

 

Exhibit No.

 

Description

3.1

 

Amended and Restated Certificate of Incorporation, dated January 4, 2005, as amended to date (incorporated herein by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q, as filed with the SEC on August 14, 2013)

 

 

 

3.2

 

Seventh Amended and Restated Bylaws, effective July 1, 2013 (incorporated herein by reference to Exhibit 3.3 to our Quarterly Report on Form 10-Q, as filed with the SEC on August 14, 2013)

 

 

 

3.3

 

Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated herein by reference to Exhibit 3.1 to Form 8-K, as filed with the SEC on December 31, 2020)

 

 

 

10.1

 

Loan and Security Agreement dated June 9, 2014 by and between Comerica Bank and MobileSmith, Inc. (incorporated by reference herein to Exhibit 10.1 to our Quarterly Report on Form 10-Q, as filed with the SEC on August 13, 2014)

 

 

 

10.2*

 

Letter Agreement dated as of October 11, 2017 between MobileSmith, Inc. and Robert Smith (incorporated herein by reference to Exhibit 10.1 to form 8- K, as filed with the SEC on November 6, 2017) .

 

 

 

10.3*

 

Executive Employment Agreement dated as of January 1, 2021 between MobileSmith, Inc. and Jerry Lepore (incorporated herein by reference to Exhibit 10.1 to Form 8- K, as filed with the SEC on January 5, 2021)

 

 

 

10.4

 

Form of Series A Exchange Agreement between MobileSmith Inc. and various entities (incorporated herein by reference to Exhibit 10.1 to Form 8- K, as filed with the SEC on December 31, 2020)

 

 

 

23.1

 

Consent of Independent Registered Public Accounting Firm (filed herewith)

 

 

 

31.1

 

Certification of Principal Executive Officer Pursuant to Rule 13a-14/15d-14 (filed herewith)

 

 

 

31.2

 

Certification of Principal Financial Officer Pursuant to Rule 13a-14/15d-14 (filed herewith)

 

 

 

32.1

 

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

 

 

 

32.2

 

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

 

 

 

101.1

 

The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in XBRL (eXtensible Business Reporting language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows, (iv) the Statements of Stockholders’ Deficit and (v) related notes to these financial statements, tagged as blocks of text and in detail (filed herewith)

_________________

* Management contract or compensatory plan.

 

 
31

 

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