The accompanying notes are an integral part of these condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
For the Six Months’ Period Ended June 30, 2022
(unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
MobileSmith, Inc. (referred to herein as the “Company,” “us,” “we,” or “our”) was incorporated as Smart Online, Inc. in the State of Delaware in 1993. The Company changed its name to MobileSmith, Inc. effective July 1, 2013. The same year the Company focused exclusively on development of do-it-yourself customer facing platform that enabled organizations to rapidly create, deploy, and manage custom, native smartphone and tablet apps deliverable across iOS and Android mobile platforms without writing a single line of code. During 2017 the Company concluded that it had its highest rate of success with clients within the Healthcare industry and concentrated its development and sales and marketing efforts in that industry. During 2018 we further refined our Healthcare offering and redefined our product - a suite of e-health mobile solutions that consist of a catalog of ready to deploy mobile app solutions (App Blueprints) and support services. In 2019 and 2020 we consolidated our current solutions under a single offering branded Peri™. Peri™ is a cloud-based collection of applications that run on 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 an 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 Company prepared the accompanying unaudited condensed financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its audited annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its financial position, results of operations, cash flows, and stockholders’ deficit as of June 30, 2022. The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These condensed financial statements and accompanying notes should be read in conjunction with the audited annual financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 on file with the SEC (the “Annual Report”).
Except as otherwise noted, there have been no material changes to the Company’s significant accounting policies as compared to the significant accounting policies described in the Annual Report. The accompanying condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During the six months ended June 30, 2022, the Company incurred net losses as well as negative cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts or classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
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. The Company has been funding its operations, in part, from the proceeds from the issuance of its Series A Preferred Stock (with the terms set forth in Note 4 below) to related parties. However, there can be no assurance that the Company will in fact be able to raise additional capital through t its Series A Preferred Stock or even from other sources on commercially accepted terms, if at all, or to be able to negotiate additional extensions of the Comerica LSA on terms acceptable to the Company, if at all. As such, there is substantial doubt about the Company’s ability to continue as a going concern.
Recently Issued Accounting Pronouncements and Their Impact on Significant Accounting Policies
The Company’s significant accounting policies are detailed in “Note 2: Significant Accounting Policies” of the Company’s Annual Report.
2. DEBT
The table below summarizes the Company’s debt outstanding on June 30, 2022 and December 31, 2021:
Debt Description | | June 30, | | | December 31, | | | | | | |
| | 2022 | | | 2021 | | | Maturity | | Rate | |
| | | | | | | | | | | |
Comerica Bank Loan and Security Agreement | | $ | 5,000,000 | | | $ | 5,000,000 | | | June 2024 | | | 5.35 | % |
| | | | | | | | | | | | | | |
Less: Current portion of long term debt | | | - | | | | 5,000,000 | | | | | | | |
Debt - long term | | $ | 5,000,000 | | | $ | - | | | | | | | |
Bank Loan
The Company has an outstanding Loan and Security Agreement with Comerica Bank (“Comerica”) dated June 9, 2014 (the “LSA”) in the amount of $5,000,000, with an extended maturity of June 9, 2022. On May 31, 2022 the Company and Comerica Bank entered into Fourth Amendment to the LSA, which extended the maturity of the LSA to June 9, 2024, as reported on a Current Report on Form 8-K filed with the Securities and Exchange Commission on June 6, 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, 2023, which term is renewable for one year periods, unless notice of non-renewal is given by UBS AG at least 45 days prior to the then current expiration date.
The LSA with Comerica has the following additional terms:
● | a variable interest rate at prime plus 0.6% payable quarterly; |
● | secured by substantially all of the assets of the Company, including the Company’s intellectual property; and |
● | 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 June 30, 2022.
3. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company may be subject to routine litigation, claims or disputes in the ordinary course of business. The Company defends itself vigorously in all such matters. In the opinion of management, no pending or known threatened claims, actions or proceedings against the Company are expected to have a material adverse effect on its financial position, results of operations or cash flows. However, the Company cannot predict with certainty the outcome or effect of any such litigation or investigatory matters or any other pending litigations or claims. There can be no assurance as to the ultimate outcome of any such lawsuits and investigations. The Company will record a liability when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. The Company periodically evaluates developments in its legal matters that could affect the amount of liability that it has previously accrued, if any, and makes adjustments as appropriate. Significant judgment is required to determine both the likelihood of there being, and the estimated amount of, a loss related to such matters, and the Company’s judgment may be incorrect. The outcome of any proceeding is not determinable in advance. Until the final resolution of any such matters that the Company may be required to accrue for, there may be an exposure to loss in excess of the amount accrued, and such amounts could be material.
4. STOCKHOLDERS DEFICIT
Preferred Stock
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, with respect to the then outstanding Series A Preferred Stock.. The issuance of the Series A Preferred Stock was recorded at fair value on February 24, 2022 as determined below:
● | The value of the 54,966 shares of Series A Preferred Stock dividend was recorded at $2,597,699. In absence of retained earnings, the dividend resulted in a charge to additional paid in capital for Common Stock. In addition, on February 24, 2022 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 $1,764,405. |
In addition, during the six month period ended June 30, 2022 the Company issued 62,937 shares of Series A Preferred Stock in exchange for $2,700,000 in cash funding. The shares were issued with beneficial conversions feature discount and resulted in a deemed dividend with charge to loss attributable to common stock shareholders of $ 2,399,300.
Our Series A Preferred Stock has the following standard terms:
● | Each share of Series A Preferred Stock shall have a par value of $0.001 per share and a stated value equal to $42.90 (the “Stated Value “); |
● | Each share of the Series A Preferred Stock then outstanding shall be entitled to receive an annual dividend equal to $3.43, subject to proration related to the timing of issuance. Such dividend is designed to have an effective yield of 8% on the Stated Value; |
● | Each dividend shall be paid either in shares of Series A Preferred Stock or in cash, at the option of the Company, on the respective dividend date; |
● | The holders of Series A Preferred Stock shall have no voting rights with respect to any matters to be voted on by the stockholders of the Company; |
● | The holders of Series A Preferred Stock shall have certain Board observation and inspection rights administered through a designated agent; |
● | Each share of Series A Preferred Stock shall be convertible, at any time and from time to time, at the option of the Holder into 30 shares of Common Stock, which results in conversion ratio of $1.43 of the Stated Value of Series A Preferred Stock into one share of common stock; |
● | The shares are subject to automatic conversion immediately prior to the occurrence of a Fundamental Transaction, as defined in the Series A Preferred Stock Certificate of Designation. A Fundamental Transaction includes, but is not limited to, a sale, merger or similar change in ownership. |
Equity Compensation Plan
The following is a summary of the stock option activity for the six months ended June 30, 2022:
| | Number of Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | |
Outstanding, December 31, 2021 | | | 10,883,300 | | | $ | 2.06 | | | | 7.6 | | | $ | 9,553,832 | |
Cancelled | | | (1,774,610 | ) | | | 1.93 | | | | | | | | | |
Issued | | | 500,000 | | | | 2.55 | | | | | | | | | |
Outstanding, June 30, 2022 | | | 9,608,690 | | | | 2.11 | | | | 7.4 | | | | 12,275,437 | |
Vested and exercisable, June 30, 2022 | | | 5,462,850 | | | $ | 1.96 | | | | 6.8 | | | $ | 7,786,913 | |
Aggregate intrinsic value represents the difference between the closing price of the Company’s common stock on June 30, 2022, and the exercise price of outstanding, in-the-money stock options. The closing price of the common stock on June 30, 2022, as reported on the OTCQB, was $3.39 per share.
On June 30, 2022, an amount of $7,161,694 unvested expense related to outstanding stock options has yet to be recorded over a weighted average period of 2.9 years.
5. FAIR VALUE MEASUREMENTS
We are required to provide financial statement users with information about assets and liabilities measured at fair value in the balance sheet or disclosed in the notes to the financial statements regarding (1) the valuation techniques and inputs used to develop fair value measurements, including the related judgments and assumptions made, (2) the uncertainty in the fair value measurements as of the reporting date, and (3) how changes in the measurements impact the performance and cash flows of the entity.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by the accounting literature contains three levels as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimations.
The February 24, 2002 issuance of Series A Preferred Stock as payment in kind for dividends resulted in transaction which required the Company to record newly issued Series A Preferred Stock 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. The Company used a valuation method that takes into consideration both the Level 1 input of observable market value of MobileSmith common stock on the date of the transaction, as quoted on the OTCQB, that, although being thinly traded, could not be ignored and Level 3 inputs resulting from a Fundamental Analysis to arrive at Company Enterprise Value. The single most significant factor included in the valuation is the weighting between values resulting from Level 1 and Level 3 input models.
The fair value of Series A Preferred Stock was determined to be $2,597,699. The fair value calculated by three valuation methods and by weighting the results of each method calculation to arrive at the final fair value.
Method 1. Monte Carlo simulation based on the OTCQB quoted value of Common Stock
The Company used the income (discounted cash flow) approach to arrive at the fair value of the Series A Preferred Stock on February 24, 2022. 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 Brownian Motion/Monte Carlo model to simulate future movement of equity securities and discounted the results back to the February 24, 2022 transaction date. The model used the following notable inputs:
● | the market price of the Company common stock on February 24, 2022 of $2.50 as a starting point of simulation |
● | the risk free rate and discount rate of 2.16%; |
● | 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) and probabilities of payment of dividend in cash or in additional preferred shares. |
Method 2. Monte Carlo simulation based on the value of Common Stock determined using Fundamental analysis
The Company used the income (discounted cash flow) approach to arrive at the fair value of the Series A Preferred Stock on February 24, 2022. 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 Brownian Motion/Monte Carlo model to simulate future movement of equity securities and discounted the results back to the February 24, 2022 transaction date. The model used the following notable inputs:
● | the price of the Company common stock on February 24, 2022 of $0.54 as a starting point of simulation (as derived from total equity value from Fundamental Analysis) |
● | the risk free rate and discount rate of 2.16%; |
● | 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) and probabilities of payment of dividend in cash or in additional preferred shares. |
Method 3. Monte Carlo simulation of total equity value based on the Fundamental Analysis
The Company used the income (discounted cash flow) approach to arrive at the fair value of the Series A Preferred Stock on February 24, 2022. Using this approach, the total equity value payouts were simulated, allocated to Series A Preferred Stock and discounted back to the date of the transaction. The Company used the Geometric Brownian Motion/Monte Carlo model to simulate future movement of total equity. The model used the following notable inputs:
● | total equity value of $39,158,000 as of the date of transaction, as derived from Fundamental Analysis |
● | the risk free rate and discount rate of 1.96%; |
● | term of simulation is 10 years; |
● | the model also considered the probability of a Fundamental Transaction (as defined in Series A Preferred Stock certificate of designation) and probabilities of payment of dividend in cash or in additional preferred shares. |
Fundamental Analysis.
The Company performed Fundamental Analysis to arrive at Business Enterprise Value (“BEV”) as of February 24, 2022 of approximately $39,000,000.
The key assumptions used in arriving at the BEV are as follows:
● | Multiple applied to the revenue to determine terminal value is 12x. |
● | Discount rate applied to the cash flows and terminal value is 50% as customary for a first stage/early development company |
● | fully diluted number of shares to calculate adjusted equity value is 72,836,053 shares of common stock allocated as follows: 28,389,493 shares to common stock and 44,446,560 to shares of common stock issuable upon conversion of 1,481,552 shares of Series A Preferred Stock |
● | number of annual periods considered for discounted cash flows is three years. |
6. DISAGGREGATED PRESENTATION OF REVENUE AND OTHER RELEVANT INFORMATION
The tables below depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, such as type of customer and type of contract.
Customer size impact on billings and revenue:
| | 6 Months Ended June 30, 2022 | | | 6 Months Ended June 30, 2021 | |
| | Billings | | | GAAP Revenue | | | Billings | | | GAAP Revenue | |
Top 5 Customers (Measured By Amounts Billed) | | $ | 392,000 | | | $ | 235,785 | | | $ | 342,000 | | | $ | 221,640 | |
All Other Customers | | | 201,257 | | | | 389,724 | | | | 501,543 | | | | 594,703 | |
| | $ | 593,257 | | | $ | 625,509 | | | $ | 843,543 | | | $ | 816,343 | |
For the six months ended June 30, 2022, two customers accounted for 75% of the accounts receivable balance and no customer accounted for more than 10% of total revenue.
For the six months ended June 30, 2021, three customers accounted for 70% of the accounts receivable balance and no customer accounted for more than 10% of total revenue.
Below is a summary of new customer acquisition impact on billings and revenue:
| | 6 Months Ended June 30, 2022 | | | 6 Months Ended June 30, 2021 | |
| | Billings | | | GAAP Revenue | | | Billings | | | GAAP Revenue | |
Customers In Existence As Of The Beginning Of The Period (Including Upgrades) | | $ | 593,257 | | | $ | 625,509 | | | $ | 843,543 | | | $ | 816,343 | |
Customers Acquired During The Period | | | - | | | | - | | | | - | | | | - | |
| | $ | 593,257 | | | $ | 625,509 | | | $ | 843,543 | | | $ | 816,343 | |
7. LEASES
Leases (Topic 842) Disclosures
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: | | Six Months Ended June 30, 2022 | |
Operating lease expense | | $ | 103,080 | |
Remaining Lease Term (Years) | | | 1.83 | |
Discount Rate | | | 8 | % |
Maturities of operating lease liability as of June 30, 2022 were as follows: | | Operating Lease Expense | | | Variable Lease Expense | | | Total Lease Expense | |
2022 | | $ | 95,537 | | | $ | 7,048 | | | $ | 102,585 | |
2023 | | | 191,074 | | | | 14,519 | | | | 205,593 | |
2024 | | | 63,691 | | | | 4,840 | | | | 68,531 | |
Total lease payments | | $ | 350,302 | | | $ | 26,407 | | | | 376,709 | |
Less imputed interest | | | | | | | | | | | (30,590 | ) |
Total | | | | | | | | | | $ | 346,119 | |
8. SUBSEQUENT EVENTS
Subsequent to June 30, 2022, to the date of the filing of this Form 10-Q, the Company issued 17,483 shares of Series A Preferred Stock in exchange for $750,000 of cash investment.
On August 8, 2022, the Company granted 2,250,000 stock options to certain employees and contractors. The options are issued under standard Company terms: term of ten years, vesting over five years and exercise price at or above fair market value on the date of grant.