Blueprint

 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 001-32634
____________________________
 
MOBILESMITH, INC.
(Exact name of registrant as specified in its charter)
____________________________
 
Delaware
95-4439334
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
5400 Trinity Road, Suite 208
Raleigh, North Carolina
27607
(Address of principal executive offices)
(Zip Code)
 
(855) 516-2413
(Registrant’s telephone number, including area code)
____________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☑ No ☐
  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit). Yes ☑ No ☐
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
☐ 
Smaller reporting company
☒ 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
  
As of November 14, 2018, there were 28,271,598 shares of the registrant’s common stock, par value $0.001 per share, outstanding.
 
 

 
 
 
 
MOBILESMITH, INC.
 
FORM 10-Q
For the Quarterly Period Ended September 30, 2018
 
TABLE OF CONTENTS
 
 
 
Page No.
PART I – FINANCIAL INFORMATION
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017
3
 
 
 
 
Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2018 and 2017
4
 
 
 
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2018 and 2017
5
 
 
 
 
Condensed Consolidated Statement of Stockholders' Deficit for the nine months period ended September 30, 2018 (unaudited)
6
 
 
 
 
Notes to Condensed Consolidated Financial Statements (unaudited) 
7
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
18
 
 
 
Item 4.
Controls and Procedures
18
 
PART II – OTHER INFORMATION
 
 
 
Item 1. 
Legal Proceedings
19
 
 
 
Item 1a. 
 Risk Factors
19
 
 
 
Item 2.
Unregistered Sales of Equity Security and Use of Proceeds
19
 
 
 
Item 3. 
Defaults Upon Senior Securities
19
 
 
 
Item 4.
Mine Safety Disclosures
19
 
 
 
Item 5. 
Other Information
19
 
 
 
Item 6.
Exhibits
19
 
 
 
 
Signatures
20
 
 
 
 
 
 
2
 
 
 PART I – FINANCIAL INFORMATION
MOBILESMITH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS          
 
 
September 30, 2018
 
 
December 31, 2017
 
 
 
(unaudited)
 
 
 
 
Current Assets
 
 
 
 
 
 
Cash and Cash Equivalents
 $349,969 
 $58,484 
Restricted Cash
  147,411 
  120,372 
Trade Accounts Receivable,
  297,157 
  260,403 
Prepaid Expenses and Other Current Assets
  103,891 
  71,992 
Total Current Assets
  898,428 
  511,251 
 
    
    
Property and Equipment, Net
  52,356 
  71,603 
Capitalized Software, Net
  90,662 
  169,593 
Intangible Assets, Net
  6,965 
  20,093 
Other Assets
  72,800 
  - 
Total Other Assets
  222,783 
  261,289 
Total Assets
 $1,121,211 
 $772,540 
 
    
    
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
    
    
Trade Accounts Payable
 $166,265 
 $125,982 
Accrued Expenses
  213,143 
  201,528 
Accrued Interest
  748,547 
  865,822 
Capital Lease Obligations
  29,350 
  34,927 
Contract Liability, Current
  463,965 
  860,927 
Bank Loan
  - 
  5,000,000 
Convertible Notes Payable, Related Parties, Net of Discount
  - 
  37,101,243 
Convertible Notes Payable, Net of Discount
  - 
  680,640 
Total Current Liabilities
  1,621,270 
  44,871,069 
 
    
    
Long-Term Liabilities
    
    
Capital Lease Obligations
  7,336 
  28,907 
Deferred Rent
  11,471 
  26,286 
Contract Liability
  1,323,340 
  527,576 
Bank Loan
  5,000,000 
  - 
Subordinated Promissory Note, Related Party 
  525,000 
  - 
Convertible Notes Payable, Related Parties, Net of Discount
  35,112,226 
  - 
Convertible Notes Payable, Net of Discount
  610,740 
  - 
Total Long-Term Liabilities
  42,590,113 
  582,769 
Total Liabilities
  44,211,383 
  45,453,838 
 
    
    
Commitments and Contingencies (Note 3)
    
    
Stockholders' Deficit
    
    
Preferred Stock, $0.001 Par Value, 5,000,000 Shares Authorized, No Shares Issued and Outstanding at September 30, 2018 and December 31, 2017
  - 
  - 
Common Stock, $0.001 Par Value, 100,000,000 Shares Authorized At September 30, 2018 and December 31, 2017; 28,271,598 and 24,722,647 Shares Issued and Outstanding at September 30, 2018 and December 31, 2017, Respectively
  28,272 
  24,723 
Additional Paid-in Capital
  113,575,290 
  105,795,621 
Accumulated Deficit
  (156,693,734)
  (150,501,642)
Total Stockholders' Deficit
  (43,090,172)
  (44,681,298)
Total Liabilities and Stockholders' Deficit
 $1,121,211 
 $772,540 
 
    
    
 
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3
 
 
MOBILESMITH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
  Three Months Ended     
  Nine Months Ended     
 
 
September 30, 2018
 
 
September 30, 2017
 
 
September 30, 2018
 
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
REVENUES:
 
 
 
 
 
 
 
 
 
 
 
 
Subscription and Support
 $525,659 
 $1,886,344 
 $1,543,400 
 $2,932,687 
Total Revenue
  525,659 
  1,886,344 
  1,543,400 
  2,932,687 
COST OF REVENUES:
    
    
    
    
Subscription and Support
  200,616 
  147,535 
  546,036 
  431,457 
Professional Services and Other
  - 
  - 
  - 
  29,304 
Total Cost of Revenue
  200,616 
  147,535 
  546,036 
  460,761 
 
    
    
    
    
GROSS PROFIT
  325,043 
  1,738,809 
  997,364 
  2,471,926 
OPERATING EXPENSES:
    
    
    
    
Sales and Marketing
  426,620 
  299,559 
  1,110,350 
  865,181 
Research and Development
  471,486 
  406,113 
  1,238,977 
  1,295,647 
General and Administrative
  618,811 
  367,342 
  1,816,216 
  1,165,708 
Total Operating Expenses
  1,516,917 
  1,073,014 
  4,165,543 
  3,326,536 
INCOME (LOSS) FROM OPERATIONS
  (1,191,874)
  665,795 
  (3,168,179)
  (854,610)
 
    
    
    
    
OTHER INCOME (EXPENSE):
    
    
    
    
Other Income
  1,590 
  365 
  3,189 
  1,549 
Interest Expense, Net
  (986,956)
  (1,104,318)
  (3,092,379)
  (3,226,932)
             Total Other Expense
  (985,366)
  (1,103,953)
  (3,089,190)
  (3,225,383)
 
    
    
    
    
NET LOSS
 $(2,177,240)
 $(438,158)
 $(6,257,369)
 $(4,079,993)
 
    
    
    
    
NET LOSS PER COMMON SHARE:
    
    
    
    
Basic and Fully Diluted
 $(0.08)
 $(0.02)
 $(0.22)
 $(0.21)
 
WEIGHTED-AVERAGE NUMBER OF SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE:
 
    
Basic and Fully Diluted
  28,271,598 
  19,827,542 
  28,271,598 
  19,827,542 
 
    
    
    
    
 
The accompanying notes are an integral part of these condensed consolidated financial statements. 
 
 
4
 
 
MOBILESMITH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Nine Months Ended
 
 
Nine Months Ended
 
 
 
September 30, 2018
 
 
September 30, 2017
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net Loss
 $(6,257,369)
 $(4,079,993)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
    
    
Depreciation and Amortization
  120,805 
  122,873 
Bad Debt Expense
  - 
  12,500 
Amortization of Debt Discount
  569,794 
  486,527 
Share Based Compensation
  1,039,507 
  327,149 
Changes in Assets and Liabilities:
    
    
Accounts Receivable
  (36,754)
  (7,348)
Prepaid Expenses and Other Assets
  (39,422)
  15,093 
Accounts Payable
  46,598 
  40,541 
Contract Liability
  398,802 
  (165,786)
Accrued and Other Expenses
  (126,790)
  399,462 
Net Cash Used in Operating Activities
  (4,284,829)
  (2,848,982)
 
    
    
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
Payments to Acquire Property, Plant and Equipment
  (9,499)
  (8,339)
Net Cash Used in Investing Activities
  (9,499)
  (8,339)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
Proceeds From Issuance of Short Term Loan from Related Party
  525,000 
  - 
Proceeds From Issuance of Long Term Debt
  4,115,000 
  3,725,000 
Repayments of Debt Borrowings
  (27,148)
  (27,427)
Net Cash Provided by Financing Activities
  4,612,852 
  3,697,573 
 
    
    
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
  318,524 
  840,252 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
  178,856 
  664,723 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
 $497,380 
 $1,504,975 
 
    
    
Supplemental Disclosures of Cash Flow Information:
    
    
Cash Paid During the Period for Interest
 $2,626,399 
 $2,314,434 
 
    
    
Non-Cash Investing and Financing Activities
    
    
The Company Recorded Debt Discount Associated with Beneficial Conversion Feature
 $1,673,811 
 $78,497 
The Company converted 5,075,000 of its convertible notes into common shares
 $5,075,000 
 $- 
 
    
    
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5
 
 
MOBILESMITH, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30, 2018
(unaudited)
 
 
  Common Stock        
 
 
Additional Paid-In Capital
 
 
Accumulated Deficit
 
 
Totals
 
 
 
Shares
 
 
0.001
Par Value
 
 
 
 
 
 
 
 
 
 
BALANCES, DECEMBER 31, 2017
  24,722,647 
 $24,723 
 $105,795,621 
 $(150,501,642)
 $(44,681,298)
 
    
    
    
    
    
Equity-Based Compensation
  -
 
  - 
  1,039,507 
  - 
  1,039,507 
Beneficial Conversion Feature Recorded as a Result of Issuance of Convertible Debt
  -
 
  -
 
  1,673,811 
  -
 
  1,673,811 
Conversion of Notes Payable to Common Stock
  3,548,951 
  3,549 
  5,066,351 
  -
 
  5,069,900 
Cumulative adjustment related to adoption of ASC606 Revenue Recognition guidance
  -
 
  -
 
  - 
  65,277 
  65,277 
Net Loss
  - 
  - 
  -
 
  (6,257,369)
  (6,257,369)
BALANCES, SEPTEMBER 30, 2018
  28,271,598 
 $28,272 
 $113,575,290 
 $(156,693,734)
 $(43,090,172)
 
    
    
    
    
    
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
6
 
 
MOBILESMITH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarterly Period Ended September 30, 2018
(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 consists of:
   
access to a catalog of ready to deploy mobile app solutions (App Blueprint Catalog)
related deployment, support and integration services (App Build and Managed Services and custom development, where applicable), and
hosting of the deployed mobile apps.
 
Our flagship MobileSmith® Platform has transformed from a do-it-yourself customer facing platform into an internally used engine that supports the deployment of mobile apps created from Blueprints, integration of various third-party code and services into the mobile apps produced from Blueprints and the hosting of deployed apps and design of new Blueprints.
 
The Company prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its audited annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  In management’s opinion, the Company has made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present its financial position, results of operations, cash flows, and stockholders’ deficit as of September 30, 2018.  The Company’s interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year.  These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 on file with the SEC (the “Annual Report”).
 
Except as otherwise noted, there have been no material changes to the Company’s significant accounting policies as compared to the significant accounting policies described in the Annual Report.  The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  During the nine months ended September 30, 2018 and 2017, the Company incurred net losses as well as negative cash flows from operations.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts or classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
 
 
7
 
 
Recently Issued Accounting Pronouncements and Their Impact on Significant Accounting Policies
The Company's significant accounting policies are detailed in "Note 2: Significant Accounting Policies" of the Company's Annual Report on Form 10-K for the year ended December 31, 2017. 
 
Adoption of Financial Accounting Standards Board, Accounting Standards Codification, Topic 606, Revenue Recognition ("Topic 606") did not have material impact on the Company's condensed consolidated financial statements.  The adoption of Topic 606 did result in changes to the Company's accounting policies and introduced new definitions and disclosure requirements that are discussed below and throughout these condensed consolidated financial statements.
 
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. 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. Transaction price excludes any future renewal periods or any marketing or sales discounts. Transaction price may include a significant financing component in instances where Company offers discounts for accelerated payments on the long-term contracts.  Significant financing component is recorded in other assets and is amortized as interest expense in the Company’s income statement 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 time over the term of the contract, using the output method of time elapsed. Other performance obligations 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. 
 
8
 
 
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 September 30, 2018 the Company’s other assets include approximately $51,000 of such costs. 
 
Contract Liabilities
A new contract liability is created every time the Company records receivables due from its customers. Contract liability represents 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 to 36 months.
 
Customer Credit Risk
Most of Company's receivables (billings) are collected within 30-45 day period.  The majority of Company's customers are healthcare organizations, which historically have had low credit risk. 
 
Use of practical expedients in application of the Topic 606
The newly adopted recognition standard prescribes the application of accounting standards to individual contracts with customers, but allows for the application of the guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the effect of such application is immaterial.  The Company applies practical expedients in following instances:

The Company does not adjust promised amount of consideration for the effects of a significant financing component if, at contract inception, the period between when the Company transfers its services to a customer and when the customer pays services will be one year or less.
The Company recognizes incremental costs of obtaining a contract as expenses when incurred if the amortization period of the asset that the Company otherwise would have recognized is one year or less.
 
Transition Disclosures in the Period of  Adoption of Topic 606
The Company applied the transition guidance in Topic 606 to the contracts that were not substantially completed as of January 1, 2018. 
 
The Company selected a modified retrospective approach at the time of adoption, at which time cumulative effect of initially adopting the standard is to be recognized in retained earnings as of the date of adoption and additional footnote disclosures will be included in the financial statements.  The impact of adoption on the selected accounts is as follows:
 
The cumulative effects of the changes made to the Company's Condensed Consolidated Balance Sheet at January 1, 2018 due to the adoption of Topic 606 were as follows:
 
 
 
Balance at
 
 
 
 
 
Balance at
 
 
 
December 31, 2017
 
 
Adjustments
 
 
January 1, 2018
 
Assets:
 
 
 
 
 
 
 
 
 
Prepaid Expenses and Other Current Assets
 $71,992 
 $65,277 
 $137,269 
 
    
    
    
Equity:
    
    
    
Accumulated Deficit
 $(150,501,642)
 $65,277 
 $(150,436,365)
 
9
 
 
The following tables summarize the current period impacts of adopting Topic 606  on our Condensed Consolidated Financial Statements:
 
Condensed Consolidated Balance Sheet:
 
 
As Reported as of 9/30/2018
 
 
Balances without Adoption of Topic 606
 
 
Effect of Adoption
 
Assets
 
 
 
 
 
 
 
 
 
Prepaid Expenses and Other Current Assets
 $103,891 
 $91,426 
 $12,465*
Other Assets
  72,800 
  - 
  72,800*
 
    
    
    
Liabilities
    
    
    
Contract Liability
  1,787,305 
  1,753,268 
  34,037**
 
    
    
    
Equity
    
    
    
Accumulated Deficit
 $(156,693,734)
 $(156,759,011)
 $65,277 
 
*Total impact on the Company's assets was $85,265, of which $51,223 resulted from capitalization of sales commissions and $34,042 was related to capitalization of interest expense for significant financing component.  The combined impact is presented on a classified basis to reflect the current and non-current nature of the balances.
**Represents the combined impact of adjustments to capitalized sales commissions and interest expense for significant financing component on the contract liability.
 
Condensed Consolidated Statements of Operations:
 
 
 
As Reported for the Period Ended 9/30/2018
 
 
Balances without Adoption of Topic 606
 
 
Effect of Adoption
 
REVENUES:
 
 
 
 
 
 
 
 
 
Subscription and Support
 $1,543,400 
 $1,527,399 
 $16,001 
 
    
    
    
OPERATING EXPENSES:
    
    
    
Sales and Marketing
 $1,110,350 
 $1,093,983 
 $16,367 
 
    
    
    
OTHER INCOME (EXPENSE):
    
    
    
Interest Expense, Net
 $(3,092,379)
 $(3,078,696)
 $(13,683)
 
 
10
 

2.   DEBT
 
The table below summarizes the Company's debt outstanding at September 30, 2018 and December 31, 2017:
Debt Description
 
September 30, 2018
 
 
December 31, 2017
 
Maturity
 
Rate
 
 
 
 
 
 
 
 
 
 
 
 
Comerica bank loan and security agreement 
 $5,000,000 
 $5,000,000 
June 2020
  5.60%
Capital lease obligations - noteholder lease
  25,655 
  45,294 
August 2019
  8.00%
Capital lease obligations - office furniture and other equipment
  - 
  4,870 
August 2018
  9.80%
Capital lease obligations - vehicle
  11,031 
  13,670 
July 2021
  5.59%
Convertible notes - related parties, net of unamortized discount of $1,552,005 and $447,988, respectively
  35,112,226 
  37,101,243 
November 2020
  8.00%
Convertible notes, net of unamortized discount of $45,029 and $50,129, respectively
  610,740 
  680,640 
November 2020
  8.00%
Subordinated promissory note, related party 
  525,000 
  - 
 
    
Total debt
  41,284,652 
  42,845,717 
 
    
 
    
    
 
    
Less:  current portion of long term debt
    
    
 
    
Capital lease obligations
  29,350 
  34,927 
 
    
Convertible notes - related parties, net of discount of $447,988
  - 
  37,101,243 
 
    
Convertible notes, net of discount of $50,129
  - 
  680,640 
 
    
Comerica bank loan and security agreement 
  - 
  5,000,000 
 
    
Subordinated promissory note, related party 
  - 
  - 
 
    
Total current portion of long term debt
  29,350 
  42,816,810 
 
    
 
    
    
 
    
Debt - long term
 $41,255,302 
 $28,907 
 
    
 
    
    
 
    
 
Convertible Notes
 
During the nine months ended September 30, 2018, the Company privately placed $4,115,000 in principal amount of additional unsecured Convertible Subordinated Promissory Notes (the “2014 NPA Notes”) to Union Bancaire Privée (“UBP”) under its existing unsecured Convertible Subordinated Note Purchase Agreement dated December 10, 2014 (the “2014 NPA”). The 2014 NPA Notes are convertible by the holder into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at a per share conversion price of $1.43.
 
On May 25, 2018, the Company and the holders of the majority of the aggregate outstanding principal amount of the 2014 NPA Notes and holders of the majority of the aggregate outstanding principal amount of the Secured Promissory Notes (the “2007 NPA Notes”) issued under the Convertible Secured Subordinated Note Purchase Agreement dated November 14, 2007 (the "2007 NPA”) agreed to extend to November 14, 2020, the maturity date of the 2014 NPA Notes and the 2007 NPA Notes.  Except as so extended, all of the terms relating to the outstanding 2007 NPA Notes and the 2014 NPA Notes continue in full force and effect. The Company is entitled to utilize the amounts available for future borrowing under each of the 2007 Note Purchase Agreement and the 2014 Note Purchase Agreement through November 14, 2020.
 
As a result of modification, any unamortized discount will be amortized into interest expense through the new maturity date of November 14, 2020.
 
The market value of the Company’s common stock on the date of each issuance of the 2014 NPA Notes to UBP was higher than the conversion price, which resulted in a beneficial conversion feature totaling $1,673,811 and corresponding debt discount, which is being amortized into interest expense through the maturity of the Notes.
 
During the nine months period ended September 30, 2018 three noteholders converted a total of $5,075,000 of Notes into 3,548,951 shares of Company's common stock at the stated conversion price of $1.43 per share.
 
The table below summarizes convertible notes issued and outstanding as of September 30, 2018 by type:
 
Convertible Notes Type:
 
Balance
 
 
 
 
 
 2007 NPA notes, net of discount
 $18,370,263 
 2014 NPA notes, net of discount
  17,352,703 
Total convertible notes, net of discount
 $35,722,966 
 
    
 
Comerica LSA
 
The Company has an outstanding Loan and Security Agreement with Comerica Bank dated June 9, 2014 (the "LSA") in the amount of $5,000,000, with original maturity of June 9, 2016.  On June 8, 2018, the Company and Comerica Bank entered into Second Amendment to the LSA, which extended the maturity of the LSA to June 9, 2020.  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, 2019, 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.
 
 
11
 
 
3.   COMMITMENTS AND CONTINGENCIES
 
Aggregate future lease commitments
 
The Company leases computers, office equipment, office furniture and company vehicle under capital lease agreements that expire through July 2021. Total amount financed under these capital leases at September 30, 2018 was $36,686.  This obligation is included within the Company’s total debt.
 
The table below summarizes Company’s future obligations under its capital leases:
 
Year:
 
 
 
2018
 $8,334 
2019
  23,631 
2020
  4,219 
Thereafter
  2,461 
 
  38,645 
Less amount representing interest
  (1,959)
Capital lease obligations
 $36,686 
 
    
 
The Company leases its office space in Raleigh, North Carolina pursuant to an operating lease with an initial term that expires in March 2019.  The Company has extended the lease through April of 2024.  As a result of the amendment the Company has received an incentive from the landlord valued at approximately $100,000.  The Company intends to take advantage of the incentive through March 31, 2019.
 
Year:
 
 
 
2018
 $43,300 
2019
  184,302 
2020
  191,199 
2021
  196,950 
2022
  202,851 
2023
  208,962 
2024
  70,693 
Total
 $1,098,257 
 

 
12
 
 
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 is not currently party to any pending litigation, the outcome of which will have a material adverse effect on our operations, financial position or liquidity.  The Company defends itself vigorously in all such matters.  In the opinion of management, no pending or known threatened claims, actions or proceedings against the Company are expected to have a material adverse effect on its financial position, results of operations or cash flows.  However, the company cannot predict with certainty the outcome or effect of any such litigation or investigatory matters or any other pending litigations or claims.  There can be no assurance as to the ultimate outcome of any such lawsuits and investigations.  The Company will record a liability when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated.  The Company periodically evaluates developments in its legal matters that could affect the amount of liability that it has previously accrued, if any, and makes adjustments as appropriate. Significant judgment is required to determine both the likelihood of there being, and the estimated amount of, a loss related to such matters, and the Company’s judgment may be incorrect. The outcome of any proceeding is not determinable in advance. Until the final resolution of any such matters that the Company may be required to accrue for, there may be an exposure to loss in excess of the amount accrued, and such amounts could be material.   
 
 
4.   EQUITY AND EQUITY BASED COMPENSATION
 
As of September 30, 2018, options to purchase 7,130,744 shares of Common Stock were granted under 2016 Equity Compensation Plan, in addition to 27,250 options granted under previous plans.

The following is a summary of the stock option activity for the nine months ended September 30, 2018:
 
 
Number of shares
 
 
Weighted Average Exercise Price
 
 
Weighted Average Remaining Contractual Term
 
 
Aggregate Intrinsic Value
 
Outstanding, December 31, 2017
  2,658,247 
 $1.54 
 
 
 
 
 
 
Cancelled
 (558,011)
  1.57 
 
 
 
 
 
 
Issued
  5,057,758 
  1.95 
 
 
 
 
 
 
Outstanding, September 30, 2018
  7,157,994 
  1.83 
  7.7 
 $5,100 
Vested and exercisable, September 30, 2018
  1,203,240 
 $1.56 
  4.1 
 $5,100 
 
 
Aggregate intrinsic value represents the difference between the closing price of the Company’s common stock at September 30, 2018 and the exercise price of outstanding, in-the-money stock options. The closing price of the common stock at September 30, 2018, as reported on the OTCQB Venture Marketplace, was $1.30 per share.
 
At September 30, 2018, $7,436,572 in unvested expense has yet to be recorded related to outstanding stock options.
 
 
5.    DISAGGREGATED PRESENTATION OF REVENUE AND OTHER RELEVANT INFORMATION
 
The tables below depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, such as type of customer and type of contract.
 
Customer size impact on billings and revenue:
 
 
 
Nine Months
Ended September 30, 2018
 
 
Nine Months
  Ended September 30, 2017        
 
 
 
Billings
 
 
GAAP Revenue
 
 
Billings
 
 
GAAP Revenue
 
Top 5 customers by amounts billed
 $619,780 
 $156,995 
 $1,402,846 
 $1,888,543 
All other customers
  1,290,887 
  1,386,405 
  1,365,272 
  1,044,144 
 
 $1,910,667 
 $1,543,400 
 $2,768,118 
 $2,932,687 
 
 
As of September 30, 2018, four customers accounted for 68% of the accounts receivable balance.   For the nine months ended September 30, 2017, one major customer accounted for 54% of total revenues and three customers accounted for 84% of the accounts receivable balance.
 
New customer acquisition impact on billings and revenue:
 
 
 
Nine Months
Ended September 30, 2018
 
 
  Nine Months
          Ended September 30, 2017        
 
 
 
Billings
 
 
GAAP Revenue
 
 
Billings
 
 
GAAP Revenue
 
Customers in existence as of the beginning of the period (including upgrades)
 $1,330,361 
 $1,450,031 
 $1,555,677 
 $2,572,949 
Customers acquired during the period
  580,306 
  93,369 
  1,212,441 
  359,738 
 
 $1,910,667 
 $1,543,400 
 $2,768,118 
 $2,932,687 
 
 
As of September 30, 2018 the aggregate amount of the transaction price allocated to unsatisfied (or partially satisfied) performance obligations was $3,165,941, of which $1,787,305 had been billed to the customers and recorded as contract liability and $1,378,636 remained unbilled as of September 30, 2018.   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 September 30, 2018)
 
 
Unbilled
 
 
Total
 
2018
 $463,965 
 $114,310 
 $578,275 
2019
  1,119,247 
  401,607 
  1,520,854 
2020
  204,093 
  684,146 
  888,239 
2021
  - 
  178,573 
  178,573 
TOTAL
 $1,787,305 
 $1,378,636 
 $3,165,941 
 
 
At January 1, 2018 total contract liability balance was $1,338,465 (net of the Topic 606 adoption adjustment), of which $808,033 was recognized in revenue during the nine months ended September 30, 2018.
 
6.   SUBSEQUENT EVENTS

 
On October 24, 2018, the Company entered into the Amendment No. 3 (the “Third Amendment”) to the 2014 NPA Notes. The Third Amendment decreases the frequency of interest payments under the 2014 Notes from once per quarter to twice per year in January and July with the final installment payable on the maturity date of the 2014 Notes.
 
In addition, October 24, 2018 the Company entered into the Ninth Amendment (the “Ninth Amendment”) to the 2007 NPA Notes. The Ninth Amendment decreases the frequency of interest payments under the 2007 NPA Notes from once per quarter to twice per year in January and July with the final installment payable on the maturity date of the 2007 NPA Notes.
 


13
 
 
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Information set forth in this Quarterly Report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and other laws.  Forward-looking statements consist of, among other things, trend analyses, statements regarding future events, future financial performance, our plan to build our business and the related expenses, our anticipated growth, trends in our business, our ability to continue as a going concern, and the sufficiency of our capital resources including funds that we may be able to raise under our convertible note facility, our ability to raise financing from other sources and/or ability to defer expenditures, the impact of the liens on our assets securing amounts owed to third parties, expectation regarding competitors as more and larger companies attempt to market products/services competitive to our company, market acceptance of our new product offerings, rate of new user subscriptions, market penetration of our products and  expectations regarding our revenues and expense,  all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Words such as “expect,” “anticipate,” “project,” “intend,” “plan,” “estimate,” variations of such words, and similar expressions also are intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified under Part I, Item 1A, “Risk Factors,” in the Annual Report on Form 10-K for the year ended December 31, 2017 and our subsequent periodic reports filed with the SEC for factors that may cause actual results to be different than those expressed in these forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
 
The following discussion is designed to provide a better understanding of our unaudited condensed consolidated financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results.  The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the audited annual consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report.  Historical results and percentage relationships among any amounts in the condensed consolidated financial statements are not necessarily indicative of trends in operating results for any future periods.
 
Overview
 
We develop and market healthcare industry solutions designed to improve delivery of healthcare by means of mobile technology.  Our suite of e-health mobile solutions and related services provide a catalog of vetted mobile app tools that can be rapidly customized to fit the needs of a specific healthcare organization with goals of addressing many key pain points of the industry.  Apps built from our Blueprints focus on:
 
● improvements in hospital's HCAHPS scores (the Hospital Consumer Assessment of Healthcare Providers and Systems score) through increased customer satisfaction from improvements in patient engagement;
● reductions of same-day cancellations and preventable re-admissions with tailored Perioperative Apps resulting in direct savings to the hospitals;
● making it easy for patients to connect with care options through ER/Urgent care and Physician Referral Apps resulting in savings to the hospitals.
 
Our services offering includes: 

access to a catalog of ready to deploy mobile app solutions (App Blueprint Catalog);
related deployment, support and integration services (App Build and Managed Services and custom development, where applicable) and
hosting of the deployed mobile apps.
 
Our flagship MobileSmith® Platform has transformed from customer facing into an internal platform that supports the deployment of mobile apps created from Blueprints, integration of various third-party code and services into the mobile apps produced from Blueprints, hosting of deployed apps and design of new Blueprints that can be rapidly deployed by the Healthcare industry.
 
Target Market and Sales Channels
 
During 2017 we completed a strategic shift and focused our business activities and research and development primarily on Healthcare industry in the United States. In 2018 we continue to refine our healthcare focus with expansion of our service offering to health insurance companies - the payer market.
 
 
 
14
 
 
RESULTS OF OPERATIONS
 
Highlights of operational results.
Company revenue in 2018 when compared to 2017 fluctuated significantly due to revenue from two major customers, that did not renew their contracts in 2018.   The first such customer is a government agency with a significant contract for which revenue recognition was deferred in compliance with United States Generally Accepted Accounting Principles ("GAAP") revenue recognition requirements for sale of software products and services.  During the 2017 Period (as defined below), revenue recognition criteria have been satisfied and therefore, the Company commenced and completed related revenue recognition in accordance with our revenue recognition policy.   There is no revenue associated with this contract in 2018.  The second customer is a retail customer, who did not renew the contract as their technological needs in retail and our healthcare focused offering diverged.
 
Comparison of the Three Months Ended September 30, 2018 (the “2018 Period”) to the Three Months Ended September 30, 2017 (the “2017 Period”).
 
 
 
Three Months Ended September 30, 2018
 
 
Three Months Ended September 30, 2017
 
 
Increase (Decrease)
 
 
 
 
 
 
 
 
 
  $
 
 
 
 
 
 
  
Revenue
  525,659 
  1,886,344 
  (1,360,685)
  -72%
Cost of Revenue
  200,616 
  147,535 
  53,081 
  36%
Gross Profit
  325,043 
  1,738,809 
  (1,413,766)
  -81%
 
    
    
    
    
 Sales and Marketing
  426,620 
  299,559 
  127,061 
  42%
 Research and Development
  471,486 
  406,113 
  65,373 
  16%
 General and Administrative
  618,811 
  367,342 
  251,469 
  68%
 
    
    
    
    
 Interest Expense
  986,956 
  1,104,318 
  (117,362)
  -11%
 
 
 
Revenue decreased by $1,360,685 or 72%.  The decrease is primarily attributable to revenue from contracts with two major customers as discussed above, offset by new customer revenue and existing clients' upgrades.
 
 
 
2018
 
 
2017
 
Revenue from Contracts With Two Major Customers
 $- 
 $1,458,256
Revenue from Other Contracts
  525,659
 428,088
Total Revenue
 $525,659
 $1,886,344 
 
Cost of Revenue increased by $53,081 or 36%.  This increase is attributable to third-party costs to support our services offering.
 
Gross Profit decreased by $1,413,766 or 81%.  Such decrease is attributable to the reduced revenue as a result of two significant clients not renewing their contracts as documented above.
 
Sales and Marketing expense increased by $127,061 or 42%.   An increase of approximately $10,000 is attributable to increase in client and prospect related travel.  An increase of $80,000 is due to an increase in employee stock based compensation.  An increase of approximately $30,000 is attributable to changes in other marketing activities and increase in use of market and PR consultants.
 
Research and Development expense increased by $65,373 or 16%.  Salaries and other payroll related expenses decreased by $51,000 as the Company left certain vacant positions unfilled for the 2018 Period compared to the 2017 Period, offset by an increase of $116,000 in employee stock based compensation.
 
General and Administrative expense increased by $251,469 or 68% during the 2018 Period.  An increase of $200,000 is attributable to increase in employee stock based compensation.  An increase of $8,000 is attributable to increase in compensation and expansion of the Board.  An increase of $27,000 is attributable to an increase in professional services expenses and increase of $12,000 is attributable to increase in travel expenses.
 
Interest Expense decreased by $117,362 or 11%.  The cash part of interest expense decreased by approximately $127,000 due to the decrease in the face value of our outstanding convertible debt after partial conversion of outstanding notes.    Interest expense related to Comerica Bank LSA increased by $10,000.
 
15
 
 
RESULTS OF OPERATIONS
 
Comparison of the Nine Months Ended September 30, 2018 (the “2018 Period”) to the Nine Months Ended September 30, 2017 (the “2017 Period”).
 
 
 
 
 
 
 
Nine months ended September 30, 2018
 
 
Nine months ended September 30, 2017
 
 
Increase (Decrease)
 


 
 

 
 
 $ 
 
% 
 
 
 
    
Revenue
  1,543,400 
  2,932,687 
  (1,389,287)
  -47%
Cost of Revenue
  546,036 
  460,761 
  85,275 
  19%
Gross Profit
  997,364 
  2,471,926 
  (1,474,562)
  -60%
 
    
    
    
    
 Sales and Marketing
  1,110,350 
  865,181 
  245,169 
  28%
 Research and Development
  1,238,977 
  1,295,647 
  (56,670)
  -4%
 General and Administrative
  1,816,216 
  1,165,708 
  650,508 
  56%
 
    
    
    
    
 Interest Expense
  3,092,379 
  3,226,932 
  (134,553)
  -4%
 
Revenue decreased by $1,389,287 or 47%.   Such decrease is primarily attributable to revenue from contracts with two major customers as discussed above, offset by new customer revenue and existing clients' upgrades.
 
 
 
2018
 
 
2017
 
Revenue from Contracts With Two Major Customers
 $14,447 
 $1,782,710
 
Revenue from Other Contracts
  1,528,953
 
  1,149,977 
Total Revenue
 $1,543,400 
 $2,932,687 
 
Cost of Revenue increased by $85,275 or 19%.  This increase is attributable to third-party costs to support our services offering ..
 
Gross Profit decreased by $1,474,562 or 60%.  Such increase is attributable to the decrease in revenue as a result of two significant clients not renewing their contracts as documented above.
 
Sales and Marketing expense increased by $245,169 or 28%.  An increase of $91,000 is attributable to increase in salary compensation and related benefits due to expansion of our sales team, offset by $32,000 decrease in sales commissions .  An increase of $42,000 is attributable to more frequent client and prospect related travel.  An increase of $109,000 is due to an increase in employee stock based compensation.  An increase of $28,000 is attributable to change in marketing activity mix resulting from decrease in tradeshow and campaign activity offset by increase in use of industry consultants and PR activity.
 
Research and Development expense decreased by $56,670 or 4%.  Salaries expense decreased by $226,000 as the Company left certain vacant positions unfilled for the 2018 Period compared to the 2017 Period, offset by an increase of $169,000 attributable to decrease in employee stock based compensation.
 
General and Administrative expense increased by $650,508 or 56% during the 2018 Period.  An increase of $407,000 is attributable to increase in employee stock based compensation.  An increase of $155,000 is attributable to the expansion of the Company's board of directors and concomitant expenses, increase in executive compensation and severance payments to a former Chief Executive Officer.   An increase of $40,000 is attributable to increase in general travel expense.   An increase of $57,000 is attributable to an increase in professional services expenses, offset by a decrease in other minor expense categories. 
 
Interest Expense decreased by $134,553 or 4%.  The cash part of interest expense decreased by approximately $275,000 due to the decrease in the face value of our convertible debt after partial conversion of notes in shares of common stock.  Debt discount amortization increased by $83,000 due to beneficial conversion feature associated with recently issued convertible notes.  Interest expense increased by $46,000 related to Comerica LSA - a combination of an increase in variable interest rate on the LSA and inclusion in interest of transaction costs associated with the extension of maturity date of the LSA.
 
 
16
 
 
 
Liquidity and Capital Resources
 
We have not yet achieved positive cash flows from operations, and our main source of funds for our operations continues to be  the sale of our notes under our convertible note facilities.  We expect to continue to rely on this source until we are able to generate sufficient cash from revenues to fund our operations or obtain alternate sources of financing. We believe that anticipated cash flows from operations, and additional funding under the convertible note facilities, of which no assurance can be provided, together with cash on hand, will provide sufficient funds to finance our operations for the next 12 months.  Changes in our operating plans, lower than anticipated sales, increased expenses, or other events may cause us to seek additional equity or debt financing in future periods.  There can be no guarantee that financing will continue to be available to us under the convertible note facilities or otherwise on acceptable terms or at all.  Additional equity and convertible debt financing could be dilutive to the holders of shares of our common stock, and additional debt financing, if available, could impose greater cash payment obligations and more covenants and operating restrictions.
 
Nonetheless, there are factors that can impact our ability to continue to fund our operating activities for the next twelve months. These include:
 
Our ability to expand revenue volume;
Our ability to maintain product pricing as expected, particularly in light of increased competition and its unknown effects on market dynamics; and  
Our continued need to reduce our cost structure while simultaneously expanding the breadth of our business, enhancing our technical capabilities, and pursing new business opportunities.
 
In addition, we have an outstanding Loan and Security Agreement (the "LSA") with Comerica Bank in the amount of $5 million, which matures in June of 2020 and is secured by an extended irrevocable letter of credit issued by UBS AG (Geneva, Switzerland) ("UBS AG") with a renewed term expiring on May 31, 2019, 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.  If UBS were to elect to not renew the irrevocable letter of credit issued by it beyond May 31, 2019, 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 date of this report on Form 10Q, 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.
 
Additionally, we extended maturities on all notes issued under the 2007 and 2014 NPAs  through November 14, 2020 and extended maturity of Comerica LSA through June 9, 2020.
 
Uses of Cash
 
During the nine months ended September 30, 2018, we used in operating activities approximately $6.2 million, which was offset by $1.9 million in cash collected from our customers, netting approximately $4.3 million of net cash used in operating activities.  Approximately $2.6 million of this amount was used to pay interest payments on the convertible notes and bank debt; approximately $2.4 for payroll, benefits and related costs; approximately $340,000 was used for non-payroll related sales and marketing efforts, such as tradeshows and marketing campaigns and approximately $765,000 was used for other non-payroll development and general and administrative expenses, which included among other things: infrastructure costs, rent, insurance, legal, professional, compliance, and other expenditures.
 
During the nine months ended September 30, 2017, we used in operating activities approximately $5.6 million, which was offset by $2.8 million in cash collected from our customers, netting approximately $2.8 million of net cash used in operating activities.  Approximately $2.3 million of this amount was used to pay interest payments on the convertible notes and bank debt; approximately $2.5 million for payroll, benefits and related costs; approximately $290,000 was used for non-payroll related sales and marketing efforts, such as tradeshows and marketing campaigns and approximately $565,000 was used for other non-payroll development and general and administrative expenses, which included among other things: infrastructure costs, rent, insurance, legal, professional, compliance, and other expenditures.
 
Capital Expenditures and Investing Activities
 
Our capital expenditures are limited to the purchase of new office equipment and new mobile devices that are used for testing. Cash used for investing activities was not significant and we do not plan any significant capital expenditures in the near future.
 
Going Concern
 
Our independent registered public accounting firm has issued an emphasis of matter paragraph in their report included in the Annual Report on Form 10-K for the year ended December 31, 2017 in which they express substantial doubt as to our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts or classification of liabilities that might be necessary should we be unable to continue as a going concern.  Our continuation as a going concern depends on our ability to generate sufficient cash flows to meet our obligations on a timely basis, to obtain additional financing that is currently required, and ultimately to attain profitable operations and positive cash flows. There can be no assurance that our efforts to raise capital or increase revenue will be successful. If our efforts are unsuccessful, we may have to cease operations and liquidate our business.
 
 
17
 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Smaller reporting companies are not required to provide the information required by this item.
 
ITEM 4. CONTROLS AND PROCEDURES
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures for the nine months ended September 30, 2018.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow for timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2018, our disclosure controls and procedures were effective at a reasonable assurance level.
 
Changes in Internal Control over Financial Reporting
 
During the quarter ended September 30, 2018, there were no changes made in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
 
18
 
 
PART II – OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
From time to time, the Company may be subject to routine litigation, claims or disputes in the ordinary course of business.  The Company is not currently party to any pending litigation, the outcome of which will have a material adverse effect on our operations, financial position or liquidity.  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 periodicallyevaluates developments in its legal matters that could affect the amount of liability that it has previously accrued, if any, and makes adjustments as appropriate. Significant judgment is required to determine both the likelihood of there being, and the estimated amount of, a loss related to such matters, and the Company’s judgment may be incorrect. The outcome of any proceeding is not determinable in advance. Until the final resolution of any such matters that the Company may be required to accrue for, there may be an exposure to loss in excess of the amount accrued, and such amounts could be material.
 
ITEM 1A. RISK FACTORS
 
Smaller reporting companies are not required to provide the information required by this item.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
The following paragraph sets forth certain information with respect to all securities sold by us during the three months ended September 30, 2018 without registration under the Securities Act:
 
Between July 1, 2018 and September 30, 2018, we issued to one accredited investor $750,000 in principal amount of our convertible notes under the 2014 Note Purchase Agreement. The note is convertible into shares of our Common Stock at a per share conversion rate of $1.43. All notes issued under this facility are scheduled to mature on November 14, 2020.
 
The securities issued in the transactions described above were issued without registration under the Securities Act in reliance upon the exemptions provided in Section 4(2) of the Securities Act. The recipient of securities in such transaction acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof. Appropriate legends were affixed to the share certificates issued in all of the above transactions. The recipient represented that it was an “accredited investor” within the meaning of Rule 501(a) of Regulation D under the Securities Act, or had such knowledge and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in its common stock. The recipient had adequate access, through their relationships with the Company and its officers and directors, to information about the Company. None of the transactions described above involved general solicitation or advertising.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5. OTHER INFORMATION
 
None.
 
ITEM 6. EXHIBITS
 
Exhibit No.
Description
 
31.1 
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) (Filed herewith)
 
31.2 
Certification of Principal Financial and Accounting Officer Pursuant to Rule 13a-14(a) (Filed herewith)
 
32.1
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 (Furnished herewith)
 
32.2 
Certification of Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section 1350 (Furnished herewith)
   
                          
10.1
Amendment No. 3 to Convertible Subordinated Promissory Notes issued by the Company from time to time pursuant to that certain Convertible Subordinated Note Purchase Agreement, dated December 11, 2014, by and among MobileSmith, Inc. and Union Bancaire Privee (incorporated by reference from the Company’s current report on Form 8-K filed on October 30, 2018)
   
                          
10.2
Ninth Amendment to Convertible Secured Subordinated Promissory Notes issued by the Company from time to time pursuant to that certain Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, by and among MobileSmith, Inc., Grasford Investments LTD. and Union Bancaire Privee (incorporated by reference from the Company’s current report on Form 8-K filed on October 30, 2018)
 
                           
10.3
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statement of Stockholders’ Deficit and (v) related notes to these condensed consolidated financial statements, tagged as blocks of text and in detail  (Filed herewith).              
 
 
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
MOBILESMITH, INC.
 
 
 
 
 
November 14, 2018
By:  
/s/  Randy Tomlin
 
 
 
Randy Tomlin
 
 
 
Chief Executive Officer  (Principal Executive Officer) 
 
 
 
 
 
 
November 14, 2018
By:  
/s/  Gleb Mikhailov
 
 
 
Gleb Mikhailov 
 
 
 
Chief Financial Officer (Principal Financial and Accounting Officer)
    
 
 
 
 
 
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