5. DISAGGREGATED PRESENTATION
OF REVENUE AND OTHER RELEVANT INFORMATION
The
tables below depict how the nature, amount, timing, and uncertainty
of revenue and cash flows are affected by economic factors, such as
type of customer and type of contract.
Customer size
impact on billings and revenue:
|
3 Months Ended March 31,
2020
|
3 Months Ended March 31,
2019
|
|
Billings
|
GAAP Revenue
|
Billings
|
GAAP Revenue
|
Top
5 customers (measured by amounts billed)
|
$338,173
|
$171,535
|
$355,500
|
$246,529
|
All
other Customers
|
$195,211
|
$453,037
|
$131,311
|
$494,190
|
|
$533,384
|
$624,572
|
$486,811
|
$740,719
|
For the three
months ended March 31, 2020, two customers accounted for 46% of the
accounts receivable balance and one customer accounted for 17% of
total revenue.
For the three months ended March 31, 2019,
three customers accounted for 73% of the accounts receivable
balance and two customers accounted for 27% of total
revenue.
Below is a summary
of new customer acquisition impact on billings and
revenue:
|
3 Months Ended March 31,
2020
|
3 Months Ended March 31,
2019
|
|
Billings
|
GAAP Revenue
|
Billings
|
GAAP Revenue
|
Customers
in existence as of the beginning of the period (including
upgrades)
|
$533,384
|
$624,572
|
$486,811
|
$740,719
|
Customers
acquired during the period
|
$-
|
$-
|
$-
|
$-
|
|
$533,384
|
$624,572
|
$486,811
|
$740,719
|
6.
SUBSEQUENT EVENTS
Subsequent to March
31, 2020, the Company borrowed $205,000 through issuance of two
subordinated promissory notes to a related party. The notes
carry interest rate of 8% per year and mature on November 14,
2020.
Subsequent to March
31, 2020, the Company
borrowed $500,000 from an
unrelated party through issuance of 2014 NPA Notes under the same
terms of those described in Note
2.
Conditions
caused by the COVID-19 pandemic significantly impacted our main
customer base - healthcare providers in the United States.
Healthcare providers in many states are overwhelmed with COVID-19
patients. Many hospitals halted elective and critical surgical
procedures, which are the main target of our primary Peri™
offering. Many hospitals furloughed their non-essential staff or
re-assigned their staff to intensive care units. We have
experienced difficulties in our selling process in engaging
decision makers within hospital organizations. Travel limitations
have also restricted access to our current and potential
customers.
Elective
surgeries are a significant component of hospital revenues. Without
such revenue healthcare systems may incur significant losses from
operations and reduced cashflows. We may experience increase in
non-renewals for subscription to our software products or adverse
changes to the payment terms under existing contracts.
If
the COVID-19 pandemic has an extended substantial impact on our
employees and customers, our results of operations, our liquidity
and access to financing may be negatively impacted.
On April 29, 2020 the
Company borrowed $542,100 through issuance of a promissory
note in accordance with the Paycheck Protection Program
("PPP") established by Section 1102 of the CARES Act and
implemented and administered by the Small Business Administration
(the "PPP loan"). The PPP loan matures on April 29,
2022. The PPP loan carries interest at 1% per year and is
payable in 18 monthly installments of $30,513 with first
installment due on November 29, 2020. The PPP loan may be
prepaid at any time prior to maturity with no prepayment
penalties. The PPP loan contains events of default and other
provisions customary for a loan of this type. Pursuant to the
PPP rules, all or portion of this loan may be forgiven. The
actual amount of the loan forgiveness will depend, in part, on the
total amount of payroll costs, certain allowed rent and utility
costs. Not more than 25% of the loan forgiveness amount may
be attributable to non-payroll costs. The Company intends to
use the proceeds from the PPP loan for qualifying expenses and to
apply for forgiveness of the PPP loan in accordance with the terms
of the CARES Act. However, the Company cannot completely
assure at this time that such forgiveness of the PPP loan will
occur.
On April 30, 2020, we amended both
2007 NPA and 2014 NPA. As a result of the amendments the
maturities of 2007 NPA Notes and 2014 NPA Notes were extended to
November 14, 2022. In addition, the amendment to 2014 NPA
allows the Company to issue 2014 NPA Notes as a consideration of
cancellation of other
indebtedness.
On May 6,2020 the
Company and holders of $4,063,250 in subordinated promissory notes
exchanged the notes for the 2014 NPA Notes issued under 2014
NPA. Avy Lugassy, one of Company's principal shareholders is
a beneficial owner of the entities holding newly issued 2014 NPA
Notes.
The newly issued 2014 NPA Notes have the following
terms:
●
a
maturity date of the earlier of (i) November 14, 2022, (ii) a
Change of Control (as defined in the 2014 NPA), or (iii) when, upon
or after the occurrence of an Event of Default (as defined in the
2014 NPA), other than for a bankruptcy related, such amounts are
declared due and payable by at least two-thirds of the aggregate
outstanding principal amount of the 2014 NPA Notes;
●
an
interest rate of 8% per year, with accrued interest payable in cash
in semi-annual installments with the final installment payable on
the maturity date of the note;
●
a
conversion price per share that is fixed at $1.43 per
share;
●
optional conversion
upon noteholder request; provided that, if at the time of any such
request, the Company does not have a sufficient number of shares of
common stock authorized to allow for such conversion, the
noteholder may only convert that portion of their Notes outstanding
for which the Company has a sufficient number of authorized shares
of common stock. To the extent multiple noteholders under the 2014
NPA, the 2007 NPA, or both, request conversion of its notes on the
same date, any limitations on conversion shall be applied on a pro
rata basis. In such case, the noteholder may request that the
Company call a special meeting of its stockholders specifically for
the purpose of increasing the number of shares of common stock
authorized to cover conversions of the remaining portion of the
notes outstanding as well as the maximum issuances contemplated
pursuant to the Company’s 2004 Equity Compensation Plan,
within 90 calendar days after the Company’s receipt of such
request; and
●
may not
be prepaid without the consent of holders of at least two-thirds of
the aggregate outstanding principal amount of 2014 NPA
Notes.
ITEM
2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Information set forth in this Quarterly Report on Form 10-Q
contains various forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934 (the “Exchange Act”)
and other laws. Forward-looking statements consist of,
among other things, trend analyses, statements regarding future
events, future financial performance, our plan to build our
business and the related expenses, our anticipated growth, trends
in our business, our ability to continue as a going concern, and
the sufficiency of our capital resources including funds that we
may be able to raise under our convertible note facility, our
ability to raise financing from other sources and/or ability to
defer expenditures, the impact of the liens on our assets securing
amounts owed to third parties, expectation regarding competitors as
more and larger companies attempt to market products/services
competitive to our company, market acceptance of our new product
offerings, including updates to our Platform, rate of new user
subscriptions, market penetration of our products
and expectations regarding our revenues and
expense, all of which are based on current expectations,
estimates, and forecasts, and the beliefs and assumptions of our
management. Words such as “expect,”
“anticipate,” “project,”
“intend,” “plan,” “estimate,”
variations of such words, and similar expressions also are intended
to identify such forward-looking statements. These forward-looking
statements are subject to risks, uncertainties, and assumptions
that are difficult to predict. Therefore, actual results may differ
materially and adversely from those expressed in any
forward-looking statements. Readers are directed to
risks and uncertainties identified under Part I, Item 1A,
“Risk Factors,” in the Annual Report on Form 10-K
for the year ended December 31, 2019 and our subsequent periodic
reports filed with the SEC for factors that may cause actual
results to be different than those expressed in these
forward-looking statements. Except as required by law, we undertake
no obligation to revise or update publicly any forward-looking
statements for any reason.
The following
discussion is designed to provide a better understanding of our
unaudited condensed financial statements, including a brief
discussion of our business and products, key factors that impacted
our performance, and a summary of our operating
results. The following discussion should be read in
conjunction with the unaudited condensed financial statements and
the notes thereto included in Part I, Item 1 of this Quarterly
Report on Form 10-Q, and the audited annual financial statements
and notes thereto and Management’s Discussion and Analysis of
Financial Condition and Results of Operations contained in the
Annual Report. Historical results and percentage
relationships among any amounts in the condensed financial
statements are not necessarily indicative of trends in operating
results for any future periods.
Additional Risk
Factors
Overview
MobileSmith provides procedure management
assistance and operational improvement
patient/member-facing mobile application services to the healthcare
industry.
During 2018 we refined our healthcare offering and redefined our
product - a suite of e-health mobile solutions, that consists of a
catalog of ready to deploy mobile app solutions (App Blueprints)
and support services.
In 2019 we
consolidated our current solutions under a single integrated
initial offering branded Peri™. Peri™ is a cloud-based
surgical and clinical procedure application architected to
accomplish the following :
- Run on a platform
integrated with future MobileSmith applications;
- Incorporate
MobileSmith developed or licenses healthcare service
applications;
- Securely link those services to Electronic Medical Records (EMR)
platforms;
- Produce a mobile
app based set of pre and postoperative instructions (which we refer
to as Clinical Pathways), that establishes a direct two-way
clinical procedure management process between a patient and a
healthcare provider and by doing so improves patient engagement for
the benefit of the patient and improves clinical outcomes measured
in procedure cancellations and post procedure readmissions
for the benefit of a provider.
From time to time
we have provided custom software development services. Such
services are not core to our business model and will likely
decrease in significance in the future.
As noted below in
Item 1A “Risk Factors” of Part II “Other
Information” below, conditions caused by the COVID-19
pandemic significantly impacted our main customer base - healthcare
providers in the United States. Healthcare providers in many states
are overwhelmed with COVID-19 patients. Many hospitals halted
elective and critical surgical procedures, which are the main
target of our primary Peri™ offering. Many hospitals
furloughed their non-essential staff or re-assigned their staff to
intensive care units. We have experienced difficulties in our
selling process in engaging decision makers within hospital
organizations. Travel limitations have also restricted access to
our current and potential customers. Elective surgeries are a
significant component of hospital revenues. Without such revenue
healthcare systems may incur significant losses from operations and
reduced cashflows. We may experience increase in non-renewals for
subscription to our software products or adverse changes to the
payment terms under existing contracts. If the COVID-19 pandemic
has an extended substantial impact on our employees and customers,
our results of operations, our liquidity and access to financing
may be negatively impacted.
Target Market
and Sales Channels
During 2017, we
completed a strategic shift and focused our business and research
and development activities primarily on the Healthcare industry in
the United States. In 2018 we refined our healthcare focus by
identifying two target markets: (i) healthcare providers (including
hospitals, hospital systems and the United States Veterans Health
Administration) and (ii) healthcare payer market (including
insurance companies and insurance brokers).
Both markets are targeted with a diversified sales workforce that
includes direct sales and resellers, such as channel
partners.
RESULTS
OF OPERATIONS
Comparison of the Three Months Ended March 31, 2020 (the
“2020 Period”) to the Three Months Ended March 31, 2019
(the “2019 Period”).
|
Three months ended March 31,
2020
|
Three months ended March 31,
2019
|
Increase (Decrease)
$
|
Increase (Decrease)
%
|
Revenue
|
$624,572
|
$740,719
|
$(116,147)
|
-16%
|
Cost
of Revenue
|
258,563
|
231,921
|
26,642
|
11%
|
Gross
Profit
|
366,009
|
508,798
|
(142,789)
|
-28%
|
|
|
|
|
|
Selling
and Marketing
|
367,314
|
359,781
|
7,533
|
2%
|
Research
and Development
|
627,795
|
499,872
|
127,923
|
26%
|
General
and Administrative
|
824,801
|
713,661
|
111,140
|
16%
|
|
|
|
|
|
Interest
Expense
|
$1,851,103
|
$1,112,784
|
$738,319
|
66%
|
Revenue
decreased by $116,147 or 16%. The decrease
in revenue is attributable to loss of
customers offset by new customer revenue and existing
client upgrades.
Cost of Revenue
increased by $26,642 or 11%. The increase is predominantly
due to work on a services contract with a U.S. government
agency.
Gross Profit
decreased by $142,789 or 28%. The decrease is primarily
attributable to decrease in revenue.
Selling and
Marketing expense remained flat with an increase of $7,533
or 2%.
Research and
Development expense increased by $127,923 or 26%. An
increase of $89,000 is due to increase in stock based
compensation. An increase of $121,000 is attributable to
increase in payroll expense as we invested heavily in the
development of Peri. Such increases are offset by decreases
in outsourced development costs and recruiting
fees.
General and
Administrative expense increased by $111,140 or 16%.
An increase of $130,000 is due to increase in stock based
compensation. Executive compensation increased by $15,400,
offset by decrease in travel expense and decreases in other minor
expense categories.
Interest Expense
increased by $738,319 or 66%. Approximately $151,000 of this
increase is due to increase in cash interest portion due to
increase in face value of debt. The remaining increase is due
to increase in non-cash interest component resulting from
amortization of debt discount.
Liquidity and Capital
Resources
We have not yet achieved positive cash
flows from operations, and our main source of funds for our
operations continues to be the sale of our notes under our
convertible note facilities. We will continue to rely on this source
until we are able to generate sufficient cash from revenues to fund
our operations or obtain alternate sources of financing. We believe
that anticipated cash flows from operations, and additional funding
under the convertible note facilities, of which no assurance can be
provided, together with cash on hand, will provide sufficient funds
to finance our operations for the next 12
months. Changes in our operating plans, lower than
anticipated sales, increased expenses, impact of COVID-19 pandemic
(as described in "Risk Factors") or other events may cause us to
seek additional equity or debt financing in future periods.
There can be no guarantee that financing will continue to be
available to us under the convertible note facilities or otherwise
on acceptable terms or at all. Additional equity and
convertible debt financing could be dilutive to the holders of
shares of our common stock, and additional debt financing, if
available, could impose greater cash payment obligations and more
covenants and operating restrictions.
Nonetheless, there
are factors that can impact our ability to continue to fund
our operating activities for the next twelve months. These
include:
●
Our
ability to expand revenue volume;
●
Our
ability to maintain product pricing as
expected, particularly in light of increased competition and its
unknown effects on market dynamics;
●
Our
continued need to reduce
our cost structure while simultaneously expanding the breadth
of our business, enhancing our technical capabilities,
and pursing new business opportunities.
●
Our
ability to predict and offset the extended impact COVID-19 will
have to our primary market's financial outcome, and our
business.
In addition, we
have an outstanding Loan and Security Agreement (the "LSA") with
Comerica Bank in the amount of $5 million, which matures in June of
2020 and is secured by an extended irrevocable letter of credit
issued by UBS AG (Geneve, Switzerland) ("UBS AG") with a renewed
term expiring on May 31, 2021.
Capital Expenditures and Investing Activities
Our capital
expenditures are limited to the purchase of new office equipment
and new mobile devices that are used for testing. Cash used for
investing activities was not significant and we do not plan any
significant capital expenditures in the near future.
Going
Concern
Our independent
registered public accounting firm has issued an emphasis of matter
paragraph in their report included in the Annual Report on
Form 10-K for the year ended December 31, 2019 in which they
express substantial doubt as to our ability to continue as a going
concern. The condensed financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts or classification of
liabilities that might be necessary should we be unable to continue
as a going concern. Our continuation as a going
concern depends on our ability to generate sufficient cash flows to
meet our obligations on a timely basis, to obtain additional
financing that is currently required, and ultimately to attain
profitable operations and positive cash flows. There can be no
assurance that our efforts to raise capital or increase revenue
will be successful. If our efforts are unsuccessful, we may have to
cease operations and liquidate our business.