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:
|
9 Months Ended September 30,
2020
|
9 Months Ended September 30,
2019
|
|
Billings
|
GAAP Revenue
|
Billings
|
GAAP Revenue
|
Top
5 customers (measured by amounts billed)
|
$527,160
|
$611,026
|
$1,002,040
|
$596,210
|
All
other Customers
|
993,869
|
1,132,729
|
1,045,873
|
1,584,088
|
|
$1,521,029
|
$1,743,755
|
$2,047,913
|
$2,180,298
|
For
the nine months ended September 30, 2020, one customer accounted
for 16% of total revenue and two customers accounted for 67% of
accounts receivable balance.
For the nine months ended September 30,
2019, one
customer accounted for 17% of total revenue and one customer
accounted for 89% of accounts receivable
balance.
New customer
acquisition impact on billings and revenue:
|
9 Months Ended September 30,
2020
|
9 Months Ended September 30,
2019
|
|
Billings
|
GAAP Revenue
|
Billings
|
GAAP Revenue
|
Customers
in existence as of the beginning of the period (including
upgrades)
|
$1,387,693
|
$1,711,012
|
$1,476,663
|
$2,175,245
|
Customers
acquired during the period
|
133,336
|
32,743
|
571,250
|
5,053
|
|
$1,521,029
|
$1,743,755
|
$2,047,913
|
$2,180,298
|
6.
LEASES
Leases (Topic 842)
Disclosures
We are a lessee for a
non-cancellable operating lease for our corporate office in
Raleigh, North Carolina. We are also a lessee for a non-cancellable
finance lease for a corporate vehicle and office furniture.
Financing leases are not significant in terms of both balances and
period expenses. The operating lease for the corporate office
expires on April 30, 2024.
The following table summarizes the information about our operating
lease:
|
Nine Months Ended September 30,
2020
|
|
Operating lease
expense
|
$153,271
|
Weighted Average
Remaining Lease Term (Years)
|
5 years
|
Weighted Average
Discount Rate
|
8%
|
Maturities of operating lease liability as of September 30, 2020,
were as follows:
|
Operating Lease Expense
|
Variable Lease Expense
|
Total Lease Expense
|
2020
(remaining 3 months)
|
47,590
|
3,310
|
50,900
|
2021
|
189,994
|
13,609
|
203,603
|
2022
|
189,615
|
13,988
|
203,603
|
2023
|
189,225
|
14,378
|
203,603
|
2024
|
63,074
|
4,793
|
67,867
|
Total
lease payments
|
$679,498
|
$50,078
|
729,576
|
Less
imputed interest
|
|
|
(97,075)
|
Total
|
|
|
$632,501
|
7.
SUBSEQUENT EVENTS
Subsequent to September 30, 2020, the Company borrowed $300,000
through issuance of a subordinated promissory notes to a related
party. The note carries an interest rate of 8% per year and
matures on November 14, 2022.
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 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
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 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
establish a direct two-way clinical procedure management process
between a patient and a healthcare provider thereby improving
patient engagement during the process which both benefits the
patient by improving patient experience and benefits the provider
by improving clinical outcome measured in procedure cancellations
and post procedure
readmissions.
During second
quarter of 2020 and in a response to the COVID 19 pandemic we
rapidly designed and brought to market a suite of special
applications. These applications include the
following:
- COVID response
mobile applications used by hospital staff and hospital target
communities for coordination and rapid distribution of
information.
- COVIDClear mobile
applications are self-attestation and symptom reporting mobile
tools that are used by employers to facilitate return of their
workforce back to work.
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. For a period of
time many hospitals halted elective and critical surgical
procedures, which are the main target of our primary Peri™
offering. Many hospitals have also 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.
Impact of COVID-19 on Company's
operations.
As of the date of
this report, the Company has not experienced a significant level of
non-renewals on customer contracts due to the COVID-19
pandemic. Although the initial interest in our Peri™
product has decreased in first two quarters of 2020, the interest
in Peri™ started to pick back up in the months of June and
July, as some regions in the United States made considerable
progress in containing the virus. The interest in COVID
response and COVIDClear offering has been considerable. As a
result, all newly acquired customers in 2020 purchased our COVID
related products. The COVID-19 pandemic has created new
opportunities for the Company in terms of product offering and
acquisition of customers outside of our main target market, which
until COVID-19 developments included predominantly hospitals and
healthcare systems.
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 September 30, 2020 (the
“2020 Period”) to the Three Months September 30, 2019
(the “2019 Period”).
|
Three Months ended September 30,
2020
|
Three Months ended September 30,
2019
|
Increase (Decrease)
$
|
Increase (Decrease)
%
|
Revenue
|
$511,411
|
$646,255
|
$(134,844)
|
-21%
|
Cost
of Revenue
|
199,031
|
274,499
|
(75,468)
|
-27%
|
Gross
Profit
|
312,380
|
371,756
|
(59,376)
|
-16%
|
|
|
|
|
|
Selling
and Marketing
|
249,565
|
257,947
|
(8,382)
|
-3%
|
Research
and Development
|
719,043
|
747,528
|
(28,485)
|
-4%
|
General
and Administrative
|
835,775
|
927,315
|
(91,540)
|
-10%
|
|
|
|
|
|
Interest
Expense
|
1,118,422
|
1,294,461
|
(176,039)
|
-14%
|
Revenue
decreased by $134,844 or 21%. The decrease
in revenue is primarily attributable
to customers that did not renew their subscriptions in the past and
for which revenue recognition ended at the end of the contract
term, offset by acquisition of new
customers.
Cost of Revenue
decreased by $75,468 or 27%. The decrease was primarily
attributable to a decrease in outsourced contractor expenses and
our delivery team expense associated with winding down of a
services contract with a U.S. government agency. An
additional $21,000 decrease was attributable to elimination of
various third party software services used in delivery of our
products.
Gross Profit
decreased by $59,376 or 16%. Gross Profit decreased
as a result of decrease in
revenue, and, to a lesser extent, as a result of a decrease in
revenue on several contracts that were not renewed which trails the
decrease in associated cost of revenue.
Selling and
Marketing expense decreased by $8,382 or 3%. The
decrease is due to fluctuations in the timing of marketing
campaigns.
Research and
Development expense decreased by $28,485 or 4%. The
decrease is largely attributable to decrease in stock based
compensation expense.
General and
Administrative expense decreased by $91,540 or 10%.
The decrease is mostly attributable to decrease in stock based
compensation.
Interest Expense
decreased by $176,039 or 14%. The non-cash interest component
decreased by $290,000 due to amortization of debt premiums and
discounts, offset by an increase in cash portion of $115,000 due to
increase in face value of debt.
Comparison of the nine Months Ended September 30, 2020 (the
“2020 Period”) to the nine Months Ended September 30,
2019 (the “2019
Period”).
|
Nine months ended September 30,
2020
|
Nine months ended September 30,
2019
|
Increase (Decrease)
$
|
Increase (Decrease)
%
|
Revenue
|
$1,743,755
|
$2,180,298
|
$(436,543)
|
-20%
|
Cost
of Revenue
|
638,815
|
809,423
|
(170,608)
|
-21%
|
Gross
Profit
|
1,104,940
|
1,370,875
|
(265,935)
|
-19%
|
|
|
|
|
|
Selling
and Marketing
|
917,931
|
1,064,851
|
(146,920)
|
-14%
|
Research
and Development
|
2,097,276
|
2,055,797
|
41,479
|
2%
|
General
and Administrative
|
2,485,093
|
2,630,953
|
(145,860)
|
-6%
|
|
|
|
|
|
Interest
Expense
|
4,728,698
|
3,575,051
|
1,153,647
|
32%
|
Loss
on Debt Extinguishment
|
4,864,750
|
-
|
4,864,750
|
|
Revenue
decreased by $436,543 or 20%. The decrease
in revenue is primarily attributable
to customers that did not renew their subscriptions in the past and
for which revenue recognition ended at the end of the contract
term, offset by acquisition of new
customers.
Cost of Revenue
decreased by $170,608 or 21%. The decrease of approximately
$130,000 was due to decrease in our delivery team expense
associated with winding down of a services contract with a U.S.
government agency. Approximately $48,000 of the decrease is
associated with decrease in amortization previously capitalized
software development costs.
Gross Profit
decreased by $265,935 or 19%. The decrease is consistent with
the decrease in revenue and cost of revenue.
Selling and
Marketing expense decreased by $146,920 or 14%.
A decrease of $96,000 was attributable to decrease in stock based
compensation expense. The remaining decrease is attributable
to decrease in compensation due to restructuring of sales and
marketing team and decrease in travel.
Research and
Development expense increased by $41,479 or 2%. The
increase is largely attributable to payroll and stock based
compensation, offset by a decrease in recruiting
expense.
General and
Administrative expense decreased by $145,860 or 6%.
The decrease is attributable to decrease in stock based
compensation expense.
Interest Expense
increased by $1,153,647 or 32%. An increase of $1,562,000 is
due to increase in non-cash interest component resulting from
amortization of debt discount, as the fair value of our share of
stock as quoted on OTCQB was significantly higher than the
conversion price of 2014 NPA Notes issued during the 2020 Period,
which resulted in significant debt discount which is amortized into
interest expense. This is offset by amortization of debt
premium of $775,000. The cash portion of interest increased
by $367,000 due to increase in face value of
debt.
Loss on Debt Extinguishment of
$4,864,750 resulted from a debt exchange transaction. See
"Debt" footnote for additional description of the
transaction.
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 considering 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; and
●
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 2022 and is secured by an
extended irrevocable letter of credit issued by UBS AG (Geneve,
Switzerland) ("UBS AG") with a renewed term expiring on May 31,
2021.
Capital Expenditures and Investing Activities
Our capital
expenditures are limited to the purchase of new office equipment
and new mobile devices that are used for testing. Cash used for
investing activities was not significant and we do not plan any
significant capital expenditures in the near future.
Going
Concern
Our independent registered public accounting firm has issued an
emphasis of matter paragraph in their report included in
the Annual Report on Form 10-K for the year ended December 31,
2019 in which they express substantial doubt as to our ability to
continue as a going concern. The condensed financial statements do
not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts or
classification of liabilities that might be necessary should we be
unable to continue as a going concern. Our continuation as a going
concern depends on our ability to generate sufficient cash flows to
meet our obligations on a timely basis, to obtain additional
financing that is currently required, and ultimately to attain
profitable operations and positive cash flows. There can be no
assurance that our efforts to raise capital or increase revenue
will be successful. If our efforts are unsuccessful, we may have to
cease operations and liquidate our business.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable for
smaller reporting companies.
ITEM
4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures for the
three months ended September 30, 2020. The term
“disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means
controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the
Company’s management, including its principal executive and
principal financial officers, as appropriate to allow for timely
decisions regarding required disclosure. Management recognizes that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives, as ours are designed to do, and
management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of September 30, 2020, our
disclosure controls and procedures were effective at a reasonable
assurance.
Changes
in Internal Control over Financial Reporting
During the quarter
ended September 30, 2020, there were no changes made in our
internal controls over financial reporting (as such term is defined
in Rule 13a-15(f) of the Exchange Act) that have materially
affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
PART
II – OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
From time to time, the Company may be subject to routine
litigation, claims or disputes in the ordinary course of business.
The Company defends itself vigorously in all such matters. In the
opinion of management, no pending or known threatened claims,
actions or proceedings against the Company are expected to have a
material adverse effect on its financial position, results of
operations or cash flows. However, the Company cannot predict with
certainty the outcome or effect of any such litigation or
investigatory matters or any other pending litigations or claims.
There can be no assurance as to the ultimate outcome of any such
lawsuits and investigations. The Company will record a liability
when it believes that it is both probable that a loss has been
incurred and the amount can be reasonably estimated. The Company
periodically evaluates developments in its legal matters that could
affect the amount of liability that it has previously accrued, if
any, and makes adjustments as appropriate. Significant judgment is
required to determine both the likelihood of there being, and the
estimated amount of, a loss related to such matters, and the
Company’s judgment may be incorrect. The outcome of any
proceeding is not determinable in advance. Until the final
resolution of any such matters that the Company may be required to
accrue for, there may be an exposure to loss in excess of the
amount accrued, and such amounts could be material.
ITEM 1A. RISK FACTORS
The effects of the COVID-19 pandemic have materially affected how
we and our customers are operating our businesses, and the duration
and extent to which this will impact our future results of
operations and overall financial performance remains
uncertain.
Conditions caused by the COVID-19 pandemic significantly impacted
our main customer base - healthcare providers in the United
States. Initially, healthcare providers in many states were
overwhelmed with COVID-19 patients and this remains a risk to
reoccur in the future. For a period of time, many hospitals halted
elective and critical surgical procedures, which are the main
target of our primary Peri™ offering. Many hospitals have
also furloughed their non-essential staff or re-assigned their
staff to intensive care units. We have experienced difficulties in
our selling process in engaging decision makers within hospital
organizations. Travel limitations have also restricted access to
our current and potential customers.
Elective surgeries are a significant component of hospital
revenues. Without such revenue healthcare systems may incur
significant losses from operations and reduced cashflows. We may
experience increase in non-renewals for subscription to our
software products or adverse changes to the payment terms under
existing contracts.
If the COVID-19 pandemic has an extended substantial impact on our
employees and customers, our results of operations, our liquidity
and access to financing may be negatively impacted.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
The following
paragraph sets forth certain information with respect to all
securities sold by us during the three months ended September 30,
2020 without registration under the Securities Act:
Between July 1, 2020 and September 30, 2020, we issued to certain
accredited investors $200,000 in principal amount of our 2014 NPA
Notes under the 2014 Note Purchase Agreement. The notes are
convertible into shares of our Common Stock at a per share
conversion rate of $1.43. All notes issued under this facility have
an interest rate of 8% and mature on November 14,
2022.
In addition, between July 1, 2020 and September 30, 2020 we issued
one subordinated promissory note to a related party in the amount
of $360,000. This note has an interest rate of 8% and matures
on November 14, 2022.
All of the securities issued in the transactions described above
were issued without registration under the Securities Act in
reliance upon the exemptions provided in Section 4(2) of the
Securities Act. The recipient of securities in such transaction
acquired the securities for investment only and not with a view to
or for sale in connection with any distribution thereof.
Appropriate legends were affixed to the share certificates issued
in all of the above transactions. The recipient represented that it
was an “accredited investor” within the meaning of Rule
501(a) of Regulation D under the Securities Act, or had such
knowledge and experience in financial and business matters as to be
able to evaluate the merits and risks of an investment in its
common stock. The recipient had adequate access, through their
relationships with the Company and its officers and directors, to
information about the Company. None of the transactions described
above involved general solicitation or advertising.