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

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

Delaware	95-4439334
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

5400 Trinity Road, Suite 208 Raleigh, North Carolina	27607
(Address of principal executive offices)	(Zip Code)

  

  

Large accelerated filer	o		Accelerated filer o
Non-accelerated filer	o		Smaller reporting company þ

  

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		Page No.
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013	3
	Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2014 and 2013	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2014 and 2013	5
	Condensed Consolidated Statement of Stockholders' Deficit  for the period ended  June 30, 2014 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
PART II – OTHER INFORMATION
Item 6.	Exhibits	21
	Signatures

ASSETS
		June 30,				December, 31
		2014				2013
		(unaudited)
Current Assets
Cash and Cash Equivalents		$	1,126,311			$	223,514
Restricted Cash			112,538				131,757
Trade Accounts Receivable, Net of Allowance for Doubtful Accounts of $7,500 and Zero, Respectively			47,284				48,885
Prepaid Expenses and Other Current Assets			55,532				97,957
Total Current Assets			1,341,665				502,113
Property & Equipment, Net			130,377				140,383
Capitalized Software, Net			563,114				636,061
Intangible Assets, Net			130,248				138,992
Other Assets			67,329				15,370
Total Other Assets			891,068				930,806
Total Assets		$	2,232,733			$	1,432,919
LIABILITIES AND STOCKHOLDERS DEFICIT
Current Liabilities
Trade Accounts Payable		$	52,569			$	58,901
Accrued Expenses			79,809				267,425
Accrued Interest			309,213				290,560
Capital Lease Obligations and Bank Loans			27,206				5,026,113
Deferred Revenue			211,374				163,868
Total Current Liabilities			680,171				5,806,867
Long-Term Liabilities
Bank Loan			5,000,000				-
Convertible Notes Payable, Related Parties, Net of Discount			23,358,874				23,512,836
Convertible Notes Payable, Net of Discount			680,640				730,770
Capital Lease Obligations			129,126				142,986
Deferred Rent			62,764				25,314
Total Long-Term Liabilities			29,231,404				24,411,906
Total Liabilities			29,911,575				30,218,773
Commitments and Contingencies (Note 3)
Stockholders' Deficit
Preferred Stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at June 30, 2014 and December 31, 2013			-				-
Common Stock, $0.001 par value, 45,000,000 shares authorized, 19,827,542 shares issued and outstanding at June 30, 2014 and December 31, 2013			19,828				19,828
Additional Paid-in Capital			97,429,605				93,059,983
Accumulated Deficit			(125,128,275	)			(121,865,665	)
Total Stockholders' Deficit			(27,678,842	)			(28,785,854	)
Total Liabilities and Stockholders' Deficit		$	2,232,733			$	1,432,919

 

 

		Three Months Ended								Six Months Ended
		June 30,				June 30,				June 30,				June 30,
		2014				2013				2014				2013
REVENUES:
Total Revenues		$	194,783			$	60,753			$	382,728			$	125,208
COST OF REVENUES			124,682				127,347				260,269				275,227
GROSS PROFIT (LOSS)			70,101				(66,594	)			122,459				(150,019	)
OPERATING EXPENSES:
Sales and Marketing			235,627				265,141				455,784				552,453
Research and Development			261,737				222,386				530,614				390,216
General and Administrative			347,402				346,528				682,569				764,509
Impairment of Long Lived Assets, Net			16,296				38,936				16,296				38,936
Gain on Legal Settlements			-				(5,235	)			-				(5,235	)
Total Operating Expenses			861,062				867,756				1,685,263				1,740,879
LOSS FROM OPERATIONS			(790,961	)			(934,350	)			(1,562,804	)			(1,890,898	)
OTHER INCOME (EXPENSE):
Other Income			633				-				1,889				-
Interest Expense, Net			(1,095,243	)			(509,360	)			(1,921,685	)			(981,698	)
Gain on Reversal of a Liability			169,861				-				169,861				-
Gain (Loss) On Debt Extinguishment			50,129				(21,793,055	)			50,129				(21,793,055	)
Total Other Expense			(874,620	)			(22,302,415	)			(1,699,806	)			(22,774,753	)
LOSS FROM CONTINUING OPERATIONS		$	(1,665,581	)		$	(23,236,765	)		$	(3,262,610	)		$	(24,665,651	)
Income (Loss) from Discontinued Operations			-				(919	)			-				163
Impairment of Assets of Discontinued Operations			-				(14,654	)			-				(14,654	)
NET LOSS		$	(1,665,581	)		$	(23,252,338	)		$	(3,262,610	)		$	(24,680,142	)
NET LOSS PER COMMON SHARE:
Basic and Fully Diluted from Continuing
Operations		$	(0.08	)		$	(1.27	)		$	(0.16	)		$	(1.34	)
Basic and Fully Diluted from Discontinued
Operations		$	0.00			$	0.00			$	0.00			$	0.00
WEIGHTED-AVERAGE NUMBER OF SHARES
USED IN COMPUTING NET LOSS PER
COMMON SHARE:
Basic And Fully Diluted			19,827,542				18,352,542				19,827,542				18,352,542

 

		Six Months Ended
		June 30,				June 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss		$	(3,262,610	)		$	(24,680,142	)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation and Amortization			83,383				72,394
Amortization of Debt Discount			722,605				1,030
Share-Based Compensation			53,056				24,098
Impairment of Long-Lived Assets			16,296				53,590
(Gain) Loss on debt extinguishment			(50,129	)			21,793,055
Changes in Assets and Liabilities:
Accounts Receivable			1,601				(23,061	)
Contracts Receivable			-				(8,792	)
Prepaid Expenses and Other Current Assets			(9,535	)			24,732
Accounts Payable			(6,332	)			(124,986	)
Deferred Revenue			47,506				29,570
Accrued and Other Expenses			(131,513	)			235,620
Net Cash Used in Operating Activities			(2,535,672	)			(2,602,892	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to Acquire Property, Plant and Equipment			(7,983	)			(19,222	)
Investment in Internally Developed Software			-				(177,184	)
Net Cash Used in Investing Activities			(7,983	)			(196,406	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted Cash Used to Pay Interest Expense			144,219				83,899
Deposit of Cash to Restricted Account			(125,000	)			(202,886	)
Repayment of Bank Loan			(5,000,000	)			-
Proceeds from Bank Loan			5,000,000				-
Proceeds from Issuance of Long Term Debt			3,440,000				3,025,000
Repayments of Debt Borrowings			(12,767	)			(32,686	)
Net Cash Provided by Financing Activities			3,446,452				2,873,327
NET (DECREASE) IN CASH AND CASH EQUIVALENTS			902,797				74,029
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			223,514				58,458
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	1,126,311			$	132,487
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for Interest		$	1,166,219			$	927,058
Non-Cash Investing and Financing Activities:
The Company Recorded Debt Discount Associated with Beneficial Conversion Feature		$	4,316,567			$	-

		Common Stock								Additional
						$	0.001			Paid-In				Accumulated
		Shares				Par Value				Capital				Deficit				Totals
BALANCES, DECEMBER 31, 2013			19,827,542			$	19,828			$	93,059,983			$	(121,865,665	)		$	(28,785,854	)
Share-Based Compensation											53,056								53,056
Beneficial Conversion Feature Recorded as a Result of Issuance of June 27, 2013 Debt Modification and Subsequent Issuance of Convertible Debt											2,695,714								2,695,714
Extinguishment of Related Party Debt Resulting from May 12, 2014 Debt Modification											1,620,852								1,620,852
Net Loss															(3,262,610	)			(3,262,610	)
BALANCES, JUNE 30, 2014			19,827,542			$	19,828			$	97,429,605			$	(125,128,275	)		$	(27,678,842	)

●	Subscription to its Software as a Service (“SaaS”) cloud based mobile app development platform to  customers who design and build their own apps;

●	Dedicated internal and secure mobile development platform for the U.S. Department of Defense and related contractors;

●	Custom mobile application design and development services;

●	Mobile application marketing services; and

●	Mobile strategy implementation consulting.

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 six months ended June 30, 2014 and 2013, the Company incurred net losses as well as negative cash flows.  The Company has not yet determined the effect, if any, that the adoption of this standard will have on the Companys financial position or results of operations. These factors indicate that the Company may be unable 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.

 

In May 2014, the FASB issued ASU 2014-9 Revenue from Contracts with Customers (Topic 606). This guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company will adopt this standard in fiscal year 2017.

 

 

Debt Description		June 30,				December 31,
		2014				2013			Maturity		Rate
Bank Loan		$	5,000,000			$	5,000,000		June, 2016			3.85	%
Capital lease obligations - Noteholder lease			122,899				132,321		August, 2019			8.00	%
Capital lease obligations - Office furniture			33,433				36,778		September, 2016			9.80	%
Convertible notes - related parties, net of discount of $5,515,357 and $1,921,394, respectively			23,358,874				23,512,836		November, 2016			8.00	%
Convertible notes, net of discount of $50,129 and zero, respectively			680,640				730,770		November, 2016			8.00	%
Total debt			29,195,846				29,412,705
Less:  current portion of long term debt
Capital lease obligations			27,206				26,113
Bank Loan			-				5,000,000
Total current portion of long term debt			27,206				5,026,113
Debt - long term		$	29,168,640			$	24,386,592

 

●	a maturity date of the earlier of (i) November 14, 2016, (ii) a Change of Control (as defined in the Note Purchase Agreement), or (iii) when, upon or after the occurrence of an Event of Default (as defined in the Note Purchase Agreement) such amounts are declared due and payable by a Noteholder or made automatically due and payable in accordance with the terms of the Note Purchase Agreement;
●	an interest rate of 8% per year;
●	a total borrowing commitment of $33.3 million;
●	a conversion price that is fixed at $1.43; and
●	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 as well as the issuance of the maximum amount of common stock permitted under the Company’s 2004 Equity Compensation Plan, 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 the remaining portion of the Notes outstanding as well as the maximum issuances permitted under the 2004 Equity Compensation Plan.

 

 

 

●

volatility of stock price was determined to be 47% and was based on the Company’s historical volatility;

●

risk free rate of 1.41%;

●

credit spread over the risk free rate was determined to be approximately 20%, which was derived from a combination of the credit spread of CCC rated bonds with added premium for lack of marketability of the convertible instrument;

●

nodes of the binomial model were extended for 2.5 years, which approximates the  time period until maturity of the convertible instrument; the model included 5 nodes; and

●

conversion price was fixed at $1.43 per share.

 

	●		a maturity date of June 9, 2016;
	●		a variable interest rate at prime plus 0.6% (3.85% on the date of execution) payable quarterly;
	●		secured by substantially all of the assets of the Company, including the Company’s intellectual property;
	●		secured by an extended irrevocable SBLC issued by UBS AG (Geneva, Switzerland) (“UBS AG”) with an initial term expiring on May 31, 2015, which term shall be automatically renewed 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; and
	●		acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, including but not limited to, failure by the Company to perform its obligations and observe the covenants made by it under the LSA and insolvency of the Company.

Year:
2014		$	19,278
2015			39,259
2016			39,259
2017			39,259
2018			34,189
Thereafter			19,412
			190,656
Less amount representing interest			(34,324	)
Capital lease obligations		$	156,332

 

 

Year:
2014		$	79,488
2015			162,528
2016			165,678
2017			167,786
2018			172,418
Thereafter			44,082
Total		$	791,980

						Weighted
			Weighted			Average	Aggregate
	Number of		Average			Remaining	Intrinsic
	Shares		Exercise Price			Contractual Term	Value
Outstanding, December 31, 2013	530,378		$	1.99
Cancelled	(99,708)			4.29
Issued	-			-
Outstanding, June 30, 2014	430,670		$	1.46		4.90	$	20,800
Vested and exercisable, June 30, 2014	182,683		$	1.31		5.66	$	18,125

 

 

 

Cost of revenue decreased from $127,347 to $124,682 by $2,665, or 2%, in the three month period ended June 30, 2014 compared to the same period in 2013.   There were no significant changes in the composition of our product team or infrastructure to support the Platform.

Gross profit was $70,101 for the three months ended June 30, 2014, compared to the loss of $66,594 for the same period in 2013, an increase of $136,695.  In a SaaS model, the cost to deliver revenue increases at a much smaller rate than revenue itself.  As we retain current customers and acquire new customers, our gross margins are expected to increase.

 

 

 

 

On May 12, 2014, the Company modified all of its current and future Notes outstanding under the Note Purchase Agreement. A modification of a portion of the Notes in the transaction was treated as debt extinguishment and the new Notes were recorded at fair value, which was lower than the previous carrying value. The $50,129 difference between the carrying value of the $730,770 non-related party notes and the newly established fair value of the Notes of $680,640 was recorded as a gain on extinguishment of debt.

Interest expense was $1,095,243 in the three month period ended June 30, 2014 compared to $509,380 in the same period in 2013, an increase of $585,883, or 115%, $110,522 of which is related to the general increase in debt and the remaining $475,361 is related to amortization of debt discount.

Sales and marketing expenses decreased from $552,453 to $455,784 by $96,669, or 17%,  in the six month period ended June 30, 2014 compared to the same period in 2013.    This decrease is attributable to an internal re-allocation of employee wages among departments by function of approximately $100,000.   Our target marketing budget for 2014 remained relatively unchanged from 2013.  The majority of non-payroll sales and marketing expenses is a mix of marketing campaigns and tradeshow participation.

 
 

 

 

Interest expense was $1,921,685 in the six month period ended June 30, 2014 compared to $981,698 in the same period in 2013, an increase of $939,987, or 96%, $217,361 of which is related to the general increase in debt and the remaining $722,605 of which is related to amortization of debt discount.

 

 

●	a maturity date of the earlier of (i) November 14, 2016, (ii) a Change of Control (as defined in the Note Purchase Agreement), or (iii) when, upon or after the occurrence of an Event of Default (as defined in the Note Purchase Agreement) such amounts are declared due and payable by a Noteholder or made automatically due and payable in accordance with the terms of the Note Purchase Agreement;
●	an interest rate of 8% per year;
●	a total borrowing commitment of $33.3 million;
●	a conversion price that is fixed at $1.43; and
●	optional conversion upon Noteholder request, provided that, if at the time of any such request, we do not have a sufficient number of shares of common stock authorized to allow for such conversion as well as the issuance of the maximum amount of common stock permitted under our 2004 Equity Compensation Plan, the Noteholder may request that we call a special meeting of our stockholders specifically for the purpose of increasing the number of shares of common stock authorized to cover the remaining portion of the Notes outstanding as well as the maximum issuances permitted under the 2004 Equity Compensation Plan.

	●		a maturity date of June 9, 2016;
	●		a variable interest rate at prime plus 0.6% (3.85% on the date of execution) payable quarterly;
	●		secured by substantially all of the assets of the Company, including the Company’s intellectual property;
	●		secured by an SBLC issued by UBS AG with an initial term expiring on May 31, 2015, which term shall be automatically renewed 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; and
	●		acceleration of payment of all amounts due thereunder upon the occurrence and continuation of certain events of default, including but not limited to, our failure to perform our obligations and observe the covenants made by us under the LSA and our insolvency.

 

Exhibit No.		Description
3.1		Amended and Restated Certificate of Incorporation, dated January 4, 2005, as amended to date (incorporated herein by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2013)
3.2		Seventh Amended and Restated Bylaws, effective July 1, 2013 (incorporated herein by reference to Exhibit 3.3 to our Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2013)
10.1		Loan and Security Agreement, dated June 9, 2014, between Comerica Bank and MobileSmith, Inc. (Filed herewith)
10.2		Amendment to Security Agreement, dated June 9, 2014, between MobileSmith, Inc. and Doron Roethler, as Collateral Agent (Filed herewith)
31.1		Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) (Filed herewith)
31.2		Certification of Principal Financial 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 Officer Pursuant to 18 U.S.C. Section 1350 (Furnished herewith)
101.1		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, 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 Statement of Stockholders’ Deficit and (v) related notes to these financial statements, tagged as blocks of text and in detail  (Filed herewith)

 

 

 

August 13, 2014	By:	/s/ Gleb Mikhailov
		Gleb Mikhailov
		Chief Financial Officer

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