This discussion summarizes significant factors affecting the operating results, financial condition and liquidity of MobileSmith for the two-year period ended December 31, 2021. This discussion should be read in conjunction with the financial statements and notes thereto included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K and the more detailed discussion and analysis of our financial condition and results of operations in conjunction with the risks described in Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K.

Overview of Financing Activities and Sources of Cash

From November 14, 2007 and through November of 2020, we have financed our working capital deficiency primarily through the issuance of convertible promissory notes under two convertible note facilities and subordinated promissory notes to related parties. (Refer to "Debt" footnote for more information on the notes).






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On December 23, 2020, the Company and all but one debt investor entered into a debt exchange transaction where the Company exchanged its convertible debt and promissory notes plus accrued but unpaid interest into Series A Preferred Stock.

On such date, a total of 1,158,141 shares of Series A Preferred Stock were issued in exchange for $49,684,127 of face value of debt that also included accrued interest. On January 28, 2021 the Company exchanged remaining face value of $2,900,000 of convertible debt for 70,014 shares of Series A Preferred Stock.

Starting in December of 2020, we have entered into Series A Preferred Stock purchase agreements for our Series A Preferred Stock and started financing our shortfall in operations by issuance of Series A Preferred Stock under the agreement.

In 2020, we issued 8,158 of Series A Preferred Stock in exchange for $350,000 in cash. In 2021, we issued 110,996 of Series A Preferred Stock in exchange for $4,761,700 in cash.

Each share of our Series A Preferred Stock is convertible at any time into 30 shares of our common stock (subject to adjustment as set forth in the Certificate of Designation), which equates to the same conversion rate that existed under our 2007 and 2014 Notes (as defined in "Debt" footnote). Each share of Series A Preferred Stock is entitled to an annual dividend equal to $3.43, which equates to an annual dividend rate of 8% which is the same as annual interest rate that existed under the 2007 and 2014 Notes. The dividend is payable in January and July of each year and may, at the Company's discretion, be paid either in cash or in additional shares of Series A Preferred Stock based on the formula set forth in the Certificate of Designations.

A summary of the terms of the Series A Preferred Stock are as follows:





·   Each share of Series A Preferred Stock shall have a par value of $0.001 per
    share and a stated value equal to $42.90 (the "Stated Value");
·   Each share of the Series A Preferred Stock then outstanding shall be entitled
    to receive an annual dividend equal to $3.43, subject to proration related to
    the timing of issuance. Such dividend is designed to have an effective yield
    of 8% on invested Stated Value;
·   Each dividend shall be paid either in shares of Series A Preferred Stock or
    in cash, at the option of the Company, on the respective dividend date;
·   The holders of Series A Preferred Stock shall have no voting rights with
    respect to any matters to be voted on by the stockholders of the Company;
·   The holders of Series A Preferred Stock shall have certain Board observation
    and inspection rights administered through a designated Agent;
·   Each share of Series A Preferred Stock shall be convertible, at any time and
    from time to time, at the option of the Holder into 30 shares of common
    stock, which results in conversion ratio of $1.43 of stated value of Series A
    Preferred Stock into one share of common stock (the "Series A Preferred
    Conversion Price");
·   The shares are subject to automatic conversion immediately prior to the
    occurrence of a Fundamental Transaction, as defined in a Certificate of
    Designation. A Fundamental Transaction includes, but is not limited to, a
    sale, merger or similar change in ownership.




Comerica LSA

We have an outstanding Loan and Security Agreement (the "LSA") with Comerica Bank pursuant to which $5,000,000 is outstanding with an original maturity date of June 9, 2016. On June 9, 2020, the Company and Comerica Bank entered into Third Amendment to the LSA, which extended the maturity of the LSA to June 9, 2022.

The LSA is secured by an extended irrevocable letter of credit issued by UBS AG (Geneva, Switzerland) with a renewed term expiring on May 31, 2022, which term is automatically renewable for one year periods, unless notice of non-renewal is given by UBS AG at least 45 days prior to the then current expiration date. The provision of any such notice by UBS will constitute an event of default under the LSA, at which time all amounts outstanding under the LSA will become due and payable. As of the date of this Form 10-K, no such notice has been provided to us and we have not we been provided with any indication that we are to receive notice of non-renewal of the letter of credit.






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Significance of Human Capital in Our Operations.

Our success depends on the performance of employees and contractors that make up our team of about 30 individuals. The team is by far our largest investment and cost. We make significant investments in technical skills and knowledge of healthcare industry. As such, expansion of the team often comes with additional recruiting expenses. All of our employees are currently based in the United States. During 2020 we invested in remote work environment, which allowed us to expand our hiring practices geographically from local markets to include the entire United States.

Comparison of Operating Results for Fiscal Years Ended December 31, 2021 and 2020





General Overview.

Due to COVID-19 pandemic 2020 was a year of significant uncertainty for the entire healthcare industry; activities were put on hold as the society was going through the acute phase. By the end of 2020 and the beginning of 2021, we regrouped and focused on building our team.





Results of Operations



                             Year ended        Year ended
                            December 31,      December 31,        Increase          Increase
                                2021              2020          (Decrease) $       Decrease %
Revenue                    $    1,572,884     $   2,197,079     $    (624,195 )            -28 %
Cost of Revenue                   751,684           833,945           (82,261 )            -10 %
Gross Profit                      821,200         1,363,134          (541,934 )            -40 %

 Selling and Marketing          2,134,265         1,328,246           806,019               61 %
 Research and
Development                     3,531,935         2,820,222           711,713               25 %
 General and
Administrative                  2,972,422         3,325,366          (352,944 )            -11 %

 Interest Expense                 290,597         6,040,630        (5,750,033 )            -95 %
 Loss on Debt
Extinguishment                  7,114,422        59,353,584       (52,239,162 )            -88 %
 Gain on Debt
Extinguishment - PPP
Loan Forgiveness           $    1,084,100     $           -     $   1,084,100                -

Revenue decreased by $624,195, or 28%. The decrease is associated with loss of customers due to non-renewals of contracts and re-negotiated fees.

Cost of Revenue decreased by $82,261, or 10%. This decrease is mostly attributable to decrease in outsourced and internal development costs associated with delivery of custom development services.

Gross Profit decreased by $541,934, or 40%. Contract non-renewals resulted in loss of customers who predominantly had purchased subscription services that carry higher margins than services revenue or contracts with integrations with service partners.

Selling and Marketing expense increased by $806,019, or 61%. Personnel expense, which includes both employees and contractors, increased by approximately $500,000. Marketing campaigns and various outreach software tools increased by approximately $137,000 as sales and marketing activities accelerated. Recruiting decreased by $45,000. Stock based compensation increased by $222,000 as new stock options were issued to new members of the sales team.

Research and Development expense increased by $711,713, or 25%. Personnel expense, which includes both employees and contractors, increased by $382,000 as we expanded our product team, intensified product development and kept up with inflationary pressures on compensation. Recruiting costs decreased by $24,000. IT and software costs increased by $17,000. Stock based compensation increased by approximately $314,000, as we added new members to our product team.

General and Administrative expense decreased by $352,944, or 11%. Stock based compensation decreased by $411,000, as we reissued certain incentive stock options that had previously expired. Travel expense and software and IT related costs increased by approximately $32,000 and $47,000, respectively. Personnel costs , which includes the Board of Directors and consultants, increased by approximately $28,000. Legal expenses decreased by $21,000. Depreciation expense decreased by $30,000.

Interest Expense decreased by $5,750,033 or 95% as we exchanged all but debt bank into equity. Loss of $59,353,584 in 2020 resulted from two debt exchange transactions, which took place in May and December of 2020. In August of 2021, dividends and interest payable were settled with the issuance of Series A Preferred Stock, totaling $7,114,422. For more information about the transactions refer to "Debt" and "Stockholders' Deficit" footnotes of the financial statements included in this Form 10K.

Gain on Debt Extinguishments of $1,084,100 resulted from the forgiveness of two PPP loans received. PPP Loan #1 was received in April of 2020 and forgiven in February 2021. PPP Loan #2 was received in February 2021 and forgiven in August of 2021.






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Liquidity and Capital Resources

We have not yet achieved positive cash flows from operations, and historically our main source of funds for our operations had been the sale of our convertible promissory notes issued under our convertible note facilities and subordinated promissory notes to related parties. Subsequent to the exchange of debt for Series A Preferred Stock that was completed on January 28, 2021, our source of funding is expected to be issuance of Series A Preferred Stock. We need to continue to rely on outside funding until we are able to generate sufficient cash from revenues to fund our operations. We believe that anticipated cash flows from operations, and additional issuances of Series A Preferred Stock, together with cash on hand, will provide sufficient funds to finance our operations at least for the next 12 months from the date of this report. 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 be available to us on acceptable terms, if 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.

During 2021 we issued 110,996 shares of our Series A Preferred Stock in exchange for $4,761,700 in cash financing and we received $542,000 from proceeds from a second PPP loan.

Nonetheless, there are factors that can impact our ability to continue to fund our operating the next twelve months. These include:





    ·   Our ability to expand revenue volume during and post the COVID-19
        pandemic, when healthcare systems have been concentrating their efforts on
        emergency services and recovery from pandemic and they may postpone other
        initiatives;

    ·   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 raise capital amidst global economic downturn in the wake
        of COVID-19 pandemic and increased geopolitical risks in Europe related to
        the conflict between Russia and Ukraine, since our main investors are
        located in Europe.

In addition, if UBS were to elect not to renew the irrevocable letter of credit beyond May 31, 2022, 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 filing date of this report on Form 10-K, 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.






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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.





Going Concern

Our independent registered public accounting firm has issued an emphasis of matter paragraph in their report included in this Form 10-K in which they express substantial doubt as to our ability to continue as a going concern. The 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, extend payment terms, 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.

Critical accounting policies and estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, stock based compensation and fair value measurements of certain debt and equity transactions. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations.






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Revenue Recognition and Deferred Revenue

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 except for some custom development work which is capable of being distinct. 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. The transaction price may include a significant financing component in instances where Company offers discounts for accelerated payments on the long-term contracts. A significant financing component is recorded in other assets and is amortized as interest expense in the Company's statement of operations 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 the term of the contract, using the output method of time elapsed. Other performance obligations identified are evaluated based on the specific terms of the agreement 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.






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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 December 31, 2021 the Company's other assets include approximately $3,000 of such costs.





Contract Liabilities

A new contract liability is created every time the Company records receivables due from its customers and has not satisfied the requirements to recognize revenue. Contract liability represents Company's obligation to transfer services for which the Company has already invoiced. All of the contract liabilities will be recognized in revenue over a period of 12 to 36 months.

Share-Based Compensation

The Company measures share-based compensation cost at the grant date based on the fair value of the award. The Company recognizes compensation cost on a straight-line basis over the requisite service period. The requisite service period is generally three years. The Company accounts for forfeitures as they occur. The Company uses the simplified method allowed by SAB 107 for estimating expected term of the options in calculating the fair value of the awards that have a term of more than 7 years because the Company does not have reliable historical data on exercise of its options.

Fair Value Measurements

Certain debt and equity transactions require the Company to record newly issued financing instruments at fair value at the time of issuance. The Company follows guidance in ASC 820 Fair Value Measurements to determine fair value of such instruments. We use Level 3 from the fair value hierarchy prescribed by ASC 820. Level 3 inputs require us to use significant judgements and unobservable inputs when determining fair value of financing instruments. Such judgements and inputs are described in detail in footnote 6 in the financial statements that accompany this report.

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