MobileSmith, Inc. (Form: 10-Q, Received: 05/15/2014 16:27:11)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2014

o	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	(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)

(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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer ¨

Non-accelerated filer	¨	Smaller reporting company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of May 13, 2014, there were 19,827,542 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

MOBILESMITH, INC.

FORM 10-Q

For the Quarterly Period Ended March 31, 2014

TABLE OF CONTENTS

		Page No.
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013	3
	Condensed Statements of Operations (unaudited) for the three months ended March 31, 2014 and 2013	4
	Condensed Statements of Cash Flows (unaudited) for the three months ended March 31, 2014 and 2013	5
	Condensed Statement of Stockholders' Deficit as of March 31, 2014 (unaudited) and December 31, 2013	6
	Notes to Condensed Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
Item 4.	Controls and Procedures	15

PART II – OTHER INFORMATION
Item 5.	Other information	16
Item 6.	Exhibits	17
	Signatures	18

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MOBILESMITH, INC.

CONDENSED BALANCE SHEETS

ASSETS
	March, 31			December, 31
	2014			2013
	(unaudited)
Current Assets
Cash and Cash Equivalents	$	284,132		$	223,514
Restricted Cash		81,201			131,757
Trade Accounts Receivable, Net		181,065			48,885
Prepaid Expenses and Other Current Assets		63,551			97,957
Total Current Assets		609,949			502,113

Property & Equipment, Net		136,736			140,383
Capitalized Software, Net		607,736			636,061
Intangible Assets, Net		134,622			138,992
Other Assets		38,493			15,370
Total Non-Current Assets		917,587			930,806
Total Assets	$	1,527,536		$	1,432,919

LIABILITIES AND STOCKHOLDERS DEFICIT
Current Liabilities
Trade Accounts Payable	$	76,105		$	58,901
Accrued Expenses		276,345			267,425
Accrued Interest		294,629			290,560
Notes Payable, Current		5,026,639			5,026,113
Deferred Revenue		289,098			163,868
Total Current Liabilities		5,962,816			5,806,867

Long-Term Liabilities
Notes Payable, Related Parties, Net of Discount		23,363,692			23,512,836
Notes Payable, Non-current		730,770			730,770
Capital Lease Obligations		136,495			142,986
Deferred Rent		63,285			25,314
Total Long-Term Liabilities		24,294,242			24,411,906
Total Liabilities		30,257,058			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 March 31, 2014 and December 31, 2013		-			-
Common Stock, $0.001 par value, 45,000,000 shares authorized, 19,827,542 shares issued and outstanding at March 31, 2014 and December 31, 2013		19,828			19,828
Additional Paid-in Capital		94,713,344			93,059,983
Accumulated Deficit		(123,462,694	)		(121,865,665	)
Total Stockholders' Deficit		(28,729,522	)		(28,785,854	)
Total Liabilities and Stockholders' Deficit	$	1,527,536		$	1,432,919

The accompanying notes are an integral part of these condensed financial statements.

MOBILESMITH, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended
	March 31,			March 31,
	2014			2013
REVENUES:
Total Revenues	$	187,945		$	64,456

COST OF REVENUES		135,587			143,300

GROSS PROFIT (LOSS)		52,358			(78,844	)

OPERATING EXPENSES:
Sales and Marketing		220,157			287,312
Research and Development		268,877			167,830
General and Administrative		335,167			407,895


Total Operating Expenses		824,201			863,037

LOSS FROM OPERATIONS		(771,843	)		(941,881	)

OTHER INCOME (EXPENSE):
Other Income		1,256			-
Interest expense, net		(826,442	)		(472,338	)
Total other expense		(825,186	)		(472,338	)

LOSS FROM CONTINUING OPERATIONS	$	(1,597,029	)	$	(1,414,219	)

Income (loss) from discontinued operations		-			(13,585	)


NET LOSS	$	(1,597,029	)	$	(1,427,804	)

NET LOSS PER COMMON SHARE:

Basic and fully diluted from continuing
operations	$	(0.08	)	$	(0.08	)
Basic and fully diluted from discontinued
operations	$	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

The accompanying notes are an integral part of these condensed financial statements.

MOBILESMITH, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended
	March 31,			March 31,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss	$	(1,597,029	)	$	(1,427,804	)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation and Amortization		41,507			35,091
Amortization of Debt Discount		246,213			-
Share Based Compensation		28,004			12,181
Changes in Assets and Liabilities:
Accounts Receivable		(132,180	)		(7,694	)
Prepaid Expenses and Other Current Assets		11,283			29,097
Accounts Payable		17,204			56,888
Deferred Revenue		125,230			22,137
Accrued and Other Expenses		50,960			86,456
Net Cash Used in Operating Activities		(1,208,808	)		(1,193,648	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Payments to Acquire Property, Plant and Equipment		(5,165	)		(16,588	)
Payments to Acquire Intangible Assets		-			(12,695	)
Investment in Internally Developed Software		-			(48,961	)
Net Cash Used in Investing Activities		(5,165	)		(78,244	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted Cash Used to Pay IDB Interest Expense		50,556			32,778
Proceeds from Issuance of Long Term Debt		1,230,000			1,260,000
Repayments of Debt Borrowings		(5,965	)		(16,197	)
Net Cash Provided by Financing Activities		1,274,591			1,276,581

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		60,618			4,689
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		223,514			58,458
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	284,132		$	63,147

Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period for Interest	$	577,271		$	445,211

Non-Cash Investing and Financing Activities
The Company Recorded Debt Discount Associated with Beneficial Conversion Feature	$	1,625,357		$	-

The accompanying notes are an integral part of these condensed financial statements.

MOBILESMITH, INC.

CONDENSED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE PERIOD ENDED MARCH 31, 2014

	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	)

Equity-Based Compensation						28,004					28,004
Beneficial Conversion Feature Recorded as a Result of Issuance of June 27, 2013 Debt Modification and Subsequent Issuance of Convertible Debt						1,625,357					1,625,357
Net Loss								(1,597,029	)		(1,597,029	)

BALANCES, MARCH 31, 2014		19,827,542	$	19,828	$	94,713,344	$	(123,462,694	)	$	(28,729,522	)

The accompanying notes are an integral part of these condensed financial statements.

MOBILESMITH, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

For the Quarterly Period Ended March 31, 2014

(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 Company develops and markets software products and services tailored to users of mobile devices. The Company’s flagship product is the MobileSmith™ Platform (the “Platform”). The Platform is an innovative, patents pending mobile app development platform that enables organizations to rapidly create, deploy, and manage custom, native smartphone and tablet apps deliverable across iOS and Android mobile platforms.

The Company’s principal products and services include:

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

●	Custom mobile application design and development services provided by the Company;

●	Mobile application marketing services; and

●	Mobile strategy implementation consulting.

The Company prepared the accompanying unaudited condensed 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 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 stockholder deficit as of March 31, 2014. 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 financial statements and accompanying notes should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as amended, on file with the SEC (the “Annual Report”).

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 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 three months ended March 31, 2014 and 2013, the Company incurred net losses as well as negative cash flows and, at March 31, 2014 and 2013, had deficiencies in working capital. These factors indicate that the Company may be unable to continue as a going concern. The accompanying 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.

Certain prior year balances were reclassified in connection with the presentation of discontinued operations of legacy domain hosting operations and the presentation of debt balances as of March 31, 2014.

2. DEBT

The table below summarizes the Company’s debt at March 31, 2014 and December 31, 2013:

Debt Description	March 31,		December 31,
	2014		2013		Maturity	Rate

IDB Credit Facility	$	5,000,000	$	5,000,000	14-May		4	%
Capital lease obligations - Noteholder lease		128,008		132,321	19-Aug		8	%
Capital lease obligations - Office furniture		35,126		36,778	18-Sep		9.8	%
Convertible notes - related parties, net of discount of $3,300,538 and $1,921,394, respectively		23,363,692		23,512,836	16-Nov		8	%
Convertible notes		730,770		730,770	16-Nov		8	%
Total debt		29,257,596		29,412,705

Less: current portion of long term debt
Capital lease obligations		26,639		26,113
IDB Credit Facility		5,000,000		5,000,000
Total current portion of long term debt		5,026,639		5,026,113

Debt - long term	$	24,230,957	$	24,386,592

Convertible Notes

During the three months ended March 31, 2014, the Company sold $1,230,000 of additional Convertible Secured Subordinated Promissory Notes (the “Notes”) to Union Bancaire Privée (“UBP”) under its existing Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, as amended (as so amended, the “Note Purchase Agreement”) at conversion prices equal to $.56 on the date of sale. The Company recorded a beneficial conversion feature of $1,625,357 and corresponding debt discount, which is being amortized into interest expense through the maturity of the Notes.

IDB Credit Facility and New Facility Commitment

The Company has an outstanding promissory note with Israel Discount Bank (“IDB”) that has a maturity date of May 31, 2014 (the “IDB Credit Facility”). Borrowings under the IDB Credit Facility were guaranteed by Atlas Capital SA (“Atlas”) and subsequent to the merger between Atlas and Mirelis InvesTrust SA (“Mirelis”), by Mirelis. The IDB Credit Facility is further secured by an extended irrevocable standby letter of credit issued by UBS Private Bank with an expiration date of November 30, 2015.

The Company has obtained a bank commitment letter to borrow up to $5,000,000 under a facility with substantially the same terms as the IDB Credit Facility (the "New Facility"). If finalized, the proceeds of the New Facility would be used to repay the IDB Credit Facility on or before its maturity date.

3. COMMITMENTS AND CONTINGENCIES

Aggregate future lease commitments

The Company leases computers, office equipment and office furniture under capital lease agreements that expire through August 2019. Total amounts financed under these capital leases were $163,134 and $169,099 at March 31, 2014 and December 31, 2013, respectively. These obligations are included within the Company’s total debt.

The table below summarizes Company’s future obligations under its capital leases:

Year:

2014	$	29,444
2015		39,259
2016		39,259
2017		39,259
2018		34,189
Thereafter		19,412
		200,822
Less amount representing interest		(37,688	)

Capital lease obligations	$	163,134

The Company leases its office space in Raleigh, North Carolina pursuant to a lease with an initial term that expires in March 2019. The lease contains an option to renew for two, three-year terms. In addition, the Company leases a vehicle pursuant to a lease that expires in July 2016.

The table below summarizes the Company’s future obligations under its office and vehicle leases:

Year:
2014	$	118,878
2015		162,528
2016		165,678
2017		167,786
2018		172,418
Thereafter		44,082
Total	$	831,370

Legal Proceedings

The Company may be subject to legal proceedings and litigation arising in the ordinary course of business, including, but not limited to, certain pending patent and privacy matters, including class action lawsuits, as well as inquiries, investigations, audits and other regulatory proceedings.

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 COMPENSATION

The following is a summary of the stock option activity for the three months ended March 31, 2014:

						Weighted
				Weighted		Average		Aggregate
	Number of			Average		Remaining		Intrinsic
	Shares			Exercise Price		Contractual Term		Value
Outstanding, December 31, 2013		530,378		$	1.99
Cancelled		(78,750	)		5.00
Issued		-			-
Outstanding, March 31, 2014		451,628			1.46		5.07	$	20,800
Vested and exercisable, March 31, 2014		159,921		$	1.29		6.00	$	17,025

Aggregate intrinsic value represents the difference between the closing price of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at March 31, 2014 and the exercise price of outstanding, in-the-money stock options. The closing price of the Common Stock at March 31, 2014, as reported on the Over-the-Counter Bulletin Board, was $1.30 per share.

At March 31, 2014, $242,000 of unvested expense has yet to be recorded related to outstanding stock options.

5. MAJOR CUSTOMERS AND CONCENTRATION

For the three months ended March 31, 2014, three major customers accounted for 34% of total revenues and two customers accounted for 73% of the accounts receivable balance. For the three months ended March 31, 2013, two major customers accounted for 27% of total revenues and two customers accounted for 75% of the accounts receivable balance.

6. SUBSEQUENT EVENTS

Subsequent to March 31, 2014, the Company sold two Notes totaling $810,000 to UBP on the same terms as previously sold Notes. The Notes will mature on November 14, 2016.

On May 12, 2014, the Company entered into the Seventh Amendment to Convertible Secured Subordinated Note Purchase Agreement (the “Seventh Amendment”) and the Fifth Amendment to Convertible Secured Subordinated Promissory Notes (the “Fifth Amendment”), with the holders of a majority of the aggregate outstanding principal amount of the Notes issued by the Company under the Note Purchase Agreement (collectively, the “Noteholders”). The Seventh Amendment and the Fifth Amendment apply to all $28,205,000 in principal amount of Notes outstanding as of May 12, 2014 and all future Notes. As amended, the Notes have the following terms:

●	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 particular requested conversion the Company does not have a sufficient number of shares of its 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 the 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 contemplated pursuant to the Company’s 2004 Equity Compensation Plan.

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, the potential impact of current or future litigation and government investigations, our ability to continue as a going concern, and the sufficiency of our capital resources including funds available under our existing credit facility or any replacement facility, the funds available under our Note facility and the future sales of Notes, 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 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 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 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 financial statements are not necessarily indicative of trends in operating results for any future periods.

Overview

We develop and market a software-as-a-service (“SaaS”) platform that allows non-programmers to design and build native mobile applications for smartphones and tablets. Our flagship product is the Platform. Platform related services often include data integration and training. We also provide consulting services, which include assistance with design and implementation of mobile strategy, implementation of mobile marketing strategy and the development of mobile apps.

We use a SaaS business model – the customers acquire access to the Platform through user subscription agreements and are able to obtain total control of mobile app production. Our business model allows for creation and management of any desired number of apps by our customers for a monthly license fee. The on-demand SaaS model developed using multi-tenant architecture enables end users to visit a website and use the SaaS applications, all via a web browser, with no installation, no special information technology knowledge, and no maintenance. The SaaS application is transformed into a service that can be used anytime and anywhere by the end user. Multi-tenant SaaS applications also permit us to add needed functionality to our applications in one location for the benefit of all end users. This capability allows us to provide upgrades universally.

Target Market and Sales Channels

We believe that the do-it-yourself model for creation and management of apps will become a cost effective solution for enterprise clients who have an ever increasing need to interact with their customers and employees through mobile devices. Single apps may reach their limits of usability very quickly, if made complex. The Platform offers an ability to create multiple, customized non-template apps with designated functionalities and specific designs without incurring additional costs.

Our market penetration strategy focuses on three distinct sectors:

Government:

We believe that the Platform has a unique capability to service various structures within federal, state and local governments, as government structure is highly segmented by function and territory. In addition, the Platform can be safely placed behind the firewalls of individual departments, where data security is a primary concern. Replicating the Platform and placing it behind a secure firewall would allow an organization to create and manage multiple mobile apps with targeted functionality for targeted audiences without going outside of the secure firewall.

Healthcare clients:

Healthcare organizations, such as hospitals and healthcare networks, are akin to government in their departmental segmentation and territorial reach. Additionally, healthcare companies are subject to increased regulation as a result of the Affordable Care Act and may be subject to penalties for delivering inefficient care under new Medicare regulations. Hospitals increasingly turn to portfolios of apps to increase efficiency and remain competitive: outpatient care apps, wellness apps, physician referral apps, appointment apps, discharge apps and others. We believe that the Platform has a significant competitive advantage in the healthcare space due to the ability to deliver a variety of targeted mobile solutions cost effectively.

Enterprise clients:

The third sector combines all other large and multi-national enterprise clients, where large-scale customization based on functionality or territory is of the highest value, and other contributors such as time to market, technology reach, and ease of use play important roles. These target clients may include large food chains, media and PR companies, software solutions providers, hardware manufacturers, mortgage brokers and real estate franchises.

Results of Operations for the Three Months Ended March 31, 2014 and March 31, 2013

Revenue

We generated revenues of $187,945 in the three months ended March 31, 2014, which is a 192% increase from $64,456 in the three months ended March 31, 2013. We continue to expand our mobile presence in the market. Our number of customers increased by 41% in the three months ended March 31, 2014, as compared to three months ended March 31, 2013.

Cost of Revenue and Gross Profit

Cost of revenue decreased by $7,713 to $135,587 in the three months ended March 31, 2014, or a decrease of 5% from $143,300 in the three months ended March 31, 2013. Gross profit increased by $131,202, for a profit of $52,358, in the three months ended March 31, 2014, compared to a loss of $78,844 in the three months ended March 31, 2013. The increase in gross profit is attributable to an increase in revenue due to the addition of new customers, with the costs of realizing that revenue remaining relatively unchanged .

Sales and Marketing

Sales and marketing expenses were $220,157 in the three months ended March 31, 2014, a decrease of $67,155, or 23%, from $287,312 in the three months ended March 31, 2013. The decrease is due to a decrease in tradeshow and marketing campaign related expenses of approximately $10,000 and a decrease due to internal re-allocation of Company employee wages among the Company departments by function of approximately $57,000.

Research and Development

Research and development expenses were $268,877 in the three months ended March 31, 2014, an increase of $101,047, or 60%, from $167,830 in the three months ended March 31, 2013. Payroll and related expenses of our development team increased by $30,147 in the three months ended March 31, 2014, compared to the three months ended March 31, 2013, due to the continued expansion of our development team to support new features of the Platform. In addition, stock based compensation increased by $12,545 in the three months ended March 31, 2014, compared to the three months ended March 31, 2013, resulting from the recognition of expenses related to stock options granted in September 2013. An additional increase of approximately $50,000 is attributable to development expenses that were capitalized as software development costs during the three months ended March 31, 2013, compared to $0 in the three months ended March 31, 2014. We believe that the current composition of our development team is sufficient for implementation of our research and development strategy and to support our growth.

General and Administrative

General and administrative expenses were $335,167 in the three months ended March 31, 2014, compared to $407,895 in the three months ended March 31, 2013, a decrease of $72,728, or 18%. The decrease is due to a reduction in the legal and professional fees associated with a network breach incident that occurred in June 2012.

Interest expense

Net interest expense was $826,442 in the three months ended March 31, 2014, compared to $472,338 in the three months ended March 31, 2013, an increase of $354,104, or 75%. Approximately $100,000 is related to a general increase in debt and approximately $250,000 is related to the amortization of debt discount, which is included in interest expense.

Liquidity and Capital Resources

We have not yet achieved positive cash flows from operations, and our main source of funds for our operations is the sale of additional Notes. We must continue to rely on this source 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 Notes, together with cash on hand, will provide sufficient funds to finance our operations at least for the next 12 to 18 months, depending on our ability to achieve strategic goals outlined in our annual operating budget approved by the Board of Directors. 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 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.

Uses of Cash

During the three months ended March 31, 2014, we used in operating activities approximately $1.38 million, which was offset by approximately $170,000 in cash collected from our customers; approximately $577,000 was used to pay interest payments on the Notes; approximately $545,000 was used for payroll, benefits and related costs; approximately $60,000 was used on non-payroll related sales and marketing efforts; and approximately $200,000 was used for general and administrative expenses.

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 in the three months ended March 31, 2014 was insignificant. We are not planning any significant capital expenditures in the near future.

Financing Activities and Sources of Cash

Since November 14, 2007, we have financed our working capital deficiency primarily with the issuance of Notes under the Note Purchase Agreement. During the three months ended March 31, 2014, we borrowed an additional $1,230,000 under the Note Purchase Agreement. The aggregate outstanding amount of the Notes, as of March 31, 2014, was $24,094,462, net of a discount of $3,300,538.

On May 12, 2014, we entered into the Seventh Amendment to the Note Purchase Agreement and the Fifth Amendment to the Notes with a majority of the Noteholders. The Seventh Amendment and the Fifth Amendment apply to all $28,205,000 in principal amount of Notes outstanding as of May 12, 2014 and all future Notes. As amended, the Notes have the following terms:

●	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 particular requested conversion we do not have a sufficient number of shares of our 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 the 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 contemplated pursuant to our 2004 Equity Compensation Plan.

The Company has an outstanding promissory note with IDB that has a maturity date of May 31, 2014. Borrowings under the IDB Credit Facility were guaranteed by Atlas and subsequent to the merger between Atlas and Mirelis, by Mirelis. The IDB Credit Facility is further secured by an extended irrevocable standby letter of credit issued by UBS Private Bank with an expiration date of November 30, 2015.

The Company has obtained a bank commitment letter to borrow up to $5,000,000 under a facility with substantially the same terms as the IDB Credit Facility. The Company expects to close on the New Facility on or before before the maturity date of the IDB Credit Facility on May 31, 2014. The proceeds of the New Facility will be used to repay the IDB Credit Facility on or before its maturity date.

If the Company does not close on the New Facility on or before May 31, 2014, or replace IDB with another lender, IDB will likely execute on the letter of credit issued by UBS and the proceeds of the New Facility or alternate financing will be used to repay UBS.

Off Balance Sheet Arrangements

As of March 31, 2014, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Going Concern

Our independent registered public accounting firm has issued an emphasis of matter paragraph in their report included in the Annual Report 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, 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.

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 March 31, 2014. 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 March 31, 2014, our disclosure controls and procedures were effective at a reasonable assurance level.

There has been no change to our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the three months ended March 31, 2014 that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 5. OTHER INFORMATION

On May 8, 2014, the Company entered into the Seventh Amendment to the Note Purchase Agreement and the Fifth Amendment to the Notes with a majority of the Noteholders. The Seventh Amendment and the Fifth Amendment apply to all $28,205,000 in principal amount of Notes outstanding as of May 8, 2014 and all future Notes. As amended, the Notes have the following terms:

●	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 particular requested conversion the Company does not have a sufficient number of shares of its 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 the 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 contemplated pursuant to the Company’s 2004 Equity Compensation Plan.

ITEM 6. EXHIBITS

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, as 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, as filed with the SEC on August 14, 2013)

10.1		Seventh Amendment to Convertible Secured Subordinated Note Purchase Agreement and Fifth Amendment to Convertible Secured Subordinated Promissory Notes, dated May 12, 2014, by and among Moble Smith, Inc., Grasford Investments Ltd. and Crystal Management Ltd. ( 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 March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Balance Sheets, (ii) the Condensed Statements of Operations, (iii) the Condensed 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 )

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.


	By:	/s/ Amir Elbaz
May 15, 2014		Amir Elbaz
		Chief Executive Officer


	By:	/s/ Gleb Mikhailov
May 15, 2014		Gleb Mikhailov
		Chief Financial Officer

EXHIBIT 10.1

SEVENTH AMENDMENT TO CONVERTIBLE SECURED SUBORDINATED NOTE

PURCHASE AGREEMENT AND FIFTH AMENDMENT TO CONVERTIBLE SECURED SUBORDINATED PROMISSORY NOTES

THIS SEVENTH AMENDMENT TO CONVERTIBLE SECURED SUBORDINATED NOTE PURCHASE AGREEMENT AND FIFTH AMENDMENT TO CONVERTIBLE SECURED SUBORDINATED PROMISSORY NOTES (this “ Amendment ”), effective as of May 12, 2014, is made and entered into by and among MobileSmith, Inc., a Delaware corporation (the “ Company ”), the undersigned holders (the “ Holders ”, and each individually, a “ Holder ”) of the Convertible Secured Subordinated Promissory Notes (the “ Notes ”) issued by the Company from time to time pursuant to that certain Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007 (as amended through the date hereof, the “ Note Purchase Agreement ”), among the Company and the Holders. Capitalized terms used but not defined herein have the meanings assigned to them in the Note Purchase Agreement.

WITNESSETH:

WHEREAS, the Company and the Investors desire to amend the Notes previously issued pursuant to the Note Purchase Agreement to provide that the Company will increase number of authorized shares at the earlier of (1) promptly after the time of request of conversion, if there are not sufficient shares available to effect such conversion or (2) the time of the next shareholder meeting;

WHEREAS, the Company and the Investors desire to amend the Notes previously issued pursuant to the Note Purchase Agreement to provide that the Conversion Price of each Note be fixed at $1.43 (one hundred and ten percent (110%) of the closing price of the Company’s common stock on April 14, 2014) for all currently outstanding Notes and any Additional Notes, and to provide that the definition of “Conversion Price” contained in any Additional Note issued on or after the date hereof shall be conformed to the definition thereof contained in the Notes, as hereby amended;

WHEREAS, Section 9(a) of the Note Purchase Agreement provides that any provision of the Note Purchase Agreement may be amended with the written consent of the Company and Holders holding at least a Requisite Percentage;

WHEREAS, Section 8 of each of the Notes provides that any provision of the Notes may be amended with the written consent of the Company and Holders holding at least a Requisite Percentage.

NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

Section 1. Amendment to Note Purchase Agreement . All references in the Note Purchase Agreement to “Note” or “Notes” shall mean the form of Convertible Secured Subordinated Promissory Note attached hereto as Exhibit 1 .

Section 2. Amendment to Conversion Price .

(a) Section 1(c) of each Note shall be deleted in its entirety and the following shall be inserted in lieu thereof:

“ Conversion Price ” shall mean the lowest “Applicable Conversion Price” determined for each Note issued under the Note Purchase Agreement. The “ Applicable Conversion Price ” for each Note issued under the Note Purchase Agreement shall be $1.43 (in each case as adjusted for stock splits, dividends or combinations, recapitalizations or similar events).

(b) The Conversion Price as defined in any Additional Note issued on the date hereof or hereafter shall be the same as provided in the Notes, as hereby amended.

Section 3. Amendment to Conversion .

(a) Section 6(a) of each Note shall be deleted in its entirety and the following shall be inserted in lieu thereof:

Optional Conversion . At any time on or prior to the Maturity Date each Investor will have the option to convert all or a portion of the entire principal amount of the Notes outstanding into Common Stock immediately upon the Investor’s request; provided, however, that if, at the time of any particular conversion, the Company does not have the number of authorized shares of Common Stock sufficient to allow for such particular conversion as well as the issuance of the maximum amount of Common Stock permitted under the Company’s 2004 Equity Compensation Plan, the Investors 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 Investors request conversion of their Notes on the same date, any limitations on conversion shall be applied on a pro rata basis. In such case, the Investors may request, in writing, that the Company call a special meeting of the stockholders of the Company specifically for the purpose of increasing the number of authorized shares of Common Stock to cover 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 the Investors’ written request. Notwithstanding the above, the Company shall use its best efforts to increase its number of authorized shares of Common Stock to 100,000,000 or such greater number so as to allow for the full conversion of any outstanding Notes on the earlier of: (1) promptly after the date on which a request for conversion, for which there are not sufficient shares available to effect such conversion, is received by the Company, or (2) the time of the next shareholder meeting. The number of shares of Common Stock that this Note may be converted into shall be determined by dividing the principal amount then outstanding by the Conversion Price at the time of conversion. If the Investor elects to convert this Note on demand, it shall provide the Company with written notice of its election at least one (1) day prior to the date selected for conversion. Upon conversion, the Investor shall deliver to the Company the original of this Note (or a notice to the effect that the original Note has been lost, stolen or destroyed and an agreement reasonably acceptable to the Company whereby the holder agrees to indemnify the Company from any loss incurred by it in connection with this Note). However, upon such conversion of this Note, this Note shall be deemed converted and of no further force and effect, whether or not the Note is delivered for cancellation as set forth in the preceding sentence. If there shall occur a Change of Control, the Company shall give written notice to the Investor at least five (5) days prior to any closing thereof and the Investor’s election to convert this Note shall be conditional upon the consummation thereof.

(b) The conversion provisions as described in Section 6(a) of any Additional Note issued on the date hereof or hereafter shall be the same as provided in the Notes, as hereby amended.

Section 4. Ratification . Except as specifically amended above, each of the Notes and the Note Purchase Agreement shall continue in full force and effect in accordance with its terms, and is hereby in all respects ratified and confirmed.

Section 5. Counterparts . This Amendment may be executed in several counterparts and by facsimile or other electronic transmission, each of which shall be an original and all of which together shall constitute but one and the same.

[Remainder of Page Intentionally Left Blank]

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the date first above written.

	MOBILESMITH, INC.

	By:	/s/ Gleb Mikhailov
	Name:	Gleb Mikhailov
	Title:	Chief Financial Officer


	GRASFORD INVESTMENTS LTD.

	By:	/s/ Avy Lugassy
	Name:	Avy Lugassy
	Title:


	CRYSTAL MANAGEMENT LTD.

	By:	/s/ Doron Roethler
	Name:	Doron Roethler
	Title:


		WILLIAM FURR


	THE BLUELINE FUND

	By:
	Name:
	Title:


	UBP, UNION BANCAIRE PRIVEE

	By:
	Name:
	Title:

EXHIBIT 1

THIS NOTE AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS. THE COMPANY, IN ITS SOLE DISCRETION, SHALL HAVE THE RIGHT TO REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH ANY PROPOSED TRANSFER NOR IS SUCH TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE.

MOBILESMITH, INC.

CONVERTIBLE SECURED SUBORDINATED PROMISSORY NOTE

$_______________ ________________, __ ____

Durham, NC

FOR VALUE RECEIVED, MobileSmith, Inc., a Delaware corporation (the “ Company ”) promises to pay to _____________________ (“ Investor ”), or its registered assigns, in lawful money of the United States of America the principal sum of ____________________ ($_____), or such lesser amount as shall equal the outstanding principal amount hereof, together with interest from the date of this Note on the unpaid principal balance at a rate equal to 8.00% per annum, computed on the basis of the actual number of days elapsed and a year of 360 days. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable hereunder, shall be due and payable on the earlier of (i) November 14, 2016, (ii) a Change of Control or (iii) when, upon or after the occurrence of an Event of Default (as defined below), such amounts are declared due and payable by Investor or made automatically due and payable in accordance with the terms hereof (such date upon which all amounts payable hereunder are due is referred to herein as the “ Maturity Date ”).

This Note is one of the “Notes” issued pursuant to the Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007 (as amended, modified or supplemented, the “ Note Purchase Agreement ”), between the Company and the Investors (as defined in the Note Purchase Agreement). Capitalized terms used herein and not otherwise defined shall have the meanings assigned thereto in the Note Purchase Agreement. This Note and the Investor are subject to certain restrictions, and are entitled to certain rights and privileges, set forth in the Note Purchase Agreement.

THE OBLIGATIONS DUE UNDER THIS NOTE ARE SECURED BY A SECURITY AGREEMENT DATED AS OF NOVEMBER 14, 2007 (AS AMENDED, RESTATED OR SUPPLEMENTED, THE “ SECURITY AGREEMENT ”) AND EXECUTED BY COMPANY FOR THE BENEFIT OF THE INVESTORS. ADDITIONAL RIGHTS OF INVESTOR ARE SET FORTH IN THE SECURITY AGREEMENT.

The following is a statement of the rights of Investor and the conditions to which this Note is subject, and to which Investor, by the acceptance of this Note, agrees:

1. Definitions . As used in this Note, the following capitalized terms have the following meanings:

(a) “ Business Day ” shall mean any day other than a Saturday or Sunday or other day on which the New York Stock Exchange is permitted or required by law to close.

(b) the “ Company ” includes the corporation initially executing this Note and any Person which shall succeed to or assume the obligations of the Company under this Note.

(c) “ Conversion Price ” shall mean the lowest “Applicable Conversion Price” determined for each Note issued under the Note Purchase Agreement. The “ Applicable Conversion Price ” for each Note issued under the Note Purchase Agreement shall be calculated by multiplying 110% by the closing price of the Company’s common stock on April 14, 2014 (in each case as adjusted for stock splits, dividends or combinations, recapitalizations or similar events).

(d) “ Change of Control ” shall mean (i) any consolidation or merger or other transaction or series of transactions involving the Company pursuant to which the Company’s stockholders own less than fifty percent (50%) of the voting securities of the surviving entity (other than an equity financing) or (ii) the sale of all or substantially all of the assets of the Company.

(e) “ Event of Default ” has the meaning given in Section 4 hereof.

(f) “ Note Purchase Agreement ” has the meaning given in the introductory paragraph hereof.

(g) “ Obligations ” shall mean and include all loans, advances, debts, liabilities and obligations, howsoever arising, owed by the Company to Investor of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of this Note, the Note Purchase Agreement and the Security Agreement, including, all interest, fees, charges, expenses, attorneys’ fees and costs and accountants’ fees and costs chargeable to and payable by the Company hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U. S. C. Section 101 et seq. ), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding.

(h) “ Person ” shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority.

(i) “ Requisite Percentage ” shall mean, at least a majority of the aggregate outstanding principal amount of the Notes issued pursuant to the Note Purchase Agreement

(j) “ Securities Act ” shall mean the Securities Act of 1933, as amended.

(k) “ Security Agreement ” has the meaning given in the introductory paragraphs to this Note.

(l) “ Transaction Documents ” shall mean this Note, each of the other Notes issued under the Note Purchase Agreement, the Note Purchase Agreement, the Registration Rights Agreement, dated November 14, 2007, as amended, restated and supplemented, and the Security Agreement.

2. Interest . Accrued interest on this Note shall be payable in cash in quarterly installments commencing on the third month anniversary of the date of issuance of this Note with the final installment payable on the Maturity Date.

3. Prepayment . This Note may not be prepaid without the consent of a Requisite Percentage. Any prepayment must be made in connection with the prepayment of all outstanding Notes.

4. Events of Default . The occurrence of any of the following shall constitute an “ Event of Default ” under this Note and the other Transaction Documents:

(a) Failure to Pay . The Company shall fail to pay (i) when due any principal or interest payment on the due date hereunder or (ii) any other payment required under the terms of this Note or any other Transaction Document on the date due and, with respect to this subclause (ii) only, such payment shall not have been made within five (5) days of the Company’s receipt of written notice to the Company of such failure to pay;

(b) Non-Performance of Affirmative Covenants . The Company shall default in the due observance or performance of any material covenant set forth in the Note, the Note Purchase Agreement or the Security Agreement, which default shall continue uncured for fifteen (15) days after receipt of written notice to the Company thereof;

(c) Voluntary Bankruptcy or Insolvency Proceedings . The Company shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vii) take any action for the purpose of effecting any of the foregoing;

(d) Involuntary Bankruptcy or Insolvency Proceedings . Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within 30 days of commencement;

(e) Misrepresentations . Any of the representations and warranties of the Company in the Note Purchase Agreement or the Security Agreement proves to have been false or misleading in any material respect when made or furnished or deemed made;

(f) Judgments . One or more judgments, decrees or orders (excluding settlement orders) for the payment of money shall be entered against the Company or any of its subsidiaries involving in the aggregate a liability of $1,000,000 or more, and any such judgment, decree or order shall continue without discharge or stay for a period of sixty (60) days; or

(g) Cross-Defaults . The Company or any of its subsidiaries shall default in the performance or observance of any agreement or instrument relating to any indebtedness, or any other event shall occur or condition exist, and the effect of such default, event or condition is to cause or permit the holder or holders of any such indebtedness to cause indebtedness, in excess of $500,000 individually or in the aggregate, to become due prior to its stated maturity.

5. Rights of Investor upon Default . Upon the occurrence or existence of any Event of Default (other than an Event of Default described in Sections 4(c) or 4(d) ) and at any time thereafter during the continuance of such Event of Default, Investor may, with the consent of the Agent, by written notice to the Company, declare all outstanding Obligations payable by the Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. Upon the occurrence or existence of any Event of Default described in Sections 4(c) and 4(d) , immediately and without notice, all outstanding Obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default and subject to the consent of the Agent, Investor may exercise any other right power or remedy granted to it by the Transaction Documents or otherwise permitted to it by law, either by suit in equity or by action at law, or both.

6. Conversion .

(a) Optional Conversion . At any time on or prior to the Maturity Date each Investor will have the option to convert all or a portion of the entire principal amount of the Notes outstanding into Common Stock immediately upon the Investor’s request; provided, however, that if, at the time of any particular conversion, the Company does not have the number of authorized shares of Common Stock sufficient to allow for such particular conversion as well as the issuance of the maximum amount of Common Stock permitted under the Company’s 2004 Equity Compensation Plan, the Investors 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 Investors request conversion of their Notes on the same date, any limitations on conversion shall be applied on a pro rata basis. In such case, the Investors may request, in writing, that the Company call a special meeting of the stockholders of the Company specifically for the purpose of increasing the number of authorized shares of Common Stock to cover 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 the Investors’ written request. Notwithstanding the above, the Company shall use its best efforts to increase its number of authorized shares of Common Stock to 100,000,000 or such greater number so as to allow for the full conversion of any outstanding Notes on the earlier of: (1) promptly after the date on which a request for conversion, for which there are not sufficient shares available to effect such conversion, is received by the Company, or (2) the time of the next shareholder meeting. The number of shares of Common Stock that this Note may be converted into shall be determined by dividing the principal amount then outstanding by the Conversion Price at the time of conversion. If the Investor elects to convert this Note on demand, it shall provide the Company with written notice of its election at least one (1) day prior to the date selected for conversion. Upon conversion, the Investor shall deliver to the Company the original of this Note (or a notice to the effect that the original Note has been lost, stolen or destroyed and an agreement reasonably acceptable to the Company whereby the holder agrees to indemnify the Company from any loss incurred by it in connection with this Note). However, upon such conversion of this Note, this Note shall be deemed converted and of no further force and effect, whether or not the Note is delivered for cancellation as set forth in the preceding sentence. If there shall occur a Change of Control, the Company shall give written notice to the Investor at least five (5) days prior to any closing thereof and the Investor’s election to convert this Note shall be conditional upon the consummation thereof.

(b) Mechanics of Optional Conversion . As soon as practicable following surrender by the Investor of the original of this Note, the Company shall issue and deliver to Investor a certificate or certificates for the shares of Common Stock into which the Note has been converted (bearing such legends as may be required or advisable in the opinion of counsel to the Company). Such conversion shall be deemed to have been made immediately prior to the close of business on the date selected for the conversion and the Investor shall be treated for all purposes as the record holder or holders of such Common Stock on such date.

(c) Fractional Shares; Interest; Effect of Conversion . No fractional shares shall be issued upon conversion of this Note. In lieu of the Company issuing any fractional shares to Investor upon the conversion of this Note, the Company shall pay to Investor an amount equal to the product obtained by multiplying the Conversion Price by the fraction of a share not issued pursuant to the previous sentence. Upon conversion of this Note in full and the payment of any amounts specified in this Section 6(c) , the Company shall be forever released from all its obligations and liabilities under this Note.

7. Successors and Assigns . Subject to the restrictions on transfer described in Sections 9 and 10 below, the rights and obligations of the Company and Investor shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties.

8. Waiver and Amendment . Any provision of this Note may be amended, waived or modified upon the written consent of the Company and the holders of a Requisite Percentage.

9. Transfer of this Note or Securities Issuable on Conversion Hereof . With respect to any offer, sale or other disposition of this Note or securities into which such Note may be converted, Investor will give written notice to the Company prior thereto, describing briefly the manner thereof, together with (unless waived by the Company) a written opinion of Investor’s counsel, or other evidence if reasonably satisfactory to the Company, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Upon receiving such written notice and reasonably satisfactory opinion, if so requested, or other evidence, the Company, as promptly as practicable, shall notify Investor that Investor may sell or otherwise dispose of this Note or such securities, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 9 that the opinion of counsel for Investor, or other evidence, is not reasonably satisfactory to the Company, the Company shall so notify Investor promptly after such determination has been made. Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Subject to the foregoing, transfers of this Note shall be registered upon registration books maintained for such purpose by or on behalf of the Company. Prior to presentation of this Note for registration of transfer, the Company shall treat the registered holder hereof as the owner and holder of this Note for the purpose of receiving all payments of principal and interest hereon and for all other purposes whatsoever, whether or not this Note shall be overdue and the Company shall not be affected by notice to the contrary. Notwithstanding anything in this Section 9 to the contrary, no opinion of counsel shall be required with respect to any transfer by an Investor to its officers, directors, partners, members or other affiliates.

10. Assignment by the Company . Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of the holders of a Requisite Percentage.

11. Notices . All notices, requests, demands, consents, instructions or other communications required or permitted hereunder shall be in writing and faxed, mailed or delivered to each party at the respective addresses of the parties as set forth in the Note Purchase Agreement, or at such other address or facsimile number as the Company shall have furnished to Investor in writing. All such notices and communications will be deemed effectively given the earlier of (i) when received, (ii) when delivered personally, (iii) one business day after being delivered by facsimile (with receipt of appropriate confirmation), (iv) one business day after being deposited with an overnight courier service of recognized standing or (v) two days after being deposited in the U.S. mail, first class with postage prepaid.

12. Pari Passu Notes . Investor acknowledges and agrees that the payment of all or any portion of the outstanding principal amount of this Note and all interest hereon shall be pari passu in right of payment and in all other respects to the other Notes issued pursuant to the Note Purchase Agreement or pursuant to the terms of such Notes. In the event Investor receives payments in excess of its pro rata share of the Company’s payments to the Investors of all of the Notes, then Investor shall hold in trust all such excess payments for the benefit of the holders of the other Notes and shall pay such amounts held in trust to such other holders upon demand by such holders.

13. Usury . In the event any interest is paid on this Note which is deemed to be in excess of the then legal maximum rate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of this Note.

14. Waivers . The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument.

15. Remedies Cumulative . The remedies of Investor as provided herein and in the Note Purchase Agreement and in any other documents governing or securing repayment hereof shall be cumulative and concurrent and may be pursued singly, successively, or together, at the sole discretion of Investor to the extent provided herein and in the Note Purchase Agreement and may be exercised as often as occasion therefore shall arise. No act or omission of the Investor, including specifically, but without limitation, any failure to exercise any right, remedy or recourse, shall be effective as a waiver of any right of the Investor hereunder, unless set forth in a written document executed by the Investor, and then only to the extent specifically recited therein. A waiver or release with reference to one event shall not be construed as continuing, as a bar to, or as a waiver or release of any subsequent right, remedy or recourse as to any subsequent event. All notices, waivers, releases and/or consents by an Investor shall be directed to the Company only through the Agent.

16. No Rights of a Stockholder . Nothing contained in this Note shall be construed as conferring upon the Investor or any other Person the right to vote or consent or to receive notice as an stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company prior to the time that this Note is converted pursuant to Section 6 .

17. Governing Law . This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of law provisions of the State of Delaware, or of any other state.

( Signature Page Follows )

The Company has caused this Note to be issued as of the date first written above.

MOBILESMITH, INC.

a Delaware corporation

By:_______________________

Name:______________________

Title:_______________________

Exhibit 31.1

CERTIFICATION

I, Amir Elbaz, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of MobileSmith, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 15, 2014

/s/ Amir Elbaz
Amir Elbaz
Chairman and Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION

I, Gleb Mikhailov, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of MobileSmith, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 15, 2014

/s/ Gleb Mikhailov
Gleb Mikhailov
Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION

In connection with the Quarterly Report of MobileSmith, Inc. (the "Company") on Form 10-Q for the quarterly period ended March 31, 2014, as filed with the Securities and Exchange Commission (the "Report"), I, Amir Elbaz, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, to my knowledge, that:

	(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 15, 2014

/s/ Amir Elbaz
Amir Elbaz
Chairman and Chief Executive Officer

EXHIBIT 32.2

CERTIFICATION

In connection with the Quarterly Report of MobileSmith, Inc. (the "Company") on Form 10-Q for the quarterly period ended March 31, 2014, as filed with the Securities and Exchange Commission (the "Report"), I, Gleb Mikhailov, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, to my knowledge, that:

	(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 15, 2014

/s/ Gleb Mikhailov
Gleb Mikhailov
Chief Financial Officer