Information set forth in this Quarterly Report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") and other laws. Forward-looking statements consist of, among other things, trend analyses, statements regarding future events, future financial performance, our plan to build our business and the related expenses, our anticipated growth, trends in our business, our ability to continue as a going concern, and the sufficiency of our capital resources including funds that we may be able to raise through our Series A Preferred Stock, our ability to raise financing from other sources and/or ability to defer expenditures, the impact of the liens on our assets securing amounts owed to third parties, expectation regarding competitors as more and larger companies attempt to market products/services competitive to our company, market acceptance of our new product offerings, including updates to our Platform, rate of new user subscriptions, market penetration of our products and expectations regarding our revenues and expense, all of which are based on current expectations, estimates, and forecasts, and the beliefs and assumptions of our management. Words such as "expect," "anticipate," "project," "intend," "plan," "estimate," variations of such words, and similar expressions also are intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified under Part I, Item 1A, "Risk Factors," in the Annual Report on Form 10-K for the year ended December 31, 2020 and our subsequent periodic reports filed with the SEC for factors that may cause actual results to be different than those expressed in these forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

The following discussion is designed to provide a better understanding of our unaudited condensed financial statements, including a brief discussion of our business and products, key factors that impacted our performance, and a summary of our operating results. The following discussion should be read in conjunction with the unaudited condensed financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and the audited annual financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report. Historical results and percentage relationships among any amounts in the condensed financial statements are not necessarily indicative of trends in operating results for any future periods.





Overview

MobileSmith is a developer of software applications for the healthcare industry. Our software products include a cloud-based collection of applications that run on our architected healthcare technology ecosystem. The architecture is designed to do the following:





 ?  improve experience of healthcare patients and consumers, who are often at the
    same time members of various medical insurance networks




 ?  optimize delivery of healthcare and relationship between members and
    insurance networks




 ?  increase adoption, utilization and intelligence of EMRs (electronic medical
    records), extend EMR's usability to patients and consumers of healthcare

Since 2013 the Company focused exclusively on the development of do-it-yourself customer facing platform that enabled organizations to rapidly create, deploy, and manage custom, native smartphone and tablet apps deliverable across iOS and Android mobile platforms without writing a single line of code. During 2017 the Company concluded that it had its highest rate of success with clients within the Healthcare industry and concentrated its development and sales and marketing efforts in that industry. During 2018 we further refined our Healthcare offering and redefined our product - a suite of e-health mobile solutions that consist of a catalog of ready to deploy mobile app solutions (App Blueprints) and support services. In 2019 and 2020 we consolidated our current solutions under a single offering branded Peri™. Peri™ is designed to bridge the gap between healthcare industry system tools and healthcare consumer's mobile device.






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From time to time, we have provided custom software development services. Such services are not core to our business model and will likely decrease in significance in the future.

Target Market and Sales Channels

During 2017, we completed a strategic shift and focused our business and research and development activities primarily on the Healthcare industry in the United States. In 2018 we refined our healthcare focus by identifying two target markets: (i) healthcare providers (including hospitals, hospital systems and the United States Veterans Health Administration) and (ii) healthcare payer market (including insurance companies and insurance brokers).

Both markets are targeted with a diversified sales workforce that includes direct sales and resellers, such as channel partners.

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.





RESULTS OF OPERATIONS

Comparison of the Three Months Ended June 30, 2021 (the "2021 Period") to the Three Months Ended June 30, 2020 (the "2020 Period").





                                Three
                               months        Three months
                                ended           ended
                              June 30,         June 30,         Increase           Increase
                                2021             2020          (Decrease)$       (Decrease)%
Revenue                      $   398,358     $    607,772     $    (209,414 )              -34 %
Cost of Revenue                  199,944          181,221            18,723                 10 %
Gross Profit                     198,414          426,551          (228,137 )              -53 %

Selling and Marketing            476,147          301,052           175,095                 58 %
Research and Development         858,571          750,438           108,133                 14 %
General and Administrative       705,489          824,517          (119,028 )              -14 %

Interest Expense                  48,671        1,759,173        (1,710,502 )              -97 %
Loss on Debt
Extinguishment               $         -     $  4,864,750     $  (4,864,750 )             -100 %

Revenue decreased by $209,414 or 34%. A decrease of $105,000 accounted for completion of a large contract with a government agency during the three months ended June 30, 2020. The remainder of the decrease is associated with loss of customers due to non-renewals of contracts and new sales below target.

Cost of Revenue increased by $18,723 or 10%. The increase is attributed to an increase in payroll costs for a delivery team and increase in hosting costs.

Gross Profit decreased by $228,137 or 53%. The decrease is primarily attributable to a decrease in revenue.

Selling and Marketing expense increased by $175,095 or 58%. During 2020 we kept certain sales positions unfilled, as we evaluated the impact of COVID-19 on the healthcare industry. In last quarter of 2020 and during the first quarter of 2021 we started expanding our sales and marketing team, which resulted in an increase in payroll costs of $137,000 and increase in stock based compensation of $75,000. During the same period, we incurred an offsetting decrease of $42,000 in marketing campaigns, PR and marketing outsourced services.

Research and Development expense increased by $108,133 or 14%. In 2021 we invested in our product development team by expanding it and the team spent less time on efforts associated with delivery of services revenue. As a result, payroll and related expenses increased by approximately $55,000 and stock based compensation increased by $63,000.






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General and Administrative expense decreased by $119,028 or 14% predominantly due to decrease in stock based compensation of $110,000.

Interest Expense decreased by $1,710,502 or 97%. Decrease in interest expense is associated with the debt elimination transactions.

Loss on Debt Extinguishments of $4,864,750 in 2020 Period resulted from modifications of convertible notes.

Comparison of the Six Months Ended June 30, 2021 (the "2021 Period") to the Six Months Ended June 30, 2020 (the "2020 Period").





                  Six months ended       Six months ended        Increase           Increase
                   June 30, 2021          June 30, 2020         (Decrease)$        (Decrease)%
Revenue          $          816,343     $        1,232,344     $    (416,001 )               -34 %
Cost of
Revenue                     414,247                439,784           (25,537 )                -6 %
Gross Profit                402,096                792,560          (390,464 )               -49 %

Selling and
Marketing                 1,004,441                668,366           336,075                  50 %

Research and
Development               1,734,237              1,378,233           356,004                  26 %
General and
Administrative            1,611,373              1,649,318           (37,945 )                -2 %

Interest
Expense                     191,138              3,610,276        (3,419,138 )               -95 %
Loss on Debt
Extinguishment            6,507,137              4,864,750         1,642,387                  34 %

Gain on Debt
Extinguishment   $                      $                -     $     542,000                   0 %
- PPP Loan
Forgiveness                 542,000

Revenue decreased by $416,001 or 34%. A decrease of $105,000 accounted for completion of a large contract with a government agency. The remainder of the decrease is associated with loss of customers due to non-renewals of contracts and new sales below target.

Cost of Revenue decreased by $25,537 or 6%. The decrease is attributed to a completion of a single large contract with a government agency during the three months ended June 30, 2020.

Gross Profit decreased by $390,464 or 49%. The decrease is primarily attributable to a decrease in revenue.

Selling and Marketing expense increased by $336,075 or 50%. During 2020 we kept certain sales positions unfilled, as we evaluated the impact of COVID-19 on the healthcare industry. In last quarter of 2020 and during the first quarter of 2021 we started expanding our sales and marketing team, which resulted in an increase in payroll costs of $232,000, increase in related recruiting costs of $41,000 and increase in stock based compensation of $134,000. During the same period, we incurred offsetting decreases of $15,000 in travel costs and $77,000 decrease in marketing campaigns, PR and marketing outsourced services.

Research and Development expense increased by $356,004 or 26%. In 2021 we invested in our product development team by expanding it and the team spent less time on efforts associated with delivery of services revenue. As a result, payroll and related expenses increased by approximately $184,000 and stock based compensation increased by $145,000.

General and Administrative expense decreased by $37,945 or 2%. The decrease can be attributed to fluctuations in various general and administrative costs.

Interest Expense decreased by $3,419,138 or 95%. Decrease in interest expense is associated with the debt elimination transactions.






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Gain on Debt Extinguishment - PPP Loan Forgiveness The Company's first PPP loan was forgiven during the 2021 Period.

Loss on Debt Extinguishments of $6,507,137 resulted from a debt exchange transaction, which took place on January 28 of 2021. For more information about the transaction refer to "Debt" footnote of the financial statements included in this Form 10Q. In 2020 Period loss on debt extinguishment resulted from modifications of convertible notes.

Liquidity and Capital Resources

We have not yet achieved positive cash flows from operations, and our main source of funds for our operations continues to be the sale of our Series A Preferred Stock. We will continue to rely on this source until we are able to generate sufficient cash from revenues to fund our operations or obtain alternate sources of financing. We believe that anticipated cash flows from operations, and additional funding under the Series A Preferred Stock, of which no assurance can be provided, together with cash on hand, will provide sufficient funds to finance our operations for the next 12 months. Changes in our operating plans, lower than anticipated sales, increased expenses, impact of COVID-19 pandemic (as described in "Risk Factors" of our Annual Report on Form 10-K for the period ending December 31, 2020 filed with the SEC) or other events may cause us to seek additional equity or debt financing in future periods. There can be no guarantee that financing will continue to be available to us through the sale of our Series A Preferred Stock or otherwise on acceptable terms or at all. Additional equity and convertible debt financing will be dilutive to the holders of shares of our common stock.

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

? Our ability to expand revenue volume;

? Our ability to maintain product pricing as expected, particularly in light of

increased competition and its unknown effects on market dynamics;

? Our continued need to reduce our cost structure while simultaneously

expanding the breadth of our business, enhancing our technical capabilities,

and pursing new business opportunities.

? Our ability to predict and offset the extended impact COVID-19 will have to

our primary market's financial outcome, and our business.

In addition, we have an outstanding Loan and Security Agreement (the "LSA") with Comerica Bank in the amount of $5 million, which matures in June of 2022 and is secured by an extended irrevocable letter of credit issued by UBS AG (Geneve, Switzerland) ("UBS AG") with a renewed term expiring on May 31, 2022.

Capital Expenditures and Investing Activities

Our capital expenditures are limited to the purchase of new office equipment and new mobile devices that are used for testing. Cash used for investing activities was not significant and we do not plan any significant capital expenditures in the near future.





Going Concern

Our independent registered public accounting firm has issued an emphasis of matter paragraph in their report included in the Annual Report on Form 10-K for the year ended December 31, 2020 in which they express substantial doubt as to our ability to continue as a going concern. The condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts or classification of liabilities that might be necessary should we be unable to continue as a going concern. Our continuation as a going concern depends on our ability to generate sufficient cash flows to meet our obligations on a timely basis, to obtain additional financing that is currently required, and ultimately to attain profitable operations and positive cash flows. There can be no assurance that our efforts to raise capital or increase revenue will be successful. If our efforts are unsuccessful, we may have to cease operations and liquidate our business.






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