STOCKHOLDERS DEFICIT

6 Months Ended

Jun. 30, 2022

4. STOCKHOLDERS DEFICIT

Preferred Stock

On February 24, 2022 the Company issued a total of 54,966 shares of Series A Preferred Stock as payment in kind for dividends declared by the board of directors, with respect to the then outstanding Series A Preferred Stock.. The issuance of the Series A Preferred Stock was recorded at fair value on February 24, 2022 as determined below:

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The value of the 54,966 shares of Series A Preferred Stock dividend was recorded at $2,597,699. In absence of retained earnings, the dividend resulted in a charge to additional paid in capital for Common Stock. In addition, on February 24, 2022 the market value of the common stock was above the Series A Preferred Stock conversion price of $1.43, which resulted in the conversion feature that was beneficial to the holder. The resulting beneficial conversion feature was recorded as a discount and amortized in its entirety as a deemed dividend and charged to loss attributable to common shareholders on the Company’s Statement of Operations in the amount of $1,764,405.

In addition, during the six month period ended June 30, 2022 the Company issued 62,937 shares of Series A Preferred Stock in exchange for $2,700,000 in cash funding. The shares were issued with beneficial conversions feature discount and resulted in a deemed dividend with charge to loss attributable to common stock shareholders of $ 2,399,300.

Our Series A Preferred Stock has the following standard terms:

●	Each share of Series A Preferred Stock shall have a par value of $0.001 per share and a stated value equal to $42.90 (the “Stated Value “);

●	Each share of the Series A Preferred Stock then outstanding shall be entitled to receive an annual dividend equal to $3.43, subject to proration related to the timing of issuance. Such dividend is designed to have an effective yield of 8% on the Stated Value;

●	Each dividend shall be paid either in shares of Series A Preferred Stock or in cash, at the option of the Company, on the respective dividend date;

●	The holders of Series A Preferred Stock shall have no voting rights with respect to any matters to be voted on by the stockholders of the Company;

●	The holders of Series A Preferred Stock shall have certain Board observation and inspection rights administered through a designated agent;

●	Each share of Series A Preferred Stock shall be convertible, at any time and from time to time, at the option of the Holder into 30 shares of Common Stock, which results in conversion ratio of $1.43 of the Stated Value of Series A Preferred Stock into one share of common stock;

●	The shares are subject to automatic conversion immediately prior to the occurrence of a Fundamental Transaction, as defined in the Series A Preferred Stock Certificate of Designation. A Fundamental Transaction includes, but is not limited to, a sale, merger or similar change in ownership.

Equity Compensation Plan

The following is a summary of the stock option activity for the six months ended June 30, 2022:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding, December 31, 2021		10,883,300		$	2.06		7.6	$	9,553,832
Cancelled		(1,774,610	)		1.93
Issued		500,000			2.55
Outstanding, June 30, 2022		9,608,690			2.11		7.4		12,275,437
Vested and exercisable, June 30, 2022		5,462,850		$	1.96		6.8	$	7,786,913

Aggregate intrinsic value represents the difference between the closing price of the Company’s common stock on June 30, 2022, and the exercise price of outstanding, in-the-money stock options. The closing price of the common stock on June 30, 2022, as reported on the OTCQB, was $3.39 per share.

On June 30, 2022, an amount of $7,161,694 unvested expense related to outstanding stock options has yet to be recorded over a weighted average period of 2.9 years.

MobileSmith, Inc. 10-Q