10-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

(Mark One)

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

For the fiscal year ended December 31, 2012

or

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

For the transition period from __________ to __________

Commission file number 001-32634

SMART ONLINE, INC.

(Exact name of registrant as specified in its charter)

Delaware	95-4439334
(State or other jurisdiction of incorporation	(I.R.S. Employer Identification
or organization)	No.)
4505 Emperor Blvd., Ste. 320 Durham, North Carolina	27703
(Address of principal executive offices)	(Zip Code)

(919) 765-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
N/A	N/A

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ

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 þ No ¨

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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	o	Accelerated filer	o
Non-accelerated filer (Do not check if a smaller reporting company)	o	Smaller reporting company	þ

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

The aggregate market value of common stock held by non-affiliates of the registrant as of June 29, 2012 was approximately $27,528,678 (based on the closing sale price of $1.50 per share).

The number of shares of the registrant’s Common Stock, $0.001 par value per share, outstanding as of March 21, 2013 was 18,352,542.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive InformationStatement to be delivered to stockholders in connection with the Annual Meeting of Stockholders planned to be held onJune 13, 2013 are incorporated by reference into Part III.

EXPLANATORY NOTE

Smart Online, Inc., or the Company, is filing this Amendment No. 1 on Form 10-K/A, or the Amendment, to amend its Annual Report on Form 10-K for the fiscal year ended December 31, 2012, or the Original Filing, as originally filed with the Securities and Exchange Commission on April 1, 2013, solely to furnish Exhibit 101—Interactive Data File (XBRL Exhibit), which was updated from the Original Filing in order to make certain labels accurately reflect corresponding labels in the Related Official Filing in accordance with Rule 405 Regulation S-T. 

This Amendment does not update any other disclosure to reflect events occurring after the filing of the Original Filing. Except as described above, no other changes have been made to the Original Filing. The Original Filing continues to speak as of the date of the Original Filing, and the Company has not updated the disclosures contained therein to reflect any events that occurred at a date subsequent to the filing of the Original Filing.

PART IV

Item 15. Exhibits, Financial Statement Schedules

The exhibit listed below is furnished herewith in response to this Item.

Exhibit	Description
101	The following materials from the Company's Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Cash Flows (iv) the Statements of Stockholders’ Deficit and (v) related notes to these financial statements, tagged as blocks of text and in detail.

2

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Smart Online, Inc.
By:	/s/ Robert M. Brinson, Jr.
	Robert M. Brinson, Jr.
	Chief Executive Officer

Dated:  April 5, 2013

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4. PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE (Details Narrative) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Property And Equipment And Capitalized Software Details Narrative
Depreciation and amortization expense	$ 91,428	$ 44,119

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9. INCOME TAXES (Details 1) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Income Tax Disclosure [Abstract]
Tax benefit computed at statutory rate of 34%	$ (1,362,000)	$ (1,097,000)
State income tax benefit, net of federal effect	(192,000)	(161,000)
Change in valuation allowance	1,566,000	1,273,000
Stock based compensation	(13,000)	(16,000)
Intangible impairment	1,000
Other permanent differences		1,000
Totals

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8. STOCKHOLDERS DEFICIT (Details Narrative) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Stockholders Deficit Details Narrative
Unvested expense yet to be recorded related to all restricted stock outstanding	$ 0	$ 2,850
Unvested expense yet to be recorded related to all incentive stock options outstanding	159,485	77,320
Outstanding options, intrinsic value	$ 25,050

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3. BALANCE SHEET ACCOUNTS (Details 1)	Dec. 31, 2012	Dec. 31, 2011
Balance Sheet Accounts Details 1
Shares into which financial instrument liability can be settled: Unrestricted shares of common stock, when issued	1,475,000	1,475,000
Settlement related financial instrument liability at fair value: Fair value of unrestricted shares of common stock (Level 1 Measurement)	2,065,000	1,770,000

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8. STOCKHOLDERS EQUITY (Tables)

12 Months Ended

Dec. 31, 2012

Equity [Abstract]

2004 Equity Compensation Plan

			Number	Initial	Expense
Date of Grant	Grantee	Title	of Options	Vesting Date	2012	2011
February 1, 2010	Robert Dieterle	VP - General Manager	75,000	February 1, 2011	$11,761	$10,660
October 21, 2010	Employees	Various	68,000	January 15, 2011	$7,474	$9,371
August 1, 2011	Employees	Various	8,400	November 1, 2011	$987	$163
September 14,  011	Robert Brinson	Board Member	20,000	December 15, 2011	$14,103	$1,163
April 1, 2012	Employees	Various	5,000	July 1, 2012	$294	-
May 15, 2012	Employees	Various	12,500	August 15, 2012	$248	-
June 13, 2012	Robert  Hancock	VP of  Sales	75,000	September 13, 012	$1,188	-
September 11, 2012	Robert  Brinson	Chief Executive Officer	75,000	December 11, 2012	$3,334	-

Schedule of Stock Options

	Shares			Weighted Average Exercise Price
BALANCE, December 31, 2010		283,000		$	2.34
Granted		28,400			1.21
Exercised		-			-
Canceled		(9,500	)		1.10
BALANCE, December 31, 2011		301,900			2.25
Granted		167,500			1.46
Exercised		-			-
Canceled		(18,500	)		1.18
BALANCE, December 31, 2012		450,900		$	2.02

Schedule of Stock Options Outstanding

								Currently Exercisable
				Average		Weighted				Weighted
		Number of		Remaining		Average				Average
Exercise		Options		Contractual		Exercise		Number of		Exercise
Price		Outstanding		Life (Years)		Price		Shares		Price
$	0.90		8,400		8.50	$	0.90		2,100	$	0.90
$	1.10		45,000		7.83	$	1.10		22,500	$	1.10
$	1.14		132,500		7.37	$	1.14		62,500	$	1.14
$	1.35		20,000		8.75	$	1.35		20,000	$	1.35
$	1.45		75,000		9.75	$	1.45		-	$	1.45
$	1.49		5,000		9.33	$	1.49		-	$	1.49
$	1.50		75,000		9.50	$	1.50		-	$	1.50
$	2.50		5,000		3.33	$	2.50		5,000	$	2.50
$	3.25		15,000		5.67	$	3.25		15,000	$	3.25
$	3.50		25,000		1.25	$	3.50		25,000	$	3.50
$	5.00		25,000		2.25	$	5.00		25,000	$	5.00
$	8.61		20,000		2.58	$	8.61		20,000	$	8.61
Totals			450,900		6.34	$	2.65		197,100	$	2.90

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10. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Revenues	$ 480,122	$ 467,308
% of Total Revenues	100.00%	100.00%
Customer A
Revenues	283,564	376,860
% of Total Revenues	59.00%	81.00%
Customer B
Revenues	49,091	86,685
% of Total Revenues	10.00%	18.00%
Others
Revenues	$ 147,467	$ 3,763
% of Total Revenues	31.00%	1.00%

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6. NOTES PAYABLE (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Notes Payable Details
IDB credit facility, short term	$ 5,000,000	$ 5,000,000
Insurance premium note, short term	23,987	21,421
Various capital leases, short term	17,754	16,394
Various capital leases, long term	132,318	150,075
Convertible notes, long term	20,500,000	15,475,000
Totals	25,674,059	20,662,890
Short term portion total	5,041,741	5,037,815
Long term portion total	$ 20,632,318	$ 15,625,075
IDB Bank Maturity	05/01/2013	05/01/2012
Insurance premium note Maturity	06/01/2013	06/01/2012
Various capital leases Maturity	08/01/2019	Various
Convertible notes Maturity	11/01/2016	11/01/2016
IDB Bank Rate	4%	4%
Insurance premium note Rate	6.9%	6.1%
Various capital leases Rate	8%	8.0-18.9%
Convertible notes Rate	8%	8%

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4. PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Property gross	$ 373,849	$ 348,860
Less accumulated depreciation	(208,908)	(184,203)
Property and equipment, net	164,941	164,657
Computer hardware
Property gross	170,278	151,450
Computer software
Property gross	45,986	40,967
Furniture and fixtures
Property gross	88,946	88,946
Office equipment
Property gross	15,360	14,218
Leasehold improvements
Property gross	$ 53,279	$ 53,279

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11. EMPLOYEE BENEFIT PLAN (Details Narrative) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Employee Benefit Plan Details Narrative
Company contribution to employee benefit plan	$ 20,928	$ 16,346

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9. INCOME TAXES (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Net current deferred income tax assets related to:
Allowance for doubtful accounts	$ 0	$ 260,000
Depreciation	131,000	114,000
Stock-based expenses	91,000	226,000
Accrued liabilities – litigation expenses	833,000	768,000
Other	7,000	8,000
Net operating loss carryforwards	26,677,000	24,692,000
Total	27,739,000	26,068,000
Less valuation allowance	(27,739,000)	(26,068,000)
Net current deferred income tax	$ 0	$ 0

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3. BALANCE SHEET ACCOUNTS

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

3. BALANCE SHEET ACCOUNTS

3. BALANCE SHEET ACCOUNTS

Accounts Receivable

	December 31
	2012		2011
Accounts receivable	$	36,050	$	682,019
Allowance for doubtful accounts		-		(675,389	)
	$	36,050	$	6,630

Settlement Related Financial Instrument Liability

The Company generally does not use derivative instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of its financial instruments. However, in connection with the Company’s Class Action lawsuit settlement approved by the United States District Court for the Middle District of  North Carolina (the “District Court”)  on July 1, 2011 (the “Class Action”) (see Note 7, “Commitments and Contingencies – Legal Proceedings”), we are required to issue 1,475,000 shares of our common stock to the Class Action class.  Through July 1, 2011, our liability related to these shares was accounted for as an accrued liability on our balance sheet and changes in the value of the shares were generally not reflected on our statements of operations, absent certain significant events, such as the approval of the settlement.  Now that the Class Action has been settled, because we have not yet issued the shares, the liability is now accounted for as a financial instrument liability on our balance sheet and, until the shares are issued, changes in their value will be reflected on our statements of operations as losses or gains, as applicable. The number of shares to be issued will not change, and these losses or gains are not cash items that will impact our income or loss from operations.

The following tabular presentation reflects the components of derivative assets and liabilities as of December 31, 2012 and December 31, 2011:

	December 31, 2012		December 31, 2011
Shares into which financial instrument liability can be settled:
Unrestricted shares of common stock, when issued		1,475,000		1,475,000

Settlement related Financial Instrument liability at fair value:
Fair value of unrestricted shares of common stock (Level 1 Measurement)	$	2,065,000	$	1,770,000

The following tabular presentation reflects the (loss) in the fair value of financial instruments for the twelve-month periods ended December 31, 2012 and 2011:

	Year ended December 31, 2012			Year ended December 31, 2011
Change in market value of settlement related financial instruments in the accompanying statement of operations is related to the Class Action settlement approved by the District Court on July 1, 2011
Unrestricted shares of common stock	$	(295,000	)	$	(147,500	)

Accrued Liabilities

	Year ended December 31, 2012		Year ended December 31, 2011
Accrued liability - development of the Company’s custom accounting application	$	-	$	75,436
Legal reserves for settlement of legal fees on behalf of former officers and employees, Michael Nouri and Eric Reza Nouri		67,227		217,227
Estimated Class Action settlement costs
Interest due on Convertible Notes		221,404		179,569
Accrued financing costs		50,000		-
Accrued Payroll		22,985		-
Other accrued items		8,724		48,735
	$	370,340	$	520,967

Deferred Revenue

Deferred revenue is comprised of the following items:

· Subscription fees – Short-term and long-term portions of cash received related to one- or two-year subscriptions for domain names and/or e-mail accounts.

· Professional service fees –Customers purchased licenses and paid professional service fees during 2012 and 2011 to develop a customized mobile application.  The applications were in process at December 31, 2011 and not delivered.  This deferred revenue represents the difference between earned fees and professional service fees that were recognized as professional service fees revenue in 2012 and 2011.

The components of deferred revenue for the periods indicated were as follows:

	December 31, 2012		December 31, 2011
Subscription fees	$	88,974	$	13,326
Professional service fees		-		19,837
Totals	$	88,974	$	33,163
Current portion	$	87,946	$	31,658
Non-current portion		1,028		1,505
Totals	$	88,974	$	33,163

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7. COMMITMENTS AND CONTINGENCIES (Details Narrative) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Commitments And Contingencies Details Narrative
Rent expense	$ 150,072	$ 166,469

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2. SIGNIFICANT ACCOUNTING POLICIES (Details)	12 Months Ended
	Dec. 31, 2012
Computer hardware
Life	10 years
Computer software
Life	10 years
Furniture and fixtures
Life	10 years
Office equipment
Life	10 years
Leasehold improvements
Life	We depreciate leasehold improvements that are stated at cost and depreciated over the term of the office lease as follows: Shorter of the estimated useful life or the lease term

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1. SUMMARY OF BUSINESS AND DESCRIPTION OF GOING CONCERN (Details Narrative)	Dec. 31, 2012
Summary Of Business And Description Of Going Concern Details Narrative
Commitment from secured subordinated noteholders to purchase convertible notes	At December 31, 2012, the Company does have a commitment from its secured subordinated noteholders to purchase up to an additional $2.8 million in convertible notes, of which $1,260,000 was issued through March 21, 2013 (Note 6).

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8. STOCKHOLDERS DEFICIT (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Stockholders Deficit Details
Number of Shares Outstanding, Beginning	301,900	283,000
Number of Shares Granted	167,500	28,400
Number of Shares Exercised	0	0
Number of Shares Cancelled	(18,500)	(9,500)
Number of Shares Outstanding, Ending	450,900	301,900
Weighted Average Exercise Price Outstanding, Beginning	$ 2.25	$ 2.34
Weighted Average Exercise Price Granted	$ 1.46	$ 1.21
Weighted Average Exercise Price Exercised
Weighted Average Exercise Price Cancelled	$ 1.18	$ 1.1
Weighted Average Exercise Price Outstanding, Ending	$ 2.02	$ 2.25

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2. SIGNIFICANT ACCOUNTING POLICIES (Details 1)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Significant Accounting Policies Details 1
Dividend yield	0.00%	0.00%
Expected volatility	84.62%	73.27%
Risk free interest rate	1.30%	2.04%
Expected lives (years)	4 years	4 years

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2. SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Significant Accounting Policies Details Narrative
Advertising Costs	$ 98,766	$ 53,509
Total stock-based compensation expense	$ 39,389	$ 47,894
Stock options excluded from the calculation of common equivalent shares	450,900	301,900

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2. SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2012

Accounting Policies [Abstract]

2. SIGNIFICANT ACCOUNTING POLICIES

2. SIGNIFICANT ACCOUNTING POLICIES

Fiscal Year - The Company’s fiscal year ends December 31. References to fiscal 2012, for example, refer to the fiscal year ended December 31, 2012.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”) requires management to make estimates and assumptions in the Company’s financial statements and notes thereto. Significant estimates and assumptions made by management include the determination of the provision for income taxes, the fair market value of stock awards issued, the period over which revenue is generated and the determination of allowances on our deferred tax assets. Actual results could differ materially from those estimates.

Fair Value of Financial Instruments -  US GAAP requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Due to the short period of time to maturity, the carrying amounts of cash equivalents, accounts receivable, accounts payable, accrued liabilities, and notes payable reported in the financial statements approximate the fair value.

Cash and Cash Equivalents - All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. 

Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (FDIC) covers $250,000 for substantially all depository accounts and temporarily provides unlimited coverage through December 31, 2013 qualifying and participating non-interest bearing transaction accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. As of December 31, 2012, the Company did not exceed these insured amounts. See Note 10, “Major Customers and Concentration of Credit Risk,” for further discussion of risk within accounts receivable.

Allowance for Doubtful Accounts - The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability, failure, or refusal of its customers to make required payments. The need for an allowance for doubtful accounts is evaluated based on specifically identified amounts that management believes to be potentially uncollectible. If actual collections experience changes, revisions to the allowance may be required.

Prepaid Expenses - Prepaid expenses consist primarily of advance payments to registries for domain name registrations, and miscellaneous payments made in advance of the period to which they relate. Prepaid expenses are amortized to expense on a straight-line basis over the period covered by the expenses. In the case of prepaid registry fees, the amortization period is consistent with the revenue recognition of the related domain name registration.

Property and Equipment  In 2009 we sold our computer hardware, furniture and fixtures and office equipment (“Personal Property”) to our noteholders in exchange for a reduction in the outstanding note balances of $200,000.  The Personal Property and equipment was then leased back from the noteholders under a ten (10) year lease.  The leased assets are capitalized and depreciated.  Personal Property and equipment are stated at the cost, as established under the lease and are depreciated over the term of the lease using the straight-line method.  We continue to own and depreciate leasehold improvements that are stated at cost and depreciated over the term of the office lease as follows:

Computer hardware	10 years
Computer software	10 years
Furniture and fixtures	10 years
Office equipment	10 years
Leasehold improvements	Shorter of the estimated useful life or the lease term

Intangible Assets and Goodwill - Intangible assets consist of the fee paid for the perpetual license for critical software and costs associated with our patent filings. The Company also owns several copyrights and trademarks related to products, names, and logos used throughout its non-acquired product lines. Management has reviewed the value of each asset and fair values are reflected in our financial statements as of December 31, 2012.

Impairment of Long-Lived Assets - The Company evaluates the recoverability of its long-lived assets in accordance with US GAAP. Management tests for the impairment of goodwill and other indefinite lived assets annually.  Management evaluates other long-lived assets whenever events and circumstances indicate that the value may be impaired.  As of December 31, 2012, we reviewed all items included in the category of capitalized software on the basis of actual cost compared to prospective future cash flow generated from future sales.

In addition to the recoverability assessment, the Company routinely reviews the remaining estimated useful lives of its long-lived assets. Any reduction in the useful-life assumption will result in increased depreciation and amortization expense in the period when such determinations are made, as well as in subsequent periods.

Revenue Recognition  – We derive revenue primarily from subscription fees charged to customers accessing our SaaS applications; professional service fees, consisting primarily of consulting; the perpetual or term licensing of software platforms or applications; and hosting and maintenance services. These arrangements may include delivery in multiple-element arrangements if the customer purchases a combination of products and/or services. We license, sell, lease, or otherwise market computer software that is more than incidental to the underlying customer arrangement

In accordance with Financial Accounting Standard Board (“FASB”) and Securities and Exchange Commission (“SEC”) Staff Accounting guidance on revenue recognition the Company considers revenue earned and realizable when: (a) persuasive evidence of the sales arrangement exists, (b) the arrangement fee is fixed or determinable, (c) service delivery or performance has occurred, (d) customer acceptance has been received, if contractually required, and (e) collectability of the arrangement fee is probable. The Company typically uses signed contractual agreements as persuasive evidence of a sales arrangement. We apply the provisions of the relevant FASB accounting pronouncements when making estimates or assumptions related to transactions involving the license of software where the software deliverables are considered more than inconsequential to the other elements in the arrangement. For contracts that contain multiple deliverables, we analyze the revenue arrangements when making estimates or assumptions in accordance with the appropriate authoritative guidance, which provides criteria governing how to determine whether goods or services that are delivered separately in a bundled sales arrangement should be considered as separate units of accounting for the purpose of revenue recognition. Deliverables are accounted for separately if they meet all of the following criteria: (a) the delivered item has value to the customer on a stand-alone basis; (b) there is objective and reliable evidence of the fair value of the undelivered items; and (c) if the arrangement includes a general right of return relative to the delivered items, the delivery or performance of the undelivered items is probable and substantially controlled by the Company

If at the inception of an arrangement the fee is not fixed or determinable, we defer revenue until the arrangement fee becomes due and payable. If we determine collectability is not probable, we defer revenue until we receive payment or collection becomes probable, whichever is earlier. The determination of whether fees are collectible requires judgment of our management, and the amount and timing of revenue recognition may change if different assessments are made.

We account for consulting, website design fees and application development services separately from the license of associated software platforms when these services have value to the customer and there is objective and reliable evidence of fair value of each deliverable. When accounted for separately, we recognize revenue as the services are rendered for time and material contracts, and when milestones are achieved and accepted by the customer for fixed price or long-term contracts. The majority of our consulting service contracts are on a time and material basis, and we typically bill our customers monthly based upon standard professional service rates.

Application development services are typically fixed price and of a longer term. As such, we account for them as long-term construction contracts that require us to recognize revenue based on estimates involving total costs to complete and the stage of completion. Our assumptions and estimates made to determine the total costs and stage of completion may affect the timing of revenue recognition, with changes in estimates of progress to completion and costs to complete accounted for as cumulative catch-up adjustments. If the criteria for revenue recognition on construction-type contracts are not met, we capitalize the associated costs of such projects and include them in costs in excess of billings on the balance sheet until such time that we are permitted to recognize revenue.

Subscription fees primarily consist of sales of subscriptions to end users. We make subscription sales either on a subscription or on a “for fee” basis. Subscriptions are generally payable on a monthly basis. We typically have a revenue-share arrangement with these marketing partners in order to encourage them to market our products and services to their customers. Subscriptions are generally payable on a monthly basis and are typically paid via credit card of the individual end user. We accrue any payments received in advance of the subscription period as deferred revenue and amortize them over the subscription period. In accordance with our policy to periodically review our accounting policies we determined that certain contracts require the reporting of subscription revenue on a gross basis and others on a net basis according to US GAAP.  On that basis, we continue to report subscription revenue from certain contracts on a gross basis and others on a net basis.

Because our customers generally do not have the contractual right to take possession of the software we license or market at any time, we recognize revenue on hosting and maintenance fees as we provide the services in accordance with US GAAP.

Deferred Revenue  -  Deferred revenue consists of billings or payments received in advance of revenue recognition, and it is recognized as the revenue recognition criteria are met. Deferred revenue also includes certain professional services fees and licensing revenues where all the revenue recognition criteria described above were not met. Deferred revenue that will be recognized over the succeeding 12-month period is recorded as current and the remaining portion is recorded as noncurrent.

Cost of Revenues  -  Cost of revenues primarily is composed of salaries associated with maintaining and supporting customers, the cost of domain name and e-mail registrations, and the cost of external facilities where the Company’s and its customers’ customized applications are hosted.

Software Development Costs - The Company capitalizes certain costs of software developed in accordance with US GAAP, which requires capitalization of certain software development costs subsequent to the establishment of technological feasibility, with costs incurred prior to this time expensed as research and development. Technological feasibility is established when all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications have been completed. The Company’s policy provides for the capitalization of certain outside contractors’ fees and payroll and payroll-related costs for employees who are directly associated with the development of the Company’s software. Capitalized costs are ratably amortized based on the greater of the revenue method or the straight-line method over the estimated useful life of the software, generally seven years. Management evaluates the recoverability of its capitalized software at the earlier of annually in the fourth quarter or whenever events or changes in circumstances indicate that, the carrying amount of such assets may not be recoverable by comparing the amount capitalized to the estimated net realizable value of the software. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes down the carrying cost to net realizable value.

Historically, the Company had not developed detailed design plans for its SaaS applications, and the costs incurred between the completion of a working model of these applications and the point at which the products were ready for general release had been insignificant. These factors, combined with the historically low revenue generated by the sale of the applications that do not support the net realizable value of any capitalized costs, resulted in the continued expensing of underlying costs as research and development.

The Company began capitalizing the development of the costs associated with the Smart On™ Mobile platform on October 1, 2011. Smart On™ Mobile was rebranded as MobileSmith™ in the first quarter of 2013. The Company demonstrated technological feasibility through the presentation of its working model of the software product. During the three-month period ending December 31, 2011, the company capitalized $172,510 of costs incurred to continue the development of its platform. The Company will continue to capitalize costs associated with the further development of additional app blocks and improvements to its platform. We officially released the product platform on February 28, 2012 and began amortizing the capitalized costs at that date on a straight-line basis over a seven-year period.

US GAAP establishes accounting and reporting standards for research and development. Costs incurred to search for new revenue producing products or services, to significantly improve an existing product, and to formulate design plans in an effort to establish technological feasibility are expensed in the period they are incurred.

Advertising Costs The Company expenses all advertising costs as they are incurred. The amounts charged to sales and marketing expense during 2012 and 2011 were $98,766 and $53,509, respectively.

Stock-Based Compensation The Company follows US GAAP for the recognition of stock based compensation. Total stock-based compensation expense recognized was $39,389 and $47,894 for the years ended December 31, 2012 and 2011, respectively.

In computing the impact of stock-based compensation expense, the fair value of each award is estimated on the date of grant based on the Black-Scholes option-pricing model utilizing certain assumptions for a risk-free interest rate, volatility, and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, in future grants, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.

The fair value of option grants under the Company’s equity compensation plan during the years ended December 31, 2012 and 2011 were estimated using the following weighted average assumptions:

	Year Ended December 31,
	2012			2011
Dividend yield		0.0	%		0.0	%
Expected volatility		84.62	%		73.27	%
Risk-free interest rate		1.30	%		2.04	%
Expected lives (years)		4.0			4.0

Dividend yield – The Company has never declared or paid dividends on its common stock and does not anticipate paying dividends in the foreseeable future.

Expected volatility – Volatility is a measure of the amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility). Expected volatility is partially based on the historical volatility of the Company’s common stock since the end of the prior fiscal year as well as management’s expectations for future volatility.

Risk free interest rate – The risk-free interest rate is based on the published yield available on U.S. Treasury issues with an equivalent term remaining equal to the expected life of the option.

Expected lives – The expected lives of the options represent the estimated period of time until exercise or forfeiture and are based on historical experience of similar awards.

Net Loss Per Share - Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted net loss per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of convertible notes, stock options, and warrants that are computed using the treasury stock method. Shares issuable upon the exercise of stock options, totaling 450,900 and 301,900 shares on December 31, 2012 and 2011, respectively, were excluded from the calculation of common equivalent shares, as the impact was anti-dilutive.

Recently Issued Accounting Pronouncements - No new significant accounting policies were adopted during 2012. There have note been any recently issued pronouncements effective after 2012 that we believe will have a material impact.

In 2012, the following standards were issued but were not applicable to our 2012 reporting, as they were not applicable:

Segment reporting

In accordance with US GAAP, the Company has determined that it has a single reporting segment and operating unit structure, specifically the software products and services targeted to small businesses that are delivered via the SaaS model.

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The value hierarchy prescribed by the accounting literature contains three levels as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimations.

The Company reviews property, equipment and intangible asset impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.  During 2012 and 2011, there was no impairment intangible assets.

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3. BALANCE SHEET ACCOUNTS (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Notes to Financial Statements
Accounts receivable	$ 36,050	$ 682,019
Allowance for doubtful accounts		(675,389)
Net	$ 36,050	$ 6,630

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5. INTANGIBLE ASSETS (Details) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Intangible Assets Details
Acquired license and costs	$ 108,534	$ 108,534
Patent development and application costs	34,443	9,151
Weighted Average Amortization Period (in Years) Acquired license and costs	7 years	7 years
Weighted Average Amortization Period (in Years) Patent development and application costs	20 years	20 years
Impairments Acquired license and costs	0	0
Impairments Patent development and application costs	0	0
Impairments INTANGIBLE ASSETS	0	0
Accumulated amortization Acquired license and costs	12,920	0
Accumulated amortization Patent development and application costs	0	0
Accumulated amortization INTANGIBLE ASSETS	12,920	0
Acquired license and costs Carrying Value (Net of Impairments)	95,614	108,534
Patent development and application costs Carrying Value (Net of Impairments)	34,443	9,151
Intangible assets, net	$ 130,057	$ 117,685

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BALANCE SHEETS (USD $)	Dec. 31, 2012	Dec. 31, 2011
ASSETS
Cash and cash equivalents	$ 58,458	$ 165,139
Restricted cash	131,103	70,445
Accounts receivable, net	36,050	6,630
Prepaid expenses	96,670	53,073
Total current assets	322,281	295,287
Property and equipment, net	164,941	164,657
Capitalized software, net	618,557	172,510
Intangible assets, net	130,057	117,685
Other assets	19,440	16,836
TOTAL ASSETS	1,255,276	766,975
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable	217,174	580,850
Notes payable	5,041,741	5,037,815
Deferred revenue	87,946	31,658
Settlement related financial instrument liability (See Note 3)	2,065,000	1,770,000
Accrued liabilities	370,340	520,967
Total current liabilities	7,782,201	7,941,290
Long-term liabilities:
Notes payable – Related Party (See note 6 )	14,725,000	13,275,000
Notes payable - other	5,907,318	2,350,075
Deferred revenue	1,028	1,505
Total long-term liabilities	20,633,346	15,626,580
Total liabilities	28,415,547	23,567,870
Stockholders' deficit:
Preferred stock, $0.001 par value, 5,000,000 shares authorized,  no shares issued and outstanding at December 31, 2012 and December 31, 2011	0	0
Common stock, $0.001 par value, 45,000,000 shares authorized, 18,352,542 and 18,342,542 shares issued and outstanding at December 31, 2012 and December 31, 2011, respectively	18,353	18,353
Additional paid-in capital	67,157,841	67,118,452
Accumulated deficit	(94,336,465)	(89,937,700)
Total stockholders' deficit	(27,160,271)	(22,800,895)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$ 1,255,276	$ 766,975

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8. STOCKHOLDERS DEFICIT (Details 1) (USD $)	Dec. 31, 2012
Stock Option A
Stock Options-Exercise Price	$ 0.9
Stock Options-Number of Options Outstanding	8,400
Stock Options-Average Remaining Contractual Life (Years)	8 years 6 months
Stock Options-Weighted Average Excercise Price	$ 0.9
Stock Options-Currently Exercisable Number of Shares	$ 2,100
Stock Options-Weighted Average Excercise Price	$ 0.9
Stock Option B
Stock Options-Exercise Price	$ 1.1
Stock Options-Number of Options Outstanding	45,000
Stock Options-Average Remaining Contractual Life (Years)	7 years 9 months
Stock Options-Weighted Average Excercise Price	$ 1.1
Stock Options-Currently Exercisable Number of Shares	22,500
Stock Options-Weighted Average Excercise Price	$ 1.1
Stock Option C
Stock Options-Exercise Price	$ 1.14
Stock Options-Number of Options Outstanding	132,500
Stock Options-Average Remaining Contractual Life (Years)	7 years 4 months
Stock Options-Weighted Average Excercise Price	$ 1.14
Stock Options-Currently Exercisable Number of Shares	62,500
Stock Options-Weighted Average Excercise Price	$ 1.14
Stock Option D
Stock Options-Exercise Price	$ 1.35
Stock Options-Number of Options Outstanding	20,000
Stock Options-Average Remaining Contractual Life (Years)	8 years 9 months
Stock Options-Weighted Average Excercise Price	$ 1.35
Stock Options-Currently Exercisable Number of Shares	20,000
Stock Options-Weighted Average Excercise Price	$ 1.35
Stock Option E
Stock Options-Exercise Price	$ 1.45
Stock Options-Number of Options Outstanding	75,000
Stock Options-Average Remaining Contractual Life (Years)	9 years 9 months
Stock Options-Weighted Average Excercise Price	$ 1.45
Stock Options-Currently Exercisable Number of Shares
Stock Options-Weighted Average Excercise Price	$ 1.45
Stock Option F
Stock Options-Exercise Price	$ 1.49
Stock Options-Number of Options Outstanding	5,000
Stock Options-Average Remaining Contractual Life (Years)	9 years 4 months
Stock Options-Weighted Average Excercise Price	$ 1.49
Stock Options-Currently Exercisable Number of Shares
Stock Options-Weighted Average Excercise Price	$ 1.49
Stock Option G
Stock Options-Exercise Price	$ 1.5
Stock Options-Number of Options Outstanding	75,000
Stock Options-Average Remaining Contractual Life (Years)	9 years 6 months
Stock Options-Weighted Average Excercise Price	$ 1.5
Stock Options-Currently Exercisable Number of Shares
Stock Options-Weighted Average Excercise Price	$ 1.5
Stock Option H
Stock Options-Exercise Price	$ 2.5
Stock Options-Number of Options Outstanding	5,000
Stock Options-Average Remaining Contractual Life (Years)	3 years 4 months
Stock Options-Weighted Average Excercise Price	$ 2.5
Stock Options-Currently Exercisable Number of Shares	5,000
Stock Options-Weighted Average Excercise Price	$ 2.5
Stock Option I
Stock Options-Exercise Price	$ 3.25
Stock Options-Number of Options Outstanding	15,000
Stock Options-Average Remaining Contractual Life (Years)	5 years 7 months
Stock Options-Weighted Average Excercise Price	$ 3.25
Stock Options-Currently Exercisable Number of Shares	15,000
Stock Options-Weighted Average Excercise Price	$ 3.25
Stock Option J
Stock Options-Exercise Price	$ 3.5
Stock Options-Number of Options Outstanding	25,000
Stock Options-Average Remaining Contractual Life (Years)	1 year 3 months
Stock Options-Weighted Average Excercise Price	$ 3.5
Stock Options-Currently Exercisable Number of Shares	25,000
Stock Options-Weighted Average Excercise Price	$ 3.5
Stock Option K
Stock Options-Exercise Price	$ 5
Stock Options-Number of Options Outstanding	25,000
Stock Options-Average Remaining Contractual Life (Years)	2 years 3 months
Stock Options-Weighted Average Excercise Price	$ 5
Stock Options-Currently Exercisable Number of Shares	25,000
Stock Options-Weighted Average Excercise Price	$ 5
Stock Option L
Stock Options-Exercise Price	$ 8.61
Stock Options-Number of Options Outstanding	20,000
Stock Options-Average Remaining Contractual Life (Years)	2 years 7 months
Stock Options-Weighted Average Excercise Price	$ 8.61
Stock Options-Currently Exercisable Number of Shares	20,000
Stock Options-Weighted Average Excercise Price	$ 8.61
Stock Option Totals
Stock Options-Number of Options Outstanding	450,900
Stock Options-Average Remaining Contractual Life (Years)	6 years 4 months
Stock Options-Weighted Average Excercise Price	$ 2.65
Stock Options-Currently Exercisable Number of Shares	$ 197,100
Stock Options-Weighted Average Excercise Price	$ 2.9

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Statements of Stockholders Deficit (USD $)	Common Stock	Additional Paid-In Capital	Accumulated Deficit	Total
Beginning Balance, amount at Dec. 31, 2010	$ 18,343	$ 67,070,568	$ (86,397,890)	$ (19,308,979)
Beginning Balance, shares at Dec. 31, 2010	18,342,542
Equity-based compensation, shares	10,000
Equity-based compensation, amount	10	47,884		47,894
Net loss			(3,539,810)	(3,539,810)
Ending Balance, amount at Dec. 31, 2011	18,353	67,118,452	(89,937,700)	(22,800,895)
Ending Balance, shares at Dec. 31, 2011	18,352,542
Equity-based compensation, amount		39,389		39,389
Net loss			(4,398,765)	(4,398,765)
Ending Balance, amount at Dec. 31, 2012	$ 18,353	$ 67,157,841	$ (94,336,465)	$ (27,160,271)
Ending Balance, shares at Dec. 31, 2012	18,352,542

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3. BALANCE SHEET ACCOUNTS (Details 3) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Notes to Financial Statements
Accrued liability - development of the Company’s custom accounting application	$ 0	$ 75,436
Legal reserves for settlement of legal fees on behalf of former officers and employees, Michael Nouri and Eric Reza Nouri	67,227	217,227
Interest due on Convertible Notes	221,404	179,569
Accrued financing costs	50,000
Accrued Payroll	22,985
Other accrued items	8,724	48,735
Total	$ 370,340	$ 520,967

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4. PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE (Tables)

12 Months Ended

Dec. 31, 2012

Property, Plant and Equipment [Abstract]

Property and equipment

	December 31, 2012			December 31, 2011
Computer hardware	$	170,278		$	151,450
Computer software		45,986			40,967
Furniture and fixtures		88,946			88,946
Office equipment		15,360			14,218
Leasehold improvements		53,279			53,279
		373,849			348,860
Less accumulated depreciation		(208,908	)		(184,203	)
Property and equipment, net	$	164,941		$	164,657

Capitalized software

	December 31, 2012			December 31, 2011
Capitalized software	$	672,359		$	172,510
Less accumulated amortization		(53,802	)		-
Capitalized software, net	$	618,557		$	172,510

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3. BALANCE SHEET ACCOUNTS (Details 4) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Notes to Financial Statements
Subscription fees	$ 88,974	$ 13,326
Professional service fees		19,837
Totals	88,974	33,163
Current portion	87,946	31,658
Non-current portion	$ 1,028	$ 1,505

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6. NOTES PAYABLE (Tables)

12 Months Ended

Dec. 31, 2012

Debt Disclosure [Abstract]

Schedule of Notes Payable

As of December 31, 2012, the Company had notes payable totaling $25,674,059. The detail of these notes is as follows:

Note Description	Short-Term Portion		Long-Term Portion		Total		Maturity	Rate
IDB Bank	$	5,000,000	$	-		5,000,000	May 2013		4	%
Insurance premium note		23,987		-		23,987	June 2013		6.9	%
Various capital leases		17,754		132,318		150,072	August 2019		8.0	%
Convertible notes		-		20,500,000		20,500,000	Nov 2016		8.0	%
Totals	$	5,041,741	$	20,632,318	$	25,674,059

As of December 31, 2011, the Company had notes payable totaling $20,662,890. The detail of these notes is as follows:

Note Description	Short-Term Portion		Long-Term Portion		Total		Maturity	Rate
IDB Bank	$	5,000,000	$	-	$	5,000,000	May 2012		4	%
Insurance premium note		21,421		-		21,421	Jun 2012		6.1	%
Various capital leases		16,394		150,075		166,469	Various		8.0-18.9	%
Convertible notes		-		15,475,000		15,475,000	Nov 2016		8.0	%
Totals	$	5,037,815	$	15,625,075	$	20,662,890

Schedule of Convertible Notes

	As of December 31, 2012
Note Buyer	Date of Purchase	Amount of Convertible Note			Interest Rate			Restated Due Date
Atlas Capital	November 14, 2007	$	2,050,000			8	%	11/14/2016
Crystal Management	November 14, 2007	$	500,000			8	%	11/14/2016
William Furr	November 14, 2007	$	250,000			8	%	11/14/2016
Blueline Fund	November 14, 2007	$	500,000			8	%	11/14/2016
Atlas Capital	August 12, 2008	$	1,250,000			8	%	11/14/2016
Crystal Management	August 12, 2008	$	250,000			8	%	11/14/2016
UBP, Union Bancaire Privee	November 21, 2008	$	250,000			8	%	11/14/2016
HSBC Private Bank (Suisse), SA	November 21, 2008	$	250,000			8	%	11/14/2016
Atlas Capital	January 6, 2009	$	500,000			8	%	11/14/2016
Atlas Capital	February 24, 2009	$	500,000			8	%	11/14/2016
Atlas Capital	April 3, 2009	$	500,000			8	%	11/14/2016
Atlas Capital	June 2, 2009	$	500,000			8	%	11/14/2016
Atlas Capital	July 16, 2009	$	250,000			8	%	11/14/2016
Atlas Capital	August 26, 2009	$	250,000			8	%	11/14/2016
Atlas Capital	September 8, 2009	$	250,000			8	%	11/14/2016
Atlas Capital	October 5, 2009	$	250,000			8	%	11/14/2016
UBP, Union Bancaire Privee	October 9, 2009	$	250,000			8	%	11/14/2016
Atlas Capital	November 6, 2009	$	500,000			8	%	11/14/2016
Atlas Capital	December 23, 2009	$	750,000			8	%	11/14/2016
Atlas Capital	February 11, 2010	$	500,000			8	%	11/14/2016
Atlas Capital	April 1, 2010	$	350,000			8	%	11/14/2016
Atlas Capital	June 2, 2010	$	600,000			8	%	11/14/2016
Atlas Capital	July 1, 2010	$	250,000			8	%	11/14/2016
Atlas Capital	August 13, 2010	$	100,000			8	%	11/14/2016
Atlas Capital	August 30, 2010	$	200,000			8	%	11/14/2016
Atlas Capital	September 14, 2010	$	300,000			8	%	11/14/2016
Atlas Capital	September 30, 2010	$	300,000			8	%	11/14/2016
Atlas Capital	November 9, 2010	$	300,000			8	%	11/14/2016
Atlas Capital	February 7, 2011	$	250,000			8	%	11/14/2016
Atlas Capital	March 4, 2011	$	325,000			8	%	11/14/2016
Atlas Capital	April 6, 2011	$	400,000			8	%	11/14/2016
UBP, Union Bancaire Privee	May 4, 2011	$	400,000			8	%	11/14/2016
Atlas Capital	September 6, 2011	$	500,000			8	%	11/14/2016
Atlas Capital	October 11, 2011	$	300,000			8	%	11/14/2016
Atlas Capital	November 7, 2011	$	300,000			8	%	11/14/2016
UBP, Union Bancaire Privee	December 14,2011	$	500,000			8	%	11/14/2016
Atlas Capital	January 5, 2012	$	350,000			8	%	11/14/2016
Atlas Capital	February 10, 2012		350,000			8	%	11/14/2016
UBP, Union Bancaire Privee	March 9, 2012	$	375,000			8	%	11/14/2016
Atlas Capital	April 2, 2012	$	350,000			8	%	11/14/2016
UBP, Union Bancaire Privee	May 8, 2012	$	300,000			8	%	11/14/2016
Atlas Capital	May 25, 2012	$	200,000			8	%	11/14/2016
UBP, Union Bancaire Privee	June 13, 2012	$	400,000			8	%	11/14/2016
UBP, Union Bancaire Privee	July 3, 2012	$	450,000			8	%	11/14/2016
UBP, Union Bancaire Privee	August 8, 2012	$	350,000			8	%	11/14/2016
UBP, Union Bancaire Privee	September 7, 2012	$	500,000			8	%	11/14/2016
UBP, Union Bancaire Privee	October 1, 2012	$	350,000			8	%	11/14/2016
Atlas Capital	October 15, 2012	$	200,000			8	%	11/14/2016
UBP, Union Bancaire Privee	October 31, 2012	$	100,000			8	%	11/14/2016
UBP, Union Bancaire Privee	November 14, 2012	$	475,000			8	%	11/14/2016
UBP, Union Bancaire Privee	December 13, 2012	$	275,000			8	%	11/14/2016
Less – lease conversion	September 4, 2009	$	(200,000	)
			20,500,000

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1. SUMMARY OF BUSINESS AND DESCRIPTION OF GOING CONCERN

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Disclosure - 1. SUMMARY OF BUSINESS AND DESCRIPTION OF GOING CONCERN

1. SUMMARY OF BUSINESS AND DESCRIPTION OF GOING CONCERN

Description of Business and Going Concern - Smart Online, Inc. (the “Company”) was incorporated in the State of Delaware in 1993. The Company develops and markets software products and   services tailored to mobile devices that are delivered via a Software-as-a-Service (“SaaS”) model. The Company’s principal products and services include:

- Mobile device applications used to provide specialized communications and e-commerce opportunities for businesses and not-for-profit organizations.

- SaaS applications for business management, web marketing, and e-commerce;

- Software business tools that assist customers in developing written content;

- Services that are designed to complement our product offerings and allow us to create custom business solutions that fit our end users’ and channel partners’ needs;

- Services that assist not-for-profit organizations in their fundraising efforts.

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 years ended December 31, 2012 and 2011, the Company incurred net losses as well as negative cash flows, and at December 31, 2012 and 2011, had deficiencies in working capital. These factors indicate that the Company may be unable 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.

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 the Company be unable to continue as a going concern. The Company’s continuation as a going concern depends upon its ability to generate sufficient cash flows to meet its obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations and positive cash flows. At December 31, 2012, the Company does have a commitment from its secured subordinated noteholders to purchase up to an additional $2.8 million in convertible notes, of which $1,260,000 was issued through March 21, 2013 (Note 6). The Company’s future plans include the introduction of its new industry-standard platform, the development of additional new products and applications, and further enhancement of its existing small-business applications and tools.

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BALANCE SHEETS (Parenthetical) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Stockholders' equity:
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, authorized	5,000,000	5,000,000
Preferred stock, issued	0	0
Preferred stock, outstanding	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, authorized	45,000,000	45,000,000
Common stock, issued	18,352,542	18,342,542
Common stock, outstanding	18,352,542	18,342,542

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11. EMPLOYEE BENEFIT PLAN

12 Months Ended

Dec. 31, 2012

Compensation and Retirement Disclosure [Abstract]

11. EMPLOYEE BENEFIT PLAN

11.  EMPLOYEE BENEFIT PLAN

All full time employees who meet certain age and length of service requirements are eligible to participate in the Company’s 401(k) Plan. The plan provides for contributions by the Company in such amounts as the Board of Directors may annually determine, as well as a 401(k) option under which eligible participants may defer a portion of their salaries. The Company contributed a total of $20,928 and $16,346 to the plan during 2012 and 2011, respectively.

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Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2012	Mar. 21, 2013	Jun. 29, 2012
Document And Entity Information
Entity Registrant Name	SMART ONLINE INC
Entity Central Index Key	0001113513
Document Type	10-K
Document Period End Date	Dec. 31, 2012
Amendment Flag	true
Amendment Description	This amendment is being filed to comply with regulations.
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Public Float			$ 27,528,678
Entity Common Stock, Shares Outstanding		18,352,542
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2012

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12. SUBSEQUENT EVENTS

12 Months Ended

Dec. 31, 2012

Subsequent Events [Abstract]

12. SUBSEQUENT EVENTS

12.  SUBSEQUENT EVENTS

 On January 7, 2013, the Company sold a Note to UBP, Union Bancaire Privee in the principal amount of $375,000, on January 29, 2013, the Company sold a Note to UBP, Union Bancaire Privee in the principal amount of $450,000, and on February 27, 2013, the Company sold a Note to UBP, Union Bancaire Privee in the amount of $435,000, each due November 14, 2016, upon substantially the same terms and conditions as the previously issued.

On February 11, 2013, the Company’s Board of Directors elected Ronen Shviki, age 44, as an independent member of the Board of Directors. Mr. Shviki is currently serving as the Vice President for Business Development of Mendelssohn Ltd., an Israeli distribution company, since January 2013. Prior to this, Mr. Shviki served in the Israel Defense Forces as a Colonel in the Army branch. For his service as a director, Mr. Shviki will receive a monthly fee in the amount of $1,500 for his service on the Board of Directors. Mr. Shviki will also be able to participate in the Company’s 2004 Equity Compensation Plan. At the time of his appointment Mr. Shviki received no equity compensation.

On February 7, 2013, Mr. Avy Lugassy, a principal with Atlas, and the beneficial owner of 7,330,269 shares of common stock of the Company, which shares represent approximately 40% of the Company’s outstanding voting securities, transferred such shares from Atlas to Grasford Investments Ltd., a British Virgin Islands company, which is owned and controlled by Mr. Lugassy. Atlas will remain the holder of a majority of the aggregate outstanding principal amount of the Company’s convertible secured subordinated notes.

On March 18, 2013, Mr. Thaddeus J. Shalek notified the Board of Directors of his resignation from his positions with the Company, including as Chief Financial Officer, effective as of 6:00 PM on April 1, 2013. The Board of Directors accepted Mr. Shalek’s resignation and has not elected a new Chief Financial Officer to replace him at this time.

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STATEMENTS OF OPERATIONS (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
REVENUES:
Subscription fees	$ 260,752	$ 363,040
Professional service fees	50,122	1,067
License fees	93,833	0
Hosting fees	1,296	216
Other revenue	74,119	102,985
Total revenues	480,122	467,308
COST OF REVENUES	385,747	690,438
GROSS PROFIT (LOSS)	94,375	(223,130)
OPERATING EXPENSES:
General and administrative	1,330,214	1,093,215
Sales and marketing	866,221	564,053
Research and development	541,605	375,124
(Gain) on legal settlements	(199,399)	(177,169)
Loss on disposal of assets, net	0	5,585
Total operating expenses	2,538,641	1,860,808
LOSS FROM OPERATIONS	(2,444,266)	(2,083,938)
OTHER (EXPENSE):
Interest expense, net	(1,659,499)	(1,308,372)
Change in market value of settlement related financial instrument (See note 3)	(295,000)	(147,500)
Total other expense	(1,954,499)	(1,455,872)
NET LOSS	$ (4,398,765)	$ (3,539,810)
NET LOSS PER COMMON SHARE:
Basic and fully diluted	$ (0.24)	$ (0.19)
WEIGHTED-AVERAGE NUMBER OF SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE:
Basic and fully diluted	18,352,542	18,352,542

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6. NOTES PAYABLE

12 Months Ended

Dec. 31, 2012

Debt Disclosure [Abstract]

6. NOTES PAYABLE

6.  NOTES PAYABLE

As of December 31, 2012, the Company had notes payable totaling $25,674,059. The detail of these notes is as follows:

Note Description	Short-Term Portion		Long-Term Portion		Total		Maturity	Rate
IDB Bank	$	5,000,000	$	-		5,000,000	May 2013		4	%
Insurance premium note		23,987		-		23,987	June 2013		6.9	%
Various capital leases		17,754		132,318		150,072	August 2019		8.0	%
Convertible notes		-		20,500,000		20,500,000	Nov 2016		8.0	%
Totals	$	5,041,741	$	20,632,318	$	25,674,059

As of December 31, 2011, the Company had notes payable totaling $20,662,890. The detail of these notes is as follows:

Note Description	Short-Term Portion		Long-Term Portion		Total		Maturity	Rate
IDB Bank	$	5,000,000	$	-	$	5,000,000	May 2012		4	%
Insurance premium note		21,421		-		21,421	Jun 2012		6.1	%
Various capital leases		16,394		150,075		166,469	Various		8.0-18.9	%
Convertible notes		-		15,475,000		15,475,000	Nov 2016		8.0	%
Totals	$	5,037,815	$	15,625,075	$	20,662,890

Convertible Notes

On November 14, 2007, in an initial closing, the Company sold $3.3 million aggregate principal amount of initial convertible secured subordinated notes due November 14, 2010 (the "Notes"). In addition, the noteholders committed to purchase on a pro rata basis up to $5.2 million aggregate principal of convertible secured subordinated Notes in future closings upon approval and call by our Board of Directors. On August 12, 2008, we exercised our option to sell $1.5 million aggregate principal of additional Notes due November 14, 2010 to existing noteholders, with substantially the same terms and conditions as the Notes sold in 2007. In connection with the sale of the additional Notes, the noteholders holding a majority of the aggregate principal amount of the convertible secured subordinated Notes then outstanding agreed to increase the aggregate principal amount of convertible secured subordinated Notes that they are committed to purchase from $8.5 million to $15.3 million.

	As of December 31, 2012
Note Buyer	Date of Purchase	Amount of Convertible Note			Interest Rate			Restated Due Date
Atlas Capital	November 14, 2007	$	2,050,000			8	%	11/14/2016
Crystal Management	November 14, 2007	$	500,000			8	%	11/14/2016
William Furr	November 14, 2007	$	250,000			8	%	11/14/2016
Blueline Fund	November 14, 2007	$	500,000			8	%	11/14/2016
Atlas Capital	August 12, 2008	$	1,250,000			8	%	11/14/2016
Crystal Management	August 12, 2008	$	250,000			8	%	11/14/2016
UBP, Union Bancaire Privee	November 21, 2008	$	250,000			8	%	11/14/2016
HSBC Private Bank (Suisse), SA	November 21, 2008	$	250,000			8	%	11/14/2016
Atlas Capital	January 6, 2009	$	500,000			8	%	11/14/2016
Atlas Capital	February 24, 2009	$	500,000			8	%	11/14/2016
Atlas Capital	April 3, 2009	$	500,000			8	%	11/14/2016
Atlas Capital	June 2, 2009	$	500,000			8	%	11/14/2016
Atlas Capital	July 16, 2009	$	250,000			8	%	11/14/2016
Atlas Capital	August 26, 2009	$	250,000			8	%	11/14/2016
Atlas Capital	September 8, 2009	$	250,000			8	%	11/14/2016
Atlas Capital	October 5, 2009	$	250,000			8	%	11/14/2016
UBP, Union Bancaire Privee	October 9, 2009	$	250,000			8	%	11/14/2016
Atlas Capital	November 6, 2009	$	500,000			8	%	11/14/2016
Atlas Capital	December 23, 2009	$	750,000			8	%	11/14/2016
Atlas Capital	February 11, 2010	$	500,000			8	%	11/14/2016
Atlas Capital	April 1, 2010	$	350,000			8	%	11/14/2016
Atlas Capital	June 2, 2010	$	600,000			8	%	11/14/2016
Atlas Capital	July 1, 2010	$	250,000			8	%	11/14/2016
Atlas Capital	August 13, 2010	$	100,000			8	%	11/14/2016
Atlas Capital	August 30, 2010	$	200,000			8	%	11/14/2016
Atlas Capital	September 14, 2010	$	300,000			8	%	11/14/2016
Atlas Capital	September 30, 2010	$	300,000			8	%	11/14/2016
Atlas Capital	November 9, 2010	$	300,000			8	%	11/14/2016
Atlas Capital	February 7, 2011	$	250,000			8	%	11/14/2016
Atlas Capital	March 4, 2011	$	325,000			8	%	11/14/2016
Atlas Capital	April 6, 2011	$	400,000			8	%	11/14/2016
UBP, Union Bancaire Privee	May 4, 2011	$	400,000			8	%	11/14/2016
Atlas Capital	September 6, 2011	$	500,000			8	%	11/14/2016
Atlas Capital	October 11, 2011	$	300,000			8	%	11/14/2016
Atlas Capital	November 7, 2011	$	300,000			8	%	11/14/2016
UBP, Union Bancaire Privee	December 14,2011	$	500,000			8	%	11/14/2016
Atlas Capital	January 5, 2012	$	350,000			8	%	11/14/2016
Atlas Capital	February 10, 2012		350,000			8	%	11/14/2016
UBP, Union Bancaire Privee	March 9, 2012	$	375,000			8	%	11/14/2016
Atlas Capital	April 2, 2012	$	350,000			8	%	11/14/2016
UBP, Union Bancaire Privee	May 8, 2012	$	300,000			8	%	11/14/2016
Atlas Capital	May 25, 2012	$	200,000			8	%	11/14/2016
UBP, Union Bancaire Privee	June 13, 2012	$	400,000			8	%	11/14/2016
UBP, Union Bancaire Privee	July 3, 2012	$	450,000			8	%	11/14/2016
UBP, Union Bancaire Privee	August 8, 2012	$	350,000			8	%	11/14/2016
UBP, Union Bancaire Privee	September 7, 2012	$	500,000			8	%	11/14/2016
UBP, Union Bancaire Privee	October 1, 2012	$	350,000			8	%	11/14/2016
Atlas Capital	October 15, 2012	$	200,000			8	%	11/14/2016
UBP, Union Bancaire Privee	October 31, 2012	$	100,000			8	%	11/14/2016
UBP, Union Bancaire Privee	November 14, 2012	$	475,000			8	%	11/14/2016
UBP, Union Bancaire Privee	December 13, 2012	$	275,000			8	%	11/14/2016
Less – lease conversion	September 4, 2009	$	(200,000	)
			20,500,000

On February 24, 2009, the maturity date definition for each of the Notes was changed from November 14, 2010 to the date upon which the note is due and payable, which was the earlier of (1) November 14, 2013, (2) a change of control, or (3) if an event of default occurs, the date upon which noteholders accelerate the indebtedness evidenced by the Notes. The formula for calculating the conversion price of the Notes was also amended such that the conversion price of each outstanding note and any additional note sold in the future would be the same and set at the lowest applicable conversion price, as described below.

On September 4, 2009, the Company entered into a sale transaction whereby it sold its computer equipment, furniture, fixtures and certain personal property located at its principal executive offices in Durham, North Carolina (collectively, the “Equipment”) on an “as-is, where-is” basis to the holders of the Company’s Notes, on a ratable basis in proportion to their respective holdings of Notes, for $200,000 (“Purchase Price”). The Purchase Price was paid through a $200,000 reduction, on a ratable basis, in the outstanding aggregate principal amount of the Notes, which principal amount was $7.8 million immediately before giving effect to this sale. The Purchase Price represented the fair market value of the Equipment based on an independent appraisal of the Equipment by Dynamic Office Services and Coastal Computers, which are not affiliated with the Company.

The foregoing Equipment served as a portion of the collateral securing the Company’s obligations under the Notes. The Noteholders and their collateral agent consented to the partial release of collateral consisting of the Equipment in order to effectuate the sale.

On March 5, 2010, the Company and the holder of a majority of the aggregate outstanding principal amount of Notes, among other noteholders extended the original maturity date of the Notes from November 14, 2010 to November 14, 2013, and amended the Note Purchase Agreement to reflect this extension, as reported on the Current Report on Form 8-K filed by the Company on March 10, 2010.

On June 13, 2012, the Company entered into the Fifth Amendment to the Note Purchase Agreement, which extends the maturity date of the Notes from November 14, 2013 to November 14, 2016.  The terms of sale and interest rate remain consistent with the Notes previously sold.

On the earlier of the maturity date of November 14, 2016 or a merger or acquisition or other transaction pursuant to which our existing stockholders hold less than 50% of the surviving entity, or the sale of all or substantially all of our assets, or similar transaction, or event of default, each noteholder in its sole discretion shall have the option to:

● convert the principal then outstanding on its Notes into shares of our common stock, or

● receive immediate repayment in cash of the Notes, including any accrued and unpaid interest.

If a noteholder elects to convert its Notes under these circumstances, the conversion price will be the lowest “applicable conversion price” determined for each Note. The “applicable conversion price” for each Note shall be calculated by multiplying 120% by the lowest of

· the average of the high and low prices of the Company’s common stock on the OTCBB averaged over the five trading days prior to the closing date of such Note:

· if the Company’s common stock is not traded on the Over-The-Counter market, the closing price of the common stock reported on the Nasdaq National Market or the principal exchange on which the common stock is listed, averaged over the five trading days prior to the closing date of the issuance of such Note, or

· the closing price of the Company’s common stock on the OTC Bulletin Board, the Nasdaq National Market, or the principal exchange on which the common stock is listed, as applicable, on the trading day immediately preceding the date such Note is converted, in each case as adjusted for stock splits, dividends or combinations, recapitalizations, or similar events.

The Company is obligated to pay interest on the Notes at an annualized rate of 8% payable in quarterly installments commencing three months after the purchase date of the Notes. The Company is not permitted to prepay the Notes without approval of the holders of at least a majority of the principal amount of the Notes then outstanding.

Payment of the Notes will be automatically accelerated if the Company enters voluntary or involuntary bankruptcy or insolvency proceedings.

The Notes and the common stock into which they may be converted have not been registered under the Securities Act or the securities laws of any other jurisdiction. As a result, offers and sales of the Notes were made pursuant to Regulation D or in reliance on Section 4(2), now section 4(a)(2), of the Securities Act of 1933 (the "Securities Act") and only made to accredited investors. The noteholders of the initial Notes included (i) The Blueline Fund, (ii) Atlas, an affiliate that originally recommended Shlomo Elia, one of our current directors, for appointment to the Board of Directors; (iii) Crystal Management Ltd., which is owned by Doron Roethler, the former Chairman of our Board of Directors and former Interim Chief Executive Officer and who currently serves as the noteholders’ bond representative; and (iv) William Furr, who is the father of Thomas Furr, who, at the time, was one of our directors and executive officers. The noteholders of the additional Notes are Atlas and Crystal Management Ltd.  As of December 31, 2012, $14.725 million of the Notes were owned by affiliates of the Company. 

If the Company proposes to file a registration statement to register any of its common stock under the Securities Act in connection with the public offering of such securities solely for cash, subject to certain limitations, the Company shall give each noteholder who has converted its Notes into common stock the opportunity to include such shares of converted common stock in the registration. The Company has agreed to bear the expenses for any of these registrations, exclusive of any stock transfer taxes, underwriting discounts, and commissions.

No fees to third parties are payable in connection with the sale of Notes.

Lines of Credit

On December 6, 2010, the Company entered into (i) a $6,500,000 Promissory Note (the "IDB Note"), as borrower, and (ii) a Letter Agreement for the $6,500,000 Term Loan Facility, each with Israel Discount Bank of New York ("IDB") as lender.

The total of all amounts borrowed under the initial IDB Credit Facility had to be drawn by June 10, 2011. The Company borrowed $5,000,000 during the initial term of the loan, which was originally due May 31, 2012. On May 31, 2012, the Company extended its IDB Credit Facility for an additional one-year period for the $5,000,000 already outstanding, and the Company deposited $250,000 in a restricted cash account held at IDB for future payments. The balance in the restricted account as of December 31, 2012 was $131,103 due to the payment of interest as stipulated in the Credit Facility documents.

Until February 7, 2013, Atlas was a beneficial owner of 40% of the common stock of the Company, and the holder of a majority of the aggregate outstanding principal amount, or the Requisite Percentage Holder, of the Notes under the Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007, as amended, or the Note Purchase Agreement, between the Company and the convertible noteholders, under which the Company is entitled to elect to sell to the convertible noteholders, and the convertible noteholders are obligated to buy, Notes.   On February 7, 2013, Mr. Avy Lugassy, a principal with Atlas, and the beneficial owner of 7,330,269 shares of common stock of the Company, which shares represent approximately 40% of the Company’s outstanding voting securities, transferred such shares from Atlas to Grasford Investments Ltd., a British Virgin Islands company, which is owned and controlled by Mr. Lugassy.  Atlas will remain the holder of a majority of the aggregate outstanding principal amount of the Company’s Notes.

Sales of Notes to the convertible noteholders are subject to certain conditions, including the absence of events or conditions that could reasonably be expected to have a material adverse effect on the ability of the Company to perform its obligations under the Note Purchase Agreement.

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5. INTANGIBLE ASSETS

12 Months Ended

Dec. 31, 2012

Goodwill and Intangible Assets Disclosure [Abstract]

5. INTANGIBLE ASSETS

5. INTANGIBLE ASSETS

The following table summarizes information about intangible assets at December 31, 2012:

Asset Category	Value Assigned		Weighted AverageAmortization Period(in Years)		Impairments		Accumulated Amortization		Carrying Value (Net of Impairments)
Acquired license and costs		108,534		7		-		12,920		95,614
Patent development and application costs		34,443		20		-		-		34,443
Totals	$	142,977			$	-	$	12,920	$	130,057

The following table summarizes information about intangible assets at December 31, 2011:

Asset Category	Value Assigned		Weighted Average Amortization Period (in Years)		Impairments		Accumulated Amortization		Carrying Value (Net of Impairments)
Acquired license and costs	$	108,534		7	$	-	$	-	$	108,534
Patent development and application costs		9,151		20		-		-		9,151
Totals	$	117,685			$	-	$	-	$	117,685

In December 2011, the Company acquired a perpetual software license for $100,000 plus associated legal fees.  The intellectual property acquired enabled the Company to reduce the cost to bring new products to market.

For the years ended December 31, 2012 and 2011, the aggregate amortization expense on the above intangibles was approximately $12,920 and $ 0, respectively. The aggregate amortization expense for the years ending December 31, 2013 through 2017 is expected to be $26,000 for each respective year.

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5. INTANGIBLE ASSETS (Tables)

12 Months Ended

Dec. 31, 2012

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of intangible assets

Asset Category	Value Assigned		Weighted AverageAmortization Period(in Years)		Impairments		Accumulated Amortization		Carrying Value (Net of Impairments)
Acquired license and costs		108,534		7		-		12,920		95,614
Patent development and application costs		34,443		20		-		-		34,443
Totals	$	142,977			$	-	$	12,920	$	130,057

Asset Category	Value Assigned		Weighted Average Amortization Period (in Years)		Impairments		Accumulated Amortization		Carrying Value (Net of Impairments)
Acquired license and costs	$	108,534		7	$	-	$	-	$	108,534
Patent development and application costs		9,151		20		-		-		9,151
Totals	$	117,685			$	-	$	-	$	117,685

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2. SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Use of Estimates

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”) requires management to make estimates and assumptions in the Company’s financial statements and notes thereto. Significant estimates and assumptions made by management include the determination of the provision for income taxes, the fair market value of stock awards issued, the period over which revenue is generated and the determination of allowances on our deferred tax assets. Actual results could differ materially from those estimates.

Fair Value of Financial Instruments

Fair Value of Financial Instruments -  US GAAP requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Due to the short period of time to maturity, the carrying amounts of cash equivalents, accounts receivable, accounts payable, accrued liabilities, and notes payable reported in the financial statements approximate the fair value.

Cash and Cash Equivalents

Cash and Cash Equivalents - All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. 

Concentration of Credit Risk

Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (FDIC) covers $250,000 for substantially all depository accounts and temporarily provides unlimited coverage through December 31, 2013 qualifying and participating non-interest bearing transaction accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. As of December 31, 2012, the Company did not exceed these insured amounts. See Note 10, “Major Customers and Concentration of Credit Risk,” for further discussion of risk within accounts receivable.

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts - The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability, failure, or refusal of its customers to make required payments. The need for an allowance for doubtful accounts is evaluated based on specifically identified amounts that management believes to be potentially uncollectible. If actual collections experience changes, revisions to the allowance may be required.

Prepaid Expenses

Prepaid Expenses - Prepaid expenses consist primarily of advance payments to registries for domain name registrations, and miscellaneous payments made in advance of the period to which they relate. Prepaid expenses are amortized to expense on a straight-line basis over the period covered by the expenses. In the case of prepaid registry fees, the amortization period is consistent with the revenue recognition of the related domain name registration.

Property and Equipment

Property and Equipment  In 2009 we sold our computer hardware, furniture and fixtures and office equipment (“Personal Property”) to our noteholders in exchange for a reduction in the outstanding note balances of $200,000.  The Personal Property and equipment was then leased back from the noteholders under a ten (10) year lease.  The leased assets are capitalized and depreciated.  Personal Property and equipment are stated at the cost, as established under the lease and are depreciated over the term of the lease using the straight-line method.  We continue to own and depreciate leasehold improvements that are stated at cost and depreciated over the term of the office lease as follows:

Intangible Assets and Goodwill

Intangible Assets and Goodwill - Intangible assets consist of the fee paid for the perpetual license for critical software and costs associated with our patent filings. The Company also owns several copyrights and trademarks related to products, names, and logos used throughout its non-acquired product lines. Management has reviewed the value of each asset and fair values are reflected in our financial statements as of December 31, 2012.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets - The Company evaluates the recoverability of its long-lived assets in accordance with US GAAP. Management tests for the impairment of goodwill and other indefinite lived assets annually.  Management evaluates other long-lived assets whenever events and circumstances indicate that the value may be impaired.  As of December 31, 2012, we reviewed all items included in the category of capitalized software on the basis of actual cost compared to prospective future cash flow generated from future sales.

In addition to the recoverability assessment, the Company routinely reviews the remaining estimated useful lives of its long-lived assets. Any reduction in the useful-life assumption will result in increased depreciation and amortization expense in the period when such determinations are made, as well as in subsequent periods.

Revenue Recognition

Revenue Recognition  – We derive revenue primarily from subscription fees charged to customers accessing our SaaS applications; professional service fees, consisting primarily of consulting; the perpetual or term licensing of software platforms or applications; and hosting and maintenance services. These arrangements may include delivery in multiple-element arrangements if the customer purchases a combination of products and/or services. We license, sell, lease, or otherwise market computer software that is more than incidental to the underlying customer arrangement

In accordance with Financial Accounting Standard Board (“FASB”) and Securities and Exchange Commission (“SEC”) Staff Accounting guidance on revenue recognition the Company considers revenue earned and realizable when: (a) persuasive evidence of the sales arrangement exists, (b) the arrangement fee is fixed or determinable, (c) service delivery or performance has occurred, (d) customer acceptance has been received, if contractually required, and (e) collectability of the arrangement fee is probable. The Company typically uses signed contractual agreements as persuasive evidence of a sales arrangement. We apply the provisions of the relevant FASB accounting pronouncements when making estimates or assumptions related to transactions involving the license of software where the software deliverables are considered more than inconsequential to the other elements in the arrangement. For contracts that contain multiple deliverables, we analyze the revenue arrangements when making estimates or assumptions in accordance with the appropriate authoritative guidance, which provides criteria governing how to determine whether goods or services that are delivered separately in a bundled sales arrangement should be considered as separate units of accounting for the purpose of revenue recognition. Deliverables are accounted for separately if they meet all of the following criteria: (a) the delivered item has value to the customer on a stand-alone basis; (b) there is objective and reliable evidence of the fair value of the undelivered items; and (c) if the arrangement includes a general right of return relative to the delivered items, the delivery or performance of the undelivered items is probable and substantially controlled by the Company

If at the inception of an arrangement the fee is not fixed or determinable, we defer revenue until the arrangement fee becomes due and payable. If we determine collectability is not probable, we defer revenue until we receive payment or collection becomes probable, whichever is earlier. The determination of whether fees are collectible requires judgment of our management, and the amount and timing of revenue recognition may change if different assessments are made.

We account for consulting, website design fees and application development services separately from the license of associated software platforms when these services have value to the customer and there is objective and reliable evidence of fair value of each deliverable. When accounted for separately, we recognize revenue as the services are rendered for time and material contracts, and when milestones are achieved and accepted by the customer for fixed price or long-term contracts. The majority of our consulting service contracts are on a time and material basis, and we typically bill our customers monthly based upon standard professional service rates.

Application development services are typically fixed price and of a longer term. As such, we account for them as long-term construction contracts that require us to recognize revenue based on estimates involving total costs to complete and the stage of completion. Our assumptions and estimates made to determine the total costs and stage of completion may affect the timing of revenue recognition, with changes in estimates of progress to completion and costs to complete accounted for as cumulative catch-up adjustments. If the criteria for revenue recognition on construction-type contracts are not met, we capitalize the associated costs of such projects and include them in costs in excess of billings on the balance sheet until such time that we are permitted to recognize revenue.

Subscription fees primarily consist of sales of subscriptions to end users. We make subscription sales either on a subscription or on a “for fee” basis. Subscriptions are generally payable on a monthly basis. We typically have a revenue-share arrangement with these marketing partners in order to encourage them to market our products and services to their customers. Subscriptions are generally payable on a monthly basis and are typically paid via credit card of the individual end user. We accrue any payments received in advance of the subscription period as deferred revenue and amortize them over the subscription period. In accordance with our policy to periodically review our accounting policies we determined that certain contracts require the reporting of subscription revenue on a gross basis and others on a net basis according to US GAAP.  On that basis, we continue to report subscription revenue from certain contracts on a gross basis and others on a net basis.

Because our customers generally do not have the contractual right to take possession of the software we license or market at any time, we recognize revenue on hosting and maintenance fees as we provide the services in accordance with US GAAP.

Deferred Revenue

Deferred Revenue  -  Deferred revenue consists of billings or payments received in advance of revenue recognition, and it is recognized as the revenue recognition criteria are met. Deferred revenue also includes certain professional services fees and licensing revenues where all the revenue recognition criteria described above were not met. Deferred revenue that will be recognized over the succeeding 12-month period is recorded as current and the remaining portion is recorded as noncurrent.

Cost of Revenues

Cost of Revenues  -  Cost of revenues primarily is composed of salaries associated with maintaining and supporting customers, the cost of domain name and e-mail registrations, and the cost of external facilities where the Company’s and its customers’ customized applications are hosted.

Software Development

Software Development Costs - The Company capitalizes certain costs of software developed in accordance with US GAAP, which requires capitalization of certain software development costs subsequent to the establishment of technological feasibility, with costs incurred prior to this time expensed as research and development. Technological feasibility is established when all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications have been completed. The Company’s policy provides for the capitalization of certain outside contractors’ fees and payroll and payroll-related costs for employees who are directly associated with the development of the Company’s software. Capitalized costs are ratably amortized based on the greater of the revenue method or the straight-line method over the estimated useful life of the software, generally seven years. Management evaluates the recoverability of its capitalized software at the earlier of annually in the fourth quarter or whenever events or changes in circumstances indicate that, the carrying amount of such assets may not be recoverable by comparing the amount capitalized to the estimated net realizable value of the software. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes down the carrying cost to net realizable value.

Historically, the Company had not developed detailed design plans for its SaaS applications, and the costs incurred between the completion of a working model of these applications and the point at which the products were ready for general release had been insignificant. These factors, combined with the historically low revenue generated by the sale of the applications that do not support the net realizable value of any capitalized costs, resulted in the continued expensing of underlying costs as research and development.

The Company began capitalizing the development of the costs associated with the Smart On™ Mobile platform on October 1, 2011. Smart On™ Mobile was rebranded as MobileSmith™ in the first quarter of 2013. The Company demonstrated technological feasibility through the presentation of its working model of the software product. During the three-month period ending December 31, 2011, the company capitalized $172,510 of costs incurred to continue the development of its platform. The Company will continue to capitalize costs associated with the further development of additional app blocks and improvements to its platform. We officially released the product platform on February 28, 2012 and began amortizing the capitalized costs at that date on a straight-line basis over a seven-year period.

US GAAP establishes accounting and reporting standards for research and development. Costs incurred to search for new revenue producing products or services, to significantly improve an existing product, and to formulate design plans in an effort to establish technological feasibility are expensed in the period they are incurred.

Advertising Costs

Advertising Costs The Company expenses all advertising costs as they are incurred. The amounts charged to sales and marketing expense during 2012 and 2011 were $98,766 and $53,509, respectively.

Stock-Based Compensation

Stock-Based Compensation The Company follows US GAAP for the recognition of stock based compensation. Total stock-based compensation expense recognized was $39,389 and $47,894 for the years ended December 31, 2012 and 2011, respectively.

In computing the impact of stock-based compensation expense, the fair value of each award is estimated on the date of grant based on the Black-Scholes option-pricing model utilizing certain assumptions for a risk-free interest rate, volatility, and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, in future grants, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.

The fair value of option grants under the Company’s equity compensation plan during the years ended December 31, 2012 and 2011 were estimated using the following weighted average assumptions:

	Year Ended December 31,
	2012			2011
Dividend yield		0.0	%		0.0	%
Expected volatility		84.62	%		73.27	%
Risk-free interest rate		1.30	%		2.04	%
Expected lives (years)		4.0			4.0

Dividend yield – The Company has never declared or paid dividends on its common stock and does not anticipate paying dividends in the foreseeable future.

Expected volatility – Volatility is a measure of the amount by which a financial variable such as share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility). Expected volatility is partially based on the historical volatility of the Company’s common stock since the end of the prior fiscal year as well as management’s expectations for future volatility.

Risk free interest rate – The risk-free interest rate is based on the published yield available on U.S. Treasury issues with an equivalent term remaining equal to the expected life of the option.

Expected lives – The expected lives of the options represent the estimated period of time until exercise or forfeiture and are based on historical experience of similar awards.

Net Loss Per Share

Net Loss Per Share - Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods. Diluted net loss per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the periods. Common equivalent shares consist of convertible notes, stock options, and warrants that are computed using the treasury stock method. Shares issuable upon the exercise of stock options, totaling 450,900 and 301,900 shares on December 31, 2012 and 2011, respectively, were excluded from the calculation of common equivalent shares, as the impact was anti-dilutive.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements - No new significant accounting policies were adopted during 2012. There have note been any recently issued pronouncements effective after 2012 that we believe will have a material impact.

In 2012, the following standards were issued but were not applicable to our 2012 reporting, as they were not applicable:

Segment reporting

Segment reporting

In accordance with US GAAP, the Company has determined that it has a single reporting segment and operating unit structure, specifically the software products and services targeted to small businesses that are delivered via the SaaS model.

Fair Value Measurement

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The value hierarchy prescribed by the accounting literature contains three levels as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimations.

The Company reviews property, equipment and intangible asset impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.  During 2012 and 2011, the Company recognized impairment charges of $0 and $ 0 respectively, based on Level 3 analysis.  (See Note 5 “Intangible Assets”)

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9. INCOME TAXES

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

9. INCOME TAXES

9.  INCOME TAXES

The Company accounts for income taxes under the asset and liability method in accordance with the requirements of US GAAP. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities.

The balances of deferred tax assets and liabilities are as follows:

	December 31, 2012			December 31, 2011
Net current deferred income tax assets related to:
Allowance for doubtful accounts	$	-		$	260,000
Depreciation		131,000			114,000
Stock-based expenses		91,000			226,000
Accrued liabilities – litigation expenses		833,000			768,000
Other		7,000			8,000
Net operating loss carryforwards		26,677,000			24,692,000
Total		27,739,000			26,068,000
Less valuation allowance		(27,739,000	)		(26,068,000	)
Net current deferred income tax	$	-		$	-

Under US GAAP, a valuation allowance is provided when it is more likely than not that the deferred tax asset will not be realized.

Total income tax expense differs from expected income tax expense (computed by applying the U.S. federal corporate income tax rate of 34% to profit (loss) before taxes) as follows:

	Year Ended December 31, 2012			Year Ended December 31, 2011
Tax benefit computed at statutory rate of 34%	$	(1,362,000	)	$	(1,097,000	)
State income tax benefit, net of federal effect		(192,000	)		(161,000	)
Change in valuation allowance		1,566,000			1,273,000
Permanent differences:
Stock based compensation		(13,000	)		(16,000	)
Other permanent differences		1,000			1,000
Totals	$	-		$	-

As of December 31, 2012, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately $70 million, which expire between 2012 and 2030. For state tax purposes, the NOL carryforwards expire between 2013 and 2024. In accordance with Section 382 of the Internal Revenue Code of 1986, as amended, a change in equity ownership of greater than 50% of the Company within a three-year period can result in an annual limitation on the Company’s ability to utilize its NOL carryforwards that were created during tax periods prior to the change in ownership.

The Company has reviewed its tax positions and has determined that it has no significant uncertain tax positions at December 31, 2012.

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7. COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2012

Commitments and Contingencies Disclosure [Abstract]

7. COMMITMENTS AND CONTINGENCIES

7.  COMMITMENTS AND CONTINGENCIES

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 $150,072 and $166,469 at December 31, 2012 and 2011, respectively, net of accumulated amortization of $49,925 and $33,531, respectively. The current and non-current portions of the capital leases have been recorded in current and long-term portions of notes payable on the balance sheets as of December 31, 2012 and 2011. See also Note 6, “Notes Payable.”

In 2008, the Company entered into a non-cancellable sublease to relocate its North Carolina headquarters to another facility near Research Triangle Park in Durham, N.C., under which the Company prepaid rent in the total amount of $450,080 and purchased existing furniture and fixtures for an additional $49,920, which furniture and fixtures were capitalized for depreciation purposes.  Effective May 1, 2010, the sublease was restructured as a direct lease with the owner of the property, with a termination date of September 30, 2011 (the "Lease").  On April 28, 2011, the Company entered into the Lease Amendment (the “Lease Amendment”) with Nottingham Hall IC, LLC (“Nottingham”), extending the termination date of the Lease from September 30, 2011 to November 15, 2013. Current monthly rents are $15,780.

Rent expense for the years ended December 31, 2012 and 2011 was $168,382 and $197,094, respectively.

Legal Proceedings

The Company is subject to claims and suits that arise from time to time in the ordinary course of business.

On June 18, 2010, the Company entered into a Stipulation and Agreement of Settlement (the "Stipulation") with the lead plaintiff in the securities class action involving the Company in the case captioned Mary Jane Beauregard vs. Smart Online, Inc., et al., filed in the District Court.  The Stipulation provides for the settlement of the Class Action on the terms described below. The District Court issued an order preliminarily approving the settlement on January 13, 2011.  The final settlement hearing was held on May 11, 2011.  As of March 14, 2012, the 1,475,000 shares of common stock had not been issued and, according to U.S. GAAP, the Company now carries the obligation as a Financial Instrument on its balance sheet (see Note 3).

The Stipulation provides for the certification of a class consisting of all persons who purchased the Company's publicly traded securities between May 2, 2005 and September 28, 2007, inclusive. As per the terms of the Stipulation, the settlement class has received total consideration of a cash payment of $350,000 made by the Company, and a cash payment of $112,500 made by Maxim Group.  In addition, Henry Nouri is required to transfer 25,000 shares of Company common stock to the settlement class and the Company is required to issue 1,475,000 shares of Company common stock to the class. Under the terms of the Stipulation, counsel for the settlement class may sell some or all of the common stock received in the settlement before distribution to the class, subject to the limitation that it cannot sell more than 10,000 shares in one day or 50,000 shares in 30 calendar days. Subject to the terms of the Stipulation, we paid the lead plaintiff $75,000 on July 14, 2010, $100,000 on September 15, 2010, $100,000 on December 14, 2010 and $75,000 on March 14, 2011.  On July 1, 2011, the District Court issued the Final Judgment and Order of Partial Dismissal with Prejudice in the Class Action case. The Court approved the Stipulation and directed that the terms of how the Stipulation should be consummated.  On July 1, 2011 we recorded the Class Action obligation as a financial instrument liability of $1,917,500 based upon the trading price of the Company’s stock at that date, see note 3.

On January 13, 2011 (the "Effective Date"), the District Court issued the Order Preliminarily Approving Settlement and Providing Notice.  Based upon the Nouri Settlement Agreement and the January 13, 2011 District Court Order Preliminarily Approving Settlement and Providing Notice, the following amounts were paid for the benefit of  the Nouri Parties: the amount of $500,000 was paid on January 22, 2011 and $75,000 was paid on March 16, 2011, April 15, 2011, June 14, 2011, July 14, 2011, August 15, 2011, September 14, 2011, October 14, 2011, November 14, 2011, December 14, 2011, January 14, 2012 and February 14, 2012; $7,773 was paid on May 12, 2011, and an additional $217,227 is payable in four fixed monthly installments of $75,000 based on the Effective Date, with the last four scheduled installments totaling $300,000 subject to reduction to the extent that fees and disbursements for the Nouris' appeal are below certain levels or if the appeal is not taken to final adjudication.  The Company was ordered by a court of proper jurisdiction to withhold $67,227 for future payment of adjudicated debt owed by the Nouris.  The Settlement Agreement provides for the exchange of mutual releases by the parties.

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8. STOCKHOLDERS EQUITY

12 Months Ended

Dec. 31, 2012

Equity [Abstract]

8. STOCKHOLDERS EQUITY

8.  STOCKHOLDERS’ EQUITY

Common Stock

The Company is authorized to issue 45,000,000 shares of common stock, $0.001 par value per share. As of December 31, 2012, it had 18,352,542 shares of common stock outstanding. Holders of common stock are entitled to one vote for each share held.

Preferred Stock

The Board of Directors is authorized, without further stockholder approval, to issue up to 5,000,000 shares of $0.001 par value preferred stock in one or more series and to fix the rights, preferences, privileges, and restrictions applicable to such shares, including dividend rights, conversion rights, terms of redemption, and liquidation preferences, and to fix the number of shares constituting any series and the designations of such series. There were no shares of preferred stock outstanding at December 31, 2012 and 2011.

Warrants

As part of the commission paid to Canaccord Adams, Inc. (“CA”), the Company’s placement agent in a transaction that closed in February 2007, CA was issued a warrant to purchase 35,000 shares of the Company’s common stock at an exercise price of $2.55 per share. This warrant expired February 21, 2012.

As of December 31, 2012, there were no warrants outstanding.

Equity Compensation Plans

2004 Equity Compensation Plan

The Company adopted its 2004 Equity Compensation Plan (the “2004 Plan”) as of March 31, 2004. The 2004 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock, and other direct stock awards to employees (including officers) and directors of the Company as well as to certain consultants and advisors. The total number of shares of common stock reserved for issuance under the 2004 Plan is 5,000,000 shares, subject to adjustment in the event of a stock split, stock dividend, recapitalization, or similar capital change.

The following table identifies recent outstanding grants of options:

			Number	Initial	Expense
Date of Grant	Grantee	Title	of Options	Vesting Date	2012	2011
February 1, 2010	Robert Dieterle	VP - General Manager	75,000	February 1, 2011	$11,761	$10,660
October 21, 2010	Employees	Various	68,000	January 15, 2011	$7,474	$9,371
August 1, 2011	Employees	Various	8,400	November 1, 2011	$987	$163
September 14,  011	Robert Brinson	Board Member	20,000	December 15, 2011	$14,103	$1,163
April 1, 2012	Employees	Various	5,000	July 1, 2012	$294	-
May 15, 2012	Employees	Various	12,500	August 15, 2012	$248	-
June 13, 2012	Robert  Hancock	VP of  Sales	75,000	September 13, 012	$1,188	-
September 11, 2012	Robert  Brinson	Chief Executive Officer	75,000	December 11, 2012	$3,334	-

During the second quarter of 2011, we issued 10,000 restricted shares of stock to Mr. Shlomo Elia for his services as a member of the Board of Directors as a result $13,850 of expense was recognized in 2011.  There were no shares of restricted stock canceled during 2012 and 2011 due to terminations and payment of employee tax obligations resulting from share vesting. At December 31, 2012 and 2011, there was $ 0, and $2,850 of unvested expense, respectively, yet to be recorded related to all restricted stock outstanding.

2001 Equity Compensation Plan

The Company adopted the 2001 Equity Compensation Plan (the “2001 Plan”) as of May 31, 2001. The 2001 Plan provided for the grant of incentive stock options, non-statutory stock options, restricted stock, and other direct stock awards to employees (including officers) and directors of the Company as well as to certain consultants and advisors. The total number of shares of common stock reserved for issuance under the 2001 Plan is 795,000 shares, subject to adjustment in the event of a stock split, stock dividend, recapitalization, or similar change. The Company cannot make any further grants under the 2001 Plan.

The exercise price for incentive stock options granted under the above plans is required to be no less than the fair market value of the common stock on the date the option is granted, except for options granted to 10% stockholders, which are required to have an exercise price of not less than 110% of the fair market value of the common stock on the date the option is granted. Incentive stock options typically have a maximum term of ten years, except for option grants to 10% stockholders, which are subject to a maximum term of five years. Non-statutory stock options have a term determined by either the Board of Directors or the Compensation Committee. Options granted under the plans are not transferable, except by will and the laws of descent and distribution.

A summary of the status of the stock option issuances as of December 31, 2012 and 2011, and changes during the periods ended on these dates is as follows:

	Shares			Weighted Average Exercise Price
BALANCE, December 31, 2010		283,000		$	2.34
Granted		28,400			1.21
Exercised		-			-
Canceled		(9,500	)		1.10
BALANCE, December 31, 2011		301,900			2.25
Granted		167,500			1.46
Exercised		-			-
Canceled		(18,500	)		1.18
BALANCE, December 31, 2012		450,900		$	2.02

The following table summarizes information about stock options outstanding at December 31, 2012:

								Currently Exercisable
				Average		Weighted				Weighted
		Number of		Remaining		Average				Average
Exercise		Options		Contractual		Exercise		Number of		Exercise
Price		Outstanding		Life (Years)		Price		Shares		Price
$	0.90		8,400		8.50	$	0.90		2,100	$	0.90
$	1.10		45,000		7.83	$	1.10		22,500	$	1.10
$	1.14		132,500		7.37	$	1.14		62,500	$	1.14
$	1.35		20,000		8.75	$	1.35		20,000	$	1.35
$	1.45		75,000		9.75	$	1.45		-	$	1.45
$	1.49		5,000		9.33	$	1.49		-	$	1.49
$	1.50		75,000		9.50	$	1.50		-	$	1.50
$	2.50		5,000		3.33	$	2.50		5,000	$	2.50
$	3.25		15,000		5.67	$	3.25		15,000	$	3.25
$	3.50		25,000		1.25	$	3.50		25,000	$	3.50
$	5.00		25,000		2.25	$	5.00		25,000	$	5.00
$	8.61		20,000		2.58	$	8.61		20,000	$	8.61
Totals			450,900		6.34	$	2.65		197,100	$	2.90

At December 31, 2012 and 2011, unvested expense yet to be recorded related to all incentive stock options outstanding were $159,485 and $77,320 respectively.  The expenses will be recognized through 2016.  The outstanding options have intrinsic value of  $25,050 at December 31, 2012 and $0 at 2011.

Dividends - The Company has not paid any cash dividends through December 31, 2012.

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10. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

10. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

10. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to credit risk principally consist of trade receivables. The Company believes the concentration of credit risk in its trade receivables is substantially mitigated by ongoing credit evaluation processes, relatively short collection terms, and the nature of the Company’s customer base, primarily mid- and large-size corporations with significant financial histories. Collateral is not generally required from customers. The need for an allowance for doubtful accounts is determined based upon factors surrounding the credit risk of specific customers, historical trends, and other information.

A significant portion of revenues is derived from certain customer relationships. The following is a summary of customers that represent total revenues:

		Year Ended December 31, 2012
	Revenue Type	Revenues		% of Total Revenues
Customer A	Subscription fees/Other revenue	$	283,564		59	%
Customer B	Subscription fees/Other revenue		49,091		10	%
Others	Others		147,467		31	%
Total		$	480,122		100	%

		Year Ended December 31, 2011
	Revenue Type	Revenues		% of Total Revenues
Customer A	Subscription fees/Other revenue	$	376,860		81	%
Customer B	Subscription fees/Other revenue		86,685		18	%
Others	Other revenue		3,763		1	%
Total		$	467,308		100	%

As of December 31, 2012, two customers accounted for 70% of accounts receivable. As of December 31, 2011, one customer accounted for 87% of accounts receivable.

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3. BALANCE SHEET ACCOUNTS (Details 2)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Balance Sheet Accounts Details 2
Change in market value of settlement related financial instruments in the accompanying statement of operations is related to the Class Action settlement approved by the District Court on July 1, 2011: Unrestricted shares of common stock	(295,000)	(147,500)

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10. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK (Details Narrative)	Dec. 31, 2012	Dec. 31, 2011
Major Customers And Concentration Of Credit Risk Details Narrative
Percentage of accounts receivable accounted for by two customers	70%
Percentage of accounts receivable accounted for by one customer		87%

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3. BALANCE SHEET ACCOUNTS (Tables)

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Schedule of Accounts Receivable

	December 31
	2012		2011
Accounts receivable	$	36,050	$	682,019
Allowance for doubtful accounts		-		(675,389	)
	$	36,050	$	6,630

Schedule of derivative assets and liabilities

	December 31, 2012		December 31, 2011
Shares into which financial instrument liability can be settled:
Unrestricted shares of common stock, when issued		1,475,000		1,475,000

Settlement related Financial Instrument liability at fair value:
Fair value of unrestricted shares of common stock (Level 1 Measurement)	$	2,065,000	$	1,770,000

Schedule of Accrued Liabilities

Accrued Liabilities
	Year ended		Year ended
	31-Dec-12		31-Dec-11
Accrued liability - development of the Company’s custom accounting application	$	-	$	75,436
Legal reserves for settlement of legal fees on behalf of former officers and employees, Michael Nouri and Eric Reza Nouri		67,227		217,227
Estimated Class Action settlement costs
Interest due on Convertible Notes		221,404		179,569
Accrued financing costs		50,000		-
Accrued Payroll		22,985		-
Other accrued items		8,724		48,735
	$	370,340	$	520,967

Components of deferred revenue

	December 31,		December 31,
	2012		2011
Subscription fees	$	88,974	$	13,326
Professional service fees		-		19,837
Totals	$	88,974	$	33,163
Current portion	$	87,946	$	31,658
Non-current portion		1,028		1,505
Totals	$	88,974	$	33,163

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9. INCOME TAXES (Tables)

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

Schedule of deferred tax assets and liabilities

	December 31, 2012			December 31, 2011
Net current deferred income tax assets related to:
Allowance for doubtful accounts	$	-		$	260,000
Depreciation		131,000			114,000
Stock-based expenses		91,000			226,000
Accrued liabilities – litigation expenses		833,000			768,000
Other		7,000			8,000
Net operating loss carryforwards		26,677,000			24,692,000
Total		27,739,000			26,068,000
Less valuation allowance		(27,739,000	)		(26,068,000	)
Net current deferred income tax	$	-		$	-

Schedule of income tax reconciliation

	Year Ended December 31, 2012			Year Ended December 31, 2011
Tax benefit computed at statutory rate of 34%	$	(1,362,000	)	$	(1,097,000	)
State income tax benefit, net of federal effect		(192,000	)		(161,000	)
Change in valuation allowance		1,566,000			1,273,000
Permanent differences:
Stock based compensation		(13,000	)		(16,000	)
Other permanent differences		1,000			1,000
Totals	$	-		$	-

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9. INCOME TAXES (Details Narrative) (USD $)	12 Months Ended
	Dec. 31, 2012
Income Taxes Details Narrative
Federal net operating loss carryforward	$ 70,000,000
Expiration of carryforward	Between 2013 and 2024

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5. INTANGIBLE ASSETS (Details Narrative) (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Intangible Assets Details Narrative
Intangible asset aggregate amortization expense	$ 12,920	$ 0

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STATEMENTS OF CASH FLOWS (USD $)	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$ (4,398,765)	$ (3,539,810)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	91,428	44,119
Stock-based compensation expense	39,389	47,894
Loss on disposal of assets	0	5,585
Changes in assets and liabilities:
Accounts receivable	(26,420)	2,301
Notes receivable	(3,000)	0
Prepaid expenses	(43,596)	111,619
Other assets	(2,604)	(11,836)
Accounts Payable	(288,675)	(45,909)
Deferred revenue	55,810	10,597
Accrued and other expenses	144,373	(1,228,405)
Net cash used in operating activities	(4,432,060)	(4,603,845)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment	(24,989)	(11,438)
Patent development costs	(25,292)	(9,151)
Purchase of software license	(75,000)	(33,534)
Capitalized software	(499,850)	(172,510)
Net cash used in investing activities	(625,131)	(226,633)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash placed at IDB Bank	(281,391)	0
Restricted cash used to pay IDB interest expense and fees	220,733	179,553
Proceeds from debt borrowings	5,027,565	3,975,000
Repayments of debt borrowings	(16,397)	(19,145)
Net cash provided by financing activities	4,950,510	4,135,408
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(106,681)	(695,070)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	165,139	860,209
CASH AND CASH EQUIVALENTS, END OF PERIOD	58,458	165,139
Supplemental disclosures of cash flow information:
Cash paid during the period for: Interest	$ 1,617,810	$ 1,271,286

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4. PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE

12 Months Ended

Dec. 31, 2012

Property, Plant and Equipment [Abstract]

4. PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE

4. PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE

Property and equipment consists of the following:

	December 31, 2012			December 31, 2011
Computer hardware	$	170,278		$	151,450
Computer software		45,986			40,967
Furniture and fixtures		88,946			88,946
Office equipment		15,360			14,218
Leasehold improvements		53,279			53,279
		373,849			348,860
Less accumulated depreciation		(208,908	)		(184,203	)
Property and equipment, net	$	164,941		$	164,657

Capitalized software consists of the following:

	December 31, 2012			December 31, 2011
Capitalized software	$	672,359		$	172,510
Less accumulated amortization		(53,802	)		-
Capitalized software, net	$	618,557		$	172,510

Depreciation and amortization expense for the years ended December 31, 2012 and 2011 was $91,428 and $44,119, respectively.

The Company began capitalizing the development of the costs associated with the MobileSmith™ platform on October 1, 2011.  The Company demonstrated technological feasibility through the presentation of its working model of the software product.  During the three-month period ending December 31, 2011, the Company capitalized $172,510 of costs incurred to continue the development of its platform.  The Company will continue to capitalize costs associated with the further development of additional app blocks for its platform.  The Company officially released the product platform on February 28, 2012 and began amortizing the capitalized costs at that date on a straight-line basis over a seven-year period.

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10. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK (Tables)

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Schedule of Major Customers

		Year Ended December 31, 2012
	Revenue Type	Revenues		% of Total Revenues
Customer A	Subscription fees/Other revenue	$	283,564		59	%
Customer B	Subscription fees/Other revenue		49,091		10	%
Others	Others		147,467		31	%
Total		$	480,122		100	%

		Year Ended December 31, 2011
	Revenue Type	Revenues		% of Total Revenues
Customer A	Subscription fees/Other revenue	$	376,860		81	%
Customer B	Subscription fees/Other revenue		86,685		18	%
Others	Other revenue		3,763		1	%
Total		$	467,308		100	%

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4. PROPERTY AND EQUIPMENT AND CAPITALIZED SOFTWARE (Details 1) (USD $)	Dec. 31, 2012	Dec. 31, 2011
Property And Equipment And Capitalized Software Details 1
Capitalized software	$ 672,359	$ 172,510
Less accumulated amortization	(53,802)	0
Capitalized software, net	$ 618,557	$ 172,510

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2. SIGNIFICANT ACCOUNTING POLICIES (Tables)

12 Months Ended

Dec. 31, 2012

Accounting Policies [Abstract]

Schedule of useful life

Computer hardware	10 years
Computer software	10 years
Furniture and fixtures	10 years
Office equipment	10 years
Leasehold improvements	Shorter of the estimated useful life or the lease term

Schedule of fair value assumptions for option grants

	Year Ended December 31,
	2012			2011
Dividend yield		0.0	%		0.0	%
Expected volatility		84.62	%		73.27	%
Risk-free interest rate		1.30	%		2.04	%
Expected lives (years)		4.0			4.0