UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10‑Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001‑35525
SMITH MICRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 33‑0029027 |
(State or other jurisdiction of | (I.R.S. Employer |
51 COLUMBIA5800 CORPORATE DRIVE
ALISO VIEJO, CA 92656PITTSBURGH, PA 15237
(Address of principal executive offices, including zip code)
(949) 362-5800(412) 837-5300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.001 per share | SMSI | NASDAQ |
Indicate by check mark whether the registrantregistrant: (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 ☒ 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☐ |
| Accelerated filer |
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Non-accelerated filer |
| ☐ |
| Smaller reporting company |
| ☒ |
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Emerging growth company |
| ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act Rule 12b-2)Act). Yes ☐ No ☒
As of October 31, 2017,May 7, 2020, there were 14,283,95341,420,954 shares of common stock outstanding
.
outstanding.
QUARTERLY REPORT ON FORM 10-Q
September 30, 2017MARCH 31, 2020
TABLETABLE OF CONTENTS
PART I. |
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Item 1. |
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| 2 | |
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| Consolidated Balance Sheets as of |
| 2 |
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| 3 | |
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| 4 | |
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| 5 | |
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| 6 | |
Item 2. |
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Item 4. |
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PART II. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 6. |
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SMITH MICRO SOFTWARE, INC.
(in thousands, except share and par value data)
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||
|
| (unaudited) |
|
| (audited) |
|
| (unaudited) |
|
| (audited) |
| ||||
Assets |
|
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Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 3,939 |
|
| $ | 2,229 |
|
| $ | 19,456 |
|
| $ | 28,268 |
|
Accounts receivable, net of allowances for doubtful accounts and other adjustments of $60 (2017) and $197 (2016) |
|
| 5,209 |
|
|
| 4,962 |
| ||||||||
Income tax receivable |
|
| 1 |
|
|
| 1 |
| ||||||||
Inventories, net of reserves for excess and obsolete inventory of $146 (2017) and $148 (2016) |
|
| 16 |
|
|
| 12 |
| ||||||||
Accounts receivable, net of allowances for doubtful accounts and other adjustments of $247 (2020) and $253 (2019) |
|
| 11,882 |
|
|
| 10,894 |
| ||||||||
Prepaid expenses and other current assets |
|
| 706 |
|
|
| 713 |
|
|
| 591 |
|
|
| 802 |
|
Total current assets |
|
| 9,871 |
|
|
| 7,917 |
|
|
| 31,929 |
|
|
| 39,964 |
|
Equipment and improvements, net |
|
| 1,381 |
|
|
| 1,811 |
|
|
| 2,152 |
|
|
| 2,109 |
|
Right-of-use assets |
|
| 6,349 |
|
|
| 6,464 |
| ||||||||
Deferred tax assets, net |
|
| 94 |
|
|
| 94 |
| ||||||||
Other assets |
|
| 146 |
|
|
| 149 |
|
|
| 458 |
|
|
| 234 |
|
Intangible assets, net |
|
| 551 |
|
|
| 745 |
|
|
| 15,875 |
|
|
| 4,535 |
|
Goodwill |
|
| 3,685 |
|
|
| 3,686 |
|
|
| 11,493 |
|
|
| 7,797 |
|
Total assets |
| $ | 15,634 |
|
| $ | 14,308 |
|
| $ | 68,350 |
|
| $ | 61,197 |
|
Liabilities and Stockholders' Equity |
|
|
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Current liabilities: |
|
|
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|
|
|
|
|
|
|
|
|
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Accounts payable |
| $ | 1,318 |
|
| $ | 1,907 |
|
| $ | 3,463 |
|
| $ | 2,050 |
|
Accrued liabilities |
|
| 3,182 |
|
|
| 3,503 |
| ||||||||
Related-party notes payable, short-term |
|
| 2,200 |
|
|
| — |
| ||||||||
Accrued payroll and benefits |
|
| 2,285 |
|
|
| 2,107 |
| ||||||||
Current operating lease liabilities |
|
| 1,273 |
|
|
| 1,221 |
| ||||||||
Other accrued liabilities |
|
| 271 |
|
|
| 244 |
| ||||||||
Deferred revenue |
|
| 367 |
|
|
| 98 |
|
|
| 1,690 |
|
|
| 98 |
|
Total current liabilities |
|
| 7,067 |
|
|
| 5,508 |
|
|
| 8,982 |
|
|
| 5,720 |
|
Non-current liabilities: |
|
|
|
|
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|
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|
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Related-party notes payable, net of discount & issuance costs of $0 (2017) and $705 (2016) |
|
| — |
|
|
| 1,295 |
| ||||||||
Notes payable, net of discount & issuance costs of $508 (2017) and $705 (2016) |
|
| 1,492 |
|
|
| 1,295 |
| ||||||||
Deferred rent and other long-term liabilities |
|
| 2,332 |
|
|
| 2,970 |
| ||||||||
Deferred tax liability, net |
|
| 181 |
|
|
| 181 |
| ||||||||
Operating lease liabilities |
|
| 5,548 |
|
|
| 5,774 |
| ||||||||
Deferred rent |
|
| 850 |
|
|
| 885 |
| ||||||||
Other long term liabilities |
|
| 117 |
|
|
| 134 |
| ||||||||
Total non-current liabilities |
|
| 4,005 |
|
|
| 5,741 |
|
|
| 6,515 |
|
|
| 6,793 |
|
Commitments and contingencies |
|
|
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|
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Stockholders' equity: |
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Preferred stock, par value $0.001 per share; 5,000,000 shares authorized; 5,500 and 0 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively |
|
| — |
|
|
| — |
| ||||||||
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 14,283,953 and 12,297,954 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively |
|
| 14 |
|
|
| 12 |
| ||||||||
Preferred stock, par value $0.001 per share; 5,000,000 shares authorized; 5,500 shares issued (2020 and 2019); 0 shares outstanding (2020 and 2019) |
|
| — |
|
|
| — |
| ||||||||
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 40,383,056 and 38,475,084 shares issued and outstanding (2020 and 2019, respectively) |
|
| 40 |
|
|
| 38 |
| ||||||||
Additional paid-in capital |
|
| 237,321 |
|
|
| 229,275 |
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|
| 276,163 |
|
|
| 274,041 |
|
Accumulated comprehensive deficit |
|
| (232,773 | ) |
|
| (226,228 | ) |
|
| (223,350 | ) |
|
| (225,395 | ) |
Total stockholders’ equity |
|
| 4,562 |
|
|
| 3,059 |
|
|
| 52,853 |
|
|
| 48,684 |
|
Total liabilities and stockholders' equity |
| $ | 15,634 |
|
| $ | 14,308 |
|
| $ | 68,350 |
|
| $ | 61,197 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||
Revenues |
| $ | 5,804 |
|
| $ | 6,478 |
|
| $ | 17,242 |
|
| $ | 21,151 |
|
Cost of revenues |
|
| 1,159 |
|
|
| 1,798 |
|
|
| 3,727 |
|
|
| 5,824 |
|
Gross profit |
|
| 4,645 |
|
|
| 4,680 |
|
|
| 13,515 |
|
|
| 15,327 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
| 1,413 |
|
|
| 2,541 |
|
|
| 4,667 |
|
|
| 7,389 |
|
Research and development |
|
| 2,100 |
|
|
| 4,174 |
|
|
| 6,771 |
|
|
| 12,204 |
|
General and administrative |
|
| 2,220 |
|
|
| 2,522 |
|
|
| 6,648 |
|
|
| 7,878 |
|
Restructuring (income) expense |
|
| (146 | ) |
|
| — |
|
|
| 568 |
|
|
| — |
|
Total operating expenses |
|
| 5,587 |
|
|
| 9,237 |
|
|
| 18,654 |
|
|
| 27,471 |
|
Operating loss |
|
| (942 | ) |
|
| (4,557 | ) |
|
| (5,139 | ) |
|
| (12,144 | ) |
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in carrying value of contingent liability |
|
| — |
|
|
| 11 |
|
|
| — |
|
|
| 668 |
|
Loss on related party debt extinguishment |
|
| (405 | ) |
|
| — |
|
|
| (405 | ) |
|
| — |
|
Interest (expense) income, net |
|
| (315 | ) |
|
| (66 | ) |
|
| (928 | ) |
|
| (68 | ) |
Other expense |
|
| (2 | ) |
|
| (9 | ) |
|
| (10 | ) |
|
| (26 | ) |
Loss before provision for income taxes |
|
| (1,664 | ) |
|
| (4,621 | ) |
|
| (6,482 | ) |
|
| (11,570 | ) |
Provision for income tax expense |
|
| 6 |
|
|
| 11 |
|
|
| 19 |
|
|
| 48 |
|
Net loss |
|
| (1,670 | ) |
|
| (4,632 | ) |
|
| (6,501 | ) |
|
| (11,618 | ) |
Other comprehensive income, before tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on available-for-sale securities |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2 |
|
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2 |
|
Comprehensive loss |
|
| (1,670 | ) |
|
| (4,632 | ) |
|
| (6,501 | ) |
|
| (11,616 | ) |
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
| $ | (0.12 | ) |
| $ | (0.38 | ) |
| $ | (0.49 | ) |
| $ | (0.98 | ) |
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
| 14,297 |
|
|
| 12,209 |
|
|
| 13,221 |
|
|
| 11,826 |
|
|
| For the Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Revenues |
| $ | 13,322 |
|
| $ | 8,432 |
|
Cost of revenues |
|
| 1,173 |
|
|
| 916 |
|
Gross profit |
|
| 12,149 |
|
|
| 7,516 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling and marketing |
|
| 2,787 |
|
|
| 1,968 |
|
Research and development |
|
| 3,729 |
|
|
| 2,682 |
|
General and administrative |
|
| 3,668 |
|
|
| 2,700 |
|
Restructuring expense |
|
| 6 |
|
|
| 104 |
|
Total operating expenses |
|
| 10,190 |
|
|
| 7,454 |
|
Operating income |
|
| 1,959 |
|
|
| 62 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest income, net |
|
| 86 |
|
|
| — |
|
Other expense |
|
| — |
|
|
| (10 | ) |
Income before provision for income taxes |
|
| 2,045 |
|
|
| 52 |
|
Provision for income tax expense |
|
| — |
|
|
| 4 |
|
Net income |
| $ | 2,045 |
|
| $ | 48 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.05 |
|
| $ | 0.00 |
|
Diluted |
| $ | 0.05 |
|
| $ | 0.00 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
| 39,482 |
|
|
| 31,297 |
|
Diluted |
|
| 42,194 |
|
|
| 31,323 |
|
|
|
|
|
|
|
|
|
|
Preferred dividends per share |
| $ | — |
|
| $ | 25.00 |
|
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
| Accumulated |
|
|
|
|
| ||
|
| Series B preferred stock |
|
| Common stock |
|
| paid-in |
|
| comprehensive |
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|
|
|
| ||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| capital |
|
| deficit |
|
| Total |
| |||||||
BALANCE, December 31, 2016 (audited) |
|
| — |
|
| $ | — |
|
|
| 12,298 |
|
| $ | 12 |
|
| $ | 229,275 |
|
| $ | (226,228 | ) |
| $ | 3,059 |
|
Shares issued in Series B preferred stock offering, net issuance costs ($287) |
|
| 3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,413 |
|
|
| — |
|
|
| 2,413 |
|
Shares issued in Series B preferred stock in accordance with debt extinguishment |
|
| 3 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,697 |
|
|
| — |
|
|
| 2,697 |
|
Shares issued in common stock offering, net |
|
| — |
|
|
| — |
|
|
| 2,162 |
|
|
| 2 |
|
|
| 1,990 |
|
|
| — |
|
|
| 1,992 |
|
Common stock warrants issued in connection with stock offering |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 64 |
|
|
| — |
|
|
| 64 |
|
Non-cash compensation recognized on stock options and Employee stock purchase plan ("ESPP") |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 34 |
|
|
| — |
|
|
| 34 |
|
Restricted stock grants, net of cancellations |
|
| — |
|
|
| — |
|
|
| (70 | ) |
|
| — |
|
|
| 968 |
|
|
| — |
|
|
| 968 |
|
Cancellation of shares for payment of withholding tax |
|
| — |
|
|
| — |
|
|
| (111 | ) |
|
| — |
|
|
| (166 | ) |
|
| — |
|
|
| (166 | ) |
Employee stock purchase plan |
|
| — |
|
|
| — |
|
|
| 4 |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| 2 |
|
Warrant repricings due to down round triggers |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 44 |
|
|
| (44 | ) |
|
| — |
|
Comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,501 | ) |
|
| (6,501 | ) |
BALANCE, September 30, 2017 (unaudited) |
|
| 6 |
|
| $ | — |
|
|
| 14,283 |
|
| $ | 14 |
|
| $ | 237,321 |
|
| $ | (232,773 | ) |
| $ | 4,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
| Accumulated |
|
|
|
|
| ||
|
| Series B Preferred Stock |
|
| Common Stock |
|
| Paid-in |
|
| Comprehensive |
|
|
|
|
| ||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||||
BALANCE, December 31, 2019 (audited) |
|
| — |
|
| $ | — |
|
|
| 38,475 |
|
| $ | 38 |
|
| $ | 274,041 |
|
| $ | (225,395 | ) |
| $ | 48,684 |
|
Non-cash compensation recognized on stock options and ESPP |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 13 |
|
|
| — |
|
|
| 13 |
|
Restricted stock grants, net of cancellations |
|
| — |
|
|
| — |
|
|
| 1,000 |
|
|
| 1 |
|
|
| 618 |
|
|
| — |
|
|
| 619 |
|
Cancellation of shares for payment of withholding tax |
|
| — |
|
|
| — |
|
|
| (110 | ) |
|
| — |
|
|
| (571 | ) |
|
| — |
|
|
| (571 | ) |
Employee stock purchase plan |
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| 5 |
|
|
| — |
|
|
| 5 |
|
Exercise of warrants |
|
| — |
|
|
| — |
|
|
| 1,009 |
|
|
| 1 |
|
|
| 2,044 |
|
|
| — |
|
|
| 2,045 |
|
Exercise of stock options |
|
| — |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
|
| 13 |
|
|
| — |
|
|
| 13 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,045 |
|
|
| 2,045 |
|
BALANCE, March 31, 2020 (unaudited) |
|
| — |
|
| $ | — |
|
|
| 40,383 |
|
| $ | 40 |
|
| $ | 276,163 |
|
| $ | (223,350 | ) |
| $ | 52,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
|
| Accumulated |
|
|
|
|
| ||
|
| Series B Preferred Stock |
|
| Common Stock |
|
| Paid-in |
|
| Comprehensive |
|
|
|
|
| ||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||||
BALANCE, December 31, 2018 (audited) |
|
| 1 |
|
| $ | — |
|
|
| 28,242 |
|
| $ | 28 |
|
| $ | 256,626 |
|
| $ | (236,091 | ) |
| $ | 20,563 |
|
Non-cash compensation recognized on stock options and ESPP |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9 |
|
|
| — |
|
|
| 9 |
|
Restricted stock grants, net of cancellations |
|
| — |
|
|
| — |
|
|
| 1,225 |
|
|
| 1 |
|
|
| 445 |
|
|
| — |
|
|
| 446 |
|
Cancellation of shares for payment of withholding tax |
|
| — |
|
|
| — |
|
|
| (103 | ) |
|
| — |
|
|
| (207 | ) |
|
| — |
|
|
| (207 | ) |
Employee stock purchase plan |
|
| — |
|
|
| — |
|
|
| 2 |
|
|
| — |
|
|
| 5 |
|
|
| — |
|
|
| 5 |
|
Common shares issued in stock offering, net of offering costs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14 | ) |
|
| — |
|
|
| (14 | ) |
Common shares issued in connection with Smart Retail acquisition, net |
|
| — |
|
|
| — |
|
|
| 2,699 |
|
|
| 3 |
|
|
| 5,126 |
|
|
| — |
|
|
| 5,129 |
|
Preferred stock dividends |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (34 | ) |
|
| (34 | ) |
Cumulative effect of adoption of ASC 842 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 93 |
|
|
| 93 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 48 |
|
|
| 48 |
|
BALANCE, March 31, 2019 (unaudited) |
|
| 1 |
|
| $ | — |
|
|
| 32,065 |
|
| $ | 32 |
|
| $ | 261,990 |
|
| $ | (235,984 | ) |
| $ | 26,038 |
|
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
| For the Nine Months Ended |
| |||||
|
| September 30, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Operating activities: |
|
|
|
|
|
|
|
|
Net loss |
| $ | (6,501 | ) |
| $ | (11,618 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 694 |
|
|
| 1,096 |
|
Amortization of debt discounts and financing issuance costs |
|
| 394 |
|
|
| 36 |
|
Restructuring costs |
|
| (146 | ) |
|
| — |
|
Change in carrying value of contingent liability |
|
| — |
|
|
| (668 | ) |
Loss on related party debt extinguishment |
|
| 405 |
|
|
| — |
|
Provision for doubtful accounts and other adjustments to accounts receivable |
|
| 78 |
|
|
| — |
|
Provision for excess and obsolete inventory |
|
| — |
|
|
| 8 |
|
(Gain) loss on disposal of fixed assets |
|
| (6 | ) |
|
| 27 |
|
Stock based compensation |
|
| 1,002 |
|
|
| 1,173 |
|
Change in operating accounts: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (325 | ) |
|
| 3,143 |
|
Income tax receivable |
|
| — |
|
|
| 99 |
|
Inventories |
|
| (4 | ) |
|
| 13 |
|
Prepaid expenses and other assets |
|
| 11 |
|
|
| (173 | ) |
Accounts payable and accrued liabilities |
|
| (1,564 | ) |
|
| (796 | ) |
Deferred revenue |
|
| 269 |
|
|
| (335 | ) |
Net cash used in operating activities |
|
| (5,693 | ) |
|
| (7,995 | ) |
Investing activities: |
|
|
|
|
|
|
|
|
Acquisition of Birdstep Technology, net of cash received |
|
| — |
|
|
| (1,927 | ) |
Acquisition of iMobileMagic, net of cash received |
|
| — |
|
|
| (558 | ) |
Capital expenditures |
|
| (68 | ) |
|
| (323 | ) |
Proceeds from the sale of short-term investments |
|
| — |
|
|
| 4,080 |
|
Net cash (used in) provided by investing activities |
|
| (68 | ) |
|
| 1,272 |
|
Financing activities: |
|
|
|
|
|
|
|
|
Cash received from stock sale for employee stock purchase plan |
|
| 2 |
|
|
| 13 |
|
Cash received from common stock offering, net of expenses |
|
| 2,056 |
|
|
| — |
|
Cash received from preferred stock and warrant offering, net of expenses |
|
| 2,413 |
|
|
| — |
|
Cash received from related-party short-term notes payable |
|
| 3,000 |
|
|
| — |
|
Cash received from related-party long-term notes payable, net of issuance costs ($83) |
|
| — |
|
|
| 1,917 |
|
Cash received from long-term notes payable, net of issuance costs ($83) |
|
| — |
|
|
| 1,917 |
|
Net cash provided by financing activities |
|
| 7,471 |
|
|
| 3,847 |
|
Net increase (decrease) in cash and cash equivalents |
|
| 1,710 |
|
|
| (2,876 | ) |
Cash and cash equivalents, beginning of period |
|
| 2,229 |
|
|
| 8,819 |
|
Cash and cash equivalents, end of period |
| $ | 3,939 |
|
| $ | 5,943 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
| $ | 5 |
|
| $ | 37 |
|
Cash paid for interest expense |
|
| 552 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Issuance of common stock warrants in connection with stock offering |
| $ | 64 |
|
| $ | — |
|
Change in unrealized gain on short-term investments |
|
| — |
|
|
| 2 |
|
Issuance of preferred stock for the settlement of sr. subordinated debt |
|
| 2,697 |
|
|
| — |
|
Reclassification of warrant liability upon adoption of ASU 2017-11 |
|
| 1,761 |
|
|
| — |
|
|
| For the Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
| $ | 2,045 |
|
| $ | 48 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 644 |
|
|
| 321 |
|
Non-cash lease expense |
|
| 244 |
|
|
| 194 |
|
Restructuring costs |
|
| 6 |
|
|
| 104 |
|
Provision for doubtful accounts and other adjustments to accounts receivable |
|
| (4 | ) |
|
| (9 | ) |
Provision for excess and obsolete inventory |
|
| — |
|
|
| 1 |
|
Loss on disposal of fixed assets |
|
| — |
|
|
| (1 | ) |
Stock based compensation |
|
| 632 |
|
|
| 455 |
|
Changes in operating accounts: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (983 | ) |
|
| (1,759 | ) |
Prepaid expenses and other assets |
|
| 215 |
|
|
| 194 |
|
Accounts payable and accrued liabilities |
|
| (840 | ) |
|
| (117 | ) |
Deferred revenue |
|
| 302 |
|
|
| (85 | ) |
Net cash provided by (used in) operating activities |
|
| 2,261 |
|
|
| (654 | ) |
Investing activities: |
|
|
|
|
|
|
|
|
Acquisition of Smart Retail business, net |
|
| — |
|
|
| (3,974 | ) |
Acquisition of Circle operator business, net |
|
| (12,150 | ) |
|
| — |
|
Capital expenditures |
|
| (771 | ) |
|
| (110 | ) |
Other investing activities |
|
| (215 | ) |
|
| — |
|
Net cash used in investing activities |
|
| (13,136 | ) |
|
| (4,084 | ) |
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of common stock warrants |
|
| 2,045 |
|
|
| — |
|
Dividends paid on preferred stock |
|
| — |
|
|
| (34 | ) |
Other financing activities |
|
| 18 |
|
|
| (9 | ) |
Net cash provided by (used in) financing activities |
|
| 2,063 |
|
|
| (43 | ) |
Net decrease in cash and cash equivalents |
|
| (8,812 | ) |
|
| (4,781 | ) |
Cash and cash equivalents, beginning of period |
|
| 28,268 |
|
|
| 12,159 |
|
Cash and cash equivalents, end of period |
| $ | 19,456 |
|
| $ | 7,378 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
| $ | 19 |
|
| $ | 9 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash activities: |
|
|
|
|
|
|
|
|
Issuance of common stock in connection with Smart Retail acquisition |
| $ | — |
|
| $ | 5,129 |
|
See accompanying notes to the consolidated financial statements.
Notes to the Consolidated Financial Statements
(Unaudited)
1. The Company
Smith Micro Software, Inc. (“Smith Micro,” “Company,” “we,” “us,” andMicro”, the “Company”, “we”, “us”, or “our”) develops software to simplify and enhance the mobile experience, providing solutions to some of the leading wireless and cable service providers device manufacturers, and enterprise businesses around the world. From optimizing wireless networksenabling the family digital lifestyle to uncovering customer experience insights, and from streamlining Wi-Fi accessproviding powerful voice messaging capabilities, we strive to ensuring family safety, our solutions enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones.smartphones and consumer IoT devices. Our portfolio also includes a wide range of products for creating, sharing and monetizing rich content, such as visual voice messaging, video streaming,retail content display optimization and 2D/3D graphics applications. With this as a focus, it is Smith Micro’s mission to help our customers thrive in a connected world.performance analytics on any product set.
2. Accounting Policies
Basis of Presentation
The accompanying interim consolidated balance sheet and statement of stockholders’ equity as of September 30, 2017,March 31, 2020, and the related consolidated statements of operations, and comprehensive lossstockholders’ equity and cash flows for each of the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, are unaudited. The unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted.
In the opinion of management, the accompanying unaudited consolidated financial statements for the periods presented reflect all adjustments which are normal and recurring, and necessary to fairly state the financial position, results of operations, and cash flows.flows of the Company. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162019 filed with the SEC.SEC on March 13, 2020.
Intercompany balances and transactions have been eliminated in consolidation.
Operating results for the three and nine months ended September 30, 2017March 31, 2020 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2017.2020.
3. Recently Issued Accounting Pronouncements
In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815) (“ASU 2017-11”), which changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU 2014-11 also clarifies existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, ASU 2017-11 requires entities that present earnings per share (EPS) in accordance with ASC Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. ASU 2017-11 is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted, including adoption in an interim period. If an entity early adopts ASU 2017-11 in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period in either of the following ways: (1) Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which ASU 2017-11 is effective or (2) Retrospectively to outstanding financial instruments with a down round feature for each reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. Revenue Recognition
The Company has elected to early adopt ASU 2017-11 during the three months ended September 30, 2017 by applying ASU 2017-11 retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented which includes the quarter ended September 30, 2016 in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. (See Note 19).
In February 2016, theadopted FASB issued ASUASC Topic No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company will be evaluating the impact of this guidance on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,606, Revenue from Contracts with Customers, (Topic 606). The amendments to this Update supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle as of thisJanuary 1, 2018, and recognizes the sale of goods and services based on the five-step analysis of transactions as provided in Topic is606, which requires an entity to recognize revenues whenrevenue to depict the transfer of promised goods or services are transferred to customers in an amount that reflects the consideration that is expectedto which the entity expects to be receivedentitled in exchange for thosesuch goods and services.
In our Wireless segment, we transfer software licenses to our customers on a royalty free, non-exclusive, non-transferrable, limited use basis during the term of the agreement. In some instances, we perform customization services to ensure the software operates within our customer’s operating platforms as well as the operating platforms of the mobile devices used by their end customers, before transferring the license. Revenue related to these services is recognized at a point in time upon acceptance of the software license by the customer. We also earn usage based revenue on our platforms. Usage based revenue is generated based on active licenses used by our customer’s end customers, the provision of hosting services, revenue share based on media placements on our platform, and use of our cloud based services. We recognize our usage based revenue when we have completed our performance obligation and have the right to invoice the customer. This revenue is generally recognized monthly or services. This Topic defines a five-step process to achievequarterly. Finally, in this core principle and, in doing so, it is possible more judgment and estimates may be required within thesegment, we ratably recognize revenue recognition process than required under existing U.S. GAAP, including identifying performance obligations inover the contract estimating the amountperiod when customers pay in advance of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company will be evaluating the impact of this guidance on our consolidated financial statements.
4. Going Concern Evaluation
In connection with preparing consolidated financial statements for the three and nine months ended September 30, 2017, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.
The Company considered the following:
Operating losses for ten consecutive quarters.
Negative cash flow from operating activities for six consecutive quarters.
Depressed stock price resulting in being non-compliant with NASDAQ listing rules to maintain a stock price of $1.00/share.
Stockholders’ equity being less than $2.5 million at March 31, 2017 and June 30, 2017 resulting in being non-compliant with NASDAQ listing rules.
Ordinarily, conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern relate to the entity’s ability to meet its obligations as they become due.
The Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial statements are issued by considering the following:
The Company raised $4 million of debt financing during the year ended December 31, 2016.
The Company has raised funds from short-term loans from insiders.
As a result of the Company’s restructurings that were implemented during the three months ended December 31, 2016, and again during the six months ended June 30, 2017, the Company’s cost structure is now in line with its future revenue projections. See Footnote 11 below for additional details regarding restructurings.
On September 29, 2017, the Company completed a $5.5 million preferred stock transaction, which converted $2.8 million of long term and short-term debt (face value) into equity and raised $2.7 million of new equity capital.
Management believes that the Company will generate enough cash from operations to satisfy its obligations for the next twelve months.
The Company will take the following actions, if it starts to trend unfavorably to its internal profitability and cash flow projections, in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:
Raise additional funds through short-term loans.
Implement additional restructuring and cost reductions.
Raise additional capital through a private placement.
Dispose of one or more product lines.
Sell or license intellectual property.
5. Cash and Cash Equivalents
Cash and cash equivalents are primarily held in two financial institutions and are uninsured except for the minimum Federal Deposit Insurance Corporation coverage and have original maturity dates of three months or less. As of September 30, 2017 and December 31, 2016, bank balances totaling approximately $3.7 million and $2.1 million, respectively, were uninsured.
6. Accounts Receivable
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for estimated credit losses and those losses have been within management’s estimates. Allowances for product returns are included in other adjustments to accounts receivable on the consolidated balance sheets. Product returns are estimated based on historical experience and management estimations.
The Company is utilizing the accounts receivable balances to secure the related party short-term notes payable.
7. Impairment or Disposal of Long Lived Assets
Long-lived assets to be held are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether or not impairment to such value has occurred as required by FASB ASC Topic No. 360, Property, Plant, and Equipment. The Company determined there was no impairment as of September 30, 2017 and December 31, 2016.
8. Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets, generally ranging from three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.
9. Goodwill
In accordance with FASB ASC Topic No. 350, Intangibles-Goodwill and Other, we review the recoverability of the carrying value of goodwill at least annually or whenever events or circumstances indicate a potential impairment. The Company’s impairment testing will be done annually at December 31. Recoverability of goodwill is determined by comparing the fair value of the Company’s reporting units to the carrying value of the underlying net assets in the reporting units. If the fair value of a reporting unit is determined to be less than the carrying value of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the fair value of its other assets and liabilities. The Company determined that there was no goodwill impairment at September 30, 2017 and December 31, 2016.
10. Intangible Assets
The following table sets forth our acquired intangible assets by major asset class as of September 30, 2017 and December 31, 2016 (in thousands except for useful life data):
|
|
|
|
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||||||||||||||||||||||||||
|
| Useful life |
|
|
|
|
|
| Accumulated |
|
| Net |
|
|
|
|
|
| Accumulated |
|
| Net book value |
|
| Impairment |
|
| Net |
| |||||||
|
| (years) |
|
| Gross |
|
| amortization |
|
| book value |
|
| Gross |
|
| amortization |
|
| before impairment |
|
| charge |
|
| book value |
| |||||||||
Purchased technology |
| 5-6 |
|
| $ | 265 |
|
| $ | (66 | ) |
| $ | 199 |
|
| $ | 265 |
|
| $ | (32 | ) |
| $ | 233 |
|
| $ | — |
|
| $ | 233 |
| |
Customer relationships |
| 3-6 |
|
|
| 528 |
|
|
| (220 | ) |
|
| 308 |
|
|
| 999 |
|
|
| (147 | ) |
|
| 852 |
|
|
| (411 | ) |
|
| 441 |
| |
Trademarks/trade names |
|
| 2 |
|
|
| 38 |
|
|
| (24 | ) |
|
| 14 |
|
|
| 38 |
|
|
| (9 | ) |
|
| 29 |
|
|
| — |
|
|
| 29 |
|
Non-compete |
|
| 3 |
|
|
| 51 |
|
|
| (21 | ) |
|
| 30 |
|
|
| 51 |
|
|
| (9 | ) |
|
| 42 |
|
|
| — |
|
|
| 42 |
|
Total |
|
|
|
|
| $ | 882 |
|
| $ | (331 | ) |
| $ | 551 |
|
| $ | 1,353 |
|
| $ | (197 | ) |
| $ | 1,156 |
|
| $ | (411 | ) |
| $ | 745 |
|
Intangible assets amortization expense was $0.1 million and $0.2 million for the three and nine months ended September 30, 2017, respectively, and $0.1 million for the three and nine months ended September 30, 2016. The Company determined there was an impairment of its Customer Relationships intangible asset in the amount of $0.4 million as of December 31, 2016.
Future amortization expense related to intangible assets as of September 30, 2017 are as follows (in thousands):
Year Ending December 31, |
|
|
|
|
2017 - 3 months remaining |
| $ | 64 |
|
2018 |
|
| 249 |
|
2019 |
|
| 143 |
|
2020 |
|
| 47 |
|
2021 |
|
| 40 |
|
Beyond |
|
| 8 |
|
Total |
| $ | 551 |
|
11. Restructuring
The following is the activity in our restructuring liability for the nine months ended September 30, 2017 (in thousands):
|
| December 31, 2016 |
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| ||
|
| Balance |
|
| Provision-net |
|
| Usage |
|
| Balance |
| ||||
Lease/rental terminations |
| $ | 1,786 |
|
| $ | (149 | ) |
| $ | (245 | ) |
| $ | 1,392 |
|
One-time employee termination benefits |
|
| 65 |
|
|
| 805 |
|
|
| (649 | ) |
|
| 221 |
|
Datacenter consolidation, other |
|
| 109 |
|
|
| (91 | ) |
|
| (18 | ) |
|
| — |
|
Total |
| $ | 1,960 |
|
| $ | 565 |
|
| $ | (912 | ) |
| $ | 1,613 |
|
Of the total $1.6 million balance, $0.2 million is reported in accrued liabilities and $1.4 million is reported in deferred rent and other long-term liabilities on the balance sheet.
12. Debt
Short-Term Debt
At September 30, 2017 and December 31, 2016, the carrying value and the aggregate fair value of the Company’s short-term debt were as follows (in thousands):
|
| As of September 30, 2017 |
|
| As of December 31, 2016 |
| ||||||||||
|
| Carrying Amount |
|
| Fair Value |
|
| Carrying Amount |
|
| Fair Value |
| ||||
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related-party notes payable, short-term |
| $ | 2,200 |
|
| $ | 2,200 |
|
| $ | — |
|
| $ | — |
|
service delivery.
On February 7, 2017,12, 2020, we acquired certain assets from Circle (as defined in Note 3 below), including a source code license to Circle’s parental control software solution and two customer contracts. Pursuant to these contracts, the Company entered into a short-term secured borrowing arrangementcustomer parties thereto license the parental control software solution for distribution to their respective subscribers in designated markets. In each case, the contracts allow the customer to take possession of the software solution and to host it on their platform or with William W. and Dieva L. Smith (“Smith”) and on February 8, 2017 entered into a short-term secured borrowing arrangement with Steven L. and Monique P. Elfman (“Elfman”) pursuantan independent third party hosting service provider without significant cost. We also provide significant services that are required by the customer to which Smith and Elfman each loanedensure they have the utility of the license. As the license to the Company $1 millionsoftware solution and the Company issued to each of them a Secured Promissory Note (the “Original Notes”) bearing interest at the rate of 18% per annum. The Original Notes were due on March 24, 2017services we provide are secured by the Company’s accounts receivable and certain other assets. William W. Smith, Jr. is the Company’s Chairman of the Board, President and Chief Executive Officer, and Steven L. Elfman is a director of the Company.
On March 25, 2017, the Company entered into an Amendment to the Original Note issued to Smith that extended the Maturity Date of the Note to June 26, 2017.
On March 31, 2017, the Company entered into a new short-term secured borrowing arrangement with Elfman for $1 million which matured on June 23, 2017.
On June 30, 2017, the Company entered into a new short-term secured borrowing arrangement with each of Smith and Elfman to refinance the prior arrangement with each of them, which matured on June 26, 2017 and June 23, 2017, respectively. Under the new
borrowing arrangements, the Company issued to each of Smith and Elfman a new Secured Promissory Note (“Replacement Notes”) with a principal balance of $1 million, bearing interest at the rate of 12% per annum, and maturing on September 25, 2017. The maturity date of the Replacement Note entered into with Smith may be extended by up to 180 days upon the mutual consent of the Company and Smith. Each of the Replacement Notes are secured by the Company’s accounts receivable and certain other assets.
On August 22, 2017, the Company entered into Amendments to the Replacement Notes issued to each of Smith and Elfman, which extended the Maturity Date of the Replacement Notes from September 25, 2017 to January 25, 2018. The amendments do not change any other terms of the Replacement Notes.
On August 23, 2017, the Company entered into a new borrowing arrangement with Smith, under which the Company borrowed $0.8 million and issued to Smith a new Secured Promissory Note, bearing interest at the rate of 12% per annum, and maturing on January 25, 2018.
On August 24, 2017, the Company entered into a new borrowing arrangement with Andrew Arno (“Arno”), under which the Company borrowed $0.3 million and issued to Arno new Secured Promissory Notes with an aggregate principal balance of $0.3 million, bearing interest at the rate of 12% per annum, and maturing on January 31, 2018. Andrew Arno is a director of the Company.
On September 29, 2017, the Company exchanged shares of the Company’s newly designated Series B 10% Convertible Preferred Stock (“Series B Preferred Stock”) for outstanding short-term indebtedness with a principal amount of $0.8 million owed to Smith and $0.1 million to Arno for 750 and 50 shares, respectively. See Note 19, Equity Transactions, for further details on the Series B Preferred Stock Offering.
The Company reviewed FASB ASC Topic No. 470-50, Debt Extinguishment, to evaluate the debt extinguishment gain incurred from the debt to equity transaction. Upon completion of the evaluation, it was determined that the gain associated with the short-term related party loan extinguishment to Preferred Stock should be accounted for as a capital contribution and was recorded to Stockholder’s Equity. The principal balance of the note and resulting fair value of the equity interest exchanged was $0.8 million. The fair value was reduced by allocated legal fees and other direct issuance costs of $0.1 million, resulting in a net fair value of $0.8 million. The capital contribution related to the gain was the difference between these two amounts, or $0.1 million.
The Company evaluated the refinancing of the short-term debt instruments under FASB ASU Topic No. 470-60, Troubled Debt Restructurings, to determine whether the modification of the debt instruments would be considered a troubled debt restructuring, using the two-step decision tree. The two steps included an assessment of whether the company is experiencing financial difficulties and if the creditorshighly interrelated, we have provided concessions. Upon completion of this review, the Company concluded that the refinancing did not qualify aslicense and our services are a troubled debt restructuring.
Long-Term Debt
At September 30, 2017,single performance obligation. The license fee is earned and recognized on a pro-rata basis over the aggregate fair value and the carrying valuecontract term based on our customer’s continued use of the Company’s long-term debt was as follows (in thousands):
|
| As of September 30, 2017 |
|
| As of December 31, 2016 |
| ||||||||||
|
| Carrying Amount |
|
| Fair Value |
|
| Carrying Amount |
|
| Fair Value |
| ||||
Long-term debt - related party |
| $ | — |
|
| $ | — |
|
| $ | 1,295 |
|
| $ | 1,295 |
|
Long-term debt |
|
| 1,492 |
|
|
| 1,492 |
|
|
| 1,295 |
|
|
| 1,295 |
|
Total long-term debt |
| $ | 1,492 |
|
| $ | 1,492 |
|
| $ | 2,590 |
|
| $ | 2,590 |
|
The carrying value of $1.5 millionlicense and $2.6 million are net of debt discount of $0.4 million and $1.2 million and debt issuance costs of $0.1 million and $0.2 million as of September 30, 2017 and December 31, 2016, respectively.
On September 2, 2016, we entered into a Note and Warrant Purchase Agreement with Unterberg Koller Capital Fund L.P. and William W. and Dieva L. Smith (collectively, the “Investors”), pursuant to which the Company issued and sold to the Investors in a private placement senior subordinated promissory notes in the aggregate principal amount of $4 million (the “Notes”). The Company completed the transactions contemplated by the Note and Warrant Purchase Agreement and issued the Notes on September 6, 2016. The Notes mature three years following the issuance date, or September 6, 2019, and bear interest at the rate of 10% of the outstanding principal balance of the Notes, payable quarterly in cash or shares of the Company’s common stock. The Notes are subordinate and junior in right of payment to the prior payment in full of all claims, whether now existing or arising in the future, of holders of senior debt of the Company, as described in the Notes.our services.
On September 29, 2017,We also provide consulting services to develop customer-specified functionality that are generally not on our software development roadmap. We recognize revenue from our consulting services upon delivery and acceptance by the Company exchanged sharescustomer of our software enhancements and upgrades. For certain Wireless segment customers we provide maintenance and technology support services for which the customer either pays upfront or as we provide the services. When the customer pays upfront, we record the payments as contract liabilities and recognize revenue ratably over the contract period as this is our stand ready performance obligation that is satisfied ratably over the maintenance and technology services period.
We receive upfront payments from customers from services to be provided under our ViewSpot arrangements. The advance receipts are deferred and subsequently recognized ratably over the contract period. We also provide consulting services to configure ad hoc targeted promotional content for our customers upon request. These requests are driven by our customers’ marketing initiatives and tend to be short term “bursts” of activity. We recognize these revenues upon delivery of the Company’s newly designated Series B 10% Convertible Preferred Stock for outstanding long-term indebtednessconfigured promotional content to the cloud platform.
For our Graphics products where we sell off-the-self software products with a principal amount of $2 million owed to Smith for 2,000no customization or post sale technology support services, we recognize revenue at the time we transfer control of the Series B Preferred Stock. See Note 19, Equity Transactions, for further details onproduct to the Series B Preferred Stock Offering.
The Company reviewed FASB ASC Topic No. 470-50, Debt Extinguishment, to evaluate the debt extinguishment loss incurred from the transaction. Upon completioncustomer. This occurs upon shipment of the evaluation, it was determined thatproduct or when the loss associated withcustomer downloads the long-term related party loan extinguishmentsoftware from our website or website of our resellers. We offer a 30 day return option to Preferred Stock should be accounted throughour customers; a return reserve is established at the Statement of Operations. The principal balance of the note and resulting fair value of the equity interest transferred was $2 million. The fair value was reduced by legal fees and other direct issuance costs of $0.1 million. The net carrying amount of the long-term note was $1.5 million, which was net of debt issuance costs of $0.1 million and discount of $0.4 million. The extinguishment loss associated with this note was the difference between the net fair value of the equity interest transferredtime revenue is recorded and the net carrying amount of the note being extinguished, which was $0.4 million.
The Company evaluated the conversion of the long-term debt under FASB ASU Topic No. 470-60, Troubled Debt Restructurings, for determining whether the modification of the debt instruments would be considered a troubled debt restructuring, using the two-step decision tree. The two steps included an assessment of whether the companyreserve is experiencing financial difficultiesmonitored and if the creditors have provided concessions. Upon completion of this review, the Company concluded that the refinancing did not qualify as troubled debt restructuring.
13. Net Loss Per Share
The Company calculates earnings per share (“EPS”) as required by FASB ASC Topic No. 260, Earnings Per Share. Basic EPS is calculated by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period, excluding common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period, plus the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For periods with a net loss, the dilutive common stock equivalents are excluded from the diluted EPS calculation. For purposes of this calculation, common stock subject to repurchase by the Company, options, and warrants are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.
On August 15, 2016, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware for the purpose of effecting a reverse stock split (the “Reverse Split”) of the outstanding shares of the Company’s common stock at a ratio of one (1) share for every four (4) shares outstanding, so that every four (4) outstanding shares of common stock before the Reverse Split represents one (1) share of common stock after the Reverse Split. Proportionate adjustments were made to: (i) the aggregate number of shares of Common Stock available for equity-based awards to be granted in the future under our 2015 Omnibus Equity Incentive Plan; (ii) the number of shares that would be owned upon vesting of restricted stock awards and stock options which are outstanding under our 2015 Omnibus Equity Incentive Plan and 2005 Stock Option Plan, and the exercise price of any outstanding stock options, and (iii) the number of shares of Common Stock available for purchase under our Preferred Shares Rights Agreement, dated October 16, 2015, between us and Computershare Trust Company, N.A., as rights agent. We have a total of 100,000,000 authorized shares of common stock, which remained unchanged by the reverse stock split. The Reverse Split was approved by the Company’s stockholders at the special meeting held on August 15, 2016 and was effective on August 17, 2016. The Company adjusted shareholders' equity to reflect the reverse stock split by reclassifying an amount equal to the par value of the additional shares arising from the split from common stock to the Additional Paid-in Capital during the third quarter of fiscal 2016, resulting in no net impact to shareholders' equity on our consolidated balance sheets. Fractional shares were rounded down to the nearest whole share. Stockholders received cash in lieu of such fractional shares. All information presented herein has been retrospectively adjusted to reflect the reverse stock split as if it took place as of the earliest period presented.
On September 29, 2017, the Company filed with the Secretary of State of the State of Delaware a Certificate of Designation of Preferences, Rights and Limitations of Series B Preferred Stock of the Company (the “Certificate of Designation”), designating a total of 5,500 shares of Series B Preferred Stock. Under the Certificate of Designation, the shares of Series B Preferred Stock have a stated value of $1,000 per share and are optionally convertible, subject to certain limitations set forth in the Certificate of Designation, into shares of the Company’s Common Stock at a conversion price of $1.14 per share, subject to adjustment in the event of a stock split, stock dividend, combination, reclassification or other recapitalization affecting the Common Stock.
The holders of Series B Preferred Stock are entitled to receive cumulative dividends out of funds legally available thereof at a rate of ten percent (10%) per annum, payable (i) when and as declared by the Board of Directors, in quarterly installments on March 1, June 1, September 1 and December 1, and (ii) upon conversion into Common Stock with respect the Series B Preferred Stock being converted.
In the event that the trading price of the Company’s Common Stock for 20 consecutive trading days (as determined in the Certificate of Designation) exceeds 400% of the then effective Conversion Price of the Series B Preferred Stock (initially set at $1.14), the Company may force conversion of the Series B Preferred Stock into shares of Common Stock or elect to redeem the Series B Preferred Stock for cash.
Until the date that stockholder approval is obtained, the Certificate of Designation limits the number of shares of Common Stock that are issuable to any holder upon conversion of such holder’s Series B Preferred Stock, such that such issuances would not cause such holder to own in excess of 19.99% of the Company’s issued and outstanding Common Stock. In addition, a holder’s shares of Series B Preferred Stock shall not be converted if, after giving effect to the conversion, such holder and its affiliated persons would own beneficially more than 9.99% of the Company’s Common Stock, subject to adjustment solely at the holder’s discretion upon 61 days’ prior notice to the Company.
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
|
| (unaudited, in thousands, except per share amounts) |
|
| (unaudited, in thousands, except per share amounts) |
| ||||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders |
| $ | (1,670 | ) |
| $ | (4,632 | ) |
| $ | (6,501 | ) |
| $ | (11,618 | ) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic |
|
| 14,297 |
|
|
| 12,209 |
|
|
| 13,221 |
|
|
| 11,826 |
|
Potential common shares - options / warrants (treasury stock method) |
|
| — |
|
|
| 2 |
|
|
| 1 |
|
|
| 3 |
|
Weighted average shares outstanding - diluted |
|
| 14,297 |
|
|
| 12,211 |
|
|
| 13,222 |
|
|
| 11,829 |
|
Shares excluded (anti-dilutive) |
|
| — |
|
|
| 2 |
|
|
| 1 |
|
|
| 3 |
|
Shares excluded due to an exercise price greater than weighted average stock price for the period |
|
| 1,973 |
|
|
| 2,062 |
|
|
| 1,869 |
|
|
| 2,062 |
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.12 | ) |
| $ | (0.38 | ) |
| $ | (0.49 | ) |
| $ | (0.98 | ) |
Diluted |
| $ | (0.12 | ) |
| $ | (0.38 | ) |
| $ | (0.49 | ) |
| $ | (0.98 | ) |
14. Stock-Based Compensation
Stock Plans
During the nine months ended September 30, 2017, the Company granted 87,500 shares of restricted stock with a weighted average grant date fair value of $1.11 per share. These costs will be amortized ratably over a period of 0 to 48 months.
As of September 30, 2017, there were 1.7 million shares available for future grants under the 2015 Omnibus Equity Incentive Plan.
Employee Stock Purchase Plan
The Company’s most recent six-month offering period ended September 30, 2017 and resulted in 2,000 shares being purchased/granted at a fair value of $0.77 per share. The next six-month offering period began on October 1, 2017 and will end on March 31, 2018. These shares will have a fair value of $0.96 per share.
Stock Compensation
The Company accounts for all stock-based payment awards made to employees and directors based on their fair values, which is recognized as compensation expense over the vesting period using the straight-line method over the requisite service period for each award as required by FASB ASC Topic No. 718, Compensation-Stock Compensation. Restricted stock is valued using the closing stock price on the date of the grant. Options are valued using a Black-Scholes valuation model.
Stock-based non-cash compensation expense related to stock options, restricted stock grants, and the employee stock purchase plan were recorded in the financial statements as follows (in thousands):actual experience. Historically, returns have been insignificant.
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
| ||||||||||
Cost of revenues |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 3 |
|
Selling and marketing |
|
| 5 |
|
|
| 84 |
|
|
| (28 | ) |
|
| 238 |
|
Research and development |
|
| 44 |
|
|
| 128 |
|
|
| 169 |
|
|
| 375 |
|
General and administrative |
|
| 119 |
|
|
| 196 |
|
|
| 463 |
|
|
| 557 |
|
Restructuring expense |
|
| — |
|
|
| — |
|
|
| 398 |
|
|
| — |
|
Total non-cash stock compensation expense |
| $ | 168 |
|
| $ | 408 |
|
| $ | 1,002 |
|
| $ | 1,173 |
|
15. Fair Value Measurements
The Company measures and discloses fair value measurements as required by FASB ASC Topic No. 820, Fair Value Measurements and Disclosures.
Fair value is an exit price, representing the amount that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the FASB establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace
Level 3 - Unobservable inputs which are supported by little or no market activity
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
As required by FASB ASC Topic No. 820, we measure our cash and cash equivalents at fair value. Our cash equivalents are classified within Level 1 by using quoted market prices utilizing market observable inputs.
As required by FASB ASC Topic No. 350, for goodwill and other intangibles impairment analysis, we utilize fair value measurements which are categorized within Level 3 of the fair value hierarchy.
3. Acquisitions
On February 12, 2020, the Company acquired the operator business of Circle Media Labs Inc. (“Circle”) pursuant to a certain Asset Purchase Agreement by and between the Company and Circle.
The following table summarizes the consideration paid for the Circle acquisition in 2020 (unaudited, in thousands):
Fair value of assets acquired |
| $ | 14,966 |
|
Fair value of liabilities assumed |
|
| 1,466 |
|
Total purchase price |
| $ | 13,500 |
|
|
|
|
|
|
Components of purchase price: |
|
|
|
|
Cash |
| $ | 12,150 |
|
Cash holdback |
|
| 1,350 |
|
Total purchase price |
| $ | 13,500 |
|
The Company’s preliminary allocation of the purchase price is summarized as follows (unaudited, in thousands):
Assets: |
|
|
|
|
Inventory, net |
| $ | 14 |
|
Intangible assets |
|
| 11,256 |
|
Goodwill |
|
| 3,696 |
|
Total assets |
| $ | 14,966 |
|
Liabilities: |
|
|
|
|
Deferred revenue |
| $ | 1,290 |
|
Amounts due to seller |
|
| 176 |
|
Total liabilities |
|
| 1,466 |
|
Total purchase price |
| $ | 13,500 |
|
Pursuant to the transaction, Smith Micro acquired certain assets related to the Circle operator business, including two new customer contracts and a source code license to Circle’s currently deployed parental control software and related technology.
Unaudited pro forma results of operations for the three months ended March 31, 2020 and 2019 are included below as if the Circle acquisition occurred on January 1, 2019. This summary of the unaudited pro forma results of operations is not necessarily indicative of what the Company’s results of operations would have been had the operator business of Circle been acquired at the beginning of 2019, nor does it purport to represent results of operations for any future periods.
|
| For the Three Months Ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
| (unaudited, in thousands, except per share amounts) |
| |||||
Revenues |
| $ | 13,789 |
|
| $ | 9,266 |
|
Net income (loss) |
|
| 2,105 |
|
|
| (889 | ) |
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.05 |
|
| $ | (0.03 | ) |
Diluted |
| $ | 0.05 |
|
| $ | (0.03 | ) |
4. Goodwill
In accordance with FASB ASC Topic No. 350, Intangibles-Goodwill and Other, we review the recoverability of the carrying value of goodwill at least annually or whenever events or circumstances indicate a potential impairment. The Company’s impairment testing will be performed annually at December 31. Recoverability of goodwill is determined by comparing the fair value of the Company’s reporting units to the carrying value of the underlying net assets in the reporting units. If the fair value of a reporting unit is determined to be less than the carrying value of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the fair value of its other assets and liabilities. The Company early adopted ASU 2017-11determined that there was no goodwill impairment at March 31, 2020 and changed its methodDecember 31, 2019.
5. Earnings Per Share
The Company calculates earnings per share (“EPS”) as required by FASB ASC Topic No. 260, Earnings Per Share. Basic EPS is calculated by dividing the net income available to common stockholders by the weighted average number of accountingcommon shares outstanding for the period, excluding common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period, plus the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For periods with a net loss, the dilutive common stock equivalents are excluded from the diluted EPS calculation. For purposes of this calculation, common stock subject to repurchase by the Company, options, and warrants duringare considered to be common stock equivalents and are only included in the ninecalculation of diluted earnings per share when their effect is dilutive.
The following table sets forth the details of basic and diluted earnings per share:
|
| For the Three Months Ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
| (unaudited, in thousands, except per share amounts) |
| |||||
Numerator: |
|
|
|
|
|
|
|
|
Net income |
| $ | 2,045 |
|
| $ | 48 |
|
Dividends paid to preferred stockholders |
|
| — |
|
|
| (34 | ) |
Net income available to common stockholders |
| $ | 2,045 |
|
| $ | 14 |
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic |
|
| 39,482 |
|
|
| 31,297 |
|
Potential common shares – options / warrants (treasury stock method) |
|
| 2,712 |
|
|
| 26 |
|
Weighted average shares outstanding – diluted |
|
| 42,194 |
|
|
| 31,323 |
|
|
|
|
|
|
|
|
|
|
Shares excluded (anti-dilutive) |
|
| 77 |
|
|
| 11,213 |
|
|
|
|
|
|
|
|
|
|
Net earnings per common share: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.05 |
|
| $ | 0.00 |
|
Diluted |
| $ | 0.05 |
|
| $ | 0.00 |
|
6. Stock-Based Compensation
Stock Plans
During the three months ended September 30, 2017March 31, 2020, the Company granted 1,000,000 shares of restricted stock and incentive stock options exercisable for 5,000 shares under the Company’s 2015 Omnibus Equity Incentive Plan, as amended. As of March 31, 2020, there were approximately 74,000 shares available for future grants under the 2015 Omnibus Equity Incentive Plan.
7. Revenues
Revenue Recognition
We primarily sell our software solutions, cloud-based services and consulting services to major wireless network and cable operators. We sell our off-the-shelf Graphics software products directly to end users as well as through our distribution and reseller channel partners.
We recognize sales of goods and services based on the five-step analysis of transactions as provided in Topic 606. For all contracts with customers, we first identify the contract which usually is established when a contract is fully executed by each party and consideration is expected to be received. Next, we identify the performance obligations in the contract. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. We then determine the transaction price in the arrangement and allocate the transaction price, if necessary, to each performance obligation identified in the contract. The allocation of the transaction price to the performance obligations are based on the relative standalone selling prices for the goods and services contained in a particular performance obligation. The transaction price is adjusted for the Company’s estimate of variable consideration which may include certain incentives and discounts, product returns, distributor fees, and storage fees. We evaluate the total amount of variable consideration expected to be earned by using the expected value method, as we believe this method represents the most appropriate estimate for this consideration, based on historical service trends, the individual contract considerations and our best judgment at the time. We include estimates of variable consideration in revenues only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We also generate the majority of our revenue on usage based fees which are variable and depend entirely on our customers use of perpetual licenses, transactions processed on our hosted environment, advertisement placements on our service platform, and activity on our cloud based service platform. As discussed in Note 3, on February 12, 2020, we purchased two customer contracts from Circle. Under these contracts, we provide our customers with licenses to software solutions and related services, for which we earn license fees, managed and hosting service fees, and consulting services which are provided throughout the life of the licensing arrangement.
Our contracts with the Tier 1 customers include promises to transfer multiple products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Our cloud-based service includes a software solution license integrated with cloud-based services. Judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Since we do not allow our customers to take possession of the software solution, and since the utility of the license comes from the could-based services that we provide, we consider the software license and the cloud services to be single performance obligation. We provide the Circle software solution license together with highly integrated consulting services to generate the utility of the license to the customers. Since the software solution and consulting services provided are highly interrelated, we consider the license and the consulting services to be a single performance obligation.
We also provide consulting services to configure ad hoc targeted promotional content to be presented on our solutions as well as consulting services to provide additional functionality for our software solutions based on our customer’s request. These requests are driven by our customer’s marketing initiatives and tend to be short term “bursts” of activity or specific incremental functionality to existing software solutions. We recognize these revenues upon delivery and acceptance of the configured promotional content or additional functionality to the software solution.
We have made accounting policy elections to exclude all taxes by governmental authorities from the measurement of the transaction price, and since our standard payment terms are less than one year, we have elected the practical expedient not to assess whether a contract has a significant financing component.
Deferred Revenue
Deferred revenue represents amounts billed to customers for which revenue has not been recognized. Deferred revenue primarily consists of the unearned portion of monthly, quarterly and annually billed service fees and prepayments made by customers for a future period. We recognize revenue upon transfer of control. As of March 31, 2020, our total deferred revenue balance was $1.7 million, of which $1.3 million was related to the acquisition of the Circle operator business.
Disaggregation of Revenues
We disaggregate revenue by our Wireless and Graphics products.
Revenues on a full retrospective basis. (See Note 19).disaggregated basis are as follows (in thousands):
|
| For the Three Months Ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
| (unaudited) |
| |||||
Wireless: |
|
|
|
|
|
|
|
|
License and service fees |
| $ | 555 |
|
| $ | — |
|
Hosted environment usage fees |
|
| 4,549 |
|
|
| 4,653 |
|
Cloud based usage fees |
|
| 7,478 |
|
|
| 2,920 |
|
Consulting services and other |
|
| 633 |
|
|
| 599 |
|
Total wireless |
| $ | 13,215 |
|
| $ | 8,172 |
|
Graphics: |
|
|
|
|
|
|
|
|
Software |
|
| 107 |
|
|
| 260 |
|
Total revenues |
| $ | 13,322 |
|
| $ | 8,432 |
|
16.8. Segment, Customer Concentration and Geographical Information
Segment Information
Public companies are required to report financial and descriptive information about their reportable operating segments as required by FASB ASC Topic No. 280, Segment Reporting. The Company has twoone primary business unitsunit based on how management internally evaluates separate financial information, business activities and management responsibility.responsibility: Wireless. The Wireless segment includes our NetWise®SafePath®, CommSuite®, SafePath®ViewSpot®, and QuickLink®NetWise® family of products. Graphics includes our consumer-based products: Poser®, Moho® ClipStudio®, MotionArtist® and StuffIt®.
The Company does not separately allocate operating expenses to these business units, nor does it allocate specific assets. Therefore, business unit information reported includes only revenues.
The following table showspresents the Wireless revenues generated by each business unitproduct (in thousands):
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
| ||||||||||
Wireless |
| $ | 4,690 |
|
| $ | 5,237 |
|
| $ | 13,678 |
|
| $ | 17,513 |
|
Graphics |
|
| 1,114 |
|
|
| 1,241 |
|
|
| 3,564 |
|
|
| 3,638 |
|
Total revenues |
| $ | 5,804 |
|
| $ | 6,478 |
|
| $ | 17,242 |
|
| $ | 21,151 |
|
|
| For the Three Months Ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
| (unaudited) |
| |||||
SafePath |
| $ | 7,848 |
|
| $ | 1,987 |
|
CommSuite |
|
| 4,539 |
|
|
| 4,357 |
|
ViewSpot |
|
| 745 |
|
|
| 1,057 |
|
Netwise |
|
| 55 |
|
|
| 538 |
|
Other |
|
| 28 |
|
|
| 233 |
|
Total wireless revenues |
| $ | 13,215 |
|
| $ | 8,172 |
|
Customer Concentration Information
A summaryRevenues generated from our sales to Sprint and their respective affiliates in the Wireless business segment accounted for 88% and 77% of the Company’s customers that represent 10% or more oftotal revenues for the Company’s net revenues is as follows:
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
| ||||||||||
Wireless: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sprint (& affiliates) |
|
| 58.8 | % |
|
| 64.5 | % |
|
| 60.0 | % |
|
| 64.7 | % |
Graphics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FastSpring |
|
| 12.6 | % |
|
| 13.7 | % |
|
| 14.1 | % |
|
| 12.8 | % |
The two customers listed abovethree months ended March 31, 2020 and 2019, respectively. This customer comprised 68%84% and 81%77% of our accounts receivable as of September 30, 2017March 31, 2020 and 2016,2019, respectively.
Geographical Information
During the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, the Company operated in three geographic locations; the Americas, EMEA (Europe, the Middle East, and Africa), and Asia Pacific. Revenues attributed to the geographic location of the customers’ bill-to address were as follows (in thousands):
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
|
| For the Three Months Ended March 31, |
| |||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2020 |
|
| 2019 |
| ||||||
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| |||||||||||||||
Americas |
| $ | 5,713 |
|
| $ | 6,218 |
|
| $ | 16,949 |
|
| $ | 20,662 |
|
| $ | 13,304 |
|
| $ | 8,392 |
|
EMEA |
|
| 43 |
|
|
| 203 |
|
|
| 124 |
|
|
| 367 |
|
|
| 8 |
|
|
| 19 |
|
Asia Pacific |
|
| 48 |
|
|
| 57 |
|
|
| 169 |
|
|
| 122 |
|
|
| 10 |
|
|
| 21 |
|
Total revenues |
| $ | 5,804 |
|
| $ | 6,478 |
|
| $ | 17,242 |
|
| $ | 21,151 |
|
| $ | 13,322 |
|
| $ | 8,432 |
|
The Company does not separately allocate specific assets to these geographic locations.
17. Related-Party Transactions
On September 2, 2016, the Company entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with William W. and Dieva L. Smith (collectively, the “Smith”), pursuant to which the Company issued and sold to Smith in a private placement senior subordinated promissory notes in the aggregate principal amount of $2 million (the “Debt Notes”) and five-year warrants (the “Warrants”) to purchase an aggregate of 850,000 shares of the Company’s common stock at an exercise price of $2.74 per share. The Company completed the transactions contemplated by the Purchase Agreement and issued the Debt Notes and Warrants on September 6, 2016. William W. Smith, Jr. is the Company’s Chairman of the Board, President and Chief Executive Officer. Refer to Note 19, Equity Transactions, for additional details.
On February 7, 2017, the Company entered into a short-term secured borrowing arrangement with Smith and on February 8, 2017, the Company entered into a short-term secured borrowing arrangement with Steven L. and Monique P. Elfman (“Elfman”) pursuant to which Smith and Elfman each loaned to the Company $1 million and the Company issued to each of them a Secured Promissory Note (the “Original Notes”) bearing interest at the rate of 18% per annum. The Original Notes were due on March 24, 2017 and were secured by the Company’s accounts receivable and certain other assets. Steven L. Elfman is a director of the Company.
On March 25, 2017, the Company entered into an Amendment to the Original Note issued to Smith that extended the Maturity Date of the Note to June 26, 2017.
On March 31, 2017, the Company entered into a new short-term secured borrowing arrangement with Elfman for $1 million which matured on June 23, 2017.
On May 16, 2017, the Company entered into a subscription agreement with Andrew Arno in a private placement pursuant to which the Company issued and sold 50,000 shares of its common stock at a price per share of $1.10. Andrew Arno is a director of the Company.
On June 30, 2017, the Company entered into a new short-term secured borrowing arrangement with each Smith and Elfman to refinance the prior arrangements with each of them which matured on June 26, 2017 and June 23, 2017, respectively. Under the new borrowing arrangement, the Company issued to each of Smith and Elfman a new Secured Promissory Note (“Replacements Notes”) with a principal balance of $1 million, bearing interest at the rate of 12% per annum, and maturing on September 25, 2017. The maturity date of the Replacement Note entered into with Smith may be extended by up to 180 days upon the mutual consent of the Company and Smith. Each of the Replacement Notes are secured by the Company’s accounts receivable and certain other assets.
On August 22, 2017, the Company entered into Amendments to the Replacement Notes issued to each of Smith and Elfman, which extended the Maturity Date of the Replacement Notes from September 25, 2017 to January 25, 2018. The amendments do not change any other terms of the Replacement Notes.
On August 23, 2017, the Company entered into a new borrowing arrangement with Smith, under which the Company borrowed $0.8 million and issued to Smith a new Secured Promissory Note, bearing interest at the rate of 12% per annum, and maturing on January 25, 2018.
On August 24, 2017, the Company entered into a new borrowing arrangement with Arno, under which the Company borrowed $0.3 million and issued to Arno Secured Promissory Notes with an aggregate principal balance of $0.3 million, bearing interest at the rate of 12% per annum, and maturing on January 31, 2018.
On September 29, 2017, the Company exchanged shares of the Company’s newly designated Series B 10% Convertible Preferred Stock for outstanding indebtedness with a principal amount of $2.8 million owed to Smith and Arno for 2,750 and 50 shares, respectively, of Series B Preferred Stock.
18.9. Commitments and Contingencies
Leases
The Company leases its buildings under operating leases that expire on various dates through 2022. Future minimum annual lease payments under such leases as of September 30, 2017 are as follows (in thousands):
Year Ending December 31, |
| Operating |
| |
2017 - 3 months remaining |
| $ | 595 |
|
2018 |
|
| 2,433 |
|
2019 |
|
| 2,029 |
|
2020 |
|
| 1,725 |
|
2021 |
|
| 1,728 |
|
2022 |
|
| 33 |
|
Total |
| $ | 8,543 |
|
As of September 30, 2017, $3.4 million of the remaining lease commitments expense has been accrued as part of the 2013 Restructuring Plan, partially offset by future estimated sublease income of $2.1 million.
Pennsylvania Opportunity Grant Program
On September 19, 2016, we entered into a Settlement and Release Agreement with the Commonwealth of Pennsylvania, acting by and through the Department of Community and Economic Development (“DCED”) to repay $0.3 million of the original $1 million grant previously received by the Company. Per the agreement, the total amount due of $0.3 million is at 0% interest and is payable in twenty equal quarterly installments commencing on January 31, 2017 and ending on October 31, 2021. The balances were $0.3 million as of September 30, 2017 and December 31, 2016 and are reported in Accrued liabilities and Deferred rent and other long-term liabilities on the balance sheet.
Litigation
The Company may become involved in various legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company’s consolidated results of operations, cash flows, or financial position, litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows, or financial position in a particular period.
Other Contingent Contractual Obligations
During its normal course of business, the Company has made certain indemnities, commitments, and guarantees under which it may be required to make payments in relation toconnection with certain transactions. These include: intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale, and/or license of Company products; indemnities to various lessors in connection with facility leases for certain claims arising from use of such facility or under such lease; indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company; indemnities involving the accuracy of representations and warranties in certain contracts; and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. In addition, the Company has made contractual commitments to employees providing for severance payments upon the occurrence of certain prescribed events. The Company may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain customer contracts. The duration of these indemnities, commitments, and guarantees varies, and in certain cases may be indefinite. The majority of these indemnities, commitments, and guarantees may not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets.
19. Equity Transactions
Preferred Stock Offering
On September 29, 2017, the Company entered into a Securities Purchase Agreement with several investors for the issuance and sale (the “Offering”) of 5,500 shares of the Company’s newly designated Series B 10% Convertible Preferred Stock (the “Series B Preferred Stock”) at a stated value of $1,000 per share, for a total purchase price of $5.5 million. The Series B Preferred Stock is convertible into the Company’s Common Stock at a conversion price of $1.14 per share, which was the closing bid price of the Common Stock on September 28, 2017, or approximately 4,824,562 shares of Common Stock in the aggregate. The holders of Series B Preferred Stock are entitled to receive cumulative dividends out of funds legally available thereof at a rate of ten percent (10%) per annum, payable (i) when and as declared by the Board of Directors, in quarterly installments on March 1, June 1, September 1 and December 1, and (ii) upon conversion into Common Stock with respect the Series B Preferred Stock being converted.
In the event that the trading price of the Company’s Common Stock for 20 consecutive trading days (as determined in the Certificate of Designation) exceeds 400% of the then effective Conversion Price of the Series B Preferred Stock (initially set at $1.14), the Company may force conversion of the Series B Preferred Stock into shares of Common Stock or elect to redeem the Series B Preferred Stock for cash. In addition, upon the occurrence of certain triggering events, each holder of Series B Preferred Stock will have the right to require the Company to redeem such holder’s shares for cash equal to the stated value plus accrued and unpaid dividends and liquidated damages, costs, expenses and other amounts due in respect of the Series B Preferred Stock, and with respect to certain other triggering events, each holder will have the right to increase the dividend rate on such holder’s Series B Preferred Stock to twelve percent (12%) while such triggering event is continuing.
In the Offering, the Company raised gross cash proceeds of $2.7 million, and exchanged outstanding indebtedness with a principal amount of $2.8 million owed to Smith (both long and short-term debt) and $0.1 million owed to Arno. The Offering raised net cash proceeds of $2.5 million (after deducting the placement agent fee and expenses of the Offering). The Company intends to use the net cash proceeds from the Offering for working capital purposes. In connection with the Offering, the Company granted customary registration rights to investors with respect to the resale of shares of Common Stock issuable upon conversion of the Series B Convertible Preferred Stock.
Common Stock Offering
On May 16, 2017, the Company entered into subscription agreements with several investors for the issuance and sale of an aggregate of 2,077,000 shares of its common stock, in a registered direct offering at a purchase price of $1.05 per share. The Shares were offered by the Company pursuant to a shelf registration statement on Form S-3 (File No. 333-215786), which was declared effective on February 10, 2017 by the Securities and Exchange Commission (the “SEC”). Also, on May 16, 2017, the Company entered into subscription agreements with four accredited investors in a private placement pursuant to which the Company issued and sold to the Investors an aggregate of 85,000 shares of its unregistered common stock at a price per share of $1.10.
The Company engaged Sutter Securities Incorporated and Chardan Capital Markets, LLC as co-placement agents in connection with the registered direct offering pursuant to engagement letter agreements with each firm. The Company agreed to pay the placement agents a cash placement fee and issued to the placement agents warrants to purchase shares of Common Stock equal to 5% of the number of shares sold through each of them, without duplication, at an exercise price per share equal to $1.21 (Sutter) and $1.155 (Chardan). The warrants have a term of five years and will be exercisable beginning on November 18, 2017.
The transactions closed on May 17, 2017 and the Company realized gross proceeds of $2.3 million before deducting transaction fees and other expenses. Offering costs related to the transaction totaled $0.2 million, comprised of $0.1 million of transaction fees and $0.1 million of legal and other expenses, resulting in net proceeds of $2.1 million.
Warrants
On September 2, 2016, we entered into a Note and Warrant Purchase Agreement with Unterberg Koller Capital Fund L.P. and William W. and Dieva L. Smith (collectively, the “Investors”), pursuant to which the Company issued five-year warrants (the “Warrants”) to purchase an aggregate of 1,700,000 shares of the Company’s common stock at an Exercise Price of $2.74 per share, which expire five years from the date of issuance. The Company completed the transaction contemplated by the Note and Warrant Purchase Agreement and issued the Warrants on September 6, 2016. The Warrants contain provisions that if the Company sells or issues shares of Common Stock (as defined in Warrants) with an exercise price per share less than the Exercise Price of $2.74, the Exercise Price shall be adjusted according to the terms set forth within the Warrants (“Triggering Event”).
On May 16, 2017, the Company engaged Sutter Securities Incorporated (“Sutter”) and Chardan Capital Markets, LLC (“Chardan”) as co-placement agents in connection with a registered direct offering. The Company agreed to pay the placement agents a cash placement fee and issued to the placement agents warrants to purchase shares of Common Stock equal to 5% of the number of shares sold through each of them, without duplication, at an exercise price per share equal to $1.21 (Sutter) and $1.155 (Chardan). The warrants issued to Sutter and Chardan have a term of five years and will be exercisable beginning on November 18, 2017.
Since the issuance of the Warrants on September 6, 2016, there have been five Triggering Events, which caused the Warrants to be repriced from the original Exercise Price of $2.74: Common Stock offerings in May 2017 for $1.10 and 1.05, the issuance of warrants to Sutter and Chardan with exercise prices of $1.21 and $1.155, respectively, all resulting in a charge of $3,000, and the Series B Preferred Stock issuance with a conversion price of $1.14 in September 2017, resulting in a charge of $41,000. The Triggering Event charges were recorded to Stockholders’ Equity in the applicable period. Upon application of the Triggering Events above, the Unterberg Koller Capital Fund L.P. Adjusted Exercise Price is $2.14 and the Smith Adjusted Exercise Price is $2.38, which is also the agreed upon floor for the Smith Warrants. 10. Leases
The Company early adopted ASU 2017-11leases office space and changed its method of accounting forequipment, and certain warrants that were initially recorded as liabilities duringoffice space is subleased. Management determines if a contract is a lease at the nine months ended September 30, 2017 on a full retrospective basis. Since the warrants were issued in conjunction with the Related – party notes payable and Notes payable (the “Notes Payable”) issuance, the Company also revalued the amount of debt discount related to the valuationinception of the warrants, which impactedarrangement and reviews all options to extend, terminate, or purchase its right-of-use assets at the net carrying value of Notes Payable. Accordingly, the Company reclassified the Warrant liability to Additional paid in capital of $1.8 million and $1.2 million and the change in valuationinception of the amountlease and accounts for these options when they are reasonably certain of debt discount from the Notes payable to Additional paid-in capitalbeing exercised.
Leases with an initial term of $0.7 million and $0.7 milliongreater than twelve months are recorded on the consolidated balance sheets forsheet. Lease expense is recognized on a straight-line basis over the three months ended September 30, 2016 and the year ended December 31, 2016, respectively. In addition, due to the retrospective adoption, for the year ended December 31, 2016, the Company credited the Change in fair value of warrant liability on its consolidated statements of operations by $0.9 million with the same offset to Accumulated deficit on the consolidated balance sheets. The following table provides a reconciliation of Warrant liability, Additional paid-in capital, Accumulated deficit and Change in fair value of warrant liability on the consolidated balance sheets for the three months ended September 30, 2016 and the year ended December 31, 2016 (in thousands):
|
| Consolidated Balance Sheet |
| |||||||||||||||||
|
| Related-party notes payable |
|
| Notes payable |
|
| Warrant liability |
|
| Additional paid-in capital |
|
| Accumulated deficit |
| |||||
Balance, September 30, 2016 (Prior to adoption of ASU 2017-11) |
| $ | 883 |
|
| $ | 883 |
|
| $ | 1,761 |
|
| $ | 227,565 |
|
| $ | (222,185 | ) |
Change in valuation of notes payable |
|
| 359 |
|
|
| 359 |
|
|
| — |
|
|
| (718 | ) |
|
| — |
|
Reclassification of warrant liability |
|
| — |
|
|
| — |
|
|
| (1,761 | ) |
|
| 1,761 |
|
|
| — |
|
Change in fair value of warrant liability |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 335 |
|
|
| (335 | ) |
Change in interest (expense) income, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (17 | ) |
|
| 17 |
|
Balance, September 30, 2016 (After adoption of ASU 2017-11) |
| $ | 1,242 |
|
| $ | 1,242 |
|
| $ | — |
|
| $ | 228,926 |
|
| $ | (222,503 | ) |
| Consolidated Balance Sheet |
| ||||||||||||||||||
|
| Related-party notes payable |
|
| Notes payable |
|
| Warrant liability |
|
| Additional paid-in capital |
|
| Accumulated deficit |
| |||||
Balance, December 31, 2016 (Prior to adoption of ASU 2017-11) |
| $ | 967 |
|
| $ | 967 |
|
| $ | 1,210 |
|
| $ | 227,889 |
|
| $ | (225,397 | ) |
Change in valuation of notes payable |
|
| 328 |
|
|
| 328 |
|
|
| — |
|
|
| (656 | ) |
|
| — |
|
Reclassification of warrant liability |
|
| — |
|
|
| — |
|
|
| (1,210 | ) |
|
| 1,210 |
|
|
| — |
|
Change in fair value of warrant liability |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 910 |
|
|
| (910 | ) |
Change in interest (expense) income, net |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (79 | ) |
|
| 79 |
|
Balance, December 31, 2016 (After adoption of ASU 2017-11) |
| $ | 1,295 |
|
| $ | 1,295 |
|
| $ | — |
|
| $ | 229,274 |
|
| $ | (226,228 | ) |
The adoption of ASU 2017-11 increased the Loss before provision for income taxes and Net loss by $0.3 million for the three months and nine months ended September 30, 2016, and increased the Net loss per share by $0.03 and $0.02 for the same periods, respectively. During the nine months ended September 30, 2017, there was no impact on the Loss before provision for income taxes, Net loss and Net loss per share due to the adoption of ASU 2017-11. lease term.
The Company’s consolidated statementlease contracts generally do not provide a readily determinable implicit rate. For these contracts, the estimated incremental borrowing rate is based on information available at the inception of cash flows for the nine months ended September 30, 2016 was also impacted bylease.
Operating lease cost consists of the adoptionfollowing (in thousands):
|
| For the Three Months Ended March 31, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
|
| (unaudited) |
| |||||
Lease cost |
| $ | 527 |
|
| $ | 397 |
|
Sublease income |
|
| (151 | ) |
|
| (151 | ) |
Total lease cost |
| $ | 376 |
|
| $ | 246 |
|
The maturity of ASU 2017-11, including the increaseoperating lease liabilities is presented in the Net loss by $0.3 million,following table (in thousands):
|
| As of March 31, 2020 |
| |
|
| (unaudited) |
| |
2020 |
| $ | 1,270 |
|
2021 |
|
| 1,669 |
|
2022 |
|
| 1,413 |
|
2023 |
|
| 1,425 |
|
2024 |
|
| 1,182 |
|
Thereafter |
|
| 1,158 |
|
Total lease payments |
|
| 8,117 |
|
Less imputed interest |
|
| (1,296 | ) |
Present value of lease liabilities |
| $ | 6,821 |
|
Additional information relating to the reduction of Amortization of debt discounts by a nominal amount and the elimination of the previously reported Change in fair value of warrant liabilities of $0.3 million.Company’s operating leases follows:
As of March 31, 2020 | ||||
(unaudited) | ||||
Weighted average remaining lease term (years) | 5.22 | |||
Weighted average discount rate | 6.89 | % |
20.11. Income Taxes
We account for income taxes as required by FASB ASC Topic No. 740, Income Taxes. This Topic clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Topic requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. In addition, the Topic permits an entity to recognize interest and penalties related to tax uncertainties as either income tax expense or operating expenses. The Company has chosen to recognize interest and penalties related to tax uncertainties as income tax expense.
The Company assesses whether a valuation allowance should be recorded against its deferred tax assets based on the consideration of all available evidence, using a “more likely than not” realization standard. The four sources of taxable income that must be considered in determining whether deferred tax assets will be realized are: (1) future reversals of existing taxable temporary differences (i.e., offset of gross deferred tax liabilities against gross deferred tax assets); (2) taxable income in prior carryback years, if carryback is permitted under the applicable tax law; (3) tax planning strategies; and (4) future taxable income exclusive of reversing temporary differences and carryforwards.
In assessing whether a valuation allowance is required, significant weight is to be given to evidence that can be objectively verified. A significant factor in the Company’s assessment is that the Company has beenwas in a five-year historical cumulative loss as of the end of fiscal year 2016.2018. These facts, combined with uncertain near-term market and economic conditions, reduced the Company’s ability to rely on projections of future taxable income in assessing the realizability of its deferred tax assets.
After a review of the four sources of taxable income as of December 31, 2016 (as described above),2019, and after consideration of the Company’s continuing cumulative loss position as of December 31, 2016,2019, the Company will continue to reserve its US-basedU.S.-based deferred tax amounts, which total $76.3$50.4 million as of September 30, 2017.March 31, 2020.
The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Currently there are no audits in process or pending from Federal incomeor state tax returns of the Company are subject to IRS examination for the 2012 – 2016 tax years.authorities. State income tax returns are subject to examination for a period of three to four years after filing. As of December 31, 2019, the company had no outstanding tax audits. The outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our consolidated financial results. It is the Company’s policy to classify any interest and/or penalties in the consolidated financial statements as a component of income tax expense.
21.On March 27, 2020, President Trump signed into U.S. federal law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which is aimed at providing emergency assistance and health care for individuals, families and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years beginning before 2021, net operating loss carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in 2018, 2019 and 2020 taxable years may be carried back to each of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility is increased from 30% to 50% of EBITDA. We are analyzing the different aspects of the CARES Act to determine whether any specific provisions may impact us.
12. Subsequent Events
The Company evaluates and discloses subsequent events as required by FASB ASC Topic No. 855, Subsequent Events. The Topic establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or are available to be issued.
Subsequent events have been evaluated as of the date of this filing and no further disclosures wereare required.
Common Stock Warrant Exercises
During April 2020, certain holders of common stock warrants exercised the warrants for approximately 1.0 million common shares, resulting in cash proceeds of approximately $2.3 million.
COVID-19
In March 2020, the World Health Organization categorized coronavirus disease 2019 (COVID-19) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects are currently unknown. While the response to the COVID-19 outbreak continues to rapidly evolve, it has led to stay-at-home orders and social distancing guidelines that have seriously disrupted activities in large segments of the economy.
In April 2020, we saw a reduction in the number of SafePath platform subscribers compared to March 2020, which we believe was driven by the COVID-19 related economic slowdown. The Company considers the outbreak of COVID-19 as a non-recognized subsequent event in accordance with accounting standards codification Topic 855, Subsequent Events, requiring disclosure in these unaudited condensed consolidated financial Statements. The Company’s consolidated financial statements presented herein reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented.
As the impact of the COVID-19 pandemic on the economy and the Company’s operations evolves, we will continue to monitor the impact on the Company’s operations and, if needed, postpone non-essential capital expenditures, reduce operating costs, and substantially reduce discretionary spending.
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
In this document, the terms “Smith Micro,” “Company,” “we,” “us,” and “our” refer to Smith Micro Software, Inc. and, where appropriate, its subsidiaries.
This reportQuarterly Report on Form 10-Q (“Report”) contains forward-looking statements regarding Smith Micro which include, but are not limited to, statements concerning our ability to remain a going concern, our ability to raise more funds, customer concentration, projected revenues, expenses, gross profit and income, the competitive factors affecting our business, market acceptance of products, the success and timing of new product introductions, the competitive factors affecting our business, our ability to raise additional capital, gross profit and income, our ability to remain a going concern, our expenses, and the protection of our intellectual property. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “estimates,” “should,” “may,” “will,” and variations of these words or similar expressions are intended to identify forward-looking statements. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed or implied in any forward-looking statements as a result of various factors. Such factors include, but are not limited to, the following:
we may not be able to remain a going concern;
we may not be able to raise additional capital to fund our operations and such capital may not be available to us at commercially reasonable terms or at all;
our customer concentration given that the majority of our sales currently depend on a few large client relationships, including Sprint;Sprint (which recently completed a merger with T-Mobile);
we may not be able to becomethe impact of the COVID-19 pandemic on our business and remain profitable;financial results;
our quarterly revenuesability to establish and operating results are difficult to predictmaintain strategic relationships with our customers and could fall below analyst or investor expectations, which could cause the price of our common stock to fall;mobile device manufacturers;
intense competition in our industry and the core vertical markets in which we operate, and our ability to successfully compete;
rapid technological evolution and resulting changes in demand for our products from our key customers and their end users;
the intensity of the competition and our ability to successfully compete;
the pace at which the market for new products develop;
our ability to hire and retain key personnel;
the availability of third party intellectual property and licenses which may not be on commercially reasonable terms, or not at all;
our ability to establish and maintain strategic relationships with our customers;
our ability to assimilate acquisitions without diverting management attention and impacting current operations;
our ability to protect our intellectual property and our ability to not infringe on the rightspossibility of others;
security and privacy breaches in our systems may damagedamaging client relations and inhibitinhibiting our ability to grow;
interruptions or delays in the services we provide from our data center hosting facilities that could harm our business;
our ability to raise additional capital and the risk of such capital not being available to us at commercially reasonable terms or at all;
our ability to become and remain profitable;
the impact of evolving information security and data privacy laws on our business and industry;
the impact of U.S. regulations on our business and industry;
our ability to protect our intellectual property and our ability to operate our business without infringing on the rights of others;
our ability to remain a going concern;
the risks inherent with international operations;
the risk of being delisted from NASDAQ if we fail to meet any of theits applicable listing requirements.requirements;
the existence of undetected software defects in our products;
the availability of third-party intellectual property and licenses needed for our operations on commercially reasonable terms, or at all;
changes in our operating income or loss due to shifts in our sales mix and variability in our operating expenses;
the difficulty of predicting our quarterly revenues and operating results and the chance of such revenues and results falling below analyst or investor expectations, which could cause the price of our common stock to fall; and
potential tax liabilities and other factors that may impact our effective tax rates.
The forward-looking statements contained in this reportReport are made on the basis of the views and assumptions of management regarding future events and business performance as of the date this reportReport is filed with the Securities and Exchange Commission (the “SEC”). In addition, we operate in a highly competitive and rapidly changing environment; therefore, new risk factors can arise, and it is not possible for management to predict all such risk factors, nor to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statement. We do not undertake any obligation to update these statements to reflect events or circumstances occurring after the date this reportReport is filed.
Overview
Smith Micro develops software to simplify and enhance the mobile experience, providing solutions to some of the leading wireless and cable service providers device manufacturers, and enterprise businesses around the world. From optimizing wireless networksenabling the family digital lifestyle to uncovering customer experience insights, and from streamlining Wi-Fi accessproviding powerful voice messaging capabilities, we strive to ensuring family safety, our solutions enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones.smartphones and consumer IoT devices. Our portfolio also includes a wide range of products for creating, sharing and monetizing rich content, such as visual voice messaging, video streaming,retail content display optimization and 2D/3D graphics applications. With thisperformance analytics on any product set.
We continue to innovate and evolve our business to respond to industry trends and maximize opportunities in emerging markets, such as a focus, it is Smith Micro’s mission to help our customers thrive in a connected world.
Over the past three decades, Smith Micro has developed deep expertise in embedded software for mobile devices, policy-based management platforms,digital lifestyle services and highly scalable client and server applications. Tier 1 mobile network operators, cable providers, OEMs/device manufacturers, and enterprise businesses across a wide range of industries use our software to capitalize on the growth of connected consumersonline safety, “Big Data” analytics, automotive telematics, and the Internet of Things (“IoT”).consumer IoT marketplace. The key to our longevity, however, is not simply technological innovation, but our never-ending focus on understanding our customers’ needs and delivering value.
A summaryRevenues generated from our sales to Sprint and their respective affiliates in the Wireless business segment accounted for 88% and 77% of the Company’s customers that represent 10% or more oftotal revenues for the Company’s net revenues is as follows:
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Wireless: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sprint (& affiliates) |
|
| 58.8 | % |
|
| 64.5 | % |
|
| 60.0 | % |
|
| 64.7 | % |
Graphics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FastSpring |
|
| 12.6 | % |
|
| 13.7 | % |
|
| 14.1 | % |
|
| 12.8 | % |
The two customers listed abovethree months ended March 31, 2020 and 2019, respectively. This customer comprised 68%84% and 81%77% of our accounts receivable as of September 30, 2017March 31, 2020 and 2016,2019, respectively.
Results of Operations
The table below sets forth certain statements of operations and comprehensive loss data expressed as a percentage of revenues for the three and nine months ended September 30, 2017March 31, 2020 and 2016.2019. Our historical results are not necessarily indicative of the operating results that may be expected in the future.
|
| For the Three Months Ended September 30, |
|
|
| For the Nine Months Ended September 30, |
| For the Three Months Ended March 31, |
|
| ||||||||||||||||||||
|
| 2017 |
|
|
| 2016 |
|
|
| 2017 |
|
|
| 2016 |
|
|
| 2020 |
|
|
| 2019 |
|
| ||||||
Revenues |
|
| 100.0 |
| % |
|
| 100.0 |
| % |
|
| 100.0 |
| % |
|
| 100.0 |
| % |
|
| 100.0 |
| % |
|
| 100.0 |
| % |
Cost of revenues |
|
| 20.0 |
|
|
|
| 27.8 |
|
|
|
| 21.6 |
|
|
|
| 27.5 |
|
|
|
| 8.8 |
|
|
|
| 10.9 |
|
|
Gross profit |
|
| 80.0 |
|
|
|
| 72.2 |
|
|
|
| 78.4 |
|
|
|
| 72.5 |
|
|
|
| 91.2 |
|
|
|
| 89.1 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
| 24.3 |
|
|
|
| 39.2 |
|
|
|
| 27.1 |
|
|
|
| 34.9 |
|
|
|
| 20.9 |
|
|
|
| 23.3 |
|
|
Research and development |
|
| 36.2 |
|
|
|
| 64.4 |
|
|
|
| 39.3 |
|
|
|
| 57.7 |
|
|
|
| 28.0 |
|
|
|
| 31.8 |
|
|
General and administrative |
|
| 38.2 |
|
|
|
| 38.9 |
|
|
|
| 38.5 |
|
|
|
| 37.3 |
|
|
|
| 27.5 |
|
|
|
| 32.0 |
|
|
Restructuring expense |
|
| (2.5 | ) |
|
|
| — |
|
|
|
| 3.3 |
|
|
|
| — |
|
|
|
| — |
|
|
|
| 1.2 |
|
|
Total operating expenses |
|
| 96.2 |
|
|
|
| 142.5 |
|
|
|
| 108.2 |
|
|
|
| 129.9 |
|
|
|
| 76.4 |
|
|
|
| 88.3 |
|
|
Operating loss |
|
| (16.2 | ) |
|
|
| (70.3 | ) |
|
|
| (29.8 | ) |
|
|
| (57.4 | ) |
| ||||||||||
Change in carrying value of contingent liability |
|
| — |
|
|
|
| 0.2 |
|
|
|
| — |
|
|
|
| 3.2 |
|
| ||||||||||
Loss on related party debt extinguishment |
|
| (7.0 | ) |
|
|
| — |
|
|
|
| (2.3 | ) |
|
|
| — |
|
| ||||||||||
Interest income (expense), net |
|
| (5.4 | ) |
|
|
| (1.0 | ) |
|
|
| (5.4 | ) |
|
|
| (0.4 | ) |
| ||||||||||
Operating income |
|
| 14.8 |
|
|
|
| 0.8 |
|
| ||||||||||||||||||||
Interest income, net |
|
| 0.6 |
|
|
|
| — |
|
| ||||||||||||||||||||
Other expense |
|
| (0.1 | ) |
|
|
| (0.2 | ) |
|
|
| (0.1 | ) |
|
|
| (0.1 | ) |
|
|
| — |
|
|
|
| (0.1 | ) |
|
Loss before provision for income taxes |
|
| (28.7 | ) |
|
|
| (71.3 | ) |
|
|
| (37.6 | ) |
|
|
| (54.7 | ) |
| ||||||||||
Income before provision for income taxes |
|
| 15.4 |
|
|
|
| 0.7 |
|
| ||||||||||||||||||||
Provision for income tax expense |
|
| 0.1 |
|
|
|
| 0.2 |
|
|
|
| 0.1 |
|
|
|
| 0.2 |
|
|
|
| — |
|
|
|
| 0.0 |
|
|
Net loss |
|
| (28.8 | ) | % |
|
| (71.5 | ) | % |
|
| (37.7 | ) | % |
|
| (54.9 | ) | % | ||||||||||
Net income |
|
| 15.4 |
| % |
|
| 0.7 |
| % |
Revenues and Expense Components
The following is a description of the primary components of our revenues and expenses:
Revenues. Revenues are net of sales returns and allowances. Our operations are organized into two business segments:
Wireless, which includes our NetWise®, CommSuite®, SafePath®, and QuickLink®, family of products; and,
Graphics, which includes our consumer-based products: Poser®, Moho® ClipStudio®, MotionArtist®, and StuffIt®.
The following table shows the revenues generated by each business segment (in thousands):
|
| For the Three Months Ended September 30, |
|
| For the Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Wireless |
| $ | 4,690 |
|
| $ | 5,237 |
|
| $ | 13,678 |
|
| $ | 17,513 |
|
Graphics |
|
| 1,114 |
|
|
| 1,241 |
|
|
| 3,564 |
|
|
| 3,638 |
|
Total revenues |
|
| 5,804 |
|
|
| 6,478 |
|
|
| 17,242 |
|
|
| 21,151 |
|
Cost of revenues |
|
| 1,159 |
|
|
| 1,798 |
|
|
| 3,727 |
|
|
| 5,824 |
|
Gross profit |
| $ | 4,645 |
|
| $ | 4,680 |
|
| $ | 13,515 |
|
| $ | 15,327 |
|
Cost of revenues. Cost of revenues consists of direct product and assembly, maintenance, data center, royalties, and technical support expenses.
Selling and marketing. Selling and marketing expenses consist primarily of personnel costs, advertising costs, sales commissions, trade show expenses, and the amortization of certain intangible assets. These expenses vary significantly from quarter to quarter based on the timing of trade shows and product introductions.
Research and development. Research and development expenses consist primarily of personnel and equipment costs required to conduct our software development efforts. It also includes the amortization of certain intangible assets.
General and administrative. General and administrative expenses consist primarily of personnel costs, professional services and fees paid for external service providers, space and occupancy costs, and legal and other public company costs.
Restructuring expense. Restructuring expenses consist primarily of one-time employee termination benefits, lease and other contract terminations, costs to consolidate facilities, and other related costs.
Change in fair value of contingent liability. The change in the fair value of the Pennsylvania grant liability.
Loss on related-party debt extinguishment. The loss recognized on related-party debt extinguished in the conversion to Series B Preferred Stock.
Interest income (expense), net. Interest income (expense), net is primarily related to interest on our debt, and the credit-adjusted risk-free interest rate used to measure our operating lease termination liabilities in restructuring.
Other expense. Other expense is primarily related to foreign exchange losses.
Provision for income tax expense. The Company accounts for income taxes as required by FASB ASC Topic No. 740, Income Taxes. This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets and liabilities result in a deferred tax asset, we are required to evaluate the probability of being able to realize the future benefits indicated by such asset. The deferred tax assets are reduced by a valuation allowance if, based upon all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Establishing, reducing, or increasing a valuation allowance in an accounting period generally results in an increase or decrease in tax expense in the statement of operations. We must make significant judgments to determine the provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits, and any valuation allowance to be recorded against deferred tax assets. The current provision for income tax expense consists of state income tax minimums, foreign tax withholdings, and foreign income taxes
Three Months Ended September 30, 2017March 31, 2020 Compared to the Three Months Ended September 30, 2016March 31, 2019
Revenues. Revenues were $5.8$13.3 million and $6.5$8.4 million for the three months ended September 30, 2017March 31, 2020 and 2016,2019, respectively, representing a decreasean increase of $0.7$4.9 million, or 10%58%. Wireless revenue of $4.7$13.2 million decreased $0.5increased $5.0 million, or 10%62%, primarily due to decreasedincreased subscribers and resulting revenues from Sprint, our largest customer.customer, Sprint, associated with growth in the SafePath product. This increase included revenue of $0.6 million related to the newly acquired Circle operator business. Graphics revenue decreased by $0.1$0.2 million, or 10%28% over last year. We continueyear, primarily due to investlower demand as a result of reduced strategic focus and marketing efforts in new products purchased through the 2016 acquisitions and pursue related opportunities. segment.
Cost of revenues. Cost of revenues were $1.2 million and $1.8$0.9 million for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, representing a decrease of $0.6 million, or 36%. This decrease was primarily due to lower sales and cost reductions.2019, respectively.
Gross profit. Gross profit was $4.6$12.1 million, or 80%91% of revenues, for the three months ended September 30, 2017, essentially flat from the $4.7March 31, 2020, compared to $7.5 million, or 72%89% of revenues, for the three months ended September 30, 2016. Lower revenues were offset by cost reductions.March 31, 2019. This increase was due primarily to lower variable costs in conjunction with the revenue mix during the quarter.
Selling and marketing. Selling and marketing expenses were $1.4$2.8 million and $2.5$2.0 million for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, representing a decrease of $1.1 million, or 44%.2019, respectively. This decreaseincrease was primarily due to additional headcount related expenses, an increase in marketing event participation, and other cost reductions due to our recent restructurings.increased intangibles amortization. The amortization of intangiblesintangible assets in selling and marketing expense was $0.1 million$267 thousand and $91 thousand for the three months ended September 30, 2017. Stock-based compensation was essentially zeroMarch 31, 2020 and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, representing a decrease of $0.1 million.2019, respectively.
Research and development. Research and development expenses were $2.1$3.7 million and $4.2$2.7 million for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, representing a decrease of $2.1 million, or 50%.2019, respectively. This decreaseincrease was primarily due to additional headcount related expenses for SafePath development, as well as increased intangibles amortization. The amortization of intangible assets in research and other cost reductions due to our recent restructurings. Stock-based compensationdevelopment expense was essentially zero$248 thousand and $0.1 million$105 thousand for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, representing a decrease of $0.1 million.2019, respectively.
General and administrative. General and administrative expenses were $2.2$3.7 million and $2.5$2.7 million for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, representing a decrease of $0.3 million, or 12%. The decrease2019, respectively. This increase was primarily due to lower operating costs due to cost reduction initiatives. Stock-based compensation was $0.1$0.9 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, representing a decrease of $0.1 million.
Restructuring expense. Restructuring income was $0.1 millionacquisition expenses incurred in 2020 and $0 for the three months ended September 30, 2017 and 2016, respectively. The 2017 income was primarily due to an increase in sublease income due to the signing of a new sublease extension.
Change in carrying value of contingent liability. The change in the carrying value of contingent liability was minimal for both of the three months ended September 30, 2017 and 2016. This results from a change in the carrying value of our $1 million Pennsylvania grant received by setting up a new facility in that state.
Loss on related party debt extinguishment. The loss on related party debt extinguishment of $0.4 million in 2017 was due to the extinguishment of related party long-term debt exchanged for Series B Preferred Stock.
Interest (expense) income, net. Interest expense was $0.3 million for the three months ended September 30, 2017, which consisted of interest on notes payable of $0.2 million and amortization of the debt discount and issuance costs was $0.1 million. Interest expense on notes payable was $0.1 million for the three months ended September 30, 2016.
Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016
Revenues. Revenues were $17.2 million and $21.2 million for the nine months ended September 30, 2017 and 2016, respectively, representing a decrease of $3.9 million, or 19%. Wireless revenues decreased $3.8 million, or 22%, primarily due to decreased activity from Sprint, our largest customer. Graphics revenues were decreased $0.1 million or 2%. We continue to invest in new products purchased through the 2016 acquisitions and pursue related opportunities.
Cost of revenues. Cost of revenues was $3.7 million and $5.8 million for the nine months ended September 30, 2017 and 2016, respectively, representing a decrease of $2.1 million, or 36%. This decrease was primarily due to lower sales and cost reductions.
Gross profit. Gross profit was $13.5 million, or 78% of revenues for the nine months ended September 30, 2017, a decrease of $1.8 million, or 12%, from $15.3 million, or 72% of revenues for the nine months ended September 30, 2016. The percentage point increase was primarily due to lower cost from recent restructurings.
Selling and marketing. Selling and marketing expenses were $4.7 million and $7.4 million for the nine months ended September 30, 2017 and 2016, respectively, representing a decrease of $2.7 million, or 37%. This decrease was primarily due to headcount reductions due to our recent restructurings. Stock-based compensation was zero and $0.2 million for the nine months ended September 30, 2017 and 2016, respectively.
Research and development. Research and development expenses were $6.8 million and $12.2 million for the nine months ended September 30, 2017 and 2016, respectively, representing a decrease of $5.4 million, or 45%. This decrease was primarily due to headcount reductions and a reduction of consulting service costs. Stock-based compensation decreased from $0.4 million to $0.2 million, or $0.2 million for the nine months ended September 30, 2017 and 2016, respectively.
General and administrative. General and administrative expenses were $6.6 million and $7.9 million for the nine months ended September 30, 2017 and 2016, respectively, representing a decrease of $1.2 million, or 16%. This decrease was primarily due to lower travel related costs, professional service fees and cost reduction initiatives. Stock-based compensation was $0.5 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively.non-cash stock compensation.
Restructuring expense. Restructuring expense was $0.6 million$6 thousand and $0$104 thousand for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively. The 2017 expense wasRestructuring charges in both periods related primarily due to one-time employee terminations and the acceleration of stock awards vesting.
Change in carrying value of contingent liability. This consists of the amount earned from our $1 million Pennsylvania grant received by setting up a new facility in that state.
Loss on related party debt extinguishment. The loss on related party debt extinguishment of $0.4 million in 2017 was due to the extinguishment of related party long-term debt exchanged for Series B Preferred Stock.termination costs.
Interest income (expense) income,, net. Interest expense was $0.9 millionincome of $86 thousand for the ninethree months ended September 30, 2017, which consisted ofMarch 31, 2020 related primarily to interest earned on notes payable of $0.4 million and amortization of the debt discount and issuance costs was $0.5 million. Interest expense on notes payable was $0.1 million for the nine months ended September 30, 2016.cash equivalents.
Liquidity and Capital Resources
Going Concern Evaluation
In connection with preparing consolidated financial statements for the three months ended September 30, 2017, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.
The Company considered the following:
Operating losses for ten consecutive quarters.
Negative cash flow from operating activities for six consecutive quarters.
Depressed stock price resulting in being non-compliant with NASDAQ listing rules to maintain a stock price of $1.00/share.
Stockholders’ equity being less than $2.5 million atAt March 31, 2017 and June 30, 2017 resulting in being non-compliant with NASDAQ listing rules.
Ordinarily, conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern relate to the entity’s ability to meet its obligations as they become due.
The Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial statements are issued by considering the following:
The Company raised $4 million of debt financing during the year ended December 31, 2016.
The Company has been able to raise funds from short-term loans from insiders.
As a result of the Company’s restructurings that were implemented during the three months ended December 31, 2016, and again during the six months ended June 30, 2017, the Company’s cost structure is now in line with its future revenue projections. See Footnote 11 for additional details regarding restructurings.
On September 29, 2017, the Company closed on $5.5 million preferred stock transactions, which extinguished $2.8 million of long term and short-term debt (face value) and raised $2.7 million of new capital.
Management believes that the Company will generate enough cash from operations to satisfy its obligations for the next twelve months.
The Company will take the following actions, if it starts to trend unfavorable to its internal profitability and cash flow projections, in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:
Raise additional funds through short-term loans.
Implement additional restructuring and cost reductions.
Raise additional capital through a private placement.
Secure a commercial bank line of credit.
Dispose of one or more product lines.
Sell or license intellectual property.
NASDAQ Notice for Failure to Satisfy Continued Listing Rules
Our common stock is currently listed on the NASDAQ Capital Market. In order to maintain that listing, we must satisfy minimum financial and other requirements. On May 8, 2017, we received a written notification from The Nasdaq Stock Market LLC notifying us that we failed to comply with Nasdaq’s Marketplace Rule 5550(b)(1) (the “Rule”) because the Company’s stockholders’ equity as of March 31, 2017 fell below the required minimum of $2.5 million and as of May 8, 2017 the Company did not meet the alternatives of market value of listed securities or net income from continuing operations for continued listing.
On September 29, 2017, the Company entered into a Securities Purchase Agreement with several investors for the issuance and sale (the “Offering”) of 5,500 shares of the Company’s newly designated Series B 10% Convertible Preferred Stock (the “Series B Preferred Stock”) at $1,000 per share, for a total purchase price of $5.5 million. In the Offering, the Company raised gross cash proceeds of $2.7 million and exchanged outstanding indebtedness with a principal amount of $2.8 million. The Offering raised net cash proceeds of $2.4 million (after deducting the placement agent fee and expenses of the Offering) and resulted in an increase in the Company’s stockholders’ equity of approximately $5.1 million.
With the completion of the Offering on September 29, 2017, the Company has regained compliance with the Rule and its stockholders’ equity balance is now greater than $2.5 million as of the quarter ended September 30, 2017 and as of the date of this report.
NASDAQ will continue to monitor the Company’s ongoing compliance with the stockholders’ equity requirement and, if at the time of the Company’s next periodic report the Company does not evidence compliance, it may be subject to delisting from NASDAQ.
At September 30, 2017,2020, we had $3.9$19.5 million in cash and cash equivalents and $2.8$22.9 million of working capital.
Operating activities
Net cash used inprovided by operating activities was $5.7$2.3 million for the ninethree months ended September 30, 2017.March 31, 2020. The primary sources of operating cash were income from operations of $2.0 million, an add-back of non-cash expenses totaling $1.5 million, a decrease in prepaid expenses and other assets of $0.2 million, and an increase in deferred revenue of $0.3 million. The primary uses of operating cash were to fund our net lossan increase in accounts receivable of $6.5 million, adding back non-cash net expenses of $2.4$1.0 million and decreasesa decrease in accounts payable and accrued expenses of $1.6 million. This usage was offset by increases in deferred revenue of $0.3 million and accounts receivable of $0.3$0.8 million.
Net cash used in operating activities was $8.0$0.7 million for the ninethree months ended September 30, 2016.March 31, 2019. The primary uses of operating cash were to fund our net lossan increase in accounts receivable of $11.6$1.8 million, adding back non-cash net expenses of $1.7 million, decreasesa decrease in accounts payable and accrued expenses of $0.8$0.1 million, and a decrease in deferred revenue of $0.3 million, and increases in prepaid and other assets for $0.2$0.1 million. This usage was partially offset by a decrease in prepaid expenses and other assets of accounts receivable of $3.1$0.2 million, and income tax refundsan add-back of $0.1non-cash expenses totaling $1.1 million.
Investing activities
Net cash used in investing activities was $68,000$13.1 million for the ninethree months ended September 30, 2017March 31, 2020, relating primarily to a $12.2 million net cash payment for the Circle operator business acquisition and $0.8 million of capital expenditures.
Net cash used in investing activities was $1.3$4.1 million for the ninethree months ended September 30, 2016 usedMarch 31, 2019, relating to acquire the shares of Birdstep Technology AB for $1.9a $4.0 million net cash iMobileMagic for $0.6 million, and capital expenditures of $0.3 million offset by sale of sale of short-term investments of $4.1 million.
Net cash received from financing activities was $7.5 millionpayment for the nine months ended September 30, 2017. We received $2.1Smart Retail acquisition and $0.1 million from the sale of our common stock in a private placement, $3.0 million from short-term loans from related-parties and $2.4 million from the sale of our Series B Preferred Stock.capital expenditures.
Financing activities
Net cash provided by financing activities was approximately $3.8$2.1 million for the ninethree months ended September 30, 2016,March 31, 2020, due primarily to $2.0 million from the net proceeds from the issuanceexercise of senior subordinated promissory notes.common stock warrants.
Net cash used in financing activities was $43 thousand for the three months ended March 31, 2019, of which $34 thousand related to a payment of dividends on preferred stock.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual obligations and commercial commitments
The following table summarizes our contractual obligations and other commitments as of September 30, 2017 (in thousands):
|
| Payments due by period |
| |||||||||||||||||
|
|
|
|
|
| 1 year |
|
|
|
|
|
|
|
|
|
| More than |
| ||
Contractual obligations: |
| Total |
|
| or less |
|
| 1-3 years |
|
| 3-5 years |
|
| 5 years |
| |||||
Operating lease obligations |
| $ | 8,543 |
|
| $ | 2,422 |
|
| $ | 3,929 |
|
| $ | 2,192 |
|
| $ | — |
|
Notes payable |
|
| 4,200 |
|
|
| 2,200 |
|
|
| 2,000 |
|
|
| — |
|
|
| — |
|
Purchase obligations |
|
| 368 |
|
|
| 368 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Pennsylvania state grant note |
|
| 292 |
|
|
| 69 |
|
|
| 206 |
|
|
| 17 |
|
|
| — |
|
Total |
| $ | 13,403 |
|
| $ | 5,059 |
|
| $ | 6,135 |
|
| $ | 2,209 |
|
| $ | — |
|
During our normal course of business, we have made certain indemnities, commitments, and guarantees under which we may be required to make payments in relation to certain transactions. These include: intellectual property indemnities to our customers and licensees in connection with the use, sale and/or license of our products; indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease; indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct; indemnities involving the accuracy of representations and warranties in certain contracts; and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. We may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain customer contracts. The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments, and guarantees may not provide for any limitation of the maximum potential for future payments we could be obligated to make. We have not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets.There were no material changes in our contractual obligations and other commercial commitments that would require an update to the disclosure provided in our 2019 Annual Report on Form 10-K, filed with the SEC on March 13, 2020 (“Annual Report”).
Recent Accounting Guidance
In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815) (“ASU 2017-11”), which changes the classification analysisSee Note 2 of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU 2014-11 also clarifies existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, ASU 2017-11 requires entities that present earnings per share (EPS) in accordance with ASC Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. ASU 2017-11 is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted, including adoption in an interim period. If an entity early adopts ASU 2017-11 in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period in either of the following ways: (1) Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustmentour Notes to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which ASU 2017-11 is effective or (2) Retrospectively to outstanding financial instruments with a down round featureConsolidated Financial Statements for each reporting period presented in accordance with the guidance oninformation regarding our recent accounting changes in paragraphs 250-10-45-5 through 45-10. The Company has elected to early adopt ASU 2017-11 during the three months ended September 30, 2017 by applying ASU 2017-11 retrospectively to outstanding financial
instruments with a round down feature for each prior reporting period presented which includes the quarter ended September 30, 2016 as well as a cumulative-effect adjustment to the Company’s beginning accumulated deficit as of January 1, 2017. (See Note 19).
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company will be evaluating the impact of this guidance on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments to this Update supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of this Topic is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This Topic defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company will be evaluating the impact of this guidance on our consolidated financial statements.guidance.
Critical Accounting Policies and Estimates
Our discussion and analysis of results of operations, financial condition, and liquidity are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may materially differ from these estimates under different assumptions or conditions. On an on-going basis, we review our estimates to ensure that they appropriately reflect changes in our business or new information as it becomes available.
We believe See Note 2 of our Notes to the followingConsolidated Financial Statements for information regarding our critical accounting policies affect our more significant estimates and assumptions used in the preparation of our consolidated financial statements:
Revenue Recognition
We currently report our net revenues under two operating groups: Wireless and Graphics. Within each of these groups, software revenue is recognized based on the customer and contract type. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectability is probable as required by FASB ASC Topic No. 985-605, Software-Revenue Recognition. We recognize revenues from sales of our software to our customers or end users as completed products are shipped and title passes or from royalties generated as authorized customers duplicate our software, if the other requirements are met. If the requirements are not met at the date of shipment, revenue is not recognized until these elements are known or resolved. For Wireless sales, returns from customers are limited to defective goods or goods shipped in error. Historically, customer returns have not exceeded the very nominal estimates and reserves. We also provide some technical support to our customers. Such costs have historically been insignificant.estimates.
We have a few multiple element agreements for which we have contracted to provide a perpetual license for use of proprietary software, to provide non-recurring engineering, and, in some cases, to provide software maintenance (post contract support). For these software and software-related multiple element arrangements, we must: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essential to the functionality of the delivered products and services; (3) determine the fair value of each undelivered element using vendor-specific objective evidence (“VSOE”); and, (4) allocate the total price among the various elements. VSOE of fair value is used to allocate a portion of the price to the undelivered elements and the residual method is used to allocate the remaining portion to the delivered elements. Absent VSOE, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements of the arrangement have been delivered. However, if the only undelivered element is post contract support, the entire arrangement fee is recognized ratably over the performance period. We determine VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In determining VSOE, we require that a
substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. We have established VSOE for our post contract support services and non-recurring engineering.
On occasion, we enter into fixed fee arrangements, i.e. for trials, in which customer payments are tied to the achievement of specific milestones. Revenue for these contracts is recognized based on customer acceptance of certain milestones as they are achieved. We also enter hosting arrangements that sometimes include up-front, non-refundable set-up fees. Revenue is recognized for these fees over the term of the agreement.
For Graphics sales, management reviews available retail channel information and makes a determination of a return provision for sales made to distributors and retailers based on current channel inventory levels and historical return patterns. Certain sales to distributors or retailers are made on a consignment basis. Revenue for consignment sales are not recognized until sell through to the final customer is established. Certain revenues are booked net of revenue sharing payments. Sales directly to end-users are recognized upon shipment. End-users have a thirty-day right of return, but such returns are reasonably estimable and have historically been immaterial. We also provide technical support to our customers. Such costs have historically been insignificant.
Accounts Receivable and Allowance for Doubtful Accounts
We sell our products worldwide. We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history, the customer’s current credit worthiness, and various other factors, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers. We estimate credit losses and maintain an allowance for doubtful accounts reserve based upon these estimates. While such credit losses have historically been within our estimated reserves, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. If not, this could have an adverse effect on our consolidated financial statements.
Impairment or Disposal of Long Lived Assets
Long-lived assets to be held are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether or not impairment to such value has occurred as required by FASB ASC Topic No. 360, Property, Plant, and Equipment. The Company determined there was no impairment as of September 30, 2017.
Goodwill
In accordance with FASB ASC Topic No. 350, Intangibles-Goodwill and Other, we review the recoverability of the carrying value of goodwill at least annually or whenever events or circumstances indicate a potential impairment. The Company’s annual impairment testing date is December 31. Recoverability of goodwill is determined by comparing the fair value of the Company’s reporting units to the carrying value of the underlying net assets in the reporting units. If the fair value of a reporting unit is determined to be less than the carrying value of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the fair value of its other assets and liabilities.
Intangible Assets and Amortization
Amortization expense related to other intangibles acquired in acquisitions is calculated on a straight-line basis over the useful lives.
Income Taxes
We account for income taxes as required by FASB ASC Topic No. 740, Income Taxes. This Topic clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Topic requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. In addition, the Topic permits an entity to recognize interest and penalties related to tax uncertainties as either income tax expense or operating expenses. The Company has chosen to recognize interest and penalties related to tax uncertainties as income tax expense.
Interest Rate Risk
Our financial instruments include cash and cash equivalents. At September 30, 2017, the carrying values of our financial instruments approximated fair values based on current market prices and rates.
Foreign Currency Risk
While a majority of our business is denominated in U.S. dollars, we do invoice in foreign currencies. For both the three and nine months ended September 30, 2017 and 2016, our revenues denominated in foreign currencies were de minimis. Fluctuations in the rate of exchange between the U.S. dollar and certain other currencies may affect our results of operations and period-to-period comparisons of our operating results. We do not currently engage in hedging or similar transactions to reduce these risks. The operational expenses of our foreign entities reduce the currency exposure we have because our foreign currency revenues are offset in part by expenses payable in foreign currencies. As such, we do not believe we have a material exposure to foreign currency rate fluctuations at this time.
Evaluation of disclosure controls and procedures
We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of September 30, 2017.March 31, 2020. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have determined that as of September 30, 2017,March 31, 2020, our disclosure controls and procedures were effective to ensure that the information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s responsibility for financial statements
Our management is responsible for the integrity and objectivity of all information presented in this report.Report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of AmericaU.S. GAAP and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s financial position and results of operations for the periods and as of the dates stated therein.
The Audit Committee of the Company’s Board of Directors, which is composed solely of independent directors, meets regularly with our independent registered public accounting firm, SingerLewak LLP, and representatives of management to review accounting, financial reporting, internal control, and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors have free access to the Audit Committee.
Changes in internal control over financial reporting
There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2017March 31, 2020 that have materially affected, or isare reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHEOTHER INFORMATION
The Company may become involved in various legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company’s consolidated results of operations, cash flows, or financial position, litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.
In addition to the other information included in this Report, you should carefully consider and evaluate all of the informationfactors discussed in this Quarterly Report and the risk factors set forthPart I, Item 1A. “Risk Factors” in our Annual Report, on Form 10-K forand the fiscal year ended December 31, 2016.factors identified at the beginning of Part I, Item 2 of this Report, under the heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which could materially affect our business, financial condition, cash flows, or results of operations. The risks described in the Annual Report are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently considers immaterial also may materially adversely affect its business, financial condition, and/or operating results. There have been no material changes to the risk factors described under Item 1A ofincluded in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which was filed2019, other than as described below.
We derive a significant portion of our revenues from sales to a concentrated number of clients, and a reduction in sales to any of them may adversely impact our revenues and operating results.
In our Wireless business segment, we sell primarily to large wireless carriers, cable operators, and OEMs, so there are a limited number of actual and potential customers for our products, resulting in significant customer concentration. For the year ended December 31, 2019, sales to Sprint and its affiliates comprised 84% of our total revenues.
Because of our relatively high customer concentration, a small number of significant customers possess a relative level of pricing and negotiating power over us, enabling them to achieve advantageous pricing and other contractual terms, including the ability to terminate their agreements with us with a limited amount of notice. Any material decrease in our sales to any of these customers would materially affect our revenue and profitability.
On April 1, 2020, Sprint Corporation and T-Mobile (US), Inc. (“T-Mobile”) completed their previously announced merger transaction, with the SECcombined company continuing to operate as T-Mobile. In the event that the combined company does not elect to continue using the solutions that we currently deliver, or that our sales to the combined company materially decrease as compared with our sales to Sprint pre-merger, our revenues and profitability would be materially and adversely affected. In addition and in connection with the Sprint/T-Mobile merger, the combined company has agreed to divest certain assets to DISH Network Corporation, including Sprint’s Boost Mobile pre-paid wireless services business (“Boost”). A portion of our solutions sales to Sprint includes sales to Boost. In the event that the divested business does not elect to continue using the solutions that we currently deliver to it, or that our sales to the divested business materially decrease as compared with our sales for Boost pre-divestiture, our revenues and profitability may be materially and adversely affected.
If there are delays in the distribution of our products or if customer negotiations for our new products cannot occur on a timely basis, we may not be able to generate revenues sufficient to meet the needs of the business in the foreseeable future or at all.
Our results of operations and financial condition may be adversely affected by public health epidemics, including the ongoing COVID-19 global health pandemic.
On March 10, 2017.11, 2020, the World Health Organization declared the global outbreak of COVID-19 to be a pandemic. The COVID-19 pandemic has significantly impacted economic activity and markets around the world. The circumstances relating to the pandemic are complex and evolving, with a broad number of governmental and commercial efforts to contain the spread of the virus globally. We have implemented a number of measures in an effort to protect our employees’ health and well-being, including having office workers work remotely, suspending employee travel, and withdrawing from certain industry events. The duration and extent of the impact of the coronavirus pandemic on our business, operations and financial results depends on factors that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions, the impact on economic activity, including the possibility of recession or financial market instability, and the impact of these and other factors on our employees, customers, industry partners, and suppliers.
In the event of illnesses to key employees or a significant portion of our workforce resulting from COVID-19, we may experience inefficiencies, delays, and/or disruptions in research and development activities and increased costs resulting from our efforts to mitigate the impact of COVID-19, all of which may adversely affect our business, operations and financial results.
Additionally, government reaction to the pandemic and restrictions and limitations applied by the government as a result, continued widespread growth in infections, travel restrictions, quarantines, or other business and industry closures as a result of the pandemic could, among other things, impact the ability of our employees and contractors to perform their duties, cause increased technology and security risk due to extended and company-wide telecommuting, lead to disruptions with our suppliers, hamper our ability to integrate recent technology acquisitions and cause disruption in our relationship with our customers or prospective customers. Many of our customers and suppliers have temporarily modified their business operations as a result of the coronavirus pandemic and government reaction. Our customers may experience decreased demand for the value-added products and services that we provide to them and may seek to suspend or delay existing or new initiatives involving our products and services. A decrease in demand for our products and services or the suspension or delay of existing or new initiatives by our customers could materially adversely affect our business, financial condition, and results of operations.
To the extent the pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks set forth in Item 1A “Risk Factors” in our Annual Report and those additional risks set forth above.
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
On September 29, 2017, the Company entered into a Securities Purchase Agreement with several investors for the issuance and sale (the “Offering”) of 5,500 shares of the Company’s newly designated Series B 10% Convertible Preferred Stock (the “Series B Preferred Stock”) at $1,000 per share, for a total purchase price of $5.5 million. The Series B Preferred Stock is convertible into the Company’s Common Stock at a conversion price of $1.14 per share, which was the closing bid price of the Common Stock on September 28, 2017, or approximately 4,824,562 shares of Common Stock in the aggregate.
The Offering was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D of the Securities Act and in reliance on similar exemptions under applicable state laws. Each of the purchasers in the Offering represented that it is an accredited investor within the meaning of Rule 501(a) of Regulation D, and was acquiring the securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The securities were offered without any general solicitation by the Company or its representatives.
The table set forth below shows all repurchases of securities by us during the three months ended September 30, 2017:March 31, 2020:
ISSUER PURCHASES OF EQUITY SECURITIES | ISSUER PURCHASES OF EQUITY SECURITIES |
| ISSUER PURCHASES OF EQUITY SECURITIES |
| ||||||||||||||||||||||||||||||
Period |
| Total Number of Shares (or Units) Purchased |
|
|
| Average Price Paid per Share (or Unit) |
|
| Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
|
| Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
|
| Total Number of Shares (or Units) Purchased |
|
|
| Average Price Paid per Share (or Unit) |
|
| Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
|
| Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
| ||||||||
July 1 - 31, 2017 |
|
| — |
|
|
| $ | — |
|
|
| — |
|
|
| — |
| |||||||||||||||||
August 1 - 31, 2017 |
|
| — |
|
|
|
| — |
|
|
| — |
|
|
| — |
| |||||||||||||||||
September 1 - 30, 2017 |
|
| 15,065 |
| (a) |
| $ | 1.17 |
|
|
| — |
|
|
| — |
| |||||||||||||||||
January 1 - 31, 2020 |
|
| 14,812 |
|
|
| $ | 4.70 |
|
|
| — |
|
|
| — |
| |||||||||||||||||
February 1 - 29, 2020 |
|
| 14,377 |
|
|
|
| 6.41 |
|
|
| — |
|
|
| — |
| |||||||||||||||||
March 1 - 31, 2020 |
|
| 80,399 |
|
|
|
| 5.14 |
|
|
| — |
|
|
| — |
| |||||||||||||||||
Total |
|
| 15,065 |
|
|
| $ | 1.17 |
|
|
|
|
|
|
|
|
|
|
| 109,588 |
| (1) |
| $ | 5.25 |
|
|
|
|
|
|
|
|
|
The above table includes:
|
| Shares of stock repurchased by the Company as payment of withholding taxes in connection with the vesting of restricted stock awards |
Exhibit |
| Description | ||
|
|
| ||
|
| |||
|
|
| ||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
31.1 |
| |||
|
|
| ||
31.2 |
| |||
|
|
| ||
32.1 |
| Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of | ||
|
|
| ||
101.INS |
| XBRL Instance Document | ||
|
|
| ||
101.SCH |
| XBRL Taxonomy Extension Schema Document | ||
|
|
| ||
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document | ||
|
|
| ||
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document | ||
|
|
| ||
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document | ||
|
|
| ||
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned thereunto duly authorized.
| SMITH MICRO SOFTWARE, INC. | |
|
| |
| By /s/ | William W. Smith, Jr. |
| William W. Smith, Jr. | |
| Chairman of the Board, President and Chief Executive Officer | |
| (Principal Executive Officer) | |
|
| |
| By /s/ | Timothy C. Huffmyer |
| Timothy C. Huffmyer | |
| Vice President and Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
3221