0001564590-19-019395.txt : 20190515 0001564590-19-019395.hdr.sgml : 20190515 20190515160630 ACCESSION NUMBER: 0001564590-19-019395 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 61 CONFORMED PERIOD OF REPORT: 20190331 FILED AS OF DATE: 20190515 DATE AS OF CHANGE: 20190515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMITH MICRO SOFTWARE, INC. CENTRAL INDEX KEY: 0000948708 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 330029027 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35525 FILM NUMBER: 19828039 BUSINESS ADDRESS: STREET 1: 5800 CORPORATE DRIVE CITY: PITTSBURGH STATE: PA ZIP: 15237 BUSINESS PHONE: 4128375300 MAIL ADDRESS: STREET 1: 5800 CORPORATE DRIVE CITY: PITTSBURGH STATE: PA ZIP: 15237 FORMER COMPANY: FORMER CONFORMED NAME: SMITH MICRO SOFTWARE, INC DATE OF NAME CHANGE: 20181023 FORMER COMPANY: FORMER CONFORMED NAME: SMITH MICRO SOFTWARE INC DATE OF NAME CHANGE: 19950731 10-Q 1 smsi-10q_20190331.htm 10-Q 03-31-19 smsi-10q_20190331.htm

 

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 March 31, 2019

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
incorporation or organization)

(I.R.S. Employer
Identification No.)

5800 CORPORATE DRIVE

PITTSBURGH, PA 15237

(Address of principal executive offices, including zip code)

(412) 837-5300

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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).  Yes     No  

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

 

As of May 13, 2019, there were 32,067,956 shares of common stock outstanding.

 

 

 


 

SMITH MICRO SOFTWARE, INC.

QUARTERLY REPORT ON FORM 10-Q

MARCH 31, 2019

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (Unaudited)

 

2

 

 

Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

 

2

 

 

Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2019 and 2018

 

3

 

 

Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2019

 

4

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

 

5

 

 

Notes to the Consolidated Financial Statements

 

6

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

Item 4.

 

Controls and Procedures

 

19

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

20

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

20

Item 6.

 

Exhibits

 

21

 

 

 

 

 

SIGNATURES

 

22

 

1


 

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

(audited)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

7,378

 

 

$

12,159

 

Accounts receivable, net of allowances for doubtful accounts and other adjustments of

   $126 (2019) and $135 (2018)

 

 

8,951

 

 

 

7,130

 

Prepaid expenses and other current assets

 

 

565

 

 

 

795

 

Total current assets

 

 

16,894

 

 

 

20,084

 

Equipment and improvements, net

 

 

852

 

 

 

865

 

Right-of-use assets

 

 

2,419

 

 

 

 

Deferred tax assets, net

 

 

191

 

 

 

191

 

Other assets

 

 

175

 

 

 

140

 

Intangible assets, net

 

 

5,270

 

 

 

238

 

Goodwill

 

 

7,797

 

 

 

3,685

 

Total assets

 

$

33,598

 

 

$

25,203

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,249

 

 

$

1,160

 

Accrued payroll and benefits

 

 

2,121

 

 

 

1,745

 

Current operating lease liabilities

 

 

987

 

 

 

 

Other accrued liabilities

 

 

330

 

 

 

450

 

Deferred revenue

 

 

234

 

 

 

28

 

Total current liabilities

 

 

4,921

 

 

 

3,383

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Operating lease liabilities

 

 

1,876

 

 

 

 

Deferred rent

 

 

578

 

 

 

723

 

Other long term liabilities

 

 

185

 

 

 

534

 

Total non-current liabilities

 

 

2,639

 

 

 

1,257

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.001 per share; 5,000,000 shares authorized; 5,500

   shares issued (2019 and 2018); 1,345 shares outstanding (2019 and 2018)

 

 

 

 

 

 

Common stock, par value $0.001 per share; 100,000,000 shares authorized;

   32,064,848 and 28,241,129 shares issued and outstanding (2019 and

   2018, respectively)

 

 

32

 

 

 

28

 

Additional paid-in capital

 

 

261,990

 

 

 

256,626

 

Accumulated comprehensive deficit

 

 

(235,984

)

 

 

(236,091

)

Total stockholders’ equity

 

 

26,038

 

 

 

20,563

 

Total liabilities and stockholders' equity

 

$

33,598

 

 

$

25,203

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the consolidated financial statements.

2


 

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data)

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

(unaudited)

 

Revenues

 

$

8,432

 

 

$

5,463

 

Cost of revenues

 

 

916

 

 

 

1,309

 

Gross profit

 

 

7,516

 

 

 

4,154

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling and marketing

 

 

1,968

 

 

 

1,730

 

Research and development

 

 

2,682

 

 

 

2,255

 

General and administrative

 

 

2,700

 

 

 

2,190

 

Restructuring expense

 

 

104

 

 

 

 

Total operating expenses

 

 

7,454

 

 

 

6,175

 

Operating income (loss)

 

 

62

 

 

 

(2,021

)

Other expense:

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

 

 

(171

)

Change in fair value of warrant liability

 

 

 

 

 

(139

)

Other expense

 

 

(10

)

 

 

(40

)

Income (loss) before provision for income taxes

 

 

52

 

 

 

(2,371

)

Provision for income tax expense

 

 

4

 

 

 

10

 

Net income (loss)

 

$

48

 

 

$

(2,381

)

 

 

 

 

 

 

 

 

 

Net earnings (loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.00

 

 

$

(0.16

)

Diluted

 

$

0.00

 

 

$

(0.16

)

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

31,297

 

 

 

15,299

 

Diluted

 

 

31,323

 

 

 

15,299

 

 

 

 

 

 

 

 

 

 

Preferred dividends per share

 

$

25.00

 

 

$

25.56

 

 

See accompanying notes to the consolidated financial statements.


3


 

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

4


 

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

 

(unaudited)

 

Operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

48

 

 

$

(2,381

)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

321

 

 

 

207

 

Non-cash lease expense

 

 

194

 

 

 

 

Amortization of debt discounts and financing issuance costs

 

 

 

 

 

65

 

Restructuring costs

 

 

104

 

 

 

 

Provision for doubtful accounts and other adjustments to accounts receivable

 

 

(9

)

 

 

22

 

Provision for excess and obsolete inventory

 

 

1

 

 

 

(6

)

Gain on disposal of fixed assets

 

 

(1

)

 

 

 

Stock based compensation

 

 

455

 

 

 

164

 

Change in fair value of warrant liability

 

 

 

 

 

139

 

Change in operating accounts:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,759

)

 

 

(232

)

Prepaid expenses and other assets

 

 

194

 

 

 

112

 

Accounts payable and accrued liabilities

 

 

(117

)

 

 

(59

)

Deferred revenue

 

 

(85

)

 

 

110

 

Net cash used in operating activities

 

 

(654

)

 

 

(1,859

)

Investing activities:

 

 

 

 

 

 

 

 

Acquisition of Smart Retail business, net

 

 

(3,974

)

 

 

 

Capital expenditures

 

 

(110

)

 

 

(16

)

Net cash used in investing activities

 

 

(4,084

)

 

 

(16

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from stock sale for employee stock purchase plan

 

 

5

 

 

 

3

 

Proceeds from (payments related to) the issuance of common stock

 

 

(14

)

 

 

4,462

 

Repayments of short-term secured promissory notes

 

 

 

 

 

(1,000

)

Dividends paid on preferred stock

 

 

(34

)

 

 

(141

)

Net cash provided by (used in) financing activities

 

 

(43

)

 

 

3,324

 

Net increase (decrease) in cash and cash equivalents

 

 

(4,781

)

 

 

1,449

 

Cash and cash equivalents, beginning of period

 

 

12,159

 

 

 

2,205

 

Cash and cash equivalents, end of period

 

$

7,378

 

 

$

3,654

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

9

 

 

$

5

 

Cash paid for interest expense

 

 

 

 

 

111

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash activities:

 

 

 

 

 

 

 

 

Issuance of common stock in connection with Smart Retail acquisition

 

$

5,129

 

 

$

 

Issuance of common stock warrants in connection with stock offering

 

 

 

 

 

2,908

 

 

See accompanying notes to the consolidated financial statements.

5


 

SMITH MICRO SOFTWARE, INC.

Notes to the Consolidated Financial Statements

(Unaudited)

1. The Company

Smith Micro Software, Inc. (“Smith Micro” or the “Company”) develops software to simplify and enhance the mobile experience, providing solutions to some of the leading wireless service providers and cable MSOs around the world. From enabling the family digital lifestyle to providing powerful voice messaging capabilities, our solutions enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones and consumer IoT devices. Our portfolio also includes a wide range of products for creating, sharing and monetizing rich content, such as visual messaging, optimizing retail content display, analytics capabilities, and 2D/3D graphics applications.

2. Accounting Policies

Basis of Presentation

The accompanying interim consolidated balance sheet as of March 31, 2019, and the related consolidated statements of operations and comprehensive loss and cash flows for the three months ended March 31, 2019 and 2018, 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 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 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, 2018 filed with the SEC on March 27, 2019.

Intercompany balances and transactions have been eliminated in consolidation.

Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2019.

Recently Adopted Accounting Pronouncements

The Company adopted FASB ASC Topic No. 842, Leases, and related amendments, as of January 1, 2019, utilizing the modified retrospective approach through a cumulative-effect adjustment to equity. We elected the package of practical expedients permitted under the transition guidance within the new standard which allowed us to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $3.1 million as of January 1, 2019, and an adjustment to retained earnings of $0.1 million. The standard did not materially impact our consolidated net income or earnings per share and had no impact on cash flows. See Note 11 for further details.

Revenue Recognition

The Company adopted FASB ASC Topic No. 606, Revenue from Contracts with Customers, as of January 1, 2018, and recognizes the sale of goods and services based on the five step analysis of transactions as provided in Topic 606 which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such 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 quarterly.

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 customer of our software enhancements and upgrades. For certain Wireless segment customers we provide maintenance and technology support services for

6


 

which the customer 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.

As discussed in Note 3, during the first quarter of 2019 we acquired assets associated with the Smart Retail product suite, later branded ViewSpot, from ISM Connect, LLC. Our ViewSpot 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. When a cloud-based service includes both on-premises software licenses and cloud 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. Certain cloud services, primarily ViewSpot, depend on a significant level of integration, interdependency, and interrelation between the on-premise applications and cloud services, and are accounted for together as one performance obligation. Revenue from ViewSpot is recognized ratably over the period in which the cloud services are provided.

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 customer’s marketing initiatives and tend to be short term “bursts” of activity. We recognize these revenues upon delivery of the configured promotional content to the cloud platform.

In our Graphics segment where we sell off-the-self software products with no customization or post sale technology support services, we recognize revenue at the time we transfer control of the product to the customer. This occurs upon shipment of the product or when the customer downloads the software from our website or website of our resellers. We offer a 30 day return option to our customers; a return reserve is established at the time revenue is recorded and the reserve is monitored and adjusted based on actual experience. Historically, returns have been insignificant.

Fair Value Measurements

The Company measures and discloses fair value measurements as required by FASB Accounting Standards Codification (“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. 820, we measured our warrant liability at fair value. Our warrant liability was classified within Level 3 as some of the inputs to our valuation model are either not observable quoted prices or are not derived principally from, or corroborated by, observable market data by correlation or other means.

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.

7


 

3. Acquisitions

In December 2018, the Company entered into a definitive agreement to acquire the net assets of ISM Connect, LLC’s Smart Retail product suite (“Smart Retail”). The transaction closed on January 9, 2019.  

The following table summarizes the consideration paid for the Smart Retail acquisition in 2019 (unaudited, in thousands):

 

Fair value of assets acquired

 

$

9,394

 

Fair value of liabilities assumed

 

 

291

 

Total purchase price

 

$

9,103

 

 

 

 

 

 

Components of purchase price:

 

 

 

 

Cash

 

$

3,974

 

Common stock

 

 

5,129

 

Total purchase price

 

$

9,103

 

The Company’s preliminary allocation of the purchase price is summarized as follows (unaudited, in thousands):

 

Assets:

 

 

 

 

Costs incurred on projects not complete

 

$

53

 

Intangible assets

 

 

5,229

 

Goodwill

 

 

4,112

 

Total assets

 

$

9,394

 

Liabilities:

 

 

 

 

Deferred revenue

 

$

291

 

Total liabilities

 

 

291

 

Total purchase price

 

$

9,103

 

The purpose of the Smart Retail acquisition was to acquire a new growing and profitable revenue stream while deepening the relationships with our customers. The Smart Retail platform, which we now call ViewSpot™ , enables wireless carriers and retailers to offer powerful on-screen, interactive device demos that deliver consistent, secure and targeted content that showcase the features of the devices that consumers what to see and learn more about. ViewSpot also provides analytics capabilities, which allow customers to gain valuable insights and buying behaviors. The platform is a logical addition to the Company’s existing product line that reaches wireless carriers and provides them with services that can attract and retain customers.

Unaudited pro forma results of operations for the three month ended March 31, 2019 and 2018 are included below as if the acquisition occurred on January 1, 2018. 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 Smart Retail been acquired at the beginning of 2018, nor does it purport to represent results of operations for any future periods.

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited, in thousands, except per share amounts)

 

Revenues

 

$

8,432

 

 

$

6,515

 

Net income (loss)

 

 

48

 

 

 

(2,032

)

Earnings (loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.00

 

 

$

(0.14

)

Diluted

 

$

0.00

 

 

$

(0.14

)

 

8


 

4. Going Concern Evaluation

In connection with preparing consolidated financial statements for the three months ended March 31, 2019, management evaluated whether there were conditions and events that, when considered in the aggregate, 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 historical operating loss and negative cash flow from operating activities trends, including the positive trends occurring in the recent year.  

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:

 

In May 2017, the Company raised $2.2 million of new capital in a private placement offering of its common stock.

 

In September 2017, the Company closed on a $5.5 million preferred stock transaction which converted $2.8 million of long and short-term debt and raised $2.7 million of new capital.

 

On March 5, 2018, the Company raised $5.0 million of new capital in a private placement offering of its common stock.  

 

On May 3, 2018, the Company raised $7.0 million of new capital in a private placement offering of its common stock.  

 

On November 7, 2018, the Company raised $7.5 million of new capital in a private placement offering of its common stock. Following this transaction, $3.2 million of short and long-term debt was repaid.

Management believes the Company will generate enough cash from operations to satisfy its obligations for the next twelve months from the issuance date.

The Company will take the following actions, if it starts to trend unfavorably against 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 capital through a private placement.

 

Raise additional capital through short-term loans.

 

Implement restructuring and cost reductions.

 

Secure a commercial bank line of credit.

 

Sell or license intellectual property.

5. 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 determined that there was no goodwill impairment at March 31, 2019 and December 31, 2018.

6. 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 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.

9


 

The following table sets forth the details of basic and diluted earnings per share:

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited, in thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

48

 

 

$

(2,381

)

Dividends paid to preferred stockholders

 

 

(34

)

 

 

(141

)

Net income (loss) available to common

   stockholders

 

$

14

 

 

$

(2,522

)

Denominator:

 

 

 

 

 

 

 

 

Weighted average shares outstanding – basic

 

 

31,297

 

 

 

15,299

 

Potential common shares – options / warrants

   (treasury stock method)

 

 

26

 

 

 

 

Weighted average shares outstanding – diluted

 

 

31,323

 

 

 

15,299

 

Shares excluded (anti-dilutive)

 

 

 

 

 

135

 

Shares excluded due to an exercise price greater

   than weighted average stock price for the period

 

 

11,213

 

 

 

1,073

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share:

 

 

 

 

 

 

 

 

Basic

 

$

0.00

 

 

$

(0.16

)

Diluted

 

$

0.00

 

 

$

(0.16

)

 

7. Stock-Based Compensation

Stock Plans

During the three months ended March 31, 2019, the Company granted 1,250,000 shares of restricted stock and 45,000 incentive stock options under the Company’s 2015 Omnibus Equity Incentive Plan, as amended. As of March 31, 2019, there were 1.3 million shares available for future grants under the 2015 Omnibus Equity Incentive Plan.

8. Revenues

Revenue Recognition

We sell products and services to customers in our Wireless and Graphics segments. In our Wireless segment, we sell our software solution, 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.

10


 

During the first quarter of 2019, we acquired the Smart Retail assets from ISM Connect, LLC. 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. When a cloud based service includes both on-premises software licenses and cloud 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. Certain cloud services, primarily ViewSpot, depend on a significant level of integration, interdependency, and interrelation between the on-premise applications and cloud services, and are accounted for together as one performance obligation. Revenue from ViewSpot is recognized ratably over the period in which the cloud services are provided.

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 customer’s marketing initiatives and tend to be short term “bursts” of activity. We recognize these revenues upon delivery of the configured promotional content to the cloud platform.

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. During the three months ended March 31, 2019 we recognized $27 thousand in our consolidated statements of operations that was previously recorded as deferred revenue in the consolidated balance sheet at January 1, 2019. As of March 31, 2019, our total deferred revenue balance was $0.2 million.

Disaggregation of Revenues

We disaggregate revenue by our Wireless and Graphics segments.

Revenues on a disaggregated basis are as follows (in thousands):

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Wireless:

 

 

 

 

 

 

 

 

CommSuite & Netwise

 

$

4,678

 

 

$

3,974

 

SafePath

 

 

2,134

 

 

 

323

 

ViewSpot

 

 

786

 

 

 

 

Consulting services and other

 

 

561

 

 

 

509

 

Legacy software licenses

 

 

13

 

 

 

10

 

Total wireless

 

 

8,172

 

 

 

4,816

 

Graphics:

 

 

 

 

 

 

 

 

Software

 

 

260

 

 

 

647

 

Total revenues

 

$

8,432

 

 

$

5,463

 

 

9. 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 two primary business units based on how management internally evaluates separate financial information, business activities and management responsibility. Wireless includes our NetWise®, CommSuite®, SafePath®, and ViewSpot™ family of products. Graphics includes our consumer-based products: Poser®, Moho®, MotionArtist®, Rebelle, PhotoDonut and StuffIt®, and through April 2018 included third-party software products under the Clip Studio® brand, which we distributed under an agreement which expired in October 2017 and permitted certain post-termination distribution rights until April 2018.

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.

11


 

The following table shows the revenues generated by each business unit (in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Wireless

 

$

8,172

 

 

$

4,816

 

Graphics

 

 

260

 

 

 

647

 

Total revenues

 

$

8,432

 

 

$

5,463

 

Customer Concentration Information

A summary of the Company’s customers that represent 10% or more of the Company’s net revenues is as follows:

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Wireless:

 

 

 

 

 

 

 

 

Sprint (& affiliates)

 

 

77

%

 

 

75

%

Graphics:

 

 

 

 

 

 

 

 

FastSpring

 

 

2

%

 

 

10

%

 

The two customers listed above comprised 78% and 80% of our accounts receivable as of March 31, 2019 and 2018, respectively.

Geographical Information

During the three months ended March 31, 2019 and 2018, 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 March 31,

 

 

 

2019

 

 

2018

 

 

 

(unaudited)

 

Americas

 

$

8,392

 

 

$

5,374

 

EMEA

 

 

19

 

 

 

30

 

Asia Pacific

 

 

21

 

 

 

59

 

Total revenues

 

$

8,432

 

 

$

5,463

 

 

The Company does not separately allocate specific assets to these geographic locations.

10. Commitments and Contingencies

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 connection 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,

12


 

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.

11. Leases

The Company leases office space and equipment, and certain office space is subleased. Management determines if a contract is a lease at the inception of the arrangement and reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised.

Leases with an initial term of greater than twelve months are recorded on the consolidated balance sheet. Lease expense is recognized on a straight-line basis over the lease term.

The Company’s lease 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 the lease.

Operating lease cost consists of the following (in thousands):

 

 

For the Three Months Ended March 31, 2019

 

 

 

(unaudited)

 

Lease cost

 

$

397

 

Sublease income

 

 

(151

)

Total lease cost

 

$

246

 

Operating lease assets and liabilities are summarized as follows (in thousands):

 

 

As of March 31, 2019

 

 

 

(unaudited)

 

Right-of-use assets

 

$

2,419

 

 

 

 

 

 

Current lease liabilities

 

$

987

 

Long-term lease liabilities

 

 

1,876

 

Total lease liabilities

 

$

2,863

 

The maturity of operating lease liabilities is presented in the following table (in thousands):

 

 

As of March 31, 2019

 

 

 

(unaudited)

 

2019

 

$

858

 

2020

 

 

1,143

 

2021

 

 

1,109

 

2022

 

 

14

 

2023

 

 

 

Thereafter

 

 

 

Total lease payments

 

 

3,124

 

Less imputed interest

 

 

261

 

Present value of lease liabilities

 

$

2,863

 

 

As of March 31, 2019, we have an additional operating lease for office space that has not yet commenced with a lease liability totaling approximately $1.5 million. This lease will commence during the second quarter of 2019.

12. Equity Transactions

In January 2019, the Company issued 2,699,531 shares of Common Stock in connection with its acquisition of the Smart Retail product suite of ISM connect, LLC. See Note 3 for further details.

13


 

13. 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 been in a five-year historical cumulative loss as of the end of fiscal 2017.  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, 2018 (as described above), and after consideration of the Company’s continuing cumulative loss position as of December 31, 2018, the Company will continue to reserve its U.S.-based deferred tax amounts, which total $52.4 million as of March 31, 2019.

The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Federal income tax returns of the Company are currently subject to IRS examination for the 2015 – 2017 tax years. State income tax returns are subject to examination for a period of three to four years after filing and currently the 2014-2017 tax years are open for audit. 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.

14. 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 are required.

14


 

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 Quarterly Report on Form 10-Q (“Report”) contains forward-looking statements regarding Smith Micro which include, but are not limited to, statements concerning customer concentration, projected revenues, 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 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:

 

our customer concentration given that the majority of our sales currently depend on a few large client relationships, including Sprint;

 

our ability to establish and maintain strategic relationships with our customers and mobile device manufacturers;

 

rapid technological evolution and resulting changes in demand for our products from our key customers and their end users;

 

intense competition in our industry and the core vertical markets in which we operate, and our ability to successfully compete;

 

our ability to comply with the requirements for our products imposed by our customers or by the third party providers of software and/or platforms that we use, and to respond quickly and effectively to any changes in such requirements;

 

our ability to assimilate acquisitions without diverting management attention and impacting current operations;

 

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 hire and retain key personnel;

 

interruptions or delays in the services we provide from our data center hosting facilities that could harm our business;

 

the possibility of security and privacy breaches in our systems damaging client relations and inhibiting our ability to grow;

 

our ability to become and remain profitable;

 

our ability to remain a going concern;

 

the risk of being delisted from NASDAQ if we fail to meet any of its applicable listing requirements;

 

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;

 

potential tax liabilities and other factors that may impact our effective tax rates;

 

the existence of undetected software defects in our products;

 

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; and

 

the risks inherent with international operations.

The forward-looking statements contained in this Report are made on the basis of the views and assumptions of management regarding future events and business performance as of the date this Report 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 Report is filed.

15


 

Overview

Smith Micro develops software to simplify and enhance the mobile experience, providing solutions to some of the leading wireless service providers and cable multiple service operators (“MSOs”) around the world.  From enabling the family digital lifestyle to providing powerful voice messaging capabilities, our solutions enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones and consumer devices for the Internet of Things (“IoT”). Our portfolio also includes a wide range of products for creating, sharing and monetizing rich content, such as visual messaging, optimizing retail content display, analytics capabilities, and 2D/3D graphics applications.

We continue to innovate and evolve our business to take advantage of industry trends and opportunities in emerging markets, such as digital lifestyle services and online safety, “Big Data” analytics, automotive telematics, and the consumer IoT marketplace. The key to our longevity, however, is not simply technological innovation, but a never-ending focus on customer value.

A summary of the Company’s customers that represent 10% or more of the Company’s net revenues is as follows:

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Wireless:

 

 

 

 

 

 

 

 

Sprint (& affiliates)

 

 

77

%

 

 

75

%

Graphics:

 

 

 

 

 

 

 

 

FastSpring

 

 

2

%

 

 

10

%

 

The two customers listed above comprised 78% and 80% of our accounts receivable as of March 31, 2019 and 2018, 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 months ended March 31, 2019 and 2018. Our historical results are not necessarily indicative of the operating results that may be expected in the future.

 

 

 

For the Three Months Ended March 31,

 

 

2019

 

 

 

2018

 

 

Revenues

 

 

100.0

 

%

 

 

100.0

 

%

Cost of revenues

 

 

10.9

 

 

 

 

24.0

 

 

Gross profit

 

 

89.1

 

 

 

 

76.0

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

 

23.3

 

 

 

 

31.7

 

 

Research and development

 

 

31.8

 

 

 

 

41.3

 

 

General and administrative

 

 

32.0

 

 

 

 

40.1

 

 

Restructuring expense

 

 

1.2

 

 

 

 

 

 

Total operating expenses

 

 

88.3

 

 

 

 

113.1

 

 

Operating income (loss)

 

 

0.8

 

 

 

 

(37.1

)

 

Interest expense, net

 

 

 

 

 

 

(3.1

)

 

Change in fair value of warrant liability

 

 

 

 

 

 

(2.5

)

 

Other expense

 

 

(0.1

)

 

 

 

(0.7

)

 

Income (loss) before provision for income taxes

 

 

0.7

 

 

 

 

(43.4