10-Q 1 smsi-10q_20200331.htm 10-Q Q1 2020 smsi-10q_20200331.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, 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
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)

 

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 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  

 

As of May 7, 2020, there were 41,420,954 shares of common stock outstanding.

 

 


 

SMITH MICRO SOFTWARE, INC.

QUARTERLY REPORT ON FORM 10-Q

MARCH 31, 2020

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (Unaudited)

 

2

 

 

Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

 

2

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019

 

3

 

 

Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019

 

4

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

 

5

 

 

Notes to the Consolidated Financial Statements

 

6

Item 2.

 

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

 

14

Item 4.

 

Controls and Procedures

 

17

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

18

Item 1A.

 

Risk Factors

 

18

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

19

Item 6.

 

Exhibits

 

20

 

 

 

 

 

SIGNATURES

 

21

 

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,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

 

(audited)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,456

 

 

$

28,268

 

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

 

 

591

 

 

 

802

 

Total current assets

 

 

31,929

 

 

 

39,964

 

Equipment and improvements, net

 

 

2,152

 

 

 

2,109

 

Right-of-use assets

 

 

6,349

 

 

 

6,464

 

Deferred tax assets, net

 

 

94

 

 

 

94

 

Other assets

 

 

458

 

 

 

234

 

Intangible assets, net

 

 

15,875

 

 

 

4,535

 

Goodwill

 

 

11,493

 

 

 

7,797

 

Total assets

 

$

68,350

 

 

$

61,197

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,463

 

 

$

2,050

 

Accrued payroll and benefits

 

 

2,285

 

 

 

2,107

 

Current operating lease liabilities

 

 

1,273

 

 

 

1,221

 

Other accrued liabilities

 

 

271

 

 

 

244

 

Deferred revenue

 

 

1,690

 

 

 

98

 

Total current liabilities

 

 

8,982

 

 

 

5,720

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Operating lease liabilities

 

 

5,548

 

 

 

5,774

 

Deferred rent

 

 

850

 

 

 

885

 

Other long term liabilities

 

 

117

 

 

 

134

 

Total non-current liabilities

 

 

6,515

 

 

 

6,793

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

 

 

276,163

 

 

 

274,041

 

Accumulated comprehensive deficit

 

 

(223,350

)

 

 

(225,395

)

Total stockholders’ equity

 

 

52,853

 

 

 

48,684

 

Total liabilities and stockholders' equity

 

$

68,350

 

 

$

61,197

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the consolidated financial statements.

2


 

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

 

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.


3


 

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS 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, 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.


4


 

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

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.

5


 

SMITH MICRO SOFTWARE, INC.

Notes to the Consolidated Financial Statements

(Unaudited)

1. The Company

Smith Micro Software, Inc. (“Smith Micro”, 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 around the world. From enabling the family digital lifestyle to providing powerful voice messaging capabilities, we strive to enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones and consumer IoT devices. Our portfolio includes a wide range of products for creating, sharing and monetizing rich content, such as visual voice messaging, retail content display optimization and performance analytics on any product set.

2. Accounting Policies

Basis of Presentation

The accompanying interim consolidated balance sheet as of March 31, 2020, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three months ended March 31, 2020 and 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 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, 2019 filed with the SEC on March 13, 2020.

Intercompany balances and transactions have been eliminated in consolidation.

Operating results for the three months ended March 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, 2020.

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. Finally, in this segment, we ratably recognize revenue over the contract period when customers pay in advance of our service delivery.

On February 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 customer 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 an independent third party hosting service provider without significant cost. We also provide significant services that are required by the customer to ensure they have the utility of the license. As the license to the  software solution and the services we provide are highly interrelated, we have concluded that the license and our services are a single performance obligation. The license fee is earned and recognized on a pro-rata basis over the contract term based on our customer’s continued use of the license and our services.

6


 

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 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 configured promotional content to the cloud platform.

For our Graphics products 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 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

 

7


 

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 determined that there was no goodwill impairment at March 31, 2020 and December 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 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.

8


 

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 March 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.

9


 

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 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

 

 

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 one primary business unit based on how management internally evaluates separate financial information, business activities and management responsibility: Wireless. The Wireless segment includes our SafePath®, CommSuite®, ViewSpot®, and NetWise® family of products.

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.

10


 

The following table presents the Wireless revenues by product (in thousands):

 

 

 

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

Revenues generated from our sales to Sprint and their respective affiliates in the Wireless business segment accounted for 88% and 77% of the Company’s total revenues for the three months ended March 31, 2020 and 2019, respectively. This customer comprised 84% and 77% of our accounts receivable as of March 31, 2020 and 2019, respectively.

Geographical Information

During the three months ended March 31, 2020 and 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 March 31,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Americas

 

$

13,304

 

 

$

8,392

 

EMEA

 

 

8

 

 

 

19

 

Asia Pacific

 

 

10

 

 

 

21

 

Total revenues

 

$

13,322

 

 

$

8,432

 

 

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

9. 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, 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


 

10. 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,

 

 

 

2020

 

 

2019

 

 

 

(unaudited)

 

Lease cost

 

$

527

 

 

$

397

 

Sublease income

 

 

(151

)

 

 

(151

)

Total lease cost

 

$

376

 

 

$

246

 

The maturity of operating lease liabilities is presented in the 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 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

%

 

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.

12


 

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 was in a five-year historical cumulative loss as of the end of fiscal 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, 2019, and after consideration of the Company’s cumulative loss position as of December 31, 2019, the Company will continue to reserve its U.S.-based deferred tax amounts, which total $50.4 million as of 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 or state tax 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.

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 are 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.

13


 

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,” “ma