Notes to the
Consolidated Financial Statements
1. The Company
Smith Micro Software, Inc. (“Smith Micro,” “Company,” “we,” “us,” and “our”) develops software to simplify and enhance the mobile experience, providing solutions to leading wireless service providers, device manufacturers, and enterprise businesses around the world. From optimizing wireless networks to uncovering customer experience insights, and from streamlining Wi-Fi access to ensuring family safety, our solutions enrich connected lifestyles, while creating new opportunities to engage consumers via smartphones. Our portfolio also includes a wide range of products for creating, sharing, and monetizing rich content, such as visual messaging, video streaming, and 2D/3D graphics applications. With this as a focus, it is Smith Micro’s mission to help our customers thrive in a connected world.
2. Basis of Presentation
The accompanying interim consolidated balance sheet and statement of stockholders’ equity as of September 30, 2017, and the related consolidated statements of operations and comprehensive loss and cash flows for the three and nine months ended September 30, 2017 and 2016, 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, necessary to fairly state the financial position, results of operations, and cash flows. 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, 2016 filed with the SEC.
Intercompany balances and transactions have been eliminated in consolidation.
Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2017.
3. Recently Issued Accounting Pronouncements
In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11,
Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815) (“ASU 2017-11”)
, which changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU 2014-11 also clarifies existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, ASU 2017-11 requires entities that present earnings per share (EPS) in accordance with ASC Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. ASU 2017-11 is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted, including adoption in an interim period. If an entity early adopts ASU 2017-11 in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period in either of the following ways: (1) Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which ASU 2017-11 is effective or (2) Retrospectively to outstanding financial instruments with a down round feature for each reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10.
The Company has elected to early adopt ASU 2017-11 during the three months ended September 30, 2017 by applying ASU 2017-11 retrospectively to outstanding financial instruments with a down round feature for each prior reporting period presented which includes the quarter ended September 30, 2016 in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. (See Note 19).
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods
6
within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the ne
w standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company will be evaluating the impact of this guidance on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The amendments to this Update supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of this Topic is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This Topic defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company will be evaluating the impact of this guidance on our consolidated financial statements.
4. Going Concern Evaluation
In connection with preparing consolidated financial statements for the three and nine months ended September 30, 2017, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.
The Company considered the following:
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Operating losses for ten consecutive quarters.
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Negative cash flow from operating activities for six consecutive quarters.
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Depressed stock price resulting in being non-compliant with NASDAQ listing rules to maintain a stock price of $1.00/share.
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Stockholders’ equity being less than $2.5 million at March 31, 2017 and June 30, 2017 resulting in being non-compliant with NASDAQ listing rules.
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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:
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The Company raised $4 million of debt financing during the year ended December 31, 2016.
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The Company has raised funds from short-term loans from insiders.
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As a result of the Company’s restructurings that were implemented during the three months ended December 31, 2016, and again during the six months ended June 30, 2017, the Company’s cost structure is now in line with its future revenue projections. See Footnote 11 below for additional details regarding restructurings.
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On September 29, 2017, the Company completed a $5.5 million preferred stock transaction, which converted $2.8 million of long term and short-term debt (face value) into equity and raised $2.7 million of new equity capital.
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Management believes that the Company will generate enough cash from operations to satisfy its obligations for the next twelve months.
The Company will take the following actions, if it starts to trend unfavorably to its internal profitability and cash flow projections, in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:
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Raise additional funds through short-term loans.
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Implement additional restructuring and cost reductions.
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Raise additional capital through a private placement.
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Secure a commercial bank line of credit.
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Dispose of one or more product lines.
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Sell or license intellectual property.
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5. Cash and Cash Equivalents
Cash and cash equivalents are primarily held in two financial institutions and are uninsured except for the minimum Federal Deposit Insurance Corporation coverage and have original maturity dates of three months or less. As of September 30, 2017 and December 31, 2016, bank balances totaling approximately $3.7 million and $2.1 million, respectively, were uninsured.
6. Accounts Receivable
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for estimated credit losses and those losses have been within management’s estimates. Allowances for product returns are included in other adjustments to accounts receivable on the consolidated balance sheets. Product returns are estimated based on historical experience and management estimations.
The Company is utilizing the accounts receivable balances to secure the related party short-term notes payable.
7. Impairment or Disposal of Long Lived Assets
Long-lived assets to be held are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether or not impairment to such value has occurred as required by FASB ASC Topic No. 360,
Property, Plant, and Equipment
. The Company determined there was no impairment as of September 30, 2017 and December 31, 2016.
8. Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets, generally ranging from three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.
9. Goodwill
In accordance with FASB ASC Topic No. 350,
Intangibles-Goodwill and Other
, we review the recoverability of the carrying value of goodwill at least annually or whenever events or circumstances indicate a potential impairment. The Company’s impairment testing will be done annually at December 31. Recoverability of goodwill is determined by comparing the fair value of the Company’s reporting units to the carrying value of the underlying net assets in the reporting units. If the fair value of a reporting unit is determined to be less than the carrying value of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the fair value of its other assets and liabilities. The Company determined that there was no goodwill impairment at September 30, 2017 and December 31, 2016.
10. Intangible Assets
The following table sets forth our acquired intangible assets by major asset class as of September 30, 2017 and December 31, 2016 (in thousands except for useful life data):
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September 30, 2017
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December 31, 2016
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Useful life
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Accumulated
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Net
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Accumulated
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Net book value
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Impairment
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Net
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(years)
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Gross
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amortization
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book value
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Gross
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amortization
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before impairment
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charge
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book value
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Purchased technology
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5-6
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$
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265
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$
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(66
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)
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$
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199
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$
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265
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$
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(32
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)
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$
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233
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$
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—
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$
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233
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Customer relationships
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3-6
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528
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(220
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)
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308
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999
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(147
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)
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852
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(411
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)
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441
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Trademarks/trade
names
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2
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38
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(24
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)
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14
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38
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(9
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)
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29
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—
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29
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Non-compete
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3
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51
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(21
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)
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30
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51
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(9
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)
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42
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—
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42
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Total
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$
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882
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$
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(331
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)
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$
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551
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$
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1,353
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$
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(197
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)
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$
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1,156
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$
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(411
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)
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$
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745
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Intangible assets amortization expense was $0.1 million and $0.2 million for the three and nine months ended September 30, 2017, respectively, and $0.1 million for the three and nine months ended September 30, 2016. The Company determined there was an impairment of its Customer Relationships intangible asset in the amount of $0.4 million as of December 31, 2016.
Future amortization expense related to intangible assets as of September 30, 2017 are as follows (in thousands):
Year Ending December 31,
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2017 - 3 months remaining
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$
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64
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2018
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249
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2019
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143
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2020
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47
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2021
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40
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Beyond
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8
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Total
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$
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551
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11. Restructuring
The following is the activity in our restructuring liability for the nine months ended September 30, 2017 (in thousands):
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December 31, 2016
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September 30, 2017
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Balance
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Provision-net
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Usage
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Balance
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Lease/rental terminations
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$
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1,786
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$
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(149
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)
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$
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(245
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)
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$
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1,392
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One-time employee termination benefits
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65
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805
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(649
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)
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221
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Datacenter consolidation, other
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109
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(91
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)
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(18
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—
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Total
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$
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1,960
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$
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565
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$
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(912
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$
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1,613
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Of the total $1.6 million balance, $0.2 million is reported in accrued liabilities and $1.4 million is reported in deferred rent and other long-term liabilities on the balance sheet.
12.
Debt
Short-Term Debt
At September 30, 2017 and December 31, 2016, the carrying value and the aggregate fair value of the Company’s short-term debt were as follows (in thousands):
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As of September 30, 2017
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As of December 31, 2016
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Carrying Amount
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Fair Value
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Carrying Amount
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Fair Value
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Current Liabilities:
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Related-party notes payable, short-term
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$
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2,200
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$
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2,200
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$
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—
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$
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—
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On February 7, 2017, the Company entered into a short-term secured borrowing arrangement with William W. and Dieva L. Smith (“Smith”) and on February 8, 2017 entered into a short-term secured borrowing arrangement with Steven L. and Monique P. Elfman (“Elfman”) pursuant to which Smith and Elfman each loaned to the Company $1 million and the Company issued to each of them a Secured Promissory Note (the “Original Notes”) bearing interest at the rate of 18% per annum. The Original Notes were due on March 24, 2017 are secured by the Company’s accounts receivable and certain other assets. William W. Smith, Jr. is the Company’s Chairman of the Board, President and Chief Executive Officer, and Steven L. Elfman is a director of the Company.
On March 25, 2017, the Company entered into an Amendment to the Original Note issued to Smith that extended the Maturity Date of the Note to June 26, 2017.
On March 31, 2017, the Company entered into a new short-term secured borrowing arrangement with Elfman for $1 million which matured on June 23, 2017.
On June 30, 2017, the Company entered into a new short-term secured borrowing arrangement with each of Smith and Elfman to refinance the prior arrangement with each of them, which matured on June 26, 2017 and June 23, 2017, respectively. Under the new
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borrowing arrangements, the Company issued to each of Smith and Elfman a new Secured Promissory Note (“Replacement Notes”) with a principal balance of $1 milli
on, bearing interest at the rate of 12% per annum, and maturing on September 25, 2017. The maturity date of the Replacement Note entered into with Smith may be extended by up to 180 days upon the mutual consent of the Company and Smith. Each of the Replac
ement Notes are secured by the Company’s accounts receivable and certain other assets.
On August 22, 2017, the Company entered into Amendments to the Replacement Notes issued to each of Smith and Elfman, which extended the Maturity Date of the Replacement Notes from September 25, 2017 to January 25, 2018. The amendments do not change any other terms of the Replacement Notes.
On August 23, 2017, the Company entered into a new borrowing arrangement with Smith, under which the Company borrowed $0.8 million and issued to Smith a new Secured Promissory Note, bearing interest at the rate of 12% per annum, and maturing on January 25, 2018.
On August 24, 2017, the Company entered into a new borrowing arrangement with Andrew Arno (“Arno”), under which the Company borrowed $0.3 million and issued to Arno new Secured Promissory Notes with an aggregate principal balance of $0.3 million, bearing interest at the rate of 12% per annum, and maturing on January 31, 2018. Andrew Arno is a director of the Company.
On September 29, 2017, the Company exchanged shares of the Company’s newly designated Series B 10% Convertible Preferred Stock (“Series B Preferred Stock”) for outstanding short-term indebtedness with a principal amount of $0.8 million owed to Smith and $0.1 million to Arno for 750 and 50 shares, respectively. See Note 19, Equity Transactions, for further details on the Series B Preferred Stock Offering.
The Company reviewed FASB ASC Topic No. 470-50,
Debt Extinguishment
, to evaluate the debt extinguishment gain incurred from the debt to equity transaction. Upon completion of the evaluation, it was determined that the gain associated with the short-term related party loan extinguishment to Preferred Stock should be accounted for as a capital contribution and was recorded to Stockholder’s Equity. The principal balance of the note and resulting fair value of the equity interest exchanged was $0.8 million. The fair value was reduced by allocated legal fees and other direct issuance costs of $0.1 million, resulting in a net fair value of $0.8 million. The capital contribution related to the gain was the difference between these two amounts, or $0.1 million.
The Company evaluated the refinancing of the short-term debt instruments under FASB ASU Topic No. 470-60,
Troubled Debt Restructurings,
to determine whether the modification of the debt instruments would be considered a troubled debt restructuring, using the two-step decision tree. The two steps included an assessment of whether the company is experiencing financial difficulties and if the creditors have provided concessions. Upon completion of this review, the Company concluded that the refinancing did not qualify as a troubled debt restructuring.
Long-Term Debt
At September 30, 2017, the aggregate fair value and the carrying value of the Company’s long-term debt was as follows (in thousands):
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As of September 30, 2017
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As of December 31, 2016
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Carrying Amount
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Fair Value
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Carrying Amount
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Fair Value
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Long-term debt - related party
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$
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—
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$
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—
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$
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1,295
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$
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1,295
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Long-term debt
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1,492
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1,492
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1,295
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1,295
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Total long-term debt
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$
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1,492
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$
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1,492
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$
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2,590
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$
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2,590
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The carrying value of $1.5 million and $2.6 million are net of debt discount of $0.4 million and $1.2 million and debt issuance costs of $0.1 million and $0.2 million as of September 30, 2017 and December 31, 2016, respectively.
On September 2, 2016, we entered into a Note and Warrant Purchase Agreement with Unterberg Koller Capital Fund L.P. and William W. and Dieva L. Smith (collectively, the “Investors”), pursuant to which the Company issued and sold to the Investors in a private placement senior subordinated promissory notes in the aggregate principal amount of $4 million (the “Notes”). The Company completed the transactions contemplated by the Note and Warrant Purchase Agreement and issued the Notes on September 6, 2016.
The Notes mature three years following the issuance date, or September 6, 2019, and bear interest at the rate of 10% of the outstanding principal balance of the Notes, payable quarterly in cash or shares of the Company’s common stock. The Notes are subordinate and junior in right of payment to the prior payment in full of all claims, whether now existing or arising in the future, of holders of senior debt of the Company, as described in the Notes.
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On September 29, 2017, the Company exchanged shares of the Company’s newly designated Series B 10% Convertible Preferred Stock for outstanding long-term indebtedness with a principal amount of $2 million owed to Smith for 2,000 of the Series B Preferre
d Stock. See Note 19, Equity Transactions, for further details on the Series B Preferred Stock Offering.
The Company reviewed FASB ASC Topic No. 470-50,
Debt Extinguishment
, to evaluate the debt extinguishment loss incurred from the transaction. Upon completion of the evaluation, it was determined that the loss associated with the long-term related party loan extinguishment to Preferred Stock should be accounted through the Statement of Operations. The principal balance of the note and resulting fair value of the equity interest transferred was $2 million. The fair value was reduced by legal fees and other direct issuance costs of $0.1 million. The net carrying amount of the long-term note was $1.5 million, which was net of debt issuance costs of $0.1 million and discount of $0.4 million. The extinguishment loss associated with this note was the difference between the net fair value of the equity interest transferred and the net carrying amount of the note being extinguished, which was $0.4 million.
The Company evaluated the conversion of the long-term debt under FASB ASU Topic No. 470-60,
Troubled Debt Restructurings
, for determining whether the modification of the debt instruments would be considered a troubled debt restructuring, using the two-step decision tree. The two steps included an assessment of whether the company is experiencing financial difficulties and if the creditors have provided concessions. Upon completion of this review, the Company concluded that the refinancing did not qualify as troubled debt restructuring.
13. Net Loss Per Share
The Company calculates earnings per share (“EPS”) as required by FASB ASC Topic No. 260,
Earnings Per Share
. Basic EPS is calculated by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period, excluding common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period, plus the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For periods with a net loss, the dilutive common stock equivalents are excluded from the diluted EPS calculation. For purposes of this calculation, common stock subject to repurchase by the Company, options, and warrants are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.
On August 15, 2016, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware for the purpose of effecting a reverse stock split (the “Reverse Split”) of the outstanding shares of the Company’s common stock at a ratio of one (1) share for every four (4) shares outstanding, so that every four (4) outstanding shares of common stock before the Reverse Split represents one (1) share of common stock after the Reverse Split. Proportionate adjustments were made to: (i) the aggregate number of shares of Common Stock available for equity-based awards to be granted in the future under our 2015 Omnibus Equity Incentive Plan; (ii) the number of shares that would be owned upon vesting of restricted stock awards and stock options which are outstanding under our 2015 Omnibus Equity Incentive Plan and 2005 Stock Option Plan, and the exercise price of any outstanding stock options, and (iii) the number of shares of Common Stock available for purchase under our Preferred Shares Rights Agreement, dated October 16, 2015, between us and Computershare Trust Company, N.A., as rights agent. We have a total of 100,000,000 authorized shares of common stock, which remained unchanged by the reverse stock split. The Reverse Split was approved by the Company’s stockholders at the special meeting held on August 15, 2016 and was effective on August 17, 2016. The Company adjusted shareholders' equity to reflect the reverse stock split by reclassifying an amount equal to the par value of the additional shares arising from the split from common stock to the Additional Paid-in Capital during the third quarter of fiscal 2016, resulting in no net impact to shareholders' equity on our consolidated balance sheets. Fractional shares were rounded down to the nearest whole share. Stockholders received cash in lieu of such fractional shares. All information presented herein has been retrospectively adjusted to reflect the reverse stock split as if it took place as of the earliest period presented.
On September 29, 2017, the Company filed with the Secretary of State of the State of Delaware a Certificate of Designation of Preferences, Rights and Limitations of Series B Preferred Stock of the Company (the “Certificate of Designation”), designating a total of 5,500 shares of Series B Preferred Stock. Under the Certificate of Designation, the shares of Series B Preferred Stock have a stated value of $1,000 per share and are optionally convertible, subject to certain limitations set forth in the Certificate of Designation, into shares of the Company’s Common Stock at a conversion price of $1.14 per share, subject to adjustment in the event of a stock split, stock dividend, combination, reclassification or other recapitalization affecting the Common Stock.
The holders of Series B Preferred Stock are entitled to receive cumulative dividends
out of funds legally available thereof at
a rate of ten percent (10%) per annum,
payable (i) when and as declared by the Board of Directors, in quarterly installments on March 1, June 1, September 1 and December 1, and (ii) upon conversion into Common Stock with respect the Series B Preferred Stock being converted.
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In the event that the
trading price of the Company’s Common Stock for 20 consecutive trading days (as determined in the Certificate of Designation) exceeds 400% of the then effective Convers
ion Price of the Series B Preferred Stock (initially set at $1.14), the Company may force conversion of the Series B Preferred Stock into shares of Common Stock or elect to redeem the Series B Preferred Stock for cash.
Until the date that stockholder approval is obtained, the Certificate of Designation limits the number of shares of Common Stock that are issuable to any holder upon conversion of such holder’s Series B Preferred Stock, such that such issuances would not cause such holder to own in excess of 19.99% of the Company’s issued and outstanding Common Stock. In addition, a holder’s shares of Series B Preferred Stock shall not be converted if, after giving effect to the conversion, such holder and its affiliated persons would own beneficially more than 9.99% of the Company’s Common Stock, subject to adjustment solely at the holder’s discretion upon 61 days’ prior notice to the Company.
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For the Three Months Ended September 30,
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For the Nine Months Ended September 30,
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2017
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2016
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|
2017
|
|
|
2016
|
|
|
|
(unaudited, in thousands, except per share amounts)
|
|
|
(unaudited, in thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to
common stockholders
|
|
$
|
(1,670
|
)
|
|
$
|
(4,632
|
)
|
|
$
|
(6,501
|
)
|
|
$
|
(11,618
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding - basic
|
|
|
14,297
|
|
|
|
12,209
|
|
|
|
13,221
|
|
|
|
11,826
|
|
Potential common shares -
options / warrants
(treasury stock method)
|
|
|
—
|
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
Weighted average shares
outstanding - diluted
|
|
|
14,297
|
|
|
|
12,211
|
|
|
|
13,222
|
|
|
|
11,829
|
|
Shares excluded
(anti-dilutive)
|
|
|
—
|
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
Shares excluded due to an
exercise price greater than
weighted average
stock price for the period
|
|
|
1,973
|
|
|
|
2,062
|
|
|
|
1,869
|
|
|
|
2,062
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.98
|
)
|
Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.98
|
)
|
14. Stock-Based Compensation
Stock Plans
During the nine months ended September 30, 2017, the Company granted 87,500 shares of restricted stock with a weighted average grant date fair value of $1.11 per share. These costs will be amortized ratably over a period of 0 to 48 months.
As of September 30, 2017, there were 1.7 million shares available for future grants under the 2015 Omnibus Equity Incentive Plan.
Employee Stock Purchase Plan
The Company’s most recent six-month offering period ended September 30, 2017 and resulted in 2,000 shares being purchased/granted at a fair value of $0.77 per share. The next six-month offering period began on October 1, 2017 and will end on March 31, 2018. These shares will have a fair value of $0.96 per share.
Stock Compensation
The Company accounts for all stock-based payment awards made to employees and directors based on their fair values, which is recognized as compensation expense over the vesting period using the straight-line method over the requisite service period for each award as required by FASB ASC Topic No. 718,
Compensation-Stock Compensation
. Restricted stock is valued using the closing stock price on the date of the grant. Options are valued using a Black-Scholes valuation model.
12
Stock-based non-cash compensation expense related to stock options, restricted stock grants, and the employee stock purchase plan were recorded in the financial statements as follows (in thousands):
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cost of revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Selling and marketing
|
|
|
5
|
|
|
|
84
|
|
|
|
(28
|
)
|
|
|
238
|
|
Research and development
|
|
|
44
|
|
|
|
128
|
|
|
|
169
|
|
|
|
375
|
|
General and administrative
|
|
|
119
|
|
|
|
196
|
|
|
|
463
|
|
|
|
557
|
|
Restructuring expense
|
|
|
—
|
|
|
|
—
|
|
|
|
398
|
|
|
|
—
|
|
Total non-cash stock compensation expense
|
|
$
|
168
|
|
|
$
|
408
|
|
|
$
|
1,002
|
|
|
$
|
1,173
|
|
15. Fair Value Measurements
The Company measures and discloses fair value measurements as required by FASB ASC Topic No. 820,
Fair Value Measurements and Disclosures
.
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the FASB establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
|
•
|
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
|
|
•
|
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace
|
|
•
|
Level 3 - Unobservable inputs which are supported by little or no market activity
|
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
As required by FASB ASC Topic No. 820, we measure our cash and cash equivalents at fair value. Our cash equivalents are classified within Level 1 by using quoted market prices utilizing market observable inputs.
The Company early adopted ASU 2017-11 and changed its method of accounting for warrants during the nine months ended September 30, 2017 on a full retrospective basis. (See Note 19).
16. 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 QuickLink® family of products. Graphics includes our consumer-based products: Poser®, Moho® ClipStudio®, MotionArtist® and StuffIt®.
The Company does not separately allocate operating expenses to these business units, nor does it allocate specific assets. Therefore, business unit information reported includes only revenues.
The following table shows the revenues generated by each business unit (in thousands):
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Wireless
|
|
$
|
4,690
|
|
|
$
|
5,237
|
|
|
$
|
13,678
|
|
|
$
|
17,513
|
|
Graphics
|
|
|
1,114
|
|
|
|
1,241
|
|
|
|
3,564
|
|
|
|
3,638
|
|
Total revenues
|
|
$
|
5,804
|
|
|
$
|
6,478
|
|
|
$
|
17,242
|
|
|
$
|
21,151
|
|
13
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 September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Wireless:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sprint (& affiliates)
|
|
|
58.8
|
%
|
|
|
64.5
|
%
|
|
|
60.0
|
%
|
|
|
64.7
|
%
|
Graphics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FastSpring
|
|
|
12.6
|
%
|
|
|
13.7
|
%
|
|
|
14.1
|
%
|
|
|
12.8
|
%
|
The two customers listed above comprised 68% and 81% of our accounts receivable as of September 30, 2017 and 2016, respectively.
Geographical Information
During the three and nine months ended September 30, 2017 and 2016, the Company operated in three geographic locations; the Americas, EMEA (Europe, the Middle East, and Africa), and Asia Pacific. Revenues, attributed to the geographic location of the customers’ bill-to address, were as follows (in thousands):
|
|
For the Three Months Ended September 30,
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Americas
|
|
$
|
5,713
|
|
|
$
|
6,218
|
|
|
$
|
16,949
|
|
|
$
|
20,662
|
|
EMEA
|
|
|
43
|
|
|
|
203
|
|
|
|
124
|
|
|
|
367
|
|
Asia Pacific
|
|
|
48
|
|
|
|
57
|
|
|
|
169
|
|
|
|
122
|
|
Total revenues
|
|
$
|
5,804
|
|
|
$
|
6,478
|
|
|
$
|
17,242
|
|
|
$
|
21,151
|
|
The Company does not separately allocate specific assets to these geographic locations.
17. Related-Party Transactions
On September 2, 2016, the Company entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with William W. and Dieva L. Smith (collectively, the “Smith”), pursuant to which the Company issued and sold to Smith in a private placement senior subordinated promissory notes in the aggregate principal amount of $2 million (the “Debt Notes”) and five-year warrants (the “Warrants”) to purchase an aggregate of 850,000 shares of the Company’s common stock at an exercise price of $2.74 per share. The Company completed the transactions contemplated by the Purchase Agreement and issued the Debt Notes and Warrants on September 6, 2016. William W. Smith, Jr. is the Company’s Chairman of the Board, President and Chief Executive Officer. Refer to Note 19, Equity Transactions, for additional details.
On February 7, 2017, the Company entered into a short-term secured borrowing arrangement with Smith and on February 8, 2017, the Company entered into a short-term secured borrowing arrangement with Steven L. and Monique P. Elfman (“Elfman”) pursuant to which Smith and Elfman each loaned to the Company $1 million and the Company issued to each of them a Secured Promissory Note (the “Original Notes”) bearing interest at the rate of 18% per annum. The Original Notes were due on March 24, 2017 and were secured by the Company’s accounts receivable and certain other assets. Steven L. Elfman is a director of the Company.
On March 25, 2017, the Company entered into an Amendment to the Original Note issued to Smith that extended the Maturity Date of the Note to June 26, 2017.
On March 31, 2017, the Company entered into a new short-term secured borrowing arrangement with Elfman for $1 million which matured on June 23, 2017.
On May 16, 2017, the Company entered into a subscription agreement with Andrew Arno in a private placement pursuant to which the Company issued and sold 50,000 shares of its common stock at a price per share of $1.10. Andrew Arno is a director of the Company.
14
On June 30, 2017, the Company entered into a new short-term secured bor
rowing arrangement with each Smith and
Elfman to refinance the prior arrangements
with each of them which matured on June 26, 2017 and June 23, 2017, respectively.
Under the new borrowing arrangement, the Company issued to each of Smith and Elfman a new Se
cured Promissory Note (“Replacements Notes”) with a principal balance of $1 million, bearing interest at the rate of 12% per annum, and maturing on September 25, 2017. The maturity date of the Replacement Note entered into with Smith may be extended by up
to 180 days upon the mutual consent of the Company and Smith. Each of the Replacement Notes are secured by the Company’s accounts receivable and certain other assets.
On August 22, 2017, the Company entered into Amendments to the Replacement Notes issued to each of Smith and Elfman, which extended the Maturity Date of the Replacement Notes from September 25, 2017 to January 25, 2018. The amendments do not change any other terms of the Replacement Notes.
On August 23, 2017, the Company entered into a new borrowing arrangement with Smith, under which the Company borrowed $0.8 million and issued to Smith a new Secured Promissory Note, bearing interest at the rate of 12% per annum, and maturing on January 25, 2018.
On August 24, 2017, the Company entered into a new borrowing arrangement with Arno, under which the Company borrowed $0.3 million and issued to Arno Secured Promissory Notes with an aggregate principal balance of $0.3 million, bearing interest at the rate of 12% per annum, and maturing on January 31, 2018.
On September 29, 2017, the Company exchanged shares of the Company’s newly designated Series B 10% Convertible Preferred Stock for outstanding indebtedness with a principal amount of $2.8 million owed to Smith and Arno for 2,750 and 50 shares, respectively, of Series B Preferred Stock.
18. Commitments and Contingencies
Leases
The Company leases its buildings under operating leases that expire on various dates through 2022. Future minimum annual lease payments under such leases as of September 30, 2017 are as follows (in thousands):
Year Ending December 31,
|
|
Operating
|
|
2017 - 3 months remaining
|
|
$
|
595
|
|
2018
|
|
|
2,433
|
|
2019
|
|
|
2,029
|
|
2020
|
|
|
1,725
|
|
2021
|
|
|
1,728
|
|
2022
|
|
|
33
|
|
Total
|
|
$
|
8,543
|
|
As of September 30, 2017, $3.4 million of the remaining lease commitments expense has been accrued as part of the 2013 Restructuring Plan, partially offset by future estimated sublease income of $2.1 million.
Pennsylvania Opportunity Grant Program
On September 19, 2016, we entered into a Settlement and Release Agreement with the Commonwealth of Pennsylvania, acting by and through the Department of Community and Economic Development (“DCED”) to repay $0.3 million of the original $1 million grant previously received by the Company. Per the agreement, the total amount due of $0.3 million is at 0% interest and is payable in twenty equal quarterly installments commencing on January 31, 2017 and ending on October 31, 2021. The balances were $0.3 million as of September 30, 2017 and December 31, 2016 and are reported in Accrued liabilities and Deferred rent and other long-term liabilities on the balance sheet.
Litigation
The Company may become involved in various legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company’s consolidated results of operations, cash flows, or financial position, litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows, or financial position in a particular period.
15
Other Contingent Contractual Obligations
During its normal course of business, the Company has made certain indemnities, commitments, and guarantees under which it may be required to make payments in relation to 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 such facility or lease; indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company; indemnities involving the accuracy of representations and warranties in certain contracts; and, indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. In addition, the Company has made contractual commitments to employees providing for severance payments upon the occurrence of certain prescribed events. The Company may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain customer contracts. The duration of these indemnities, commitments, and guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments, and guarantees may not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets.
19. Equity Transactions
Preferred Stock Offering
On September 29, 2017, the Company entered into a Securities Purchase Agreement with several investors for the issuance and sale (the “Offering”) of 5,500 shares of the Company’s newly designated Series B 10% Convertible Preferred Stock (the “Series B Preferred Stock”) at a stated value of $1,000 per share, for a total purchase price of $5.5 million. The Series B Preferred Stock is convertible into the Company’s Common Stock at a conversion price of $1.14 per share, which was the closing bid price of the Common Stock on September 28, 2017, or approximately 4,824,562 shares of Common Stock in the aggregate.
The holders of
Series B
Preferred Stock are entitled to receive cumulative dividends
out of funds legally available thereof at
a rate of ten percent (10%) per annum,
payable (i) when and as declared by the Board of Directors, in quarterly installments on March 1, June 1, September 1 and December 1, and (ii) upon conversion into Common Stock with respect the Series B Preferred Stock being converted.
In the event that the
trading price of the Company’s Common Stock for 20 consecutive trading days (as determined in the Certificate of Designation) exceeds 400% of the then effective Conversion Price of the Series B Preferred Stock (initially set at $1.14), the Company may force conversion of the Series B Preferred Stock into shares of Common Stock or elect to redeem the Series B Preferred Stock for cash. In addition,
upon the occurrence of certain triggering events, each holder of
Series B Preferred Stock
will have the right to require the Company to redeem such holder’s shares for cash equal to the stated value plus accrued and unpaid dividends and liquidated damages, costs, expenses and other amounts due in respect of the Series B Preferred Stock, and with respect to certain other triggering events, each holder will have the right to increase the dividend rate on such holder’s Series B Preferred Stock to twelve percent (12%) while such triggering event is continuing.
In the Offering, the Company raised gross cash proceeds of $2.7 million, and exchanged outstanding indebtedness with a principal amount of $2.8 million owed to Smith (both long and short-term debt) and $0.1 million owed to Arno. The Offering raised net cash proceeds of $2.5 million (after deducting the placement agent fee and expenses of the Offering). The Company intends to use the net cash proceeds from the Offering for working capital purposes.
In connection with the Offering, the Company granted customary registration rights to investors with respect to the resale of shares of Common Stock issuable upon conversion of the Series B Convertible Preferred Stock.
Common Stock Offering
On May 16, 2017, the Company entered into subscription agreements with several investors for the issuance and sale of an aggregate of 2,077,000 shares of its common stock, in a registered direct offering at a purchase price of $1.05 per share. The Shares were offered by the Company pursuant to a shelf registration statement on Form S-3 (File No. 333-215786), which was declared effective on February 10, 2017 by the Securities and Exchange Commission (the “SEC”). Also, on May 16, 2017, the Company entered into subscription agreements with four accredited investors in a private placement pursuant to which the Company issued and sold to the Investors an aggregate of 85,000 shares of its unregistered common stock at a price per share of $1.10.
The Company engaged Sutter Securities Incorporated and Chardan Capital Markets, LLC as co-placement agents in connection with the registered direct offering pursuant to engagement letter agreements with each firm. The Company agreed to pay the placement agents a cash placement fee and issued to the placement agents warrants to purchase shares of Common Stock equal to 5% of the number of shares sold through each of them, without duplication, at an exercise price per share equal to $1.21 (Sutter) and $1.155 (Chardan). The warrants have a term of five years and will be exercisable beginning on November 18, 2017.
16
The transactions closed on May 17, 2017 and the Company realized gross proceeds of $2.3 million before deducting transaction fees and other expenses.
Offering costs related to the transaction totaled $0.2 million, comprised of $0.1 million of transaction fees and $0.1 million of legal and other expenses, resulting in net proceeds of $2.1 million.
Warrants
On September 2, 2016, we entered into a Note and Warrant Purchase Agreement with Unterberg Koller Capital Fund L.P. and William W. and Dieva L. Smith (collectively, the “Investors”), pursuant to which the Company issued five-year warrants (the “Warrants”) to purchase an aggregate of 1,700,000 shares of the Company’s common stock at an Exercise Price of $2.74 per share, which expire five years from the date of issuance. The Company completed the transaction contemplated by the Note and Warrant Purchase Agreement and issued the Warrants on September 6, 2016. The Warrants contain provisions that if the
Company sells or issues shares of Common Stock (as defined in Warrants) with an exercise price per share less than the Exercise Price of $2.74, the Exercise Price shall be adjusted according to the terms set forth within the Warrants (“Triggering Event”).
On May 16, 2017, the Company engaged Sutter Securities Incorporated (“Sutter”) and Chardan Capital Markets, LLC (“Chardan”) as co-placement agents in connection with a registered direct offering. The Company agreed to pay the placement agents a cash placement fee and issued to the placement agents warrants to purchase shares of Common Stock equal to 5% of the number of shares sold through each of them, without duplication, at an exercise price per share equal to $1.21 (Sutter) and $1.155 (Chardan). The warrants issued to Sutter and Chardan have a term of five years and will be exercisable beginning on November 18, 2017.
Since the issuance of the Warrants on September 6, 2016, there have been five Triggering Events, which caused the Warrants to be repriced from the original Exercise Price of $2.74: Common Stock offerings in May 2017 for $1.10 and 1.05, the issuance of warrants to Sutter and Chardan with exercise prices of $1.21 and $1.155, respectively, all resulting in a charge of $3,000, and the Series B Preferred Stock issuance with a conversion price of $1.14 in September 2017, resulting in a charge of $41,000. The Triggering Event charges were recorded to Stockholders’ Equity in the applicable period. Upon application of the Triggering Events above, the
Unterberg Koller Capital Fund L.P. Adjusted Exercise Price is $2.14 and the Smith Adjusted Exercise Price is $2.38, which is also the agreed upon floor for the Smith Warrants.
The Company early adopted ASU 2017-11 and changed its method of accounting for certain warrants that were initially recorded as liabilities during the nine months ended September 30, 2017 on a full retrospective basis. Since the warrants were issued in conjunction with the Related – party notes payable and Notes payable (the “Notes Payable”) issuance, the Company also revalued the amount of debt discount related to the valuation of the warrants, which impacted the net carrying value of Notes Payable. Accordingly, the Company reclassified the Warrant liability to Additional paid in capital of $1.8 million and $1.2 million and the change in valuation of the amount of debt discount from the Notes payable to Additional paid-in capital of $0.7 million and $0.7 million on the consolidated balance sheets for the three months ended September 30, 2016 and the year ended December 31, 2016, respectively. In addition, due to the retrospective adoption, for the year ended December 31, 2016, the Company credited the Change in fair value of warrant liability on its consolidated statements of operations by $0.9 million with the same offset to Accumulated deficit on the consolidated balance sheets. The following table provides a reconciliation of Warrant liability, Additional paid-in capital, Accumulated deficit and Change in fair value of warrant liability on the consolidated balance sheets for the three months ended September 30, 2016 and the year ended December 31, 2016 (in thousands):
|
|
Consolidated Balance Sheet
|
|
|
|
Related-party
notes payable
|
|
|
Notes payable
|
|
|
Warrant liability
|
|
|
Additional
paid-in capital
|
|
|
Accumulated
deficit
|
|
Balance, September 30, 2016 (Prior to
adoption of ASU 2017-11)
|
|
$
|
883
|
|
|
$
|
883
|
|
|
$
|
1,761
|
|
|
$
|
227,565
|
|
|
$
|
(222,185
|
)
|
Change in valuation of notes payable
|
|
|
359
|
|
|
|
359
|
|
|
|
—
|
|
|
|
(718
|
)
|
|
|
—
|
|
Reclassification of warrant liability
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,761
|
)
|
|
|
1,761
|
|
|
|
—
|
|
Change in fair value of warrant liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
335
|
|
|
|
(335
|
)
|
Change in interest (expense) income, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17
|
)
|
|
|
17
|
|
Balance, September 30, 2016 (After adoption
of ASU 2017-11)
|
|
$
|
1,242
|
|
|
$
|
1,242
|
|
|
$
|
—
|
|
|
$
|
228,926
|
|
|
$
|
(222,503
|
)
|
17
|
|
Consolidated Balance Sheet
|
|
|
|
Related-party
notes payable
|
|
|
Notes payable
|
|
|
Warrant liability
|
|
|
Additional
paid-in capital
|
|
|
Accumulated
deficit
|
|
Balance, December 31, 2016 (Prior to
adoption of ASU 2017-11)
|
|
$
|
967
|
|
|
$
|
967
|
|
|
$
|
1,210
|
|
|
$
|
227,889
|
|
|
$
|
(225,397
|
)
|
Change in valuation of notes payable
|
|
|
328
|
|
|
|
328
|
|
|
|
—
|
|
|
|
(656
|
)
|
|
|
—
|
|
Reclassification of warrant liability
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,210
|
)
|
|
|
1,210
|
|
|
|
—
|
|
Change in fair value of warrant liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
910
|
|
|
|
(910
|
)
|
Change in interest (expense) income, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(79
|
)
|
|
|
79
|
|
Balance, December 31, 2016 (After adoption
of ASU 2017-11)
|
|
$
|
1,295
|
|
|
$
|
1,295
|
|
|
$
|
—
|
|
|
$
|
229,274
|
|
|
$
|
(226,228
|
)
|
The adoption of ASU 2017-11 increased the Loss before provision for income taxes and Net loss by $0.3 million for the three months and nine months ended September 30, 2016, and increased the Net loss per share by $0.03 and $0.02 for the same periods, respectively. During the nine months ended September 30, 2017, there was no impact on the Loss before provision for income taxes, Net loss and Net loss per share due to the adoption of ASU 2017-11.
The Company’s consolidated statement of cash flows for the nine months ended September 30, 2016 was also impacted by the adoption of ASU 2017-11,
including the increase in the Net loss by $0.3 million, the reduction of Amortization of debt discounts by a nominal amount and the elimination of the previously reported Change in fair value of warrant liabilities of $0.3 million.
20. 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 year 2016. These facts, combined with uncertain near-term market and economic conditions, reduced the Company’s ability to rely on projections of future taxable income in assessing the realizability of its deferred tax assets.
After a review of the four sources of taxable income as of December 31, 2016 (as described above), and after consideration of the Company’s continuing cumulative loss position as of December 31, 2016, the Company will continue to reserve its US-based deferred tax amounts, which total $76.3 million, as of September 30, 2017.
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 subject to IRS examination for the 2012 – 2016 tax years. State income tax returns are subject to examination for a period of three to four years after filing. 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.
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21. 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 were required.
19