Notes to the Consolidated Financial Statements
(Unaudited)
1. The Company
Smith Micro Software, Inc. (“Smith Micro” or the “Company”) develops software to simplify and enhance the mobile experience, providing solutions to some of the leading wireless service providers and cable MSOs around the world. From enabling the family digital lifestyle to providing powerful voice messaging capabilities, our solutions enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones and consumer IoT devices. Our portfolio also includes a wide range of products for creating, sharing and monetizing rich content, such as visual messaging, optimizing retail content display, analytics capabilities, and 2D/3D graphics applications.
2. Accounting Policies
Basis of Presentation
The accompanying interim consolidated balance sheet as of March 31, 2019, and the related consolidated statements of operations and comprehensive loss and cash flows for the three months ended March 31, 2019 and 2018, are unaudited. The unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted.
In the opinion of management, the accompanying unaudited consolidated financial statements for the periods presented reflect all adjustments which are normal and recurring, and necessary to fairly state the financial position, results of operations, and cash flows of the Company. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on March 27, 2019.
Intercompany balances and transactions have been eliminated in consolidation.
Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2019.
Recently Adopted Accounting Pronouncements
The Company adopted FASB ASC Topic No. 842,
Leases,
and related amendments, as of January 1, 2019, utilizing the modified retrospective approach through a cumulative-effect adjustment to equity. We elected the package of practical expedients permitted under the transition guidance within the new standard which allowed us to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $3.1 million as of January 1, 2019, and an adjustment to retained earnings of $0.1 million. The standard did not materially impact our consolidated net income or earnings per share and had no impact on cash flows. See Note 11 for further details.
Revenue Recognition
The Company adopted FASB ASC Topic No. 606,
Revenue from Contracts with Customers,
as of January 1, 2018, and recognizes the sale of goods and services based on the five step analysis of transactions as provided in Topic 606 which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods and services.
In our Wireless segment, we transfer software licenses to our customers on a royalty free, non-exclusive, non-transferrable, limited use basis during the term of the agreement. In some instances, we perform customization services to ensure the software operates within our customer’s operating platforms as well as the operating platforms of the mobile devices used by their end customers before transferring the license. Revenue related to these services is recognized at a point in time upon acceptance of the software license by the customer. We also earn usage based revenue on our platforms. Usage based revenue is generated based on active licenses used by our customer’s end customers, the provision of hosting services, revenue share based on media placements on our platform, and use of our cloud based services. We recognize our usage based revenue when we have completed our performance obligation and have the right to invoice the customer. This revenue is generally recognized monthly or quarterly.
We also provide consulting services to develop customer specified functionality that are generally not on our software development roadmap. We recognize revenue from our consulting services upon delivery and acceptance by the customer of our software enhancements and upgrades. For certain Wireless segment customers we provide maintenance and technology support services for
6
which the customer pays upfront or as we provide the services. When the customer pays upfront, we record the payments as contract liabil
ities and recognize revenue ratably over the contract period as this is our stand ready performance obligation that is satisfied ratably over the maintenance and technology services period.
As discussed in Note 3, during the first quarter of 2019 we acquired assets associated with the Smart Retail product suite, later branded ViewSpot, from ISM Connect, LLC. Our ViewSpot contracts with the Tier 1 customers include promises to transfer multiple products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a cloud-based service includes both on-premises software licenses and cloud services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Certain cloud services, primarily ViewSpot, depend on a significant level of integration, interdependency, and interrelation between the on-premise applications and cloud services, and are accounted for together as one performance obligation. Revenue from ViewSpot is recognized ratably over the period in which the cloud services are provided.
We receive upfront payments from customers from services to be provided under our ViewSpot arrangements. The advance receipts are deferred and subsequently recognized ratably over the contract period. We also provide consulting services to configure ad hoc targeted promotional content for our customers upon request. These requests are driven by our customer’s marketing initiatives and tend to be short term “bursts” of activity. We recognize these revenues upon delivery of the configured promotional content to the cloud platform.
In our Graphics segment where we sell off-the-self software products with no customization or post sale technology support services, we recognize revenue at the time we transfer control of the product to the customer. This occurs upon shipment of the product or when the customer downloads the software from our website or website of our resellers. We offer a 30 day return option to our customers; a return reserve is established at the time revenue is recorded and the reserve is monitored and adjusted based on actual experience. Historically, returns have been insignificant.
Fair Value Measurements
The Company measures and discloses fair value measurements as required by FASB Accounting Standards Codification (“ASC”) Topic No. 820,
Fair Value Measurements and Disclosures
.
Fair value is an exit price, representing the amount that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the FASB establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
|
•
|
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
|
|
•
|
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace
|
|
•
|
Level 3 - Unobservable inputs which are supported by little or no market activity
|
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
As required by FASB ASC Topic No. 820, we measure our cash and cash equivalents at fair value. Our cash equivalents are classified within Level 1 by using quoted market prices utilizing market observable inputs.
As required by FASB ASC Topic No. 820, we measured our warrant liability at fair value. Our warrant liability was classified within Level 3 as some of the inputs to our valuation model are either not observable quoted prices or are not derived principally from, or corroborated by, observable market data by correlation or other means.
As required by FASB ASC Topic No. 350, for goodwill and other intangibles impairment analysis, we utilize fair value measurements which are categorized within Level 3 of the fair value hierarchy.
7
3
. Acquisitions
In December 2018, the Company entered into a definitive agreement to acquire the net assets of ISM Connect, LLC’s Smart Retail product suite (“Smart Retail”). The transaction closed on January 9, 2019.
The following table summarizes the consideration paid for the Smart Retail acquisition in 2019 (unaudited, in thousands):
Fair value of assets acquired
|
|
$
|
9,394
|
|
Fair value of liabilities assumed
|
|
|
291
|
|
Total purchase price
|
|
$
|
9,103
|
|
|
|
|
|
|
Components of purchase price:
|
|
|
|
|
Cash
|
|
$
|
3,974
|
|
Common stock
|
|
|
5,129
|
|
Total purchase price
|
|
$
|
9,103
|
|
The Company’s preliminary allocation of the purchase price is summarized as follows (unaudited, in thousands):
Assets:
|
|
|
|
|
Costs incurred on projects not complete
|
|
$
|
53
|
|
Intangible assets
|
|
|
5,229
|
|
Goodwill
|
|
|
4,112
|
|
Total assets
|
|
$
|
9,394
|
|
Liabilities:
|
|
|
|
|
Deferred revenue
|
|
$
|
291
|
|
Total liabilities
|
|
|
291
|
|
Total purchase price
|
|
$
|
9,103
|
|
The purpose of the Smart Retail acquisition was to acquire a new growing and profitable revenue stream while deepening the relationships with our customers. The Smart Retail platform, which we now call ViewSpot™ , enables wireless carriers and retailers to offer powerful on-screen, interactive device demos that deliver consistent, secure and targeted content that showcase the features of the devices that consumers what to see and learn more about. ViewSpot also provides analytics capabilities, which allow customers to gain valuable insights and buying behaviors. The platform is a logical addition to the Company’s existing product line that reaches wireless carriers and provides them with services that can attract and retain customers.
Unaudited pro forma results of operations for the three month ended March 31, 2019 and 2018 are included below as if the acquisition occurred on January 1, 2018. This summary of the unaudited pro forma results of operations is not necessarily indicative of what the Company’s results of operations would have been had Smart Retail been acquired at the beginning of 2018, nor does it purport to represent results of operations for any future periods.
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited, in thousands, except per share amounts)
|
|
Revenues
|
|
$
|
8,432
|
|
|
$
|
6,515
|
|
Net income (loss)
|
|
|
48
|
|
|
|
(2,032
|
)
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
(0.14
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.14
|
)
|
8
4
. Going
Concern Evaluation
In connection with preparing consolidated financial statements for the three months ended March 31, 2019, management evaluated whether there were conditions and events that, when considered in the aggregate, raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.
The Company considered the historical operating loss and negative cash flow from operating activities trends, including the positive trends occurring in the recent year.
Ordinarily, conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern relate to the entity’s ability to meet its obligations as they become due.
The Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial statements are issued by considering the following:
|
•
|
In May 2017, the Company raised $2.2 million of new capital in a private placement offering of its common stock.
|
|
•
|
In September 2017, the Company closed on a $5.5 million preferred stock transaction which converted $2.8 million of long and short-term debt and raised $2.7 million of new capital.
|
|
•
|
On March 5, 2018, the Company raised $5.0 million of new capital in a private placement offering of its common stock.
|
|
•
|
On May 3, 2018, the Company raised $7.0 million of new capital in a private placement offering of its common stock.
|
|
•
|
On November 7, 2018, the Company raised $7.5 million of new capital in a private placement offering of its common stock. Following this transaction, $3.2 million of short and long-term debt was repaid.
|
Management believes the Company will generate enough cash from operations to satisfy its obligations for the next twelve months from the issuance date.
The Company will take the following actions, if it starts to trend unfavorably against its internal profitability and cash flow projections, in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:
|
•
|
Raise additional capital through a private placement.
|
|
•
|
Raise additional capital through short-term loans.
|
|
•
|
Implement restructuring and cost reductions.
|
|
•
|
Secure a commercial bank line of credit.
|
|
•
|
Sell or license intellectual property.
|
5. Goodwill
In accordance with FASB ASC Topic No. 350,
Intangibles-Goodwill and Other
, we review the recoverability of the carrying value of goodwill at least annually or whenever events or circumstances indicate a potential impairment. The Company’s impairment testing will be performed annually at December 31. Recoverability of goodwill is determined by comparing the fair value of the Company’s reporting units to the carrying value of the underlying net assets in the reporting units. If the fair value of a reporting unit is determined to be less than the carrying value of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the fair value of its other assets and liabilities. The Company determined that there was no goodwill impairment at March 31, 2019 and December 31, 2018.
6. Earnings Per Share
The Company calculates earnings per share (“EPS”) as required by FASB ASC Topic No. 260,
Earnings Per Share
. Basic EPS is calculated by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period, excluding common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period, plus the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For periods with a net loss, the dilutive common stock equivalents are excluded from the diluted EPS calculation. For purposes of this calculation, common stock subject to repurchase by the Company, options, and warrants are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.
9
The following table sets forth the details of basic and diluted earnings per share:
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited, in thousands, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
48
|
|
|
$
|
(2,381
|
)
|
Dividends paid to preferred stockholders
|
|
|
(34
|
)
|
|
|
(141
|
)
|
Net income (loss) available to common
stockholders
|
|
$
|
14
|
|
|
$
|
(2,522
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
|
|
31,297
|
|
|
|
15,299
|
|
Potential common shares – options / warrants
(treasury stock method)
|
|
|
26
|
|
|
|
—
|
|
Weighted average shares outstanding – diluted
|
|
|
31,323
|
|
|
|
15,299
|
|
Shares excluded (anti-dilutive)
|
|
|
—
|
|
|
|
135
|
|
Shares excluded due to an exercise price greater
than weighted average stock price for the period
|
|
|
11,213
|
|
|
|
1,073
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
(0.16
|
)
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
(0.16
|
)
|
7. Stock-Based Compensation
Stock Plans
During the three months ended March 31, 2019, the Company granted 1,250,000 shares of restricted stock and 45,000 incentive stock options under the Company’s 2015 Omnibus Equity Incentive Plan, as amended. As of March 31, 2019, there were 1.3 million shares available for future grants under the 2015 Omnibus Equity Incentive Plan.
8. Revenues
Revenue Recognition
We sell products and services to customers in our Wireless and Graphics segments. In our Wireless segment, we sell our software solution, cloud based services and consulting services to major wireless network and cable operators. We sell our off-the-shelf Graphics software products directly to end users as well as through our distribution and reseller channel partners.
We recognize sales of goods and services based on the five-step analysis of transactions as provided in Topic 606. For all contracts with customers, we first identify the contract which usually is established when a contract is fully executed by each party and consideration is expected to be received. Next, we identify the performance obligations in the contract. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. We then determine the transaction price in the arrangement and allocate the transaction price, if necessary, to each performance obligation identified in the contract. The allocation of the transaction price to the performance obligations are based on the relative standalone selling prices for the goods and services contained in a particular performance obligation. The transaction price is adjusted for the Company’s estimate of variable consideration which may include certain incentives and discounts, product returns, distributor fees, and storage fees. We evaluate the total amount of variable consideration expected to be earned by using the expected value method, as we believe this method represents the most appropriate estimate for this consideration, based on historical service trends, the individual contract considerations and our best judgment at the time. We include estimates of variable consideration in revenues only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We also generate the majority of our revenue on usage based fees which are variable and depend entirely on our customers use of perpetual licenses, transactions processed on our hosted environment, advertisement placements on our service platform, and activity on our cloud based service platform.
10
During the first quarter
of
2019, we acquired
the Smart Retail
assets from ISM Connect
,
LLC
.
Our contracts with the Tier 1 customers include promises to transfer multiple products and services. Determining whether products and
services are considered distinct performance obligations that should be accounted for separately versus together may require sig
nificant judgment. When a cloud
based service includes both on-premises software licenses and cloud services, judgment is requi
red to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud se
rvice and recognized over time.
Certain cloud services, primarily ViewSpot, depend on a significa
nt level of integration, interdependency, and interrelation between the on-premise applications and cloud services, and are accounted for together as one performance obligation. Revenue from ViewSpot is recognized ratably over the period in which the cloud
services are provided.
We receive upfront payments from customers from services to be provided under our ViewSpot arrangements. The advance receipts are deferred and subsequently recognized ratably over the contract period. We also provide consulting services to configure ad hoc targeted promotional content for our customers upon request. These requests are driven by our customer’s marketing initiatives and tend to be short term “bursts” of activity. We recognize these revenues upon delivery of the configured promotional content to the cloud platform.
We have made accounting policy elections to exclude all taxes by governmental authorities from the measurement of the transaction price, and since our standard payment terms are less than one year, we have elected the practical expedient not to assess whether a contract has a significant financing component.
Deferred Revenue
Deferred revenue represents amounts billed to customers for which revenue has not been recognized. Deferred revenue primarily consists of the unearned portion of monthly, quarterly and annually billed service fees and prepayments made by customers for a future period. We recognize revenue upon transfer of control. During the three months ended March 31, 2019 we recognized $27 thousand in our consolidated statements of operations that was previously recorded as deferred revenue in the consolidated balance sheet at January 1, 2019.
As of March 31, 2019, our total deferred revenue balance was $0.2 million.
Disaggregation of Revenues
We disaggregate revenue by our Wireless and Graphics segments.
Revenues on a disaggregated basis are as follows (in thousands):
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
Wireless:
|
|
|
|
|
|
|
|
|
CommSuite & Netwise
|
|
$
|
4,678
|
|
|
$
|
3,974
|
|
SafePath
|
|
|
2,134
|
|
|
|
323
|
|
ViewSpot
|
|
|
786
|
|
|
|
—
|
|
Consulting services and other
|
|
|
561
|
|
|
|
509
|
|
Legacy software licenses
|
|
|
13
|
|
|
|
10
|
|
Total wireless
|
|
|
8,172
|
|
|
|
4,816
|
|
Graphics:
|
|
|
|
|
|
|
|
|
Software
|
|
|
260
|
|
|
|
647
|
|
Total revenues
|
|
$
|
8,432
|
|
|
$
|
5,463
|
|
9. Segment, Customer Concentration and Geographical Information
Segment Information
Public companies are required to report financial and descriptive information about their reportable operating segments as required by FASB ASC Topic No. 280,
Segment Reporting
. The Company has two primary business units based on how management internally evaluates separate financial information, business activities and management responsibility. Wireless includes our NetWise®, CommSuite®, SafePath®, and ViewSpot™ family of products. Graphics includes our consumer-based products: Poser®, Moho®, MotionArtist®, Rebelle, PhotoDonut and StuffIt®, and through April 2018 included third-party software products under the Clip Studio® brand, which we distributed under an agreement which expired in October 2017 and permitted certain post-termination distribution rights until April 2018.
The Company does not separately allocate operating expenses to these business units, nor does it allocate specific assets. Therefore, business unit information reported includes only revenues.
11
The following table shows the revenues
generated by each business unit (in thousands):
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
Wireless
|
|
$
|
8,172
|
|
|
$
|
4,816
|
|
Graphics
|
|
|
260
|
|
|
|
647
|
|
Total revenues
|
|
$
|
8,432
|
|
|
$
|
5,463
|
|
Customer Concentration Information
A summary of the Company’s customers that represent 10% or more of the Company’s net revenues is as follows:
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
Wireless:
|
|
|
|
|
|
|
|
|
Sprint (& affiliates)
|
|
|
77
|
%
|
|
|
75
|
%
|
Graphics:
|
|
|
|
|
|
|
|
|
FastSpring
|
|
|
2
|
%
|
|
|
10
|
%
|
The two customers listed above comprised 78% and 80% of our accounts receivable as of March 31, 2019 and 2018, respectively.
Geographical Information
During the three months ended March 31, 2019 and 2018, the Company operated in three geographic locations; the Americas, EMEA (Europe, the Middle East, and Africa), and Asia Pacific. Revenues attributed to the geographic location of the customers’ bill-to address were as follows (in thousands):
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
Americas
|
|
$
|
8,392
|
|
|
$
|
5,374
|
|
EMEA
|
|
|
19
|
|
|
|
30
|
|
Asia Pacific
|
|
|
21
|
|
|
|
59
|
|
Total revenues
|
|
$
|
8,432
|
|
|
$
|
5,463
|
|
The Company does not separately allocate specific assets to these geographic locations.
10. Commitments and Contingencies
Litigation
The Company may become involved in various legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company’s consolidated results of operations, cash flows, or financial position, litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows, or financial position in a particular period.
Other Contingent Contractual Obligations
During its normal course of business, the Company has made certain indemnities, commitments, and guarantees under which it may be required to make payments in connection with certain transactions. These include: intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale, and/or license of Company products; indemnities to various lessors in connection with facility leases for certain claims arising from use of such facility or under such lease; indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company; indemnities involving the accuracy of representations and warranties in certain contracts; and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. In addition, the Company has made contractual commitments to employees providing for severance payments upon the occurrence of certain prescribed events. The Company may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain customer contracts. The duration of these indemnities,
12
commitments, and guarante
es varies, and in certain cases
may be indefinite. The majority of these indemnities, commitments, and guarantee
s may not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance
sheets.
11. Leases
The Company leases office space and equipment, and certain office space is subleased. Management determines if a contract is a lease at the inception of the arrangement and reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised.
Leases with an initial term of greater than twelve months are recorded on the consolidated balance sheet. Lease expense is recognized on a straight-line basis over the lease term.
The Company’s lease contracts generally do not provide a readily determinable implicit rate. For these contracts, the estimated incremental borrowing rate is based on information available at the inception of the lease.
Operating lease cost consists of the following (in thousands):
|
|
For the Three Months Ended March 31, 2019
|
|
|
|
(unaudited)
|
|
Lease cost
|
|
$
|
397
|
|
Sublease income
|
|
|
(151
|
)
|
Total lease cost
|
|
$
|
246
|
|
Operating lease assets and liabilities are summarized as follows (in thousands):
|
|
As of March 31, 2019
|
|
|
|
(unaudited)
|
|
Right-of-use assets
|
|
$
|
2,419
|
|
|
|
|
|
|
Current lease liabilities
|
|
$
|
987
|
|
Long-term lease liabilities
|
|
|
1,876
|
|
Total lease liabilities
|
|
$
|
2,863
|
|
The maturity of operating lease liabilities is presented in the following table (in thousands):
|
|
As of March 31, 2019
|
|
|
|
(unaudited)
|
|
2019
|
|
$
|
858
|
|
2020
|
|
|
1,143
|
|
2021
|
|
|
1,109
|
|
2022
|
|
|
14
|
|
2023
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
Total lease payments
|
|
|
3,124
|
|
Less imputed interest
|
|
|
261
|
|
Present value of lease liabilities
|
|
$
|
2,863
|
|
As of March 31, 2019, we have an additional operating lease for office space that has not yet commenced with a lease liability totaling approximately $1.5 million. This lease will commence during the second quarter of 2019.
12. Equity Transactions
In January 2019, the Company issued 2,699,531 shares of Common Stock in connection with its acquisition of the Smart Retail product suite of ISM connect, LLC. See Note 3 for further details.
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. Income Taxes
We account for income taxes as required by FASB ASC Topic No. 740,
Income Taxes
. This Topic clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Topic requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. In addition, the Topic permits an entity to recognize interest and penalties related to tax uncertainties as either income tax expense or operating expenses. The Company has chosen to recognize interest and penalties related to tax uncertainties as income tax expense.
The Company assesses whether a valuation allowance should be recorded against its deferred tax assets based on the consideration of all available evidence, using a “more likely than not” realization standard. The four sources of taxable income that must be considered in determining whether deferred tax assets will be realized are: (1) future reversals of existing taxable temporary differences (i.e., offset of gross deferred tax liabilities against gross deferred tax assets); (2) taxable income in prior carryback years, if carryback is permitted under the applicable tax law; (3) tax planning strategies; and (4) future taxable income exclusive of reversing temporary differences and carryforwards.
In assessing whether a valuation allowance is required, significant weight is to be given to evidence that can be objectively verified. A significant factor in the Company’s assessment is that the Company has been in a five-year historical cumulative loss as of the end of fiscal 2017. These facts, combined with uncertain near-term market and economic conditions, reduced the Company’s ability to rely on projections of future taxable income in assessing the realizability of its deferred tax assets.
After a review of the four sources of taxable income as of December 31, 2018 (as described above), and after consideration of the Company’s continuing cumulative loss position as of December 31, 2018, the Company will continue to reserve its U.S.-based deferred tax amounts, which total $52.4 million as of March 31, 2019.
The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Federal income tax returns of the Company are currently subject to IRS examination for the 2015 – 2017 tax years. State income tax returns are subject to examination for a period of three to four years after filing and currently the 2014-2017 tax years are open for audit. The outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our consolidated financial results. It is the Company’s policy to classify any interest and/or penalties in the consolidated financial statements as a component of income tax expense.
14. Subsequent Events
The Company evaluates and discloses subsequent events as required by FASB ASC Topic No. 855,
Subsequent Events
. The Topic establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or are available to be issued. Subsequent events have been evaluated as of the date of this filing and no further disclosures are required.
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