Item 1. Financial Statements
See accompanying notes to the consolidated financial statements.
See accompanying notes to the consolidated financial statements.
See accompanying notes to the consolidated financial statements.
See accompanying notes to the consolidated financial statements.
SMITH MICRO SOFTWARE, INC.
Notes to the Consolidated Financial Statements
(Unaudited)
1. The Company
Smith Micro Software, Inc. (“Smith Micro” or “the Company”) develops software to simplify and enhance the mobile experience, providing solutions to some of the leading wireless and cable service providers around the world. From enabling the family digital lifestyle to providing powerful voice messaging capabilities, the Company strives to enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones and consumer Internet of Things (“IoT”) devices. Smith Micro’s portfolio includes a wide range of products for creating, sharing, and monetizing rich content, such as visual voice messaging, retail content display optimization and performance analytics on any product set.
Smith Micro’s solution portfolio is comprised of proven products that enable its customers to provide:
|
• |
In-demand digital services that connect today’s digital lifestyle, including family location services, parental controls, and consumer IoT devices to mobile consumers worldwide; |
|
• |
Easy visual access to voice messages on mobile devices through visual voicemail and voice-to-text transcription functionality; and |
|
• |
Strategic, consistent, and measurable digital demonstration experiences that educate retail shoppers, create awareness of products and services, and drive in-store sales, and optimize retail experiences with actionable analytics derived from in-store customer behavior. |
2. Accounting Policies
Basis of Presentation
The accompanying interim consolidated balance sheet as of March 31, 2022, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the three months ended March 31, 2022 and 2021, 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 of America (“US GAAP”) have been omitted.
In the opinion of management, the accompanying unaudited consolidated financial statements for the periods presented reflect all adjustments which are normal and recurring, and necessary to fairly state the financial position, results of operations, and cash flows of the Company. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 11, 2022.
Intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the prior period consolidated financial statements have been reclassified for comparative purposes principally to conform to the presentation of the current year period.
Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2022.
3. Credit Facility
On March 31, 2022, the Company and its wholly-owned subsidiary, Smith Micro Software, LLC, as co-borrowers entered into a credit agreement with Wells Fargo Bank, National Association providing for a $7.0 million secured revolving credit facility (the “Credit Facility”) that can be utilized to finance the Company’s working capital requirements and other general corporate purposes, and of which up to $0.5 million is available for letters of credit.
The Credit Facility will mature on March 31, 2023. The loans under the Credit Facility bear interest at the secured overnight financing rate plus 2%. The Credit Facility allows voluntary repayment of outstanding loans at any time without premium or penalty. The Credit Facility is secured by substantially all of the property of the borrowers.
The Credit Facility contains representations and warranties, affirmative and negative covenants and events of default customary for financings of this type, including negative covenants that, among other things, limit the ability of the borrowers to incur liens, limit the ability of the borrowers to make certain fundamental changes and limit the ability of the borrowers to incur other indebtedness, in each case subject to exceptions and qualifications. The Credit Facility also contains a current asset coverage ratio covenant for any quarter in
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which the Credit Facility has an outstanding balance. This covenant requires the ratio of (i) the sum of cash plus marketable securities, plus accounts receivable to (ii) the principal balance outstanding of the Credit Facility to not be less than 2.0 to 1.0. As of March 31, 2022, there were no borrowings outstanding under the Credit Facility.
4. Goodwill and Intangible Assets
In accordance with FASB ASC Topic No. 350, Intangibles-Goodwill and Other, Smith Micro reviews 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 on December 31. Recoverability of goodwill is determined by comparing the fair value of the Company’s reporting unit to the carrying value of the underlying net assets in the reporting unit. 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, 2022 and December 31, 2021.
The components of the Company’s intangible assets were as follows for the periods presented:
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
|
|
(unaudited, in thousands, except for useful life data) |
|
|
(audited, in thousands, except for useful life data) |
|
|
|
Weighted Average Remaining Useful Life (in Years) |
|
|
Gross |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
|
Weighted Average Remaining Useful Life (in Years) |
|
Gross |
|
|
Accumulated Amortization |
|
|
Net Book Value |
|
Purchased technology |
|
7 |
|
|
$ |
13,529 |
|
|
$ |
(4,288 |
) |
|
$ |
9,241 |
|
|
8 |
|
$ |
13,529 |
|
|
$ |
(3,764 |
) |
|
$ |
9,765 |
|
Customer relationships |
|
13 |
|
|
|
27,960 |
|
|
|
(3,337 |
) |
|
|
24,623 |
|
|
13 |
|
|
27,960 |
|
|
|
(2,816 |
) |
|
|
25,144 |
|
Customer contracts |
|
2 |
|
|
|
7,000 |
|
|
|
(4,810 |
) |
|
|
2,190 |
|
|
2 |
|
|
7,000 |
|
|
|
(4,441 |
) |
|
|
2,559 |
|
Software license |
|
8 |
|
|
|
5,419 |
|
|
|
(983 |
) |
|
|
4,436 |
|
|
9 |
|
|
5,419 |
|
|
|
(793 |
) |
|
|
4,626 |
|
Non-compete |
|
|
1 |
|
|
|
283 |
|
|
|
(215 |
) |
|
|
68 |
|
|
|
1 |
|
|
283 |
|
|
|
(196 |
) |
|
|
87 |
|
Patents |
|
|
5 |
|
|
|
600 |
|
|
|
(171 |
) |
|
|
429 |
|
|
|
5 |
|
|
600 |
|
|
|
(150 |
) |
|
|
450 |
|
Total |
|
|
|
|
|
$ |
54,791 |
|
|
$ |
(13,804 |
) |
|
$ |
40,987 |
|
|
|
|
|
$ |
54,791 |
|
|
$ |
(12,160 |
) |
|
$ |
42,631 |
|
The Company amortizes intangible assets over the pattern of economic benefit expected to be generated from the use of the assets, with a total weighted average amortization period of approximately 10 years as of March 31, 2022 and December 31, 2021.
As of March 31, 2022, estimated amortization expense for the remainder of 2022 and thereafter was as follows:
Year Ending December 31, |
|
Amortization Expense |
|
|
|
(unaudited, in thousands) |
|
2022 |
|
$ |
4,666 |
|
2023 |
|
|
5,874 |
|
2024 |
|
|
5,635 |
|
2025 |
|
|
5,402 |
|
2026 |
|
|
5,007 |
|
2027 and thereafter |
|
|
14,403 |
|
Total |
|
$ |
40,987 |
|
5. Earnings Per Share
The Company calculates earnings per share (“EPS”) as required by FASB ASC Topic No. 260, Earnings Per Share. Basic EPS is calculated by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period, excluding common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period, plus the weighted average number of
7
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.
The following table sets forth the details of basic and diluted earnings per share:
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(unaudited, in thousands, except per share amounts) |
|
Numerator: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(7,002 |
) |
|
$ |
(3,225 |
) |
Denominator: |
|
|
|
|
|
|
|
|
Weighted average shares outstanding –
basic |
|
|
54,501 |
|
|
|
43,368 |
|
Potential common shares – options /
warrants (treasury stock method) |
|
|
— |
|
|
|
— |
|
Weighted average shares outstanding –
diluted |
|
|
54,501 |
|
|
|
43,368 |
|
|
|
|
|
|
|
|
|
|
Shares excluded (anti-dilutive) |
|
|
1,024 |
|
|
|
2,559 |
|
|
|
|
|
|
|
|
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.13 |
) |
|
$ |
(0.07 |
) |
Diluted |
|
$ |
(0.13 |
) |
|
$ |
(0.07 |
) |
6. Stock-Based Compensation
Stock Plans
During the three months ended March 31, 2022, the Company granted 1.2 million shares of restricted stock under the Company’s 2015 Omnibus Equity Incentive Plan, as amended (the “2015 Plan”). As of March 31, 2022, there were approximately 2.6 million shares available for future grants under the Company’s 2015 Plan.
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7. Revenues
Revenue Recognition
In accordance with FASB ASC Topic No. 606, Revenue from Contracts with Customers, the Company 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.
The Company recognizes sales of goods and services based on the five-step analysis of transactions as provided in Topic 606. For all contracts with customers, the Company first identifies the contract which usually is established when a contract is fully executed by each party and consideration is expected to be received. Next, the Company identifies 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. The Company then determines the transaction price in the arrangement and allocates 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. The Company evaluates the total amount of variable consideration expected to be earned by using the expected value method, as the Company believes this method represents the most appropriate estimate for this consideration, based on historical service trends, the individual contract considerations, and its best judgment at the time. The Company includes 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. The Company also generates the majority of its revenue on usage-based fees which are variable and depend entirely on customers’ use of perpetual licenses, transactions processed on the Company’s hosted environment, advertisement placements on the Company’s service platform, and activity on the Company’s cloud-based service platform.
The Company’s contracts with the mobile network operator (“MNO”) 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. Smith Micro’s cloud-based service includes a software solution license integrated with cloud-based services. Since the Company does not allow its customers to take possession of the software solution, and since the utility of the license comes from the cloud-based services that the Company provides, Smith Micro considers the software license and the cloud services to be a single performance obligation. The Company provides the license to the software solution that it acquired from Circle Media Labs Inc. in 2020 together with highly integrated consulting services to generate the utility of the license to the customers. Since the software solution and consulting services provided are highly interrelated, Smith Micro consider the license and the consulting services to be a single performance obligation. The Company recognizes revenue associated with its MNO customers based on their active subscribers’ access and usage of Smith Micro’s software licenses and cloud-based services on Smith Micro’s platforms.
Smith Micro has made accounting policy elections to exclude all taxes by governmental authorities from the measurement of the transaction price, and since the Company’s standard payment terms are less than one year, the Company has elected the practical expedient not to assess whether a contract has a significant financing component.
Disaggregation of Revenues
Revenues on a disaggregated basis are as follows:
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(unaudited, in thousands) |
|
License and service fees |
|
$ |
828 |
|
|
$ |
1,587 |
|
Hosted environment usage fees |
|
|
1,429 |
|
|
|
4,141 |
|
Cloud based usage fees |
|
|
9,878 |
|
|
|
4,963 |
|
Consulting services and other |
|
|
600 |
|
|
|
690 |
|
Total revenues |
|
$ |
12,735 |
|
|
$ |
11,381 |
|
9
8. Segment, Customer Concentration and Geographical Information
Segment Information
Public companies are required to report financial and descriptive information about their reportable operating segments as required by FASB ASC Topic No. 280, Segment Reporting. The Company has one primary business unit based on how management internally evaluates separate financial information, business activities and management responsibility: Wireless. The Wireless segment includes the SafePath®, CommSuite®, and ViewSpot® families of products.
The Company does not separately allocate operating expenses to these product lines, nor does it allocate specific assets. Therefore, product line information reported includes only revenues.
The following table presents the Wireless revenues by product line:
|
|
For the Three Months Ended March 31, |
|
|
|
|
2022 |
|
|
2021 |
|
|
|
|
(unaudited, in thousands) |
|
|
SafePath |
|
|
10,366 |
|
|
|
6,267 |
|
|
CommSuite |
|
|
1,429 |
|
|
|
4,128 |
|
|
ViewSpot |
|
|
935 |
|
|
|
930 |
|
|
Other |
|
|
5 |
|
|
|
56 |
|
|
Total wireless revenues |
|
$ |
12,735 |
|
|
$ |
11,381 |
|
|
Customer Concentration Information
The Company has certain customers whose revenues individually represented 10% or more of the Company’s total revenues, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable.
For the three months ended March 31, 2022 three customers with over 10% of revenues made up 40%, 37%, and 10% of revenues. For the three months ended March 31, 2021, three customers with over 10% of revenues made up 71%, 10%, and 10% of revenues.
As of March 31, 2022, four customers accounted for 36%, 35%, 12%, and 11% of accounts receivable, and as of March 31, 2021, two customers accounted for 61% and 19% of accounts receivable.
Geographical Information
During the three months ended March 31, 2022 and 2021, the Company operated in two geographic locations: the Americas and Europe, Middle East and Africa (EMEA). Revenues attributed to the geographic location of the customers’ bill-to address were as follows:
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(unaudited, in thousands) |
|
Americas |
|
$ |
12,193 |
|
|
$ |
10,144 |
|
EMEA |
|
|
542 |
|
|
|
1,237 |
|
Total revenues |
|
$ |
12,735 |
|
|
$ |
11,381 |
|
The Company does not separately allocate specific assets to these geographic locations.
9. Commitments and Contingencies
Litigation
The Company may become involved in various legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company’s consolidated results of operations, cash flows, or financial position, litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows, or financial position in a particular period.
10
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: indemnities to the Company’s customers pursuant to contracts for the Company’s products and services, including indemnities with respect to intellectual property, confidentiality and data privacy; indemnities to various lessors in connection with facility leases for certain claims arising from use of such facility or under such lease; indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company; indemnities involving the accuracy of representations and warranties in certain contracts; and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. In addition, the Company has made contractual commitments to employees providing for severance payments upon the occurrence of certain prescribed events. The Company may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain customer contracts. The duration of these indemnities, commitments, and guarantees varies, and in certain cases may be indefinite. The majority of these indemnities, commitments, and guarantees may not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets.
10. Leases
The Company leases office space and equipment, and certain office space is subleased. Management determines if a contract is a lease at the inception of the arrangement and reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised.
Leases with an initial term of greater than twelve months are recorded on the consolidated balance sheet. Lease expense is recognized on a straight-line basis over the lease term.
The Company’s lease contracts generally do not provide a readily determinable implicit rate. For these contracts, the estimated incremental borrowing rate is based on information available at the inception of the lease.
Operating lease cost consists of the following:
|
|
For the Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
|
|
(unaudited, in thousands) |
|
Lease cost |
|
$ |
434 |
|
|
$ |
558 |
|
Sublease income |
|
|
(18 |
) |
|
|
(151 |
) |
Total lease cost |
|
$ |
416 |
|
|
$ |
407 |
|
The maturity of operating lease liabilities is presented in the following table:
|
|
As of March 31, 2022 |
|
|
|
(unaudited, in thousands) |
|
2022 |
|
$ |
1,261 |
|
2023 |
|
|
1,687 |
|
2024 |
|
|
1,526 |
|
2025 |
|
|
1,168 |
|
2026 |
|
|
481 |
|
Total lease payments |
|
|
6,123 |
|
Less imputed interest |
|
|
(650 |
) |
Present value of lease liabilities |
|
$ |
5,473 |
|
Additional information relating to the Company’s operating leases follows:
|
|
As of March 31, 2022 |
|
|
|
(unaudited) |
|
Weighted average remaining lease term (years) |
|
|
3.8 |
|
Weighted average discount rate |
|
|
6.2 |
% |
11. Income Taxes
The Company accounts 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
11
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 was in a three-year historical cumulative loss as of the end of fiscal 2021. In addition, the Company was also in a loss for fiscal 2017 and 2018. These facts, combined with uncertain near-term market and economic conditions, reduced the Company’s ability to rely on projections of future taxable income in assessing the realizability of its deferred tax assets.
After a review of the four sources of taxable income as of December 31, 2021, and after consideration of the Company’s cumulative loss position as of December 31, 2021, the Company will continue to reserve its U.S.-based deferred tax amounts, which total $57.3 million as of March 31, 2022.
The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Currently there are no audits in process or pending from Federal or state tax authorities. The Company is no longer subject to examination for U.S. federal income tax returns for years before December 31, 2018 and for state income tax returns, the Company is no longer subject to examination for years before December 31, 2017. As of December 31, 2021, the company had no outstanding tax audits. The outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. Smith Micro 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 the consolidated financial results of the Company. 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.
12. Subsequent Events
The Company evaluates and discloses subsequent events as required by FASB ASC Topic No. 855, Subsequent Events. The Topic establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or are available to be issued. Subsequent events have been evaluated as of the date of this filing and no further disclosures are required.
12