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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10‑Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001‑35525

 

SMITH MICRO SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

33‑0029027

(State or other jurisdiction of
incorporation or organization)

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

5800 CORPORATE DRIVE

PITTSBURGH, PA 15237

(Address of principal executive offices, including zip code)

(412) 837-5300

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

SMSI

 

NASDAQ

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No  

 

As of May 6, 2021, there were 53,200,076 shares of common stock outstanding.

 

 


 

 

SMITH MICRO SOFTWARE, INC.

QUARTERLY REPORT ON FORM 10-Q

March 31, 2021

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (Unaudited)

 

2

 

 

Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020

 

2

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020

 

3

 

 

Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020

 

4

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020

 

5

 

 

Notes to the Consolidated Financial Statements

 

6

Item 2.

 

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

 

15

Item 4.

 

Controls and Procedures

 

18

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

19

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

19

Item 6.

 

Exhibits

 

20

 

 

 

 

 

SIGNATURES

 

21

 

1


 

 

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

 

(audited)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

89,247

 

 

$

25,754

 

Accounts receivable, net of allowance for doubtful accounts and other

   adjustments of $5 and $10 (2021 and 2020, respectively)

 

 

8,333

 

 

 

12,347

 

Prepaid expenses and other current assets

 

 

908

 

 

 

1,189

 

Total current assets

 

 

98,488

 

 

 

39,290

 

Equipment and improvements, net

 

 

2,161

 

 

 

2,170

 

Right-of-use assets

 

 

5,690

 

 

 

5,785

 

Other assets

 

 

679

 

 

 

694

 

Intangible assets, net

 

 

10,400

 

 

 

12,698

 

Goodwill

 

 

12,266

 

 

 

12,266

 

Total assets

 

$

129,684

 

 

$

72,903

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,640

 

 

$

2,282

 

Accrued payroll and benefits

 

 

3,150

 

 

 

2,867

 

Current operating lease liabilities

 

 

1,427

 

 

 

1,433

 

Other accrued liabilities

 

 

188

 

 

 

216

 

Deferred revenue

 

 

1,027

 

 

 

1,572

 

Total current liabilities

 

 

8,432

 

 

 

8,370

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Operating lease liabilities

 

 

4,627

 

 

 

4,805

 

Deferred rent

 

 

845

 

 

 

887

 

Deferred tax liabilities, net

 

 

59

 

 

 

59

 

Other long term liabilities

 

 

66

 

 

 

66

 

Total non-current liabilities

 

 

5,597

 

 

 

5,817

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   51,645,718 and 41,232,804 shares issued and outstanding (2021 and

   2020, respectively)

 

 

52

 

 

 

41

 

Additional paid-in capital

 

 

340,058

 

 

 

279,905

 

Accumulated comprehensive deficit

 

 

(224,455

)

 

 

(221,230

)

Total stockholders’ equity

 

 

115,655

 

 

 

58,716

 

Total liabilities and stockholders' equity

 

$

129,684

 

 

$

72,903

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the consolidated financial statements.

2


 

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

 

(unaudited)

 

Revenues

 

$

11,381

 

 

$

13,322

 

Cost of revenues

 

 

1,545

 

 

 

1,173

 

Gross profit

 

 

9,836

 

 

 

12,149

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling and marketing

 

 

4,232

 

 

 

2,787

 

Research and development

 

 

5,183

 

 

 

3,729

 

General and administrative

 

 

3,658

 

 

 

3,668

 

Restructuring expense

 

 

 

 

 

6

 

Total operating expenses

 

 

13,073

 

 

 

10,190

 

Operating income (loss)

 

 

(3,237

)

 

 

1,959

 

Other income:

 

 

 

 

 

 

 

 

Interest income, net

 

 

8

 

 

 

86

 

Other income

 

 

4

 

 

 

 

Income (loss) before provision for income taxes

 

 

(3,225

)

 

 

2,045

 

Provision for income tax expense

 

 

 

 

 

 

Net income (loss)

 

$

(3,225

)

 

$

2,045

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.07

)

 

$

0.05

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

43,368

 

 

 

39,482

 

Diluted

 

 

43,368

 

 

 

42,194

 

 

See accompanying notes to the consolidated financial statements.


3


 

 

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

BALANCE, December 31, 2020 (audited)

 

 

41,233

 

 

$

41

 

 

$

279,905

 

 

$

(221,230

)

 

$

58,716

 

Non-cash compensation recognized on

   stock options and ESPP

 

 

 

 

 

 

 

 

18

 

 

 

 

 

 

18

 

Restricted stock grants, net of cancellations

 

 

970

 

 

 

1

 

 

 

997

 

 

 

 

 

 

998

 

Cancellation of shares for payment of

   withholding tax

 

 

(121

)

 

 

 

 

 

(824

)

 

 

 

 

 

(824

)

Employee stock purchase plan

 

 

4

 

 

 

 

 

 

15

 

 

 

 

 

 

15

 

Common shares issued in stock offering,

   net of offering costs

 

 

9,521

 

 

 

10

 

 

 

59,888

 

 

 

 

 

 

59,898

 

Exercise of common stock warrants

 

 

33

 

 

 

 

 

 

40

 

 

 

 

 

 

40

 

Exercise of stock options

 

 

6

 

 

 

 

 

 

19

 

 

 

 

 

 

19

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,225

)

 

 

(3,225

)

BALANCE, March 31, 2021 (unaudited)

 

 

51,646

 

 

$

52

 

 

$

340,058

 

 

$

(224,455

)

 

$

115,655

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2019 (audited)

 

 

38,475

 

 

$

38

 

 

$

274,041

 

 

$

(225,395

)

 

$

48,684

 

Non-cash compensation recognized on

   stock options and ESPP

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

13

 

Restricted stock grants, net of cancellations

 

 

1,000

 

 

 

1

 

 

 

618

 

 

 

 

 

 

619

 

Cancellation of shares for payment of

   withholding tax

 

 

(110

)

 

 

 

 

 

(571

)

 

 

 

 

 

(571

)

Employee stock purchase plan

 

 

2

 

 

 

 

 

 

5

 

 

 

 

 

 

5

 

Exercise of common stock warrants

 

 

1,009

 

 

 

1

 

 

 

2,044

 

 

 

 

 

 

2,045

 

Exercise of stock options

 

 

7

 

 

 

 

 

 

13

 

 

 

 

 

 

13

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,045

 

 

 

2,045

 

BALANCE, March 31, 2020 (unaudited)

 

 

40,383

 

 

$

40

 

 

$

276,163

 

 

$

(223,350

)

 

$

52,853

 

 

See accompanying notes to the consolidated financial statements.


4


 

 

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

 

(unaudited)

 

Operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(3,225

)

 

$

2,045

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,497

 

 

 

644

 

Non-cash lease expense

 

 

307

 

 

 

244

 

Restructuring costs

 

 

 

 

 

6

 

Provision for doubtful accounts and other adjustments to accounts receivable

 

 

(3

)

 

 

(4

)

Provision for excess and obsolete inventory

 

 

(97

)

 

 

 

Stock based compensation

 

 

1,016

 

 

 

632

 

Changes in operating accounts:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,018

 

 

 

(983

)

Prepaid expenses and other assets

 

 

381

 

 

 

215

 

Accounts payable and accrued liabilities

 

 

(649

)

 

 

(840

)

Deferred revenue

 

 

(545

)

 

 

302

 

Net cash provided by operating activities

 

 

3,700

 

 

 

2,261

 

Investing activities:

 

 

 

 

 

 

 

 

Acquisition of Circle operator business, net

 

 

 

 

 

(12,150

)

Capital expenditures

 

 

(190

)

 

 

(771

)

Other investing activities

 

 

11

 

 

 

(215

)

Net cash used in investing activities

 

 

(179

)

 

 

(13,136

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from common stock offering, net of offering expenses

 

 

59,898

 

 

 

 

Proceeds from exercise of common stock warrants

 

 

40

 

 

 

2,045

 

Other financing activities

 

 

34

 

 

 

18

 

Net cash provided by financing activities

 

 

59,972

 

 

 

2,063

 

Net increase (decrease) in cash and cash equivalents

 

 

63,493

 

 

 

(8,812

)

Cash and cash equivalents, beginning of period

 

 

25,754

 

 

 

28,268

 

Cash and cash equivalents, end of period

 

$

89,247

 

 

$

19,456

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

23

 

 

$

19

 

 

See accompanying notes to the consolidated financial statements.

5


 

SMITH MICRO SOFTWARE, INC.

Notes to the Consolidated Financial Statements

(Unaudited)

1. The Company

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

2. Accounting Policies

Basis of Presentation

The accompanying interim consolidated balance sheet as of March 31, 2021, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the three months ended March 31, 2021 and 2020, are unaudited. The unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted.

In the opinion of management, the accompanying unaudited consolidated financial statements for the periods presented reflect all adjustments which are normal and recurring, and necessary to fairly state the financial position, results of operations, and cash flows of the Company. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on March 8, 2021.

Intercompany balances and transactions have been eliminated in consolidation.

Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2021.

Impact of COVID-19

In March 2020, the World Health Organization categorized coronavirus disease 2019 (COVID-19) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. We continue to monitor the spread of COVID-19 throughout the United States and other countries across the world. The duration and severity of its effects continue to be uncertain. While the response to the COVID-19 outbreak continues to rapidly evolve, it has led to stay-at-home orders and social distancing guidelines that have seriously disrupted, and continue to disrupt, activities in large segments of the economy.

During the past four quarters, we saw a reduction in the number of SafePath® platform subscribers compared to March 2020, which we believe was largely driven by the COVID-19 related economic slowdown. The Company’s consolidated financial statements presented herein reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s customers, all of which are uncertain and cannot be predicted.

As the impact of the COVID-19 pandemic on the economy and the Company’s operations continue to evolve, we will continue to monitor the impact on the Company’s operations and, if needed, postpone non-essential capital expenditures, reduce operating costs, and substantially reduce discretionary spending.

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.

6


 

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 customers’ 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 customers’ end customers, the provision of hosting services, revenue share based on media placements on our platform, and use of our cloud based services. We recognize our usage based revenue when we have completed our performance obligation and have the right to invoice the customer. This revenue is generally recognized monthly or quarterly. Finally, in this segment, we ratably recognize revenue over the contract period when customers pay in advance of our service delivery.

On February 12, 2020, we acquired certain assets from Circle (as defined in Note 3 below), including a source code license to Circle’s parental control software solution and two customer contracts. Pursuant to these contracts, the customer parties thereto license the parental control software solution for distribution to their respective subscribers in designated markets. In each case, the contracts allow the customer to take possession of the software solution and to host it on their platform or with an independent third party hosting service provider without significant cost. We also provide significant services that are required by the customer to ensure they have the utility of the license. As the license to the software solution and the services we provide are highly interrelated, we have concluded that the license and our services are a single performance obligation. The license fee is earned and recognized on a pro-rata basis over the contract term based on our customer’s continued use of the license and our services.

We also provide consulting services to develop customer-specified functionality that is 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 customers we provide maintenance and technology support services for which the customer either pays upfront or as we provide the services. When the customer pays upfront, we record the payments as contract liabilities and recognize revenue ratably over the contract period as this is our stand ready performance obligation that is satisfied ratably over the maintenance and technology services period.

We receive upfront payments from customers from services to be provided under our ViewSpot® contracts. The advance receipts are deferred and subsequently recognized ratably over the contract period. We also provide consulting services to configure ad hoc targeted promotional content for our customers upon request. These requests are driven by our customers’ marketing initiatives and tend to be short term “bursts” of activity. We recognize these revenues upon delivery of the configured promotional content to the cloud platform.

Fair Value Measurements

The Company measures and discloses fair value measurements as required by FASB ASC Topic No. 820, Fair Value Measurements and Disclosures.

Fair value is an exit price, representing the amount that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the FASB establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

 

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets

 

Level 2 - Include other inputs that are directly or indirectly observable in the marketplace

 

Level 3 - Unobservable inputs which are supported by little or no market activity

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

As required by FASB ASC Topic No. 820, we measure our cash and cash equivalents at fair value. Our cash equivalents are classified within Level 1 by using quoted market prices utilizing market observable inputs. 

As required by FASB ASC Topic No. 350, for goodwill and other intangibles impairment analysis, we utilize fair value measurements which are categorized within Level 3 of the fair value hierarchy.

7


 

3. Acquisitions

On February 12, 2020, the Company acquired the operator business of Circle Media Labs Inc. (“Circle”) pursuant to a certain Asset Purchase Agreement by and between the Company and Circle.

The following table summarizes the consideration paid for the Circle acquisition in 2020 (unaudited, in thousands):

 

Fair value of assets acquired

 

$

14,966

 

Fair value of liabilities assumed

 

 

1,466

 

Total purchase price

 

$

13,500

 

 

 

 

 

 

Components of purchase price:

 

 

 

 

Cash

 

$

13,500

 

Total purchase price

 

$

13,500

 

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

 

Assets:

 

 

 

 

Inventory, net

 

$

14

 

Intangible assets

 

 

10,483

 

Goodwill

 

 

4,469

 

Total assets

 

$

14,966

 

Liabilities:

 

 

 

 

Deferred revenue

 

$

1,290

 

Amounts due to seller

 

 

176

 

Total liabilities

 

 

1,466

 

Total purchase price

 

$

13,500

 

All of the goodwill will be deductible for tax purposes.

Pursuant to the transaction, Smith Micro acquired certain assets related to the Circle operator business, including two new customer contracts and a source code license to Circle’s then deployed parental control software and related technology.

Unaudited pro forma results of operations for the three months ended March 31, 2021 and 2020 are included below as if the Circle acquisition occurred on January 1, 2019. This summary of the unaudited pro forma results of operations is not necessarily indicative of what the Company’s results of operations would have been had the operator business of Circle been acquired at the beginning of 2019, nor does it purport to represent results of operations for any future periods.

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(unaudited, in thousands, except per share amounts)

 

Revenues

 

$

11,381

 

 

$

13,789

 

Net income (loss)

 

 

(3,225

)

 

 

2,105

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.07

)

 

$

0.05

 

Diluted

 

$

(0.07

)

 

$

0.05

 

 

4. Goodwill and Intangible Assets

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 on 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, 2021 and December 31, 2020.

8


 

During the first quarter of 2021, we received a customer contract termination notice related to a customer contract acquired in the acquisition of Circle’s operator business (as discussed in Note 3), which was otherwise set to expire in the second quarter of 2024. The contract was terminated effective April 15, 2021; however, in accordance with its terms, we continue to deliver wind-down services under the contract. While the terms of the contract allow for a wind-down period of up to two years post termination, the Company expects to continue services under this contract through the second quarter of 2022. The Company determined the customer contract should be accounted for under the contract modification guidance in Topic 606. As a result, the Company recognized deferred revenue of $0.6 million which was being amortized over the customer contract term and will amortize the remaining $0.3 million over the remaining service period. Additionally, the Company reviewed its customer contract intangible asset associated with this customer contract and determined that the carrying value was in excess of its fair value. Accordingly, the Company recorded a $1.5 million impairment charge within “selling and marketing expenses” in the consolidated statements of operations during the three months ended March 31, 2021 and will amortize the remaining $0.4 million over the remaining service period.

5. Earnings Per Share

The Company calculates earnings per share (“EPS”) as required by FASB ASC Topic No. 260, Earnings Per Share. Basic EPS is calculated by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period, excluding common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period, plus the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For periods with a net loss, the dilutive common stock equivalents are excluded from the diluted EPS calculation. For purposes of this calculation, common stock subject to repurchase by the Company, options, and warrants are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.

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

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(unaudited, in thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(3,225

)

 

$

2,045

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average shares outstanding –

   basic

 

 

43,368

 

 

 

39,482

 

Potential common shares – options /

   warrants (treasury stock method)

 

 

 

 

 

2,712

 

Weighted average shares outstanding –

   diluted

 

 

43,368

 

 

 

42,194

 

 

 

 

 

 

 

 

 

 

Shares excluded (anti-dilutive)

 

 

2,559

 

 

 

77

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.07

)

 

$

0.05

 

Diluted

 

$

(0.07

)

 

$

0.05

 

 

6. Stock-Based Compensation

Stock Plans

9


 

During the three months ended March 31, 2021, the Company granted 1,000,000 shares of restricted stock and incentive stock options exercisable for 10,000 shares under the Company’s 2015 Omnibus Equity Incentive Plan, as amended (the “2015 Plan”). As of March 31, 2021, there were approximately 3.9 million shares available for future grants under the Company’s 2015 Plan.

7. Revenues

Revenue Recognition

We primarily sell our software solutions, cloud-based services and consulting services to major wireless network and cable operators.

We 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 is based on the relative standalone selling prices for the goods and services contained in a particular performance obligation. The transaction price is adjusted for the Company’s estimate of variable consideration which may include certain incentives and discounts, product returns, distributor fees, and storage fees. We evaluate the total amount of variable consideration expected to be earned by using the expected value method, as we believe this method represents the most appropriate estimate for this consideration, based on historical service trends, the individual contract considerations and our best judgment at the time. We include estimates of variable consideration in revenues only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. We also generate the majority of our revenue on usage based fees which are variable and depend entirely on our customers’ use of perpetual licenses, transactions processed on our hosted environment, advertisement placements on our service platform, and activity on our cloud-based service platform. As discussed in Note 3, on February 12, 2020, we purchased two customer contracts, among other assets, from Circle. Under these contracts, we provide our customers with licenses to software solutions and related services, for which we earn license fees, managed and hosting service fees, and consulting services which are provided throughout the life of the licensing arrangement.

Our contracts with the Tier 1 customers include promises to transfer multiple products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Our cloud-based service includes a software solution license integrated with cloud-based services. Judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Since we do not allow our customers to take possession of the software solution, and since the utility of the license comes from the could-based services that we provide, we consider the software license and the cloud services to be a single performance obligation. We provide the Circle software solution license together with highly integrated consulting services to generate the utility of the license to the customers. Since the software solution and consulting services provided are highly interrelated, we consider the license and the consulting services to be a single performance obligation.

We also provide consulting services to configure ad hoc targeted promotional content to be presented on our solutions, as well as consulting services to provide additional functionality for our software solutions based on our customers’ request. These requests are driven by our customers’ marketing initiatives and tend to be short term “bursts” of activity or specific incremental functionality to existing software solutions. We recognize these revenues upon delivery and acceptance of the configured promotional content or additional functionality to the software solution.

We have made accounting policy elections to exclude all taxes by governmental authorities from the measurement of the transaction price, and since our standard payment terms are less than one year, we have elected the practical expedient not to assess whether a contract has a significant financing component.

Deferred Revenue

Deferred revenue represents amounts billed to customers for which revenue has not been recognized. Deferred revenue primarily consists of the unearned portion of monthly, quarterly and annually billed service fees and prepayments made by customers for a future period. We recognize revenue upon transfer of control. As of March 31, 2021, our total deferred revenue balance was $1.0 million, of which $0.9 million was related to the acquisition of the Circle operator business.

As also discussed in Note 4, during the first quarter of 2021, we received a customer contract termination notice related to a customer contract acquired in the acquisition of Circle’s operator business (as discussed in Note 3), which was otherwise set to expire in the second quarter of 2024. The contract was terminated effective April 15, 2021; however, in accordance with its terms, we continue to deliver wind-down services under the contract. While the terms of the contract allow for a wind-down period of up to two years post termination, the Company expects to continue services under this contract through the second quarter of 2022. The Company determined the customer contract should be accounted for under the contract modification guidance in Topic 606. As a result, the Company recognized deferred revenue of $0.6 million which was being amortized over the customer contract term and will amortize the remaining $0.3 million over the remaining service period. Additionally, the Company reviewed its customer contract intangible asset associated with this customer contract and determined that the carrying value was in excess of its fair value. Accordingly, the Company recorded

10


 

a $1.5 million impairment charge within “selling and marketing expenses” in the consolidated statements of operations during the three months ended March 31, 2021 and will amortize the remaining $0.4 million over the remaining service period.

Disaggregation of Revenues

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

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

License and service fees

 

$

1,587

 

 

$

555

 

Hosted environment usage fees

 

 

4,141

 

 

 

4,549

 

Cloud based usage fees

 

 

4,963

 

 

 

7,647

 

Consulting services and other

 

 

690

 

 

 

571

 

Total revenues

 

$

11,381

 

 

$

13,322

 

 

8. Segment, Customer Concentration and Geographical Information

Segment Information

Public companies are required to report financial and descriptive information about their reportable operating segments as required by FASB ASC Topic No. 280, Segment Reporting. The Company has one primary business unit based on how management internally evaluates separate financial information, business activities and management responsibility: Wireless. The Wireless segment includes our SafePath®, CommSuite®, and ViewSpot® families of products.

The Company does not separately allocate operating expenses to these business units, nor does it allocate specific assets. Therefore, business unit information reported includes only revenues.

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

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

SafePath

 

$

6,267

 

 

$

7,848

 

CommSuite

 

 

4,128

 

 

 

4,539

 

ViewSpot

 

 

930

 

 

 

745

 

Other

 

 

56

 

 

 

83

 

Total wireless revenues

 

$

11,381

 

 

$

13,215

 

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, as follows:

For the three months ended March 31, 2021 and 2020, three customers accounted for 91% and one customer accounted for 91% of revenues, respectively. As of March 31, 2021, two customers accounted for 80% of accounts receivable, and at March 31, 2020, one customer accounted for 84% of accounts receivable.

11


 

Geographical Information

During the three months ended March 31, 2021 and 2020, 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,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

Americas

 

$

10,144

 

 

$

13,304

 

EMEA

 

 

1,237

 

 

 

8

 

Asia Pacific

 

 

 

 

 

10

 

Total revenues

 

$

11,381

 

 

$

13,322

 

 

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

9. Commitments and Contingencies

Litigation

The Company may become involved in various legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company’s consolidated results of operations, cash flows, or financial position, litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows, or financial position in a particular period.

Other Contingent Contractual Obligations

During its normal course of business, the Company has made certain indemnities, commitments, and guarantees under which it may be required to make payments in connection with certain transactions. These include: intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale, and/or license of Company products; indemnities to various lessors in connection with facility leases for certain claims arising from use of such facility or under such lease; indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company; indemnities involving the accuracy of representations and warranties in certain contracts; and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. In addition, the Company has made contractual commitments to employees providing for severance payments upon the occurrence of certain prescribed events. The Company may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain customer contracts. The duration of these indemnities, commitments, and guarantees varies, and in certain cases may be indefinite. The majority of these indemnities, commitments, and guarantees may not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets.

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.

12


 

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

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

Lease cost

 

$

558

 

 

$

527

 

Sublease income

 

 

(151

)

 

 

(151

)

Total lease cost

 

$

407

 

 

$

376

 

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

 

 

As of  March 31, 2021

 

 

 

(unaudited)

 

2021

 

$

1,386

 

2022

 

 

1,615

 

2023

 

 

1,600

 

2024

 

 

1,226

 

2025

 

 

867

 

Thereafter

 

 

291

 

Total lease payments

 

 

6,985

 

Less imputed interest

 

 

(931

)

Present value of lease liabilities

 

$

6,054

 

 

Additional information relating to the Company’s operating leases follows:

 

 

As of  March 31, 2021

 

 

 

(unaudited)

 

Weighted average remaining lease term (years)

 

 

4.27

 

Weighted average discount rate

 

 

6.75

%

 

11. Income Taxes