ANNUAL REPORT
2019
FROM THE CEO
Fellow Shareholders,
These are exciting times at Smith Micro and I am pleased to report that
2019 was an exceptional year for the company. We delivered excellent
results across the board, building on the momentum gained in 2018
and exceeding our expectations. Our revenue expansion was driven by
the compelling growth of SafePath®, which is our family digital lifestyle
platform and the company’s largest revenue contributor. Revenues
were further bolstered by the consistent performance of our voice
messaging platform, CommSuite®. We also added a new revenue
stream with the full-scale deployment of ViewSpot®, our smart retail
product suite, which performed solidly and in line with expectations.
Without a doubt, 2019 delivered results to remember for Smith Micro.
Looking at the results, total revenues for the year came in at $43.3
million, which represents an increase of 65% when compared to fiscal
2018. Net income grew to $10.7 million or $0.29 per share. We also
delivered strong operating cash flow of $10.0 million, of which $5.2
million came in the fourth quarter of fiscal 2019.
SafePath
William W. Smith, Jr.
Chairman of the Board,
President and Chief
Executive Officer
As I mentioned earlier, SafePath was Smith Micro’s lead growth engine in 2019. This product line brought in
annual revenues of $17.8 million, which represents 435% growth when compared to 2018 revenue performance.
We have now delivered eight consecutive quarters of revenue growth with SafePath – a strong testament to our
team, our customers, and this platform solution.
The 2019 SafePath success story goes well beyond revenues as we expanded the capabilities of the platform to
add new features and product functionality during the year. Our Connected Lifestyle Platform vision for SafePath
continues to come together as we cultivate an unprecedented leadership role in the mobile operator space.
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SafePath Family empowers mobile and cable service providers with white-label solutions that meet the
ever-changing digital lifestyle needs of mobile consumers with powerful family location and parental
controls functionality. In 2019, we upgraded the user experience of our SafePath platform to simplify new
user onboarding and streamline overall in-app navigation.
SafePath IoT enables mobile and cable service providers to deliver a seamless connected life experience for
consumer IOT devices to their subscribers with one central application. In 2019, we launched the first tracker
solution on our platform, an industry first with having both SafePath Family and SafePath IoT under a single
application. In 2020, we expect to see several new consumer IOT devices come to market, such as watches
designed for kids, elderly care monitoring devices, drive monitoring, and pet trackers to name a few, all of
which can be powered by our platform.
SafePath Home is a cloud-managed router solution that allows mobile and cable service providers to deliver
the same robust digital parental controls as the mobile experience on all in-home connected devices, such as
gaming consoles, computers, and tablets. Our recent acquisition of Circle Media Labs’ operator business has
substantially expanded the parental controls feature set of SafePath Home and has significantly accelerated our
product roadmap, allowing us to bring to market a leading in-home solution for digital lifestyle management.
Our strategic acquisition of Circle’s operator business also diversified our customer base by adding two key
operator accounts – T-Mobile USA and Sky UK – to Smith Micro’s client portfolio and bolstered the strength of
Smith Micro’s digital lifestyle solution ahead of the merger of Sprint and T-Mobile US.
CommSuite
CommSuite is our comprehensive white-label platform that enables wireless carriers to deliver reliable and
contemporary voice messaging services to mobile subscribers. The CommSuite platform delivered solid,
consistent results for Smith Micro throughout 2019 and is expected to remain a very profitable solution going
forward.
We continue to invest R&D efforts in the platform to deliver a more compelling solution in the fast-changing
voice market. A great example of our innovation in this area is CommSuite Anywhere – a clientless solution that
works on any smartphone. CommSuite Anywhere enables users to receive and respond to voicemail from any
device at any time and deliver their voicemail via text message to their channel of choice such as Slack, Facebook
Messenger, or Teams.
ViewSpot
Our newest product platform, ViewSpot, performed in line with expectations in 2019. We invested heavily in the
further development and enhancement of the smart retail platform and expanded our overall market opportunity
during the year and will continue to do so in 2020. Our ViewSpot platform represents healthy growth potential for
Smith Micro as wireless carriers and other consumer-focused businesses with brick-and-mortar locations seek to
enhance the digital components of the in-store customer experience. In 2020, we will continue to improve and
expand this offering to meet the needs of this attractive and emerging market.
As we look ahead to 2020 and beyond and recognizing that we are certainly in uncertain times due to the
worldwide pandemic, we remain very excited and bullish regarding our business case. We have three strong
product lines that address important priorities for our core customer base and the technical expertise and
business relationships to continue to execute our strategic vision. I believe we are at the very early stages of our
growth curve and remain confident that we will continue to lead our respective markets while driving sustained
growth and profitability.
Most sincerely yours,
William W. Smith, Jr.
Chairman of the Board,
President and Chief
Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
(cid:4) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from __________ to __________
Commission File Number 01-35525
SMITH MICRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
5800 Corporate Drive, Pittsburgh, PA
(Address of principal executive offices)
33-0029027
(I.R.S. Employer
Identification Number)
15237
(Zip Code)
Registrant's telephone number, including area code: (412) 837-5300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Trading
Symbol(s)
SMSI
Name of each exchange on which registered
NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (cid:4) NO (cid:3)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 YES (cid:4) NO (cid:3)
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 (cid:3) NO (cid:4)
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 (cid:3) NO (cid:4)
Indicate by check mark if whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See definition of “accelerated filer”, “large accelerated filer”, “smaller reporting company”, and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
(cid:4)
Large accelerated filer
☐
Non-accelerated filer
Emerging growth company (cid:4)
Accelerated filer
Smaller reporting company
(cid:3)
(cid:3)
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. (cid:4)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES (cid:4) NO (cid:3)
As of June 30, 2019, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of the
common stock of the registrant held by non-affiliates was $80,684,962 based upon the closing sale price of such stock as reported on the Nasdaq
Capital Market on that date. For purposes of such calculation, only executive officers, board members, and beneficial owners of more than 10% of
the registrant’s outstanding common stock are deemed to be affiliates.
As of March 9, 2020, there were 39,484,420 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2020 Annual Meeting of Stockholders to be filed under the Securities Exchange Act of
1934 are incorporated by reference in Part III of this report.
SMITH MICRO SOFTWARE, INC.
2019 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1.
BUSINESS............................................................................................................................................
Item 1A. RISK FACTORS...................................................................................................................................
Item 1B. UNRESOLVED STAFF COMMENTS ...............................................................................................
Item 2.
PROPERTIES .......................................................................................................................................
Item 3.
LEGAL PROCEEDINGS .....................................................................................................................
Item 4. MINE SAFETY DISCLOSURES ........................................................................................................
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES..............................................
Item 6.
SELECTED CONSOLIDATED FINANCIAL DATA ........................................................................
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .............................................................................................................
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .....................................................
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ...............................................................................................................
Item 9A. CONTROLS AND PROCEDURES.....................................................................................................
Item 9B. OTHER INFORMATION ....................................................................................................................
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE .............................
Item 11. EXECUTIVE COMPENSATION........................................................................................................
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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.................................................................................
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Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ................................................................................................................................
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.......................................................................
PART IV
Item 15. EXHIBITS ............................................................................................................................................
Item 16. FORM 10-K SUMMARY ....................................................................................................................
SIGNATURES......................................................................................................................................
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this document, the terms “Smith Micro,” “Company,” “we,” “us,” and “our” refer to Smith Micro Software, Inc.
and, where appropriate, its subsidiaries.
This Annual Report on Form 10-K (this “Report”) contains forward-looking statements regarding Smith Micro which
include, but are not limited to, statements concerning customer concentration, projected revenues, market acceptance
of products, the success and timing of new product introductions, the competitive factors affecting our business, our
ability to raise additional capital, gross profit and income, our expenses, the protection of our intellectual property,
and our ability to remain a going concern. These forward-looking statements are based on our current expectations,
estimates and projections about our industry, management's beliefs, and certain assumptions made by us. Words such
as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “estimates,”
“should,” “may,” “will,” and variations of these words or similar expressions are intended to identify forward-
looking statements. Forward-looking statements also include the assumptions underlying or relating to any of the
foregoing statements. These statements are not guarantees of future performance and are subject to risks,
uncertainties, and assumptions that are difficult to predict. Therefore, our actual results could differ materially from
those expressed or implied in any forward-looking statements as a result of various factors. Such factors include, but
are not limited to, the following:
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our customer concentration given that the majority of our sales currently depend on a few large client
relationships, including Sprint;
our ability to establish and maintain strategic relationships with our customers and mobile device
manufacturers;
intense competition in our industry and the core vertical markets in which we operate, and our ability to
successfully compete;
rapid technological evolution and resulting changes in demand for our products from our key customers
and their end users;
our ability to hire and retain key personnel;
our ability to assimilate acquisitions without diverting management attention and impacting current
operations;
the possibility of security and privacy breaches in our systems damaging client relations and inhibiting our
ability to grow;
interruptions or delays in the services we provide from our data center hosting facilities that could harm
our business;
our ability to raise additional capital and the risk of such capital not being available to us at commercially
reasonable terms or at all;
our ability to become and remain profitable;
the impact of evolving information security and data privacy laws on our business and industry;
the impact of U.S. regulations on our business and industry;
our ability to protect our intellectual property and our ability to operate our business without infringing
on the rights of others;
our ability to remain a going concern;
the risks inherent with international operations;
the risk of being delisted from NASDAQ if we fail to meet any of its applicable listing requirements;
the existence of undetected software defects in our products;
the availability of third-party intellectual property and licenses needed for our operations on commercially
reasonable terms, or at all;
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changes in our operating income or loss due to shifts in our sales mix and variability in our operating
expenses;
the difficulty of predicting our quarterly revenues and operating results and the chance of such revenues
and results falling below analyst or investor expectations, which could cause the price of our common
stock to fall;
potential tax liabilities and other factors that may impact our effective tax rates; and
those additional factors which are listed under Item 1A of Part I of this Report under the caption “RISK
FACTORS.”
The forward-looking statements contained in this Report are made on the basis of the views and assumptions of
management regarding future events and business performance as of the date this Report is filed with the Securities
and Exchange Commission (the “SEC”). In addition, we operate in a highly competitive and rapidly changing
environment; therefore, new risk factors can arise, and it is not possible for management to predict all such risk
factors, nor to assess the impact of all such risk factors on our business or the extent to which any individual risk
factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-
looking statement. We do not undertake any obligation to update these statements to reflect events or circumstances
occurring after the date this Report is filed.
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Item 1. BUSINESS
General
PART I
Providing software solutions that simplify and enhance the mobile experience to some of the leading wireless and
cable service providers around the globe is a mission that Smith Micro pursues with passion. 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 Internet of Things (“IoT”)
devices. The Smith Micro 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. In general, we offer our customers:
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Valuable digital services that connect today’s digital lifestyle, including leading edge family location and
parental controls, as well as enable connected family and consumer IoT devices to mobile consumers
worldwide;
Easy visual access to wirelessly delivered voicemail messages, while also providing easy conversion of
voice messages to text and email messages that can be delivered through a variety of devices;
Immediate, consistent and measurable retail content that educates consumers, creates awareness of
products and services and drives in-store sales; and
Engaging retail content displayed on wireless devices in retail locations that also gather valuable
actionable analytics.
We continue to innovate and evolve our business to respond to industry trends and maximize opportunities in emerging
markets, such as digital lifestyle services and online safety, “Big Data” analytics, automotive telematics, and the
consumer IoT marketplace. The key to our longevity, however, is not simply technological innovation, but our never-
ending focus on understanding our customers’ needs and delivering value.
During fiscal year 2019, we built on the momentum from 2018 and achieved better than expected revenue growth,
profitability and cash flow generation, while improving overall operations and execution of our business to deliver
solid financial results. We further strengthened our balance sheet during the year, as exercised warrants from previous
private placements added capital, allowing us to accelerate hiring and other strategic initiatives.
The Company was incorporated in California in November 1983, and reincorporated in Delaware in June 1995. Our
principal executive offices are located at 5800 Corporate Drive, Pittsburgh, Pennsylvania 15237 and our telephone
number is (412) 837-5300. Our website address is www.smithmicro.com, and we make our filings with the U.S.
Securities and Exchange Commission (the “SEC”) available on the Investor Relations page of our website.
Information contained on our website does not constitute a part of this Report. Our common stock is traded on the
NASDAQ under the symbol “SMSI.”
Business Segments
Our business is focused on one industry segment: Wireless. During fiscal 2019, we divested or phased down non-core
product lines including Graphics, NetWise and Quicklink. Our revenues still include an immaterial amount generated
from our Graphics products. We do not separately allocate operating expenses, nor do we allocate specific assets to
these segments. Therefore, segment information reported includes only revenues. See Note 14 of the Notes to
Consolidated Financial Statements for financial information related to our business segment and geographical
information.
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Wireless Segment
The wireless industry continues to undergo rapid change on all fronts as connected devices, mobile applications, and
digital content are consumed by users who want information, high-speed wireless connectivity, and entertainment
anytime, anywhere. While most of us think about being “connected” in terms of computers, tablets and smartphones,
the consumer IoT market is creating a world where almost anything can be connected to the wireless internet. Wearable
devices such as smartwatches, smart home devices, fitness trackers, pet trackers and GPS locators are now
commonplace, enabling people, pets and things to be connected to the “Internet of Everything.” These devices have
created an entire ecosystem of over-the-top (“OTT”) apps, while expanding how communication service providers
can provide value to mobile consumers.
Although there are numerous business opportunities associated with pervasive connectivity, there are also numerous
challenges, including:
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The average age by which most children use smartphones and other connected devices continues to decrease.
As such, parents and guardians must be proactive in managing and combating digital lifestyle issues such as
excess screen time, cyberbullying, and online safety;
Complexity, congestion, and spectrum scarcity plague wireless networks, making it difficult and expensive
to satisfy the demand for mobile services by consumers and businesses;
(cid:129) As IoT use cases continue to proliferate and scale, management complexity, security and interoperability
must be addressed efficiently and correctly;
(cid:129) Mobile network operators (“MNOs”) are being marginalized by messaging applications and face growing
competitive pressure from cable multiple system operators (“MSOs”) and others deploying Wi-Fi networks
to attract mobile users;
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Enterprises face increasing pressure to mobilize workforces, operations, and customer engagement, but lack
the expertise and technologies needed to leverage mobile technology securely and cost-effectively; and
Consumers seek simpler network access and more personalized mobile experiences, while simultaneously
demanding faster, cheaper, and more secure wireless services.
To address these challenges, Smith Micro offers multi-platform, modular solutions such as:
SafePath® – The SafePath platform delivers a connected life experience for families and the connected devices that
are part of their daily digital lifestyle inside and outside the home. The SafePath platform includes: SafePath Family
– which enables mobile service providers to meet the needs of their customers for family real time location, protection
and parental controls services; SafePath IoT – that allows service providers to deliver a connected digital life
experience to their customers by bringing all of their connected devices like child and elderly wearable locators, pet
trackers, car trackers, and other Consumer IOT devices under a single pane of glass on the SafePath platform; and
SafePath Home – which provides an expansion of our platform through a cloud-based router agent that integrates
with all 5G modems and broadband routers to enable the same parental controls and remote monitoring controls for
all connected devices in the home.
CommSuite® – The CommSuite premium messaging platform helps mobile service providers deliver a next-
generation voicemail experience to mobile subscribers, while monetizing a legacy cost-center. CommSuite Visual
Voicemail (“VVM”) quickly and easily allows users to manage voice messages just like email or SMS with reply,
forwarding and social sharing options. CommSuite also enables multi-language Voice-to-Text (“VTT”) transcription
messaging, which facilitates convenient message consumption for users by reading versus listening. In 2019, the
CommSuite product was installed on more than 18 million mobile handsets and is available to both postpaid premium
subscribers as well as prepaid subscribers.
ViewSpot® – Our retail display management platform provides wireless carriers and retailers with a way to bring
powerful on-screen, interactive demos to life. These engaging demos deliver consistent, secure and targeted content
that showcases the features of the devices about which consumers most want to learn more and to see. The ViewSpot
platform also offers powerful analytics capabilities so carriers can gain valuable insights into their consumer base and
its buying behavior as well as their overall retail operations.
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Products
Our primary products consist of the following:
Business Segment
Products
Description
Wireless
SafePath Family
SafePath IoT
SafePath Home
A platform that enables mobile service providers to provide
customers with family real time location, protection and parental
controls services.
A platform that enables mobile service providers to deliver a
connected digital life experience to their customers by bringing all
of their connected devices, like child and elderly wearable locators,
pet trackers, car trackers, and connected home security devices,
under a single pane of glass.
A cloud managed platform that extends to connected devices in the
home through a router agent that integrates with 5G modems and
broadband routers to enable parental controls and remote monitoring
under a single pane of glass.
CommSuite VVM
Visual Voicemail delivered directly to a mobile phone app and
managed like email and available to both postpaid and prepaid
subscribers.
CommSuite VTT
Voice-to-Text transcription of voicemail and voice SMS messages.
ViewSpot
An innovative retail display management platform that provides
wireless carriers and retailers with a way to bring powerful on-
screen, interactive demos to life, delivering consistent, secure and
targeted content that showcases the features of the devices about
which consumers want to learn more and to see. It also offers
analytics capabilities for carriers to gain valuable insights into their
consumer base and its buying behavior as well as their overall retail
operations.
Marketing and Sales Strategy
Because of our broad product portfolio, deep integration experience, and flexible business models, we can quickly
bring to market innovative solutions that support our customers’ needs to create new revenue opportunities and
differentiate their products and services among their competitors.
Our marketing and sales strategy is as follows:
Leverage Operator Relationships. We continue to capitalize on our strong relationships with the world’s leading
MNOs and MSOs. These customers serve as our primary distribution channel, providing access to hundreds of
millions of end users around the world.
Focus on High-Growth Markets. We continue to focus on providing digital lifestyle solutions, analytics/Big Data
solutions, premium messaging services, and visual retail content management solutions.
Expand our Customer Base. In addition to growing our business with current customers, we look to expand our MNO
and MSO customers worldwide, as well as to expand into new partnerships as we extend the reach of our product
platforms within the connected lifestyle ecosystem.
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Key Revenue Contributors
Revenues attributable to Sprint and their respective affiliates in the Wireless business segment accounted for 84% and
81% of the Company’s total revenues for fiscal years 2019 and 2018, respectively. The loss of Sprint or decisions by
Sprint to substantially reduce purchases from us for any reason could have a material adverse effect on our business.
Customer Service and Technical Support
We provide technical support and customer service through our online knowledge base, email, and live chat. OEM
customers generally provide their own primary customer support functions and rely on us for support to their technical
support personnel.
Product Development
The software industry, particularly the wireless market, is characterized by rapid and frequent changes in technology
and user needs. We work closely with industry groups and customers, both current and potential, to help us anticipate
changes in technology and determine future customer needs. Software functionality depends upon the capabilities of
the related hardware. Accordingly, we maintain engineering relationships with various hardware manufacturers and
we develop our software in tandem with their product development. Our engineering relationships with manufacturers,
as well as with our major customers, are central to our product development efforts. We remain focused on the
development and expansion of our technology, particularly in the wireless space. Research and development
expenditures amounted to $11.7 million and $8.6 million for the years ended December 31, 2019 and 2018,
respectively.
Competition
The markets in which we operate are highly competitive and subject to rapid changes in technology. These conditions
create new opportunities for Smith Micro, as well as for our competitors, and we expect new competitors to continue
to enter the market. We not only compete with other software vendors for new customer contracts, we also compete
to acquire technology and qualified personnel.
We believe that the principal competitive factors affecting the mobile software market include domain expertise,
product features, usability, quality, price, customer service, speed to market and effective sales and marketing efforts.
Although we believe that our products currently compete favorably with respect to these factors, there can be no
assurance that we can maintain our competitive position against current and potential competitors. We also believe
that the market for our software products has been and will continue to be characterized by significant price
competition. A material reduction in the price we obtain for our products would negatively affect our profitability.
Many of our existing and potential customers have the resources to develop products that compete directly with our
products. As such, these customers may opt to discontinue the purchase of our products in the future. With this as
background, our future performance is substantially dependent upon the extent to which existing customers elect to
purchase software from us rather than designing and developing their own software.
Proprietary Rights and Licenses
We protect our intellectual property through a combination of patents, copyrights, trademarks, trade secrets, foreign
intellectual property laws, confidentiality procedures and contractual provisions. We have United States and foreign
patents and pending patent applications that relate to various aspects of our products and technology. We have also
registered, and applied for the registration of, U.S. and international trademarks, service marks, domain names, and
copyrights. We will continue to apply for such protections in the future as we deem necessary to protect our intellectual
property. We seek to avoid unauthorized use and disclosure of our proprietary intellectual property by requiring
employees and third parties with access to our proprietary information to execute confidentiality agreements with us
and by restricting access to our source code.
Our MNO/MSO customers license our products through software license agreements or access our offerings through
software as a service (“SaaS”) agreements. Our license agreements contain restrictions on reverse engineering,
duplication, disclosure, and transfer, and our SaaS agreements contain restrictions on access and use.
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Despite our efforts to protect our proprietary technology and our intellectual property rights, unauthorized parties may
attempt to copy or obtain and use our technology to develop applications with the same functionality as our
applications. Policing unauthorized use of our technology and intellectual property rights is difficult, and we may not
be able to detect unauthorized use of our intellectual property rights or take effective steps to enforce our intellectual
property rights.
Employees
As of December 31, 2019, we had a total of 198 employees within the following departments: 137 in engineering and
operations, 39 in sales and marketing, and 22 in management and administration. We are not subject to any collective
bargaining agreement and we believe that our relationships with our employees are good.
Item 1A. RISK FACTORS
Our future operating results are highly uncertain. Before deciding to invest in our common stock or to maintain or
change your investment, you should carefully consider the risks described below, in addition to the other information
contained in this Report and in our other filings with the SEC, including our other Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem
immaterial may also affect our business operations. If any of these risks actually occur, our business, financial
condition or results of operations could be seriously harmed. In that event, the market price for our common stock
could decline and you may lose all or part of your investment.
We derive a significant portion of our revenues from sales to a concentrated number of clients, and a reduction in
sales to any of them may adversely impact our revenues and operating results.
In our Wireless business segment, we sell primarily to large wireless carriers, cable operators, and OEMs, so there are
a limited number of actual and potential customers for our products, resulting in significant customer
concentration. For the year ended December 31, 2019, sales to Sprint and its affiliates comprised 84% of our total
revenues.
Because of our relatively high customer concentration, a small number of significant customers possess a relative
level of pricing and negotiating power over us, enabling them to achieve advantageous pricing and other contractual
terms, including the ability to terminate their agreements with us with a limited amount of notice. Any material
decrease in our sales to any of these customers would materially affect our revenue and profitability.
Sprint Corporation and T-Mobile (US), Inc. (“T-Mobile”) have announced that they have entered into a business
combination agreement and have more recently announced that they expect the transaction will be completed as early
as April 1, 2020, with the combined company continuing to operate as T-Mobile. In the event that the combined
company does not elect to continue using the solutions that we currently deliver to Sprint, or that our sales to the
combined company materially decrease as compared with our sales to Sprint, our revenues and profitability would be
materially and adversely affected.
If there are delays in the distribution of our products or if customer negotiations for our new products cannot occur on
a timely basis, we may not be able to generate revenues sufficient to meet the needs of the business in the foreseeable
future or at all.
Our growth depends in part on our customers’ ability and willingness to promote our services and attract and retain
new end user customers or achieve other goals outside of our control.
We sell our wireless products for use on handheld devices primarily to our carrier, cable/MSO, and enterprise
customers, who deploy our products for use by their end user customers. The success of our carrier, cable/MSO and
enterprise customers, and their ability and willingness to market services to their end users that are supported by our
products, is critical to our future success. Our ability to generate revenues from sales of our software is also
constrained by our carrier customers’ ability to attract and retain customers. We have no input into or influence upon
their marketing efforts and sales and customer retention activities. If our large carrier customers fail to maintain or
9
grow demand for their services, revenues or revenue growth from our products designed for use on mobile devices
will decline and our results of operations will suffer.
We derive a significant portion of our revenues from only a few core vertical markets, and changes within these
vertical markets, or failure to penetrate new markets, could adversely impact our revenues and operating results.
We derive a significant portion of our revenue from a few vertical markets, such as wireless carriers, cable operators,
and handset manufacturers. In order to sustain and grow our business, we must continue to sell our software products
in these vertical markets. Shifts in the dynamics of these vertical markets, such as new product introductions by our
competitors, could materially harm our results of operations, financial condition and prospects. Increasing our sales
outside our core vertical markets to markets in which we do not have significant experience, for example to large
enterprises, would require us to devote time and resources to hire and train sales employees familiar with those
industries. Even if we are successful in hiring and training sales teams, customers in other vertical markets may not
need or sufficiently value our current products or new product introductions.
Technology and customer needs change rapidly in our market, which could render our products obsolete and
negatively affect our business, financial condition, and results of operations.
Our success depends on our ability to anticipate and adapt to changes in technology and industry standards. We will
also need to continue to develop and introduce new and enhanced products to meet our target markets’ changing
demands and keep up with evolving industry standards, including changes in the Microsoft, Google, and Apple
operating systems with which our products are designed to be compatible, and to promote those products successfully.
The communications software markets in which we operate are characterized by rapid technological change, changing
customer needs, frequent new product introductions, evolving industry standards, and short product life cycles. In
addition, some of the technology we market, which has been sold as software in the past, can be integrated at the
chipset level by the leading mobile chipset manufacturers. In addition, new products and product enhancements can
require long development and testing periods as a result of the complexities inherent in today’s computing
environments and the performance demanded by customers and called for by evolving wireless networking
technologies. Any of these factors could render our existing products obsolete and unmarketable. If our target markets
do not develop as we anticipate, our products do not gain widespread acceptance in these markets, or we are unable
to develop new versions of our software products that can operate on future wireless networks and PC and mobile
device operating systems and interoperate with other popular applications, our business, financial condition and results
of operations could be materially and adversely affected.
If we are unable to retain key personnel, the loss of their services could materially and adversely affect our business,
financial condition and results of operations.
Our future performance depends in significant part upon the continued service of our senior management and other
key technical personnel. We do not have employment agreements with our key employees. The loss of the services of
our key employees would materially and adversely affect our business, financial condition and results of operations.
Our future success also depends on our ability to continue to attract, retain, and motivate qualified personnel,
particularly highly skilled engineers involved in the ongoing research and development required to develop and
enhance our products. Competition for these employees remains high and employee retention is a common problem
in our industry. Our inability to attract and retain the highly trained technical personnel that are essential to our product
development, marketing, service, and support teams may limit the rate at which we can generate revenue, develop
new products or product enhancements and generally would have an adverse effect on our business, financial condition
and results of operations.
Competition within our target markets is intense and includes numerous established competitors and new entrants,
which could negatively affect our revenues and results of operations.
We operate in markets that are extremely competitive and subject to rapid changes in technology. Because there are
low barriers to entry into the software markets in which we participate and may participate in the future, we expect
significant competition to continue from both established and emerging software companies, domestic and
international. In fact, our growth opportunities in new product markets could be limited to the extent established and
emerging software companies enter or have entered those markets.
10
Many of our other current and prospective competitors have significantly greater financial, marketing, service,
support, technical, and other resources than we do. As a result, they may be able to adapt more quickly than we can to
new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion
and sale of their products. Announcements of competing products by competitors could result in the cancellation of
orders by customers in anticipation of the introduction of such new products. In addition, some of our competitors
are currently making complementary products that are sold separately. Such competitors could decide to enhance their
competitive position by bundling their products to attract customers seeking integrated, cost-effective software
applications. Some competitors have a retail emphasis and offer OEM products with a reduced set of features. The
opportunity for retail upgrade sales may induce these and other competitors to make OEM products available at their
own cost or even at a loss. We also expect competition to increase as a result of software industry consolidations,
which may lead to the creation of additional large and well-financed competitors. Increased competition is likely to
result in price reductions, fewer customer orders, reduced margins, and loss of market share.
Our acquisitions of companies or technologies may disrupt our business and divert management attention and
cause our other operations to suffer.
We have historically made targeted acquisitions of smaller companies or product lines with technology important to
our business strategy and expect to continue to do so in the future. Most recently, we acquired the operator business
from Circle Media Labs Inc. and prior to that our smart retail business, known as ViewSpot. As part of any acquisition,
we will be required to assimilate the operations, products, and, where applicable, personnel of the acquired businesses
and train, retain, and motivate key personnel needed for the successful integration of the acquired business. We may
not be able to maintain uniform standards, controls, procedures and policies if we fail in these efforts. Additionally,
as we integrate any newly acquired business into our existing operations, process changes may result in unanticipated
or unintended delays in sales of acquired products or services, which could adversely affect our relationships with
customers of the acquired business and result in lower revenues from the acquired business than anticipated.
Acquisitions may cause disruptions in our operations and divert management’s attention from our Company’s day-to-
day operations, which could impair our relationships with our existing employees, customers, and strategic partners.
Acquisitions may also subject us to liabilities and risks that are not known or identifiable at the time of the acquisition.
We may also have to incur debt or issue equity securities in order to finance future acquisitions. Our financial condition
could be harmed to the extent we incur substantial debt or use significant amounts of our cash resources in acquisitions.
The issuance of equity securities for any acquisition could be substantially dilutive to our existing stockholders. In
addition, we expect our profitability could be adversely affected because of acquisition-related accounting costs, write
offs, amortization expenses, and charges related to acquired intangible assets. In consummating acquisitions, we are
also subject to risks of entering geographic and business markets in which we have had limited or no prior experience.
If we are unable to fully integrate acquired businesses, products, or technologies within existing operations, we may
not receive the intended benefits of such acquisitions.
Security and privacy breaches may harm our business.
The uninterrupted operation of our hosted solutions and the confidentiality and security of third-party information and
materials is critical to our business. Any failures in our security and privacy measures, such as “hacking” of our
systems by outsiders or the inadequate protection of pre-release mobile devices in our custody, could have a material
adverse effect on our financial position and results of operations. If we are unable to protect, or our customers and
mobile device manufacturer partners perceive that we are unable to protect, the security and privacy of information
and materials in our care, our growth could be materially adversely affected and we could be subject to material
liability. A security or privacy breach may:
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cause our customers to lose confidence in our solutions;
cause our mobile device manufacturer partners to cease doing business with us;
harm our reputation;
expose us to material liability; and
increase our expense from potential remediation costs.
While we believe we use proven applications and have established adequate safeguards designed for facility security,
data security and integrity to process electronic transactions, there can be no assurance that these applications and
safeguards will be adequate to prevent a security breach or to address changing market conditions or the security and
11
privacy concerns of existing and potential customers and device manufacturer partners. In addition, our customers and
end users may use our products and services in a manner which violates security or data privacy laws in one or more
jurisdictions. Any significant or high profile security breach, data privacy breach or violation of data privacy laws
could result in the loss of business and reputation, litigation against us, liquidated and other damages, and regulatory
investigations and penalties that could adversely affect our operating results and financial condition.
Interruptions or delays in service from data center hosting facilities could impair the delivery of our service and
harm our business.
We currently serve our customers from data center hosting facilities. Any damage to, or failure of, such facilities
generally could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to
issue credits or pay penalties, cause customers to terminate their on-demand services, and adversely affect our renewal
rates and our ability to attract new customers.
We may raise additional capital through the issuance of equity or convertible debt securities or by borrowing money
in order to meet our capital needs. Additional funds to allow us to meet our capital needs may not be available on
terms acceptable to us or at all.
We believe that our cash and the cash we expect to generate from operations will be sufficient to meet our capital
needs for the next twelve months. However, it is possible that we may need or choose to obtain additional financing
to fund our future activities. We could raise these funds by selling more stock to the public or to selected investors, or
by borrowing money. We may not be able to obtain additional funds on favorable terms, or at all. If adequate funds
are not available, we may be required to curtail our operations or other business activities significantly or to obtain
funds through arrangements with strategic partners or others that may require us to relinquish rights to certain
technologies or potential markets.
It is possible that our future capital requirements may vary materially from those currently anticipated. The amount of
capital that we will need in the future will depend on many factors, including but not limited to:
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the market acceptance of our products;
the levels of promotion and advertising that will be required to launch our products and achieve and
maintain a competitive position in the marketplace;
our business, product, capital expenditure, and research and development plans and product and
technology roadmaps;
the levels of working capital that we maintain;
capital improvements to new and existing facilities;
technological advances;
our competitors’ response to our products; and
our relationships with suppliers and customers.
In addition, we may raise additional capital to accommodate planned growth, hiring, and infrastructure needs or to
consummate acquisitions of other businesses, products or technologies.
The Company has a history of net losses, may incur substantial net losses in the future, and may not achieve
profitability.
We have undertaken recent restructurings to reduce our expenses to be more in line with our current and projected
revenue. However, if our revenues do not continue to increase in the future, we may need to undertake further
restructurings, we may incur additional operating losses, and we may not be able to achieve profitability.
12
The success of our products depends upon effective operation with operating systems, devices, networks and
standards that we do not control and on our continued relationships with mobile operating system providers and
device manufacturers.
We are dependent on the interoperability of our products with popular operating systems, networks, and standards that
we do not control. For example, we depend upon the interoperability of our mobile products with the Android and
iOS mobile operating systems. Any changes, bugs, or technical issues in such systems, or changes in our relationships
with mobile operating system partners, handset manufacturers, or mobile carriers, or in their terms of service or
policies that degrade our products’ functionality, reduce or eliminate our ability to distribute our products, or give
preferential treatment to competitive products could adversely affect the usage of our products.
We maintain relationships with mobile device manufacturers which provide us with insights into product development
and emerging technologies. These insights allow us to keep abreast of, or to anticipate, market trends and help us to
serve our current and prospective customers. Mobile device manufacturers are under no obligation to continue
providing us with these valuable insights. If we are unable to maintain our existing relationships with mobile device
manufacturers, if we fail to enter into relationships with additional mobile device manufacturers, or if mobile device
manufacturers favor one of our competitors, our ability to provide products that meet our current and prospective
customers’ needs could be compromised and our reputation and future revenue prospects could suffer. For example,
if our software does not function well with a popular mobile device because we have not maintained a relationship
with its manufacturer, carriers seeking to provide that device to their respective customers may choose an alternative
solution. Even if we succeed in establishing and maintaining these relationships, they may not result in additional
customers or revenues.
Evolving information security and data privacy laws and regulations may result in increased compliance costs,
impediments to the development or performance of our offerings, and monetary or other penalties.
Because our solutions process customer data that may contain personally identifying information, we are subject to
federal, state and foreign laws and regulations regarding the privacy and protection of such data. These laws and
regulations address a range of issues, including data privacy, cybersecurity and restrictions or technological
requirements regarding the collection, use, storage, protection, retention or transfer of data. The regulatory framework
for data privacy and cybersecurity issues worldwide can vary substantially from jurisdiction to jurisdiction. Foreign
privacy and data protection laws and regulations can be more restrictive than those in the United States. In the
European Union (“EU”), the General Data Protection Regulation (“GDPR”), came into force in May 2018. GDPR
replaced the former EU Data Protection Directive and related country-specific legislation. GDPR includes operational
and governance requirements for companies that collect or process personal data of residents of the European Union,
and provides for significant penalties for non-compliance. The costs of compliance with, and other burdens imposed
by, these laws and regulations may become substantial and may limit the use and adoption of our offerings, require us
to change our business practices, impede the performance and development of our solutions, or lead to significant
fines, penalties or liabilities for noncompliance with such laws or regulations.
Regulations affecting our customers and us and future regulations, to which they or we may become subject to,
may harm our business.
Certain of our customers in the communications industry are subject to regulation by the Federal Communications
Commission, which could have an indirect effect on our business. In addition, the U.S. telecommunications industry has
been subject to continuing deregulation since 1984. We cannot predict when, or upon what terms and conditions, further
regulation or deregulation might occur or the effect regulation or deregulation may have on demand for our products
from customers in the communications industry. Demand for our products may be indirectly affected by regulations
imposed upon potential users of those products, which may increase our costs and expenses.
We may be unable to adequately protect our intellectual property and other proprietary rights, and we may be
subject to claims for intellectual property infringement, which could negatively impact our business and financial
results.
Our success is dependent upon our software code base, our programming methodologies and other intellectual
properties and proprietary rights. In order to protect our proprietary technology, we rely on a combination of trade
secrets, nondisclosure agreements, patents, and copyright and trademark law. We currently own U.S. trademark
registrations for certain of our trademarks and U.S. patents for certain of our technologies. However, these measures
13
afford us only limited protection. Furthermore, we rely primarily on “shrink wrap” licenses that are not signed by the
end user and, therefore, may be unenforceable under the laws of certain jurisdictions. Accordingly, it is possible that
third parties may copy or otherwise obtain our rights without our authorization. It is also possible that third parties
may independently develop technologies similar to ours. It may be difficult for us to detect unauthorized use of our
intellectual property and proprietary rights. In addition, we sometimes include open source software in our products.
As a result of our use of open source in our products, we may license or be required to license or disclose code and/or
innovations that turn out to be material to our business and may also be exposed to increased litigation risk. If the
protection of our proprietary rights is inadequate to prevent unauthorized use or appropriation by third parties, the
value of our brands and other intangible assets may be diminished and competitors may be able to more effectively
mimic our products, services, and methods of operations. Any of these events could have an adverse effect on our
business and financial results.
We may be subject to claims of intellectual property infringement as the number of trademarks, patents, copyrights,
and other intellectual property rights asserted by companies in our industry grows and the coverage of these patents
and other rights and the functionality of software products increasingly overlap. From time to time, we have received
communications from third parties asserting that our trade name or features, content, or trademarks of certain of our
products infringe upon intellectual property rights held by such third parties. We have also received correspondence
from third parties separately asserting that our products may infringe on certain patents held by each of the parties.
Although we are not aware that any of our products infringe on the proprietary rights of others, third parties may claim
infringement by us with respect to our current or future products. Additionally, our customer agreements require that
we indemnify our customers for infringement claims made by third parties involving our intellectual property
embedded in their products. Infringement claims, whether with or without merit, could result in time-consuming and
costly litigation, divert the attention of our management, cause product shipment delays, or require us to enter into
royalty or licensing agreements with third parties. If we are required to enter into royalty or licensing agreements, they
may not be on terms that are acceptable to us. Unfavorable royalty or licensing agreements could seriously impair our
ability to market our products and have an adverse effect on our business and financial results.
If we are unable to meet our obligations as they become due over the next twelve months, the Company may not be
able to continue as a going concern.
We believe that we will be able to meet our financial obligations as they become due over the next twelve months,
primarily based on our current working capital levels, our current financial projections, and our ability to secure short-
term loans and raise capital when necessary.
Our ability to continue as a going concern is substantially dependent upon multiple factors, which primarily include
those factors set forth above. If our financial and cash flow position the Company unfavorably compared to our internal
plans and projections, we may need to consider additional actions to mitigate conditions or events that would raise
substantial doubt about our ability to continue as a going concern, including the following:
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Raising additional capital through short-term loans.
Implementing additional restructuring and cost reductions.
Raising additional capital through a private placement or other transaction.
Disposing of or discontinuing one or more product lines.
Selling or licensing intellectual property.
14
Should our going concern assumption not be appropriate or should we become unable to continue in the normal course
of operations, adjustments would be required to the amounts and classifications of assets and liabilities within our
consolidated financial statements, and these adjustments could be significant. Our consolidated financial statements do
not reflect the adjustments or reclassifications of assets and liabilities that would be necessary if we were to become
unable to continue as a going concern.
Our business, financial condition and operating results could be adversely affected as a result of legal, business,
and economic risks specific to international operations.
In recent years, our revenues derived from sales to customers outside the U.S. have not been material. Our revenues
derived from such sales can vary from quarter to quarter and from year to year. We also frequently ship products to
our domestic customers’ international manufacturing divisions and subcontractors. In the future, we may expand these
international business activities. International operations are subject to many inherent risks, including:
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general political, social and economic instability;
trade restrictions;
the imposition of governmental controls;
exposure to different legal standards, particularly with respect to intellectual property;
burdens of complying with a variety of foreign laws, including without limitation data privacy laws, such
as the GDPR in Europe;
import and export license requirements and restrictions of the United States and any other country in
which we operate;
unexpected changes in regulatory requirements;
foreign technical standards;
changes in tariffs;
difficulties in staffing and managing international operations;
difficulties in securing and servicing international customers;
difficulties in collecting receivables from foreign entities;
fluctuations in currency exchange rates and any imposition of currency exchange controls; and
potentially adverse tax consequences.
These conditions may increase our cost of doing business. Moreover, as our customers are adversely affected by these
conditions, our business with them may be disrupted and our results of operations could be adversely affected.
If we fail to meet the requirements for continued listing on the NASDAQ Stock Market, our common stock would
likely be delisted from trading on NASDAQ, which would likely reduce the liquidity of our common stock and could
cause our trading price to decline.
Our common stock is currently listed for quotation on the NASDAQ Stock Market. We are required to meet specified
financial requirements in order to maintain our listing on NASDAQ. If we fail to satisfy NASDAQ’s continued listing
requirements, our common stock could be delisted from NASDAQ and our common stock would instead trade on the
OTC Market. Any potential delisting of our common stock from NASDAQ would likely result in decreased liquidity
and increased volatility of our common stock, and would likely cause our trading price to decline.
Our products may contain undetected software defects, which could negatively affect our revenues.
Our software products are complex and may contain undetected defects. If we discover software defects in our
products we may experience delayed or lost revenues during the period it takes to correct these problems. Defects,
whether actual or perceived, could result in adverse publicity, loss of revenues, product returns, a delay in market
15
acceptance of our products, loss of competitive position, or claims against us by customers. Any such problems could
be costly to remedy and could cause interruptions, delays, or cessation of our product sales, which could cause us to
lose existing or prospective customers and could negatively affect our results of operations.
We rely directly and indirectly on third-party intellectual property and licenses, which may not be available on
commercially reasonable terms or at all.
Many of the Company’s products and services, including our wireless suite of products, as well as our graphics
products, include third-party intellectual property, which require licenses directly to us or to unrelated companies that
provide us with sublicenses and/or execution of services for the operation of our business. The Company has
historically been able to obtain such licenses or sublicenses on reasonable terms. There is, however, no assurance that
the necessary licenses could be obtained on acceptable terms, or at all, in the future. If the Company or our third-party
service providers are unable to obtain or renew critical licenses on reasonable terms, we may be forced to terminate
or curtail our products and services which rely on such intellectual property, and our financial condition and operating
results may be materially adversely affected.
Our operating income or loss may continue to change due to shifts in our sales mix and variability in our operating
expenses.
Our operating income or loss can change quarter to quarter and year to year due to a change in our sales mix and the
timing of our continued investments in research and development and infrastructure. We continue to invest in research
and development, which is the lifeline of our technology portfolio. The timing of these additional expenses can vary
significantly quarter to quarter and even from year to year.
Our quarterly revenues and operating results are difficult to predict and could fall below analyst or investor
expectations, which could cause the price of our common stock to fall.
Our quarterly revenues and operating results have fluctuated significantly in the past and may continue to vary from
quarter to quarter due to a number of factors, many of which are not within our control. If our operating results do not
meet the expectations of securities analysts or investors, our stock price may decline. Fluctuations in our operating
results may be due to a number of factors, including the following:
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the gain or loss of a key customer;
the size and timing of orders from and shipments to our major customers;
our ability to maintain or increase gross margins;
variations in our sales channels or the mix of our product sales;
our ability to anticipate market needs and to identify, develop, complete, introduce, market and produce
new products and technologies in a timely manner to address those needs;
the availability and pricing of competing products and technologies and the resulting effect on sales and
pricing of our products;
acquisitions;
the effect of new and emerging technologies;
the timing of acceptance of new mobile services by users of our customers’ services;
deferrals of orders by our customers in anticipation of new products, applications, product enhancements
or operating systems; and
general economic and market conditions.
We have difficulty predicting the volume and timing of orders. In any given quarter, our sales may involve large
financial commitments from a relatively small number of customers. As a result, the cancellation or deferral of even
a small number of orders could materially impact our revenues, which would adversely affect our quarterly financial
performance. Also, we have often recorded a large amount of our sales in the last month of the quarter and often in
16
the last week of that month. Accordingly, delays in the closing of sales near the end of a quarter could cause quarterly
revenues to fall substantially short of anticipated levels. Significant sales may also occur earlier than expected, which
could cause operating results for later quarters to compare unfavorably with operating results from earlier quarters.
Future orders may come from new customers or from existing customers for new products. The sales cycles may be
greater than what we have experienced in the past, increasing the difficulty to predict quarterly revenues.
Because we sell primarily to large carriers, cable/MSOs and OEM customers, we have no direct relationship with
most end users of our products. This indirect relationship delays feedback and blurs signals of change in the quick-
to-evolve wireless ecosystem, and is one of the reasons we have difficulty predicting demand.
A large portion of our operating expenses, including rent, depreciation and amortization, is fixed and difficult to reduce
or change. Accordingly, if our total revenue does not meet our expectations, we may not be able to adjust our expenses
quickly enough to compensate for the shortfall in revenue. In that event, our business, financial condition, and results
of operations would be materially and adversely affected.
Due to all of the foregoing factors, and the other risks discussed in this Report, you should not rely on quarter-to-
quarter comparisons of our operating results as an indication of future performance.
We may have exposure to additional tax liabilities.
As a multinational corporation, we are subject to income taxes as well as sales, use, and other non-income based taxes,
in both the U.S. and various foreign jurisdictions. Significant judgment is required in determining our worldwide
provision for income taxes, sales and use taxes, and other tax liabilities. Changes in tax laws or tax rulings may have
a significantly adverse impact on our effective tax rate.
We are also subject to non-income based taxes, such as payroll, sales, use, value-added, net worth, property, and goods
and services taxes, in both the United States and various foreign jurisdictions. We are regularly under audit by tax
authorities with respect to these non-income based taxes and may have exposure to additional non-income based tax
liabilities. An increasing number of states have considered or have adopted laws that attempt to impose obligations on
out-of-state retailers to collect sales and use taxes on their behalf. A successful assertion by one or more states or
foreign countries requiring us to collect sales and use taxes where we do not do so could result in substantial tax
liabilities, including for past sales, as well as penalties and interest.
Although we believe that our income and non-income based tax estimates are reasonable, there is no assurance that our
provisions for taxes are correct, or that the final determination of tax audits or tax disputes will not be different from what
is reflected in our historical income tax provisions and accruals. If we are required to pay substantially more taxes in the
future or for prior periods, our operating results and financial condition could be adversely affected.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Our corporate headquarters is located in Pittsburgh, Pennsylvania, where we currently lease approximately 55,600
square feet of space under a lease that expires on April 30, 2026. We sublease 19,965 square feet of our leased space
in Pittsburgh under an agreement which commenced on February 1, 2015 and continues through December 31, 2021.
We lease and occupy approximately 8,513 square feet of space in Aliso Viejo, California under a lease that expires
on October 31, 2024. Internationally, we lease approximately 7,900 square feet in Belgrade, Serbia under a lease that
expires December 31, 2023, we lease approximately 700 square feet in Stockholm, Sweden under a month-to-month
lease arrangement, and we lease approximately 3,200 square feet in Braga, Portugal under a lease that expires July 31,
2021.
17
Item 3. LEGAL PROCEEDINGS
The Company may become involved in various legal proceedings arising from its business activities. While
management does not currently believe that 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.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable.
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PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the NASDAQ Stock Market under the symbol “SMSI.” The high and low sale prices
for our common stock as reported by NASDAQ are set forth below for the periods indicated.
YEAR ENDED DECEMBER 31, 2019:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
YEAR ENDED DECEMBER 31, 2018:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$
$
2.93 $
3.48
6.90
6.53
2.96 $
2.73
2.85
2.85
1.69
2.75
2.95
3.64
1.45
1.56
2.20
1.62
On March 9, 2020, the closing sale price for our common stock as reported by NASDAQ was $5.23.
For information regarding Securities Authorized for Issuance under Equity Compensation Plans, please refer to Item
12 in Part III of this Annual Report on Form 10-K.
Holders
As of March 9, 2020, there were approximately 93 holders of record of our common stock based on information
provided by our transfer agent.
Dividends
We have never declared or paid any cash dividends on our common stock. We do not expect to pay any cash dividends
on our common stock for the foreseeable future. Any determination to pay dividends on our common stock in the
future will be at the discretion of our Board of Directors, subject to applicable laws, and will depend on our financial
condition, operating results, capital requirements, general business conditions, and other factors that our Board of
Directors considers relevant.
During the third quarter of 2019, the Company forced conversion of all outstanding shares of our Series B 10%
Convertible Preferred Stock (the “Series B Preferred Stock”). The holders of our Series B Preferred Stock were entitled
to receive, out of funds legally available therefor, cumulative cash dividends on such shares at a rate per share of ten
percent (10%) per annum, payable (i) when and as declared by our Board of Directors, in quarterly installments on
March 1, June 1, September 1 and December 1, (ii) upon conversion of such shares into common stock, and (iii) upon
our optional redemption of such shares in accordance with the terms set forth in the Certificate of Designation for our
Series B Preferred Stock. As of March 9, 2020, no shares of Series B Preferred Stock are outstanding.
19
Purchases of Equity Securities by the Company
The table set forth below shows all purchases of securities by us during the fourth quarter of fiscal year 2019:
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number
of Shares
(or Units)
Purchased
Average
Price Paid
per Share
(or Unit)
Total Number of
Shares (or Units)
Purchased as
Part of Publicly
Announced Plans
or Programs
$
12,783
$
12,788
12,784
$
38,355 (a) $
5.86
4.75
4.57
5.06
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or Programs
—
—
—
—
—
—
—
—
Period
October 1 - 31, 2019
November 1 - 30, 2019
December 1 - 31, 2019
Total
The above table includes:
(a) Acquisition of stock by the Company as payment of withholding taxes in connection with the vesting of
restricted stock awards in an aggregate amount of 38,355 shares during the periods set forth in the table. All of
the shares were cancelled when they were acquired.
20
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related
notes thereto appearing elsewhere in this Report. The following selected consolidated statements of operations and
comprehensive loss data and the consolidated balance sheet data as of and for the years ended December 31, 2019 and
2018 have been derived from audited consolidated financial statements included elsewhere in this Report. The
consolidated statements of operations and comprehensive loss data and the consolidated balance sheet data presented
below as of and for the years ended December 31, 2017, 2016 and 2015 are derived from audited consolidated financial
statements that are not included in this Report.
2019
2018
Year Ended December 31,
2017
2016
2015
Consolidated Statement of
Operations Data
(in thousands, except per share
data):
Revenues
Cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring expenses
Long-lived asset impairment
Total operating expenses
Operating income (loss)
Non-operating income (expense):
Change in fair value of warrant
liability
Change in carrying value of
contingent liability
Loss on debt extinguishment
Gain on sale of software product
Interest income (expense), net
Other income (expense), net
Income (loss) before provision for
income taxes
Provision for income tax expense
(benefit)
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Weighted average shares:
Basic
Diluted
$
$
$
$
Consolidated Balance Sheet Data
(in thousands):
Total assets
Total liabilities
Accumulated comprehensive deficit
Total stockholders' equity
43,346 $
3,927
39,419
7,517
11,682
9,921
194
—
29,314
10,105
26,285 $
4,333
21,952
5,784
8,602
8,607
173
—
23,166
(1,214)
22,974 $
5,082
17,892
6,186
8,952
8,551
(123)
—
23,566
(5,674)
28,235 $
7,564
20,671
9,615
15,906
10,341
303
411
36,576
(15,905)
—
(812)
—
—
—
—
483
228
(14)
—
(203)
—
(472)
(26)
—
(405)
—
(1,120)
(8)
668
—
—
(313)
(22)
39,507
8,152
31,355
8,902
13,863
11,128
—
—
33,893
(2,538)
—
—
—
—
1
3
10,802
(2,727)
(7,207)
(15,572)
(2,534)
80
10,722 $
13
(2,740) $
(546)
(6,661) $
(229)
(15,343) $
0.31 $
0.29 $
(0.14) $
(0.14) $
(0.49) $
(0.49) $
(1.28) $
(1.28) $
34,513
36,991
22,322
22,322
13,489
13,489
11,951
11,951
68
(2,602)
(0.23)
(0.23)
11,486
11,486
2019
2018
As of December 31,
2017
2016
2015
$
$
61,197 $
12,513
(225,395)
48,684 $
25,203 $
4,640
(236,091)
20,563 $
13,877 $
9,310
(232,933)
4,567 $
14,308 $
11,249
(226,228)
3,059 $
24,473
10,447
(210,887)
14,026
21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and the related notes and other financial information appearing elsewhere in this
Report. This Report contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements” and Part I, Item 1A, “Risk Factors.”
Readers are also urged to carefully review and consider these and other disclosures made by us which attempt to
advise interested parties of the factors which affect our business.
Introduction and Overview
Providing software solutions that simplify and enhance the mobile experience to some of the leading wireless and
cable service providers around the globe is a mission that Smith Micro pursues with passion. 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. The Smith Micro
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.
During 2019, we experienced an increase in our Wireless revenues primarily due to higher customer demand for our
CommSuite product and continued SafePath subscriber growth related to a contract signed in 2017. CommSuite has
achieved continual subscriber growth since making development updates during the fourth quarter of 2017, which
among other enhancements, resulted in a larger addressable market. Our divestiture and exit of non-core product lines
that included Graphics, NetWise, and QuickLink resulted in a revenue decline of $2.6 million. The Company received
additional cash proceeds of $11.5 million during 2019 from to the exercise of warrants associated with three private
placements of common stock the Company completed in 2018.
Results of Operations
Revenues generated from our sales to Sprint and their respective affiliates in the Wireless business segment accounted
for 84% and 81% of the Company’s total revenues for fiscal years 2019 and 2018, respectively. This customer
accounted for 92% and 82% of accounts receivable as of December 31, 2019 and 2018, respectively.
The following table sets forth certain consolidated statement of comprehensive income (loss) data as a percentage of
total revenues for the periods indicated:
Revenues
Cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring expenses
Total operating expenses
Operating income (loss)
Change in fair value of warrant liability
Loss on debt extinguishment
Gain on sale of software product
Interest income (expense)
Other expense
Income (loss) before provision for income taxes
Provision for income tax expense
Net income (loss)
22
Year Ended December 31,
2019
2018
100.0 %
9.1
90.9
17.3
27.0
22.9
0.4
67.6
23.3
—
—
1.1
0.5
—
24.9
0.2
24.7 %
100.0 %
16.5
83.5
22.0
32.7
32.7
0.7
88.1
(4.6)
(3.1)
(0.8)
—
(1.8)
(0.1)
(10.4)
0.0
(10.4)%
Revenues and Expense Components
The following is a description of the primary components of our revenues and expenses:
Revenues. Revenues are net of sales returns and allowances. Our operations are organized into one business segment:
Wireless, which includes all of our existing core products, including SafePath®, CommSuite®, and ViewSpot®
family of products. We also generate an immaterial amount of revenue from a few non-core Graphics products.
Cost of revenues. Cost of revenues consists of direct product and assembly, maintenance, data center, royalties, and
technical support expenses.
Selling and marketing. Selling and marketing expenses consist primarily of personnel costs, advertising costs, sales
commissions, trade show expenses, and the amortization of certain intangible assets. These expenses vary significantly
from quarter to quarter based on the timing of trade shows and product introductions.
Research and development. Research and development expenses consist primarily of personnel and equipment costs
required to conduct our software development efforts. It also includes the amortization of certain intangible assets.
General and administrative. General and administrative expenses consist primarily of personnel costs, professional
services and fees paid for external service providers, space and occupancy costs, and legal and other public company
costs.
Loss on debt extinguishment. Loss resulting from the extinguishment of debt.
Gain on sale of software product. Gain resulting from the sale of the Poser® 3D animation software.
Interest income (expense), net. Interest income is primarily related to interest earned on cash equivalents. Interest
expense is primarily related to interest on our debt.
Other income (expense), net. Other income (expense) is primarily related to fixed asset disposals and gains or losses
or other non-operating gains or losses.
Provision for income tax expense (benefit). The Company accounts for income taxes as required by Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 740, Income Taxes.
This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that
have been recognized in the Company’s financial statements or tax returns. Measurement of the deferred items is
based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and
tax bases of the Company’s assets and liabilities result in a deferred tax asset, we are required to evaluate the
probability of being able to realize the future benefits indicated by such asset. The deferred tax assets are reduced by
a valuation allowance if, based upon all available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. Establishing, reducing or increasing a valuation allowance in an accounting period
generally results in an increase or decrease in tax expense in the statement of operations. We must make significant
judgments to determine the provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits,
and any valuation allowance to be recorded against deferred tax assets.
Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
Revenues. Revenues of $43.3 million in 2019 increased $17.1 million, or 65%, from $26.3 million in 2018. Wireless
revenues of $42.6 million increased $18.1 million, or 74%, from $24.5 million in 2018. The increase was primarily
due to higher demand in both CommSuite and SafePath subscribers, as well as revenue associated with the ViewSpot
acquisition. The growth in Wireless revenues from these products was slightly offset by a reduced strategic focus on
the NetWise products. Sales from our discontinued or non-core products decreased $1.1 million, or 59%, from $1.8
million in 2018, primarily related to the conclusion during 2018 of the wind-down sales period following termination of
our reseller agreement with Japanese software developer Celsys in October 2017, and also lower demand as a result of
reduced strategic focus and marketing efforts of these products.
23
Cost of revenues. Cost of revenues of $3.9 million in 2019 decreased $0.4 million, or 9%, from $4.3 million in 2018.
This decrease was primarily due to lower internal and external variable costs in conjunction with the revenue mix.
Gross profit. Gross profit of $39.4 million or 91% of revenues in 2019 increased $17.5 million, or 80%, from $22.0
million, or 84% of revenues in 2018. The increase was primarily due to the lower internal and external variable costs
attributable to the revenue mix.
Selling and marketing. Selling and marketing expenses of $7.5 million in 2019 increased $1.7 million, or 30%, from
$5.8 million in 2018. This increase was primarily due to increases in headcount for ViewSpot and commissions due to
increased performance levels. The amortization of intangible assets was $0.4 million and $0.2 million in 2019 and
2018, respectively.
Research and development. Research and development expenses of $11.7 million in 2019 increased $3.1 million, or
36%, from $8.6 million in 2018. This increase was primarily due to additional headcount related expenses for
ViewSpot and SafePath development.
General and administrative. General and administrative expenses of $9.9 million in 2019 increased $1.3 million, or
15%, from $8.6 million in 2018. This increase was primarily due to an increase in non-cash stock compensation,
variable compensation expense, consulting fees, and acquisition fees.
Restructuring expenses. Restructuring expense of $0.2 million in 2019 related to additional restructuring activities
initiated during 2019. Expense of $0.2 million in 2018 was a result of restructuring activities initiated during the year.
Change in fair value of warrant liability. The change in fair value of warrant liability was $0.8 million in 2018. As
discussed in Note 6 of the consolidated financial statements, the existing outstanding warrants were reclassified from
liabilities to equity in November 2018.
Loss on debt extinguishment. Loss on debt extinguishment of $0.2 million in 2018 related to the write-off of debt
issuance costs and discount as a result of the early payoff of the Unterberg note payable.
Gain on sale of software product. The gain on sale of software product of $0.5 million resulted from the sale of the
Company’s Poser 3D animation software in June 2019.
Interest expense, net. Interest income was $0.2 million in 2019 resulting from interest earned on cash equivalents during
the year. Interest expense was $0.5 million in 2018 related to interest incurred on outstanding debt.
Provision for income tax expense. Because of our cumulative loss position, the current provision for income tax
expense consists of state income tax minimums, foreign tax withholdings, and foreign income taxes. After
consideration of the Company’s cumulative loss position as of December 31, 2019, the Company retained a valuation
allowance related to its U.S.-based deferred tax assets of $50.4 million at December 31, 2019. During fiscal year 2019,
the valuation allowance on deferred tax assets decreased by $2.0 million.
Liquidity and Capital Resources
Going Concern Evaluation
In connection with preparing consolidated financial statements for the year ended December 31, 2019, management
evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about
the Company’s ability to continue as a going concern within one year from the date that the financial statements are
issued.
The Company considered the historical operating loss and negative cash flow from operating activities trends,
including the positive trends occurring in the recent year.
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 and management believes that the Company will generate enough cash from operations
to satisfy its obligations for the next twelve months from the issuance date.
24
At December 31, 2019, we had $28.3 million in cash and cash equivalents and $34.2 million of working capital.
Operating Activities
In 2019, net cash provided by operating activities was $10.0 million, primarily due to net income of $10.7 million.
In 2018, net cash used in operating activities was $2.9 million, primarily due to an increase in accounts receivable of
$1.9 million and a decrease in accounts payable and accrued liabilities of $1.1 million.
Investing Activities
In 2019, cash used in investing activities was $5.3 million, due to $4.0 million in payments related to the Smart Retail
acquisition in January 2019 and $1.7 million in capital expenditures, offset by proceeds of $0.4 million from the sale
of the Poser 3D animation software.
In 2018, cash used in investing activities was $0.2 million, related to capital expenditures.
Financing Activities
In 2019, cash provided by financing activities was $11.4 million, primarily due to $11.5 million in proceeds from the
exercise of common stock warrants during the second half of the year. This was offset by $0.1 million in preferred
stock dividend payments during the year.
In 2018, cash provided by financing activities was $13.0 million due to net proceeds from common stock offerings of
$17.6 million, offset by repayments of notes payable of $4.2 million and preferred stock dividend payments of $0.4
million.
Contractual Obligations and Commercial Commitments
During our normal course of business, we have made certain indemnities, commitments, and guarantees under which
we may be required to make payments in relation to certain transactions. These include: intellectual property
indemnities to our customers and licensees in connection with the use, sale and/or license of our products; indemnities
to various lessors in connection with facility leases for certain claims arising from such facility or lease; indemnities
to vendors and service providers pertaining to claims based on the negligence or willful misconduct; 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. We 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 we could be obligated to make. We have not recorded any liability for these indemnities,
commitments and guarantees in the accompanying consolidated balance sheets.
Real Property Leases
Our corporate headquarters is located in Pittsburgh, Pennsylvania, where we currently lease approximately 55,600
square feet of space under a lease that expires on April 30, 2026. We sublease 19,965 square feet of our leased space
in Pittsburgh under an agreement which commenced on February 1, 2015 and continues through December 31, 2021.
We lease and occupy approximately 8,513 square feet of space in Aliso Viejo, California under a lease that expires
on October 31, 2024. Internationally, we lease approximately 7,900 square feet in Belgrade, Serbia under a lease that
expires December 31, 2023, we lease approximately 700 square feet in Stockholm, Sweden under a month-to-month
lease arrangement, and we lease approximately 3,200 square feet in Braga, Portugal under a lease that expires July 31,
2021.
We lease an additional 19,100 square feet in Aliso Viejo, California under a lease that expires January 31, 2022. In
August 2014, we signed an addendum to sublease all of this space commencing on September 15, 2014 for a three-
year period, with two renewal options. In October 2017, the sublease agreement was renewed through January 2022.
25
Off-Balance Sheet Arrangements
As of December 31, 2019, we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our discussion and analysis of results of operations, financial condition, and liquidity are based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. We base our estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances. Actual results may materially differ from these estimates under different
assumptions or conditions. On an on-going basis, we review our estimates to ensure that they appropriately reflect
changes in our business or new information as it becomes available.
We believe the following critical accounting policies affect our more significant estimates and assumptions used in
the preparation of our consolidated financial statements:
Business Combinations
The Company applies the provisions of FASB ASC Topic No. 805, Business Combinations, in the accounting for its
acquisitions, which requires recognition of the assets acquired and the liabilities assumed at their acquisition date fair
values, separately from goodwill. Goodwill as of the acquisition date is measured as the excess of consideration
transferred over the net of the acquisition date fair values of the tangible and identifiable intangible assets acquired
and liabilities assumed. While the Company uses its best estimates and assumptions to accurately value assets acquired
and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, its estimates are
inherently uncertain and subject to refinement. As a result, during the measurement period that exists up to twelve
months from the acquisition date, the Company may record adjustments to the tangible and specifically identifiable
intangible assets acquired and liabilities assumed with a corresponding adjustment to goodwill in the reporting period
in which the adjusted amounts are determined. Upon the conclusion of the measurement period or final determination
of the values of assets acquired and liabilities assumed, whichever comes first, the impact of any subsequent
adjustments is included in the consolidated statements of operations.
Costs to exit or restructure certain activities of an acquired company or the Company’s internal operations are
accounted for as a one-time termination and exit cost pursuant to FASB ASC Topic No. 420, Exit or Disposal Cost
Obligations, and are accounted for separately from the business combination. A liability for costs associated with an
exit or disposal activity is recognized and measured at its fair value in the Company’s consolidated statement of
operations in the period in which the liability is incurred.
Uncertain income tax positions and tax-related valuation allowances that are acquired in connection with a business
combination are initially estimated as of the acquisition date. The Company reevaluates these items quarterly based
upon facts and circumstances that existed as of the acquisition date, with any adjustments to the preliminary estimates
being recorded to goodwill if such adjustments occur within the 12-month measurement period. Subsequent to the end
of the measurement period or the Company’s final determination of the value of the tax allowance or contingency,
whichever comes first, changes to these uncertain tax positions and tax-related valuation allowances will affect the
provision for income taxes in the consolidated statement of operations, and could have a material impact on results of
operations and financial position.
Fair Value of Financial Instruments
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 upon the sale of an asset or the amount that
would be 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
26
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:
(cid:129)
(cid:129)
(cid:129)
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 equivalents and short-term investments at fair value.
Our cash equivalents and short-term investments are classified within Level 1 by using quoted market prices utilizing
market observable inputs.
As required by FASB ASC Topic No. 825, Financial Instruments, an entity can choose to measure at fair value many
financial instruments and certain other items that are not currently required to be measured at fair value. Subsequent
changes in fair value for designated items are required to be reported in earnings in the current period. This Topic also
establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value.
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.
Impairment or Disposal of Long Lived Assets
Long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying
value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether
or not impairment to such value has occurred as required by FASB ASC Topic No. 360, Property, Plant, and
Equipment.
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 annual impairment testing date is 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.
Intangible Assets and Amortization
Amortization expense related to other intangibles acquired in acquisitions is calculated on a straight line basis over
two to ten years. Intangible assets are tested for impairment if events or circumstances occur indicating that the
respective asset might be impaired.
Going Concern Evaluation
In connection with preparing its consolidated financial statements, management evaluates whether there are conditions
and events, considered in the aggregate, that raise 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. See management’s going concern
evaluation for the year ended December 31, 2019 in the “Liquidity and Capital Resources” section above.
27
Revenue Recognition
The Company adopted FASB ASC Topic No. 606, Revenue from Contracts with Customers, as of January 1, 2018,
and recognizes the sale of goods and services based on the five step analysis of transactions as provided in Topic 606
which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods and
services.
In our Wireless segment, we transfer software licenses to our customers on a royalty free, non-exclusive, non-
transferrable, limited use basis during the term of the agreement. In some instances, we perform customization services
to ensure the software operates within our customer’s operating platforms as well as the operating platforms of the
mobile devices used by their end customers before transferring the license. Revenue related to these services is
recognized at a point in time upon acceptance of the software license by the customer. We also earn usage based
revenue on our platforms. Usage based revenue is generated based on active licenses used by our customer’s end
customers, the provision of hosting services, revenue share based on media placements on our platform, and use of
our Cloud Based services. We recognize our usage based revenue when we have completed our performance
obligation and have the right to invoice the customer. This revenue is generally recognized monthly or quarterly.
Finally, in this segment, we ratably recognize revenue over the contract period when customers pay in advance of our
service delivery.
We also provide consulting services to develop customer specified functionality that are generally not on our software
development roadmap. We recognize revenue from our consulting services upon delivery and acceptance by the
customer of our software enhancements and upgrades. For certain Wireless segment customers we provide
maintenance and technology support services for which the customer 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.
For our Graphics products where we sell off-the-self software products with no customization or post sale technology
support services, we recognize revenue at the time we transfer control of the product to the customer. This occurs
upon shipment of the product or when the customer downloads the software from our website or website of our
resellers. We offer a 30 day return option to our customers; a return reserve is established at the time revenue is
recorded and the reserve is monitored and adjusted based on actual experience. Historically, returns have been
insignificant.
Stock-Based Compensation
The Company accounts for all stock-based payment awards made to employees and directors based on their fair values
and recognizes such awards as compensation expense over the vesting period using the straight-line method over the
requisite service period for each award as required by FASB ASC Topic No. 718, Compensation-Stock Compensation.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-
09 clarifies the principles for recognizing revenue when an entity either enters into a contract with customers to transfer
goods or services or enters into a contract for the transfer of non-financial assets. The Company adopted ASU 2014-
09 as of January 1, 2018 utilizing the modified retrospective approach. This adoption did not have a material impact
on our consolidated financial statements. See Note 11 for further details.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability
among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as
a lease liability and a right-of-use asset (as defined). The Company adopted the 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. Management elected the package of practical expedients permitted under the transition
guidance within the new standard which allowed for the carry forward of 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
28
impact the consolidated net income or earnings per share and had no impact on cash flows. See Note 13 for further
details.
Recently Issued Accounting Standards Not Yet Adopted
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which is designed to
improve the effectiveness of disclosures related to fair value measurements. This ASU is effective for annual periods
beginning after December 15, 2019 and early adoption is allowed in any interim reporting periods within those annual
reporting periods. The Company is currently assessing the impact that this ASU will have on its consolidated financial
statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements appear in a separate section of this Annual Report on Form 10-K beginning on
page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”))
as of December 31, 2019. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer
determined that as of December 31, 2019, our disclosure controls and procedures were effective to ensure that the
information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported
within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and
procedures, our management recognizes that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is
required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management’s Responsibility for Financial Statements
Our management is responsible for the integrity and objectivity of all information presented in this Report. The
consolidated financial statements were prepared in conformity with accounting principles generally accepted in the
United States of America and include amounts based on management’s best estimates and judgments. Management
believes the consolidated financial statements fairly reflect the form and substance of transactions and that the
consolidated financial statements fairly represent the Company’s financial position and results of operations for the
periods and as of the dates stated therein.
The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly
with our independent registered public accounting firm, SingerLewak LLP, and representatives of management to
review accounting, financial reporting, internal control, and audit matters, as well as the nature and extent of the audit
effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors
have free access to the Audit Committee.
29
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting during the quarter ended December 31,
2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial
reporting.
Report of Management on Internal Control Over Financial Reporting
Our management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing
and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act).
Our management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our
internal control over financial reporting as of December 31, 2019. Management based this assessment on criteria for
effective internal control over financial reporting described in “Internal Control-Integrated Framework 2013” issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management determined that, as of December 31, 2019, we maintained effective internal
control over financial reporting.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 has been audited
by SingerLewak, LLP, an independent registered public accounting firm, as stated in their report set forth in the Report
of Independent Registered Public Accounting Firm on page F-2 of this Annual Report on Form 10-K.
Item 9B. OTHER INFORMATION
None.
30
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is set forth under the headings “Proposal 1: Election of Directors,” “Executive
Officers,” “Corporate Governance,” and “Delinquent Section 16(a) Reports” in the Company’s definitive Proxy
Statement for the 2020 Annual Meeting of Stockholders (“2020 Proxy Statement”) and is incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the headings “Executive Compensation” and “Director
Compensation” in the Company’s 2020 Proxy Statement and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A portion of the information required by this Item is set forth under the heading “Security Ownership of Certain
Beneficial Owners and Management” in the Company’s 2020 Proxy Statement and is incorporated herein by reference.
Securities Authorized for Issuance Under an Equity Compensation Plan
The following table summarizes information as of December 31, 2019 for the equity compensation plans of the
Company pursuant to which grants of options, restricted stock, restricted stock units or other rights to acquire shares
may be granted from time to time (in thousands, except option price data):
2015 Omnibus Equity Incentive Plan (1)
2005 Stock Option / Stock Issuance Plan (2)
Total
Number of
shares to be
issued upon
exercise of
outstanding
options
Weighted
average
exercise
price of
outstanding
options
Number of
shares
remaining
available
for
future
issuance
101 $
96
197 $
2.53
5.63
4.03
1,274
—
1,274
(1)
The 2015 Omnibus Equity Incentive Plan (the “2015 OEIP”) was approved by shareholders effective June 18,
2015.
(2) Upon shareholder approval of the 2015 OEIP, any unissued shares under the 2005 Plan were canceled and no
longer available for future issuance.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is set forth under the heading “Proposal 1: Election of Directors” and under the
subheadings “Board Member Independence,” “Audit Committee,” “Compensation Committee,” “Governance and
Nominating Committee,” and “Certain Relationships and Related Party Transactions” under the heading “Corporate
Governance” in the Company’s 2020 Proxy Statement and is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is set forth under the heading “Proposal 3: Ratification of Appointment of
Independent Registered Public Accounting Firm” in the Company’s 2020 Proxy Statement and is incorporated herein
by reference.
31
Item 15. EXHIBITS
(a) (1) Financial Statements
PART IV
Smith Micro’s financial statements appear in a separate section of this Annual Report on Form 10-K beginning on the
pages referenced below:
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ............................................
CONSOLIDATED BALANCE SHEETS .............................................................................................................
CONSOLIDATED STATEMENTS OF OPERATIONS......................................................................................
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY..............................................................
CONSOLIDATED STATEMENTS OF CASH FLOWS .....................................................................................
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...........................................................................
Page
F-1
F-3
F-4
F-5
F-6
F-7
(3) Exhibits
Exhibit No.
Title
Method of Filing
2.1
2.2
3.1
3.1.1
3.1.2
3.1.3
3.1.4
3.1.5
Asset Purchase Agreement, dated as of December
17, 2018, between the Company and ISM
Connect, LLC
Incorporated by reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K filed on
December 18, 2018
Asset Purchase Agreement, dated as of February
12, 2020, between the Company and Circle
Media Labs Inc.
Incorporated by reference to Exhibit 2.1 to the
Registrant’s Current Report on Form 8-K filed on
February 19, 2020
Amended and Restated Certificate of
Incorporation
Certificate of Amendment to Amended and
Restated Certificate of Incorporation dated July
11, 2000
Certificate of Amendment of Amended and
Restated Certificate of Incorporation dated
August 17, 2005
Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement No. 33-95096
(P)
Incorporated by reference to Exhibit 3.1.1 to the
Registrant’s Quarterly Report on Form 10-Q for
the period ended June 30, 2000, filed on August
14, 2000
Incorporated by reference to Exhibit 3.1.2 to the
Registrant’s Annual Report on Form 10-K for the
period ended December 31, 2005, filed on March
31, 2006
Certificate of Amendment to Amended and
Restated Certificate of Incorporation dated June
21, 2012
Incorporated by reference to Appendix B to the
Registrant’s Definitive Proxy Statement on
Schedule 14A filed on April 27, 2012
Certificate of Elimination of Series A Junior
Participating Preferred Stock dated October 16,
2015
Incorporated by reference to Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K filed on
October 16, 2015
Certificate of Designation of Series A
Participating Preferred Stock dated October 16,
2015
Incorporated by reference to Exhibit 3.2 to the
Registrant’s Current Report on Form 8-K filed on
October 16, 2015
32
Exhibit No.
Title
Method of Filing
3.1.6
3.1.7
Certificate of Amendment to Amended and
Restated Certificate of Incorporation dated
August 15, 2016
Incorporated by reference to Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K filed on
August 17, 2016
Certificate of Designation of Preferences, Rights
and Limitations of Series B 10% Convertible
Preferred Stock, dated September 29, 2017
Incorporated by reference to Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K filed on
October 4, 2017
3.2
Amended and Restated Bylaws
3.2.1
Certificate of Amendment of Amended and
Restated Bylaws
Incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement No. 33-95096
(P)
Incorporated by reference to Exhibit 3.3 to the
Registrant’s Current Report on Form 8-K filed on
October 31, 2007
Filed herewith
Incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement No. 33-95096
(P)
Incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K filed on
October 16, 2015
Incorporated by reference to Exhibit 4.1 to the
Registrant’s Current Report on Form 8-K filed on
May 17, 2017
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed on
August 20, 2014
Description of the Company’s Securities
Registered Pursuant to Section 12 of the
Securities Exchange Act of 1934
Specimen certificate representing shares of
Common Stock
Preferred Shares Rights Agreement, dated as of
October 16, 2015, between the Registrant and
Computershare Trust Company, N.A., as Rights
Agent
Form of Common Stock Purchase Warrant, dated
May 17, 2017, issued by the Registrant to each of
Sutter Securities Incorporated and Chardan
Capital Markets, LLC
Form of Registration Rights Agreement dated
August 15, 2014
Form of Warrant to Purchase Common Stock,
dated September 6, 2016, issued by the Registrant
to each of the Investors party to the Note and
Warrant Purchase Agreement dated September 2,
2016
Incorporated by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K filed on
September 7, 2016
Form of Registration Rights Agreement, dated
September 6, 2016 entered into between the
Registrant and each of the Investors party thereto
Incorporated by reference to Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K filed on
September 7, 2016
Registration Rights Agreement, dated as of
September 29, 2017, between the Registrant and
each of the Purchasers party thereto
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed on
October 4, 2017
Registration Rights Agreement, dated as of
March 5, 2018, between the Registrant and each
of the Purchasers party thereto
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed on
March 6, 2018
4.10
Form of Warrant to Purchase Common Stock,
issued by the Registrant to each of the Purchasers
party to the March SPA (defined below)
Incorporated by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K filed on
March 6, 2018
33
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
10.2*
10.3
10.4*
10.5
Exhibit No.
Title
Method of Filing
4.11
4.12
4.13
4.14
Registration Rights Agreement, dated as of May
3, 2018, between the Registrant and each of the
Purchasers party thereto
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed on
May 4, 2018
Form of Warrant to Purchase Common Stock,
issued by the Registrant to each of the Purchasers
party to the May SPA (defined below)
Incorporated by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K filed on
May 4, 2018
Registration Rights Agreement, dated as of
November 7, 2018, between the Registrant and
each of the Purchasers party thereto
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed on
November 7, 2018
Form of Warrant to Purchase Common Stock,
issued by the Registrant to each of the Purchasers
party to the November SPA (defined below)
Incorporated by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K filed on
November 7, 2018
10.1
Form of Indemnification Agreement
Amended and Restated 2005 Stock Option /
Stock Issuance Plan
Incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement No. 33-95096
(P)
Incorporated by reference to Exhibit 10.7 to the
Registrant’s Registration Statement on Form S-8
(Reg. No. 333-149222) filed on February 13,
2008
Summary of oral agreement dated June 2005 by
and between William W. Smith, Jr. and the
Registrant
Incorporated by reference to Exhibit 10.10 to the
Registrant’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2009
Amended & Restated Employee Stock Purchase
Plan
Form of Common Stock Purchase Agreement
dated August 15, 2014
10.6*
2015 Omnibus Equity Incentive Plan
10.6.1*
Form of Restricted Stock Agreement under the
2015 Omnibus Equity Incentive Plan
Incorporated by reference to Exhibit 10.11 to the
Registrant’s Registration Statement on Form S-8
(No. 333-169671) filed on September 30, 2010
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on
August 20, 2014
Incorporated by reference to Appendix A to the
Registrant’s Definitive Proxy Statement on
Schedule 14A filed on April 30, 2015
Incorporated by reference to Exhibit 10.6.1 to the
Registrant’s Annual Report on Form 10-K filed
on March 30, 2018
10.6.2*
10.71
10.8
Amendment to Smith Micro Software, Inc. 2015
Omnibus Equity Incentive Plan, adopted June 14,
2018
Incorporated by reference to Exhibit 99.1 to the
Registrant’s Current Report on Form 8-K filed on
June 15, 2018
Note and Warrant Purchase Agreement, dated
September 2, 2016, by and among the Company
and each of the Investors party thereto
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on
September 7, 2016
Form of Senior Subordinated Promissory Note,
dated September 6, 2016, issued by the Registrant
to each of the Investors party to the Note and
Warrant Purchase Agreement dated September 2,
2016
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed on
September 7, 2016
1 Exhibits may be removed if there are no longer any obligations or performances required after this filing is made.
34
Exhibit No.
Title
Method of Filing
10.9
10.10
10.11*
10.12
10.12.1
10.12.2
10.13
10.13.1
10.13.2
10.14*
10.15
10.15.1
10.15.2
Amendment to Senior Subordinated Promissory
Note, dated December 27, 2016, between the
Registrant and Unterberg Koller Capital Fund
L.P.
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on
December 28, 2016
Form of Subscription Agreement, dated May 16,
2017, between the Registrant and each of the
investors party thereto
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on
May 17, 2017
Offer Letter by and between the Registrant and
Timothy C. Huffmyer, dated June 19, 2017
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on
June 20, 2017
Secured Promissory Note dated June 26, 2017,
issued by the Registrant to William W. Smith, Jr.
and Dieva L. Smith
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on
July 7, 2017
Amendment to Secured Promissory Note, dated
January 30, 2018, between the Registrant and
William W. Smith, Jr. and Dieva L. Smith
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed on
January 31, 2018
Second Amendment to Secured Promissory Note,
dated March 5, 2018, between the Registrant and
William W. Smith, Jr. and Dieva L. Smith
Incorporated by reference to Exhibit 10.20.2 to
the Registrant’s Annual Report on Form 10-K
filed on March 30, 2018
Secured Promissory Note dated June 23, 2017,
issued by the Registrant to Steven L. and
Monique P. Elfman
Incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K filed on
July 7, 2017
Amendment to Secured Promissory Note, dated
August 18, 2017, between the Registrant and
Steven L. and Monique P. Elfman
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on
August 25, 2017
Second Amendment to Secured Promissory Note,
dated January 30, 2018, between the Registrant
and Steven L. and Monique P. Elfman
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on
January 31, 2018
Resignation Severance and Release Agreement,
dated as of July 10, 2017, between the Registrant
and Steven Yasbek
Incorporated by reference to Exhibit 99.1 to the
Registrant’s Current Report on Form 8-K/A filed
on July 11, 2017
Secured Promissory Note, dated August 24, 2017,
issued by the Registrant to Next Generation TC
FBO Andrew Arno IRA 1663
Incorporated by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K filed on
August 25, 2017
Amendment to Secured Promissory Note, dated
January 30, 2018, between the Registrant and
Next Generation TC FBO Andrew Arno IRA
1663
Second Amendment to Secured Promissory Note,
dated March 5, 2018, between the Registrant and
Next Generation TC FBO Andrew Arno IRA
1663
Incorporated by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form 8-K filed on
January 31, 2018
Incorporated by reference to Exhibit 10.24.2 to
the Registrant’s Annual Report on Form 10-K
filed on March 30, 2018
10.16
Secured Promissory Note, dated August 24, 2017,
issued by the Registrant to Andrew Arno
Incorporated by reference to Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K filed on
August 25, 2017
35
Exhibit No.
Title
Method of Filing
10.16.1
10.16.2
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
21.1
23.1
31.1
31.2
32.1
Amendment to Secured Promissory Note, dated
January 30, 2018, between the Registrant and
Andrew Arno
Incorporated by reference to Exhibit 10.4 to the
Registrant’s Current Report on Form 8-K filed on
January 31, 2018
Second Amendment to Secured Promissory Note,
dated March 5, 2018, between the Registrant and
Andrew Arno
Incorporated by reference to Exhibit 10.25.2 to
the Registrant’s Annual Report on Form 10-K
filed on March 30, 2018
Securities Purchase Agreement, dated as of
September 29, 2017, between the Registrant and
each of the Purchasers party thereto
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on
October 4, 2017
Securities Purchase Agreement, dated as of
March 5, 2018, between the Registrant and each
of the Purchasers party thereto (the “March
SPA”)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on
March 6, 2018
Letter Agreement, dated March 5, 2018, between
the Company and William W. Smith, Jr. and
Dieva L. Smith
Incorporated by reference to Exhibit 10.11 to the
Registrant’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2018
Letter Agreement, dated March 5, 2018, between
the Company and Andrew Arno
Form of Lock-Up Agreement entered into
between the Company and each of its directors
and certain executive officers in connection with
the March SPA
Form of Voting Agreement entered into between
the Company and each of its directors and certain
executive officers in connection with the March
SPA
Incorporated by reference to Exhibit 10.12 to the
Registrant’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2018
Incorporated by reference to Exhibit 10.13 to the
Registrant’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2018
Incorporated by reference to Exhibit 10.14 to the
Registrant’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2018
Securities Purchase Agreement, dated as of May
3, 2018, between the Registrant and each of the
Purchasers party thereto (the “May SPA”)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on
May 4, 2018
Securities Purchase Agreement, dated as of
November 7, 2018, between the Registrant and
each of the Purchasers party thereto (the
“November SPA”)
Incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on
November 7, 2018
Subsidiaries
Consent of Independent Registered Public
Accounting Firm
Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Certifications of the Chief Executive Officer and
the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Furnished herewith
36
101.INS
XBRL Instance Document
Filed herewith
101.SCH
XBRL Taxonomy Extension Schema Document
Filed herewith
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Taxonomy Extension Calculation
Linkbase Document
Filed herewith
XBRL Taxonomy Extension Definition Linkbase
Document
Filed herewith
XBRL Taxonomy Extension Label Linkbase
Document
XBRL Taxonomy Extension Presentation
Linkbase Document
Filed herewith
Filed herewith
(P) Paper Filing Exhibit
*denotes the management contracts and compensatory arrangements in which any director or named executive
officer participates
(b) Exhibits
The exhibits filed as part of this report are listed above in Item 15(a)(3) of this Form 10-K.
Item 16. FORM 10-K SUMMARY
None.
37
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
Date: March 13, 2020
Date: March 13, 2020
SMITH MICRO SOFTWARE, INC.
By: /s/ William W. Smith, Jr.
William W. Smith, Jr.
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Timothy C. Huffmyer
Timothy C. Huffmyer
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ William W. Smith, Jr.
William W. Smith, Jr.
/s/ Timothy C. Huffmyer
Timothy C. Huffmyer
/s/ Andrew Arno
Andrew Arno
/s/ Thomas G. Campbell
Thomas G. Campbell
/s/ Steven L. Elfman
Steven L. Elfman
/s/ Samuel Gulko
Samuel Gulko
/s/ Gregory J. Szabo
Gregory J. Szabo
Date
March 13, 2020
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
March 13, 2020
Director
Director
Director
Director
Director
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
Smith Micro Software, Inc. and its subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Smith Micro Software, Inc. and its subsidiaries
(collectively, the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the years then ended (collectively, the “financial statements”). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years then ended, in
conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission in 2013, and our report dated March 13, 2020 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ SingerLewak LLP
We have served as the Company’s auditor since 2004.
Denver, Colorado
March 13, 2020
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
Smith Micro Software, Inc. and its subsidiaries
Opinion on the Internal Control Over Financial Reporting
We have audited Smith Micro Software, Inc. and its Subsidiaries’ (collectively, “the Company”) internal control over
financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related
consolidated statements of operations, shareholders’ equity and cash flows for each of the years then ended, and our
report dated March 13, 2020, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s
Report on the Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ SingerLewak LLP
Denver, Colorado
March 13, 2020
F-2
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value data)
Current assets:
Assets
Cash and cash equivalents
Accounts receivable, net of allowances for doubtful accounts and
other adjustments of $253 and $135 at December 31, 2019
and 2018, respectively
Prepaid expenses and other current assets
Total current assets
Equipment and improvements, net
Right-of-use assets
Deferred tax asset, net
Other assets
Intangible assets, net
Goodwill
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Accrued payroll and benefits
Current operating lease liabilities
Other accrued liabilities
Deferred revenue
Total current liabilities
Non-current liabilities:
Operating lease liabilities
Deferred rent
Other long term liabilities
Total non-current liabilities
Commitments and contingencies (Note 12)
Stockholders' equity:
December 31,
2019
2018
$
28,268 $
12,159
$
$
10,894
802
39,964
2,109
6,464
94
234
4,535
7,797
61,197 $
2,050 $
2,107
1,221
244
98
5,720
5,774
885
134
6,793
7,130
795
20,084
865
—
191
140
238
3,685
25,203
1,160
1,745
—
450
28
3,383
—
723
534
1,257
Preferred stock, par value $0.001 per share; 5,000,000 shares
authorized; 0 and 1,345 shares issued and outstanding at
December 31, 2019 and 2018, respectively
Common stock, par value $0.001 per share; 100,000,000 shares
authorized; 38,475,084 and 28,241,129 shares issued and
outstanding at December 31, 2019 and 2018, respectively
Additional paid-in capital
Accumulated comprehensive deficit
Total stockholders’ equity
Total liabilities and stockholders' equity
$
—
—
38
274,041
(225,395)
48,684
61,197 $
28
256,626
(236,091)
20,563
25,203
See accompanying notes to the consolidated financial statements.
F-3
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Revenues
Cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring expenses
Total operating expenses
Operating income (loss)
Non-operating income (expense):
Change in fair value of warrant liability
Loss on debt extinguishment
Gain on sale of software product
Interest income (expense), net
Other expense, net
Income (loss) before provision for income taxes
Provision for income tax expense
Net income (loss)
Net earnings (loss) per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Year Ended December 31,
2019
2018
$
43,346 $
3,927
39,419
7,517
11,682
9,921
194
29,314
10,105
—
—
483
228
(14)
10,802
80
10,722
0.31 $
0.29 $
34,513
36,991
$
$
26,285
4,333
21,952
5,784
8,602
8,607
173
23,166
(1,214)
(812)
(203)
—
(472)
(26)
(2,727)
13
(2,740)
(0.14)
(0.14)
22,322
22,322
See accompanying notes to the consolidated financial statements.
F-4
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Preferred stock
Common stock
Additional Accumulated
paid-in comprehensive
Shares Amount Shares Amount
6 $
— 14,269 $
capital
14 $ 237,486 $
deficit
(232,933) $ 4,567
Total
BALANCE, December 31, 2017
Non-cash compensation recognized on
stock options and ESPP
Restricted stock grants, net of cancellations
Cancellation of shares for payment of
withholding tax
Employee stock purchase plan
Preferred shares converted to common
shares
Common shares issued in stock offering,
net of offering costs
Issuance of warrants in stock offering
Exercise of warrants
Reclassification of warrants previously
classified as liabilities to equity
Warrant repricing
Canadian tax adjustments from prior period
Preferred stock dividends
Comprehensive loss
BALANCE, December 31, 2018
Non-cash compensation recognized on
stock options and ESPP
Restricted stock grants, net of cancellations
Cancellation of shares for payment of
withholding tax
Employee stock purchase plan
Preferred shares converted to common
shares
Common shares issued in stock offering,
net of offering costs
Common shares issued in connection with
Smart Retail acquisition, net
Exercise of common stock warrants
Exercise of stock options
Preferred stock dividends
Cumulative effect of adoption of ASC 842
Comprehensive loss
BALANCE, December 31, 2019
$
—
—
—
—
—
—
— 1,124
—
—
(94)
5
—
1
—
—
36
898
(209)
5
—
—
—
—
36
899
(209)
5
(5)
— 3,645
4
(4)
—
—
—
—
—
—
—
—
—
—
1 $
—
—
—
—
— 9,267
—
—
26
—
9
—
—
17,591
(6,792)
—
— 17,600
(6,792)
—
—
—
—
—
—
—
—
—
—
—
—
—
— 28,242 $
—
—
— 1,225
—
—
(214)
4
7,604
—
11
—
—
—
—
—
—
—
28 $ 256,626 $
—
(11)
(2)
(404)
(2,741)
7,604
—
(2)
(404)
(2,741)
(236,091) $ 20,563
—
1
—
—
43
1,450
(701)
10
—
—
43
1,451
—
—
(701)
10
(1)
— 1,180
1
(1)
—
—
—
—
—
—
(14)
—
(14)
—
—
—
—
—
—
— $
— 2,699
— 5,327
13
—
—
—
—
—
—
—
— 38,476 $
5,126
3
11,452
5
50
—
—
—
—
—
—
—
38 $ 274,041 $
5,129
—
— 11,457
50
—
(119)
(119)
93
93
10,722 10,722
(225,395) $ 48,684
See accompanying notes to the consolidated financial statements.
F-5
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization
Non-cash rent expense
Amortization of debt discounts and financing issuance costs
Restructuring costs
Gain on sale of software product
Change in fair value of warrant liability
Loss on debt extinguishment
Provision for adjustments to accounts receivable and doubtful accounts
Provision for excess and obsolete inventory
Loss on disposal of fixed assets
Non-cash compensation related to stock options and restricted stock
Deferred income taxes
Change in operating accounts:
Accounts receivable
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Deferred revenue
Net cash provided by (used in) operating activities
Investing activities:
Acquisitions, net
Proceeds from sale of software product
Capital expenditures
Net cash used in investing activities
Financing activities:
Proceeds from exercise of common stock warrants
Proceeds from (payments related to) issuance of common stock
Repayments of short-term secured promissory notes
Repayments of related-party notes payable
Repayments of notes payable
Proceeds from exercise of stock options
Proceeds from stock sale for employee stock purchase plan
Preferred stock dividends
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Cash paid for income taxes
Cash paid for interest
Non-cash investing and financing activities:
Issuance of common stock in connection with acquisition
Issuance of common stock warrants in connection with stock offering
Reclassification of warrants from liabilities to equity
Conversion of preferred stock to common stock
Year Ended December 31,
2018
2019
$
10,722 $
(2,740)
1,341
954
—
194
(483)
—
—
143
1
6
1,494
97
(3,811)
(32)
(417)
(221)
9,988
(3,974)
370
(1,659)
(5,263)
11,457
(14)
—
—
—
50
10
(119)
11,384
16,109
12,159
28,268 $
779
—
239
173
—
812
203
(82)
(16)
7
935
213
(1,903)
(197)
(1,252)
(45)
(2,874)
—
—
(173)
(173)
—
17,600
(1,000)
(1,200)
(2,000)
—
5
(404)
13,001
9,954
2,205
12,159
104 $
— $
2
386
5,129 $
— $
— $
1 $
—
10,792
7,604
4
$
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
F-6
SMITH MICRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Basis of Presentation and Summary of Significant Accounting Policies
The Company
Smith Micro 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.
In general, we offer our customers:
(cid:129) Valuable digital services that connect today’s digital lifestyle, including leading edge family
location and parental controls, as well as enabling connected family and consumer IoT devices to
mobile consumers worldwide;
(cid:129)
(cid:129)
(cid:129)
Easy visual access to wirelessly delivered voicemail messages, while also providing easy
conversion of voice messages to text and email messages that can be delivered through a variety of
devices;
Immediate, consistent and measurable retail content that educates consumers, creates awareness of
products and services and drives in store sales; and
Engaging retail content displayed on wireless devices in retail locations that also gather valuable
actionable analytics.
We continue to innovate and evolve our business to respond to industry trends and maximize opportunities in
emerging markets, such as digital lifestyle services and online safety, “Big Data” analytics, automotive
telematics, and the consumer IoT marketplace. The key to our longevity, however, is not simply technological
innovation, but our never-ending focus on understanding our customers’ needs and delivering value.
Basis of Presentation
The accompanying consolidated financial statements reflect the operating results and financial position of Smith
Micro and its wholly owned subsidiaries in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). All intercompany amounts have been eliminated in consolidation.
Foreign Currency Transactions
The Company has international operations resulting from current and prior year acquisitions. The countries in
which the Company has a subsidiary or branch office are Serbia, Sweden, and Portugal. The functional currency
for all of these foreign entities is the U.S. dollar in accordance with the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic No. 830-30, Foreign Currency Matters-
Translation of Financial Statements. Foreign currency transactions that increase or decrease expected functional
currency cash flows is a foreign currency transaction gain or loss that are included in determining net income
for the period in which the exchange rate changes. Likewise, a transaction gain or loss (measured from the
transaction date or the most recent intervening balance sheet date, whichever is later) realized upon settlement
of a foreign currency transaction is included in determining net income for the period in which the transaction
is settled.
F-7
Business Combinations
The Company applies the provisions of FASB ASC Topic No. 805, Business Combinations, in the accounting
for its acquisitions, which requires recognition of the assets acquired and the liabilities assumed at their
acquisition date fair values, separately from goodwill. Goodwill as of the acquisition date is measured as the
excess of consideration transferred over the net of the acquisition date fair values of the tangible and identifiable
intangible assets acquired and liabilities assumed. While the Company uses its best estimates and assumptions
to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent
consideration, where applicable, its estimates are inherently uncertain and subject to refinement. As a result,
during the measurement period that exists up to twelve months from the acquisition date, the Company may
record adjustments to the tangible and specifically identifiable intangible assets acquired and liabilities assumed
with a corresponding adjustment to goodwill in the reporting period in which the adjusted amounts are
determined. Upon the conclusion of the measurement period or final determination of the values of assets
acquired and liabilities assumed, whichever comes first, the impact of any subsequent adjustments is included
in the consolidated statements of operations.
Costs to exit or restructure certain activities of an acquired company or the Company’s internal operations are
accounted for as a one-time termination and exit cost pursuant to FASB ASC Topic No. 420, Exit or Disposal
Cost Obligations, and are accounted for separately from the business combination. A liability for costs
associated with an exit or disposal activity is recognized and measured at its fair value in the Company’s
consolidated statement of operations in the period in which the liability is incurred.
Uncertain income tax positions and tax-related valuation allowances that are acquired in connection with a
business combination are initially estimated as of the acquisition date. The Company reevaluates these items
quarterly based upon facts and circumstances that existed as of the acquisition date, with any adjustments to the
preliminary estimates being recorded to goodwill if such adjustments occur within the 12-month measurement
period. Subsequent to the end of the measurement period or the Company’s final determination of the value of
the tax allowance or contingency, whichever comes first, changes to these uncertain tax positions and tax-related
valuation allowances will affect the provision for income taxes in the consolidated statement of operations, and
could have a material impact on results of operations and financial position.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts
in the consolidated financial statements and accompanying notes. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
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 upon the sale of an asset or the amount
that would be 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:
(cid:129)
(cid:129)
(cid:129)
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.
F-8
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 equivalents and short-term investments at fair
value. Our cash equivalents and short-term investments are classified within Level 1 by using quoted market
prices utilizing market observable inputs.
As required by FASB ASC Topic No. 825, Financial Instruments, an entity can choose to measure at fair value
many financial instruments and certain other items that are not currently required to be measured at fair value.
Subsequent changes in fair value for designated items are required to be reported in earnings in the current
period. This Topic also establishes presentation and disclosure requirements for similar types of assets and
liabilities measured at fair value.
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.
Significant Concentrations
For the year ended December 31, 2019, one customer, accounting for over 10% of revenues, made up 84% of
revenues and 92% of accounts receivable, and one service provider with more than 10% of purchases totaled
10% of accounts payable. For the year ended December 31, 2018, one customer, accounting for over 10% of
revenues, made up 81% of revenues and 82% of accounts receivable, and one service provider with more than
10% of purchases totaled 21% of accounts payable.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash, government securities, mutual funds, and money market
funds. These securities are primarily held in one financial institution and are uninsured except for the minimum
Federal Deposit Insurance Corporation coverage, and have original maturity dates of three months or less. As
of December 31, 2019 and 2018, bank balances totaling approximately $28.0 million and $11.8 million,
respectively, were uninsured.
Accounts Receivable and Allowance for Doubtful Accounts
We sell our products worldwide. We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history, the customer’s current credit worthiness and various other factors, as
determined by our review of their current credit information. We continuously monitor collections and payments
from our customers. We estimate credit losses and maintain an allowance for doubtful accounts reserve based
upon these estimates. While such credit losses have historically been within our estimated reserves, we cannot
guarantee that we will continue to experience the same credit loss rates that we have in the past. If not, this could
have an adverse effect on our consolidated financial statements. Allowances for product returns are included in
other adjustments to accounts receivable on the accompanying consolidated balance sheets. Product returns are
estimated based on historical experience and have also been within management’s estimates.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation is computed using the straight-line method based
on the estimated useful lives of the assets, generally ranging from three to seven years. Leasehold improvements
are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease
term.
Internal Software Development Costs
Development costs incurred in the research and development of new software products and enhancements to
existing software products are expensed as incurred until technological feasibility has been established. The
F-9
Company considers technological feasibility to be established when all planning, designing, coding, and testing
has been completed according to design specifications. After technological feasibility is established, any
additional costs are capitalized. Through December 31, 2019, software has been substantially completed
concurrently with the establishment of technological feasibility; accordingly, no costs have been capitalized to
date.
Impairment or Disposal of Long Lived Assets
Long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their
carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to
determine whether or not impairment to such value has occurred as required by FASB ASC Topic No. 360,
Property, Plant, and Equipment. The Company determined there was an impairment of its Customer
Relationships intangible asset in the amount of $0.4 million as of December 31, 2016.
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 annual impairment testing date is 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.
Intangible Assets and Amortization
Amortization expense related to other intangibles acquired in acquisitions is calculated on a straight line basis
over two to ten years. Intangible assets are tested for impairment if events or circumstances occur indicating
that the respective asset might be impaired.
Derivatives
The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC
Topic No. 480, Distinguishing Liabilities from Equity and FASB ASC Topic No. 815, Derivatives and Hedging.
Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the
fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of
interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value
of the financial instruments.
Going Concern Evaluation
In connection with preparing consolidated financial statements for the year ended December 31, 2019,
management evaluated whether there were conditions and events, considered in the aggregate, that
raised substantial doubt about the Company’s ability to continue as a going concern within one year from the
date that the financial statements are issued.
The Company considered the historical operating loss and negative cash flow from operating activities trends,
including the positive trends occurring in the recent year.
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 and management believes that the Company will generate enough cash
from operations to satisfy its obligations for the next twelve months from the issuance date.
F-10
Revenue Recognition
The Company adopted FASB ASC Topic No. 606, Revenue from Contracts with Customers, as of January 1,
2018, and recognizes the sale of goods and services based on the five step analysis of transactions as provided
in Topic 606 which requires an entity to recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for such goods and services.
In our Wireless segment, we transfer software licenses to our customers on a royalty free, non-exclusive, non-
transferrable, limited use basis during the term of the agreement. In some instances, we perform customization
services to ensure the software operates within our customer’s operating platforms as well as the operating
platforms of the mobile devices used by their end customers before transferring the license. Revenue related to
these services is recognized at a point in time upon acceptance of the software license by the customer. We also
earn usage based revenue on our platforms. Usage based revenue is generated based on active licenses used by
our customer’s end customers, the provision of hosting services, revenue share based on media placements on
our platform, and use of our Cloud Based services. We recognize our usage based revenue when we have
completed our performance obligation and have the right to invoice the customer. This revenue is generally
recognized monthly or quarterly. Finally, in this segment, we ratably recognize revenue over the contract period
when customers pay in advance of our service delivery.
We also provide consulting services to develop customer specified functionality that are generally not on our
software development roadmap. We recognize revenue from our consulting services upon delivery and
acceptance by the customer of our software enhancements and upgrades. For certain Wireless segment
customers we provide maintenance and technology support services for which the customer 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.
For our Graphics products where we sell off-the-self software products with no customization or post sale
technology support services, we recognize revenue at the time we transfer control of the product to the customer.
This occurs upon shipment of the product or when the customer downloads the software from our website or
website of our resellers. We offer a 30 day return option to our customers; a return reserve is established at the
time revenue is recorded and the reserve is monitored and adjusted based on actual experience. Historically,
returns have been insignificant.
Product and Services Warranties
Warranty related costs are recorded in our operating expenses as incurred as these costs are immaterial for the
products and services we sell.
Shipping and Handling Costs
We incur shipping and handling costs as part of our Graphics software sales. These costs are treated as
fulfillment costs and are expensed as incurred.
Principal and Agent Considerations
We own the Intellectual Property and retain ownership when we license our customized software solutions for
use by our Wireless segment customers. We are a principal in these transactions and as such we recognize our
Wireless segment revenue on a gross basis.
We sell our Graphics software products directly to end consumers as well as through our distributors and re-
sellers. We are a principal in these transactions as we bear the inventory risk, customers (or customer’s end
users) view us as the primary obligor responsible for supporting the software products, and we have full
discretion in establishing the prices for our graphics software products. As a principal we record our Graphics
revenues on a gross basis.
F-11
Sales Incentives
For our Graphics sales, the cost of sales incentives the Company offers without charge to customers that can be
used in, or that are exercisable by a customer as a result of, a single exchange transaction is accounted for as a
reduction of revenue as required by FASB ASC Topic No. 605-50, Revenue Recognition-Customer Payments
and Incentives. We use historical redemption rates to estimate the cost of customer incentives. Total sales
incentives were $16 thousand and $0.1 million for the years ended December 31, 2019 and 2018, respectively.
Stock-Based Compensation
The Company accounts for all stock-based payment awards made to employees and directors based on their fair
values and recognizes such awards as compensation expense over the vesting period using the straight-line
method over the requisite service period for each award as required by FASB ASC Topic No. 718,
Compensation-Stock Compensation.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU
2014-09 clarifies the principles for recognizing revenue when an entity either enters into a contract with
customers to transfer goods or services or enters into a contract for the transfer of non-financial assets. The
Company adopted ASU 2014-09 as of January 1, 2018 utilizing the modified retrospective approach. This
adoption did not have a material impact on our consolidated financial statements. See Note 11 for further details.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and
comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on
the balance sheet as a lease liability and a right-of-use asset (as defined). The Company adopted the 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. Management elected the package of practical
expedients permitted under the transition guidance within the new standard which allowed for the carry forward
of 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 the consolidated net income or earnings
per share and had no impact on cash flows. See Note 13 for further details.
Recently Issued Accounting Standards Not Yet Adopted
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which is designed
to improve the effectiveness of disclosures related to fair value measurements. This ASU is effective for annual
periods beginning after December 15, 2019 and early adoption is allowed in any interim reporting periods within
those annual reporting periods. The Company is currently assessing the impact that this ASU will have on its
consolidated financial statements.
F-12
2. 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 (in thousands):
Fair value of assets acquired
Fair value of liabilities assumed
Total purchase price
Components of purchase price:
Cash
Common stock
Total purchase price
$
$
$
$
The Company’s allocation of the purchase price is summarized as follows (in thousands):
Assets:
Costs incurred on projects not complete
Intangible assets
Goodwill
Total assets
Liabilities:
Deferred revenue
Total liabilities
Total purchase price
$
$
$
$
9,394
291
9,103
3,974
5,129
9,103
53
5,229
4,112
9,394
291
291
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 the Company now calls
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 provides analytics capabilities, which allows customers to gain valuable
insights and buying behaviors. The platform was 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 years ended December 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.
Revenues
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Year Ended December 31,
2019
2018
(in thousands, except per share amounts)
$
$
$
43,346
10,722
0.31
0.29
$
$
$
30,086
(1,421)
(0.08)
(0.08)
F-13
3. Equipment and Improvements
Equipment and improvements consist of the following (in thousands):
Computer hardware, software, and equipment
Leasehold improvements
Office furniture and fixtures
Construction in progress
Less accumulated depreciation and amortization
Equipment and improvements, net
December 31,
2019
2018
$
$
$
9,079
2,808
1,017
494
13,398
(11,289)
$
2,109
14,658
5,316
962
25
20,961
(20,096)
865
Depreciation and amortization expense on equipment and improvements was $0.4 million and $0.5 million for
the years ended December 31, 2019 and 2018, respectively.
4. Goodwill and Intangible Assets
The following table sets forth our acquired intangible assets by major asset class as of December 31, 2019 and
December 31, 2018 (in thousands, except for useful life data):
December 31, 2019
Useful
life
Useful
life
Purchased technology
Customer relationships
Trademarks/trade names
Non-compete
Total
(years) Gross Additions
4-6 $ 265 $ 2,253 $
999 2,976
3-10
—
38
2
—
51
3
$ 1,353 $ 5,229 $
Purchased technology
Customer relationships
Trademarks/trade names
Non-compete
Total
(years) Gross Additions
4-6 $ 265 $ — $
—
999
3-6
—
38
2
—
51
3
— $
$ 1,353
Accumulated
amortization
Net book
value
before
impairment
Impairment
charge in
2016
(687) $
(860)
(38)
(51)
(1,636) $
1,831 $
3,115
—
—
4,946 $
December 31, 2018
Net book
value
$ 1,831
2,704
—
—
(411) $ 4,535
—
(411)
—
—
Accumulated
amortization
Net book
value
before
impairment
Impairment
charge in
2016
Net book
value
(125) $
(499)
(38)
(42)
(704) $
140 $
500
—
9
649 $
—
$
(411)
—
—
(411) $
140
89
—
9
238
Intangible assets amortization expense was $0.9 million and $0.2 million for the years ended December 31,
2019 and 2018, respectively.
F-14
Future amortization expense related to intangible assets as of December 31, 2019 are as follows (in thousands):
Year Ending December 31,
2020
2021
2022
2023
2024
Total
$
$
907
901
869
345
1,513
4,535
Valuation of Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets as required by FASB ASC Topic No. 350,
Intangibles-Goodwill and Other. This statement requires us to periodically assess the impairment of our
goodwill and intangible assets, which requires us to make assumptions and judgments regarding the carrying
value of these assets. These assets are considered to be impaired if we determine that their carrying value
may not be recoverable based upon our assessment of the following events or changes in circumstances:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
a determination that the carrying value of such assets cannot be recovered through undiscounted cash
flows;
loss of legal ownership or title to the assets;
significant changes in our strategic business objectives and utilization of the assets; or
the impact of significant negative industry or economic trends.
If the intangible assets are considered to be impaired, the impairment we recognize is the amount by which the
carrying value of the intangible assets exceeds the fair value of the intangible assets. In addition, we base the
useful lives and the related amortization expense on our estimate of the useful life of the intangible assets. Due
to the numerous variables associated with our judgments and assumptions relating to the carrying value of our
intangible assets and the effects of changes in circumstances affecting these valuations, both the precision and
reliability of the resulting estimates are subject to uncertainty, and as additional information becomes known,
we may change our estimate, in which case, the likelihood of a material change in our reported results would
increase. The Company recognized an impairment loss of $0.4 million in the three and twelve months ended
December 31, 2016 related to a previously acquired intangible asset.
We review the recoverability of the carrying value of goodwill at least annually or whenever events or
circumstances indicate a potential impairment. Our annual impairment testing date is December 31.
Recoverability of goodwill is determined by comparing the estimated fair value of our reporting units to the
carrying value of the underlying net assets in the reporting units. If the estimated fair value of a reporting unit
is determined to be less than the fair 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 estimated fair
value of the reporting unit and the fair value of its other assets and liabilities. We determined that we did not
have any impairment of goodwill at December 31, 2019 and 2018.
5. Debt and Related Party Transactions
Short-term Debt
On February 7, 2017, the Company entered into a short-term secured borrowing arrangement with William W.
and Dieva L. Smith (“Smith”) and on February 8, 2017 entered into a short-term secured borrowing arrangement
with Steven L. and Monique P. Elfman (“Elfman”) pursuant to which Smith and Elfman each loaned to the
Company $1.0 million and the Company issued to each of them a Secured Promissory Note (the “Original
Notes”) bearing interest at the rate of 18% per annum. The Original Notes were due on March 24, 2017 and
were secured by the Company’s accounts receivable and certain other assets. William W. Smith, Jr. is the
Company’s Chairman of the Board, President and Chief Executive Officer, and Steven L. Elfman is a director
of the Company. On March 25, 2017, the Company entered into an Amendment to the Original Note issued to
Smith that extended the Maturity Date of the Note to June 26, 2017. On March 31, 2017, the Company entered
F-15
into a new short-term secured borrowing arrangement with Elfman for $1.0 million which matured on June 23,
2017.
On June 30, 2017, the Company entered into a new short-term secured borrowing arrangement with each of
Smith and Elfman to refinance the prior arrangement with each of them, which matured on June 26, 2017 and
June 23, 2017, respectively. Under the new borrowing arrangements, the Company issued to each of Smith and
Elfman a new Secured Promissory Note (“Replacement Notes”) with a principal balance of $1.0 million, bearing
interest at the rate of 12% per annum, and maturing on September 25, 2017. The maturity date of the
Replacement Note entered into with Smith may be extended by up to 180 days upon the mutual consent of the
Company and Smith. Each of the Replacement Notes were secured by the Company’s accounts receivable and
certain other assets.
On August 18, 2017, the Company entered into Amendments to the Replacement Notes issued to each of Smith
and Elfman, which extended the Maturity Date of the Replacement Notes from September 25, 2017 to January
25, 2018. The amendments did not change any other terms of the Replacement Notes.
On August 23, 2017, the Company entered into a borrowing arrangement with Smith, under which the Company
borrowed $0.8 million and issued to Smith a Secured Promissory Note, bearing interest at the rate of 12% per
annum, and maturing on January 25, 2018.
On August 24, 2017, the Company entered into a new borrowing arrangement with Andrew Arno (“Arno”),
under which the Company borrowed $0.3 million and issued to Arno new Secured Promissory Notes with an
aggregate principal balance of $0.3 million, bearing interest at the rate of 12% per annum, and maturing on
January 31, 2018. Andrew Arno is a director of the Company.
On January 30, 2018, the Company amended certain of its existing Secured Promissory Notes (the “Notes”) for
the sole purpose of extending the relevant maturity dates. The Note dated August 18, 2017 issued to Steven L.
Elfman and Monique P. Elfman was amended to extend its maturity date to February 11, 2018 and was
subsequently paid in full. The Note dated June 26, 2017 issued to William W. Smith, Jr. and Dieva L. Smith
was amended to extend its maturity date to July 25, 2018. The Notes dated August 24, 2017 issued to Next
Generation TC FBO Andrew Arno IRA 1663 and Andrew Arno were amended to extend the maturity date of
each to July 25, 2018.
As a condition to closing of the private placement offering in March 2018 discussed in Note 6, the following
Notes were further amended for the sole purpose of extending the maturity dates of each to March 25, 2020:
(i) Secured Promissory Note dated June 26, 2017, issued to William W. Smith and Dieva L. Smith, as amended;
(ii) Secured Promissory Note dated August 24, 2017, issued to Next Generation TC FBO Andrew Arno IRA
1663, as amended; and (iii) Secured Promissory Note, dated August 24, 2017 issued to Andrew Arno, as
amended.
On September 29, 2017, the Company exchanged shares of the Company’s newly designated Series B 10%
Convertible Preferred Stock (“Series B Preferred Stock”) for outstanding short-term indebtedness with a
principal amount of $0.8 million owed to Smith and $0.1 million to Arno for 750 and 50 shares, respectively.
See Note 6, Equity Transactions, for further details on the Series B Preferred Stock Offering.
Long-term Debt
On September 2, 2016, we entered into a Note and Warrant Purchase Agreement with Unterberg Koller Capital
Fund L.P. and William W. and Dieva L. Smith (collectively, the “Investors”), pursuant to which the Company
issued and sold to the Investors in a private placement senior subordinated promissory notes in the aggregate
principal amount of $4.0 million (the “Notes”). The Company completed the transactions contemplated by the
Note and Warrant Purchase Agreement and issued the Notes on September 6, 2016. The Notes were to mature
three years following the issuance date, or September 6, 2019, and bear interest at the rate of 10% of the
outstanding principal balance of the Notes, payable quarterly in cash or shares of the Company’s common stock.
F-16
On September 29, 2017, the Company exchanged shares of the Company’s newly designated Series B 10%
Convertible Preferred Stock for outstanding long-term indebtedness with a principal amount of $2.0 million
owed to Smith for 2,000 of the Series B Preferred Stock. See Note 6, Equity Transactions, for further details on
the Series B Preferred Stock Offering.
In November 2018, the $2.0 million Unterberg Koller Note was paid in full, and an extinguishment loss
consisting of the unamortized debt discount and issuance costs totaling $0.2 million was recognized.
6. Equity Transactions
Preferred Stock Offering
On September 29, 2017, the Company entered into a Securities Purchase Agreement with several investors for
the issuance and sale (the “Offering”) of 5,500 shares of the Company’s newly designated Series B 10%
Convertible Preferred Stock (the “Series B Preferred Stock”) at a stated value of $1,000 per share, for a total
purchase price of $5.5 million. The Series B Preferred Stock is convertible into the Company’s Common Stock
at a conversion price of $1.14 per share, which was the closing bid price of the Common Stock on September
28, 2017, or 4,824,562 shares of Common Stock in the aggregate. The holders of Series B Preferred Stock were
entitled to receive cumulative dividends out of funds legally available thereof at a rate of ten percent (10%) per
annum, payable (i) when and as declared by the Board of Directors, in quarterly installments on March 1, June 1,
September 1 and December 1, (ii) upon conversion into Common Stock with respect the Series B Preferred
Stock being converted, and (iii) upon redemption of the Series B Preferred Stock by the Company.
In the event that the trading price of the Company’s Common Stock for 20 consecutive trading days (as
determined in the Certificate of Designation) exceeds 400% of the then effective Conversion Price of the Series
B Preferred Stock (initially set at $1.14), the Company may force conversion of the Series B Preferred Stock
into shares of Common Stock or elect to redeem the Series B Preferred Stock for cash. In addition, upon the
occurrence of certain triggering events, each holder of Series B Preferred Stock will have the right to require
the Company to redeem such holder’s shares for cash equal to the stated value plus accrued and unpaid dividends
and liquidated damages, costs, expenses and other amounts due in respect of the Series B Preferred Stock, and
with respect to certain other triggering events, each holder will have the right to increase the dividend rate on
such holder’s Series B Preferred Stock to twelve percent (12%) while such triggering event is continuing.
In the Offering, the Company raised gross cash proceeds of $2.7 million, and exchanged outstanding
indebtedness with a principal amount of $2.8 million owed to Smith (both long and short-term debt) and $0.1
million owed to Arno for 2,750 and 50 shares, respectively. The Offering raised net cash proceeds of $2.5
million (after deducting the placement agent fee and expenses of the Offering).
In connection with the Offering, the Company entered into a Registration Rights Agreement with investors (the
“Series B Registration Rights Agreement”) under which the Company agreed to prepare and file a registration
statement with the SEC within 30 days after closing of the Series B Transaction for the purpose of registering
the resale of shares of common stock issuable upon conversion of the Series B Preferred Stock (the “Conversion
Shares”). The Company agreed to use its reasonable best efforts to cause such resale registration statement to
be declared effective by the SEC within 90 days after the closing of the Series B Transaction (120 days in the
event the registration statement is reviewed by the SEC) and agreed to pay liquidated damages to the Series B
Stockholders if such resale registration statement were not to become effective within the applicable time period.
The Conversion Shares were included in the registration statement filed in connection with the March Offering,
and such registration statement became effective on April 19, 2018, which was later than the deadline specified
in the Series B Registration Rights Agreement, resulting in liquidated damage payments of $48 thousand to
Series B Stockholders. Certain Series B Stockholders, including without limitation, Smith and Arno, waived
their rights to receive such liquidated damage payments.
During the third quarter of 2019, the Company forced conversion of all outstanding Series B Preferred Stock in
accordance with its terms.
F-17
Common Stock Offerings
March 2018 Offering
On March 6, 2018, the Company completed the March Offering, wherein a total of 2,857,144 shares of the
Company’s common stock were issued at a purchase price of $1.75 per share, for a total purchase price of $5.0
million, with each investor also receiving a warrant to purchase up to a number of shares of common stock equal
to the number of shares of common stock purchased by such investor in the offering at an exercise price of $2.17
per share. The March Offering raised net cash proceeds of approximately $4.5 million (after deducting the
placement agent fee and expenses of the March Offering). The Company used the net cash proceeds from the
March Offering for working capital purposes, to fund required dividend payments, payment of principal and
interest payments under short-term borrowing obligations, and payment of interest (but not principal) under
long-term borrowing obligations.
The Company engaged Chardan as placement agent for the March Offering pursuant to an engagement letter
agreement. The Company agreed to pay Chardan a cash placement fee equal to 8.0% of the gross proceeds of
the March Offering, and issued to Chardan a warrant to purchase shares of common stock equal to 3.0% of the
number of shares sold in the March Offering (the “Chardan Warrant”). The Chardan Warrant has an exercise
price of $2.365 per share, a term of 5.5 years from the closing date of the March Offering, and otherwise has
identical terms to the warrants issued to the investors in the March Offering.
Pursuant to the purchase agreement entered in connection with the March Offering (the “March Purchase
Agreement”), the Company used its best efforts to cause the conversion of all shares of the Company’s Series
B 10% Convertible Preferred Stock (the “Series B Preferred Stock”) into shares of common stock pursuant to
the terms of the Company’s Certificate of Designation (the “Certificate of Designation”) with respect to the
Series B Preferred Stock. In connection therewith, the Company entered into letter agreements with each of
William W. Smith, Jr. (“Smith”) and Andrew Arno (“Arno”), whereby each of Smith and Arno agreed to take
certain action to convert the shares of Series B Preferred Stock held by them pursuant to terms outlined in the
March Purchase Agreement, and further agreed that the shares of common stock issued upon such conversion
shall not be subject to resale registration rights. Each of Smith and Arno completed the conversion of their shares
of Series B Preferred Stock in accordance with such letter agreements.
The Company prepared and filed a registration statement with the SEC for the purpose of registering the resale
of shares of common stock issued in the March Offering, and such registration statement became effective
within the time period agreed by the parties to the March Offering.
The Company has outstanding warrants issued pursuant to an agreement entered into on September 6, 2016 with
Unterberg Koller Capital Fund L.P. (the “Unterberg Warrant Agreement”). The March Offering caused a
Triggering Event as defined in the Unterberg Warrant Agreement, and the warrants were repriced from an
exercise price of $2.14 to $2.07. The Triggering Event charges of $11 thousand were recorded to Stockholders’
Equity during the first quarter of 2018.
May 2018 Offering
On May 3, 2018, the Company completed the May Offering, wherein a total of 3,170,000 shares of the
Company’s common stock were issued at a purchase price of $2.21 per share, for a total purchase price of
approximately $7.0 million, with each investor also receiving a warrant to purchase up to a number of shares of
common stock equal to the number of shares of common stock purchased by such investor in the Offering at an
exercise price of $2.11 per share. The May Offering raised net cash proceeds of approximately $6.3 million
(after deducting the placement agent fee and expenses). The Company used the net cash proceeds from the May
Offering for working capital purposes, and to fund required dividend payments, payment of principal and
interest payments under short-term borrowing obligations, and payment of interest (but not principal) under
long-term borrowing obligations.
The Company engaged Chardan as placement agent for the May Offering pursuant to an engagement letter
agreement. The Company agreed to pay Chardan a cash placement fee equal to 7.0% of the gross proceeds of
the May Offering. The Company also engaged Roth Capital Partners, LLC (“Roth”) as its financial advisor for
F-18
the May Offering. The Company agreed to pay Roth a cash fee equal to 2.0% of the gross proceeds of the May
Offering.
The Company prepared and filed a registration statement with the SEC for the purpose of registering the resale
of shares of common stock issued in the May Offering, and such registration statement became effective within
the time period agreed by the parties to the May Offering.
November 2018 Offering
On November 7, 2018, the Company completed the November Offering, wherein a total of 3,239,785 shares of
the Company’s common stock were issued at a purchase price of $2.32 per share, for a total purchase price of
approximately $7.5 million, with each investor also receiving a warrant to purchase up to a number of shares of
common stock equal to the number of shares of common stock purchased by such investor in the Offering at an
exercise price of $2.20 per share.
As part of the November Offering, the previously issued warrant agreements from the March and May 2018
Offerings were amended, which allowed the Company to reclassify them from liability to equity treatment.
These warrants were initially accounted for as liabilities under ASC 815-40-25 since the original warrants
provided the investors a cash settlement option in the event of a fundamental transaction that was not also
provided to the common stockholders. In connection with the November Offering, these warrants were amended
to remove the cash settlement option in the event of a fundamental transaction, thereby allowing equity
treatment.
The November Offering raised net cash proceeds of approximately $6.9 million (after deducting the placement
agent fee and expenses). The Company is using the net cash proceeds for general corporate purposes and repaid
certain short and long-term debt obligations of $3.2 million.
The Company engaged Chardan as placement agent for the November Offering pursuant to an engagement letter
agreement. The Company agreed to pay Chardan a cash placement fee equal to 6.0% of the gross proceeds of
the November Offering. The Company also engaged Roth as its financial advisor for the November Offering.
The Company agreed to pay Roth a cash fee equal to 2.0% of the gross proceeds of the November Offering.
The Company prepared and filed a registration statement with the SEC for the purpose of registering the resale
of shares of common stock issued in the November Offering, and such registration statement became effective
within the time period agreed by the parties to the November Offering.
Warrants
The Company issued warrants to purchase shares of Common Stock in connection with a registered direct
offering completed in May 2017, March 2018, May 2018 and November 2018. See the prior section under the
heading “Common Stock Offering” for additional details regarding the warrants issued in connection with those
offerings.
7. Income Taxes
Income (loss) before provision for income taxes was generated from the following sources (in thousands):
Year Ended December 31,
2019
2018
Domestic
Foreign
Total loss before provision for income taxes
$
$
F-19
10,833
$
(31)
$
10,802
(2,541)
(186)
(2,727)
A summary of the income tax expense (benefit) is as follows (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Total income tax expense (benefit)
Year Ended December 31,
2018
2019
$
$
(132) $
7
108
(17)
144
—
(47)
97
80
$
(265)
2
63
(200)
265
—
(52)
213
13
A reconciliation of the provision for income taxes to the amount of income tax expense (benefit) that would
result from applying the federal statutory rate to the loss before income taxes is as follows:
Federal statutory rate
State tax, net of federal benefit
Equity compensation
International tax items
Foreign taxes
State NOL true-up
Miscellaneous
Effect of change in rate
Change in valuation allowance
Year Ended December 31,
2019
2018
21.0 %
3.6
0.1
0.2
0.6
(6.1)
0.4
0.9
(19.8)
0.7 %
21.0 %
3.0
(0.7)
(1.7)
(0.4)
(30.4)
(7.7)
(12.6)
29.0
(0.5)%
F-20
The major components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
Deferred income tax assets
Net operating loss carry forwards
Credit carry forwards
Fixed assets
Intangibles
Equity-based compensation
Nondeductible accruals
Various reserves
Other
Valuation allowance
Total deferred income taxes - net
Deferred income tax liabilities
Foreign intangibles
Unrealized translation gain/loss
Prepaid expenses
Total deferred income liabilities
$
Year Ended December 31,
2018
2019
$
41,650
3,159
373
4,679
308
319
209
2
(50,397)
302
(27)
(120)
(61)
(208)
41,356
3,292
493
6,417
439
565
55
107
(52,414)
310
(74)
(4)
(41)
(119)
Net deferred income tax assets
$
94
$
191
The Company has federal and state net operating loss (“NOL”) carryforwards of approximately $158.1 million
and $145.9 million, respectively, at December 31, 2019, to reduce future cash payments for income taxes. These
federal NOL carryforwards will expire from 2024 through 2037 and state NOL carryforwards will expire 2019
through 2039. The Company also had $0.1 million of alternative minimum tax credit carryforwards with an
indefinite life, available to offset regular federal income tax requirements.
The Company has federal and state tax credit carryforwards of approximately $2.5 million and $0.7 million,
respectively, at December 31, 2019. These tax credits will begin to expire in 2028.
To the extent that an ownership change has occurred under Internal Revenue Code Sections 382 and 383, the
Company’s use of its loss carryforwards and credit carryforwards to offset future taxable income may be limited.
At December 31, 2019 and 2018, the Company had unrecognized tax benefits, including interest and penalties,
of approximately $0.4 million.
The Company’s gross unrecognized tax benefits as of December 31, 2019 and 2018 and the changes in those
balances are as follows (in thousands):
Year Ended December 31,
2018
2019
Beginning balance
Increases (decreases) in tax positions for the
current year
Increases (decreases) in tax positions for the
prior year
Gross unrecognized tax benefits, ending balance
$
$
428
$
—
—
428
$
428
—
—
428
F-21
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 either as 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 five-year
historical cumulative loss as of the end of fiscal 2018. These facts, combined with uncertain near-term market
and economic conditions, reduced the Company’s ability to rely on projections of future taxable income in
assessing the realizability of its deferred tax assets.
After a review of the four sources of taxable income as of December 31, 2019 (as described above), and after
consideration of the Company’s cumulative loss position as of December 31, 2019, the Company recorded a
valuation allowance related to its U.S.-based deferred tax assets of $50.4 million at December 31, 2019. The
valuation allowance on deferred tax assets decreased by $2.0 million and $0.5 million in 2019 and 2018,
respectively.
We recognized interest and penalties accrued related to unrecognized tax benefits in income tax expense. During
2019 and 2018, we recognized $0 in interest and penalties. The cumulative interest and penalties at December
31, 2019 and 2018 were $0. We do not anticipate any material changes to unrecognized tax benefits within the
next twelve months that will affect the effective tax rate.
The Company is subject to U.S. federal income tax as well as to income tax of multiple state jurisdictions.
Currently there are no audits in process or pending from Federal or state tax authorities. State income tax returns
are subject to examination for a period of three to four years after filing. As of December 31, 2019, the company
had no outstanding tax audits. The outcome of tax audits cannot be predicted with certainty. If any issues
addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations,
the Company could be required to adjust its provision for income tax in the period such resolution occurs. As
of December 31, 2019, a current estimate of the range of changes that may occur within the next twelve months
cannot be made due to the uncertainty regarding the timing of these events.
For financial reporting purposes, income (loss) before provision for income taxes for our foreign subsidiaries
was $(31) thousand and $(186) thousand for the years ended December 31, 2019 and 2018, respectively. We do
not provide for U.S. taxes on our unremitted earnings of foreign subsidiaries that have not been previously taxed
since we intend to invest such undistributed earnings indefinitely outside of the U.S.
As a part of the provisions of the 2017 Act, the corporate alternative minimum tax (“AMT”) has been repealed
for tax years beginning after December 31, 2017. Taxpayers with AMT credit carryforwards that have not yet
been used may claim a refund in future years for those credit. Since the AMT credit will now be fully refundable
regardless of whether there is a future income tax liability before AMT credits, the benefit of the AMT credit
will be realized in the future. Accordingly, a valuation allowance established against AMT credit carryforward
F-22
balance is no longer necessary and a benefit has been recognized with respect to a $0.5 million AMT credit
carryforward balance that was generated with 2011 net operating loss carrybacks. The Company has opted to
reflect the balance as part of deferred tax asset balance. With the filing of the 2019 federal tax return, the
Company will receive a refund of $133 thousand of the balance and this amount has been classified as a federal
income tax receivable.
The 2017 Act subjects a U.S. shareholder to current tax on global intangible low-taxed income (“GILTI”) earned
by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-
Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes
for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to
GILTI in the year the tax is incurred. We have elected to recognize the tax on GILTI as a period expense in the
period the tax is incurred. The current income related to the GILTI inclusion in 2019 is less than $59 thousand.
8. 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 purposes of this
calculation, common stock subject to repurchase by the Company and options are considered to be common
stock equivalents, and are only included in the calculation of diluted earnings per share when their effect is
dilutive.
$
Numerator:
Net income (loss)
Dividends paid to preferred stockholders
Net income (loss) available to common stockholders $
Denominator:
Weighted average shares outstanding - basic
Potential common shares - options (treasury
stock method)
Weighted average shares outstanding - diluted
Shares excluded due to an exercise price greater than
weighted average stock price for the period
Earnings (loss) per common share:
Year Ended December 31,
2018
2019
(in thousands, except per share amounts)
10,722 $
(119)
10,603 $
34,513
2,478
36,991
(2,740)
(404)
(3,144)
22,322
—
22,322
88
1,081
Basic
Diluted
$
$
0.31 $
0.29 $
(0.14)
(0.14)
9. Employee Benefit Plans
The Company offers its employees participation in a 401(k) plan, in which the Company matches the employee
contributions at a rate of 20%, subject to a vesting schedule. Total employer contributions amounted to $0.2
million and $0.1 million for the years ended December 31, 2019 and 2018, respectively.
F-23
10. Stock-Based Compensation
Stock Plans
On June 18, 2015, our stockholders approved the 2015 Omnibus Equity Incentive Plan (“2015 OEIP”) and a
subsequent amendment to the 2015 OEIP to increase the number of shares reserved thereunder was approved by
our stockholders on June 14, 2018. The 2015 OEIP replaced the 2005 Stock Option / Stock Issuance Plan (“2005
Plan”) which was due to expire on July 28, 2015. All outstanding options under the 2005 Plan remain outstanding,
but no new grants will be made under the 2005 Plan. The maximum number of shares of the Company’s common
stock available for issuance over the term of the 2015 OEIP may not exceed 4,625,000 shares.
The 2015 OEIP provides for the issuance of full value awards (restricted stock, performance stock, dividend
equivalent right or restricted stock units) and partial value awards (stock options or stock appreciation rights) to
employees, non-employee members of the board and consultants. Any full value award settled in shares will be
debited as 1.2 shares, and partial value awards settled in shares will be debited as 1.0 shares against the share
reserve. The exercise price per share for stock option grants is not to be less than the fair market value per share
of the Company’s common stock on the date of grant. The Board of Directors has the discretion to determine
the vesting schedule. Stock options may be exercisable immediately or in installments, but generally vest over
a four-year period from the date of grant. In the event the holder ceases to be employed by the Company, all
unvested stock options terminate and all vested stock options may be exercised within a period of 90 days
following termination. In general, stock options expire ten years from the date of grant. Restricted stock is
valued using the closing stock price on the date of the grant. The total value is expensed over the vesting period
of 12 to 48 months.
Employee Stock Purchase Plan
The Company has a shareholder approved employee stock purchase plan (“ESPP”), under which substantially
all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85%
of the lower of the fair market values of the stock as of the beginning and end of six-month offering periods. An
employee’s payroll deductions under the ESPP are limited to 10% of the employee’s compensation and
employees may not purchase more than the lesser of $25,000 of stock, or 250 shares, for any purchase period.
Additionally, no more than 250,000 shares in the aggregate may be purchased under the plan.
Stock Compensation Expense
The Company accounts for all stock-based payment awards made to employees and directors based on their fair
values and recognized as compensation expense over the vesting period using the straight-line method over the
requisite service period for each award as required by FASB ASC Topic No. 718, Compensation-Stock
Compensation.
Valuation of Stock Option and Restricted Stock Awards
The assumptions used to compute the share-based compensation costs for the stock options granted during the
years ended December 31, 2019 and 2018, using the Black-Scholes option pricing model, were as follows:
Weighted average grant date fair value of
stock options
Assumptions
Risk-free interest rate (weighted average)
Expected dividend yield
Weighted average expected life (years)
Volatility (weighted average)
Forfeiture rate
Year Ended December 31,
2019
2018
$
1.84
$
1.56
2.36%
—
6.2
78.7%
26.0%
2.90%
—
6.2
73.8%
26.6%
F-24
The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury zero-
coupon bonds with maturities similar to those of the expected term of the award being valued. The Company
assumed no dividend yield because it does not expect to pay dividends for the foreseeable future. The weighted
average expected life is the vesting period for those options granted during that period. The average volatility is
based on the actual historical volatility of our common stock. The forfeiture rate was based on modified
employee turnover.
Valuation of ESPP
The fair values are estimated at the beginning of each offering period using a Black-Scholes valuation model
that uses the assumptions noted in the following table. The risk-free rate is based on the U.S. treasury yield
curve in effect at the time of grant. Expected volatility was based on the historical volatility on the day of grant.
Following is a schedule of the shares purchased, the fair value per share, and the Black-Scholes model
assumptions for each offering period:
Offering Period Ended
Shares purchased for offering
period
Fair value per share
Assumptions
Risk-free interest rate (average)
Expected dividend yield
Weighted average expected life
(years)
Volatility (average)
Compensation Costs
September 30,
2019
March 31,
2019
September 30,
2018
March 31,
2018
$
2,195
2.28
$
2,112
1.07
$
1,843
0.96
$
3,250
0.75
1.84%
—
0.5
86.3%
2.44%
—
0.5
51.7%
2.29%
—
0.5
54.3%
1.92%
—
0.5
81.4%
Non-cash stock-based compensation expenses related to stock options, restricted stock grants and the ESPP
were recorded in the financial statements as follows (in thousands):
Selling and marketing
Research and development
General and administrative
Total non-cash stock compensation expense
$
$
247 $
278
969
1,494 $
112
207
616
935
Year Ended December 31,
2018
2019
F-25
Stock Options
A summary of the Company’s stock options outstanding under the 2015 OEIP and 2005 Plan as of December
31, 2019 and the activity during the years ended herein are as follows (in thousands except per share amounts):
Outstanding as of December 31, 2017
(114 options exercisable at a weighted average
exercise price of $6.18)
Granted
Exercised
Canceled / expired
Outstanding as of December 31, 2018
(121 options exercisable at a weighted average
exercise price of $5.64)
Granted
Exercised
Canceled / expired
Outstanding as of December 31, 2019
Shares
Weighted Avg.
Exercise Price
5.71
137 $
Aggregate
Intrinsic Value
7
$
Wtd. Avg.
Remaining
Contractual
Life (Yrs)
30 $
— $
(9) $
158 $
65 $
(13) $
(13) $
197 $
2.32
—
8.96
4.88
2.65
3.81
7.81
4.03
5.16
3.67
$
$
$
$
$
$
$
$
$
$
5.9
6.3
4.1
6.0
—
—
—
—
—
28
22
171
35
133
Exercisable as of December 31, 2019
Vested and expected to vest at December 31, 2019
112 $
163 $
As of December 31, 2019, there was $2.9 million of unrecognized compensation costs related to non-vested
stock options and restricted stock granted under the Plans. At December 31, 2019, there were 1.3 million and 0
shares available for future grants under the 2015 OEIP and 2005 Plan, respectively.
Restricted Stock Awards
A summary of the Company’s restricted stock awards outstanding under the 2015 OEIP and 2005 Plan as of
December 31, 2019, and the activity during years ended therein, are as follows (in thousands):
Unvested at December 31, 2017
Granted
Vested
Canceled and forfeited
Unvested at December 31, 2018
Granted
Vested
Canceled and forfeited
Unvested at December 31, 2019
Number
of shares
Weighted average
grant date
fair value
167
1,125
(283)
(2)
1,007
1,250
(673)
(25)
1,559
3.49
1.92
2.52
0.83
2.01
2.00
2.06
1.97
1.98
F-26
11. Revenues
Adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
We adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective approach. We have
applied the new standard to all open contracts at the date of initial application. The cumulative adjustment to
the opening accumulated deficit balance at January 1, 2018 was immaterial.
Revenue Recognition
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.
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.
Performance Obligations
CommSuite and Netwise Revenue
In our Wireless segment, we sell our software solutions to major wireless network and cable operators. For our
Netwise and CommSuite products, we may provide customization services for a fee to ensure our software
solution can operate on their operating platforms and the operating platform of the mobile devices of our
customer’s end users. In addition, since the mobile device OEMs change their operating systems regularly, we
provide maintenance services to ensure utility of the software license is not diminished for our customers. We
consider the customization services, the software license, and maintenance services to maintain the utility of the
software license for our customers as a single performance obligation. We provide the perpetual license on a
royalty free basis. Revenue related to customization services, if charged, is recognized at a point in time upon
delivery and acceptance of the customized software license by the customer.
To support the Netwise and CommSuite solutions, we also provide customers with our hosted environment and
ASP services for the duration of the license term. We consider the provision of these services to be a separate
performance obligation. In these transactions, the total consideration expected is variable. We do not estimate
when the variable consideration will be recognized because the License Usage Based Fees, Hosting Service
Fees and ASP Advertising Fees relate specifically to our efforts to transfer the services for a specified period
(month or quarter) which are distinct from the services provided in other specified periods. Our customer’s or
the customer’s end customer’s usage occurs within the defined period, and the variability of our license, hosting
and ASP fees is resolved in the specified period, and such fees earned are not subject to adjustment based on
the activity in other periods.
F-27
We earn revenue from these services on a fixed fee per perpetual license usage on our hosted environment and
advertising revenue share for advertisements placed by our customers on our platform. The usage fees are not
earned until we transfer our software license to our customers. We recognize the usage based fees when we are
entitled to the consideration earned for the distinct service period based on our customer’s usage of our licenses,
hosting services, and ASP advertising platform (“hosted environment usage fees”).
SafePath Cloud Based Services
Our SafePath solution is a hybrid Software as a Service offering. We consider the provision of the perpetual
license and the cloud based platform as a single performance obligation. We provide the perpetual license on a
royalty free basis and earn revenue based on a fixed fee usage of our cloud based services. We recognize the
usage based fees when we are entitled to the consideration earned for the distinct service period based on our
customer’s usage of our cloud based services.
ViewSpot Cloud Based Services
During the first quarter of 2019, we acquired the Smart Retail contract asset from ISM Connect, LLC, later
branded as ViewSpot. ViewSpot product is a cloud based platform that its Mobile Network Operator customers
use to display its promotional content to mobile devices being sold in its retail outlets. Using this solution, the
MNOs have the ability to promote specific mobile devices in targeted geographic retail locations and monitor
the efficacy of the promotions and the mobile device user’s behavior to the targeted advertising. We sell a
royalty free license, consulting services to configure the advertising content so that it can be displayed on
targeted mobile devices, and cloud-based services to serve the advertising content and capture end consumer’s
behavior on the mobile device. ViewSpot services depend on a significant level of integration, interdependency,
and interrelation between the on-premise applications, consulting services and the cloud services, and are
accounted for together as a single performance obligation. The ViewSpot services are sold on a fixed fee basis
to our customers based on pre-defined purchase order. We receive upfront payments from customers for services
to be provided under our ViewSpot arrangements. Since we are obligated to provide the required services over
the contract period, the revenue is recognized over time. The advance receipts are deferred and subsequently
recognized ratably over the contract period.
From time to time, 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 revenues from these ad hoc services at a point in time which is upon
delivery of the configured promotional content to the cloud platform.
Consulting Services and Other
In our Wireless segment, we have developed a roadmap for adding new functionality to our products to extend
the product lifecycle and expand our customer’s use of the product on their networks. From time to time, we
enter into consulting services arrangements with our customers to develop incremental functionality not
included on our developmental roadmap. We earn revenue from our consulting services that is recognized at the
time of delivery of the software when the services have been completed and control has been transferred to our
customers.
We also enter into arrangements with certain customers to provide technology support services beyond the initial
warranty period. Technology support services include e-mail and telephone support and unspecified rights to
bug fixes available on a when-and-if available basis. We consider the provision of such technology support
services to be a separate performance obligation. We generally bill in advance for a fixed term and recognize
revenue from these arrangements ratably over the contractual term as we perform our services.
F-28
Graphics Revenue
We sell our off-the-shelf Graphics software products directly to end users as well as through our distribution
and reseller channel partners. These products require no customization and minimal post-sale technology
support services. We recognize revenue from Software sales 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 distributor and resellers partners. In some instances, we will consign our software
products to a distributor or reseller. In those instances, we recognize revenue when the end consumer takes
control of the product.
We offer a 30 day return policy to our customers; a return reserve is established at the time revenue is recorded.
We review available retail channel information and make a determination of a return provision for sales made
to distributors and retailers based on current channel inventory levels and historical return patterns. The return
reserve is monitored and adjusted based on actual experience. Historically, returns have been insignificant.
Unearned Revenue
Unearned revenue represents amounts billed to customers for which revenue has not been recognized. Unearned
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.
Costs to Obtain a Customer Contract
We generally pay sales commissions to our sales force, which are incremental and recoverable costs of acquiring
contracts. In most instances, sales commissions are only paid when we earn usage based fees on the contracts.
The commission obligation is established each quarter based on the usage based fees earned. The commission
obligation is not adjusted by future usage based fees earned, that is each period is discrete from the other. As a
result of the structure of the commission plan, we record the commission expense when the commission
obligation is determined, which is generally quarterly.
In the second quarter of 2019, we introduced an amended and restated sales commission plan that incentivizes
and recognizes the efforts of eligible participants to earn commissions on future revenue generated on new
contracts, sale of a new product to an existing contract, or sale of a product to a different group within an existing
customer. The sales commissions are tiered based on the opportunity size. Sales commissions paid under this
amended sales commission plan are incremental contract acquisition costs, and accordingly are recorded as a
deferred contract asset that is amortized on a straight-line basis over the average contract life of the new, renewed
and modified contract.
Costs to Fulfill a Customer Contract
We incur costs to fulfill obligations under a contract. We recognize these costs as we fulfill our performance
obligation and recognize revenue. Where we provide services and earn revenue over the contract term based on
usage of our platforms, we recognize the associated fulfillment costs as they are incurred and as usage based
revenue is recognized.
F-29
Disaggregation of Revenues
We disaggregate revenue by our Wireless and Graphics products.
Revenues on a disaggregated basis are as follows (in thousands):
Wireless:
Hosted environment usage fees
Cloud based usage fees
Consulting services and other
Total wireless
Graphics:
Software
Total revenues
Year Ended December 31,
2019
2018
$
$
$
19,517 $
20,011
3,076
42,604 $
742
43,346 $
18,889
3,327
2,258
24,474
1,811
26,285
12. Commitments and Contingencies
Pennsylvania Opportunity Grant Program
On September 26, 2011, we received $1.0 million from the State of Pennsylvania to help fund our agreement to
start-up a new facility. The grant carried with it an obligation, or commitment, to employ at least 232 people
within a three-year time period that ended on December 31, 2013. We received an extension of time to meet
this employment commitment by April 30, 2016. The grant contained conditions that would require us to return
a pro-rata amount of the monies received if we failed to meet these conditions. As such, the monies had been
recorded as a liability in the accrued liabilities line item on the balance sheet until we are irrevocably entitled to
retain the monies, or until it is determined that we need to return a portion or all of the monies received. On June
27, 2016, we received a letter from the State of Pennsylvania requesting reimbursement of $0.3 million and said
we earned the remaining $0.7 million of the original $1.0 million grant. On September 19, 2016, we entered
into a Settlement and Release Agreement with the Commonwealth of Pennsylvania, acting by and through the
Department of Community and Economic Development to repay $0.3 million of the original $1.0 million grant.
Per the agreement, the total amount due of $0.3 million is at 0% interest and is payable in twenty equal quarterly
installments commencing on January 31, 2017 and ending on October 31, 2021.
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.
F-30
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.
13. 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.
During the second quarter of 2019, the Company extended the lease term on its Pittsburgh, PA headquarters,
which resulted in a net increase in right-of-use assets and lease liabilities of approximately $3.0 million.
Additionally, an office lease in Aliso Viejo, CA commenced during the second quarter, which increased right-
of-use assets and lease liabilities by approximately $1.5 million.
During the fourth quarter of 2019, the company extended the lease term on its Belgrade, Serbia office space,
which resulted in a net increase in right-to-use assets and lease liabilities of approximately $0.2 million.
Operating lease cost consists of the following (in thousands):
Lease cost, gross
Sublease income
Total lease cost, net
For the Year Ended
December 31, 2019
$
$
2,076
(603)
1,473
Operating lease assets and liabilities are summarized as follows (in thousands):
Right-of-use assets
Current lease liabilities
Long-term lease liabilities
Total lease liabilities
As of December 31, 2019
$
$
$
6,464
1,221
5,774
6,995
F-31
The maturity of operating lease liabilities is presented in the following table (in thousands):
As of December 31, 2019
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less imputed interest
Present value of lease liabilities
$
$
1,656
1,633
1,376
1,388
1,182
1,159
8,394
(1,399)
6,995
14. 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 historically had two
primary business units based on how management internally evaluates separate financial information, business
activities and management responsibility: Wireless and Graphics. Wireless primarily includes our SafePath®,
CommSuite®, and ViewSpot® family of products. Graphics includes our consumer-based products: Moho®,
MotionArtist®, Rebelle, PhotoDonut and StuffIt®, Poser® (through June 2019), and Clip Studio® (through
April 2018).
With the more recent divestitures of Poser and Clip Studio, the Graphics business has become insignificant in
relation to total consolidated revenues and no longer qualifies as a reportable operating segment. Therefore, the
Company will disclose only one reportable operating segment, Wireless, and the following disclosures reflect
this change.
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):
CommSuite
SafePath
ViewSpot
Netwise
Other
Total wireless revenues
Year Ended December 31,
2019
2018
18,713
17,782
4,229
1,642
238
42,604
$
$
17,760
3,327
—
3,104
283
24,474
$
$
The following table presents the quarterly revenues generated by the Wireless segment (in thousands):
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Total wireless revenues
Year Ended December 31,
2019
2018
8,172
10,637
11,614
12,181
42,604
$
$
4,816
6,506
6,283
6,869
24,474
$
$
F-32
Customer Concentration Information
Revenues generated from our sales to Sprint and their respective affiliates in the Wireless business segment
accounted for 84% and 81% of the Company’s total revenues for fiscal years 2019 and 2018, respectively. This
customer comprised 92% and 82% of our accounts receivable as of December 31, 2019 and 2018, respectively.
This major customer could reduce their orders of our products in favor of a competitor's product or for any other
reason. The loss of this major customer or decisions by a significant customer to substantially reduce purchases
could have a material adverse effect on our business.
Geographical Information
During the years ended December 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 customer’s bill-to address were as follows (in thousands):
Americas
EMEA
Asia Pacific
Total revenues
Year Ended December 31,
2019
2018
$
$
43,236
67
43
43,346
$
$
26,054
90
141
26,285
15. Restructuring
Restructuring charges in 2019 and 2018 related to one-time employee termination costs.
The activity in our restructuring liability for the year ended December 31, 2019 (in thousands) follows:
Balance at
December 31,
2018
Provision, net
Usage
Transfer
Balance at
December 31,
2019
Lease/rental terminations
One-time employee termination
benefits
Total
$
$
495
(11)
—
(484) $
114
609 $
194
183 $
(308)
(308) $
—
(484) $
—
—
—
On January 1, 2019, $0.5 million of reserves associated with lease terminations was offset with the right-of-use
assets upon the adoption of ASC 842.
16. Gain on Sale of Software Product
In June 2019, pursuant to an Asset Purchase Agreement entered earlier in the same month, the Company sold
certain assets of its Poser 3D animation software product to Bondware, Inc. for $500 thousand, of which $350
thousand was paid at closing and the remainder to be paid in quarterly installments over three years. The
Company recorded a gain on the transaction in the amount of approximately $483 thousand, which is presented
as Other Income in the consolidated statements of operations.
F-33
17. Subsequent Events
The Company evaluates and discloses subsequent events as required by 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.
On February 12, 2020, the Company acquired the operator business of Circle Media Labs Inc. (“Circle”), a
Delaware corporation, pursuant to a certain Asset Purchase Agreement (the “Purchase Agreement”) dated as of
the same date by and between the Company and Circle. Pursuant to the terms of the Purchase Agreement, the
Company acquired certain assets, including customer contracts and a perpetual source code license, for a
purchase price of $13.5 million in cash. The Company has engaged a third party firm to value the acquired
assets, and the results of such valuation are not available as of the date of issuance of the financial statements.
During February 2020, certain holders of common stock warrants exercised approximately 1.0 million warrants
resulting in cash proceeds of approximately $2.2 million.
18. Quarterly Financial Data (Unaudited)
The following financial information reflects all normal recurring adjustments, which are, in the opinion of
management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for
fiscal 2019 and 2018 are as follows (in thousands, except per share data):
Year Ended December 31, 2019
1st
2nd
3rd
Quarter
Quarter
Quarter
4th
Quarter
Selected quarterly financial data:
8,432 $ 10,854 $ 11,782 $ 12,278
$
Revenues
9,880 $ 10,771 $ 11,252
7,516 $
$
Gross profit
3,631
3,480 $
2,932 $
62 $
$
Operating income
3,671
3,567 $
3,436 $
48 $
$
Net income
$
0.10
0.10 $
0.11 $
— $
Net earnings per share - basic (1)
31,297 32,068 36,094 38,501
Weighted average shares outstanding - basic
Net earnings per share - diluted (1)
0.09
$
Weighted average shares outstanding - diluted 31,323 35,308 39,472 41,767
0.10 $
0.09 $
— $
Year Ended December 31, 2018
1st
2nd
3rd
Quarter
Quarter
Quarter
4th
Quarter
Selected quarterly financial data:
6,945 $
5,463 $
$
7,352
Revenues
5,829 $
$
4,154 $
6,423
Gross profit
$ (2,021) $
74 $
678
Operating income (loss)
$ (2,381) $ (2,177) $
2,801
Net income (loss)
0.10
(0.10) $
$
Net earnings (loss) per share - basic (1)
15,299 21,888 25,020 26,925
Weighted average shares outstanding - basic
Net earnings (loss) per share - diluted (1)
0.10
$
Weighted average shares outstanding - diluted 15,299 21,888 25,020 27,395
6,525 $
5,546 $
55 $
(983) $
(0.04) $
(0.10) $
(0.04) $
(0.16) $
(0.16) $
(1) Basic and diluted net loss per share is computed independently for each of the quarters presented. Therefore,
the sum of the quarterly per share amounts will not necessarily equal the total for the year.
F-34
Thomas G. Campbell
Director
Gregory J. Szabo
Director
Marco Leal Goncalves
Vice President,
Worldwide Products
Kenneth Shebek
Vice President,
Chief Information Officer
BOARD OF DIRECTORS
William W. Smith, Jr.
Chairman of the Board, President
and Chief Executive Officer
Steven L. Elfman
Director
Andrew Arno
Director
Samuel Gulko
Director
OFFICERS & SENIOR MANAGEMENT
Timothy C. Huffmyer
Vice President,
Chief Financial Officer
Gail Redmond
Senior Vice President,
Sales Worldwide
David Blakeney
Senior Vice President,
Engineering
Charles B. Messman
Vice President,
Corporate Development
& Investor Relations
David P. Sperling
Vice President,
Chief Technology Officer
CONTACT INFORMATION
Corporate Headquarters
5800 Corporate Drive
Pittsburgh, PA 15237 USA
+1 (412) 837-5300
ADDITIONAL LOCATIONS
Transfer Agent & Registrar
Computershare Trust Company N.A.
462 South 4th Street
Louisville, KY 40202 USA
+1 (800) 962-4284
www.computershare.com
Legal Counsel
Buchanan Ingersoll & Rooney PC
Pittsburgh, PA 15219 USA
Auditors
SingerLewak LLP
Los Angeles, CA 90024 USA
Španskih boraca 3
11070 Belgrade
Serbia
+381 11 3121 965
Rua do Parque Poente, 39
4705-002 Sequeira - Braga
Portugal
+351 253 339 644
Årstaängsvägen 9
117 43 Stockholm
Sweden
ADDITIONAL INFORMATION
Smith Micro maintains an investor relations program. If you have any questions or would like additional
information concerning the operations or financial statements, please contact:
Smith Micro Software, Inc.
Investor Relations
5800 Corporate Drive
Pittsburgh, PA 15237 USA
+1 (412) 837-5300
ir@smithmicro.com
Smith Micro Software, Inc.
5800 Corporate Drive
Pittsburgh, PA 15237
Phone: +1 (412) 837-5300
NASDAQ Symbol: SMSI
www.smithmicro.com