Smith Micro Software
2011 Annual Report
A L E T T E R F R O M T H E C E O
Dear Fellow Shareholders,
2012 will mark the 30th anniversary of Smith Micro. Over the past three decades, the
Company has faced the ebb and flow of technology transitions, economic swings, fickle
financial markets, and even natural disasters. One of the hallmarks of our longevity is
adaptability, a trait that is serving us well as we enter the next phase of our business.
Although our traditional USB connection management revenues declined throughout
2011, impacting our overall financial performance, our heritage and wireless expertise
remain strong differentiators that continue to open doors of opportunity.
In 2011, Smith Micro delivered several new products that extend the company’s mobile
platform to solve new problems and offer more value to mobile network operators
(MNOs) and their customers. For example, our intelligent traffic management solution
helps MNOs address the critical, global problem of congested wireless networks, a
situation that no amount of additional wireless spectrum will be able to allay for long.
By managing the problem at the source of data traffic—the mobile device—Smith
Micro provides a level of control to operators not previously available, while eliminating
the burden from end-users to manually switch their devices between 3G, 4G, and WiFi
networks, in order to use the best performing or most cost-effective service. Smith Micro
is leading the way in providing innovative solutions that can help MNOs to manage
network traffic while simultaneously enhancing the user experience.
But traffic management is not the only problem for which Smith Micro offers a
compelling solution. Mobile hotspots, and smartphone-based hotspots in particular,
are introducing new challenges for MNOs and consumers alike. Unauthorized hotspot
applications—a consequence of the open Android marketplace—can cost operators
hundreds of millions of dollars in lost revenue. In addition, poorly designed mobile apps
can severely impact network performance and availability of services to consumers,
while also draining their data plans unknowingly. Our new application control solution
helps MNOs recoup these dollars by managing application entitlement in real time, and
providing a convenient way to up-sell users to on-demand hotspot services without
long-term commitments.
From a subscriber perspective, mobile hotspot features on smartphones can be
difficult to activate, configure and secure. Since these are shareable devices, the risk of
consuming more data than expected is high, and there have been numerous reports
of outrageous data bills, also known as “bill shock,” associated with these devices. Our
hotspot management solution helps make mobile hotspots more user-friendly and
easier to lock down, providing reliable wireless connections for enterprise users as well
as general consumers.
The Advanced Technology group of Smith Micro continues to invest a significant
amount of time and expertise contributing to the development of industry standards,
which are being used to simplify broadband connectivity in new operating platforms,
such as Microsoft’s Windows 8. While basic connection capabilities are becoming easier
to implement, our expertise and experience in advanced connection management
features, such as usage metering, diagnostics, security controls, and back-end system
integration, are still important to operators, allowing them to focus on differentiating
their services rather than just getting them to work. By leveraging and extending
industry standards across our full range of connection managers, Smith Micro helps
MNOs reduce the cost and complexity of supporting fragmented mobile platforms
and operating systems, while ensuring a consistent experience for subscribers running
Windows 8 or Windows 7, as well as Android, iOS and other popular operating systems.
While the majority of our revenues continue to come from carrier customers, we are also
growing our footprint in the enterprise market with several new customers in North
America and Europe, ranging from banking to utilities to hospitality and government
agencies. Our secure connectivity, video streaming and device management solutions
are well-suited to help these organizations manage costs, risk and compliance as they
deploy mobile workforces and a wide range of Machine-to-Machine (M2M) services
over public and private wireless networks.
On the consumer side of the business, the Productivity & Graphics group has shifted
away from lower-margin utility and publishing products and is now focused primarily
on our growing and profitable graphics tools. 2011 culminated in a return to health
and profits for the division, which benefitted from right-sizing the staff and from the
success of several key releases in the graphics portfolio. Poser and Anime Studio—both
developed in house—continued to grow share in their respective markets in 2011, and
the team is invested heavily in advancing our position as a provider of new cutting-
edge tools that turn the imaginations of artists into digital art.
As we celebrate three decades of service to the telecommunications industry, we
take pride in the extensive expertise we have developed in embedded software for
networked devices (both wireless and wired), and the many successes we have had
serving Tier 1 network operators, device makers, enterprises and end users. As our
customers struggle to reduce costs and complexity in a market that is characterized by
rapid evolution and fragmentation, Smith Micro continues to answer with innovative
solutions that increase reliability, performance, and usability of wireless services—
enhancing the mobile experience for all.
Today, the Smith Micro mission is to help our global customers thrive by providing
software solutions that:
1. Simplify mobile connectivity to reduce support costs and
increase
customer loyalty
2. Optimize network and device resources for maximum performance
and efficiency
3. Enable a safe, productive wireless environment that meets enterprise
standards for security and control
4. Provide new opportunities to engage and maintain relevance to end
users, resulting in mutually higher value relationships
Our theme for 2012 is “Forward thinking, delivered today,” reflecting our commitment to
apply proven technology in new ways to solve important problems for our customers,
and manage our business to capitalize on the exciting opportunities that lie ahead.
We have never been more determined to fulfill on both fronts, and we look forward to
sharing in the fruits of our labor with you, our shareholders.
Best Regards,
William W. Smith, Jr.
Chairman, President and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
______________
[ X ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2011
[ ]
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 0-26536
SMITH MICRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
_____________________
Delaware
(State or other jurisdiction of incorporation or organization)
33-0029027
(I.R.S. Employer Identification Number)
51 Columbia, Aliso Viejo, CA
(Address of principal executive offices)
92656
(Zip Code)
Registrant's telephone number, including area code: (949) 362-5800
Common Stock, $.001 par value
(Title of each class)
The NASDAQ Stock Market LLC
(NASDAQ Global Market)
(Name of each exchange on which registered)
_____________________
Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.001 par value
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[ ] NO [ X ]
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 [ ] NO [X ]
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 [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]
Indicate by check mark if whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Accelerated filer [X]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES[ ] NO [ X ]
As of June 30, 2011, 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 $135,417,808 based upon the closing sale price of such
stock as reported on the Nasdaq Global 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 February 13, 2012, there were 35,591,810 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2012 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.
2011 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
BUSINESS ...................................................................................................................................................... 4
RISK FACTORS ............................................................................................................................................. 10
UNRESOLVED STAFF COMMENTS ......................................................................................................... 19
PROPERTIES ................................................................................................................................................. 19
LEGAL PROCEEDINGS ............................................................................................................................... 20
RESERVED .................................................................................................................................................... 20
PART II
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ........................................................ 21
SELECTED CONSOLIDATED FINANCIAL DATA .................................................................................. 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .............................................................................................................. 25
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................... 40
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................................................... 40
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE .......................................................................................................................... 40
CONTROLS AND PROCEDURES ............................................................................................................... 40
OTHER INFORMATION ............................................................................................................................... 41
PART III
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ....................................... 42
EXECUTIVE COMPENSATION .................................................................................................................. 44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS ........................................................................................... 44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE .......................................................................................................................................... 44
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES ................................................................................. 44
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ...................................................................... 45
SIGNATURES ................................................................................................................................................ 48
PART IV
2
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 report contains forward-looking statements regarding Smith Micro which include, but are not limited to,
statements concerning projected revenues, expenses, gross profit and income, the competitive factors affecting our
business, market acceptance of products, customer concentration, the success and timing of new product
introductions and the protection of our intellectual property. 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 and adversely 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:
•
•
•
•
•
•
•
•
•
•
•
changes in demand for our products from our customers and their end-users;
our ability to predict consumer needs, introduce new products, gain broad market acceptance for
such products and ramp up manufacturing in a timely manner;
our business and stock price may decline further which could cause an additional impairment of
long-lived assets or restructuring charge resulting in a material adverse effect on our financial
condition and results of operations;
the intensity of the competition and our ability to successfully compete;
the pace at which the market for new products develop;
the response of competitors, many of whom are bigger and better financed than us;
our ability to protect our intellectual property and our ability to not infringe on the rights of others;
our ability to successfully execute our business plan and control costs and expenses;
the continued economic slowdown and uncertainty and its effects on capital expenditures by our
customers and their end users;
the amount of our legal expenses and our financial exposure to any adverse judgments or settlements
associated with the outstanding securities litigation, and any future litigation that may arise, and the
adequacy of our insurance policy coverage regarding those expenses and any damages or settlement
payments related to such litigation; and
those additional factors which are listed under the section “1A. Risk Factors” beginning on page
10 of this report.
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”). We do not undertake any obligation to update these
statements to reflect events or circumstances occurring after the date this report is filed.
3
PART
I
Item
1.
BUSINESS
General
Smith Micro Software, Inc. provides software and services that simplify, secure and enhance the mobile
experience. The Company’s portfolio of wireless solutions includes a wide range of client and server
applications that manage voice, data, video and connectivity over mobile broadband networks. Our
primary customers are the world’s leading mobile network operators, mobile device manufacturers and
enterprise businesses. In addition to our wireless and mobility software, Smith Micro offers personal
productivity and graphics products distributed through a variety of consumer channels worldwide.
The proliferation of mobile broadband technology continues to provide new opportunities for Smith Micro
on a global basis. Over the last decade, the Company has developed extensive expertise in embedded
software for networked devices (both wireless and wired), and we have leveraged that expertise to solve an
unending tide of connectivity and mobile service challenges for our customers. As network operators and
businesses struggle to reduce costs and complexity in a market that is characterized by rapid evolution and
fragmentation, Smith Micro answers with innovative solutions that increase reliability, security,
performance, efficiency, and usability of wireless services over a wide variety of networks and device
platforms.
The underlying philosophy driving our products and services is our desire to improve the user experience
and optimize resources for our customers. These objectives are delivered through the combination of
rigorous market analysis and planning, technology innovation that leverages substantial intellectual
property, leadership in industry standards, quality engineering, and extensive commercial deployment
experience gained over 30 years. As technology, market dynamics and consumer demands change, Smith
Micro has proven its ability to evolve and meet those demands again and again.
During fiscal year 2011, we experienced a significant decrease in our revenues. This was primarily due to the
introduction and market acceptance of mobile hotspot devices, Tablets and Smartphones capable of
functioning as a WWAN hotspot, resulting in lower demand in our North American marketplace for our core
connection management products. While we launched new wireless products that addressed this technology
shift, they are new to the market and their rate of adoption and deployment is unknown at this time causing
material uncertainty regarding the timing of our future wireless revenues.
As a result of our decreased revenues, slow adoption of our new products, operating losses and depressed
stock prices, we recorded a goodwill and other long-lived asset impairment charge of $112.9 million in
fiscal year 2011. All goodwill and intangible assets have been written off as of December 31, 2011.
We were incorporated in California in November 1983, and we reincorporated in Delaware in June 1995.
Our principal executive offices are located at 51 Columbia, Aliso Viejo, California 92656. Our telephone
number is (949) 362-5800. Our website address is www.smithmicro.com. We make our SEC filings
available on the Investor Relations page of our website. Information contained on our website is not part of
this Annual Report on Form 10-K.
Business
Segments
Our operations are organized into two business segments: Wireless and Productivity & Graphics. We do
not separately allocate operating expenses, nor do we allocate specific assets to these groups. Therefore,
4
segment information reported includes only revenues and cost of revenues. See Note 7 of Notes to
Consolidated Financial Statements for financial information related to our business segments and
geographical information.
Wireless
Smith Micro’s primary focus is to develop mobile connectivity and communications management solutions
for the wireless industry. Rapid advancements in wireless technology, including higher speed networks,
new intelligent connected devices and increasing availability of digital content and mobile applications, are
fueling the mobile broadband market. The demand for pervasive connectivity is being driven by an
insatiable consumer need to access information and digital entertainment anytime and from anywhere. In
addition, there is an evolving variety of media being consumed “on-demand” from Smartphones and
Tablets, as well as new devices being used to connect to wireless networks, such as USB modems and
mobile hotspots. Wireless data access services for multimedia-enabled devices are being adopted at such a
fast pace that global infrastructure for wireless networks cannot support them without significant
investments to support higher speeds and greater capacity.
In helping global customers manage this complex wireless ecosystem, we consistently observe four key
needs of network operators to:
• Simplify mobile connectivity to reduce support costs and increase stickiness of mobile
subscribers;
• Optimize network and device resources for maximum performance and efficiency;
• Enable a safe, productive wireless environment that meets enterprise standards for security and
control; and
• Engage and maintain relevance to end users in response to business threats from device
makers, internet giants like Google and Facebook, and the explosion of over-the-top
application and content providers.
Developing software that enables wireless operators to achieve these goals represents the primary market
opportunity for Smith Micro, and we are well-equipped to capitalize on it.
Our flagship broadband connectivity solution, QuickLink® Mobile, has been shipped on more than 100
million devices worldwide. This patented technology allows mobile users to easily connect a PC, laptop or
other wireless device to wireless wide area networks (“WWANs”) and wireless local area networks
(“WLANs”) or Wi-Fi hotspots. Many of the world’s largest wireless service providers, including AT&T,
Bell Canada, Bouygues, Cablevision, Clear, Comcast, Orange, Sprint, T-Mobile USA, Verizon Wireless,
Vodafone and others, use QuickLink Mobile to provide a convenient and secure mobile connection for
subscribers using wireless services over carrier, public, and private WWAN, WLAN and Wi-Fi networks.
In 2011, Smith Micro announced several new solutions that extend our core connectivity technology to
solve new problems and offer more value to mobile operators and consumers. For example, Experience
Manager™, QuickLink Hotspot Manager™ and Mobile Network Director™ are all components of our
mobile Experience Platform™, designed to enhance the user experience and optimize network resources
through an integrated set of client and server applications.
Experience Manager enables end-users to manage their broadband connections and data plans in a
consistent way across different devices and networks, while providing convenient access to new mobile
services offered by the operator or other content and service providers. For wireless operators, Experience
Manager helps to reduce support costs and improve customer satisfaction by simplifying broadband usage
for end-users, while leveraging device real estate to promote operator and partner services that increase
average revenue per user (“ARPU”). It can be deployed as a host-less client, leveraging our SODA™
5
(Secure On-Device API) interface technology on mobile connectivity devices such as USB modems and
mobile hotspot “pucks,” or as a rich application running on Windows and Mac computers to further engage
end users. QuickLink Hotspot Manager extends Experience Manager to provide greater control over the
use and sharing of mobile hotspot devices, including Smartphones used as mobile hotspots and dedicated
mobile hotspots.
Mobile Network Director helps mobile operators alleviate data traffic congestion from mobile devices and
enables seamless network transitions and data offloading between networks (3G/4G/Wi-Fi). It gives
mobile operators greater visibility and more precise control – on a per device basis – over bandwidth usage
across their own networks, as well as public, business and home Wi-Fi networks, in order to optimize
network resources. Using Mobile Network Director, subscribers are automatically connected to – and
transparently moved between – the best networks available, improving connection speed and reliability,
and potentially saving billions in capital outlays for operators.
As part of the Experience Platform, Smith Micro continues to provide solutions that enhance mobile
communications. These include Push-to-Talk, Visual Voicemail with Voice-to-Text services, Vidio™ for
efficient transcoding and adaptive video streaming, and Vidio XTP™ for extending Telepresence
capabilities to mobile devices. This portfolio of premium end-user applications includes mobile handset
software, as well as hosted software-as-a-service solutions for operators and media content owners. These
products work across a broad range of operating systems and platforms, allowing operators to further
monetize voice and data services. Smith Micro also provides device management software to leading
device manufacturers such as HTC and Nokia, as well as wireless mobility solutions designed to address
security and mobility needs of large enterprises.
Productivity
&
Graphics
The Productivity & Graphics Group focuses on developing a variety of software for the consumer,
prosumer, and professional markets. Our solutions span compression, graphics and utilities. This group
also republishes and markets third party software titles that complement our existing line of products. All of
these products are available through direct sales on the Smith Micro websites (smithmicro.com,
mysmithmicro.com and contentparadise.com), on affiliate websites, direct through customer service order
desks, on-line resellers and through traditional retail outlets.
The group’s primary product offering is its line of graphic titles, in particular Poser®, Anime Studio® and
Manga Studio™. These products are aimed at digital artists of all skill levels helping them to produce
professional level animations, comics, and other 2D and 3D art. Poser is the industry leading tool for 3D
human figure design and animation. Anime Studio is used by both hobbyists and professional artists
working for high-end animation studios like Disney, and Manga Studio is at the top of the market for comic
illustration software, used by famous graphic novelists such as Dave Gibbons, the author of the Watchmen.
The group is focused on pursuing adjacent markets to these graphic arts, as well as new platforms for the
existing titles, such as iOS.
The secondary product line is StuffIt®, driven by its patented and patent-pending image compression, with
a focus on our innovative “lossless” JPEG compression technology. StuffIt provides superior lossless
compression, encryption and archiving. We have enhanced this industry-leading product’s feature set with
new, online file transfer capabilities.
Products
and
Services
Our primary products consist of the following:
6
Product Groups
Wireless
Products
QuickLink® Mobile
QuickLink® Mobility
Experience Manager™
QuickLink Hotspot
Manager™
Mobile Network Director™
Device Management Suite
Push-To-Talk
Visual Voicemail and
Voice –to–Text
Vidio™ and Vidio XTP™
Productivity &
Graphics
StuffIt Deluxe®
Poser®
Anime Studio™
Manga Studio™
Marketing
and
Sales
Strategy
Description
Connection management application to control, customize
and automate wireless connections from PCs and Macs to
WWAN and WLAN/Wi-Fi networks
A mobile VPN and connection management solution targeted
to enterprises with mobile workforces
A management application for simplifying and enhancing
mobile broadband usage for consumers
Granular controls for the use and sharing of mobile hotspot
features on Smartphones and wireless pucks
Intelligent traffic management for data offload and seamless
network transitions between 3G/4G/Wi-Fi
Provides automated mobile device provisioning and
configuration
A data service that uses a mobile Internet connection to send
and receive “walkie-talkie” style calls
Voicemail delivered directly to a mobile phone and stored in
a visual inbox, with optional voice to text transcription
Adaptive streaming of video content, as well as extension of
Telepresence video streams to personal computers, Tablets
and mobile devices
Patented, lossless compression solution for documents and
media
A solution for creating 3D character art and animations
An animation tool for professionals and digital artists
A solution for creating manga and comic art
Our primary marketing focus is on enhancing the mobile broadband experience and optimizing network
resources through our mobile Experience Platform for wireless operators. Because of our broad product
portfolio and deep device integration experience, we are able to leverage innovation across a wide range of
platforms and operating systems and quickly bring to market solutions that meet the evolving needs of our
target customers. We continue to develop innovative, enabling technology and infrastructure products that
facilitate the usage of wireless data and other premium mobile services, thereby providing our customers
with additional revenue opportunities and differentiated services that encourage customer loyalty.
Our sales strategy is as follows:
Leverage Carrier and OEM Relationships. We continue to capitalize on our strong relationships with the
world’s leading wireless carriers and mobile device manufacturers. Our carrier customers serve as our
primary distribution channel, providing access to hundreds of millions of end-users around the world, and
also providing market feedback for future product offerings.
Focus on Multiple High-Growth Markets. We continue to focus on wireless connectivity and
communications management. Within these markets, we see ongoing enhancement of networks and
services by wireless carriers and an increasing availability of rich media and multi-media enabled
Smartphones and Tablet computers. This represents a remarkable alignment between our product portfolio
and the market opportunity.
Expand our Customer Base. In addition to introducing new products to current customers, we intend to
grow our domestic and international business through sales of our portfolio of products to new carrier
customers, as well as into new vertical markets such as hospitality, public safety and education.
Selectively Pursue Partnerships and Acquisitions of Complementary Products and Services. In line with the
Company’s strategy, we will continue to pursue selected partnerships and acquisition opportunities in an
7
effort to expand our product and technological abilities, enter complementary markets and extend our
geographic reach. In the past, we have used acquisitions to enhance our technology features and customer
base, and to extend our product offerings into new markets. We will leverage partnerships with technology
providers and systems integrators to further our penetration into new markets and deliver more
comprehensive solutions to our customers.
Revenues to three customers (Sprint, Verizon Wireless and AT&T) and their respective affiliates in the
Wireless business segment accounted for 24.8%, 18.4% and 11.7%, respectively, of the Company’s total
revenues for the fiscal year 2011. In 2010, our three largest customers (Verizon Wireless, Sprint and
AT&T) accounted for 40.1%, 13.9% and 12.3%, respectively, of our total revenues. In 2009, our four
largest customers (Verizon Wireless, Dell, Sprint and AT&T) accounted for 32.8%, 12.2%, 10.4% and
10.3%, respectively, of our total revenues. Our major customers could reduce their orders of our products
in favor of a competitor's product or for any other reason. The loss of any of our major customers or
decisions by a significant customer to substantially reduce purchases could have a material adverse effect
on our business.
Sales to Verizon Wireless and their affiliates amounted to 18.4%, 40.1%, and 32.8% of the Company’s
revenues for fiscal years 2011, 2010 and 2009, respectively. We have a master software and license
distribution agreement with Verizon Wireless whereby Smith Micro grants them non-exclusive licenses to
reproduce and have produced, market, and distribute the software, in object form only, to distributors, re-
sellers, OEM customers of Verizon Wireless and end users. The license term for end users continues in
perpetuity unless otherwise stated in subsequent amendments. The master agreement commenced in
December 2000 and has been consistently extended through subsequent amendments. They can cancel the
agreement at any time. Products and services sold to Verizon include per unit license fees for connectivity
and security and VZAccess manager software, engineering design and development fees, customization
and adaptation fees and website hosting. The master agreement and subsequent amendments are detailed in
Exhibit 10.4 in this document.
Customer
Service
and
Technical
Support
We provide technical support and customer service through our online knowledge base, via email, live chat
and by telephone. OEM customers generally provide their own primary customer support functions and
rely on us for support to their own 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 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 $41.7 million, $42.8 million, and $36.5 million for the years ended December 31, 2011, 2010
and 2009, respectively.
Manufacturing
Although we primarily deliver our software via electronic downloads, we do deliver our software in several
other forms. We offer a package or kit that may include CD-ROM(s) and certain other documentation or
marketing material. We also permit selected OEM customers to duplicate our products on their own CD-
8
ROM’s, USB devices, or embedded devices, and pay a royalty based on usage. Some OEM business
requires that we provide a CD, which includes a soft copy of a user guide. Finally, we grant licenses to
certain OEM customers that enable those customers to preload a copy of our software onto a personal
computer. With the enterprise sales program, we offer site licenses under which a corporate user is allowed
to distribute copies of the software to users within their corporate sites.
Our product development group produces a product master for each product that is then duplicated and
packaged into products by the manufacturing organization. All product components are purchased by our
personnel in our Aliso Viejo, California facility. Our manufacturing is subcontracted to outside vendors and
includes the replication of CD-ROM’s and the printing of documentation materials. Assembly of the final
package is completed by our Aliso Viejo, California facility.
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 historical connection management
competitors, and we expect new competitors to enter the market. We also believe that competition from
established and emerging software companies will continue to intensify as the emerging mobile, wireless
and Internet markets evolve. We compete with other software vendors for new customer contracts, as well
as in our efforts 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 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 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 of our products could
negatively affect our profitability.
Many existing and potential OEM customers have technological capabilities to develop products that
compete directly with our products. These customers may discontinue the purchase of our products. Our
future performance is substantially dependent upon the extent to which existing OEM customers elect to
purchase communications software from us rather than design and develop their own software. Because our
customers are not contractually obligated to purchase any of our products, they may cease to rely, or fail to
expand their reliance on us as a source for communications software in the future.
Proprietary
Rights
and
Licenses
Our success and ability to compete is dependent upon our software code base, our programming
methodologies and other intellectual properties. To protect our proprietary technology and intellectual
property, we rely on a combination of trade secrets, nondisclosure agreements, patents, copyright and
trademark law that may afford only limited protection. As of December 31, 2011, we owned 46 issued U.S.
patents and have 61 U.S. patent applications that are currently pending. These patents are intended to
provide generalized protection of our intellectual property technology base and we will continue to apply
for various patents and trademarks in the future as we deem necessary to protect our intellectual property
technology base.
We seek to avoid unauthorized use and disclosure of our proprietary intellectual property by requiring
employees and consultants with access to our proprietary information to execute confidentiality agreements
with us and by restricting access to our source code. The deterrent steps that we have taken to protect our
proprietary technology may not be adequate to deter misappropriation of our proprietary information or
prevent the successful assertion of any adverse claim against us relating to software or intellectual property
utilized by us. In addition, we may not be able to detect unauthorized use of our intellectual property rights
or take effective steps to enforce those rights.
9
In selling our products, we primarily rely on “shrink wrap” licenses that are not signed by licensees and
may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign
countries do not protect our proprietary rights to as great an extent as do the laws of the United States.
Accordingly, the means we use currently to protect and enforce all of our proprietary rights and intellectual
property rights may not be adequate. Moreover, our competitors may independently develop competitive
technology similar to ours. We also license technology on a non-exclusive basis from several companies
for inclusion in our products and anticipate that we will continue to do so in the future. If we are unable to
continue to license these technologies or to license other necessary technologies for inclusion in our
products, or such third party technologies become subject to claims directed to or against the third party
technologies used by us, or if we experience substantial increases in royalty payments under these third
party licenses, our business could be materially and adversely affected.
Employees
As of December 31, 2011, we had a total of 410 employees within the following departments: 259 in
engineering, 79 in sales and marketing, 36 in management and administration and 36 in operations and
customer support. 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 increase 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 reports
on Forms 10-K, 10-Q and 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, that could seriously harm our business,
financial condition or results of operations. In that event, the market price for our common stock could
decline and you may lose all or part of your investment.
Our revenues currently depend on a small number of products and customers, so our revenue and
operating results are vulnerable to shifts in demand and may continue to decline.
A substantial majority of our revenue is derived from sales of our wireless connectivity and security
software products. Revenues from sales of our core connection management product have recently declined
and may continue to decline in future quarters due to shifts in technology, particularly the inclusion of
connectivity in the operating system of new devices and decline in sales of USB hardware by wireless
carriers. We have developed new products which address these shifts in technology, but currently have not
realized any revenues from these products. There can be no guarantee that our revenues will stabilize or
increase in future years.
In addition, our strategy is to continue to introduce and market new products, but these efforts are not likely
to reduce the extent to which our revenues are dependent on a small number of products. Rapid shifts in
the markets for these products and consumer habits, changes in demand by end-users and changes in
underlying technology could cause material and rapid changes in our revenues and profitability. Factors
which could affect demand for our products include the rate of adoption of the 4G networking standard by
wireless carriers and handset manufacturers, and changes in consumer demand for PC networking due to
the adoption of Smartphones and Tablet computing. If our products fail to remain current with and useful
to new and emerging markets, our business, financial condition and results of operations would be
materially and adversely affected.
10
We also derive a significant portion of our revenues from a few vertical markets, such as wireless carriers
and handset manufacturers. In order to sustain and grow our business, we must continue to sell our
software products into 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. To increase our sales outside our core vertical markets, for example to large
enterprises, requires 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.
In addition, because we sell primarily to large carriers and OEMs, there are a limited number of actual and
potential customers for our products, resulting in customer concentration for sales of our products and
services. For the year ended December 31, 2011, Sprint, Verizon Wireless, and AT&T comprised of
24.8%, 18.4% and 11.7% of our total revenues, respectively. Because of our customer concentration, our
largest customers may have significant pricing power over us. Furthermore, a substantial decrease in sales
to any of our largest customers could materially affect our revenues and profitability. Additionally, these
customers are not the end-users of our products. If any of these customers’ efforts to market their products
which incorporate our software are unsuccessful in the marketplace, our revenues and profitability could be
adversely affected.
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:
•
•
•
•
•
•
•
•
•
•
•
•
the gain or loss of a key customer;
the size and timing of orders from and shipments to our major customers;
the size and timing of any product return requests;
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 have
involved, and we expect will continue to 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 would
reduce our revenues, which would adversely affect our quarterly financial performance. Also, we have
often booked a large amount of our sales in the last month of the quarter and often in 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.
11
Because we sell primarily to large carriers 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 further impairments of long-lived assets if our business does not improve and our stock
price declines which could cause a material adverse effect on our financial condition and results of
operations.
The Company assesses potential impairment to its long-lived assets as required by FASB ASC Topic No.
360, Property, Plant, and Equipment, when there is evidence that events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized
when the carrying amount of the long-lived assets exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset. Any required impairment loss is
measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is
recorded as a reduction in the carrying value of the related asset and a charge to operating results. For the
year ended December 31, 2011, we recorded a charge for impairment of long-lived assets of $18.7 million
($13.4 million on intangible assets and $5.3 million on fixed assets) due, in part, to continued declines in
our revenues and profitability and our continued depressed stock price. In future years, we may be required
to take further charges for impairment of fixed assets, which could have a material adverse effect on our
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. A
number of established software and hardware companies, such as Microsoft Corporation, Google Inc. and
Apple Inc. pose a significant competitive threat to us because their handset operating systems and phones
may include some capabilities now provided by certain of our OEM and retail software products. If handset
manufacturers and carriers are satisfied relying on the capabilities of systems using Windows, Android or
iPhone OS, or other hardware or operating systems, sales of our products are likely to decline. In addition,
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 in the future, both 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. Furthermore, our existing and potential OEM customers may acquire or develop
products that compete directly with our products.
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
12
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.
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, keep up with evolving industry standards, including changes in the Microsoft
and Google operating systems with which our products are designed to be compatible, and to promote those
products successfully. The communications and utilities 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. Any of these factors could render our existing
products obsolete and unmarketable. 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.
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.
We are entering new, emerging markets in which we have limited experience; if these markets do not
develop or we are unable to otherwise succeed in them, our revenues will suffer and the price of our
common stock will likely decline.
Our recent and planned product introductions to support new higher speed networking and 4G technologies
such as HSPA+, LTE and WiMAX network protocols have allowed us to enter new markets. A viable
market for these products may not develop or be sustainable, and we may face intense competition in these
markets. In addition, our success in these markets depends on our carrier customers’ ability to successfully
introduce new mobile services enabled by our products and our ability to broaden our carrier customer
base, which we believe will be difficult and time-consuming. If the expected benefits from entering new
markets do not materialize, our revenues will suffer and the price of our common stock would likely
decline. In addition, to the extent we enter new markets through acquisitions of companies or technologies,
our financial condition could be harmed or our stockholders could suffer dilution without a corresponding
benefit to our company if we do not realize expected benefits of entering such new markets.
If the adoption of and investments in new technologies and services grows more slowly than anticipated
in our product planning and development, our operating results, financial condition and prospects may
be negatively affected.
If the adoption of and investments in new networking and 4G technologies and services does not grow or
grows more slowly than anticipated, we will not obtain the anticipated returns from our planning and
development investments. For example, our Device Management Suite of products allows our customers to
update mobile devices from a home office and incorporates technology that provides a mechanism to allow
for efficient firmware updates for mobile devices. In addition, we have introduced new high-speed
networking and 4G products, but the pace of the market introduction of such technologies is uncertain.
Future sales and any future profits from these and related products are substantially dependent upon the
acceptance and use of these new technologies, and on the continued adoption and use of mobile data
services by end-users.
13
Many of our customers and other communications service providers have made and continue to make
major investments in next generation networks that are intended to support more complex applications. If
communications service providers delay their deployment of networks or fail to deploy such networks
successfully, demand for our products could decline, which would adversely affect our revenues. Also, to
the extent we devote substantial resources and incur significant expenses to enable our products to be
interoperable with new networks that have failed or have been delayed or not deployed, our operating
results, financial condition and prospects may be negatively 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 and consulting personnel. We do not have employment agreements with our key
employees that govern the length of their service. 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.
If we fail to continue to establish and maintain strategic relationships with mobile device manufacturers,
market acceptance of our products and our profitability may suffer.
Most of our strategic relationships with mobile device manufacturers are not subject to written contract, but
rather are in the form of informal working relationships. We believe these relationships are valuable to our
success. In particular, these relationships provide us with insights into product development and emerging
technologies, which allows us to keep abreast of, or anticipate, market trends and helps us serve our current
and prospective customers. Because these relationships are not typically governed by written agreements,
there is no obligation for many of our partners to continue working with us. If we are unable to maintain
our existing strategic relationships with mobile device manufacturers or if we fail to enter into additional
strategic relationships or the parties with whom we have strategic relationships 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 could choose a
competitor’s software over ours or develop their own. Even if we succeed in establishing these
relationships, they may not result in additional customers or revenues.
Our growth depends in part on our customers’ ability and willingness to promote services and attract
and retain new customers or achieve other goals outside of our control.
We sell our products for use on handheld devices primarily through our carrier customers. Losing the
support of these customers may limit our ability to compete in existing and potential markets and could
negatively affect our revenues. In addition, the success of these customers and their ability and willingness
to market services 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 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.
14
Our operating results may be adversely impacted by the continued worldwide economic slowdown and
uncertainties in the marketplace.
Since the second half of 2008, economic conditions worldwide and in the United States have experienced a
general deterioration, resulting in slower economic activity and a highly uncertain recovery, decreased
consumer confidence and retail spending, reduced corporate profits and capital spending, and generally
adverse business conditions. These conditions make it difficult for our wireless carrier and OEM
customers and their end users to accurately forecast and plan future business activities and capital
expenditures, which could cause them to slow spending on our products and services. Furthermore, during
challenging economic times our customers may face issues gaining timely access to sufficient credit, which
could result in an impairment of their ability to make timely payments to us. We cannot predict the timing,
strength or duration of the current economic slowdown or the emerging economic recovery, or to what
extent they will continue to affect us. If the economy, consumer spending or the markets in which we
operate continue at their present levels or deteriorate, we may need to record charges related to
restructuring costs and the impairment of long-lived assets, and our business, financial condition and results
of operations will likely be materially and adversely affected.
Acquisitions of companies or technologies may disrupt our business and divert management attention
and cause our current operations to suffer.
We have historically made targeted acquisitions of smaller companies with important technology and
expect to continue to do so in the future. As part of any acquisition, we will be required to assimilate the
operations, products and personnel of the acquired businesses and train, retain and motivate key personnel
from the acquired businesses. We may not be able to maintain uniform standards, controls, procedures and
policies if we fail in these efforts. Similarly, 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 current 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 acquisitions.
Our operating income or loss may continue to change due to shifts in our sales mix and increased
spending on our research and development and infrastructure.
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. In
addition we continue to invest in our infrastructure with a new engineering design and data center in
Pittsburgh, Pennsylvania. The timing of these additional expenses can vary significantly quarter to quarter
and even from year to year.
Our products may contain undetected software defects, which could negatively affect our revenues.
Our software products are complex and may contain undetected defects. In the past, we have discovered
software defects in certain of our products and have experienced delayed or lost revenues during the period
it took to correct these problems. Although we and our OEM customers test our products, it is possible that
15
errors may be found or occur in our new or existing products after we have commenced commercial
shipment of those products. Defects, whether actual or perceived, could result in adverse publicity, loss of
revenues, product returns, a delay in market 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. In addition, some of our software contains
open source components that are licensed under the GNU General Public License and similar open source
licenses. These components may contain undetected defects or incompatibilities, may cause us to lose
control over the development of portions of our software code, and may expose us to claims of
infringement if these components are, or incorporate, infringing materials, the licenses are not enforceable
or are modified to become incompatible with other open source licenses, or exposure to misappropriation
claims if these components include unauthorized materials from a third party.
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 United
States 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, which
could negatively impact our revenues.
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 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.
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.
16
We may raise additional capital through the issuance of additional equity or convertible debt securities
or by borrowing money, in order to meet our capital needs. Additional funds may not be available on
terms acceptable to us to allow us to meet our capital needs.
We believe that the cash and cash equivalents and short-term investments on hand and the cash we expect
to generate from operations will be sufficient to meet our capital needs for at least the next twelve months.
However, it is possible that we may need or choose to obtain additional financing to fund our activities in
the future. 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.
We have on file with the SEC a shelf Form S-3 to sell from time to time up to 4,000,000 shares of our
common stock in one or more offerings in amounts, at prices and on the terms that we will determine at the
time of offering. In addition, we have on file with the SEC a shelf Form S-4 to sell from time to time up to
1,000,000 shares of our common stock in connection with our future acquisitions of other businesses, assets
or securities. If we raise additional funds by issuing additional equity or convertible debt securities
(whether in a public offering or private placement), the ownership percentages of existing stockholders
would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or
privileges senior to those of the holders of our common stock. We currently have no established line of
credit or other business borrowing facility in place.
It is possible that our future capital requirements may vary materially from those now planned. The amount
of capital that we will need in the future will depend on many factors, including:
•
•
•
•
•
•
•
•
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 inventory and accounts receivable 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, infrastructure and
facility needs or to consummate acquisitions of other businesses, products or technologies.
We risk being delisted from NASDAQ if our stock trades below $1.00 per share.
Our stock is currently trading above $1.00 per share. However, if our stock price were to drop below $1.00
per share and remain below $1.00 per share for an extended period of time, we would be in violation of the
continued listing requirements of the NASDAQ Global Market (“NASDAQ”) and would risk delisting of
our shares from NASDAQ. If our common stock were delisted from NASDAQ, this could have a number
of negative consequences, including reduced liquidity of our common stock, the loss of federal preemption
of state securities laws, potential loss of confidence by suppliers, customers and employees, loss of
additional analyst coverage and institutional investor interest, and more difficulty in raising capital on
favorable terms, if at all.
If our market capitalization remains below $50 million for an extended period of time, additional
investment analysts who follow our stock may drop their coverage of the Company, which could reduce
interest in our stock by institutional investors and reduce liquidity of our shares.
17
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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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;
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.
We have been named as a party to a purported class action and shareholder derivative lawsuit and we
may be named in additional litigation, all of which could require significant management time and
attention and result in significant legal expenses. An unfavorable outcome in one or more of these
lawsuits could have a material adverse effect on our business, financial condition, results of operations
and cash flows.
On June 29, 2011, a complaint was filed in the U.S. District Court for the Central District of California
against us and certain of our current and past officers and directors on behalf of certain purchasers of our
common stock. The complaint has been brought as a purported stockholder class action, and, in general,
includes allegations that we and certain of our officers and directors violated federal securities laws by
making materially false and misleading statements regarding our business prospects and financial results,
thereby artificially inflating the price of our common stock. The plaintiff is seeking unspecified monetary
damages and other relief.
On August 29, 2011, two prospective lead plaintiffs filed motions for
appointment of lead plaintiff and for appointment of lead counsel.
On October 17, 2011, the court
appointed the two prospective lead plaintiffs as co-lead plaintiffs and their respective counsel as co-lead
counsel. On December 15, 2011, the co-lead plaintiffs filed their consolidated amended complaint. On
February 14, 2012, we filed our motion to dismiss the consolidated amended complaint. A hearing on the
motion to dismiss has been set for May 21, 2012. We intend to vigorously defend against the claims
advanced.
On August 11, 2011, a shareholder derivative complaint was filed in the Superior Court of California for
18
the County of Orange against the Company’s directors and certain of its executive officers.
Thereafter,
two additional similar complaints, also styled as shareholder derivative actions, were filed in state court
(collectively, the "State Derivative Actions"). On December 23, 2011, one of the plaintiffs in the State
Derivative Actions filed a motion to consolidate the State Derivative Actions and to appoint lead counsel.
A hearing on the pending motion has been set for March 1, 2012.
We expect the state court to
consolidate the State Derivative Actions and to appoint lead counsel, and we expect plaintiffs to thereafter
file an amended shareholder derivative complaint. On September 12, 2011, a shareholder derivative
complaint was filed in the U.S. District Court for the Central District of California against certain of the
officers and directors named in the State Derivative Actions but also against additional officers of the
Company. Thereafter, two additional similar complaints, also styled as shareholder derivative actions,
were filed in federal court (collectively, the “Federal Derivative Actions”). On December 6, 2011, the
federal court consolidated two of the Federal Derivative Actions and appointed co-lead counsel for
plaintiffs, and we expect the federal court to issue an order consolidating all of the Federal Derivative
Actions. On January 27, 2012, plaintiffs filed their amended shareholder derivative complaint.
Collectively, the State Derivative Actions and the Federal Derivative Actions are referred to as the
"Derivative Actions."
The shareholder derivative complaints in the Derivative Actions allege breaches of
fiduciary duties by the defendants and other violations of state law.
In general, the complaints in the
Derivative Actions allege that the Company’s directors and certain of its officers caused or allowed for the
dissemination of materially false and misleading statements regarding our business prospects and financial
results, thereby artificially inflating the price of our common stock.
Plaintiffs in the Derivative Actions
seek unspecified monetary damages and other relief, including reforms and improvements to the
Company’s corporate governance and internal procedures.
We intend to vigorously defend against the
claims advanced in the Derivative Actions, and intend to file demurrers and/or motion(s) to dismiss the
shareholder derivative complaints in the Derivative Actions.
Regardless of the merits, the expense of defending such litigation may have a substantial impact if our
insurance carriers fail to cover the cost of the litigation, and the time required to defend the actions could
divert management’s attention from the day-to-day operations of our business, which could adversely affect
our business, results of operations and cash flows. In addition, an unfavorable outcome in such litigation
could have a material adverse effect on our business, results of operations and cash flows.
Item
1B.
UNRESOLVED
STAFF
COMMENTS
None.
Item
2.
PROPERTIES
Our corporate headquarters, including our principal administrative, sales and marketing, customer support and
research and development facility, is located in Aliso Viejo, California, where we currently lease and occupy
approximately 52,700 square feet of space pursuant to leases that expire on May 31, 2016 and January 31, 2022.
We lease approximately 55,600 square feet in Pittsburgh, Pennsylvania under a lease that expires December 31,
2021. We lease approximately 21,000 square feet in Mountain View, California under a lease that expires
February 28, 2014. We lease approximately 15,300 square feet in Watsonville, California under a lease that
expires September 30, 2018.
Internationally, we lease space in Belgrade, Serbia and Vancouver, Canada. These leases expire in 2012 and 2016.
19
Item
3.
LEGAL
PROCEEDINGS
On June 29, 2011, a complaint was filed in the U.S. District Court for the Central District of California against
us and certain of our current and past officers and directors on behalf of certain purchasers of our common
stock. The complaint has been brought as a purported stockholder class action, and, in general, includes
allegations that we and certain of our officers and directors violated federal securities laws by making materially
false and misleading statements regarding our business prospects and financial results, thereby artificially
inflating the price of our common stock. The plaintiff is seeking unspecified monetary damages and other relief.
On August 29, 2011, two prospective lead plaintiffs filed motions for appointment of lead plaintiff and for
appointment of lead counsel. On October 17, 2011, the court appointed the two prospective lead plaintiffs as co-
lead plaintiffs and their respective counsel as co-lead counsel. On December 15, 2011, the co-lead plaintiffs
filed their consolidated amended complaint. On February 14, 2012, we filed our motion to dismiss the
consolidated amended complaint. A hearing on the motion to dismiss has been set for May 21, 2012. We
intend to vigorously defend against the claims advanced.
On August 11, 2011, a shareholder derivative complaint was filed in the Superior Court of California for the
County of Orange against the Company’s directors and certain of its executive officers. Thereafter, two
additional similar complaints, also styled as shareholder derivative actions, were filed in state court
(collectively, the "State Derivative Actions"). On December 23, 2011, one of the plaintiffs in the State
Derivative Actions filed a motion to consolidate the State Derivative Actions and to appoint lead counsel. A
hearing on the pending motion has been set for March 1, 2012. We expect the state court to consolidate the
State Derivative Actions and to appoint lead counsel, and we expect plaintiffs to thereafter file an amended
shareholder derivative complaint. On September 12, 2011, a shareholder derivative complaint was filed in the
U.S. District Court for the Central District of California against certain of the officers and directors named in
the State Derivative Actions but also against additional officers of the Company. Thereafter, two additional
similar complaints, also styled as shareholder derivative actions, were filed in federal court (collectively, the
“Federal Derivative Actions”). On December 6, 2011, the federal court consolidated two of the Federal
Derivative Actions and appointed co-lead counsel for plaintiffs, and we expect the federal court to issue an
order consolidating all of the Federal Derivative Actions. On January 27, 2012, plaintiffs filed their amended
shareholder derivative complaint. Collectively, the State Derivative Actions and the Federal Derivative Actions
are referred to as the "Derivative Actions." The shareholder derivative complaints in the Derivative Actions
allege breaches of fiduciary duties by the defendants and other violations of state law. In general, the complaints
in the Derivative Actions allege that the Company’s directors and certain of its officers caused or allowed for
the dissemination of materially false and misleading statements regarding our business prospects and financial
results, thereby artificially inflating the price of our common stock. Plaintiffs in the Derivative Actions seek
unspecified monetary damages and other relief, including reforms and improvements to the Company’s
corporate governance and internal procedures. We intend to vigorously defend against the claims advanced in
the Derivative Actions, and intend to file demurrers and/or motion(s) to dismiss the shareholder derivative
complaints in the Derivative Actions.
Regardless of the merits, the expense of defending such litigation may have a substantial impact if our insurance
carriers fail to cover the cost of the litigation, and the time required to defend the actions could divert
management’s attention from the day-to-day operations of our business, which could adversely affect our
business, results of operations and cash flows. In addition, an unfavorable outcome in such litigation could
have a material adverse effect on our business, results of operations and cash flows.
Item
4.
RESERVED
20
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 Global 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 DECEM BER 31, 2011:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
YEAR ENDED DECEM BER 31, 2010:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$17.03
9.49
4.22
1.73
$9.59
11.20
10.63
16.35
$7.90
3.94
1.45
0.96
$7.37
8.51
7.61
9.74
On February 13, 2012, the closing sale price for our common stock as reported by NASDAQ was $2.41.
For information regarding Securities Authorized for Issuance under Equity Compensation Plans, please
refer to Item 12.
Stock
Performance
Graph
The following graph and information compares the cumulative total stockholder return on our common
stock against the cumulative total return of the S&P Midcap 400 Index and the S&P Midcap Applications
Software Index (Peer Group) for the same period.
The graph covers the period from December 31, 2006 through December 31, 2011. The graph assumes that
$100 was invested in our common stock on December 31, 2006, and in each index, and that all dividends
were reinvested. No cash dividends have been declared on our common stock. Stockholder returns over the
indicated period should not be considered indicative of future stockholder returns.
21
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Smith Micro Software, Inc., the S&P Midcap 400 Index, and S&P MidCap Application
Software
$160
$140
$120
$100
$80
$60
$40
$20
$0
12/06
12/07
12/08
12/09
12/10
12/11
Smith Micro Software, Inc.
S&P Midcap 400
S&P MidCap Application Software
*$100 invested on 12/31/06 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2012 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
12/06
12/07
12/08
12/09
12/10
12/11
Smith Micro
Software, Inc.
100.00
59.69
39.18
64.48
110.92
7.96
S&P Midcap 400
100.00
107.98
68.86
100.00
105.19
66.15
S&P MidCap
Application
Software
Holders
94.60
97.82
119.80
117.72
137.14
135.50
As of February 13, 2012, there were approximately 182 holders of record of our common stock based on
information provided by our transfer agent.
22
Dividends
We have never paid any cash dividends on our common stock and we have no current plans to do so.
Recent
Sales
of
Unregistered
Securities
None.
Purchases
of
Equity
Securities
by
the
Company
During fiscal year 2011, the Company acquired, as payment of withholding taxes in connection with the
vesting of restricted stock awards, an aggregate of 36,730 shares of its common stock in the amounts set
forth in the following table. All of the shares were cancelled when they were acquired.
Period
Total Number
of Shares
Withheld
Average
Price per
Share
February, 2011
8,906
$
14.59
May, 2011
13,367
$
9.65
August, 2011
December, 2011
6,771
7,686
$
4.30
$
1.96
On November 2, 2011, the Company announced that its Board of Directors had approved a program
authorizing the repurchase of up to 5,000,000 shares of the company's common stock over a period of up to
two years. Under this program, stock repurchases may be made from time to time and the actual amount
expended will depend on a variety of factors including market conditions, regulatory and legal
requirements, corporate cash generation and other factors. The stock repurchases may be made in both open
market and privately negotiated transactions, and may include the use of Rule 10b5-1 trading plans. The
program does not obligate Smith Micro to repurchase any particular amount of common stock during any
period and the program may be modified or suspended at any time at the Company's discretion. As of the
date of this report, no shares have been repurchased under this program.
23
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 Annual Report. The following selected
consolidated statement of operations data for the years ended December 31, 2011, 2010 and 2009, and the
consolidated balance sheet data at December 31, 2011 and 2010, have been derived from audited consolidated
financial statements included elsewhere in this Annual Report. The consolidated statement of operations data
presented below for the years ended December 31, 2008 and 2007, and the consolidated balance sheet data at
December 31, 2009, 2008 and 2007 are derived from audited consolidated financial statements that are not
included in this Annual Report.
2011
Year Ended December 31,
2009
2010
2008
2007
Consolidated S tatement of Operations Data (in thousands, except per share data):
107,279
Revenues
130,501
57,767
$
$
$
$
98,424
$
73,377
Cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring expenses
Goodwill and long-lived asset impairment
Total operating expenses
Operating income (loss)
Interest and other income
Income (loss) before taxes
Income tax expense (benefit)
Net income (loss)
13,761
44,006
15,507
114,994
15,486
91,793
20,108
78,316
20,644
52,733
26,594
41,711
25,279
3,184
112,904
209,672
(165,666)
131
(165,535)
(5,929)
(159,606)
$
29,708
42,759
24,146
-
-
96,613
18,381
130
18,511
6,165
12,346
$
24,999
36,530
19,155
-
-
80,684
11,109
381
11,490
6,738
4,752
$
24,814
30,811
19,990
-
-
75,615
2,701
739
3,440
4,172
(732)
$
18,394
14,772
15,318
-
-
48,484
4,249
4,254
8,503
5,342
3,161
$
Net income (loss) per share:
Basic
Diluted
Weighted average shares:
Basic
Diluted
$
$
(4.48)
(4.48)
$
$
0.36
0.36
$
$
0.15
0.14
$
$
(0.02)
(0.02)
$
$
0.11
0.10
35,617
35,617
34,204
34,615
32,438
32,897
30,978
30,978
29,768
30,998
2011
2010
As of December 31,
2009
2008
2007
$
234,892
16,627
16,538
218,265
$
$
205,934
17,955
4,192
187,979
$
$
176,995
11,591
(560)
165,404
$
Consolidated Balance S heet Data (in thousands):
Total assets
Total liabilities
Accumulated earnings (deficit)
Total stockholders' equity
79,941
15,081
(143,068)
64,860
$
$
24
$
162,421
7,907
172
154,514
$
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 Annual Report. Readers are also urged to carefully review and consider the various disclosures made by
us which attempt to advise interested parties of the factors which affect our business, including without
limitation the disclosures made in Item 1A of Part I of this Annual Report under the caption “Risk Factors.”
Risk factors that could cause actual results to differ from those contained in the forward-looking statements
include but are not limited to: deriving revenues from a small number of products; our dependence upon the
large carrier customers for a significant portion of our revenues; potential fluctuations in quarterly results;
potential further impairments of long-lived assets; our failure to successfully compete; changes in technology;
our entry into new markets; failure of our customers to adopt new technologies; loss of key personnel; failure to
maintain strategic relationships with device manufacturers; failure of our products to achieve broad acceptance;
the duration and depth of the current economic slowdown and its effects on the capital expenditures by our
customers and their end users; our failure to successfully integrate acquisitions; undetected software defects; our
failure to protect intellectual property; exposure to intellectual property claims; our inability to raise more funds
to meet our capital needs; being delisted from NASDAQ; doing business internationally; and an unfavorable
outcome from a class action and/or shareholder derivative lawsuit.
Introduction
and
Overview
Smith Micro Software, Inc. provides software and services that simplify, secure and enhance the mobile
experience. The Company’s portfolio of wireless solutions includes a wide range of client and server
applications that manage voice, data, video and connectivity over mobile broadband networks. Our
primary customers are the world’s leading mobile network operators, mobile device manufacturers and
enterprise businesses. In addition to our wireless and mobility software, Smith Micro offers personal
productivity and graphics products distributed through a variety of consumer channels worldwide.
The proliferation of mobile broadband technology continues to provide new opportunities for Smith Micro
on a global basis. Over the last decade, the Company has developed extensive expertise in embedded
software for networked devices (both wireless and wired), and we have leveraged that expertise to solve an
unending tide of connectivity and mobile service challenges for our customers. As network operators and
businesses struggle to reduce costs and complexity in a market that is characterized by rapid evolution and
fragmentation, Smith Micro answers with innovative solutions that increase reliability, security,
performance, efficiency, and usability of wireless services over a wide variety of networks and device
platforms.
The underlying philosophy driving our products and services is our desire to improve the user experience
and optimize resources for our customers. These objectives are delivered through the combination of
rigorous market analysis and planning, technology innovation that leverages substantial intellectual
property, leadership in industry standards, quality engineering, and extensive commercial deployment
experience gained over 30 years. As technology, market dynamics and consumer demands change, Smith
Micro has proven its ability to evolve and meet those demands again and again.
During fiscal year 2011, we experienced a significant decrease in our revenues. This was primarily due to the
introduction and market acceptance of mobile hotspot devices, Tablets and Smartphones capable of
functioning as a WWAN hotspot, resulting in lower demand in our North American marketplace for our core
connection management products. While we launched new wireless products that addressed this technology
shift, they are new to the market and their rate of adoption and deployment is unknown at this time causing
material uncertainty regarding the timing of our future wireless revenues.
25
As a result of our decreased revenues, slow adoption of our new products, operating losses and depressed
stock prices, we recorded a goodwill and other long-lived asset impairment charge of $112.9 million in
fiscal year 2011. All goodwill and intangible assets have been written off as of December 31, 2011.
For the year ended December 31, 2011, revenues to three customers and their respective affiliates in the
Wireless business segment accounted for 24.8%, 18.4% and 11.7% of the Company’s total revenues and
63% of accounts receivable. For the year ended December 31, 2010, revenues to three customers and their
respective affiliates in the Wireless business segment accounted for 40.1%, 13.9% and 12.3% of the
Company’s total revenues and 78% of accounts receivable. For the year ended December 31, 2009,
revenues to four customers and their respective affiliates in the Wireless business segment accounted for
32.8%, 12.2%, 10.4% and 10.3% of the Company’s total revenues and 75% of accounts receivable.
Results
of
Operations
The following table sets forth certain consolidated statement of operating 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
Goodwill and long-lived asset impairment
Total operating expenses
Operating income (loss)
Interest and other income
Income (loss) before taxes
Income tax expense (benefit)
Net income (loss)
Year Ended December 31,
2010
2009
2011
100.0%
23.8%
76.2%
46.0%
72.2%
43.8%
5.5%
195.5%
363.0%
(286.8)%
0.2%
(286.6)%
(10.3)%
(276.3)%
100.0%
11.9%
88.1%
22.8%
32.8%
18.4%
-
-
74.0%
14.1%
0.1%
14.2%
4.7%
9.5%
100.0%
14.4%
85.6%
23.3%
34.0%
17.9%
-
-
75.2%
10.4%
0.3%
10.7%
6.3%
4.4%
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 two
business segments:
• Wireless, which includes our connectivity and security management, mobile VPN, media and
content management, device management, Push-To-Talk, Visual Voicemail, Visual
Voicemail to Text, contact and calendar syncing, video content delivery and optimization
solutions and managed file transfers; and
• Productivity & Graphics, which includes retail and direct sales of our compression and broad
consumer-based software.
The following table shows the revenues generated by each business segment (in thousands):
26
Wireless
Productivity & Graphics
Corporate/Other
Total revenues
Cost of revenues
Gross profit
Year Ended December 31,
2010
2011
2009
$
48,711
$
118,684
$
89,420
8,816
240
57,767
13,761
44,006
$
11,399
418
17,014
845
130,501
15,507
114,994
$
107,279
15,486
91,793
$
“Corporate/Other” refers to the consulting portion of our services sector which has been de-
emphasized and is no longer considered a strategic element of our future plans.
Cost of revenues. Cost of revenues consists of direct product costs, royalties, and the amortization of
purchased intangibles and capitalized software.
Selling and marketing. Selling and marketing expenses consist primarily of personnel costs,
advertising costs, sales commissions, trade show expenses, and the amortization of certain purchased
intangibles. 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 and the amortization of
certain acquired intangibles.
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.
Restructuring expenses. Restructuring expenses consist primarily of one-time employee termination
benefits, lease and other contract terminations and costs to consolidate facilities and relocate
employees.
Goodwill and long-lived asset impairment. Goodwill and long-lived asset impairment charges are a
result of determining that the recoverability of the carrying value of goodwill, intangible assets, and
fixed assets will not be realized.
Interest and other income. Interest and other income are directly related to our average cash and
short term investment balances during the period and vary among periods. Our other excess cash is
invested in short term marketable equity and debt securities classified as cash equivalents.
Income tax expense. 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. After consideration of the Company’s three year cumulative
loss position as of December 31, 2011 and sources of taxable income, the Company recorded a
27
valuation allowance related to its U.S.-based deferred tax amounts, with a corresponding charge to
income tax expense, of $53.2 million for the year ended December 31, 2011.
Year
Ended
December
31,
2011
Compared
to
the
Year
Ended
December
31,
2010
Revenues. Revenues of $57.8 million for fiscal year 2011 decreased $72.7 million, or 55.7%, from
$130.5 million for fiscal year 2010. Wireless revenues of $48.7 million decreased $70.0 million, or
59.0%, primarily due to lower sales of our base business connection manager products to our carrier
customers of $58.3 million and PC OEM customers of $8.3 million and large device solutions sales in
fiscal 2010 that were not repeated in fiscal 2011 of $3.4 million. Productivity & Graphics sales
decreased $2.6 million, or 22.7%, primarily due to low consumer spending and moving toward a
more internal distribution model. Corporate/Other sales decreased $0.1 million as we continue to de-
emphasize this business. Due to the introduction and market acceptance of mobile hotspot devices,
Tablets and Smartphones capable of functioning as a WWAN hotspot, our core connection
management products experienced lower demand in our North American marketplace. While we have
launched new wireless products that address this technology shift, they are new to the market and their
rate of adoption and deployment is unknown at this time causing material uncertainty regarding the
timing of our future wireless revenues.
Cost of revenues. Cost of revenues of $13.8 million for fiscal year 2011 decreased $1.7 million, or
11.3%, from $15.5 million for fiscal year 2010. Direct product costs increased $0.4 million primarily
due to costs associated with the start-up of our new backup and messaging services. Amortization of
intangibles decreased from $5.9 million to $3.8 million, or $2.1 million, primarily due to the
impairment charge we recorded for these assets in fiscal year 2011. No future amortization of
intangibles is anticipated as these assets have been fully impaired.
Gross profit. Gross profit of $44.0 million or 76.2% of revenues for fiscal year 2011 decreased $71.0
million, or 61.7%, from $115.0 million, or 88.1% of revenues for fiscal year 2010. The 11.9
percentage point decrease in gross profit was primarily due to lower product margins of 9.9 points as
a result of the lower revenues not absorbing our fixed costs and our datacenter and start-up costs
associated with our backup and messaging products. Amortization of intangibles as a percentage of
revenues decreased 2.0 points primarily due to the lower revenues and the impairment charge we
recorded in fiscal 2011.
Selling and marketing. Selling and marketing expenses of $26.6 million for fiscal year 2011
decreased $3.1 million, or 10.5%, from $29.7 million for fiscal year 2010. This decrease was primarily
due to lower personnel related expenses of $0.9 million, lower advertising costs of $0.2 million and
lower travel costs of $0.1 million. Stock-based compensation decreased from $3.1 million to $2.1
million, or $1.0 million. Amortization of intangibles decreased from $3.0 million to $2.1 million, or
$0.9 million. No future amortization of intangibles is anticipated as these assets have been fully
impaired.
Research and development. Research and development expenses of $41.7 million for fiscal year
2011 decreased $1.0 million, or 2.5%, from $42.7 million for fiscal year 2010. Personnel, recruiting
and travel expenses decreased $0.4 million as a result of implementing our restructuring plans. This
decrease was offset by increases in software maintenance and other small equipment of $0.6 million
related to our new products. Stock-based compensation decreased from $2.7 million to $1.4 million,
or $1.3 million. Amortization of purchased technologies increased from $0.1 million to $0.2
million, or $0.1 million. No future amortization of purchased technologies is anticipated as these
assets have been fully impaired.
General and administrative. General and administrative expenses of $25.2 million for fiscal year
2011 increased $1.1 million, or 4.7%, from $24.1 million for fiscal year 2010. This increase was
primarily due to increased space and occupancy costs and depreciation/amortization associated with
facility and datacenter expansions in Aliso Viejo and Pittsburgh of $2.7 million and legal expenses
of $0.8 million, partially offset by lower personnel related costs of $0.8 million and other cost
28
decreases of $0.2 million. Stock-based compensation expense decreased from $5.7 million to $4.3
million, or $1.4 million.
Restructuring expenses. Restructuring expenses of $3.2 million for fiscal year 2011 were related to
the Chicago facility shutdown of $0.8 million, the Sweden facility shutdown of $0.8 million and
other one-time employee termination and other costs in the U.S. of $1.6 million. There were no
restructuring expenses in 2010.
Goodwill and long-lived asset impairment. Goodwill and long-lived asset impairment charges of
$112.9 million for fiscal year 2011 were related to goodwill of $94.2 million, intangible assets of
$13.4 million, and fixed assets of $5.3 million. There were no impairment charges in 2010.
Interest and other income. Interest and other income was $0.1 million for both fiscal year 2011 and
2010.
Income tax expense. We recorded an income tax benefit of $5.9 million for fiscal year 2011 and a
tax provision of $6.2 million for fiscal year 2010. The effective tax rate for fiscal year 2011 was
impacted by the valuation allowance and carryback of losses to offset taxable income in prior years.
Year
Ended
December
31,
2010
Compared
to
the
Year
Ended
December
31,
2009
Revenues. Revenues of $130.5 million for fiscal year 2010 increased $23.2 million, or 21.6%, from
$107.3 million for fiscal year 2009. Wireless revenues of $118.7 million increased $29.3 million, or
32.7%, primarily due to new connectivity and security product licenses of $16.5 million, increased
visual voicemail and push-to-talk revenues of $8.4 million and new device solutions and multimedia
revenues of $4.4 million. Productivity & Graphics sales decreased $5.6 million, or 33.0%, primarily
due to unfavorable consumer spending trends. Corporate/Other sales decreased $0.5 million as we
have de-emphasized this business.
Cost of revenues. Cost of revenues of $15.5 million for fiscal year 2010 was essentially unchanged
from fiscal year 2009. Direct product costs decreased $0.9 million primarily due to a shift in product
mix and overhead cost reductions. The change in product mix was due to a decrease in sales of lower
margin productivity and graphics products and an increase in sales of higher margin OEM license
products. Amortization of intangibles increased from $4.9 million to $5.9 million, or $1.0 million,
primarily due to the Core Mobility acquisition which closed in the fourth quarter of 2009. Stock-
based compensation expense decreased from $0.2 million to $0.1 million, or $0.1 million.
Gross profit. Gross profit of $115.0 million or 88.1% of revenues for fiscal year 2010 increased
$23.2 million, or 25.3%, from $91.8 million, or 85.6% of revenues for fiscal year 2009. The 2.5
percentage point increase in gross profit was primarily due to improved product margins of 2.4
points as a result of the change in product mix mentioned above and overhead cost reductions and
lower amortization of intangibles expense as a percentage of revenues of 0.1 points.
Selling and marketing. Selling and marketing expenses of $29.7 million for fiscal year 2010 increased
$4.7 million, or 18.8%, from $25.0 million for fiscal year 2009. This increase was primarily due to
costs associated with headcount increases of $3.5 million, increased travel of $0.6 million and
advertising and media relations related to our new product launches of $0.5 million. Stock-based
compensation increased from $2.8 million to $3.1 million, or $0.3 million. Amortization of
intangibles due to our acquisitions increased from $2.7 million to $3.0 million, or $0.3 million.
These cost increases were partially offset by lower third party commissions on our reduced
Productivity & Graphics revenues of $0.3 million and other expense decreases of $0.2 million.
Research and development. Research and development expenses of $42.7 million for fiscal year
2010 increased $6.2 million, or 17.1%, from $36.5 million for fiscal year 2009. This increase was
primarily due to increased personnel and recruiting costs associated with acquired and new hired
headcount of $6.8 million, increased travel of $0.4 million and other expenses increasing by $0.1
million. These increases were partially offset by lower amortization of purchased technologies
which decreased from $1.2 million to $0.1 million, or $1.1 million. Stock-based compensation
remained flat year over year at $2.7 million.
29
General and administrative. General and administrative expenses of $24.1 million for fiscal year
2010 increased $5.0 million, or 26.1%, from $19.1 million for fiscal year 2009. This increase was
primarily due to an increase in space and occupancy costs as a result of our acquisition of Core
Mobility and the expansion of our corporate headquarters campus of $1.9 million, acquired and new
headcount of $1.1 million and increased depreciation of $0.5 million. Stock-based compensation
increased from $4.1 million to $5.6 million, or $1.5 million.
Interest and other income. Interest and other income of $0.1 million for fiscal year 2010 decreased
$0.3 million from $0.4 million for fiscal year 2009. This decrease was due to lower interest and
investment income realized from our short-term investments.
Income tax expense. We recorded income tax expense for fiscal year 2010 in the amount of $6.2
million as a result of our pre-tax operating profit for the period and the relatively large amount of
incentive stock option expense which is not deductible for tax purposes. The provision for income
taxes was $6.7 million for fiscal year 2009. The lower effective tax rate in fiscal year 2010 as
compared to fiscal year 2009 was primarily due to increased federal tax credits and higher
disqualifying disposition deductions due to the exercise of stock options.
Liquidity
and
Capital
Resources
At December 31, 2011, we had $46.0 million in cash and cash equivalents and short-term investments and
$52.7 million of working capital.
On November 2, 2011, the Company announced that its Board of Directors had approved a program
authorizing the repurchase of up to five million shares of the company's common stock over a period of up
to two years. Under this program, stock repurchases may be made from time to time and the actual amount
expended will depend on a variety of factors including market conditions, regulatory and legal
requirements, corporate cash generation and other factors. The stock repurchases may be made in both open
market and privately negotiated transactions, and may include the use of Rule 10b5-1 trading plans. The
program does not obligate Smith Micro to repurchase any particular amount of common stock during any
period and the program may be modified or suspended at any time at the company's discretion.
On October 26, 2009, we acquired Core Mobility, Inc. (“Core Mobility”) for $10 million in cash ($6.9
million upon closing and $3.1 million held back as security against possible indemnification obligations but
subsequently paid during 2010) and 700,000 shares of Smith Micro common stock.
We currently anticipate that capital expenditures will be considerably lower in 2012 from 2011. We believe
that our existing cash, cash equivalents and short-term investment balances will be sufficient to finance our
working capital and capital expenditure requirements through at least the next twelve months. We may
require additional funds to support our working capital requirements or for other purposes and may seek to
raise additional funds through public or private equity or debt financing or from other sources. If additional
financing is needed, we cannot assure that such financing will be available to us at commercially
reasonable terms or at all.
Operating
Activities
In 2011, net cash used in operations was $13.5 million primarily due to our net loss adjusted for
goodwill and long-lived asset impairments, depreciation, amortization, non-cash stock-based
compensation, and inventory and accounts receivable reserves of $28.4 million, an increase of
income taxes receivable of $5.4 million and a decrease in accounts payable and accrued liabilities of
$2.4 million. This usage was partially offset by a decrease in accounts receivable of $20.0 million,
lease incentives of $2.2 million and a decrease of all other net assets of $0.5 million.
In 2010, net cash provided by operations was $24.7 million primarily due to our net income adjusted
for depreciation, amortization, non-cash stock-based compensation, and inventory and accounts
receivable reserves of $33.2 million, an increase of deferred tax liabilities net of $0.8 million, and a
30
decrease in prepaid expenses of $0.3 million. These increases were partially offset by an increase of
accounts receivable due to our increased revenue of $6.5 million, an increase in income tax
receivable of $1.9 million and an increase of all other net assets of $1.2 million.
In 2009, net cash provided by operations was $18.5 million primarily due to our net income adjusted
for depreciation, amortization, non-cash stock-based compensation, and inventory and accounts
receivable reserves of $25.8 million and a decrease in deferred income tax assets of $0.9 million.
These increases were partially offset by an increase of accounts receivable due to our increased
revenue of $6.0 million and an increase of all other net assets of $2.2 million.
Investing
Activities
In 2011, cash provided by investing activities of $2.7 million was due to the sale of short-term
investments of $16.1 million, partially offset by capital expenditures of $13.4 million which were
primarily for leasehold improvements and to expand our datacenters.
In 2010, we used cash of $30.3 million for investing activities to purchase short-term investments of
$23.4 million, capital expenditures which primarily were for leasehold improvements and to expand
our datacenter of $6.3 million, and for the acquisition of Avot Media of $0.6 million.
In 2009, we used cash of $20.4 million for investing activities to purchase short-term investments of
$8.7 million, acquire Core Mobility for $6.9 million, and for capital expenditures which primarily
were leasehold improvements, computers, and upgrading our data centers and business systems of
$4.8 million.
Financing
Activities
In 2011, cash provided by financing activities of $0.4 million was from the sale of stock for our
employee stock purchase plan.
In 2010, cash provided by financing activities of $8.8 million was related to the exercise of stock
options of $7.3 million and tax benefits associated with stock-based compensation of $1.5 million.
In 2009, cash provided by financing activities of $2.5 million was related to the exercise of stock
options of $1.6 million and tax benefits associated with stock-based compensation of $0.9 million.
Contractual
Obligations
and
Commercial
Commitments
As of December 31, 2011, we had no debt. The following table summarizes our contractual
obligations as of December 31, 2011 (in thousands):
Payments due by period
Contractual obligations:
Operating lease obligations
Purchase obligations
Total
Total
20,802
502
21,304
$
$
$
$
$
$
Less than
1 year
2,840
502
3,342
1-3 years
5,354
-
5,354
3-5 years
4,507
-
4,507
More than
5 years
8,101
-
8,101
$
$
$
$
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
31
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, including our principal administrative, sales and marketing, customer
support and research and development facility, is located in Aliso Viejo, California, where we currently
lease and occupy approximately 52,700 square feet of space pursuant to leases that expire on May 31,
2016 and January 31, 2022. We lease approximately 55,600 square feet in Pittsburgh, Pennsylvania
under a lease that expires December 31, 2021. We lease approximately 21,000 square feet in Mountain
View, California under a lease that expires February 28, 2014. We lease approximately 15,300 square
feet in Watsonville, California under a lease that expires September 30, 2018. Internationally, we lease
space in Belgrade, Serbia and Vancouver, Canada. These leases expire in 2012 and 2016.
Off-‐Balance
Sheet
Arrangements
As of December 31, 2011, 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. The preparation of these 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:
Revenue
Recognition
We currently report our net revenues under two operating groups: Wireless and Productivity &
Graphics. Within each of these groups software revenue is recognized based on the customer and
contract type. We recognize revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the price is fixed and determinable, and collectability is probable as required by FASB
ASC Topic No. 985-605, Software-Revenue Recognition. We recognize revenues from sales of our
software to our customers or end users as completed products are shipped and title passes; or from
royalties generated as authorized customers duplicate our software, if the other requirements are met.
If the requirements are not met at the date of shipment, revenue is not recognized until these
elements are known or resolved. For Wireless sales, returns from customers are limited to defective
goods or goods shipped in error. Historically, customer returns have not exceeded the very nominal
estimates and reserves. We also provide some technical support to our customers. Such costs have
historically been insignificant.
32
We have a few multiple element agreements for which we have contracted to provide a perpetual
license for use of proprietary software, to provide non-recurring engineering, and in some cases to
provide software maintenance (post contract support). As of January 1, 2011, we adopted ASU No.
2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements which
amends revenue recognition guidance for arrangements with multiple deliverables. The new
guidance eliminated the residual method of revenue recognition and allows the use of management’s
best estimate of selling price for individual elements of an arrangement when vendor specific
objective evidence (“VSOE”), vendor objective evidence (“VOE”) or third-party evidence (“TPE”)
is unavailable. For most of our multiple element agreements, VSOE for all contract elements is used
and the timing of the individual element revenue streams is determined and recognized as delivered.
For Productivity & Graphics sales, management reviews available retail channel information and
makes a determination of a return provision for sales made to distributors and retailers based on
current channel inventory levels and historical return patterns. Certain sales to distributors or
retailers are made on a consignment basis. Revenue for consignment sales are not recognized until
sell through to the final customer is established. Certain revenues are booked net of revenue sharing
payments. Sales directly to end-users are recognized upon shipment. End users have a thirty day
right of return, but such returns are reasonably estimable and have historically been immaterial. We
also provide technical support to our customers. Such costs have historically been insignificant.
Sales
Incentives
For our Productivity & 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. 985-605, Software-Revenue Recognition. We use historical redemption rates to estimate the
cost of customer incentives. Total sales incentives were $1.2 million, $2.0 million, and $1.2 million
for the years ended December 31, 2011, 2010 and 2009, respectively.
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.
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 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, 2011, software has been substantially completed concurrently with the establishment
of technological feasibility; accordingly, no costs have been capitalized to date.
33
In-‐Process
Research
and
Development
In 2009, we capitalized $1.0 million of IPR&D costs related to our acquisition of Core Mobility in
accordance with accounting standards that became effective in 2009. This IPR&D project was
completed during the fourth quarter of 2010. Amortization commenced in 2011.
The fair value of the IPR&D was determined using the discounted cash flow approach. The expected
future cash flows were estimated and discounted to their net present values at an appropriate risk-
adjusted rate of return. Significant factors considered in the calculation of the rate of return were the
weighted average cost of capital and return on assets, as well as the risks inherent in the
development process, including the likelihood of achieving technological success and market
acceptance. Future cash flows were estimated based on forecasted revenue and costs, taking into
account the expected product life cycle, market penetration and growth rates.
As a result of our goodwill and long-lived asset impairment analysis, we have fully impaired this
asset during fiscal year 2011. As such, there will be no future amortization expense recorded for this
impaired asset.
Capitalized
Software
and
Amortization
We capitalized internally developed software and software purchased from third parties if the related
software product under development had reached technological feasibility or if there were
alternative future uses for the purchased software as required by FASB ASC Topic No. 985-20,
Software-Costs of Software to be Sold, Leased, or Marketed. These costs were amortized on a
product-by-product basis, typically over an estimated life of five to seven years, using the larger of
the amount calculated using the straight-line method or the amount calculated using the ratio
between current period gross revenues and the total of current period gross revenues and estimated
future gross revenues. At each balance sheet date, we evaluated on a product-by-product basis the
unamortized capitalized cost of computer software compared to the net realizable value of that
product. The amount by which the unamortized capitalized costs of a computer software product
exceeded its net realizable value was written off.
As a result of our goodwill and long-lived asset impairment analysis, we have fully impaired these
assets during fiscal year 2011. As such, there will be no future amortization expense recorded for
these impaired assets.
Intangible
Assets
and
Amortization
Amortization expense related to other intangibles acquired in previous acquisitions was calculated
on a straight line basis over various useful lives.
As a result of our goodwill and long-lived asset impairment analysis, we have fully impaired these
assets as of December 31, 2011. As such, there will be no future amortization expense recorded for
these impaired assets.
Impairment
of
Goodwill
and
Intangible
Assets
The Company accounts for goodwill and other intangible assets in accordance with FASB ASC
Topic No. 350, Intangibles-Goodwill and Other, which requires that goodwill and other identifiable
intangible assets with indefinite useful lives be tested for impairment at least annually. The
Company tests goodwill and intangible assets for impairment in December of each year, or more
frequently if events and circumstances warrant. These assets are impaired if the Company
determines that their carrying values may not be recoverable based on an assessment of certain
events or changes in circumstances:
34
•
•
•
•
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 assets are considered to be impaired, the Company recognizes the amount by which the
carrying value of the assets exceeds the fair value of the assets as an impairment loss.
The goodwill impairment test is a two-step process. The first step compares the Company’s fair
value to its net book value. If the fair value is less than the net book value, the second step of the test
compares the implied fair value of the Company’s goodwill to its carrying amount. If the carrying
amount of goodwill exceeds its implied fair value, the Company would recognize an impairment loss
equal to that excess amount.
The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole
in an orderly transaction between market participants at the measurement date. Quoted market prices
in active markets are the best evidence of fair value and shall be used as the basis for the
measurement, if available. However, the market price of an individual equity security (and thus the
market capitalization of a reporting unit with publicly traded equity securities) may not be
representative of the fair value of the reporting unit as a whole. Substantial value may arise from the
ability to take advantage of synergies and other benefits that flow from control over another entity.
Consequently, measuring the fair value of a collection of assets and liabilities that operate together in
a controlled entity is different from measuring the fair value of that entity’s individual equity
securities. An acquiring entity often is willing to pay more for equity securities that gives it a
controlling interest than an investor would pay for a number of equity securities representing less
than a controlling interest. That control premium may cause the fair value of a reporting unit to
exceed its market capitalization. The quoted market price of an individual equity security, therefore,
need not be the sole measurement basis of the fair value of a reporting unit.
At December 31, 2010, the Company estimated the fair value in Step 1 based on the income
approach which included discounted cash flows as well as a market approach that utilized the
Company’s earnings and revenue multiples. The Company’s discounted cash flows required
management judgment with respect to forecasted revenues, launch of new products, operating
expenses, working capital and the selection and use of an appropriate discount rate. The Company’s
assessment resulted in a fair value that was marginally greater than the Company’s carrying values
for the Productivity & Graphics operating unit and was significantly greater than the Company’s
carrying values for the Wireless operating unit at December 31, 2010. In accordance with the
authoritative literature, the second step of the impairment test was not required to be performed and
no impairment of goodwill was recorded as of December 31, 2010.
At June 30, 2011, the Company concluded that a decline in its stock price and market capitalization
was not representative of the fair value of the reporting unit as a whole. The goodwill impairment
test should be based on an “other-than-temporary” decline. The Company believed that it was “more
likely than not” that the fair value of the Company’s two reporting units had not declined below the
reporting unit’s carrying amount because there had been temporary declines in (1) the stock price,
(2) revenues due to a technology shift in our marketplace resulting in our core connection
management products experiencing lower demand in certain markets and (3) earnings as we continued
to invest heavily in R&D to bring new products to market. There are several new products that we
expected to launch during the second half of 2011 that would address the technology shift in the
marketplace. As such, the Company expected these new products, should they be successful, to result
in improved revenues and profitability during the second half of 2011.
At June 30, 2011, the Company stated that if its revenues, profitability, and stock price did not
improve in the third and/or fourth quarter of 2011, we would “more likely than not” have to perform
35
Step 1 of the impairment test. The triggering events we monitored were revenues, new product
launches, profitability, and stock price.
During the period ended September 30, 2011, the Company concluded that a sustained decline in its
stock price and market capitalization was representative of the fair value of the reporting unit as a
whole. The triggering events that led us to this conclusion were:
• Revenues - declined for the third consecutive quarter.
• New product launches – although we were in trials for several of our new products, as of
September 30, 2011 we had not realized any revenues from these new products.
• Profitability – declined for the third consecutive quarter.
• Stock price – had remained at depressed prices.
As such, the Company performed Step 1 of the impairment test. For both reporting units, fair value
was determined by an average of a market approach and a discounted cash flow method. For the
Wireless unit, the concluded fair value as of September 30, 2011 was approximately $78.7 million
and the carrying value was $172.6 million which failed Step 1 and triggered Step 2. For the
Productivity & Graphics unit, the concluded fair value as of September 30, 2011 was approximately
$5.7 million and the carrying value was $16.8 million which failed Step 1 and triggered Step 2. For
Step 2, the implied fair value of goodwill was measured (as the excess of the fair value of a reporting
unit over the amounts assigned to its assets and liabilities, including any unrecognized intangible
assets), and compared to the carrying value of goodwill. The inputs measured at fair value used in
this valuation methodology were considered Level 3 in the three-tier value hierarchy per FASB ASC
Topic No. 820, Fair Value Measurements and Disclosures. The excess (if any) of the carrying value
of goodwill was compared to the implied fair value of goodwill and resulted in an impairment loss of
$94.2 million in the fiscal quarter ended September 30, 2011.
The following table sets forth the change in the carrying amount of goodwill balances as of
December 31, 2011 and 2010 (in thousands):
Balance as of December 31, 2010
Impairment losses
Balance as of December 31, 2011
Wireless
$
84,616
(84,616)
$ -
Productivity &
Graphics
9,615
$
(9,615)
$ -
Total
$
94,231
(94,231)
$ -
Impairment
or
Disposal
of
Long
Lived
Assets
The Company assesses potential impairment to its long-lived assets as required by FASB ASC Topic
No. 360, Property, Plant, and Equipment, when there is evidence that events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment
loss is recognized when the carrying amount of the long-lived assets is not recoverable if it exceeds
the sum of the undiscounted cash flows expected to result from the use and eventual disposition of
the asset. Any required impairment loss is measured as the amount by which the carrying amount of
a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the
related asset and a charge to operating results.
As a result of the triggering events described above in our goodwill impairment analysis, the
Company reviewed its long-lived assets for recoverability. As a result of this analysis, the Company
recognized a long-lived asset impairment charge of $18.7 million in the fiscal quarter ended
September 30, 2011 which was allocated to the intangible assets of $13.4 million and $5.3 million to
equipment and improvements, primarily related to our leasehold improvements. The inputs
36
measured at fair value used in this valuation methodology were considered Level 3 in the three-tier
value hierarchy per FASB ASC Topic No. 820, Fair Value Measurements and Disclosures.
The following table sets forth the change in the carrying amount of intangible asset balances as of
December 31, 2011 and 2010 (in thousands):
Balance as of December 31, 2010
Accumulated amortization
Impairment losses
Balance as of December 31, 2011
Wireless
$17,136
(5,306)
(11,830)
$ -
Productivity &
Graphics
$2,323
(778)
(1,545)
$ -
Total
$19,459
(6,084)
(13,375)
$ -
Income
Taxes
We account for income taxes as required by FASB ASC Topic No. 740, Income Taxes. This Topic
clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements and prescribes a recognition threshold and measurement process for financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. The
Topic also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. In the event the future consequences of differences
between financial reporting bases and the 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 Company records a valuation allowance to reduce any deferred
tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not
expected to be realized.
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 assets against gross deferred tax liabilities); (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 is in a three-year historical cumulative loss as of the end of fiscal 2011. This fact,
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, 2011 (as described above),
and after consideration of the Company’s three-year cumulative loss position as of December 31,
2011, the Company recorded a valuation allowance related to its U.S.-based deferred tax amounts,
with a corresponding charge to income tax expense, of $53.2 million during the year ended
December 31, 2011.
Stock-‐Based
Compensation
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
37
straight-line method over the requisite service period for each award as required by FASB ASC
Topic No. 718, Compensation-Stock Compensation.
Recent
Accounting
Pronouncements
In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-12,
Comprehensive Income (Topic 220). The amendments in this Update supersede certain pending
paragraphs
in ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income, to effectively defer only those changes in Update 2011-05 that relate to the
presentation of reclassification adjustments out of accumulated other comprehensive income. The
amendments will be temporary to allow the Board time to redeliberate the presentation requirements
for reclassifications out of accumulated other comprehensive income for annual and interim financial
statements for public, private, and non-profit entities.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic
350): Testing Goodwill for Impairment. Under the amendments in this Update, an entity has the
option to first assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an
entity determines it is not more likely than not that the fair value of a reporting unit is less than its
carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity
concludes otherwise, then it is required to perform the first step of the two-step impairment test by
calculating the fair value of the reporting unit and comparing the fair value with the carrying amount
of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity
is required to perform the second step of the goodwill impairment test to measure the amount of the
impairment loss, if any. Under the amendments in this Update, an entity has the option to bypass the
qualitative assessment for any reporting unit in any period and proceed directly to performing the
first step of the two-step goodwill impairment test. An entity may resume performing the qualitative
assessment in any subsequent period. The Company has adopted ASU No. 2011-8 and its adoption
did not have an impact on its consolidated results of operations and financial condition as the
Company elected the option to bypass the qualitative assessment and proceed directly to performing
step one of the goodwill impairment test for the period ended September 30, 2011. The Company
recorded a goodwill impairment charge of $94.2 million for the period ended September 30, 2011.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220):
Presentation of Comprehensive Income. Under the amendments to this Update, an entity has the
option to present the total of comprehensive income, the components of net income, and the
components of other comprehensive
in a single continuous statement of
income either
comprehensive income or in two separate but consecutive statements. In both choices, an entity is
required to present each component of net income along with total net income, each component of
other comprehensive income along with a total for other comprehensive income, and a total amount
for comprehensive income. This Update eliminates the option to present the components of other
comprehensive income as part of the statement of changes in stockholders' equity. The amendments
in this Update do not change the items that must be reported in other comprehensive income or when
an item of other comprehensive income must be reclassified to net income. For the Company, this
guidance is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2011. Early adoption is permitted. The Company is currently assessing its
implementation of this new guidance, but it will not have a material impact on the consolidated
financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements and Disclosures
(Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair
value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the
38
amendments change the wording used to describe many of the requirements in U.S. GAAP for
measuring fair value and for disclosing information about fair value measurements. For many of the
requirements, the Board does not intend for the amendments in this Update to result in a change in
the application of the requirements in Topic 820. Some of the amendments clarify the Board’s intent
about the application of existing fair value measurement requirements. Other amendments change a
particular principle or requirement for measuring fair value or for disclosing information about fair
value measurements. For the Company, this guidance is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2011. Early adoption is not permitted. The
Company is currently assessing its implementation of this new guidance, but does not expect a
material impact on the consolidated financial statements.
In December 2010, the FASB issued ASU No. 2010-28, Intangibles-Goodwill and Other (Topic
350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force). The
amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero
or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the
goodwill impairment test if it is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that a goodwill impairment exists, an entity should
consider whether there are any adverse qualitative factors indicating that an impairment may exist.
The qualitative factors are consistent with the existing guidance which requires that goodwill of a
reporting unit be tested for impairment between annual tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying
amount. For the Company, this guidance is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2010. Early adoption is not permitted. The Company has
adopted ASU No. 2010-28 and its adoption has not had an impact on its consolidated results of
operations and financial condition.
In October 2009, the FASB issued ASU No. 2009-14, Software (Topic 985): Certain Revenue
Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task
Force). This new guidance amends the scope of existing software revenue recognition accounting.
Tangible products containing software components and non-software components that function
together to deliver the product’s essential functionality would be scoped out of the accounting
guidance on software and accounted for based on other appropriate revenue recognition guidance.
For the Company, this guidance is effective for all new or materially modified arrangements entered
into on or after January 1, 2011 with earlier application permitted as of the beginning of a fiscal year.
Full retrospective application of the new guidance is optional. This guidance must be adopted in the
same period that the company adopts the amended accounting for arrangements with multiple
deliverables described in the next paragraph. The Company has adopted ASU No. 2009-14 and its
adoption has not had an impact on its consolidated results of operations and financial condition.
In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-
Deliverable Revenue Arrangements. ASU No. 2009-13 amends revenue recognition guidance for
arrangements with multiple deliverables. The new guidance eliminates the residual method of
revenue recognition and allows the use of management’s best estimate of selling price for individual
elements of an arrangement when vendor specific objective evidence (“VSOE”), vendor objective
evidence (“VOE”) or third-party evidence (“TPE”) is unavailable. For the Company, this guidance is
effective for all new or materially modified arrangements entered into on or after January 1, 2011
with earlier application permitted as of the beginning of a fiscal year. Full retrospective application
of the new guidance is optional. The Company has adopted ASU No. 2009-13 and its adoption has
not had an impact on its consolidated results of operations and financial condition.
39
Item
7A.
QUANTITATIVE
AND
QUALITATIVE
DISCLOSURES
ABOUT
MARKET
RISK
Interest
Rate
Risk
Our financial instruments include cash and cash equivalents, and short-term investments. At December 31,
2011, the carrying values of our financial instruments approximated fair values based on current market
prices and rates.
Foreign
Currency
Risk
While a majority of our business is denominated in U.S. dollars, we do occasionally invoice in foreign
currencies. For the three years ended December 31, 2011, 2010 and 2009, our revenues denominated in
foreign currencies were $1.1 million, $1.7 million, and $1.6 million, respectively. Fluctuations in the rate of
exchange between the U.S. dollar and certain other currencies may affect our results of operations and
period-to-period comparisons of our operating results. We do not currently engage in hedging or similar
transactions to reduce these risks. The operational expenses of our foreign entities reduce the currency
exposure we have because our foreign currency revenues are offset in part by expenses payable in foreign
currencies. As such, we do not believe we have a material exposure to foreign currency rate fluctuations at
this time.
Item
8.
FINANCIAL
STATEMENTS
AND
SUPPLEMENTARY
DATA
Our consolidated financial statements and schedule appear in a separate section of this Annual Report on Form
10-K beginning on page F-1 and S-1, respectively.
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, 2011. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer have determined that as of December 31, 2011, 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 Securities
and Exchange Commission’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
40
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 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.
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, 2011 that have materially affected, or is 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 Securities Exchange Act of 1934).
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, 2011. Management based
this assessment on criteria for effective internal control over financial reporting described in “Internal
Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Based on this assessment, management determined that, as of December 31, 2011, we maintained effective
internal control over financial reporting.
SingerLewak LLP, an independent registered public accounting firm, who audited the consolidated
financial statements included in this Annual Report on Form 10-K, has also audited the effectiveness of our
internal control over financial reporting as stated in its report appearing elsewhere in this Annual Report on
Form 10-K.
Item
9B.
OTHER
INFORMATION
None.
41
PART
III
Item
10.
DIRECTORS,
EXECUTIVE
OFFICERS
AND
CORPORATE
GOVERNANCE
The following table sets forth certain information regarding our executive officers and certain key officers as of
February 17, 2012:
Name
Age
Position
William W. Smith, Jr.
Andrew C. Schmidt
Von Cameron
Rick Carpenter
Chris G. Lippincott
David P. Sperling
Steven M. Yasbek
64
50
48
49
40
43
58
Chairman of the Board, President and Chief Executive Officer
Vice President and Chief Financial Officer
Executive Vice President – Worldwide Sales
Vice President and General Manager - Wireless
Vice President – Worldwide Operations
Vice President and Chief Technology Officer
Chief Accounting Officer
Mr. Smith co-founded Smith Micro and has served as the Chairman of the Board, President and Chief Executive
Officer since inception in 1982. Mr. Smith was employed by Rockwell International Corporation in a variety of
technical and management positions from 1975 to 1984. Mr. Smith served with Xerox Data Systems from 1972
to 1975 and RCA Computer Systems Division from 1969 to 1972 in mainframe sales and pre-sale technical
roles. Mr. Smith received a B.A. in Business Administration from Grove City College.
Mr. Schmidt joined the Company in June 2005 and serves as the Company’s Chief Financial Officer. Prior to
joining Smith Micro, Mr. Schmidt was the Chief Financial Officer of Genius Products, Inc., a publicly traded
entertainment company from August 2004 to June 2005. From April 2003 to June 2004, he was Vice President
(Finance) and acting Chief Accounting Officer of Peregrine Systems, Inc., a publicly held provider of enterprise
level software then in Chapter 11 reorganization. From July 2000 to January 2003, he was Executive Vice
President and Chief Financial Officer of Mad Catz Interactive, Inc., a publicly traded provider of console video
game accessories. He holds a B.B.A. in Finance from the University of Texas and an M.S. in Accountancy from
San Diego State University.
Mr. Cameron joined the Company in April of 2008 as the Executive Vice President of Worldwide Sales. Mr.
Cameron has held executive management positions with Openwave, Oracle, FoxT and Booz Allen & Hamilton.
Mr. Cameron served proudly in the United States Air Force and earned his B.S. in Math–Operations Research
from the United States Air Force Academy in Colorado, Springs, CO and an M.B.A. from Golden Gate
University in San Francisco, California.
Mr. Carpenter joined the Company in May of 2009 as the Vice President of Engineering for the Company’s
Connectivity & Security Business Unit and currently serves as the Vice President and General Manager of the
Wireless Business Unit. Prior to joining Smith Micro, Mr. Carpenter served as a Vice President of Engineering
at NextWave Wireless where he was responsible for WiMAX chipset development. From 2000 to 2005, he was
Director of Software Engineering for CDMA products at AirPrime, which was ultimately acquired by Sierra
Wireless. Mr. Carpenter has also held engineering management positions at Motorola and DENSO Wireless and
started his professional career in May of 1986. He holds a BS in Computer Science from the University of
Texas, Permian Basin and studied Masters-level Computer Science & Engineering at the University of Texas
Arlington.
Mr. Lippincott joined the Company in February of 1993. From 1993 to 2000, Mr. Lippincott held various sales
positions within the company including Director of OEM Sales, Director of Retail Sales and Vice President of
42
Enterprise Sales. In 2000, Mr. Lippincott began serving as General Manager of the company’s Internet
Solutions Division, until 2004 when he accepted the role of Vice President, Worldwide Operations. Mr.
Lippincott attended the University of California, Berkeley studying Business Administration.
Mr. Sperling joined the Company in April 1989 and has been the Director of Software Engineering since April
1992. He assumed the Chief Technology Officer position in September 1999. Mr. Sperling began his
professional career as a software engineer with us and he currently has two patents and three patents pending for
various telephony and Internet technologies. Mr. Sperling holds a B.S. degree in Computer Science and an
MBA from the University of California, Irvine.
Mr. Yasbek joined the Company in May of 2008 as the Chief Accounting Officer. Mr. Yasbek has held
executive finance and information technology positions with REMEC, Paradigm Wireless Systems, Intellisys
Group, Pacific Scientific Company, Symbol Technologies, TRW, and most recently as Chief Financial Officer
of Alphatec Spine. He holds a B.S. in Accounting and M.B.A from Loyola Marymount University, and is a
Certified Public Accountant.
Officers are elected by, and serve at the discretion of, the Board of Directors.
For information about our Directors, please see the section titled “Directors and Executive Officers” appearing
in our Proxy Statement for our 2012 Annual Meeting of Stockholders, which is hereby incorporated by
reference.
The section titled “Corporate Governance” appearing in our Proxy Statement for our 2012 Annual Meeting of
Stockholders is hereby incorporated by reference.
Audit
Committee;
Audit
Committee
Financial
Expert
Our Board of Directors has a standing Audit Committee. The members of the Audit Committee are Messrs.
Arno, Gulko and Szabo. Our Board has determined that Mr. Gulko, Chairman of the Audit Committee, is
an audit committee financial expert as defined by Item 401(h) of Regulation S-K and that each member of
the Audit Committee is independent within the meaning of Nasdaq Marketplace Rule 4200(a)(15).
Section
16(a)
Beneficial
Ownership
Reporting
Compliance
Section 16(a) of the Exchange Act requires certain of the company’s executive officers, as well as its
directors and persons who own more than ten percent (10%) of a registered class of the Company’s equity
securities to file reports of ownership and changes in ownership with the Securities and Exchange
Commission.
Based solely on its review of the copies of such forms received by the Company, or written representations
from certain reporting persons, the Company believes that all filing requirements applicable to our
executive officers, directors and more than 10% stockholders were met in a timely manner in 2011.
Code
of
Ethics
We have adopted a Code of Ethics that applies to all of our employees, including our principal executive
officer, our principal financial officer, and all members of our finance department performing similar
functions. Our Code of Ethics was filed as Exhibit 14 to the Annual Report on Form 10-K for the year
ended December 31, 2003 which was filed on March 25, 2004. In the event of an amendment to, or a
waiver from, certain provisions of our Code of Ethics, we intend, to the extent possible, to satisfy Form 8-K
disclosure requirements by disclosing this information on our website at www.smithmicro.com.
43
Item
11.
EXECUTIVE
COMPENSATION
The section titled “Executive Compensation and Related Information” appearing in our Proxy Statement for our
2012 Annual Meeting of Stockholders is hereby incorporated by reference.
Item
12.
SECURITY
OWNERSHIP
OF
CERTAIN
BENEFICIAL
OWNERS
AND
MANAGEMENT
AND
RELATED
STOCKHOLDER
MATTERS
The section titled “Ownership of Securities and Related Stockholder Matters” appearing in our Proxy Statement
for our 2012 Annual Meeting of Stockholders is hereby incorporated by reference.
Securities
Authorized
for
Issuance
Under
An
Equity
Compensation
Plan
The following table provides information as of December 31, 2011 with respect to the shares of common
stock that may be issued under our existing equity compensation plans:
(in thousands, except per share amounts)
Equity compensation plan approved by shareholders (1)
Equity compensation plan not approved by shareholders
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
2,167
-
2,167
$11.03
-
$11.03
2,208
-
2,208
(1) The number of shares to be issued upon exercise includes options granted under both the 1995 Stock Option/Stock
Issuance Plan and the 2005 Stock Option/Stock Issuance Plan. The number of shares remaining available for future
issuance consists only of the 2005 Plan.
Item
13.
CERTAIN
RELATIONSHIPS
AND
RELATED
TRANSACTIONS,
AND
DIRECTOR
INDEPENDENCE
The section titled “Related Party Transactions” and “Director Independence” appearing in our Proxy Statement
for our 2012 Annual Meeting of Stockholders is incorporated herein by reference.
Item
14.
PRINCIPAL
ACCOUNTING
FEES
AND
SERVICES
The section titled “Ratification of Appointment of Independent Registered Public Accounting Firm – Principal
Accountant Fees and Services” appearing in our Proxy Statement for our 2012 Annual Meeting of Stockholders
is incorporated herein by reference.
44
PART
IV
Item
15.
EXHIBITS
AND
FINANCIAL
STATEMENT
SCHEDULES
(a)
(1)
Financial
Statements
Smith Micro’s financial statements appear in a separate section of this Annual Report on Form 10-K
beginning on the pages referenced below:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ........................................................ F-1
CONSOLIDATED BALANCE SHEETS ...................................................................................................................... F-3
CONSOLIDATED STATEMENTS OF OPERATIONS ............................................................................................... F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ....................................................................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS ............................................................................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .................................................................................... F-7
Page
(2)
Financial
Statement
Schedule
Smith Micro’s financial statement schedule appears in a separate section of this Annual Report on Form
10-K on the pages referenced below. All other schedules have been omitted as they are not applicable, not
required or the information is included in the consolidated financial statements or the notes thereto.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ........................................................................... S-1
Page
(3)
Exhibits
Exhibit No.
3.1
3.1.1
3.1.2
3.2
Title
Amended and Restated Certificate of
Incorporation of the Registrant.
to
Amendment
the Amended and
Restated Certificate of Incorporation of
the Registrant.
Restated
Certificate
Certificate of Amendment to Amended
of
and
Incorporation of Registrant as filed
August 18, 2005 with Delaware
Secretary of State.
Amended and Restated Bylaws of the
Registrant.
Method of Filing
Incorporated by reference to Exhibit 3.1
to the Registrant's Registration Statement
No. 33-95096.
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.
Incorporated by reference to Exhibit 3.1.2
to the Registrant’s Annual Report on
Form 10-K
the period ended
December 31, 2005.
for
Incorporated by reference to Exhibit 3.2
to the Registrant's Registration Statement
No. 33-95096.
45
Exhibit No.
3.3
4.1
10.1
10.2
10.3
10.4 †
10.4.1†
10.4.2†
10.4.3†
10.4.4†
10.4.5†
10.5
10.6
10.7
Title
Certificate of Amendment of Amended
and Restated Bylaws of Smith Micro
Software, Inc.
Specimen certificate representing shares
of Common Stock of the Registrant.
Form of Indemnification Agreement.
1995 Stock Option/Stock Issuance Plan
as Amended and Restated
through
February 7, 2001.
Amended and Restated 2005 Stock
Option / Stock Issuance Plan.
License
Software
Master
and
Distribution Agreement (Contract No.
220-00-0134) effective as of December
1, 2000, between Cellco Partnership
the
(d/b/a Verizon Wireless) and
Registrant.
Amendment of Master Software License
and Distribution Agreement (Contract
No. 220-00-0134).
Amendment No. 2
the Master
Software License and Distribution
Agreement (Contract No. 220-00-0134).
to
Amendment No. 6
the Master
Software License and Distribution
Agreement (Contract No. 220-00-0134).
to
Amendment No. 7
the Master
Software License and Distribution
Agreement (Contract No. 220-00-0134).
to
Amendment No. 9
the Master
Software License and Distribution
Agreement (Contract No. 220-00-0134).
to
Letter Agreement, dated June 13, 2005,
by and between Smith Micro Software,
Inc. and Andrew Schmidt.
Summary of oral agreement dated June
2005 by and between William W.
Smith, Jr. and the Registrant.
Amended & Restated Employee Stock
Purchase Plan.
46
Method of Filing
Incorporated by reference to Exhibit 3.3
to the Registrant’s Current Report on
Form 8-K filed on October 31, 2007.
Incorporated by reference to Exhibit 4.1
to the Registrant's Registration Statement
No. 33-95096.
Incorporated by reference to Exhibit 10.1
to the Registrant's Registration Statement
No. 33-95096.
the
to
Incorporated
Appendix attached
the Definitive
Proxy Statement for the 2001 Annual
Meeting of Stockholders filed on April
27, 2001.
Incorporated by reference to Exhibit 10.7
to the Registrant’s Registration Statement
on Form S-8 (Reg. No. 333-149222).
Incorporated by reference to Exhibit 10.1
to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended June 30,
2003.
reference
to
by
to
to
to Exhibit
Incorporated by reference
10.1.1
the Registrant’s Quarterly
Report on Form 10-Q for the quarter
ended June 30, 2003.
to Exhibit
Incorporated by reference
10.1.2
the Registrant’s Quarterly
Report on Form 10-Q for the quarter
ended June 30, 2003.
Incorporated by reference
to Exhibit
10.4.3 to the Registrant’s Annual Report
on Form 10-K for
the year ended
December 31, 2009.
Incorporated by reference
to Exhibit
10.4.4 to the Registrant’s Annual Report
on Form 10-K for
the year ended
December 31, 2009.
Incorporated by reference
to Exhibit
10.4.5 to the Registrant’s Annual Report
on Form 10-K for
the year ended
December 31, 2009.
Incorporated by reference to Exhibit 10.5
to the Registrant’s Current Report on
Form 8-K filed on November 30, 2006.
to Exhibit
Incorporated by reference
10.10
the Registrant’s Quarterly
Report on Form 10-Q for the quarter
ended June 30, 2009.
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.
to
Exhibit No.
14.1
Title
Code of Ethics.
14.1.1
Attachment 1 to Code of Ethics.
21.1
23.1
31.1
31.2
32.1
Independent Registered
Subsidiaries.
Consent of
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.
Certifications of the Chief Executive
Officer and the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Method of Filing
Incorporated by reference to Exhibit 14.1
to the Registrant’s Annual Report on
Form 10-K for the year ended December
31, 2003.
Incorporated by reference
to Exhibit
14.1.1 to the Registrant’s Annual Report
on Form 10-K for
the year ended
December 31, 2003.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Furnished herewith.
*** 101.INS XBRL Instance Document
*** 101.SCH XBRL Taxonomy Extension Schema Document
*** 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
*** 101.DEF XBRL Taxonomy Extension Definition Linkbase Document
*** 101.LAB XBRL Taxonomy Extension Label Linkbase Document
*** 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
___________________
†
Confidential treatment has been granted with respect to certain confidential portions of this exhibit
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, which confidential portions have
been omitted from the exhibit and filed separately with the Securities and Exchange Commission.
*** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a
registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is
deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not
subject to liability under these sections.
(b) Exhibits
The exhibits filed as part of this report are listed above in Item 15(a) (3) of this Form 10-K.
(c) Financial Statement Schedule
The Financial Statement Schedule required by Regulation S-X and Item 8 of this Form are listed above in
Item 15(a)(2) of this Form 10-K.
47
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: February 27, 2012
Date: February 27, 2012
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/ Andrew C. Schmidt
Andrew C. Schmidt,
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
/s/ William W. Smith, Jr.
William W. Smith, Jr.
/s/ Andrew C. Schmidt
Andrew C. Schmidt
/s/ Andrew Arno
Andrew Arno
/s/ Thomas G. Campbell
Thomas G. Campbell
/s/ Samuel Gulko
Samuel Gulko
/s/ Gregory J. Szabo
Gregory J. Szabo
Title
Chairman of the Board,
President and Chief Executive Officer (Principal
Executive Officer)
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Date
February 27, 2012
February 27, 2012
February 27, 2012
February 27, 2012
February 27, 2012
February 27, 2012
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Smith Micro Software, Inc.
We have audited the accompanying consolidated balance sheets of Smith Micro Software, Inc. and subsidiaries
(collectively, the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of
operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31,
2011. Our audits also included the financial statement schedule of the Company listed in Item 15(a)(2). These
financial statements and financial statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2011 and 2010, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2011, in conformity with U. S.
generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2011, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated February 27, 2012 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ SINGERLEWAK LLP
Los Angeles, California
February 27, 2012
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Smith Micro Software, Inc.
We have audited Smith Micro Software Inc. and subsidiaries’ (collectively, the “Company”) internal control
over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 included in the accompanying
“Report of Management on 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). 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.
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 (a) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b)
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 (c) 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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets as of December 31, 2011 and 2010, and the related consolidated
statements of operations, stockholders’ equity, and cash flows, and the financial statement schedule, for each of
the three years in the period ended December 31, 2011 of the Company, and our report dated February 27, 2012
expressed an unqualified opinion.
/s/ SINGERLEWAK LLP
Los Angeles, California
February 27, 2012
F-2
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value data)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances for doubtful accounts
and other adjustments of $1,382 (2011) and $855 (2010)
Income tax receivable
Inventories, net of reserves for excess and obsolete inventory
of $417 (2011) and $558 (2010)
Prepaid expenses and other current assets
Deferred tax asset
Total current assets
Equipment and improvements, net
Goodwill
Intangible assets, net
Other assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Total current liabilities
Non-current liabilities:
Deferred rent and other long term liabilities
Deferred tax liability
Total non-current liabilities
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock, par value $0.001 per share; 5,000,000 shares
authorized; none issued or outstanding
Common stock, par value $0.001 per share; 50,000,000 shares authorized;
35,611,976 and 34,971,108 shares issued and outstanding at December 31,
2011 and December 31, 2010, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated earnings (deficit)
Total stockholders’ equity
Total liabilities and stockholders' equity
December 31,
2011
2010
$
7,475
38,497
$
17,856
54,694
8,525
8,293
309
1,138
8
64,245
15,482
-
-
214
79,941
$
$
3,181
7,641
703
11,525
3,546
10
3,556
29,812
2,872
370
1,167
2,565
109,336
11,623
94,231
19,459
243
234,892
$
$
4,592
8,444
1,667
14,703
197
1,727
1,924
-
-
36
207,927
(35)
(143,068)
64,860
79,941
$
35
201,702
(10)
16,538
218,265
234,892
$
See accompanying notes to the consolidated financial statements.
F-3
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amount)
Revenues
Cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring expenses
Goodwill and long-lived asset impairment
Total operating expenses
Operating income (loss)
Interest and other income
Income (loss) before taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Year ended December 31,
2010
2011
2009
$
57,767
13,761
44,006
26,594
41,711
25,279
3,184
112,904
209,672
(165,666)
131
(165,535)
(5,929)
(159,606)
$
$
130,501
15,507
114,994
$
107,279
15,486
91,793
29,708
42,759
24,146
-
-
96,613
18,381
130
18,511
6,165
12,346
$
24,999
36,530
19,155
-
-
80,684
11,109
381
11,490
6,738
4,752
$
$
$
(4.48)
(4.48)
$
$
0.36
0.36
$
$
0.15
0.14
35,617
35,617
34,204
34,615
32,438
32,897
See accompanying notes to the consolidated financial statements.
F-4
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
BALANCE, December 31, 2008
Issuance of common stock for acquisition
Exercise of common stock options
Non cash compensation recognized
on stock options
Restricted stock grants, net of cancellations
Cancellation of shares for payment
of withholding tax
Tax benefit related to the exercise of
stock options
Tax benefit deficiencies related to
restricted stock expense
Other comprehensive income:
Unrealized loss on short-term investments
Net income
Total comprehensive income
BALANCE, December 31, 2009
Exercise of common stock options
Non cash compensation recognized
on stock options and ESPP
Restricted stock grants, net of cancellations
Cancellation of shares for payment
of withholding tax
Tax benefit related to the exercise of
stock options
Tax benefit deficiencies related to
restricted stock expense
Other comprehensive income:
Unrealized loss on short-term investments
Net income
Total comprehensive income
BALANCE, December 31, 2010
Exercise of common stock options
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
Tax benefit deficiencies related to
restricted stock expense
Other comprehensive loss:
Unrealized loss on short-term investments
Net loss
Total comprehensive loss
BALANCE, December 31, 2011
Accumulated
other
comprehensive
income (loss)
Accumulated
income
(deficit)
Total
$
69
$
(560)
$
165,404
Common stock
Shares
31,400
Amount
$
31
700
414
1
-
-
888
-
1
Additional
paid-in
capital
$
165,864
6,880
1,664
5,266
3,457
-
-
-
-
(22)
-
(180)
-
-
-
-
-
871
(66)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(71)
-
-
4,752
33,380
$
33
$
183,756
$
(2)
$
4,192
$
760
1
-
868
-
1
7,254
4,559
4,936
-
-
-
(37)
-
(331)
-
-
-
1,543
-
-
-
(15)
-
-
-
-
-
-
-
-
-
-
-
-
-
(8)
-
-
12,346
34,971
$
35
$
201,702
$
(10)
$
16,538
$
7
-
12
-
-
575
-
1
(37)
96
-
-
-
-
973
5,556
(303)
413
(426)
-
-
-
-
-
-
-
-
-
-
-
6,881
1,664
5,266
3,458
(180)
871
(66)
(71)
4,752
4,681
187,979
7,255
4,559
4,937
(331)
1,543
(15)
(8)
12,346
12,338
218,265
12
973
5,557
(303)
413
(426)
-
-
-
-
-
-
(25)
-
-
(159,606)
35,612
$
36
$
207,927
$
(35)
$
(143,068)
(25)
(159,606)
(159,631)
64,860
$
See accompanying notes to the consolidated financial statements.
F-5
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2010
2009
2011
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities, net of the effect of acquisitions:
Depreciation and amortization
Goodwill and long-lived asset impairment
Loss (gain) on disposal of fixed assets
Lease incentives
Provision for adjustments to accounts receivable and doubtful accounts
Provision for excess and obsolete inventory
Tax benefits from stock-based compensation
Non cash compensation related to stock options and restricted stock
Change in operating accounts, net of effect from acquisitions:
Accounts receivable
Income tax receivable
Deferred income taxes
Inventories
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Net cash provided by (used in) operating activities
Investing activities:
Acquisition of Avot M edia, net of cash received
Acquisition of Core M obility, Inc., net of cash received
Capital expenditures
Cash proceeds from the disposal of fixed assets
Sale (purchase) of short-term investments
Net cash provided by (used in) investing activities
Financing activities:
Tax benefits from stock-based compensation
Cash received from stock sale for employee stock purchase plan
Cash received from exercise of stock options
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
$
(159,606)
$
12,346
$
4,752
10,177
112,904
181
2,223
1,244
158
-
6,530
20,043
(5,421)
414
(97)
58
(2,355)
(13,547)
-
-
(13,431)
-
16,172
2,741
-
413
12
425
(10,381)
17,856
11,778
-
29
-
851
203
(1,543)
9,496
(6,516)
(1,892)
849
(167)
259
(949)
24,744
(675)
143
(6,312)
-
(23,418)
(30,262)
1,543
-
7,254
8,797
3,279
14,577
10,540
-
(11)
-
1,596
1,063
(871)
8,724
(5,998)
(980)
914
(372)
(507)
(384)
18,466
-
(6,907)
(4,809)
31
(8,706)
(20,391)
871
-
1,665
2,536
611
13,966
Cash and cash equivalents, end of period
$
7,475
$
17,856
$
14,577
Supplemental disclosures of cash flow information:
Cash paid for income taxes
$
700
$
5,776
$
6,612
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 Software, Inc. provides software and services that simplify, secure and enhance the
mobile experience. The Company’s portfolio of wireless software products includes a wide range of
client and server applications that manage voice and data communications and connectivity across
3G, 4G and Wi-Fi networks. We sell these products and services to many of the world’s leading
mobile network operators, original equipment manufacturers (“OEM”), device manufacturers and
enterprise businesses. The proliferation of mobile broadband technology is providing new
opportunities for our products and services on a global basis. When broadband network
technologies, such as EVDO, UMTS/HSPA, Wi-Fi, LTE and WiMAX, are combined with new
mobile devices such as Smartphones, Tablet computers, Netbooks and emerging Machine-to-
Machine (“M2M”) devices, many new challenges emerge in the areas of connectivity, reliability,
security, performance, cost of ownership, and ease-of-use. Our core technologies are designed to
address these emerging mobile challenges, helping our customers to save money while capitalizing
on new revenue opportunities.
Our products operate on a wide range of device platforms, including Windows, Mac, UNIX, Linux,
iOS, Android, Windows Mobile, Symbian and Java platforms. Our patented compression
technologies are utilized within various Smith Micro enterprise and consumer products, providing
efficient data delivery and storage across a number of platforms. In addition to our wireless and
mobility software, our innovative line of productivity and graphics products is distributed through a
variety of consumer channels worldwide, our online stores, and third-party wholesalers, retailers and
value-added resellers.
The underlying philosophy common to all of our products is our desire to improve the user
experience and optimize resources for our customers. These objectives are delivered through the
combination of quality engineering, standards-based innovation, and unmatched software integration
expertise. We have over 30 years of experience in the design, engineering, and commercial
deployment of mobile software products around the world.
Basis
of
Presentation
The accompanying consolidated financial statements reflect the operating results and financial
position of Smith Micro Software, Inc. and its wholly owned subsidiaries in accordance with
accounting principles generally accepted in the United States of America. All intercompany amounts
have been eliminated in consolidation.
Foreign
Currency
Transactions
The Company has international operations resulting from acquisitions over the past several years.
The countries in which the Company has a subsidiary or branch office in are Sweden, Hong Kong,
Serbia, the United Kingdom, and Canada. 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
F-7
(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.
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.
The carrying value of accounts receivable, foreign cash accounts, prepaid expenses, other current
assets, accounts payable, and accrued liabilities are considered to be representative of their
respective fair values because of the short-term nature of those instruments.
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As such, fair value is a
market-based measurement that is determined based on assumptions that market participants would
use in pricing an asset or a liability. As a basis for considering such assumptions, the FASB
establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:
• Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
• Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
• Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
As required by FASB ASC Topic No. 820, we measure our cash 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 permitted, the
Company has elected not to use the fair value option to measure our available-for-sale securities
under this Topic and will continue to report as required by FASB ASC Topic No. 320, Investments-
Debt and Equity Securities. We have made this election because the nature of our financial assets
and liabilities are not of such complexity that they would benefit from a change in valuation to fair
value.
Significant
Concentrations
For the year ended December 31, 2011, three customers, each accounting for over 10% of revenues,
made up 54.9% of revenues and 63% of accounts receivable, and four suppliers, each with more than
10% of inventory purchases, totaled 4% of accounts payable. For the year ended December 31,
2010, three customers, each accounting for over 10% of revenues, made up 66.3% of revenues and
F-8
78% of accounts receivable, and five suppliers, each with more than 10% of inventory purchases,
totaled 5% of accounts payable. For the year ended December 31, 2009, four customers, each
accounting for over 10% of revenues, made up 65.7% of revenues and 75% of accounts receivable,
and four suppliers, each with more than 10% of inventory purchases, totaled 3% 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 two financial institutions and are
uninsured except for the minimum Federal Deposit Insurance Corporation (“FDIC”) coverage, and
have original maturity dates of three months or less. As of December 31, 2011 and 2010, bank
balances totaling approximately $3.3 million and $17.6 million, respectively, were uninsured.
Short-‐Term
Investments
Short-term investments consist of corporate notes, bonds, and commercial paper and U.S.
government agency and government sponsored enterprise obligations. The Company accounts for
these short-term investments as required by FASB ASC Topic No. 320, Investments-Debt and
Equity Securities. These debt and equity securities are not classified as either held-to-maturity
securities or trading securities. As such, they are classified as available-for-sale securities.
Available-for-sale securities are recorded at fair value, with unrealized gains or losses recorded as a
separate component of accumulated other comprehensive income in stockholders’ equity until
realized.
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.
Inventories
Inventories consist principally of compact disks (“CDs”), boxes and manuals and are stated at the
lower of cost (determined by the first-in, first-out method) or market. The Company regularly
reviews its inventory quantities on hand and records a provision for excess and obsolete inventory
based primarily on management’s forecast of product demand and production requirements. At
December 31, 2011, our net inventory balance of $0.3 million consisted of $0.2 million of assembled
products and $0.1 million of components. At December 31, 2010, our net inventory balance of $0.4
million consisted of $0.2 million of assembled products and $0.2 million of components.
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.
F-9
The Company recorded an impairment charge against certain improvements in the amount of $5.3
million for the year ended December 31, 2011. Please see “Impairment or Disposal of Long-Lived
Assets,” below.
In-‐Process
Research
and
Development
In 2009, we capitalized $1.0 million of IPR&D costs related to our acquisition of Core Mobility in
accordance with accounting standards that became effective in 2009. This IPR&D project was
completed during the fourth quarter of 2010. Amortization commenced in 2011.
The fair value of the IPR&D was determined using the discounted cash flow approach. The expected
future cash flows were estimated and discounted to their net present values at an appropriate risk-
adjusted rate of return. Significant factors considered in the calculation of the rate of return were the
weighted average cost of capital and return on assets, as well as the risks inherent in the
development process, including the likelihood of achieving technological success and market
acceptance. Future cash flows were estimated based on forecasted revenue and costs, taking into
account the expected product life cycle, market penetration and growth rates.
As a result of our goodwill and long-lived asset impairment analysis, we have fully impaired this
asset during fiscal year 2011. As such, there will be no future amortization expense recorded for this
impaired asset.
Intangible
Assets
and
Amortization
Amortization expense related to other intangibles acquired in previous acquisitions was calculated
on a straight line basis over various useful lives.
As a result of our goodwill and long-lived asset impairment analysis, we have fully impaired these
assets during fiscal year 2011. As such, there will be no future amortization expense recorded for
these impaired assets.
Impairment
of
Goodwill
and
Intangible
Assets
The Company accounts for goodwill and other intangible assets in accordance with FASB ASC
Topic No. 350, Intangibles-Goodwill and Other, which requires that goodwill and other identifiable
intangible assets with indefinite useful lives be tested for impairment at least annually. The
Company tests goodwill and intangible assets for impairment in December of each year, or more
frequently if events and circumstances warrant. These assets are impaired if the Company
determines that their carrying values may not be recoverable based on an assessment of certain
events or changes in circumstances:
•
•
•
•
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 assets are considered to be impaired, the Company recognizes the amount by which the
carrying value of the assets exceeds the fair value of the assets as an impairment loss.
The goodwill impairment test is a two-step process. The first step compares the Company’s fair
value to its net book value. If the fair value is less than the net book value, the second step of the test
compares the implied fair value of the Company’s goodwill to its carrying amount. If the carrying
F-10
amount of goodwill exceeds its implied fair value, the Company would recognize an impairment loss
equal to that excess amount.
The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole
in an orderly transaction between market participants at the measurement date. Quoted market prices
in active markets are the best evidence of fair value and shall be used as the basis for the
measurement, if available. However, the market price of an individual equity security (and thus the
market capitalization of a reporting unit with publicly traded equity securities) may not be
representative of the fair value of the reporting unit as a whole. Substantial value may arise from the
ability to take advantage of synergies and other benefits that flow from control over another entity.
Consequently, measuring the fair value of a collection of assets and liabilities that operate together in
a controlled entity is different from measuring the fair value of that entity’s individual equity
securities. An acquiring entity often is willing to pay more for equity securities that gives it a
controlling interest than an investor would pay for a number of equity securities representing less
than a controlling interest. That control premium may cause the fair value of a reporting unit to
exceed its market capitalization. The quoted market price of an individual equity security, therefore,
need not be the sole measurement basis of the fair value of a reporting unit.
At December 31, 2010, the Company estimated the fair value in Step 1 based on the income
approach which included discounted cash flows as well as a market approach that utilized the
Company’s earnings and revenue multiples. The Company’s discounted cash flows required
management judgment with respect to forecasted revenues, launch of new products, operating
expenses, working capital and the selection and use of an appropriate discount rate. The Company’s
assessment resulted in a fair value that was marginally greater than the Company’s carrying values
for the Productivity & Graphics operating unit and was significantly greater than the Company’s
carrying values for the Wireless operating unit at December 31, 2010. In accordance with the
authoritative literature, the second step of the impairment test was not required to be performed and
no impairment of goodwill was recorded as of December 31, 2010.
At June 30, 2011, the Company concluded that a decline in its stock price and market capitalization
was not representative of the fair value of the reporting unit as a whole. The goodwill impairment
test should be based on an “other-than-temporary” decline. The Company believed that it was “more
likely than not” that the fair value of the Company’s two reporting units had not declined below the
reporting unit’s carrying amount because there had been temporary declines in (1) the stock price,
(2) revenues due to a technology shift in our marketplace resulting in our core connection
management products experiencing lower demand in certain markets and (3) earnings as we continued
to invest heavily in R&D to bring new products to market. There are several new products that we
expected to launch during the second half of 2011 that would address the technology shift in the
marketplace. As such, the Company expected these new products, should they be successful, to result
in improved revenues and profitability during the second half of 2011.
At June 30, 2011, the Company stated that if its revenues, profitability, and stock price did not
improve in the third and/or fourth quarter of 2011, we would “more likely than not” have to perform
Step 1 of the impairment test. The triggering events we monitored were revenues, new product
launches, profitability, and stock price.
During the period ended September 30, 2011, the Company concluded that a sustained decline in its
stock price and market capitalization was representative of the fair value of the reporting unit as a
whole. The triggering events that led us to this conclusion were:
• Revenues - declined for the third consecutive quarter.
• New product launches – although we were in trials for several of our new products, as of
September 30, 2011 we had not realized any revenues from these new products.
• Profitability – declined for the third consecutive quarter.
• Stock price – had remained at depressed prices.
F-11
As such, the Company performed Step 1 of the impairment test. For both reporting units, fair value
was determined by an average of a market approach and a discounted cash flow method. For the
Wireless unit, the concluded fair value as of September 30, 2011 was approximately $78.7 million
and the carrying value was $172.6 million which failed Step 1 and triggered Step 2. For the
Productivity & Graphics unit, the concluded fair value as of September 30, 2011 was approximately
$5.7 million and the carrying value was $16.8 million which failed Step 1 and triggered Step 2. For
Step 2, the implied fair value of goodwill was measured (as the excess of the fair value of a reporting
unit over the amounts assigned to its assets and liabilities, including any unrecognized intangible
assets), and compared to the carrying value of goodwill. The inputs measured at fair value used in
this valuation methodology were considered Level 3 in the three-tier value hierarchy per FASB ASC
Topic No. 820, Fair Value Measurements and Disclosures. The excess (if any) of the carrying value
of goodwill was compared to the implied fair value of goodwill and resulted in an impairment loss of
$94.2 million in the fiscal quarter ended September 30, 2011.
The following table sets forth the change in the carrying amount of goodwill balances as of
December 31, 2011 and 2010 (in thousands):
Balance as of December 31, 2010
Impairment losses
Balance as of December 31, 2011
$
Wireless
84,616
(84,616)
$ -
Productivity &
Graphics
9,615
$
(9,615)
$ -
Total
$
94,231
(94,231)
$ -
Impairment
or
Disposal
of
Long
Lived
Assets
The Company assesses potential impairment to its long-lived assets as required by FASB ASC Topic
No. 360, Property, Plant, and Equipment, when there is evidence that events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment
loss is recognized when the carrying amount of the long-lived assets is not recoverable if it exceeds
the sum of the undiscounted cash flows expected to result from the use and eventual disposition of
the asset. Any required impairment loss is measured as the amount by which the carrying amount of
a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the
related asset and a charge to operating results.
As a result of the triggering events described above in our goodwill impairment analysis, the
Company reviewed its long-lived assets for recoverability. As a result of this analysis, the Company
recognized a long-lived asset impairment charge of $18.7 million in the fiscal quarter ended
September 30, 2011 which was allocated to the intangible assets of $13.4 million and $5.3 million to
equipment and improvements, primarily related to our leasehold improvements. The inputs
measured at fair value used in this valuation methodology were considered Level 3 in the three-tier
value hierarchy per FASB ASC Topic No. 820, Fair Value Measurements and Disclosures.
The following table sets forth the change in the carrying amount of intangible asset balances as of
December 31, 2011 and 2010 (in thousands):
F-12
Balance as of December 31, 2010
Accumulated amortization
Impairment losses
Balance as of December 31, 2011
Wireless
$17,136
(5,306)
(11,830)
$ -
Productivity &
Graphics
$2,323
(778)
(1,545)
$ -
Total
$19,459
(6,084)
(13,375)
$ -
Deferred
Rent
and
Other
Long-‐Term
Liabilities
The long-term liabilities are for deferred rent to account for the difference between straight-line and
bargain rents, lease incentives included in deferred rent, the Pennsylvania Opportunity Grant liability
and deferred revenue beyond one year.
Revenue
Recognition
We currently report our net revenues under two operating groups: Wireless and Productivity &
Graphics. Within each of these groups software revenue is recognized based on the customer and
contract type. We recognize revenue when persuasive evidence of an arrangement exists, delivery
has occurred, the price is fixed and determinable, and collectability is probable as required by FASB
ASC Topic No. 985-605, Software-Revenue Recognition. We recognize revenues from sales of our
software to our customers or end users as completed products are shipped and title passes; or from
royalties generated as authorized customers duplicate our software, if the other requirements are met.
If the requirements are not met at the date of shipment, revenue is not recognized until these
elements are known or resolved. For Wireless sales, returns from customers are limited to defective
goods or goods shipped in error. Historically, customer returns have not exceeded the very nominal
estimates and reserves. We also provide some technical support to our customers. Such costs have
historically been insignificant.
We have a few multiple element agreements for which we have contracted to provide a perpetual
license for use of proprietary software, to provide non-recurring engineering, and in some cases to
provide software maintenance (post contract support). As of January 1, 2011, we adopted ASU No.
2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements which
amends revenue recognition guidance for arrangements with multiple deliverables. The new
guidance eliminated the residual method of revenue recognition and allows the use of management’s
best estimate of selling price for individual elements of an arrangement when vendor specific
objective evidence (“VSOE”), vendor objective evidence (“VOE”) or third-party evidence (“TPE”)
is unavailable. For most of our multiple element agreements, VSOE for all contract elements is used
and the timing of the individual element revenue streams is determined and recognized as delivered.
For Productivity & Graphics sales, management reviews available retail channel information and
makes a determination of a return provision for sales made to distributors and retailers based on
current channel inventory levels and historical return patterns. Certain sales to distributors or
retailers are made on a consignment basis. Revenue for consignment sales are not recognized until
sell through to the final customer is established. Certain revenues are booked net of revenue sharing
payments. Sales directly to end-users are recognized upon shipment. End users have a thirty day
right of return, but such returns are reasonably estimable and have historically been immaterial. We
also provide technical support to our customers. Such costs have historically been insignificant.
F-13
Sales
Incentives
For our Productivity & 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. 985-605, Software-Revenue Recognition. We use historical redemption rates to estimate the
cost of customer incentives. Total sales incentives were $1.2 million, $2.0 million and $1.2 million
for the years ended December 31, 2011, 2010 and 2009, respectively.
Capitalized
Software
and
Amortization
We capitalized internally developed software and software purchased from third parties if the related
software product under development had reached technological feasibility or if there were
alternative future uses for the purchased software as required by FASB ASC Topic No. 985-20,
Software-Costs of Software to be Sold, Leased, or Marketed. These costs were amortized on a
product-by-product basis, typically over an estimated life of five to seven years, using the larger of
the amount calculated using the straight-line method or the amount calculated using the ratio
between current period gross revenues and the total of current period gross revenues and estimated
future gross revenues. At each balance sheet date, we evaluated on a product-by-product basis the
unamortized capitalized cost of computer software compared to the net realizable value of that
product. The amount by which the unamortized capitalized costs of a computer software product
exceeded its net realizable value was written off.
As a result of our goodwill and long-lived asset impairment analysis, we have fully impaired these
assets during fiscal year 2011. As such, there will be no future amortization expense recorded for
these impaired assets.
Advertising
Expense
Advertising costs are expensed as incurred. Advertising expenses were $0.7 million, $0.9 million,
and $0.8 million for the years ended December 31, 2011, 2010 and 2009, respectively.
Stock-‐Based
Compensation
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.
Net
Income
(Loss)
Per
Share
The Company calculates earnings per share (“EPS”) as required by FASB ASC Topic No. 260,
Earning 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.
F-14
Year Ended December 31,
2010
(in thousands, except per share amounts)
2011
2009
Numerator:
Net income (loss) available to common stockholders
($159,606)
$12,346
$4,752
Denominator:
Weighted average shares outstanding - basic
35,617
34,204
32,438
Potential common shares - options (treasury stock method)
-
411
459
Weighted average shares outstanding - diluted
35,617
34,615
32,897
Shares excluded (anti-dilutive)
126
-
-
Shares excluded due to an exercise price greater than
weighted average stock price for the period
1,561
1,950
2,496
Net income (loss) per common share:
Basic
Diluted
($4.48)
($4.48)
$0.36
$0.36
$0.15
$0.14
Recent
Accounting
Pronouncements
In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-12,
Comprehensive Income (Topic 220). The amendments in this Update supersede certain pending
paragraphs
in ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income, to effectively defer only those changes in Update 2011-05 that relate to the
presentation of reclassification adjustments out of accumulated other comprehensive income. The
amendments will be temporary to allow the Board time to redeliberate the presentation requirements
for reclassifications out of accumulated other comprehensive income for annual and interim financial
statements for public, private, and non-profit entities.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic
350): Testing Goodwill for Impairment. Under the amendments in this Update, an entity has the
option to first assess qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an
entity determines it is not more likely than not that the fair value of a reporting unit is less than its
carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity
concludes otherwise, then it is required to perform the first step of the two-step impairment test by
calculating the fair value of the reporting unit and comparing the fair value with the carrying amount
of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity
is required to perform the second step of the goodwill impairment test to measure the amount of the
impairment loss, if any. Under the amendments in this Update, an entity has the option to bypass the
qualitative assessment for any reporting unit in any period and proceed directly to performing the
first step of the two-step goodwill impairment test. An entity may resume performing the qualitative
assessment in any subsequent period. The Company has adopted ASU No. 2011-8 and its adoption
did not have an impact on its consolidated results of operations and financial condition as the
Company elected the option to bypass the qualitative assessment and proceed directly to performing
step one of the goodwill impairment test for the period ended September 30, 2011. The Company
recorded a goodwill impairment charge of $94.2 million for the period ended September 30, 2011.
F-15
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220):
Presentation of Comprehensive Income. Under the amendments to this Update, an entity has the
option to present the total of comprehensive income, the components of net income, and the
components of other comprehensive
in a single continuous statement of
income either
comprehensive income or in two separate but consecutive statements. In both choices, an entity is
required to present each component of net income along with total net income, each component of
other comprehensive income along with a total for other comprehensive income, and a total amount
for comprehensive income. This Update eliminates the option to present the components of other
comprehensive income as part of the statement of changes in stockholders' equity. The amendments
in this Update do not change the items that must be reported in other comprehensive income or when
an item of other comprehensive income must be reclassified to net income. For the Company, this
guidance is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2011. Early adoption is permitted. The Company is currently assessing its
implementation of this new guidance, but it will not have a material impact on the consolidated
financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements and Disclosures
(Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair
value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the
amendments change the wording used to describe many of the requirements in U.S. GAAP for
measuring fair value and for disclosing information about fair value measurements. For many of the
requirements, the Board does not intend for the amendments in this Update to result in a change in
the application of the requirements in Topic 820. Some of the amendments clarify the Board’s intent
about the application of existing fair value measurement requirements. Other amendments change a
particular principle or requirement for measuring fair value or for disclosing information about fair
value measurements. For the Company, this guidance is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2011. Early adoption is not permitted. The
Company is currently assessing its implementation of this new guidance, but does not expect a
material impact on the consolidated financial statements.
In December 2010, the FASB issued ASU No. 2010-28, Intangibles-Goodwill and Other (Topic
350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force). The
amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero
or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the
goodwill impairment test if it is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that a goodwill impairment exists, an entity should
consider whether there are any adverse qualitative factors indicating that an impairment may exist.
The qualitative factors are consistent with the existing guidance which requires that goodwill of a
reporting unit be tested for impairment between annual tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying
amount. For the Company, this guidance is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2010. Early adoption is not permitted. The Company has
adopted ASU No. 2010-28 and its adoption has not had an impact on its consolidated results of
operations and financial condition.
In October 2009, the FASB issued ASU No. 2009-14, Software (Topic 985): Certain Revenue
Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task
Force). This new guidance amends the scope of existing software revenue recognition accounting.
Tangible products containing software components and non-software components that function
together to deliver the product’s essential functionality would be scoped out of the accounting
guidance on software and accounted for based on other appropriate revenue recognition guidance.
For the Company, this guidance is effective for all new or materially modified arrangements entered
into on or after January 1, 2011 with earlier application permitted as of the beginning of a fiscal year.
F-16
Full retrospective application of the new guidance is optional. This guidance must be adopted in the
same period that the company adopts the amended accounting for arrangements with multiple
deliverables described in the next paragraph. The Company has adopted ASU No. 2009-14 and its
adoption has not had an impact on its consolidated results of operations and financial condition.
In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-
Deliverable Revenue Arrangements. ASU No. 2009-13 amends revenue recognition guidance for
arrangements with multiple deliverables. The new guidance eliminates the residual method of
revenue recognition and allows the use of management’s best estimate of selling price for individual
elements of an arrangement when vendor specific objective evidence (“VSOE”), vendor objective
evidence (“VOE”) or third-party evidence (“TPE”) is unavailable. For the Company, this guidance is
effective for all new or materially modified arrangements entered into on or after January 1, 2011
with earlier application permitted as of the beginning of a fiscal year. Full retrospective application
of the new guidance is optional. The Company has adopted ASU No. 2009-13 and its adoption has
not had an impact on its consolidated results of operations and financial condition.
2.
Acquisitions
Core
Mobility,
Inc.
On October 26, 2009, the Company acquired Core Mobility, a developer of mobility software and
solutions, for $10 million in cash and 700,000 shares of Smith Micro common stock. Core Mobility
became a wholly-owned subsidiary of Smith Micro. In addition, the former shareholders of Core
Mobility had the ability to earn additional cash consideration of up to $1.9 million in the form of
earn-out payments, contingent on Core Mobility achieving certain milestone deliverables for product
development and deployment. In March 2010, a milestone payment of $0.6 million was made. Of
the $10 million of cash consideration, $3.0 million was held back (“Holdback”) as security against
possible indemnification obligations. As of December 31, 2010, the entire Holdback had been paid.
Acquisition-related costs of $0.2 million were recorded as expense in the fiscal year ended
December 31, 2009 in the general and administrative section of the consolidated statement of
operations.
The total purchase price is summarized as follows (in thousands):
Cash paid at closing
Holdback (including interest)
Common stock issued
M ilestone payments
Total purchase price
$
6,970
3,041
6,881
1,839
18,731
$
The Company’s allocation of the purchase price is summarized as follows (in thousands):
F-17
Assets:
Liabilities:
Cash
Accounts receivable
Unbilled receivable
Prepaid and other assets
Fixed assets
Deferred tax assets
Intangible assets
Goodwill
Total assets
Accounts payable
Accrued expenses
Deferred revenue
Deferred tax liability
Total liabilities
Total purchase price
$
63
997
324
279
856
1,735
8,858
10,694
23,806
26
258
1,280
3,511
5,075
$
18,731
The results of operations of Core Mobility have been included in the Company’s consolidated
financial statements from the date of acquisition. The pro-forma effect of the acquisition on
historical periods is not material and therefore is not included.
3.
Restructuring
In July 2011, we announced that our Chicago facility would be permanently closed as of September 30,
2011 and resulted in charges of $1.0 million recorded in the third quarter of fiscal year 2011. In October
2011, we announced a material Restructuring Plan that was approved by our Board of Directors resulting in
charges of $2.2 million in the fourth quarter of fiscal year 2011. This Restructuring Plan involved a
realignment of organizational structures, facility consolidations/closures and headcount reductions that will
amount to approximately 20% of the Company’s worldwide workforce. The Restructuring Plan is expected
to be implemented primarily during the fourth quarter of the Company’s 2011 fiscal year. Of the total
charges, all but approximately $0.4 million will be cash expenditures.
The following is the activity in our restructuring liability account which is included in Accrued liabilities
line item on the balance sheet for the year ended December 31, 2011 (in thousands):
One-time employee termination benefits
Lease/rental terminations
Relocation, move, other expenses
Total
December 31, 2010
Balance
$ -
-
-
$ -
Provision
2,230
$
558
396
3,184
$
Usage
$
(1,129)
(110)
(284)
(1,523)
$
Reclass
$ -
4
$
4
December 31, 2011
Balance
1,101
$
448
116
1,665
$
$1.2 million of the remaining balance of the restructuring liability account is estimated to be used during
the fiscal quarter ending March 31, 2012, with the remainder to be used by the end of the fiscal year 2012.
Subsequent to December 31, 2011, but before the filing of this Form 10-K, we undertook an additional
restructuring that includes a further reduction of headcount of 7-8% and other cost reductions that will
result in annualized savings of approximately $7.0M. One-time employee termination and other costs will
F-18
result in additional restructuring expenses of approximately $0.3-0.4 million to be recorded in the fiscal
quarter ending March 31, 2012.
4.
Balance
Sheet
Details
Short-‐Term
Investments
Available-for-sale securities with contractual maturities of less than 12 months were as follows (in
thousands):
Corporate notes, bonds and paper
Government securities
Fair value
31,180
$
7,317
Amortized Net unrealized
cost basis
31,217
$
7,321
loss
$
(33)
(2)
December 31, 2011
December 31, 2010
Amortized Net unrealized
Fair value cost basis
39,704
15,007
39,691
15,003
$
$
loss
$
(8)
(2)
Total
$
38,497
$
38,538
$
(35)
$
54,694
$
54,711
$
(10)
There was $1,000 of realized losses recognized in interest and other income for the year ended
December 31, 2011. There were no realized gains (losses) recognized in interest and other income
for the years ended December 31, 2010 and 2009.
Intangible
Assets
The following table sets forth our acquired intangible assets by major asset class as of December 31,
2011 and 2010 (in thousands except useful life data):
December 31, 2011
Net book
Useful life
(years)
Gross
Accumulated
amortization
value before Impairment Net book
impairment
Charge
value
December 31, 2010
Gross
Accumulated
amortization
Net book
value
Amortizing:
Purchased technology
In process R&D
Capitalized software
Customer lists
Database
Trademarks
Trade names
Non-compete
Customer relationships
Totals
1-3
2
1-7
3-5
10
5-10
1-7
2
4-7
7,347
990
23,846
1,484
182
926
2,121
21
11,130
48,047
$
$
$
$
$
$
(6,783)
(248)
(17,673)
(1,461)
(70)
(605)
(1,506)
(18)
(6,308)
(34,672)
564
742
6,173
23
112
321
615
3
4,822
13,375
(564)
(742)
(6,173)
(23)
(112)
(321)
(615)
(3)
(4,822)
(13,375)
-
$
-
-
-
-
-
-
-
-
$
-
7,347
990
23,846
1,484
182
926
2,121
21
11,130
48,047
(5,344)
(62)
(15,336)
(1,328)
(56)
(537)
(1,208)
(13)
(4,704)
(28,588)
$
2,003
928
8,510
156
126
389
913
8
6,426
$
19,459
$
$
$
$
$
$
Aggregate amortization expense on intangible assets was $6.1 million, $8.9 million, and $8.8
million for the years ended December 31, 2011, 2010, and 2009 respectively. There is no future
amortization expense on these intangible assets due to the recorded impairment.
F-19
Equipment
and
Improvements
Equipment and improvements consist of the following (in thousands):
Computer hardware, software, and equipment
Leasehold improvements
Office furniture and fixtures
Less accumulated depreciation and amortization
Equipment and improvements, net
December 31,
$
2011
16,277
6,283
1,712
24,272
(8,790)
$
2010
10,368
6,237
1,055
17,660
(6,037)
$
15,482
$
11,623
Depreciation and amortization expense on equipment and improvements was $4.1 million, $2.9
million and $1.7 million for the years ended December 31, 2011, 2010 and 2009 respectively.
The Company recorded an impairment charge against certain leasehold improvements in the amount
of $5.3 million for the year ended December 31, 2011. Please see Note 1 above, “Impairment or
Disposal of Long-Lived Assets.”
Other
Assets
These are primarily office rent deposits.
Accrued
Liabilities
Accrued liabilities consist of the following (in thousands):
Salaries and benefits
Restructuring
Earnouts/holdbacks
Royalties and revenue sharing
Marketing expenses, rebates and other
Total accrued liabilities
December 31,
2011
$
4,417
1,665
1,210
326
23
7,641
$
2010
$
6,731
-
1,210
416
87
8,444
$
F-20
5.
Income
Taxes
A summary of the income tax expense is as follows (in thousands):
Year Ended December 31,
2010
2011
2009
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Excess tax benefits related to stock based compensation
Tax deficiencies related to restricted stock expense
Purchase accounting adjustment - Core M obility
Other adjustments
Total deferred
$
(6,844)
190
311
(6,343)
$
3,071
652
54
3,777
$
3,662
1,215
65
4,942
(873)
1,713
-
-
(426)
-
-
414
943
(82)
-
1,543
(15)
-
(1)
2,388
2,734
22
-
871
(66)
(1,765)
-
1,796
Total provision
$
(5,929)
$
6,165
$
6,738
A reconciliation of the provision for income taxes to the amount of income tax expense that would result
from applying the federal statutory rate to the profit before income taxes is as follows:
Year Ended December 31,
2010
2011
2009
Federal statutory rate
State tax, net of federal benefit
Equity compensation
R&D tax credit
Goodwill impairment
Other
Change in valuation allowance
35 %
4
-
-
35 %
5
3
(5)
(5)
-
-
(30)
4 %
(5)
-
33 %
35 %
7
13
(4)
-
8
-
59 %
The major components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
F-21
Current
Various reserves
Nondeductible accruals
Deferred state taxes
Prepaid expenses
Other
Equity compensation
Valuation allowance
Total Current
Non- current
Credit carryforwards
Net operating loss carryforwards
State tax
Fixed assets
Amortization
Identifiable intangibles acquired
Equity based compensation
Other
Valuation allowance
Total Non-current
Year Ended December 31,
2011
2010
$
369
1,661
-
(96)
25
-
(1,951)
$
366
1,208
228
(127)
(27)
917
-
$
8
$
2,565
4,223
11,286
-
1,695
35,252
(2,288)
978
83
(51,239)
1,201
659
(591)
(850)
(53)
(2,258)
165
-
-
$
(10)
$
(1,727)
The Company has federal and state net operating loss carryforwards of approximately $22.0 million and
$57.8 million, respectively, at December 31, 2011, to reduce future cash payments for income taxes. Of the
$22.0 million of NOL carryforwards at December 31, 2011, $0.5 million relates to the excess tax benefits
from employee restricted stock. Equity will be increased by $0.5 million if and when such excess tax
benefits are ultimately realized. These federal net operating loss carryforwards will expire from 2025
through 2031 and state net operating loss carryforwards will expire 2015 through 2031. The Company also
had $0.6 million of AMT 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 $3.6 million and $1.0
million, respectively, at December 31, 2011. These tax credits will begin to expire in 2027.
At December 31, 2011 and 2010, respectively, the Company had unrecognized tax benefits of
approximately $0.3 million and zero, including interest and penalties, respectively.
We account for income taxes as required 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 de-recognition, 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 operating expense.
F-22
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 assets against gross deferred tax liabilities); (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 is in a
three-year historical cumulative loss as of the end of fiscal 2011. This fact, 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, 2011 (as described above), and
after consideration of the Company’s three-year cumulative loss position as of December 31, 2011, the
Company recorded a valuation allowance related to its U.S.-based deferred tax amounts, with a
corresponding charge to income tax expense, of $53.2 million during the year ended December 31, 2011.
The Company’s gross unrecognized tax benefits as of December 31, 2011 and the changes in those
balances are as follows (in thousands):
Beginning Balance
Increases for tax positions for current year
Increases/(Decreases) in tax positions for the prior year
Lapse in statute of limitations
Settlements
Other
Change in valuation allowance
Tax Year Ending
2011
$ -
162
162
-
-
-
-
Gross Unrecognized tax benefits, ending balance
$
324
The Company is subject to U.S. federal income tax as well as to income tax of multiple state jurisdictions.
Federal income tax returns of the Company are subject to IRS examination for the 2008 through 2010 tax
years. State income tax returns are subject to examination for a period of three to four years after filing.
The Company is currently under examination by the Internal Revenue Service (“IRS”) for the 2008 tax
year. 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, 2011, 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.
6.
Commitments
and
Contingencies
Leases
The Company leases its buildings under operating leases that expire on various dates through 2022.
Future minimum annual lease payments under such leases as of December 31, 2011 are as follows
(in thousands):
F-23
Year Ending December 31,
2012
2013
2014
2015
2016
Beyond
Total
Operating
2,840
$
2,870
2,484
2,381
2,126
8,101
20,802
$
Total rent expense was $2.8 million, $2.5 million and $1.9 million for the years ended December 31,
2011, 2010 and 2009, respectively.
As a condition of our new lease in Pittsburgh, the landlord agreed to incentives of $40.00 per square
foot, or a total of $2.2 million, for improvements to the space. These costs have been included in
deferred rent in our long-term liabilities and are being amortized over the remaining lease term.
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 carries with it an obligation, or commitment, to
employ at least 232 people within a three-year time period. This grant contains conditions that
would require us to return a pro-rata amount of the monies received if we fail to meet these
conditions. As such, the monies have been recorded as a liability in the Deferred rent and other
long-term liabilities line item on the balance sheet until we are irrevocably entitled to retain the
monies.
Litigation
On June 29, 2011, a complaint was filed in the U.S. District Court for the Central District of
California against us and certain of our current and past officers and directors on behalf of certain
purchasers of our common stock. The complaint has been brought as a purported stockholder class
action, and, in general, includes allegations that we and certain of our officers and directors violated
federal securities laws by making materially false and misleading statements regarding our business
prospects and financial results, thereby artificially inflating the price of our common stock. The
plaintiff is seeking unspecified monetary damages and other relief.
On August 29, 2011, two
prospective lead plaintiffs filed motions for appointment of lead plaintiff and for appointment of lead
counsel.
On October 17, 2011, the court appointed the two prospective lead plaintiffs as co-lead
plaintiffs and their respective counsel as co-lead counsel. On December 15, 2011, the co-lead
plaintiffs filed their consolidated amended complaint. On February 14, 2012, we filed our motion to
dismiss the consolidated amended complaint. A hearing on the motion to dismiss has been set for
to vigorously defend
May 21, 2012. We
against
claims
intend
the
advanced.
On August 11, 2011, a shareholder derivative complaint was filed in the Superior Court of California
for the County of Orange against the Company’s directors and certain of its executive officers.
Thereafter, two additional similar complaints, also styled as shareholder derivative actions, were
filed in state court (collectively, the "State Derivative Actions"). On December 23, 2011, one of the
plaintiffs in the State Derivative Actions filed a motion to consolidate the State Derivative Actions
and to appoint lead counsel. A hearing on the pending motion has been set for March 1, 2012.
We
expect the state court to consolidate the State Derivative Actions and to appoint lead counsel, and we
expect plaintiffs to thereafter file an amended shareholder derivative complaint. On September 12,
2011, a shareholder derivative complaint was filed in the U.S. District Court for the Central District
of California against certain of the officers and directors named in the State Derivative Actions but
also against additional officers of the Company. Thereafter, two additional similar complaints, also
F-24
styled as shareholder derivative actions, were filed in federal court (collectively, the “Federal
Derivative Actions”). On December 6, 2011, the federal court consolidated two of the Federal
Derivative Actions and appointed co-lead counsel for plaintiffs, and we expect the federal court to
issue an order consolidating all of the Federal Derivative Actions. On January 27, 2012, plaintiffs
filed their amended shareholder derivative complaint. Collectively, the State Derivative Actions and
the Federal Derivative Actions are referred to as the "Derivative Actions."
The shareholder
derivative complaints in the Derivative Actions allege breaches of fiduciary duties by the defendants
and other violations of state law.
In general, the complaints in the Derivative Actions allege that
the Company’s directors and certain of its officers caused or allowed for the dissemination of
materially false and misleading statements regarding our business prospects and financial results,
thereby artificially inflating the price of our common stock.
Plaintiffs in the Derivative Actions
seek unspecified monetary damages and other relief, including reforms and improvements to the
Company’s corporate governance and internal procedures.
We intend to vigorously defend
against the claims advanced in the Derivative Actions, and intend to file demurrers and/or motion(s)
to dismiss the shareholder derivative complaints in the Derivative Actions.
The Company is and may become involved in various other legal proceedings arising from its
business activities. While management does not believe the ultimate disposition of these matters will
have a material adverse impact on the Company’s consolidated results of operations, cash flows or
financial position, litigation is inherently unpredictable, and depending on the nature and timing of
these proceedings, an unfavorable resolution could materially affect the Company’s future
consolidated results of operations, cash flows or financial position in a particular period.
Other
Contingent
Contractual
Obligations
During its normal course of business, the Company has made certain indemnities, commitments and
guarantees under which it may be required to make payments in relation to certain transactions.
These include: intellectual property indemnities to the Company’s customers and licensees in
connection with the use, sale and/or license of Company products; indemnities to various lessors in
connection with facility leases for certain claims arising from such facility or lease; indemnities to
vendors and service providers pertaining to claims based on the negligence or willful misconduct of
the Company; indemnities involving the accuracy of representations and warranties in certain
contracts; and indemnities to directors and officers of the Company to the maximum extent
permitted under the laws of the State of Delaware. In addition, the Company has made contractual
commitments to employees providing for severance payments upon the occurrence of certain
prescribed events. The Company may also issue a guarantee in the form of a standby letter of credit
as security for contingent liabilities under certain customer contracts. The duration of these
indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The
majority of these indemnities, commitments and guarantees may not provide for any limitation of the
maximum potential for future payments the Company could be obligated to make. The Company has
not recorded any liability for these indemnities, commitments and guarantees in the accompanying
consolidated balance sheets.
7.
Segment
and
Geographical
Information
Segment
Information
Public companies are required to report financial and descriptive information about their reportable
operating segments as required by FASB ASC Topic No. 280, Segment Reporting. The Company has
two primary business units based on how management internally evaluates separate financial
information, business activities and management responsibility. Wireless includes our connectivity and
security management, mobile VPN, media and content management, device management, Push-To-
Talk, Visual Voicemail, contact and calendar syncing and video content delivery and optimization
F-25
solutions. Productivity & Graphics includes retail and direct sales of our compression and broad
consumer-based software. “Corporate/Other” revenue includes the consulting portion of our services
sector which has been de-emphasized and is no longer considered a strategic element of our future
plans.
The following table shows the revenues generated by each business unit (in thousands):
2011
Year Ended December 31,
2010
2009
Wireless
$
48,711
$
118,684
$
89,420
Productivity & Graphics
Corporate/Other
Total revenues
Cost of revenues
Gross profit
8,816
240
57,767
13,761
44,006
11,399
418
130,501
15,507
114,994
17,014
845
107,279
15,486
91,793
$
$
$
Revenues to three customers (Sprint, Verizon Wireless and AT&T) and their respective affiliates in
the Wireless business segment accounted for 24.8%, 18.4% and 11.7%, respectively, of the
Company’s total revenues for the fiscal year 2011. In 2010, our three largest customers (Verizon
Wireless, Sprint and AT&T) accounted for 40.1%, 13.9% and 12.3%, respectively, of our total
revenues. In 2009, our four largest customers (Verizon Wireless, Dell, Sprint and AT&T) accounted
for 32.8%, 12.2%, 10.4% and 10.3%, respectively, of our total revenues. Our major customers could
reduce their orders of our products in favor of a competitor's product or for any other reason. The
loss of any of our major customers or decisions by a significant customer to substantially reduce
purchases could have a material adverse effect on our business.
The following table shows the goodwill and intangible assets by each business unit (in thousands):
Goodwill
Intangibles-net
Total Wireless
Goodwill
Intangibles-net
Total Productivity & Graphics
Total
December 31, 2011
$ -
-
-
-
-
-
$ -
December 31, 2010
$84,616
17,136
101,752
9,615
2,323
11,938
$113,690
Geographical
Information
During the years ended December 31, 2011, 2010 and 2009, the Company operated in three
geographic locations: the Americas, Asia Pacific and EMEA (Europe, the Middle East, and Africa).
Revenues attributed to the geographic location of the customer’s bill-to address, were as follows (in
thousands):
2011
Year ended December 31,
2010
2009
Americas
EMEA
Asia Pacific
Total revenues
$
$
51,784
3,171
2,812
57,767
$
$
121,495
7,117
1,889
130,501
F-26
$
$
99,172
4,402
3,705
107,279
The Company does not separately allocate specific assets to these geographic locations.
8.
Profit
Sharing
The Company offers its employees a 401(k) plan, in which the Company matches the employee
contribution at a rate of 20%, subject to a vesting schedule. Total employer contributions amounted to $0.5
million, $0.6 million and $0.4 million for the years ended December 31, 2011, 2010 and 2009, respectively.
9.
Stock-‐Based
Compensation
Stock
Plans
On July 28, 2005, our Shareholders approved the 2005 Stock Option / Stock Issuance Plan (“2005
Plan”). The 2005 Plan, which became effective the same date, replaced the 1995 Stock Option /
Stock Issuance Plan (“1995 Plan”), which expired on May 24, 2005. All outstanding options under
the 1995 Plan remained outstanding, but no further grants will be made under that Plan.
The 2005 Plan provides for the issuance of non-qualified or incentive stock options and restricted
stock to employees, non-employee members of the board and consultants. The exercise price per
share for 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. 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 options terminate and all vested options may be exercised within a period
following termination. In general, 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. The maximum number of shares of the Company’s common
stock that were available for issuance over the term of the original 2005 Plan previously could not
exceed 5,000,000 shares, plus additional shares equal to 2.5% of the number of shares of common
stock outstanding on the last trading day of the calendar year commencing with calendar year 2006,
but not in excess of 750,000 shares. On October 11, 2007, our shareholders voted to approve an
amendment to the 2005 Plan to increase the maximum number of shares of common stock that may
be issued under the 2005 Plan from 5,000,000 shares (plus an annual increase) to 7,000,000 shares
(plus an annual increase).
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 1,000 shares, for any calendar year. Additionally, no more than 1,000,000
shares may be purchased under the plan.
Rule
10b5-‐1
Trading
Plans
On September 16, 2010, William W. Smith, Jr., the President and Chief Executive Officer of the
Company entered into a pre-arranged stock trading plan to sell a maximum of 200,000 shares of
Company common stock on behalf of The William W. Smith, Jr. Revocable Trust, a trust for which
Mr. Smith serves as trustee. The plan was established as part of Mr. Smith’s individual long-term
strategy for asset diversification and liquidity. All of the shares had been sold as of October 7, 2010.
The plan was adopted in accordance with guidelines specified under Rule 10b5-1 of the Securities
F-27
Exchange Act of 1934, as amended, and the Company’s policies regarding stock transactions. The
transactions under the plan were disclosed publicly with the Securities and Exchange Commission as
required by applicable securities laws.
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 weighted average grant-date fair value of stock options granted during the years ended
December 31, 2011, 2010 and 2009 was $1.16, $2.97 and $3.23, respectively. The assumptions used
to compute the share-based compensation costs for the stock options granted during the years ended
December 31, 2011, 2010 and 2009, respectively, using the Black-Scholes option pricing model,
were as follows:
Assumptions
Risk-free interest rate (average)
Expected dividend yield
Weighted average expected life (years)
Volatility (average)
Forfeiture rate
Year Ended December 31,
2010
2011
2009
0.2%
-
1
73.0%
-
0.3%
-
1
72.0%
-
0.5%
-
1
71.0%
-
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.
Grants of restricted stock are valued using the closing stock price on the date of grant. In the year
ended December 31, 2011, a total of 70,000 shares of restricted stock, with a total value of $0.4
million, were granted to non-employee members of the Board of Directors. This cost will be
amortized over a period of 12 months. In addition, 0.9 million shares of restricted stock, with a total
value of $8.4 million, were granted to key officers and employees of the Company. This cost will be
amortized over a period of 48 months.
Valuation
of
ESPP
The Company’s first offering period began October 1, 2010 and ended March 31, 2011 and a total of
43,335 shares were purchased on March 31, 2011 with a fair value of $3.98 per share. The
Company’s second six-month offering period began on April 1, 2011 and ended on September 30,
2011 and a total of 52,762 shares were purchased in the offering period with a fair value of $3.61 per
share. The third period began October 1, 2011 and will end March 31, 2012 and have a fair value of
$0.69 per share. 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.
F-28
Assumptions
Risk-free interest rate (average)
Expected dividend yield
Weighted average expected life (years)
Volatility (average)
Offering Period Ended Offering Period Ended Offering Period Ending
September 30, 2011
0.12%
-
0.5
72.0%
March 31, 2012
0.50%
-
0.5
105.0%
March 31, 2011
0.18%
-
0.5
72.0%
Compensation
Costs
Stock-based non-cash compensation expenses related to stock options and restricted stock grants
were recorded in the financial statements as follows (in thousands):
Cost of revenues
Selling and marketing
Research and development
General and administrative
Total non-cash stock compensation expense
2011
$
Year Ended December 31,
2010
$
2009
$
31
1,922
1,198
3,379
6,530
101
2,529
2,505
4,361
9,496
184
2,498
2,514
3,528
8,724
$
$
$
Total share-based compensation for each year includes cash payment of income taxes related to
grants of restricted stock in the amounts of $1.5 million, $2.1 million and $1.1 million for the years
ended December 31, 2011, 2010 and 2009, respectively.
Stock
Options
A summary of the Company’s stock options outstanding under the 2005 Plan as of December 31,
2011 and the activity during the years ended herein are as follows (in thousands except per share
amounts):
F-29
Outstanding as of December 31, 2008
(2,481 options exercisable at a weighted average exercise
price of $9.31)
Granted (weighted average fair value of $3.23)
Exercised
Cancelled
Outstanding as of December 31, 2009
(2,754 options exercisable at a weighted average exercise
price of $10.55)
Granted (weighted average fair value of $2.97)
Exercised
Cancelled
Outstanding as of December 31, 2010
(2,545 options exercisable at a weighted average exercise
price of $11.54)
Granted (weighted average fair value of $1.16)
Exercised
Cancelled
Outstanding as of December 31, 2011
S hares
Weighted Ave.
Exercise Price
Aggregate
Intrinsic Value
4,289
$
10.94
25
(414)
(364)
3,536
20
(760)
(90)
2,706
25
(7)
(557)
2,167
$
$
$
$
11.59
4.02
14.56
11.29
$
$
$
$
10.51
9.55
13.80
11.69
$
$
$
$
4.07
1.77
14.04
11.03
$
-
$
-
Exercisable as of December 31, 2011
2,167
$
11.03
$
-
Vested and expected to vest at December 31, 2011
2,167
$
11.03
$
-
During the year ended December 31, 2011, options to acquire 7,000 shares were exercised resulting
in cash proceeds to the Company of $12,000. The weighted-average grant-date fair value of options
granted during the year ended December 31, 2011 was $1.16. For the year ended December 31,
2011, there is no remaining unrecognized compensation costs related to non-vested stock options
granted under the Plan. At December 31, 2011, there were 2.2 million shares available for future
grants under the 2005 Stock Issuance / Stock Option Plan.
Additional information regarding options outstanding as of December 31, 2011 is as follows:
Range of
exercise
prices
Number
outstanding
(in thousands)
Options outstanding
Weighted average
remaining
contractual
life (years)
Weighted
average
exercise
price
Number
exercisable
(in thousands)
Options exercisable
Weighted
average
exercise
price
$
1.62
$
4.93
$
8.58
$
12.63
$
15.17
$
18.70
154
452
149
767
457
188
2,167
$
11.03
$0.24 - $4.00
$4.01 - $6.00
$6.01 - $12.00
$12.01 - $14.00
$14.01 - $16.00
$16.01 - $19.00
154
452
149
767
457
188
2,167
2.2
3.7
5.4
5.1
5.2
5.3
4.7
$
1.62
$
4.93
$
8.57
$
12.63
$
15.17
$
18.70
$
11.03
F-30
Restricted
Stock
Awards
A summary of the Company’s restricted stock awards outstanding under the 2005 Plan as of
December 31, 2011, and the activity during years ended therein, are as follows (in thousands):
Unvested at December 31, 2008
Granted
Vested
Cancelled
Unvested at December 31, 2009
Granted
Vested
Cancelled and forfeited
Unvested at December 31, 2010
Granted
Vested
Cancelled and forfeited
Unvested at December 31, 2011
Number
of shares
998
1,031
(472)
(142)
1,415
933
(679)
(65)
1,604
1,000
(823)
(426)
1,355
Weighted average
grant date fair value
7.82
5.06
7.17
5.26
6.28
8.27
6.50
9.25
7.23
8.86
7.40
7.81
3.21
$
$
$
$
$
$
$
$
$
$
$
$
$
10.
Comprehensive
Income
Comprehensive income includes unrealized gains and losses on short-term investments of corporate notes,
bonds, and commercial paper and U.S. government agency and government sponsored enterprise debt and
equity securities. The following table sets forth the calculation of comprehensive income (in thousands):
Net income (loss)
Change in unrealized gain (loss) on investments, after tax
Total comprehensive income (loss)
2011
(159,606)
(25)
(159,631)
$
$
Year Ended December 31,
2010
$
$
12,346
(8)
12,338
2009
$
$
4,752
(71)
4,681
11.
Subsequent
Events
In May 2009, the FASB issued new accounting guidance found under ASC Topic No. 855, Subsequent
Events. The Topic establishes general standards of accounting for and disclosure of events that occur after
the balance sheet date but before the financial statements are issued or are available to be issued
Subsequent events have been evaluated as of the date of this filing and there are no further disclosures
required.
F-31
12.
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 2011 and 2010 are as follows (in thousands, except per share data):
S elected quarterly financial data:
Revenues
Gross profit
Operating (loss)
Net (loss)
1st Quarter
Year ended December 31, 2011
2nd Quarter
3rd Quarter
4th Quarter
$
$
$
$
17,791
14,015
(13,012)
(7,753)
$
$
$
$
16,105
12,545
(13,046)
(7,847)
$
$
$
$
12,632
8,933
(127,983)
(134,481)
$
$
$
$
11,239
8,513
(11,625)
(9,525)
Net (loss) per share, basic (1)
$
(0.22)
$
(0.22)
$
(3.76)
$
(0.27)
Weighted average shares outstanding, basic
35,263
35,775
35,728
35,696
Net (loss) per share, diluted (1)
$
(0.22)
$
(0.22)
$
(3.76)
$
(0.27)
Weighted average shares outstanding, diluted
35,263
35,775
35,728
35,696
S elected quarterly financial data:
Revenues
Gross profit
Operating income
Net income
1st Quarter
Year ended December 31, 2010
2nd Quarter
3rd Quarter
4th Quarter
$
$
$
$
29,862
26,130
2,906
1,592
$
$
$
$
31,357
27,392
3,682
1,885
$
$
$
$
34,008
30,237
5,862
3,094
$
$
$
$
35,274
31,235
5,931
5,775
Net income per share, basic (1)
$
0.05
$
0.06
$
0.09
$
0.17
Weighted average shares outstanding, basic
33,730
34,264
34,274
34,540
Net income per share, diluted (1)
$
0.05
$
0.05
$
0.09
$
0.16
Weighted average shares outstanding, diluted
34,176
34,781
34,736
35,111
(1) Basic and diluted net income (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-32
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2011
(In thousands)
Balance at
beginning of
period
Additions
charged to
costs and
expenses
Balance at
end of
period
Deductions
Allowance for accounts receivable (1):
2011
2010
2009
Allowance for excess and obsolete inventory:
2011
2010
2009
$
855
1,045
1,204
$
558
1,221
404
$
1,244
851
1,596
$
158
203
1,063
$
(717)
(1,041)
(1,755)
$
(299)
(866)
(246)
$
1,382
855
1,045
$
417
558
1,221
(1) Allowances are for retail return reserves, marketing development funds and doubtful accounts.
S-1
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21.1
1. Allume Systems, Inc., a California corporation.
2. Tag Acquisition Corporation II, a Delaware corporation.
3. E Frontier Acquisition Corporation, a Delaware corporation.
4. IS Acquisition Sub, Inc., a Delaware corporation.
5. Tel Acquisition Corporation, a Delaware corporation.
6. STF Technologies, Inc., a Missouri corporation.
7. Smith Micro Software LLC Belgrade, a Serbia corporation.
8. Smith Micro Software UK Limited, a United Kingdom corporation.
9. William W. Smith Software Canada. Ltd., a Canadian corporation.
10. Smith Micro Software, Asia Limited, a Hong Kong corporation.
11. Mobility Acquisition Corporation, a Delaware corporation.
12. Core Mobility, Inc., a Delaware corporation.
(THIS PAGE INTENTIONALLY LEFT BLANK)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
We consent to the incorporation by reference in Registration Statement (Nos. 333-02418, 333-40106, 333-
62134, 333-121330, 333-123042, 333-129132, 333-149222, and 333-169671) on Form S-8, Registration
Statement (Nos. 333-123821, 333-128695, 333-134611, 333-137408, and 333-161658) on Form S-3 and
Registration Statement (No. 333-161659) on Form S-4 of Smith Micro Software, Inc. of our reports dated
February 27, 2012 relating to our audits of the consolidated financial statements, the financial statement
schedule, and internal control over financial reporting, which appear in this Annual Report on Form 10-K of
Smith Micro Software, Inc. for the year ended December 31, 2011.
/s/ SINGERLEWAK LLP
Los Angeles, California
February 27, 2012
(THIS PAGE INTENTIONALLY LEFT BLANK)
(THIS PAGE INTENTIONALLY LEFT BLANK)
(THIS PAGE INTENTIONALLY LEFT BLANK)
Smith Micro Software, Inc. • 51 Columbia, Aliso Viejo, California 92656 USA • +1 949 362 5800 • www.smithmicro.com • NASDAQ: SMSI