F R O M T H E C E O
Dear Fellow Shareholders,
Our 2012 performance reflects the beginning of
an important turning point for Smith Micro. The
technology strategy we have been working on for
several years is beginning to produce meaningful
results in the form of quarter-over-quarter revenue
increases. While broadband connectivity has been
the linchpin of our portfolio for the past decade, we
are now seeing growth from our premium mobile
applications and network control solutions that allow
William W. Smith, Jr.
Chairman, President and
Chief Executive Officer
wireless operators to generate new revenue streams while efficiently managing their
resources. Further, we are leveraging these technologies to help public and private
sector organizations take full advantage of the influx of mobile devices among their
workforces. Our wireless portfolio, comprised of QuickLink®, NetWise™, and CommSuite®
product families, uniquely helps our customers connect, control, and capitalize on the
power of the mobile Internet.
Smith Micro has a strong value proposition for a wireless market that is ripe with
opportunities. For example, estimates show mobile data traffic growing at a rate of
1.6 Exabytes per month in 20131, posing a major challenge for operators worldwide.
Wi-Fi networks are now integral to relieving cellular congestion, and our NetWise traffic
management solution is proving to increase Wi-Fi utilization by end-users. However,
Wi-Fi offload is only part of the answer. To remain competitive, operators must develop
traffic management strategies that ensure a high-quality wireless experience by
automatically connecting devices to the best network based on throughput, reliability,
roaming costs, and other dynamic conditions. Our NetWise solution is superior to
competing products in its ability to manage traffic to ensure the best possible user
experience under any conditions.
Monetizing data is an important goal for our wireless operator customers. Considering
almost 90 percent of tablets sold in the U.S. last year were Wi-Fi only2, wireless operators
are largely missing out on the data revenues associated with those devices. Our
QuickLink Hotspot solution helps operators by turning the smartphones consumers
already have in their hands into personal mobile hotspots that connect Wi-Fi devices to
3G and 4G networks. Although this trend is increasing, a recent survey of smartphone
users revealed a number of issues preventing broader adoption of personal hotspots,
including cost, usability, and privacy concerns.3 In addition, many hotspot users do not
pay their mobile operator for this feature, but instead use over-the-top applications
Smith Micro Software
2012 Annual Report
F R O M T H E C E O
Dear Fellow Shareholders,
Our 2012 performance reflects the beginning of
an important turning point for Smith Micro. The
technology strategy we have been working on for
several years is beginning to produce meaningful
results in the form of quarter-over-quarter revenue
increases. While broadband connectivity has been
the linchpin of our portfolio for the past decade, we
are now seeing growth from our premium mobile
applications and network control solutions that allow
William W. Smith, Jr.
Chairman, President and
Chief Executive Officer
wireless operators to generate new revenue streams while efficiently managing their
resources. Further, we are leveraging these technologies to help public and private
sector organizations take full advantage of the influx of mobile devices among their
workforces. Our wireless portfolio, comprised of QuickLink®, NetWise™, and CommSuite®
product families, uniquely helps our customers connect, control, and capitalize on the
power of the mobile Internet.
Smith Micro has a strong value proposition for a wireless market that is ripe with
opportunities. For example, estimates show mobile data traffic growing at a rate of
1.6 Exabytes per month in 20131, posing a major challenge for operators worldwide.
Wi-Fi networks are now integral to relieving cellular congestion, and our NetWise traffic
management solution is proving to increase Wi-Fi utilization by end-users. However,
Wi-Fi offload is only part of the answer. To remain competitive, operators must develop
traffic management strategies that ensure a high-quality wireless experience by
automatically connecting devices to the best network based on throughput, reliability,
roaming costs, and other dynamic conditions. Our NetWise solution is superior to
competing products in its ability to manage traffic to ensure the best possible user
experience under any conditions.
Monetizing data is an important goal for our wireless operator customers. Considering
almost 90 percent of tablets sold in the U.S. last year were Wi-Fi only2, wireless operators
are largely missing out on the data revenues associated with those devices. Our
QuickLink Hotspot solution helps operators by turning the smartphones consumers
already have in their hands into personal mobile hotspots that connect Wi-Fi devices to
3G and 4G networks. Although this trend is increasing, a recent survey of smartphone
users revealed a number of issues preventing broader adoption of personal hotspots,
including cost, usability, and privacy concerns.3 In addition, many hotspot users do not
pay their mobile operator for this feature, but instead use over-the-top applications
Smith Micro Software
2012 Annual Report
to access the hotspot feature on their smartphones, representing significant revenue
product. Beyond the technical and creative enhancements to these top-shelf graphics
leakage for the operator. QuickLink makes mobile hotspots easier and more secure
products, the team has made significant improvements in online marketing and go-to-
for consumers, while allowing operators to extend their brand and services to Wi-Fi
market strategy with channel partners to accelerate growth and drive a more profitable
devices, driving greater data revenues through increased hotspot usage.
Beyond mobile hotspots, 2012 saw the expansion of QuickLink to other new platforms,
including Windows 8 devices and silicon chipsets. The use of QuickLink MBIM Drivers
by chip vendors allows new USB and embedded modems to work with Windows 8
business. We are also developing new international channel partners to help increase
our market presence in countries such as India, UK, France, Brazil, China, and Korea.
Overall, we believe the Productivity and Graphics area of our business will continue to
contribute significantly to our top line in 2013.
computers, as well as with prior versions of Windows, eliminating the need for costly,
As we leverage our broad wireless and consumer software portfolios, and enhance
device-specific drivers. It also reduces support costs for operators by eliminating driver
our products into comprehensive solutions, we intend to exceed the expectations of
conflicts on legacy devices. Embedding connectivity solutions onto chipsets allows
our customers and shareholders in 2013. Smith Micro has proven time and time again
operators and device makers to focus on differentiating their products and services to
that we can adapt and recover through the peaks and troughs of each economic
and technology cycle. We are optimistic about our ability to prosper and find market
opportunities in a rapidly changing mobile technology market, and we appreciate your
support and confidence.
Best Regards,
William W. Smith, Jr.
Chairman, President and Chief Executive Officer
drive the top line, and Smith Micro is contributing on all fronts.
CommSuite is the next generation of our visual voicemail solution, designed to help
operators generate new revenue through integrated, rich media communications such
as videomail, animated messaging, live video streaming, voice-to-text transcription,
and social sharing of messages. With the increasing popularity of social messaging
services, operators are projected to lose billions in SMS revenues over the next few
years.4 CommSuite addresses this market shift by revitalizing legacy voicemail systems
with the latest in visual messaging technology, while driving rapid adoption of premium
apps through flexible “try and buy” deployment options. Even better, CommSuite
helps operators manage video messaging traffic through integration with our NetWise
solution. This is an important differentiator since video accounted for 51 percent of all
mobile traffic at the end of 2012.5
On the enterprise side of our business, we were honored to be included in the first annual
Aragon Research Globe report for Enterprise Mobile Management (EMM) software.6 Our
EMM solution was recognized for its standards-based approach and scalable platform,
which combines device connectivity, user management, and network optimization
capabilities. Mobile device management (MDM) has received plenty of attention in the
past year, particularly with the growing trend of employees bringing their own devices
to work, often called “BYOD” in the media. While there are many vendors providing
MDM products, few share our heritage serving Tier One wireless operators and device
makers. In fact, we have provided over-the-air device management capabilities for more
than 30 million mobile devices globally. By incorporating MDM, connectivity, security,
streaming video, and network optimization into our enterprise mobility strategy, we
1 http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11-520862.html
2 http://www.chetansharma.com/USmarketupdateQ22012.htm
3 http://www.smithmicro.com/about/news/nationwide-survey-reveals-increase-in-smartphone-hotspot-adoption.aspx
A D D I T I O N A L I N F O R M A T I O N
help enterprise customers maximize returns from their mobility investments.
4 http://ovum.com/2012/09/06/social-messaging-to-cost-telcos-54bn-by-2016/
Our Productivity and Graphics group produced several new versions of software in
2012, including Poser® 9, Anime Studio™ 9, Manga Studio™ 5, and the new MotionArtist™
5 http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11-520862.html
6 http://www.smithmicro.com/about/news/smith-micro-recognized-by-aragon-research-in-enterprise-mobile-management.aspx
Smith Micro maintains an investor relations program. If you have any questions or would like
additional information concerning the operations or financial statements, please contact:
B O A R D O F D I R E C T O R S
William W. Smith, Jr.
Chairman, President &
Chief Executive Officer
Andrew Arno
Director
Samuel Gulko
Director
Thomas G. Campbell
Gregory J. Szabo
Director
Director
O F F I C E R S & S E N I O R M A N A G E M E N T
Von Cameron
Executive Vice President,
Worldwide Sales
Chris Lippincott
Senior Vice President,
Global Operations
Andrew C. Schmidt
Vice President &
Chief Financial Officer
Rick Carpenter
Jim Mains
David P. Sperling
Senior Vice President, Engineering
Senior Vice President,
Chief Technology Officer
Products and Programs
Carla Fitzgerald
Dan Rawlings
Steven M. Yasbek
Senior Vice President, Marketing
Chief Strategy Officer
Chief Accounting Officer
C O N T A C T I N F O R M A T I O N
Corporate Headquarters
Transfer Agent & Registrar
Legal Counsel
Computershare Trust Company N.A.
Loeb & Loeb LLP
51 Columbia
Aliso Viejo, CA 92656
(949) 362-5800
250 Royall Street
Canton, MA 02021
(800) 962-4284
www.computershare.com
Los Angeles, CA 90067
Auditors
SingerLewak
Los Angeles, CA 90024
Todd Kehrli
MKR Group, Inc.
12198 Ventura Blvd., Suite 200
Los Angeles, CA 91604
(323) 468-2300
smsi@mkr-group.com
to access the hotspot feature on their smartphones, representing significant revenue
product. Beyond the technical and creative enhancements to these top-shelf graphics
leakage for the operator. QuickLink makes mobile hotspots easier and more secure
products, the team has made significant improvements in online marketing and go-to-
for consumers, while allowing operators to extend their brand and services to Wi-Fi
market strategy with channel partners to accelerate growth and drive a more profitable
devices, driving greater data revenues through increased hotspot usage.
Beyond mobile hotspots, 2012 saw the expansion of QuickLink to other new platforms,
including Windows 8 devices and silicon chipsets. The use of QuickLink MBIM Drivers
by chip vendors allows new USB and embedded modems to work with Windows 8
business. We are also developing new international channel partners to help increase
our market presence in countries such as India, UK, France, Brazil, China, and Korea.
Overall, we believe the Productivity and Graphics area of our business will continue to
contribute significantly to our top line in 2013.
computers, as well as with prior versions of Windows, eliminating the need for costly,
As we leverage our broad wireless and consumer software portfolios, and enhance
device-specific drivers. It also reduces support costs for operators by eliminating driver
our products into comprehensive solutions, we intend to exceed the expectations of
conflicts on legacy devices. Embedding connectivity solutions onto chipsets allows
our customers and shareholders in 2013. Smith Micro has proven time and time again
operators and device makers to focus on differentiating their products and services to
that we can adapt and recover through the peaks and troughs of each economic
and technology cycle. We are optimistic about our ability to prosper and find market
opportunities in a rapidly changing mobile technology market, and we appreciate your
support and confidence.
Best Regards,
William W. Smith, Jr.
Chairman, President and Chief Executive Officer
help enterprise customers maximize returns from their mobility investments.
4 http://ovum.com/2012/09/06/social-messaging-to-cost-telcos-54bn-by-2016/
Our Productivity and Graphics group produced several new versions of software in
2012, including Poser® 9, Anime Studio™ 9, Manga Studio™ 5, and the new MotionArtist™
5 http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11-520862.html
6 http://www.smithmicro.com/about/news/smith-micro-recognized-by-aragon-research-in-enterprise-mobile-management.aspx
Smith Micro maintains an investor relations program. If you have any questions or would like
additional information concerning the operations or financial statements, please contact:
1 http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11-520862.html
2 http://www.chetansharma.com/USmarketupdateQ22012.htm
3 http://www.smithmicro.com/about/news/nationwide-survey-reveals-increase-in-smartphone-hotspot-adoption.aspx
A D D I T I O N A L I N F O R M A T I O N
drive the top line, and Smith Micro is contributing on all fronts.
CommSuite is the next generation of our visual voicemail solution, designed to help
operators generate new revenue through integrated, rich media communications such
as videomail, animated messaging, live video streaming, voice-to-text transcription,
and social sharing of messages. With the increasing popularity of social messaging
services, operators are projected to lose billions in SMS revenues over the next few
years.4 CommSuite addresses this market shift by revitalizing legacy voicemail systems
with the latest in visual messaging technology, while driving rapid adoption of premium
apps through flexible “try and buy” deployment options. Even better, CommSuite
helps operators manage video messaging traffic through integration with our NetWise
solution. This is an important differentiator since video accounted for 51 percent of all
mobile traffic at the end of 2012.5
On the enterprise side of our business, we were honored to be included in the first annual
Aragon Research Globe report for Enterprise Mobile Management (EMM) software.6 Our
EMM solution was recognized for its standards-based approach and scalable platform,
which combines device connectivity, user management, and network optimization
capabilities. Mobile device management (MDM) has received plenty of attention in the
past year, particularly with the growing trend of employees bringing their own devices
to work, often called “BYOD” in the media. While there are many vendors providing
MDM products, few share our heritage serving Tier One wireless operators and device
makers. In fact, we have provided over-the-air device management capabilities for more
than 30 million mobile devices globally. By incorporating MDM, connectivity, security,
streaming video, and network optimization into our enterprise mobility strategy, we
B O A R D O F D I R E C T O R S
William W. Smith, Jr.
Chairman, President &
Chief Executive Officer
Andrew Arno
Director
Samuel Gulko
Director
Thomas G. Campbell
Gregory J. Szabo
Director
Director
O F F I C E R S & S E N I O R M A N A G E M E N T
Von Cameron
Executive Vice President,
Worldwide Sales
Chris Lippincott
Senior Vice President,
Global Operations
Andrew C. Schmidt
Vice President &
Chief Financial Officer
Rick Carpenter
Jim Mains
David P. Sperling
Senior Vice President, Engineering
Senior Vice President,
Chief Technology Officer
Products and Programs
Carla Fitzgerald
Dan Rawlings
Steven M. Yasbek
Senior Vice President, Marketing
Chief Strategy Officer
Chief Accounting Officer
C O N T A C T I N F O R M A T I O N
Corporate Headquarters
Transfer Agent & Registrar
Legal Counsel
Computershare Trust Company N.A.
Loeb & Loeb LLP
51 Columbia
Aliso Viejo, CA 92656
(949) 362-5800
250 Royall Street
Canton, MA 02021
(800) 962-4284
www.computershare.com
Los Angeles, CA 90067
Auditors
SingerLewak
Los Angeles, CA 90024
Todd Kehrli
MKR Group, Inc.
12198 Ventura Blvd., Suite 200
Los Angeles, CA 91604
(323) 468-2300
smsi@mkr-group.com
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, 2012
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number 01-35525
SMITH MICRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
_____________________
Delaware
(State or other jurisdiction of incorporation or organization)
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 A
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, 2012, 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 $58,524,300 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 11, 2013, there were 35,873,247 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2013 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.
2012 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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.
PART I
BUSINESS .................................................................................................................................................... 4
RISK FACTORS ........................................................................................................................................... 10
UNRESOLVED STAFF COMMENTS ........................................................................................................ 19
PROPERTIES ............................................................................................................................................... 19
LEGAL PROCEEDINGS ............................................................................................................................. 19
MINE SAFETY DISCLOSURES ................................................................................................................. 20
PART II
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ....................................................... 21
SELECTED CONSOLIDATED FINANCIAL DATA ................................................................................. 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ............................................................................................................ 26
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .............................. 37
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .............................................................. 37
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ........................................................................................................................ 38
CONTROLS AND PROCEDURES ............................................................................................................. 38
OTHER INFORMATION ............................................................................................................................. 39
PART III
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ....................................... 40
EXECUTIVE COMPENSATION ................................................................................................................ 42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS ......................................................................................... 42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ........................................................................................................................................ 42
PRINCIPAL ACCOUNTING FEES AND SERVICES................................................................................ 42
PART IV
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES .................................................................... 43
SIGNATURES .............................................................................................................................................. 46
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;
the availability of third party intellectual property and licenses which may not be on commercially
reasonable terms, or not at all;
our ability to successfully execute our business plan and control costs and expenses;
the ongoing uncertainty and volatility in U.S. and worldwide economic conditions may adversely
affect our operating results;
security and privacy breaches in our systems may damage client relations and inhibit our ability to
grow;
interruptions or delays in the services we provide from our data center hosting facilities could harm
our business; 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.
Today, Smith Micro’s mission is to help our global customers thrive in a highly complex wireless
ecosystem with software solutions that:
1. Simplify mobile connectivity to reduce support costs and increase usability;
2. Optimize network and device resources for maximum performance and efficiency;
3. Enable a safe, productive wireless environment that meets enterprise standards for security,
control and regulatory compliance; and
4. Engage and grow high-value relationships with end customers.
With a 30-year history of technology innovation, leadership in industry standards, quality engineering, and
extensive commercial deployment experience, Smith Micro has proven its ability to evolve and capitalize
on new market opportunities again and again. 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,
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.
4
Wireless
Rapid advancements in wireless technology, including higher speed networks, intelligent connected devices
and an abundance of digital content and mobile applications, are fueling the mobile broadband market. The
demand for pervasive connectivity is driven by an insatiable consumer desire to access information and
digital entertainment - anytime, anywhere - from smartphones, tablets, laptop computers, e-readers, gaming
devices and more. While the benefits and opportunities associated with increased mobility are plenty, so
are the challenges of this highly dynamic environment:
- Wireless data services are being adopted at such a fast pace that global wireless networks cannot
support them without significant investments to increase capacity and performance.
- Operators are being marginalized by over-the-top applications and social networks as they struggle
to supplement declining voice and messaging revenues with new data services.
- Device makers face increasing pressure to differentiate their platforms and accelerate time to
market while burdened by network certification requirements that differ for each wireless carrier.
- Enterprises are challenged to mobilize their work forces and provide wireless access to business-
critical information without sufficient tools to manage security, performance and costs.
- End users must adapt to a variety of mobile platforms, a deluge of disparate mobile apps, and
unreliable connection methods while learning to understand and manage costs of consuming data.
To address these challenges, Smith Micro has developed a robust wireless software portfolio comprised of
three product families that help our customers connect, control and capitalize on the power of the mobile
internet:
QuickLink® – software that helps users and devices connect to the mobile internet, easily and
reliably while managing their data usage.
NetWise™ – policy-based control solutions for intelligently managing data traffic and devices.
CommSuite® – premium voice, video and messaging applications to capitalize on the
proliferation of mobile devices and broadband data services.
Our flagship QuickLink connectivity solutions have been shipped on more than 100 million devices
worldwide. This patented technology allows mobile users to easily connect a tablet, laptop or other
wireless devices to cellular or Wi-Fi networks. Many of the world’s largest wireless service providers,
including AT&T, Bell Canada, Bouygues, Cablevision, Orange, Sprint, T-Mobile USA, Verizon Wireless,
and Vodafone, use QuickLink to provide a convenient and secure mobile connection for subscribers using
their wireless data services. QuickLink helps operators reduce support costs by making connectivity
consistent across device types and enabling automated diagnostics for subscriber self-care. It also provides
a channel to promote new operator services that can increase average revenue per user (“ARPU”) and
customer loyalty. QuickLink is also available for enterprises with mobile workforces, and the public
sector, providing enhanced security and configurability across carrier, public and private networks.
NetWise traffic and device management solutions help wireless operators alleviate network congestion
resulting from the explosion of mobile data services. Using NetWise, subscribers can be automatically
connected to – and transparently moved between – 3G, 4G and Wi-Fi networks to ensure the best possible
user experience, providing potentially significant savings in capital outlays for operators. With its unique
intelligent client and policy-based server design, NetWise gives operators visibility and control over data
traffic by using the power of the device to manage when and how network services are accessed. NetWise
supplements existing network servers to provide end-to-end authentication and seamless network
transitions, adding advanced policy controls for least-cost roaming, Quality of Service (“QoS”)
5
management, disabling unauthorized or chatty applications, and more. NetWise solutions also facilitate
Wi-Fi discoverability, provide detailed device analytics, and enable management of mobile devices over
the air.
With CommSuite, Smith Micro enhances mobile communications through voice, video and messaging
services like Push-to-Talk, Visual Voicemail, Voice-to-Text transcription, Video mail and more, all within
a single client application. CommSuite allows operators to drive new revenues from existing voice and
messaging infrastructure by simplifying usability and adding innovative features, such as talking avatars,
live videocasting, and customizable user interfaces, to compete with the latest over-the-top applications.
CommSuite solutions can be offered in various bundles for different market segments, with flexible billing
integration that supports popular “freemium” and ad-based business models. For enterprises, CommSuite
provides secure, adaptive video streaming for a variety of uses, including mobile conferencing, multi-
screen viewing, mobile delivery of rights-managed content (like on-demand movies), public safety
surveillance video, and more.
Beyond the advanced features within each product family, the expertise to integrate technologies across the
entire portfolio is an advantage that Smith Micro uniquely brings to its customers. For example, the ability
to enhance mobile communications with CommSuite Video mail can be combined with NetWise traffic
management capabilities to ensure that the resulting video traffic is restricted to Wi-Fi or 4G networks.
Using technology and experience acquired over 30 years, Smith Micro continues to deliver new solutions
to meet new market challenges.
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®,
Manga Studio™ and MotionArtist™. 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.
6
Products and Services
Our primary products consist of the following:
Product Groups Products
Wireless
QuickLink® Mobile
QuickLink® Mobility
QuickLink® Hotspot
QuickLink® Zero
QuickLink® MiTile
QuickLink® MBIM Drivers
NetWise™ Director
NetWise™ Passport
NetWise™ SmartSpot
NetWise™ DM Suite
CommSuite® PTT
CommSuite® VVM
CommSuite® VTT
CommSuite® VIDIO
CommSuite® VIDIOcast
and VIDIOmail
Productivity &
Graphics
Poser®
Anime Studio®
Manga Studio™
MotionArtist ™
StuffIt Deluxe®
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
Mobile VPN and connection manager targeted to enterprises
with mobile workforces and the public sector
An application that optimizes the user-experience with billing
integration, automated diagnostics, and usage metering for
mobile hotspot features on Smartphones and mobile
broadband devices
Connection manager for Microsoft Windows 8 devices
Customizable drivers that support the Mobile Broadband
Interface Model (MBIM) standard for connecting USB
devices to a variety of operating systems
Intelligent traffic management for data offload and seamless,
secure network transitions between 3G/4G/Wi-Fi
Application-based controls over wireless network access to
protect against unauthorized or chatty apps
Wi-Fi discoverability, promotion and automated
authentication
Management platform for mobile device provisioning and
configuration
A push-to-talk data service that uses a mobile Internet
connection to send and receive “walkie-talkie” style calls
Visual Voicemail (VVM) delivered directly to a mobile
phone app and managed like email
Voice-to-Text (VTT) transcription of voicemail and voice
SMS messages
Adaptive streaming of video content to support mobile
viewing across laptops, tablets, phones, TVs, and more.
Delivery of live or pre-recorded video messages captured on
mobile devices and available via web link with no client
application required
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
A solution for creating interactive presentations
Patented, lossless compression solution for documents and
media
Because of our broad product portfolio and deep device integration experience, we are able to leverage
technologies across a wide range of platforms and operating systems to quickly bring to market innovative
solutions that meet the evolving needs of our customers. We continue to offer flexible, performance-based
business models that align with our customers’ needs to create new revenue opportunities and differentiate
their products and services among their competitors.
7
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 High-Growth Markets. We continue to focus on wireless connectivity and communications
solutions taking advantage of enhanced 4G networks developed by wireless carriers and an increasing
availability of rich media and multi-media enabled Smartphones, Tablets, eReaders and other emerging
cellular and Wi-Fi devices.
Expand our Customer Base. In addition to introducing new products to current customers, we are growing
our domestic and international business through sales to new carriers and device manufacturers, as well as
increased penetration of the enterprise market, with particular focus on hospitality and public safety vertical
markets.
Selectively Pursue Partnerships and Acquisitions of Complementary Products and Services. We continue to
pursue partnerships and acquisition opportunities that will enhance our portfolio, help us enter
complementary markets, and extend our geographic reach. 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 two customers (Sprint and Verizon Wireless) and their respective affiliates in the Wireless
business segment accounted for 40.7% and 20.5%, respectively, of the Company’s total revenues for the
fiscal year 2012. In 2011, our three largest customers (Sprint, Verizon Wireless and AT&T) accounted for
24.8%, 18.4% and 11.7%, respectively, of our total revenues. 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. 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.
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 $24.8 million, $41.7 million, and $42.8 million for the years ended December 31, 2012, 2011
and 2010, respectively.
8
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-
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 carrier and OEM customers have the resources 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 carrier and OEM customers
elect to purchase software from us rather than design and develop their own software.
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, 2012, we owned 64 issued U.S.
patents and have 52 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
9
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.
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 currently use 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, 2012, we had a total of 337 employees within the following departments: 202 in
engineering, 74 in sales and marketing, 33 in operations and customer support and 28 in management and
administration. We are not subject to any collective bargaining agreement and we believe that our
relationships with our employees are good.
Item 1A. RISK FACTORS
Our future operating results are highly uncertain. Before deciding to invest in our common stock or to
maintain or 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 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 revenues from these products have not been able to
offset the decreases in our core connection management product revenues. 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
10
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.
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.
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, 2012, Sprint and Verizon Wireless comprised of 40.7 and 20.5%, 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.
In addition, in October 2012, Softbank agreed to acquire an approximately 70% ownership position in
Sprint Nextel, and the parent company of T-Mobile USA agreed to combine T-Mobile and MetroPCS
Communications. These transactions are each subject to regulatory review and approval. If approved, these
transactions could further intensify the competitive pressures that we face. Furthermore, the proposed
transactions could cause delays or cancellations of planned purchases of our products and services by these
carriers, particularly if there are proposed changes or uncertainties in the future management, product
offerings and technical specifications of these carriers.
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
11
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.
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,
12
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
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,
Google and Apple 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.
13
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 Enterprise products allow our customers to update mobile
devices from a home office and incorporate 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.
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.
We rely directly and indirectly on third-party intellectual property and licenses, which may not be
available on commercially reasonable terms or at all.
Many of the Company’s products and services include third-party intellectual property, which requires
licenses from those third parties directly to us or to unrelated companies which provide us with sublicenses
and/or execution of services for the operation of our business. These products and services include our
wireless suite of products as well as our productivity and graphics products. The Company has historically
been able to obtain such licenses on reasonable terms. There is however no assurance that in the future the
necessary licenses could be obtained on acceptable terms or at all. If the Company or our third party
service providers are unable to obtain or renew critical licenses on reasonable terms, we may be forced to
terminate or curtail our products and services which rely on such intellectual property and our financial
condition and operating results may be materially adversely affected.
If we fail to continue to establish and maintain strategic relationships with mobile device manufacturers,
wireless carriers and network infrastructure 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
14
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.
The ongoing uncertainty and volatility in U.S. and worldwide economic conditions may adversely affect
our operating results.
Our operations and performance depend significantly on economic conditions in the United States and
worldwide. The U.S. and global economic outlook remain uncertain, primarily due to the European
sovereign debt crisis, weakness in U.S. discretionary consumer spending and uncertainties regarding
mandated tax increases and government spending cuts (referred to as the “fiscal cliff”), the slowing
economy in China and volatile oil prices. A general weakening of, and related decline of confidence in, the
U.S. and global economies or the curtailment in government or corporate spending could make it difficult
for current or potential 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. These and other economic factors could adversely affect demand for our products
and services and our financial condition and operating results, and may require us to record additional
charges related to restructuring costs and/or the impairment of long-lived assets.
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
15
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.
Our operating income or loss can change quarter to quarter and year to year due to a change in our sales
mix and the timing of our continued investments in research and development and infrastructure. We
continue to invest in research and development which is the lifeline of our technology portfolio. The
timing of these additional expenses can vary significantly quarter to quarter and even from year to year.
Our 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
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
16
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.
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;
our ability to meet our headcount hiring commitment to the state of Pennsylvania;
technological advances;
17
•
•
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 low 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.
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.
18
Security and privacy breaches in our systems may damage client relations and inhibit our growth.
The uninterrupted operation of our hosted solutions and the confidentiality and security of third-party
information is critical to our business. Any failures in our security and privacy measures could have a
material adverse effect on our financial position and results of operations. If we are unable to protect, or our
clients perceive that we are unable to protect, the security and privacy of our electronic information, our
growth could be materially adversely affected. A security or privacy breach may:
• Cause our clients to lose confidence in our solutions;
• Harm our reputation;
• Expose us to liability; and
•
Increase our expense from potential remediation costs.
While we believe we use proven applications designed for data security and integrity to process electronic
transactions, there can be no assurance that our use of these applications will be sufficient to address
changing market conditions or the security and privacy concerns of existing and potential clients.
Interruptions or delays in service from data center hosting facilities could impair the delivery of our
service and harm our business.
We currently serve our customers from data center hosting facilities. Any damage to, or failure of, our
systems generally could result in interruptions in our service. Interruptions in our service may reduce our
revenue, cause us to issue credits or pay penalties, cause customers to terminate their on-demand services
and adversely affect our renewal rates and our ability to attract new customers.
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 16,000 square feet in Sunnyvale, California under a lease that expires February 28,
2015. 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 that expires December 30, 2016 and Vancouver, Canada that
expires March 31, 2014.
Item 3. LEGAL PROCEEDINGS
The Company is and may become involved in various legal proceedings arising from its business activities.
While management does not believe the ultimate disposition of these matters will have a material adverse
impact on the Company’s consolidated results of operations, cash flows or financial position, litigation is
inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable
19
resolution could materially affect the Company’s future consolidated results of operations, cash flows or
financial position in a particular period.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable.
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 DECEMBER 31, 2012:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
YEAR ENDED DECEMBER 31, 2011:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$2.87
2.37
2.16
1.89
$17.03
9.49
4.22
1.73
$1.14
1.46
1.49
1.10
$7.90
3.94
1.45
0.96
On February 11, 2013, the closing sale price for our common stock as reported by NASDAQ was $1.70.
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, 2007 through December 31, 2012. The graph assumes that
$100 was invested in our common stock on December 31, 2007, 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
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
12/07
12/08
12/09
12/10
12/11
12/12
Smith Micro Software, Inc.
S&P Midcap 400
S&P MidCap Application Software
*$100 invested on 12/31/07 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2013 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
12/07
12/08
12/09
12/10
12/11
12/12
Smith Micro
Software, Inc.
100.00
65.64
108.03
185.83
13.34
17.71
S&P Midcap 400
100.00
63.77
100.00
63.66
S&P MidCap
Application
Software
Holders
87.61
91.94
110.94
109.02
128.51
126.77
127.46
149.02
As of February 11, 2013, there were approximately 169 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
The table set forth below shows all purchases of securities by us during the fiscal year 2012:
ISSUER PURCHASES OF EQUITY SECURITIES
Total
Number of
Shares (or
Units)
Purchased
Average
Price
Paid per
Share
(or
Unit)
Period
Total
Number of
Shares (or
Units)
Purchased
as Part of
Publicly
Announced
Plans or
Programs
Maximum
Number (or
Approximate
Dollar Value)
of Shares (or
Units) that
May Yet Be
Purchased
Under the
Plans or
Programs
Jan. 1-31, 2012
-
-
Feb. 1-29, 2012
4,812
$1.28
-
-
-
-
Mar. 1-31. 2012
Apr. 1-30, 2012
-
-
$2.61
125,000
4,875,000
-
-
4,875,000
May 1-31, 2012
6,857
$1.71
196,500
4,678,500
$1.68
53,500
4,625,000
Jun. 1-30, 2012
July 1-31, 2012
-
-
-
Aug. 1-31, 2012
6,046
$1.76
Sep. 1-30, 2012
326
$1.65
Oct. 1-31, 2012
Nov. 1-30, 2012
Dec. 1-31, 2012
5,280
$1.65
-
-
-
4,625,000
4,625,000
4,625,000
4,625,000
4,625,000
4,625,000
Total
23,321(a)
375,000
4,625,000(b)
23
The above table includes:
(a)
Acquisition of stock by the Company as payment of withholding taxes in connection with the
vesting of restricted stock awards, in an aggregate amount of 23,321 shares during the periods set forth in
the table. All of the shares were cancelled when they were acquired.
(b)
Repurchases of stock under a program announced on November 2, 2011 authorizing the
repurchase by the Company of up to 5,000,000 shares 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 the
Company 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.
24
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 comprehensive income data for the years ended December 31, 2012, 2011 and 2010,
and the consolidated balance sheet data at December 31, 2012 and 2011, have been derived from audited
consolidated financial statements included elsewhere in this Annual Report. The consolidated statement of
comprehensive income data presented below for the years ended December 31, 2009 and 2008, and the
consolidated balance sheet data at December 31, 2010, 2009 and 2008 are derived from audited consolidated
financial statements that are not included in this Annual Report.
2012
Year Ended December 31,
2010
2011
2009
2008
Consolidated Statement of Comprehensive Income Data (in thousands, except per share data):
Revenues
130,501
43,329
57,767
$
$
$
$
107,279
$
98,424
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)
Non-operating income:
Change in fair value of contingent liabiltiy
Interest and other income, net
Income (loss) before provision for income taxes
Provision for income tax expense (benefit)
Net income (loss)
Other comprehensive income (loss), before tax:
Unrealized holding gains (losses) on available-
for-sale securities
Income tax expense (benefit) related to items
of other comprehensive income (expense)
Other comprehensive income (expense), net of tax
Comprehensive income (loss)
Net income (loss) per share:
Basic
Diluted
Weighted average shares:
Basic
Diluted
8,448
34,881
16,666
24,767
20,211
238
-
61,882
(27,001)
1,210
94
(25,697)
(234)
(25,463)
13,761
44,006
15,507
114,994
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
15,486
91,793
24,999
36,530
19,155
-
-
80,684
11,109
-
381
11,490
6,738
4,752
20,108
78,316
24,814
30,811
19,990
-
-
75,615
2,701
-
739
3,440
4,172
(732)
33
(24)
(14)
(118)
103
6
27
(25,436)
$
1
(25)
(159,631)
$
(6)
(8)
12,338
$
(47)
(71)
4,681
$
34
69
(663)
$
$
$
(0.71)
(0.71)
$
$
(4.48)
(4.48)
$
$
0.36
0.36
$
$
0.15
0.14
$
$
(0.02)
(0.02)
35,849
35,849
35,617
35,617
34,204
34,615
32,438
32,897
30,978
30,978
25
2012
2011
As of December 31,
2010
2009
2008
Consolidated Balance Sheet Data (in thousands):
Total assets
Total liabilities
Accumulated comprehensive earnings (deficit)
Total stockholders' equity
$
54,395
11,733
(168,539)
$
42,662
$
79,941
15,081
(143,103)
64,860
$
$
$
234,892
16,627
16,528
218,265
$
$
205,934
17,955
4,190
187,979
$
$
176,995
11,591
(491)
165,404
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;
uncertainty and volatility of current global economic conditions; our failure to successfully integrate
acquisitions; undetected software defects; our failure to protect intellectual property; exposure to intellectual
property claims; security and privacy breaches in our systems or interruptions or delays in the services we
provide which could damage client relations; our inability to raise more funds to meet our capital needs; being
delisted from NASDAQ; and doing business internationally.
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.
26
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.
For the year ended December 31, 2012, revenues to two customers and their respective affiliates in the
Wireless business segment accounted for 40.7% and 20.5% of the Company’s total revenues and 78% of
accounts receivable. 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.
Results of Operations
The following table sets forth certain consolidated statement of comprehensive income data as a percentage
of total revenues for the periods indicated:
Year Ended December 31,
2011
2010
2012
Revenues
100.0 %
100.0 %
100.0 %
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)
Non-operating income:
Change in fair value of contigent liability
Interest and other income, net
Income (loss) before provision for income taxes
Provision for income tax expense (benefit)
Net income (loss)
19.5
80.5
38.5
57.2
46.6
0.5
-
142.8
(62.3)
23.8
76.2
46.0
72.2
43.8
5.5
195.5
363.0
(286.8)
11.9
88.1
22.8
32.8
18.4
-
-
74.0
14.1
2.8
0.2
(59.3)
(0.5)
(58.8) %
-
-
0.2
(286.6)
(10.3)
(276.3) %
0.1
14.2
4.7
9.5 %
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:
27
• Wireless, which includes our QuickLink, NetWise and CommSuite family of products; and
• Productivity & Graphics, which includes our consumer-based products: Poser, Anime Studio,
Manga Studio, MotionArtist and StuffIt.
The following table shows the revenues generated by each business segment (in thousands):
Wireless
Productivity & Graphics
Corporate/Other
Total revenues
Cost of revenues
Gross profit
Year Ended December 31,
2011
2012
2010
$
36,963
$
48,711
$
118,684
6,175
191
8,816
240
11,399
418
43,329
8,448
34,881
$
57,767
13,761
44,006
$
130,501
15,507
114,994
$
“Corporate/Other” refers to the consulting portion of our services sector which has been de-
emphasized and is not 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.
Change in fair value of contingent liability. This is the return-to-profit of a milestone payment accrual
that we did not have to pay.
Interest and other income, net. Interest and other income, net is primarily 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.
Provision for income tax expense (benefit). The Company accounts for income taxes as required by
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic No. 740, Income Taxes. This statement requires the recognition of deferred tax assets and
liabilities for the future consequences of events that have been recognized in the Company’s
financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws.
28
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 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, 2012 Compared to the Year Ended December 31, 2011
Revenues. Revenues of $43.3 million for fiscal year 2012 decreased $14.5 million, or 25.0%, from
$57.8 million for fiscal year 2011. Wireless revenues of $36.9 million decreased $11.8 million, or
24.1%, primarily due to lower sales of our base business connection manager products to our carrier
customers of $15.5 million and PC OEM customers of $3.2 million, partially offset by higher sales of
our CommSuite products of $3.9 million and NetWise products of $3.0 million. Productivity &
Graphics sales decreased $2.6 million, or 30.0%, primarily due to lower sell through at large retailers
and lower overall demand. 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 continue to experience lower demand in our North American marketplace. We
have launched new wireless products and services, but 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 $8.4 million for fiscal year 2012 decreased $5.4 million, or
38.6%, from $13.8 million for fiscal year 2011. Amortization of intangibles decreased $3.8 million
due to the impairment charge we recorded for these assets in fiscal year 2011. There was no
amortization of intangibles in fiscal year 2012. Direct product costs decreased $1.6 million
primarily due to cost reductions.
Gross profit. Gross profit of $34.9 million or 80.5% of revenues for fiscal year 2012 decreased $9.1
million, or 20.7%, from $44.0 million, or 76.2% of revenues for fiscal year 2011. The 4.3 percentage
point increase in gross profit was primarily due to no amortization of intangibles in fiscal year 2012
of 6.5 points, partially offset by lower product margins of 2.2 points as a result of the lower revenues
not absorbing our fixed overhead costs.
Selling and marketing. Selling and marketing expenses of $16.7 million for fiscal year 2012
decreased $9.9 million, or 37.3%, from $26.6 million for fiscal year 2011. This decrease was primarily
due to lower personnel related expenses of $5.8 million and lower third party commissions and
advertising costs of $0.8 million. Amortization of intangibles decreased $2.1 million due to the
impairment charge we recorded for these assets in fiscal year 2011. There was no amortization of
intangibles in fiscal year 2012. Stock-based compensation decreased from $2.1 million to $0.9
million.
Research and development. Research and development expenses of $24.8 million for fiscal year
2012 decreased $16.9 million, or 40.6%, from $41.7 million for fiscal year 2011. Personnel related,
travel and supplies and equipment expenses decreased $16.1 million. Stock-based compensation
decreased from $1.4 million to $0.8 million, or $0.6 million. Amortization of purchased
technologies decreased $0.2 million due to the impairment charge we recorded for these assets in
fiscal year 2011. There was no amortization of purchased technologies in fiscal year 2012.
29
General and administrative. General and administrative expenses of $20.2 million for fiscal year
2012 decreased $5.0 million, or 20.0%, from $25.2 million for fiscal year 2011. This decrease was
primarily due to personnel related expenses of $1.8 million, lower outside legal and accounting fees
of $0.7 million, and other cost reductions of $0.6 million. Stock-based compensation expense
decreased from $4.3 million to $2.4 million, or $1.9 million.
Restructuring expenses. Restructuring expenses of $0.2 million for fiscal year 2012 were related to
one-time employee termination and other costs as a result of headcount reductions. 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
Goodwill and long-lived asset impairment. There were no impairment charges in fiscal year 2012.
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.
Change in fair value of contingent liability. When we acquired Core Mobility in October 2009, we
established a pre-acquisition contingency made up of two milestone payments that were part of the
purchase price of the business. The first milestone was met and $0.6 million was paid in March
2010. The second milestone was not met and therefore not paid. The Core Mobility shareholders
disputed the second milestone in a lawsuit which was found in our favor in August 2012. The
plaintiffs chose not to appeal the decision. As a result, we have reduced the contingent liability of
$1.2 million to its fair value of $0 at December 31, 2012.
Interest and other income, net. Interest and other income, net was $0.1 million for both fiscal year
2012 and 2011.
Provision for income tax expense (benefit). We recorded an income tax benefit of $0.2 million for
fiscal year 2012 related to state R&D tax credits of $0.7 million, partially offset by state and foreign
income taxes of $0.5 million. We recorded an income tax benefit of $5.9 million for fiscal year
2011. 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, 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.
30
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
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, net. Interest and other income, net was $0.1 million for both fiscal year
2011 and 2010.
Provision for income tax expense (benefit). 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.
Liquidity and Capital Resources
At December 31, 2012, we had $32.2 million in cash and cash equivalents and short-term investments and
$34.8 million of working capital.
In November 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
31
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. During the
fiscal year 2012 we repurchased 375,000 shares at a cost of $0.8 million.
Capital expenditures were only $0.3 million for the fiscal year 2012 versus $13.4 million for the fiscal year
2011 as we expanded our Aliso Viejo datacenter and built out our new Pittsburgh facility in 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 are hopeful that our new products will gain market acceptance in order to increase our revenues in
upcoming quarters. If our new products do not gain market acceptance, or market acceptance is slower
than anticipated, then we anticipate that it will be necessary to undertake additional restructuring to lower
costs to bring them more in line with actual revenues, thus slowing the use of cash. 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 2012, net cash used in operations was $12.8 million primarily due to our net loss adjusted for
depreciation, amortization, non-cash stock-based compensation, and inventory and accounts
receivable reserves of $17.0 million, a decrease of accounts payable and accrued liabilities of $2.2
million, and an increase in accounts receivable of $1.5 million. This usage was partially offset by a
decrease of income taxes receivable of $7.6 million and a decrease in prepaid and other assets of
$0.3 million.
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, deferred income taxes and inventory and accounts receivable reserves of $28.0
million, an increase of income taxes receivable of $5.4 million and a decrease in accounts payable
and accrued liabilities of $2.3 million. This usage was partially offset by a decrease in accounts
receivable of $20.0 million and lease incentives of $2.2 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, deferred income taxes and
inventory and accounts receivable reserves of $34.0 million and a 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.
Investing Activities
In 2012, cash provided by investing activities of $24.9 million was due to the sale of short-term
investments of $25.2 million, partially offset by capital expenditures of $0.3 million.
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.
32
Financing Activities
In 2012, cash used in financing activities of $0.7 million was due to the repurchase of our common
stock of $0.8 million which was partially offset by cash received from the sale of stock for our
employee stock purchase plan of $0.1 million.
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.
Contractual Obligations and Commercial Commitments
As of December 31, 2012, we had no debt. The following table summarizes our contractual
obligations as of December 31, 2012 (in thousands):
Payments due by period
Contractual obligations:
Operating lease obligations
Purchase obligations
Total
Total
17,870
778
18,648
$
$
Less than
1 year
2,611
778
3,389
1-3 years
5,030
-
5,030
3-5 years
3,915
-
3,915
More than
5 years
6,314
-
6,314
$
$
$
$
$
$
$
$
During our normal course of business, we have made certain indemnities, commitments and
guarantees under which we may be required to make payments in relation to certain transactions.
These include: intellectual property indemnities to our customers and licensees in connection with
the use, sale and/or license of our products; indemnities to various lessors in connection with facility
leases for certain claims arising from such facility or lease; indemnities to vendors and service
providers pertaining to claims based on the negligence or willful misconduct; indemnities involving
the accuracy of representations and warranties in certain contracts; and indemnities to directors and
officers of the Company to the maximum extent permitted under the laws of the State of Delaware.
We may also issue a guarantee in the form of a standby letter of credit as security for contingent
liabilities under certain customer contracts. The duration of these indemnities, commitments and
guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities,
commitments and guarantees may not provide for any limitation of the maximum potential for future
payments we could be obligated to make. We have not recorded any liability for these indemnities,
commitments and guarantees in the accompanying consolidated balance sheets.
Real Property Leases
Our corporate headquarters, 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 16,000 square feet in
Sunnyvale, California under a lease that expires February 28, 2015. 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 that expires December 30, 2016 and Vancouver, Canada that
expires March 31, 2014.
Off-Balance Sheet Arrangements
As of December 31, 2012, we did not have any off-balance sheet arrangements.
33
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.
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). For these software and software-related
multiple element arrangements, we must: (1) determine whether and when each element has been
delivered; (2) determine whether undelivered products or services are essential to the functionality of
the delivered products and services; (3) determine the fair value of each undelivered element using
vendor-specific objective evidence (“VSOE”), and (4) allocate the total price among the various
elements. VSOE of fair value is used to allocate a portion of the price to the undelivered elements
and the residual method is used to allocate the remaining portion to the delivered elements. Absent
VSOE, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any
undelivered element or until all elements of the arrangement have been delivered. However, if the
only undelivered element is post contract support, the entire arrangement fee is recognized ratably
over the performance period. We determine VSOE for each element based on historical stand-alone
sales to third parties or from the stated renewal rate for the elements contained in the initial
arrangement. In determining VSOE, we require that a substantial majority of the selling prices for a
product or service fall within a reasonably narrow pricing range. We have established VSOE for our
post contract support services and non-recurring engineering.
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
34
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 $0.9 million, $1.2 million, and $2.0 million
for the years ended December 31, 2012, 2011 and 2010, 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, 2012, software has been substantially completed concurrently with the establishment
of technological feasibility; accordingly, no costs have been capitalized to date.
Impairment of Goodwill and Long-Lived Assets
During the period ended September 30, 2011, the Company concluded that a 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 – remained at depressed prices.
As such, the Company performed Step 1 of the goodwill impairment test which failed, triggering
Step 2. As a result of this analysis, the excess 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.
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
35
September 30, 2011 which was allocated pro-rata to the intangible assets of $13.4 million and $5.3
million to equipment and improvements, primarily related to our leasehold improvements.
As a result of the $112.9 million goodwill and long-lived asset impairment charge recorded in the
fiscal quarter ended September 30, 2011, there were no more goodwill or intangible assets on the
balance sheet as of that date.
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 was 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
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
in ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of
paragraphs
36
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 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. The Company has
implemented this guidance.
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. The Company
has implemented this guidance and its adoption has not had an impact on its consolidated results of
operations and financial condition.
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,
2012, 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, 2012, 2011 and 2010, our revenues denominated in
foreign currencies were $0.6 million, $1.1 million, and $1.7 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.
37
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, 2012. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer have determined that as of December 31, 2012, 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
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, 2012 that have materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
38
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, 2012. 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, 2012, 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.
39
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 15, 2013:
Name
Age
Position
William W. Smith, Jr.
Andrew C. Schmidt
Von Cameron
Rick Carpenter
Chris G. Lippincott
David P. Sperling
Steven M. Yasbek
65
51
49
50
41
44
59
Chairman of the Board, President and Chief Executive Officer
Vice President and Chief Financial Officer
Executive Vice President – Worldwide Sales
Senior Vice President – Engineering
Senior Vice President – Global 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 then served as the Vice President and General Manager of the
Wireless Business Unit. Mr. Carpenter currently serves as the Senior Vice President of Engineering. 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
40
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 currently serves as the Senior Vice President of Global 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 2013 Annual Meeting of Stockholders, which is hereby incorporated by
reference.
The section titled “Corporate Governance” appearing in our Proxy Statement for our 2013 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 2012.
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.
41
Item 11. EXECUTIVE COMPENSATION
The section titled “Executive Compensation and Related Information” appearing in our Proxy Statement for our
2013 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 2013 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, 2012 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
2,275
-
2,275
$7.02
-
$7.02
2,266
-
2,266
(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 2013 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 2013 Annual Meeting of Stockholders
is incorporated herein by reference.
42
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:
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ....................................................... F-1
CONSOLIDATED BALANCE SHEETS ..................................................................................................................... F-3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME .................................................................... F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ...................................................................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS ............................................................................................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................................................................... F-7
(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.
Page
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ......................................................................... S-1
(3) Exhibits
Exhibit No.
3.1
3.1.1
3.1.2
3.1.3
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
and
of
Incorporation of Registrant as filed
August 18, 2005 with Delaware
Secretary of State.
Certificate of Designations of Series A
Junior Participating Preferred Stock of
Smith Micro Software, Inc. dated April
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
the period ended
Form 10-K
December 31, 2005.
for
Incorporated by reference t Exhibit 3.1 to
the Registrant’s Current Report on Form
8-K filed on April 25, 2012.
43
Exhibit No.
3.2
3.3
4.1
4.2
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
Title
25, 2012.
Amended and Restated Bylaws of the
Registrant.
Certificate of Amendment of Amended
and Restated Bylaws of Smith Micro
Software, Inc.
Specimen certificate representing shares
of Common Stock of the Registrant.
Stockholder Rights Agreement, dated as
of April 24, 2012, between Smith Micro
Software, Inc. and Computershare Trust
Company, N.A., as Rights Agent.
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
(d/b/a Verizon Wireless) and
the
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.
44
Method of Filing
Incorporated by reference to Exhibit 3.2
to the Registrant's Registration Statement
No. 33-95096.
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 4.1
to the Registrant’s Current Report on
Form 8-K filed on April 25, 2012.
by
reference
to
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.
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
the year ended
on Form 10-K for
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.
Exhibit No.
10.6
10.7
14.1
Title
Summary of oral agreement dated June
2005 by and between William W.
Smith, Jr. and the Registrant.
Amended & Restated Employee Stock
Purchase Plan.
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.
to
Method of Filing
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.
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.
45
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 20, 2013
Date: February 20, 2013
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 20, 2013
February 20, 2013
February 20, 2013
February 20, 2013
February 20, 2013
February 20, 2013
46
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, 2012 and 2011, and the related consolidated statements of
comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2012. 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, 2012 and 2011, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2012, 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, 2012, 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 20, 2013 expressed an unqualified
opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ SINGERLEWAK LLP
Los Angeles, California
February 20, 2013
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, 2012, 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, 2012, 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, 2012 and 2011, and the related consolidated
statements of comprehensive income, stockholders’ equity, and cash flows, and the financial statement
schedule, for each of the three years in the period ended December 31, 2012 of the Company, and our report
dated February 20, 2013 expressed an unqualified opinion.
/s/ SINGERLEWAK LLP
Los Angeles, California
February 20, 2013
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 $482 (2012) and $1,382 (2011)
Income tax receivable
Inventories, net of reserves for excess and obsolete inventory
of $352 (2012) and $417 (2011)
Prepaid expenses and other current assets
Deferred tax asset
Total current assets
Equipment and improvements, net
Other assets
Total assets
Liabilities and S tockholders' 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 6)
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; 100,000,000 shares authorized;
35,873,418 and 35,611,976 shares issued and outstanding at December 31,
2012 and December 31, 2011, respectively
Additional paid-in capital
Accumulated comprehensive deficit
Total stockholders’ equity
Total liabilities and stockholders' equity
December 31,
2012
2011
$
18,873
13,328
$
7,475
38,497
8,953
681
176
903
89
43,003
11,211
181
54,395
$
$
1,978
4,829
1,436
8,243
3,399
91
3,490
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
-
-
36
211,165
(168,539)
42,662
54,395
$
36
207,927
(143,103)
64,860
79,941
$
See accompanying notes to the consolidated financial statements.
F-3
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(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)
Non-operating income:
Change in fair value of contingent liability
Interest and other income, net
Income (loss) before provision for income taxes
Provision for income tax expense (benefit)
Net income (loss)
Year ended December 31,
2011
2012
2010
$
43,329
8,448
34,881
$
57,767
13,761
44,006
$
130,501
15,507
114,994
16,666
24,767
20,211
238
-
61,882
(27,001)
1,210
94
(25,697)
(234)
(25,463)
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
$
Other comprehensive income (loss), before tax:
Unrealized holding gains (losses) on available-for-sale securities
Income tax expense (benefit) related to items of other
comprehensive income (expense)
Other comprehensive income (expense), net of tax
Comprehensive income (loss)
33
(24)
(14)
6
27
(25,436)
$
1
(25)
(159,631)
$
(6)
(8)
12,338
$
Net income (loss) per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
$
$
(0.71)
(0.71)
$
$
(4.48)
(4.48)
$
$
0.36
0.36
35,849
35,849
35,617
35,617
34,204
34,615
See accompanying notes to the consolidated financial statements.
F-4
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
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
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
Comprehensive loss
BALANCE, December 31, 2011
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
Shares repurchased and cancelled
Comprehensive loss
BALANCE, December 31, 2012
Additional
paid-in
capital
Accumulated
comprehensive
income (deficit)
Total
$
183,756
$
4,190
$
187,979
Common stock
Shares
33,380
Amount
$
33
760
-
868
1
1
-
7,254
4,559
4,936
-
-
-
(37)
-
(331)
-
-
-
1,543
-
7,255
4,559
4,937
(331)
1,543
-
-
34,971
-
-
$
35
(15)
-
-
$
201,702
$
12,338
16,528
(15)
12,338
218,265
$
7
-
12
-
-
575
-
1
(37)
96
-
-
-
-
35,612
-
-
$
36
973
5,556
(303)
413
(426)
-
-
-
-
-
-
$
207,927
$
(159,631)
(143,103)
32
-
16
-
-
574
-
-
(23)
53
(375)
-
35,873
-
-
-
-
$
36
66
3,883
(40)
66
(753)
-
-
-
-
-
-
$
211,165
$
(25,436)
(168,539)
12
973
5,557
(303)
413
(426)
(159,631)
64,860
$
16
66
3,883
(40)
66
(753)
(25,436)
42,662
$
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,
2011
2010
2012
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
Change in fair value of contingent liability
Loss 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
Deferred income taxes
Change in operating accounts, net of effect from acquisitions:
Accounts receivable
Income tax receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Net cash provided by (used in) operating activities
Investing activities:
Acquisitions, net of cash received
Capital expenditures
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
Repurchase of common stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Cash paid for income taxes
$
(25,463)
$
(159,606)
$
12,346
4,430
-
(1,210)
163
-
1,045
73
-
3,949
-
(1,473)
7,612
60
268
(2,259)
(12,805)
-
(322)
25,196
24,874
-
66
16
(753)
(671)
11,398
7,475
18,873
$
10,177
112,904
-
181
2,223
1,244
158
-
6,530
414
20,043
(5,421)
(97)
58
(2,355)
(13,547)
-
(13,431)
16,172
2,741
11,778
-
-
29
-
851
203
(1,543)
9,496
849
(6,516)
(1,892)
(167)
259
(949)
24,744
(532)
(6,312)
(23,418)
(30,262)
-
413
12
-
425
(10,381)
17,856
7,475
$
1,543
-
7,254
-
8,797
3,279
14,577
17,856
$
$
257
$
700
$
5,776
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 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, 2012, two customers, each accounting for over 10% of revenues,
made up 61.2% of revenues and 78% of accounts receivable, and three suppliers, each with more
than 10% of inventory purchases, totaled 1% of accounts payable. For the year ended December 31,
2011, three customers, each accounting for over 10% of revenues, made up 54.9% of revenues and
F-8
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 78% of accounts receivable,
and five suppliers, each with more than 10% of inventory purchases, totaled 5% 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, 2012 and 2011, bank
balances totaling approximately $9.1 million and $3.3 million, respectively, were uninsured. As of
January 1, 2013, the Dodd-Frank Deposit Insurance Provision which provided insurance on
substantially all deposits held in non-interest bearing transaction accounts, expired. Had this
provision expired at year-end, our uninsured bank balance would have been approximately $18.6
million at December 31, 2012.
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, 2012, our net inventory balance of $0.2 million consisted of $0.1 million of assembled
products and $0.1 million of components. 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.
F-9
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation is computed using the straight-line
method based on the estimated useful lives of the assets, generally ranging from three to seven years.
Leasehold improvements are amortized using the straight-line method over the shorter of the
estimated useful life of the asset or the lease term.
Internal Software Development Costs
Development costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until technological feasibility has
been established. The 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,
2012, software has been substantially completed concurrently with the establishment of technological
feasibility; accordingly, no costs have been capitalized to date.
Impairment of Goodwill and Long-Lived Assets
During the period ended September 30, 2011, the Company concluded that a 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 – remained at depressed prices.
As such, the Company performed Step 1 of the goodwill impairment test which failed, triggering
Step 2. As a result of this analysis, the excess 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.
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 pro-rata to the intangible assets of $13.4 million and $5.3
million to equipment and improvements, primarily related to our leasehold improvements.
As a result of the $112.9 million goodwill and long-lived asset impairment charge recorded in the
fiscal quarter ended September 30, 2011, there were no more goodwill or intangible assets on the
balance sheet as of that date.
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.
F-10
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). For these software and software-related
multiple element arrangements, we must: (1) determine whether and when each element has been
delivered; (2) determine whether undelivered products or services are essential to the functionality of
the delivered products and services; (3) determine the fair value of each undelivered element using
vendor-specific objective evidence (“VSOE”), and (4) allocate the total price among the various
elements. VSOE of fair value is used to allocate a portion of the price to the undelivered elements
and the residual method is used to allocate the remaining portion to the delivered elements. Absent
VSOE, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any
undelivered element or until all elements of the arrangement have been delivered. However, if the
only undelivered element is post contract support, the entire arrangement fee is recognized ratably
over the performance period. We determine VSOE for each element based on historical stand-alone
sales to third parties or from the stated renewal rate for the elements contained in the initial
arrangement. In determining VSOE, we require that a substantial majority of the selling prices for a
product or service fall within a reasonably narrow pricing range. We have established VSOE for our
post contract support services and non-recurring engineering.
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 $0.9 million, $1.2 million and $2.0 million
for the years ended December 31, 2012, 2011 and 2010, respectively.
F-11
Advertising Expense
Advertising costs are expensed as incurred. Advertising expenses were $0.6 million, $0.7 million,
and $0.9 million for the years ended December 31, 2012, 2011 and 2010, 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.
Numerator:
Net income (loss) available to common stockholders
Denominator:
Weighted average shares outstanding - basic
Year Ended December 31,
2012
2010
2011
(in thousands, except per share amounts)
($25,463)
($159,606)
$12,346
35,849
35,617
34,204
Potential common shares - options (treasury stock method)
-
-
411
Weighted average shares outstanding - diluted
35,849
35,617
34,615
Shares excluded (anti-dilutive)
174
126
-
Shares excluded due to an exercise price greater than
weighted average stock price for the period
1,453
1,561
1,950
Net income (loss) per common share:
Basic
Diluted
($0.71)
($0.71)
($4.48)
($4.48)
$0.36
$0.36
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
in ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of
paragraphs
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
F-12
for reclassifications out of accumulated other comprehensive income for annual and interim
financial statements for public, private, and non-profit entities.
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. The Company has
implemented this guidance.
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. The Company
has implemented this guidance and its adoption has not had an impact on its consolidated results of
operations and financial condition.
2. Fair Value of Contingent Liability
When we acquired Core Mobility in October 2009, we set up a pre-acquisition contingency for two
milestone payments that were part of the purchase price of the business. The first milestone payment of
$0.6 million was met and paid in March 2010. The second milestone payment of $1.2 million was not met
and therefore not paid. The Core Mobility shareholders disputed this claim in a lawsuit which was settled
in August 2012, when the plaintiffs chose not to appeal our court victory.
As a result of the litigation victory, we were no longer liable to pay this second milestone payment and the
$1.2 million contingent liability was returned to profit as required by FASB ASC Topic No. 805, Business
Combinations. In accordance with FASB ASC Topic No. 820, Fair Value Measurement, the fair value of
this contingent liability became zero once it was determined that we did not have to pay it. The fair value
of this contingent liability is as follows (in thousands):
Fair Value Measurements Using
Quoted Prices
in Acitve
Markets for
Identical Assets
(Level 1)
$ -
Significant
Other
Significant
Observable Unobservable
Inputs
(Level 2)
$ -
Inputs
(Level 3)
$ -
Total
Gains
$1,210
Description
Contingent liability
Period Ended
December 31, 2012
$ -
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
amounted to approximately 20% of the Company’s worldwide workforce. The Restructuring Plan was
implemented primarily during the fourth quarter of the Company’s 2011 fiscal year. Of the total charges,
all but approximately $0.4 million were cash expenditures.
F-13
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):
De ce mbe r 31, 2010
One-time employee termination benefits
Lease/rental terminations
Relocation, move, other expenses
Total
Balance Provision Usage
$
$
$ -
-
-
$ -
2,230
558
396
3,184
$
(1,129)
(110)
(284)
(1,523)
$
Reclass
$ -
4
$
4
De ce mbe r 31, 2011
Balance
$
1,101
448
116
1,665
$
In February 2012, we undertook an additional Restructuring Plan that included a further reduction of
headcount of 7-8% and other cost reductions that would result in annualized savings of approximately $7.0
million. One-time employee termination and other costs resulted in additional restructuring expenses of
$0.2 million was recorded in year ended December 31, 2012.
The following is the activity in our restructuring liability account which is included in the accrued liabilities
line item on the balance sheet for the period ended December 31, 2012 (in thousands):
De ce mbe r 31, 2011
Balance
$
$
Provision-net Usage
$
145
(12)
105
238
(1,238)
(436)
(221)
(1,895)
$
$
1,101
448
116
1,665
De ce mbe r 31, 2012
Balance
$
8
-
-
$
8
$
One-time employee termination benefits
Lease/rental terminations
Relocation, move, other expenses
Total
4. Balance Sheet Details
Short-Term Investments
Short-term investments consist of 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. Available-for-sale securities with contractual maturities of less
than 12 months were as follows (in thousands):
Corporate notes, bonds and paper
Government securities/money market
December 31, 2012
Amortized
Gross
cost basis unrealized loss Fair value
9,084
$
$
4,244
9,091
4,245
(7)
(1)
$
Amortized
cost basis
$
31,217
7,321
December 31, 2011
Gross
unrealized loss
$
(37)
(4)
Fair value
$
31,180
7,317
Total
$
13,336
$
(8)
$
13,328
$
38,538
$
(41)
$
38,497
There was a de minimis amount of realized gains recognized for the year ended December 31 2012.
There were no realized gains (losses) recognized in interest and other income for the years ended
December 31, 2011 and 2010.
F-14
Equipment and Improvements
Equipment and improvements consist of the following (in thousands):
December 31,
Computer hardware, software, and equipment
Leasehold improvements
Office furniture and fixtures
Less accumulated depreciation and amortization
Equipment and improvements, net
$
$
2012
16,122
6,368
1,611
24,101
(12,890)
11,211
2011
16,277
6,283
1,712
24,272
(8,790)
15,482
$
$
Depreciation and amortization expense on equipment and improvements was $4.4 million, $4.1
million and $2.9 million for the years ended December 31, 2012, 2011 and 2010 respectively.
December 31,
2011
$
4,417
1,665
1,210
326
(53)
76
7,641
$
Other Assets
These are office rent deposits.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Salaries and benefits
Restructuring
Earnouts/holdbacks
Royalties and revenue sharing
Income taxes
Marketing expenses, rebates and other
Total accrued liabilities
2012
$
4,061
8
-
544
167
49
4,829
$
5. Income Taxes
A summary of the income tax expense is as follows (in thousands):
F-15
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Excess tax benefits related to stock based compensation
Tax deficiencies related to restricted stock expense
Other adjustments
Total deferred
Total provision
Year Ended December 31,
2011
2010
2012
$
50
(440)
156
(234)
-
-
-
-
-
-
$
(234)
$
(6,844)
190
311
(6,343)
(873)
1,713
-
(426)
-
414
(5,929)
$
$
3,071
652
54
3,777
943
(82)
1,543
(15)
(1)
2,388
6,165
$
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,
2011
2010
2012
Federal statutory rate
State tax, net of federal benefit
Equity compensation
R&D tax credit
Goodwill impairment
Other
Change in valuation allowance
35 %
3
(2)
-
-
35 %
4
-
-
35 %
5
3
(5)
(5)
-
(4)
(31)
1 %
-
(30)
4 %
(5)
-
33 %
The major components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
F-16
Current
Various reserves
Nondeductible accruals
Prepaid expenses
Other
Valuation allowance
Total Current
Non- current
Credit carryforwards
Net operating loss carryforwards
Fixed assets
Amortization
Identifiable intangibles acquired
Equity based compensation
Other
Valuation allowance
Total Non-current
Year Ended December 31,
2011
2012
$
199
1,352
(95)
43
(1,410)
89
$
3,708
23,808
1,299
31,483
(2,239)
934
24
(59,108)
(91)
$
$
369
1,661
(96)
25
(1,951)
$
8
4,223
11,286
1,695
35,252
(2,288)
978
83
(51,239)
(10)
$
The Company has federal and state net operating loss carryforwards of approximately $55.0 million and
$83.4 million, respectively, at December 31, 2012, to reduce future cash payments for income taxes. Of the
$55.0 million of NOL carryforwards at December 31, 2012, $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 2024
through 2031 and state net operating loss carryforwards will expire 2015 through 2031. The Company also
had $0.5 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 $3.4 million and $0.7
million, respectively, at December 31, 2012. These tax credits will begin to expire in 2027.
At December 31, 2012 and 2011, respectively, the Company had unrecognized tax benefits of
approximately $0.6 million and $0.3 million, including interest and penalties, respectively.
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 was 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
F-17
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.
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.
In 2007, the Company adopted FASB ASC Topic 740, “Income Taxes,” which clarifies the accounting for
income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before
being recognized in the financial statements. Management determined based on its evaluation of the
Company’s income tax positions that it has uncertain tax positions relating to research and development
(“R&D”) tax credits of $0.6 million at December 31, 2012 and $0.3 million at December 31, 2011 for
which the Company has not yet recognized an income tax benefit for financial reporting purposes.
Assuming these tax benefits had been recognized as of December 31, 2012, such benefit would have been
fully negated by a corresponding increase in the deferred income tax valuation allowance because the
Company has recorded a full valuation allowance against its recognized R&D tax credits of $3.0 million
due to uncertainty as to future realization.
The Company’s gross unrecognized tax benefits as of December 31, 2012 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
Gross Unrecognized tax benefits, ending balance
Year Ended December 31,
2011
2012
$
324
-
268
-
-
-
-
$
592
$ -
162
162
-
-
-
-
$
324
We recognized interest and penalties accrued related to unrecognized tax benefits in tax expense. During
the fiscal year 2012, we recognized approximately $38,000 in interest and penalties. We did not recognize
any interest and penalties in fiscal year 2011.
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 2009 through 2011 tax
years. State income tax returns are subject to examination for a period of three to four years after filing.
The Company closed an examination by the Internal Revenue Service (“IRS”) for the 2008 tax year in 2012
with no changes. As of December 31, 2012, the Company has been notified of audits with Illinois, New
York, and Texas. These audits are anticipated to begin in 2013. 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, 2012, a current estimate of the range
F-18
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, 2012 are as follows
(in thousands):
Year Ending December 31,
2013
2014
2015
2016
2017
Beyond
Total
Operating
2,611
$
2,606
2,424
2,128
1,787
6,314
17,870
$
Total rent expense was $2.7 million, $2.8 million and $2.5 million for the years ended December 31,
2012, 2011 and 2010, 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
The Company is and may become involved in various legal proceedings arising from its business
activities. While management does not believe the ultimate disposition of these matters will have a
material adverse impact on the Company’s consolidated results of operations, cash flows or financial
position, litigation is inherently unpredictable, and depending on the nature and timing of these
proceedings, an unfavorable resolution could materially affect the Company’s future consolidated
results of operations, cash flows or financial position in a particular period.
Other Contingent Contractual Obligations
During its normal course of business, the Company has made certain indemnities, commitments and
guarantees under which it may be required to make payments in 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
F-19
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, Customer Concentration and Geographical Information
Segment Information
Public companies are required to report financial and descriptive information about their reportable
operating segments as required by FASB ASC Topic No. 280, Segment Reporting. The Company has
two primary business units based on how management internally evaluates separate financial
information, business activities and management responsibility. Wireless includes our QuickLink,
NetWise and CommSuite family of products. Productivity & Graphics includes our consumer-based
products: Poser, Anime Studio, Manga Studio, MotionArtist and StuffIt. “Corporate/Other” revenue
includes the consulting portion of our services sector which has been de-emphasized and is not a
strategic element of our future plans.
The following table shows the revenues generated by each business unit (in thousands):
2012
Year Ended December 31,
2011
2010
Wireless
$
36,963
$
48,711
$
118,684
Productivity & Graphics
Corporate/Other
Total revenues
Cost of revenues
Gross profit
6,175
191
8,816
240
11,399
418
43,329
8,448
34,881
$
57,767
13,761
44,006
$
130,501
15,507
114,994
$
Customer Concentration Information
Revenues to two customers (Sprint and Verizon Wireless) and their respective affiliates in the
Wireless business segment accounted for 40.7% and 20.5%, respectively, of the Company’s total
revenues for the fiscal year 2012. In 2011, our three largest customers (Sprint, Verizon Wireless and
AT&T) accounted for 24.8%, 18.4% and 11.7%, respectively, of our total revenues. 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. 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.
F-20
Geographical Information
During the years ended December 31, 2012, 2011 and 2010, 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):
Year ended December 31,
2011
2010
2012
Americas
Asia Pacific
EM EA
Total revenues
$
$
$
37,724
2,871
2,734
43,329
51,784
2,812
3,171
57,767
121,495
1,889
7,117
130,501
$
$
$
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 $0.3
million, $0.5 million and $0.6 million for the years ended December 31, 2012, 2011 and 2010, 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
F-21
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.
Stock Compensation Expense
The Company accounts for all stock-based payment awards made to employees and directors based
on their fair values and recognized as compensation expense over the vesting period using the
straight-line method over the requisite service period for each award as required by FASB ASC
Topic No. 718, Compensation-Stock Compensation.
Valuation of Stock Option and Restricted Stock Awards
The assumptions used to compute the share-based compensation costs for the stock options granted
during the years ended December 31, 2012, 2011 and 2010, respectively, using the Black-Scholes
option pricing model, were as follows:
Weighted average grant-date fair value of stock options
Assumptions
Risk-free interest rate (weighted average)
Expected dividend y ield
Weighted average expected life (years)
Volatility (weighted average)
Forfeiture rate
Year Ended December 31,
2011
$1.16
2010
$2.97
2012
$0.80
0.5%
-
4
80.0%
13.7%
0.2%
-
1
73.0%
-
0.3%
-
1
72.0%
-
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. The forfeiture rate was based on modified employee turnover.
Grants of restricted stock are valued using the closing stock price on the date of grant. In the year
ended December 31, 2012, a total of 40,000 shares of restricted stock, with a total value of $0.1
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, 1.0 million shares of restricted stock, with a total
value of $2.5 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 fair values are estimated at the beginning of each offering period using a Black-Scholes
valuation model that uses the assumptions noted in the following table. The risk-free rate is based on
the U.S. treasury yield curve in effect at the time of grant. Expected volatility was based on the
historical volatility on the day of grant. Following is a schedule of the shares purchased, the fair
value per share, and the Black-Scholes model assumptions for each offering period:
F-22
O ffe ring Pe riod Ende d
Shares purchased for offering period
Fair value per share
(Ending)
March 31, S eptember 31, March 31, S eptember 31, March 31,
2012
44,666
$0.69
2011
43,335
$3.98
2011
52,762
$3.61
2012
8,052
$0.93
2013
-
$0.65
Assumptions
Risk-free interest rate (average)
Expected dividend yield
Weighted average expected life (years)
Volatility (average)
0.14%
-
0.5
74.0%
0.14%
-
0.5
78.0%
0.50%
-
0.5
105.0%
0.12%
-
0.5
72.0%
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):
2012
$
Year Ended December 31,
2011
$
2010
$
Cost of revenues
Selling and marketing
Research and development
General and administrative
Total non-cash stock compensation expense
13
865
765
2,306
3,949
31
1,922
1,198
3,379
6,530
101
2,529
2,505
4,361
9,496
$
$
$
Total share-based compensation for each year includes cash payment of income taxes related to
grants of restricted stock in the amounts of $0.4 million, $1.5 million and $2.1 million for the years
ended December 31, 2012, 2011 and 2010, respectively.
Stock Options
A summary of the Company’s stock options outstanding under the 2005 Plan as of December 31,
2012 and the activity during the years ended herein are as follows (in thousands except per share
amounts):
F-23
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
(2,167 options exercisable at a weighted average exercise
price of $11.03)
Granted (weighted average fair value of $0.80)
Exercised
Cancelled
Outstanding as of December 31, 2012
Shares
Weighted Ave.
Exercise Price
Aggregate
Intrinsic Value
3,536
$
11.29
20
(760)
(90)
2,706
25
(7)
(557)
2,167
826
(32)
(686)
2,275
$
$
$
$
10.51
9.55
13.80
11.69
$
$
$
$
4.07
1.77
14.04
11.03
$
$
$
$
1.39
0.50
12.37
7.02
$
-
$
-
$
-
Exercisable as of December 31, 2012
1,474
$
10.09
$
-
Vested and expected to vest at December 31, 2012
2,171
$
7.29
$
-
During the year ended December 31, 2012, options to acquire 32,000 shares with an intrinsic value
of $33,000 were exercised resulting in cash proceeds to the Company of $16,000. The weighted-
average grant-date fair value of options granted during the year ended December 31, 2012 was
$0.80. As of December 31, 2012, there is $6.3 million of unrecognized compensation costs related to
non-vested stock options and restricted stock granted under the Plan. At December 31, 2012, there
were 2.3 million shares available for future grants under the 2005 Stock Issuance / Stock Option
Plan.
Restricted Stock Awards
A summary of the Company’s restricted stock awards outstanding under the 2005 Plan as of
December 31, 2012, and the activity during years ended therein, are as follows (in thousands):
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
Granted
Vested
Cancelled and forfeited
Unvested at December 31, 2012
Number
of shares
1,415
933
(679)
(65)
1,604
1,000
(823)
(426)
1,355
995
(611)
(420)
1,319
F-24
Weighted average
grant date fair value
6.28
8.27
6.50
9.25
7.23
8.86
7.40
7.81
3.21
2.64
6.42
8.73
4.60
$
$
$
$
$
$
$
$
$
$
$
$
$
10. Stock Repurchase Program
In November 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. The
Company did not repurchase any shares in fiscal year 2011. The Company repurchased 375,000 shares at a
cost of $0.8 million during fiscal year 2012.
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-25
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 2012 and 2011 are as follows (in thousands, except per share data):
Selected quarterly financial data:
Revenues
Gross profit
Operating (loss)
Net (loss)
1st Quarter
Year ended December 31, 2012
2nd Quarter
3rd Quarter
4th Quarter
$
$
$
$
10,114
7,919
(9,615)
(9,682)
$
$
$
$
10,171
8,375
(6,824)
(6,825)
$
$
$
$
11,012
8,892
(6,007)
(4,813)
$
$
$
$
12,032
9,695
(4,555)
(4,143)
Net (loss) per share, basic (1)
$
(0.27)
$
(0.19)
$
(0.13)
$
(0.12)
Weighted average shares outstanding, basic
35,590
36,045
35,879
35,882
Net (loss) per share, diluted (1)
$
(0.27)
$
(0.19)
$
(0.13)
$
(0.12)
Weighted average shares outstanding, diluted
35,590
36,045
35,879
35,882
Selected 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
(1) Basic and diluted net (loss) per share is computed independently for each of the quarters presented.
Therefore, the sum of the quarterly per share amounts will not necessarily equal the total for the year.
F-26
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2012
(In thousands)
Balance at
beginning of
period
Additions
charged to
costs and
expenses
Balance at
end of
period
Deductions
Allowance for accounts receivable (1):
2012
2011
2010
Allowance for excess and obsolete inventory:
2012
2011
2010
$
1,382
855
1,045
$
417
558
1,221
$
1,045
1,244
851
$
73
158
203
$
(1,945)
(717)
(1,041)
$
(138)
(299)
(866)
$
482
1,382
855
$
352
417
558
(1) Allowances are for retail return reserves, marketing development funds and doubtful accounts.
S-1
[THIS PAGE INTENTIONALLY LEFT BLANK]
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.
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, 333-169671 and 333-179764) 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. and subsidiaries of
our reports dated February 20, 2013 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. and subsidiaries for the year ended December 31, 2012.
/s/ SINGERLEWAK LLP
Los Angeles, California
February 202, 2013
to access the hotspot feature on their smartphones, representing significant revenue
product. Beyond the technical and creative enhancements to these top-shelf graphics
leakage for the operator. QuickLink makes mobile hotspots easier and more secure
products, the team has made significant improvements in online marketing and go-to-
for consumers, while allowing operators to extend their brand and services to Wi-Fi
market strategy with channel partners to accelerate growth and drive a more profitable
devices, driving greater data revenues through increased hotspot usage.
Beyond mobile hotspots, 2012 saw the expansion of QuickLink to other new platforms,
including Windows 8 devices and silicon chipsets. The use of QuickLink MBIM Drivers
by chip vendors allows new USB and embedded modems to work with Windows 8
business. We are also developing new international channel partners to help increase
our market presence in countries such as India, UK, France, Brazil, China, and Korea.
Overall, we believe the Productivity and Graphics area of our business will continue to
contribute significantly to our top line in 2013.
computers, as well as with prior versions of Windows, eliminating the need for costly,
As we leverage our broad wireless and consumer software portfolios, and enhance
device-specific drivers. It also reduces support costs for operators by eliminating driver
our products into comprehensive solutions, we intend to exceed the expectations of
conflicts on legacy devices. Embedding connectivity solutions onto chipsets allows
our customers and shareholders in 2013. Smith Micro has proven time and time again
operators and device makers to focus on differentiating their products and services to
that we can adapt and recover through the peaks and troughs of each economic
and technology cycle. We are optimistic about our ability to prosper and find market
opportunities in a rapidly changing mobile technology market, and we appreciate your
support and confidence.
Best Regards,
William W. Smith, Jr.
Chairman, President and Chief Executive Officer
drive the top line, and Smith Micro is contributing on all fronts.
CommSuite is the next generation of our visual voicemail solution, designed to help
operators generate new revenue through integrated, rich media communications such
as videomail, animated messaging, live video streaming, voice-to-text transcription,
and social sharing of messages. With the increasing popularity of social messaging
services, operators are projected to lose billions in SMS revenues over the next few
years.4 CommSuite addresses this market shift by revitalizing legacy voicemail systems
with the latest in visual messaging technology, while driving rapid adoption of premium
apps through flexible “try and buy” deployment options. Even better, CommSuite
helps operators manage video messaging traffic through integration with our NetWise
solution. This is an important differentiator since video accounted for 51 percent of all
mobile traffic at the end of 2012.5
On the enterprise side of our business, we were honored to be included in the first annual
Aragon Research Globe report for Enterprise Mobile Management (EMM) software.6 Our
EMM solution was recognized for its standards-based approach and scalable platform,
which combines device connectivity, user management, and network optimization
capabilities. Mobile device management (MDM) has received plenty of attention in the
past year, particularly with the growing trend of employees bringing their own devices
to work, often called “BYOD” in the media. While there are many vendors providing
MDM products, few share our heritage serving Tier One wireless operators and device
makers. In fact, we have provided over-the-air device management capabilities for more
than 30 million mobile devices globally. By incorporating MDM, connectivity, security,
streaming video, and network optimization into our enterprise mobility strategy, we
B O A R D O F D I R E C T O R S
William W. Smith, Jr.
Chairman, President &
Chief Executive Officer
Andrew Arno
Director
Thomas G. Campbell
Gregory J. Szabo
Director
Director
Samuel Gulko
Director
O F F I C E R S & S E N I O R M A N A G E M E N T
Von Cameron
Executive Vice President,
Worldwide Sales
Chris Lippincott
Senior Vice President,
Global Operations
Andrew C. Schmidt
Vice President &
Chief Financial Officer
Rick Carpenter
Jim Mains
David P. Sperling
Senior Vice President, Engineering
Senior Vice President,
Chief Technology Officer
Products and Programs
Carla Fitzgerald
Dan Rawlings
Steven M. Yasbek
Senior Vice President, Marketing
Chief Strategy Officer
Chief Accounting Officer
C O N T A C T I N F O R M A T I O N
Corporate Headquarters
Transfer Agent & Registrar
Legal Counsel
51 Columbia
Aliso Viejo, CA 92656
(949) 362-5800
Computershare Trust Company N.A.
Loeb & Loeb LLP
250 Royall Street
Canton, MA 02021
(800) 962-4284
www.computershare.com
Los Angeles, CA 90067
Auditors
SingerLewak
Los Angeles, CA 90024
help enterprise customers maximize returns from their mobility investments.
4 http://ovum.com/2012/09/06/social-messaging-to-cost-telcos-54bn-by-2016/
Our Productivity and Graphics group produced several new versions of software in
2012, including Poser® 9, Anime Studio™ 9, Manga Studio™ 5, and the new MotionArtist™
5 http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11-520862.html
6 http://www.smithmicro.com/about/news/smith-micro-recognized-by-aragon-research-in-enterprise-mobile-management.aspx
Smith Micro maintains an investor relations program. If you have any questions or would like
additional information concerning the operations or financial statements, please contact:
1 http://www.cisco.com/en/US/solutions/collateral/ns341/ns525/ns537/ns705/ns827/white_paper_c11-520862.html
2 http://www.chetansharma.com/USmarketupdateQ22012.htm
3 http://www.smithmicro.com/about/news/nationwide-survey-reveals-increase-in-smartphone-hotspot-adoption.aspx
A D D I T I O N A L I N F O R M A T I O N
Todd Kehrli
MKR Group, Inc.
12198 Ventura Blvd., Suite 200
Los Angeles, CA 91604
(323) 468-2300
smsi@mkr-group.com
F R O M T H E C E O
Dear Fellow Shareholders,
Our 2012 performance reflects the beginning of
an important turning point for Smith Micro. The
technology strategy we have been working on for
several years is beginning to produce meaningful
results in the form of quarter-over-quarter revenue
increases. While broadband connectivity has been
the linchpin of our portfolio for the past decade, we
are now seeing growth from our premium mobile
applications and network control solutions that allow
William W. Smith, Jr.
Chairman, President and
Chief Executive Officer
wireless operators to generate new revenue streams while efficiently managing their
resources. Further, we are leveraging these technologies to help public and private
sector organizations take full advantage of the influx of mobile devices among their
workforces. Our wireless portfolio, comprised of QuickLink®, NetWise™, and CommSuite®
product families, uniquely helps our customers connect, control, and capitalize on the
power of the mobile Internet.
Smith Micro has a strong value proposition for a wireless market that is ripe with
opportunities. For example, estimates show mobile data traffic growing at a rate of
1.6 Exabytes per month in 20131, posing a major challenge for operators worldwide.
Wi-Fi networks are now integral to relieving cellular congestion, and our NetWise traffic
management solution is proving to increase Wi-Fi utilization by end-users. However,
Wi-Fi offload is only part of the answer. To remain competitive, operators must develop
traffic management strategies that ensure a high-quality wireless experience by
automatically connecting devices to the best network based on throughput, reliability,
roaming costs, and other dynamic conditions. Our NetWise solution is superior to
competing products in its ability to manage traffic to ensure the best possible user
experience under any conditions.
Monetizing data is an important goal for our wireless operator customers. Considering
almost 90 percent of tablets sold in the U.S. last year were Wi-Fi only2, wireless operators
are largely missing out on the data revenues associated with those devices. Our
QuickLink Hotspot solution helps operators by turning the smartphones consumers
already have in their hands into personal mobile hotspots that connect Wi-Fi devices to
3G and 4G networks. Although this trend is increasing, a recent survey of smartphone
users revealed a number of issues preventing broader adoption of personal hotspots,
including cost, usability, and privacy concerns.3 In addition, many hotspot users do not
pay their mobile operator for this feature, but instead use over-the-top applications
Smith Micro Software
2012 Annual Report