HARNESSTHE POWEROF MOBILITY--------------------------------------------------Smith Micro Software2014 Annual ReportHARNESSTHE POWEROF MOBILITY--------------------------------------------------Smith Micro Software2014 Annual Report F R O M T H E C E O
Dear Fellow Shareholders,
The end of 2014 was a positive turning point for
our business. We posted our first quarterly profit
in 16 quarters, and signed multiple, significant
agreements that we believe will help fuel our
growth in 2015 and beyond. Most importantly,
we have achieved an important transition of our
business from baseline broadband connectivity
four years ago, to more sophisticated and valuable
William W. Smith, Jr.
capabilities for enhancing the mobile experience
Chairman, President and
for consumers today.
Chief Executive Officer
A significant driver of new business in 2014 was our NetWise® solution, which optimizes
data traffic over 3G, 4G and Wi-Fi networks, and improves Quality of Experience (QoE)
for mobile users. Our NetWise client has been deployed on millions of smartphones on
the Sprint network, and is now being used by three other leading wireless operators in
North America and abroad. We also secured a new NetWise contract with one of the
largest cable providers in North America. Consumers are increasingly choosing Wi-Fi
first for mobile connectivity, and cable providers are capitalizing on this trend by rolling
out Wi-Fi hotspots by the thousands. Our new cable customer is adding NetWise to
their mobile applications to simplify Wi-Fi onboarding for subscribers, and create new
opportunities to engage their customers outside the home.
Building on this success, we have expanded the NetWise platform to enhance mobile
marketing strategies for retailers and other consumer goods and service providers.
Our new NetWise Captivate solution delivers more relevant and convenient mobile
offers to consumers by using location and other contextual information detected on
smartphones. It offers sophisticated device analytics to track shopping patterns, and
can trigger highly targeted consumer interactions. Mobile marketing and location-
based services are exciting growth areas within the wireless industry, and our NetWise
platform fills important gaps for retailers, brands and others seeking richer mobile
engagement with their customers.
Another driver of our business in 2014 was our CommSuite® platform. Sprint continues
to ship our CommSuite Visual Voicemail client on all of their Android devices, generating
strong revenue growth from premium Voice-to-Text subscriptions, as well as from
mobile advertising. In August, Sprint released a new CommSuite Avatar service that
allows subscribers to create animated voice messages using colorful characters and
backgrounds. The service was developed using our award-winning Anime Studio®
graphics product and built on the carrier-grade CommSuite platform. Avatar messaging
is also available as an over-the-top messaging app or via an SDK, allowing integration
with third-party messaging applications. With a diverse and rapidly growing content
library, and a variety of packaging and delivery methods available, we can expand
Avatar capabilities to new channels in 2015 and beyond.
We are also creatively applying our graphics assets to the gaming industry. In August
we announced a new version of our Poser® 3D graphics software optimized for online
and mobile gaming platforms, such as the Unity game engine used by millions of game
developers worldwide. New Poser Pro Game Dev opens the door for our large Poser
community to expand their work into gaming, and also exposing a huge community of
Unity developers to the world-class Poser 3D content library.
Adapting our market-leading technologies to solve new problems is what Smith
Micro has been doing for more than 30 years. As mobile platforms evolve, our proven
QuickLink® connectivity software continues to evolve as well, helping enterprises
and public safety organizations with secure, convenient and reliable access to mobile
broadband service. We also continue to enhance our VIDIO® streaming platform to
support the latest viewing devices, including Internet-enabled TVs, digital signage,
tablets, phablets, and smartphones. Whether consumers are laying by the pool at a
resort or visiting a crowded sports arena, they expect fast access to both live and on-
demand video content. Our latest “1-box” VIDIO solution makes high-performance video
delivery much simpler for hospitality, public venues and other complex environments.
While all of these product and market developments are extremely positive, we
recognize that we must continue to manage our operating expenses very closely. We
have flattened our organization and become more nimble. We have downsized our
facilities at our headquarters in Aliso Viejo, our development center in Pittsburgh, and at
our remote offices in Northern California. We are carefully balancing hiring to support
the pipeline with committed revenues, and we are targeting almost all headcount
growth in the more cost-effective areas of Belgrade, Serbia and Pittsburgh. We have
always been proud of our engineering talent, and the outstanding development
organizations we have built in Belgrade and Pittsburgh allows us to more effectively
utilize resources across time zones to deliver innovative new technology at a very rapid
pace.
This is an exciting and pivotal time for Smith Micro. We believe we are well positioned
to build on our 2014 momentum based upon four key strengths of the company:
1. We have the right products at the right time to help our customers capitalize on
the widespread adoption of smartphones, Wi-Fi, 3G and 4G networks, and content-
driven mobile applications.
2. We have the credibility and relationships with executives at Tier 1 operators, cable
providers, device manufacturers, and enterprises to secure new deals and become
trusted advisors for future initiatives.
3. We have significant competitive leverage based on our technical expertise and
operational discipline, allowing us to execute quickly and cost-effectively to
achieve our objectives.
4. We have a healthy balance sheet, supported by a growing base of business that will
allow us to invest in new areas and maintain a leadership position in our markets.
We’ve worked very hard over the past few years to enhance our product portfolio,
streamline our operations, and turn around our business case. Our team is working with
outstanding efficiency and productivity. Our products are proving to offer unmatched
functionality and value to our customers. We are extremely proud to have posted a
profit in the fourth quarter of 2014, and we will continue to push ourselves to build a
balanced, predictable, and profitable business in 2015 and beyond.
Most sincerely yours,
William W. Smith, Jr.
Chairman, CEO and President
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, 2014
[ ]
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 [ ]
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 [ ]
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 [X] (Do not check if a smaller reporting company) Smaller reporting company [ ]
Accelerated filer [ ]
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, 2014, 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 $34,209,212 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 20, 2015, there were 45,004,146 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2015 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.
2014 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
BUSINESS .................................................................................................................................................... 4
RISK FACTORS ........................................................................................................................................... 10
UNRESOLVED STAFF COMMENTS ........................................................................................................ 19
PROPERTIES ............................................................................................................................................... 19
LEGAL PROCEEDINGS ............................................................................................................................. 19
MINE SAFETY DISCLOSURES ................................................................................................................. 19
PART II(cid:3)
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ....................................................... 20
SELECTED CONSOLIDATED FINANCIAL DATA ................................................................................. 23(cid:3)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ............................................................................................................ 24(cid:3)
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .............................. 34(cid:3)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .............................................................. 35(cid:3)
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ........................................................................................................................ 35(cid:3)
CONTROLS AND PROCEDURES ............................................................................................................. 35(cid:3)
OTHER INFORMATION ............................................................................................................................. 36(cid:3)
PART III(cid:3)
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ....................................... 37(cid:3)
EXECUTIVE COMPENSATION ................................................................................................................ 39(cid:3)
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS ......................................................................................... 39(cid:3)
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ........................................................................................................................................ 39(cid:3)
PRINCIPAL ACCOUNTING FEES AND SERVICES................................................................................ 39(cid:3)
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.
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES .................................................................... 40
SIGNATURES .............................................................................................................................................. 44
PART IV(cid:3)
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:
•
•
•
•
•
•
•
•
•
•
•
•
•
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our customer concentration given that the majority of our sales depend on a few large client
relationships, including Sprint;
the risk of being delisted from the NASDAQ Global Select Market if we fail to meet any of the listing
requirements;
changes in demand for our products from our key customers and their end-users;
the intensity of the competition and our ability to successfully compete;
the pace at which the market for new products develop;
our ability to hire and retain key personnel;
the availability of third party intellectual property and licenses which may not be on commercially
reasonable terms, or not at all;
our ability to establish and maintain strategic relationships with our customers;
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 ability to protect our intellectual property and our ability to not infringe on the rights of others;
our ability to raise additional capital to fund our operations and such capital may not be available to
us at commercially reasonable terms or at all;
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
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Smith Micro provides software solutions to simplify and enhance the mobile experience. As a leader in
wireless connectivity, our applications ensure the best Quality of Experience for mobile users while
optimizing networks for wireless service providers and enterprises. Using our intelligent policy-on-device
platform, along with premium voice, video and content monetization services, we create new opportunities
to engage consumers and capitalize on the growth of connected devices. In addition to wireless and mobility
software, Smith Micro develops and distributes personal, professional and educational productivity and
graphics products and tools for consumers, artists, animators and designers worldwide.
Over the past three decades, the Company has developed deep expertise in(cid:3)embedded software for networked
devices, policy-based management platforms, and highly-scalable mobile applications and hosted services.
For organizations struggling to reduce costs and complexity in the fragmented, rapidly evolving mobile
market, Smith Micro offers proven solutions that increase reliability and efficiency while accelerating
delivery and value of mobile services to consumers.
The proliferation of mobile broadband technology continues to provide new opportunities for Smith Micro
on a global scale. Smith Micro’s mission is to help our customers thrive in a connected world with software
solutions that:
1. Simplify wireless connectivity to reduce costs and deliver “best-connected” experiences;
2. Optimize network and device resources for maximum performance, efficiency and flexibility;
3. Provide greater insight and control over the quality of service (“QoS”) delivered to users; and
4. Engage and grow high-value relationships with end customers using mobile devices.
The Company was incorporated in California in November 1983, and 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. Our NASDAQ symbol
is SMSI, and 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.
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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 6 of Notes to Consolidated
Financial Statements for financial information related to our business segments and geographical
information.
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The wireless industry continues to undergo rapid change on all fronts, from the growing expanse of
heterogeneous networks, to the vast array of connected devices, to the endless barrage of mobile applications
and digital content – especially video – consumed by users who want information and entertainment anytime,
anywhere. While most of us think about being “connected” in terms of computers, tablets and smartphones,
the emerging Internet of Things (“IoT”) market is creating a world where almost anything can be connected
to the wireless internet.
Although the opportunities associated with pervasive connectivity are plenty, so are the challenges:
- Complexity, congestion and spectrum scarcity plague wireless networks, making mobile data
access inconsistent, unreliable and expensive for consumers and businesses.
- Mobile Network Operators are being marginalized by over-the-top applications, social networks
and Wi-Fi providers as they struggle to differentiate while facing tremendous price pressure.
- Enterprises face increasing pressure to mobilize workforces, operations and customer engagement,
but lack the expertise and technologies needed to leverage mobile securely and cost-effectively.
- Consumers - frustrated by complicated, slow and restrictive access to wireless data services – seek
simpler, more personalized mobile experiences.
To address these challenges, Smith Micro offers three product families that help our customers connect,
control and capitalize on the mobile internet:
QuickLink® – applications for connecting consumer and machine-to-machine (“M2M”) devices to 3G, 4G
and Wi-Fi networks, easily and reliably, while managing their data usage.
NetWise® – policy-on-device platform for controlling device behavior, optimizing data traffic, engaging
mobile users, and improving quality of experience over wireless networks.
CommSuite® – premium voice, messaging and video services that allow operators and enterprises to flexibly
deliver and monetize apps and content.
Our QuickLink connectivity solutions have been shipped on more than 100 million devices worldwide. Many
of the world’s largest mobile network operators, including AT&T, Bell Canada, Orange, Sprint, T-Mobile,
Verizon Wireless, and Vodafone, have offered QuickLink as a white-label connection management
application to their subscribers. QuickLink components are embedded by leading chipset manufacturers and
module makers to ensure that connectivity is consistent across device types. QuickLink is also used by
enterprises and public sector organizations with mobile workforces to provide enhanced security and
configurability over public and private wireless networks.
NetWise provides visibility and control over 3G, 4G and Wi-Fi network connections to ensure the best
possible quality of experience for end users. NetWise helps operators reduce congested cellular networks
with efficient Wi-Fi offload, while also facilitating Wi-Fi on-load for broadband providers who are extending
services outside of the home. Used by several Tier 1 operators and broadband providers in the U.S., Latin
America and Asia, NetWise provides the device intelligence and a management platform to maximize service
uptake and performance. For retailers and other consumer service providers, NetWise offers a new way to
engage consumers with more personalized, context-based mobile promotions.
The CommSuite premium services platform gives operators new ways to drive revenues and better compete
with over-the-top (“OTT”) applications. It offers innovative features, such as Voice-to-Text transcription,
Avatar messaging, and Videomail, while supporting flexible business models, including “freemium” try-and-
buy offers, monthly subscriptions, content purchases, and ad-sponsored user engagement. CommSuite also
5
enables efficient, high-performance streaming of mobile video content for entertainment, hospitality, large
venues, and other industries.(cid:3)
Over the past three decades, Smith Micro has developed unmatched expertise in mobile device software,
integration to operator services, and wireless industry standards. Our ability to customize solutions that meet
stringent reliability and security requirements for Tier 1 operators makes us the preferred choice for any
company that wants more out of mobile.
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The Productivity & Graphics group develops a variety of software, including graphic design and animation,
compression and PC/Mac utilities, for consumers, professional artists, and educators. This group also
republishes and markets third-party software that complements the Company’s existing line of products.
These products are available
through direct sales on Smith Micro websites (smithmicro.com,
mysmithmicro.com and contentparadise.com), as well as through affiliate websites, resellers and retail
outlets.
The group’s primary focus is its line of graphic titles, in particular Poser®, Anime Studio®, Manga Studio®
and MotionArtist™. These products are aimed at digital artists and designers of all skill levels, helping them
to produce professional quality 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 in the motion picture industry, 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 enhancing and mobilizing these solutions to extend to new markets
including gaming, industrial design, digital content, and more.
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Our primary products consist of the following:
Product Groups Products
Wireless
QuickLink® Mobile
QuickLink® Mobility
QuickLink® Zero
QuickLink® MiTile
QuickLink® MBIM
Middleware
NetWise® Director
NetWise® I/O
NetWise® SmartSpot
NetWise® Captivate
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
Streamlined connectivity for mobile hotspot features on
smartphones and mobile broadband devices, with billing
integration, automated diagnostics, usage metering and data
management
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 access to 3G/4G/Wi-Fi networks
A toolkit for testing client/server interoperability using the
ANDSF networking standard
Wi-Fi discoverability, promotion and automated
authentication
Mobile marketing platform that uses real-time conditions,
events, location and analytics to better engage customers
6
NetWise® FOTA
Lightweight device agent and deployment server for
updating Firmware Over The Air (“FOTA”)
CommSuite® PTT
CommSuite® VVM
CommSuite® VTT
CommSuite® Avatars
CommSuite® VIDIO
CommSuite® Videomail
AniMates®
Productivity &
Graphics
Poser®
Poser Pro Game Dev
Anime Studio®
Manga Studio®
MotionArtist ™
ScatterShow™
StuffIt Deluxe®
Sock Puppets™
A push-to-talk (“PTT”) 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
Talking Avatars that let users lip-synch a message with
voice effects, backgrounds, stickers and photos to
personalize mobile communications
Adaptive streaming of live or pre-recorded video content to
support mobile viewing across laptops, tablets, phones, TVs,
and more
Creation of video messages that can be delivered to any user
via phone, SMS, email or web link, with no client software
required
Mobile messaging app for iOS and Android smartphones
that lets users send personalized Avatar messages with fun
voice effects and backgrounds
3D animation software for character art, animation and
digital design
3D character creator and animation tools, plus real-time
ready character content to game and interactive content
developers to reduce game development time and improve
the overall game experience
2D animation software for digital artists
Graphics software for creating manga and comic art
A fast, easy solution for creating interactive presentations
Creates slide shows from photo albums on mobile devices
A patented, lossless compression solution for documents
and media
iOS app to create lip-synched cartoons and share them on
Facebook and YouTube
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Because of our broad product portfolio, deep integration experience, and flexible business models, we can
quickly bring to market innovative solutions that support our customers’ needs to create new revenue
opportunities and differentiate their products and services among their competitors.
Our sales strategy is as follows:
Leverage Operator and OEM Relationships. We continue to capitalize on our strong relationships with the
world’s leading mobile network operators (“MNOs”), multiple service operators (“MSOs”), and device
manufacturers. These customers serve as our primary distribution channel, providing access to hundreds of
millions of end-users around the world.
Focus on High-Growth Markets. We continue to focus on wireless connectivity solutions and premium
mobile services, taking advantage of expanding 4G and Wi-Fi networks, as well as the explosive growth of
smartphones, tablets, M2M and other mobile devices.
Expand our Customer Base. In addition to growing business with current customers, we are adding new
customers through reseller partners and increased penetration of the enterprise market, with particular focus
on public safety, retail, and vertical markets utilizing M2M technologies.
7
Selectively Pursue Partners with Complementary Products and Services. We continue to pursue partnerships
to help us enter new markets and extend our geographic reach. We will engage technology providers and
systems integrators to deliver more comprehensive solutions to our customers.
Revenues to Sprint and their respective affiliates in the Wireless business segment accounted for 68.0% of
the Company’s total revenues for the fiscal year 2014. Revenues to FastSpring in the Productivity & Graphics
business segment accounted for 11.2% of the Company’s total revenues for the fiscal year 2014. Revenues
to two customers (Sprint and Verizon Wireless) and their respective affiliates in the Wireless business
segment accounted for 53.1% and 13.0%, respectively, of the Company’s total revenues for the fiscal year
2013. Revenues to FastSpring in the Productivity & Graphics business segment accounted for 11.4% of the
Company’s total revenues for the fiscal year 2013. In 2012, our two largest customers (Sprint and Verizon
Wireless) accounted for 40.7% and 20.5%, 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.
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We provide technical support and customer service through our online knowledge base, via email and live
chat. OEM customers generally provide their own primary customer support functions and rely on us for
support to their own technical support personnel.
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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 $14.2 million, $21.3 million, and
$24.8 million for the years ended December 31, 2014, 2013 and 2012, respectively.
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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-ROMs and certain other documentation or
marketing material. We also permit selected OEM customers to duplicate our products on their own CD-
ROMs, 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-ROMs and the printing of documentation materials. Assembly of the final
package is completed by our Aliso Viejo, California facility.
8
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The markets in which we operate are highly competitive and subject to rapid changes in technology. These
conditions create new opportunities for Smith Micro, as well as for our competitors, and we expect new
competitors to enter the market. We will not only compete with other software vendors for new customer
contracts, we will also compete to acquire technology and qualified personnel.
We believe that the principal competitive factors affecting the mobile software market include domain
expertise, product features, usability, quality, price, customer service and effective sales and marketing
efforts. Although we believe that our products currently compete favorably with respect to these factors, there
can be no assurance that we can maintain our competitive position against current and potential competitors.
We also believe that the market for our software products has been and will continue to be characterized by
significant price competition. A material reduction in the price of our products could negatively affect our
profitability.
Many existing and potential 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 customers elect to purchase software from us rather
than design and develop their own software.
(cid:87)(cid:396)(cid:381)(cid:393)(cid:396)(cid:349)(cid:286)(cid:410)(cid:258)(cid:396)(cid:455)(cid:3)(cid:90)(cid:349)(cid:336)(cid:346)(cid:410)(cid:400)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:62)(cid:349)(cid:272)(cid:286)(cid:374)(cid:400)(cid:286)(cid:400)(cid:3)
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, 2014, we owned 85 issued U.S.
patents and have 20 U.S. patent applications that are currently pending. These patents are intended to provide
generalized protection of our intellectual property technology base and we will continue to apply for various
patents and trademarks in the future as we deem necessary to protect our intellectual property technology
base.
We seek to avoid unauthorized use and disclosure of our proprietary intellectual property by requiring
employees and consultants with access to our proprietary information to execute confidentiality agreements
with us and by restricting access to our source code. The deterrent steps that we have taken to protect our
proprietary technology may not be adequate to deter misappropriation of our proprietary information or
prevent the successful assertion of any adverse claim against us relating to software or intellectual property
utilized by us. In addition, we may not be able to detect unauthorized use of our intellectual property rights
or take effective steps to enforce those rights.
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.
9
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As of December 31, 2014, we had a total of 183 employees within the following departments: 110 in
engineering, 37 in sales and marketing, 16 in operations and customer support and 20 in management and
administration. We are not subject to any collective bargaining agreement and we believe that our
relationships with our employees are good.
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1005)(cid:4)(cid:856)(cid:3)(cid:90)(cid:47)(cid:94)(cid:60)(cid:3)(cid:38)(cid:4)(cid:18)(cid:100)(cid:75)(cid:90)(cid:94)(cid:3)
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.
We derive a significant portion of our revenues from sales of a small number of products to Sprint, so our
revenues and operating results are highly vulnerable to shifts in demand and may decline.
In our Wireless business segment, we sell primarily to large carriers, cable operators, and original equipment
manufacturers (“OEMs”), so 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,
2014, sales to Sprint and their affiliates comprised 68.0% of our total revenues. Because of our customer
concentration, this carrier and other large customers may have significant pricing power over us, and any
material decrease in sales to any of them would materially affect our revenues and profitability. Additionally,
carriers, cable operators, and OEMs are not the end-users of our products. If any of their efforts to market
products and services incorporating our software are unsuccessful in the marketplace, our revenues and
profitability could be adversely affected.
On July 10, 2013, Softbank and Sprint Nextel completed a merger which could further intensify the
competitive pressures that we face. Furthermore, the uncertainties created by this merger could cause it to
delay or cancel planned purchases of our products and services, particularly if there are proposed changes or
uncertainties in the future management, product offerings and technical specifications of Sprint and its
product portfolio.
We also derive a significant portion of our revenues from a few vertical markets, such as wireless carriers,
cable operators, and handset manufacturers. In order to sustain and grow our business, we must continue to
sell our software products into these vertical markets. Shifts in the dynamics of these vertical markets, such
as new product introductions by our competitors, could materially harm our results of operations, financial
condition and prospects. To increase our sales outside our core vertical markets, for example to large
enterprises, requires us to devote time and resources to hire and train sales employees familiar with those
industries. Even if we are successful in hiring and training sales teams, customers in other vertical markets
may not need or sufficiently value our current products or new product introductions.
In 2014, we announced a restructuring plan and we may take additional restructuring actions in the future
that would result in additional charges, which would have a negative impact on our results of operations
in the period the action is taken.
On May 6, 2014, the Board of Directors approved a plan of restructuring intended to streamline and flatten
the Company’s organization, reduce overall headcount by approximately 20% and reduce its overall cost
structure by approximately $2.0 million per quarter. This resulted in a special one-time restructuring charge
10
of $1.8 million that was recorded in the fiscal quarter ended June 30, 2014. At the same time, we increased
our 2013 restructuring reserve by $0.6 million to update and adjust our lease termination cost assumptions.
If the demand for our legacy and new products does not increase, we may need to take additional restructuring
actions in future quarters, although we currently do not have any intention to do so. If future restructuring
actions are taken, this could have a material adverse effect on our financial condition and results of operations
in the period that the action is taken.
If we fail to meet the requirements for continued listing on the NASDAQ Global Select Market, our
common stock would likely be delisted from trading on the NASDAQ Global Select Market, which could
adversely affect the liquidity of our common stock and cause our trading price to decline.
Our common stock is currently listed for quotation on the NASDAQ Global Select Market. We are required
to meet specified financial requirements in order to maintain our listing on the NASDAQ Global Select
Market. If we fail to satisfy the NASDAQ Global Select Market’s continued listing requirements, our
common stock would likely be delisted from the NASDAQ Global Select Market, in which case our common
stock may trade on the OTC Bulletin Board. Any potential delisting of our common stock from the NASDAQ
Global Select Market would likely result in decreased liquidity and increased volatility of our common stock,
and would likely cause our trading price to decline.
During 2014, the Company no longer met the requirement of NASDAQ Rule 5450(b)(1)(A), which requires
companies listed on the NASDAQ Global Select Market to maintain a minimum of $10,000,000 in
stockholders’ equity for continued listing (the “Minimum Stockholders’ Equity Rule”). As a result of the
proceeds from the Company’s private placement stock offering, the Company regained compliance with the
Minimum Stockholders’ Equity Rule. Also in 2014, the Company failed to comply with Nasdaq’s
Marketplace Rule 5450(a)(1) because the bid price for the Company’s common stock over a 30 consecutive
business day period had closed below the minimum $1.00 per share requirement for continued listing. The
Company regained compliance in January 2015 after the stock price closed above $1.00 per share for 10
consecutive business days.
There can be no assurance that the Company will in the future maintain compliance with the Minimum
Stockholders’ Equity Rule, the minimum $1.00 per share rule, or other requirements for continued listing on
NASDAQ.
Our quarterly revenues and operating results are difficult to predict and could fall below analyst or
investor expectations, which could cause the price of our common stock to fall.
Our quarterly revenues and operating results have fluctuated significantly in the past and may continue to
vary from quarter to quarter due to a number of factors, many of which are not within our control. If our
operating results do not meet the expectations of securities analysts or investors, our stock price may decline.
Fluctuations in our operating results may be due to a number of factors, including the following:
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the gain or loss of a key customer;
the size and timing of orders from and shipments to our major customers;
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;
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the timing of acceptance of new mobile services by users of our customers’ services;
deferrals of orders by our customers in anticipation of new products, applications, product
enhancements or operating systems; and
general economic and market conditions.
We have difficulty predicting the volume and timing of orders. In any given quarter, our sales have involved,
and we expect will continue to involve, large financial commitments from a relatively small number of
customers. As a result, the cancellation or deferral of even a small number of orders would reduce our
revenues, which would adversely affect our quarterly financial performance. Also, we have often recorded 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.
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. In addition, the technology we market, which has
been sold as software in the past, can be integrated at the chipset level by the leading mobile chipset
manufacturers. 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.
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.
12
We operate in markets that are extremely competitive and subject to rapid changes in technology. Because
there are low barriers to entry into the software markets in which we participate and may participate in the
future, we expect significant competition to continue from both established and emerging software companies
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.
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
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 and MSO customers’ ability to successfully introduce new mobile services enabled by our
products and our ability to broaden our carrier customer base, which we believe will be difficult and time-
consuming. If the expected benefits from entering new markets do not materialize, our revenues will suffer
and the price of our common stock would likely decline. In addition, to the extent we enter new markets
through acquisitions of companies or technologies, our financial condition could be harmed or our
stockholders could suffer dilution without a corresponding benefit to our company if we do not realize
expected benefits of entering such new markets.
If the adoption of and investments in new technologies and services grows more slowly than anticipated
in our product planning and development, our operating results, financial condition and prospects may
be negatively affected.
If the adoption of and investments in new networking and 4G technologies and services does not grow or
grows more slowly than anticipated, we will not obtain the anticipated returns from our planning and
development investments. 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.
13
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
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
14
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.
Acquisitions of companies or technologies may disrupt our business and divert management attention and
cause our current operations to suffer.
We have historically made targeted acquisitions of smaller companies with important technology and expect
to continue to do so in the future. As part of any acquisition, we will be required to assimilate the operations,
products and personnel of the acquired businesses and train, retain and motivate key personnel from the
acquired businesses. We may not be able to maintain uniform standards, controls, procedures and policies if
we fail in these efforts. Similarly, acquisitions may cause disruptions in our operations and divert
management’s attention from our company’s day-to-day operations, which could impair our relationships
with our current employees, customers and strategic partners. Acquisitions may also subject us to liabilities
and risks that are not known or identifiable at the time of the acquisition.
We may also have to incur debt or issue equity securities in order to finance future acquisitions. Our financial
condition could be harmed to the extent we incur substantial debt or use significant amounts of our cash
resources in acquisitions. The issuance of equity securities for any acquisition could be substantially dilutive
to our existing stockholders. In addition, we expect our profitability could be adversely affected because of
acquisition-related accounting costs, write offs, amortization expenses, and charges related to acquired
intangible assets. In consummating acquisitions, we are also subject to risks of entering geographic and
business markets in which we have had limited or no prior experience. If we are unable to fully integrate
acquired businesses, products or technologies within existing operations, we may not receive the intended
benefits of acquisitions.
Our operating income or loss may continue to change due to shifts in our sales mix and increased spending
on our research and development.
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.
15
Certain of our customers in the communications industry are subject to regulation by the Federal
Communications Commission, which could have an indirect effect on our business. In addition, the United
States telecommunications industry has been subject to continuing deregulation since 1984. We cannot
predict when, or upon what terms and conditions, further regulation or deregulation might occur or the effect
regulation or deregulation may have on demand for our products from customers in the communications
industry. Demand for our products may be indirectly affected by regulations imposed upon potential users of
those products, which may increase our costs and expenses.
We may be unable to adequately protect our intellectual property and other proprietary rights, which could
negatively impact our revenues.
Our success is dependent upon our software code base, our programming methodologies and other
intellectual properties and proprietary rights. In order to protect our proprietary technology, we rely on a
combination of trade secrets, nondisclosure agreements, patents, and copyright and trademark law. We
currently own U.S. trademark registrations for certain of our trademarks and U.S. patents for certain of our
technologies. However, these measures afford us only limited protection. Furthermore, we rely primarily on
“shrink wrap” licenses that are not signed by the end user and, therefore, may be unenforceable under the
laws of certain jurisdictions. Accordingly, it is possible that third parties may copy or otherwise obtain our
rights without our authorization. It is also possible that third parties may independently develop technologies
similar to ours. It may be difficult for us to detect unauthorized use of our intellectual property and proprietary
rights.
We may be subject to claims of intellectual property infringement as the number of trademarks, patents,
copyrights and other intellectual property rights asserted by companies in our industry grows and the
coverage of these patents and other rights and the functionality of software products increasingly overlap.
From time to time, we have received communications from third parties asserting that our trade name or
features, content, or trademarks of certain of our products infringe upon intellectual property rights held by
such third parties. We have also received correspondence from third parties separately asserting that our
products may infringe on certain patents held by each of the parties. Although we are not aware that any of
our products infringe on the proprietary rights of others, third parties may claim infringement by us with
respect to our current or future products. Additionally, our customer agreements require that we indemnify
our customers for infringement claims made by third parties involving our intellectual property embedded in
their products. Infringement claims, whether with or without merit, could result in time-consuming and costly
litigation, divert the attention of our management, cause product shipment delays or require us to enter into
royalty or licensing agreements with third parties. If we are required to enter into royalty or licensing
agreements, they may not be on terms that are acceptable to us. Unfavorable royalty or licensing agreements
could seriously impair our ability to market our products.
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.
In addition, we may file with the SEC a shelf registration statement to sell from time to time additional 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. 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
16
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 working capital 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;
our competitors’ response to our products; and
our relationships with suppliers and customers.
In addition, we may raise additional capital to accommodate planned growth, hiring and infrastructure needs
or to consummate acquisitions of other businesses, products or technologies.
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.
17
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.
Security and privacy breaches may harm our business.
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, such as “hacking”
of our systems by outsiders, could have a material adverse effect on our financial position and results of
operations. If we are unable to protect, or our customers 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 customers 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 customers. In addition, our
customers and end users may use our products and services in a manner which violates security or data
privacy laws in one or more jurisdictions. Any significant or high profile data privacy breaches or violations
of data privacy laws, whether directly through our hosted solutions or by third parties using our products and
services, could result in the loss of business and reputation, litigation against us and regulatory investigations
and penalties that could adversely affect our operating results and financial condition.
Interruptions or delays in service from data center hosting facilities could impair the delivery of our
service and harm our business.
We currently serve our customers from data center hosting facilities. Any damage to, or failure of, 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.
We may have exposure to additional tax liabilities.
As a multinational corporation, we are subject to income taxes as well as sales, use and other non-income
based taxes, in both the United States and various foreign jurisdictions. Significant judgment is required in
determining our worldwide provision for income taxes, sales and use taxes, and other tax liabilities. Changes
in tax laws or tax rulings may have a significantly adverse impact on our effective tax rate.
We are also subject to non-income based taxes, such as payroll, sales, use, value-added, net worth, property
and goods and services taxes, in both the United States and various foreign jurisdictions. We are regularly
under audit by tax authorities with respect to these non-income based taxes and may have exposure to
additional non-income based tax liabilities. An increasing number of states have considered or adopted laws
that attempt to impose obligations on out-of-state retailers to collect sales and use taxes on their behalf. A
successful assertion by one or more states or foreign countries requiring us to collect sales and use taxes
where we do not do so could result in substantial tax liabilities, including for past sales, as well as penalties
and interest.
Although we believe that our income and non-income based tax estimates are reasonable, there is no
assurance that our provisions for taxes are correct, or that the final determination of tax audits or tax disputes
will not be different from what is reflected in our historical income tax provisions and accruals. If we are
required to pay substantially more taxes in the future or for prior periods, our operating results and financial
18
condition could be adversely affected
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1005)(cid:17)(cid:856)(cid:3)(cid:104)(cid:69)(cid:90)(cid:28)(cid:94)(cid:75)(cid:62)(cid:115)(cid:28)(cid:24)(cid:3)(cid:94)(cid:100)(cid:4)(cid:38)(cid:38)(cid:3)(cid:18)(cid:75)(cid:68)(cid:68)(cid:28)(cid:69)(cid:100)(cid:94)(cid:3)
None.
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1006)(cid:856)(cid:3)(cid:87)(cid:90)(cid:75)(cid:87)(cid:28)(cid:90)(cid:100)(cid:47)(cid:28)(cid:94)(cid:3)(cid:3)(cid:3)
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 33,600 square feet of space pursuant to lease that expires on May 31, 2016. 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.
Internationally, we lease space in Belgrade, Serbia that expires December 30, 2016.
We lease an additional 19,100 square feet in Aliso Viejo, California under a lease that expires January 31, 2022. In
August 2014, we signed an addendum to sublease all of the space commencing on September 15, 2014 for a three
year period, with two, two-year renewal options. The remaining lease expense, net of sublease income, has been
accrued for in our 2013 restructuring liability account.
We lease approximately 15,300 square feet in Watsonville, California under a lease that expires September 30, 2018.
In March 2014, we signed an addendum to sublease all of the space commencing on May 1, 2014. We continued to
pay our current monthly rent through June 30, 2014. Beginning on July 1, 2014, we are paying the landlord a
minimum amount of rent, with annual escalations, through the end of the lease. This lease expense has been accrued
for in our 2013 restructuring liability account. We have moved into a significantly smaller facility in Santa Cruz,
California and are paying month-to-month rent.
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1007)(cid:856)(cid:3)(cid:62)(cid:28)(cid:39)(cid:4)(cid:62)(cid:3)(cid:87)(cid:90)(cid:75)(cid:18)(cid:28)(cid:28)(cid:24)(cid:47)(cid:69)(cid:39)(cid:94)(cid:3)
The Company may become involved in various legal proceedings arising from its business activities. While
management does not believe the ultimate disposition of these matters will have a material adverse impact on the
Company’s consolidated results of operations, cash flows or financial position, litigation is inherently
unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could
materially affect the Company’s future consolidated results of operations, cash flows or financial position in a
particular period.
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1008)(cid:856)(cid:3)(cid:68)(cid:47)(cid:69)(cid:28)(cid:3)(cid:94)(cid:4)(cid:38)(cid:28)(cid:100)(cid:122)(cid:3)(cid:24)(cid:47)(cid:94)(cid:18)(cid:62)(cid:75)(cid:94)(cid:104)(cid:90)(cid:28)(cid:94)(cid:3)
Not Applicable.
(cid:3)
19
(cid:87)(cid:4)(cid:90)(cid:100)(cid:3)(cid:47)(cid:47)(cid:3)
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3) (cid:1009)(cid:856)(cid:3) (cid:68)(cid:4)(cid:90)(cid:60)(cid:28)(cid:100)(cid:3) (cid:38)(cid:75)(cid:90)(cid:3) (cid:90)(cid:28)(cid:39)(cid:47)(cid:94)(cid:100)(cid:90)(cid:4)(cid:69)(cid:100)(cid:859)(cid:94)(cid:3) (cid:18)(cid:75)(cid:68)(cid:68)(cid:75)(cid:69)(cid:3) (cid:28)(cid:89)(cid:104)(cid:47)(cid:100)(cid:122)(cid:853)(cid:3) (cid:90)(cid:28)(cid:62)(cid:4)(cid:100)(cid:28)(cid:24)(cid:3)
(cid:94)(cid:100)(cid:75)(cid:18)(cid:60)(cid:44)(cid:75)(cid:62)(cid:24)(cid:28)(cid:90)(cid:3)(cid:68)(cid:4)(cid:100)(cid:100)(cid:28)(cid:90)(cid:94)(cid:3)(cid:4)(cid:69)(cid:24)(cid:3)(cid:47)(cid:94)(cid:94)(cid:104)(cid:28)(cid:90)(cid:3)(cid:87)(cid:104)(cid:90)(cid:18)(cid:44)(cid:4)(cid:94)(cid:28)(cid:94)(cid:3)(cid:75)(cid:38)(cid:3)(cid:28)(cid:89)(cid:104)(cid:47)(cid:100)(cid:122)(cid:3)(cid:94)(cid:28)(cid:18)(cid:104)(cid:90)(cid:47)(cid:100)(cid:47)(cid:28)(cid:94)(cid:3)
(cid:68)(cid:258)(cid:396)(cid:364)(cid:286)(cid:410)(cid:3)(cid:47)(cid:374)(cid:296)(cid:381)(cid:396)(cid:373)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)
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, 2014:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
YEAR ENDED DECEMBER 31, 2013:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$2.69
2.07
1.37
1.23
$1.78
1.49
1.31
1.57
$1.44
0.66
0.88
0.74
$1.26
1.06
0.88
0.79
On February 20, 2015, the closing sale price for our common stock as reported by NASDAQ was $1.46.
For information regarding Securities Authorized for Issuance under Equity Compensation Plans, please refer
to Item 12.
(cid:94)(cid:410)(cid:381)(cid:272)(cid:364)(cid:3)(cid:87)(cid:286)(cid:396)(cid:296)(cid:381)(cid:396)(cid:373)(cid:258)(cid:374)(cid:272)(cid:286)(cid:3)(cid:39)(cid:396)(cid:258)(cid:393)(cid:346)(cid:3)(cid:3)
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, 2009 through December 31, 2014. The graph assumes that
$100 was invested in our common stock on December 31, 2009, 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.
20
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Smith Micro Software, Inc., the S&P Midcap 400 Index, and S&P MidCap Application
Software
$250
$200
$150
$100
$50
$0
12/09
12/10
12/11
12/12
12/13
12/14
Smith Micro Software, Inc.
S&P Midcap 400
S&P MidCap Application Software
*$100 invested on 12/31/09 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2015 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
12/09
12/10
12/11
12/12
12/13
12/14
Smith Micro
Software, Inc.
100.00
172.02
12.35
16.39
16.17
10.60
S&P Midcap 400
100.00
126.64
124.45
146.69
195.84
214.97
100.00
132.83
139.38
167.35
220.04
227.94
S&P MidCap
Application
Software
(cid:44)(cid:381)(cid:367)(cid:282)(cid:286)(cid:396)(cid:400)(cid:3)
As of February 20, 2015, there were approximately 181 holders of record of our common stock based on
information provided by our transfer agent.
21
(cid:24)(cid:349)(cid:448)(cid:349)(cid:282)(cid:286)(cid:374)(cid:282)(cid:400)(cid:3)
We have never paid any cash dividends on our common stock and we have no current plans to do so.
(cid:90)(cid:286)(cid:272)(cid:286)(cid:374)(cid:410)(cid:3)(cid:94)(cid:258)(cid:367)(cid:286)(cid:400)(cid:3)(cid:381)(cid:296)(cid:3)(cid:104)(cid:374)(cid:396)(cid:286)(cid:336)(cid:349)(cid:400)(cid:410)(cid:286)(cid:396)(cid:286)(cid:282)(cid:3)(cid:94)(cid:286)(cid:272)(cid:437)(cid:396)(cid:349)(cid:410)(cid:349)(cid:286)(cid:400)(cid:3)
On August 15, 2014, the Company entered into a common stock purchase agreement with a number of
accredited investors pursuant to which the Company issued and sold 6,845,830 shares of its common stock
at a price per share of $0.816 in a private placement. The transaction closed on August 20, 2014 and the
Company realized gross proceeds of $5.6 million before deducting commissions and other expenses.
Offering costs related to the transaction totaled $0.4 million, comprised of $0.2 million of commissions and
$0.2 million of legal and other expenses, resulting in net proceeds of $5.2 million. The offer and sale of the
shares of Common Stock in the private placement was exempt from registration pursuant to Section 4(2) of
and Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended.
(cid:87)(cid:437)(cid:396)(cid:272)(cid:346)(cid:258)(cid:400)(cid:286)(cid:400)(cid:3)(cid:381)(cid:296)(cid:3)(cid:28)(cid:395)(cid:437)(cid:349)(cid:410)(cid:455)(cid:3)(cid:94)(cid:286)(cid:272)(cid:437)(cid:396)(cid:349)(cid:410)(cid:349)(cid:286)(cid:400)(cid:3)(cid:271)(cid:455)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:18)(cid:381)(cid:373)(cid:393)(cid:258)(cid:374)(cid:455)(cid:3)
The table set forth below shows all purchases of securities by us during the fiscal year 2014:
(cid:44)(cid:54)(cid:54)(cid:56)(cid:40)(cid:53)(cid:3)(cid:51)(cid:56)(cid:53)(cid:38)(cid:43)(cid:36)(cid:54)(cid:40)(cid:54)(cid:3)(cid:50)(cid:41)(cid:3)(cid:40)(cid:52)(cid:56)(cid:44)(cid:55)(cid:60)(cid:3)(cid:54)(cid:40)(cid:38)(cid:56)(cid:53)(cid:44)(cid:55)(cid:44)(cid:40)(cid:54)(cid:3)(cid:3)
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)
(cid:49)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:11)(cid:82)(cid:85)(cid:3)
(cid:56)(cid:81)(cid:76)(cid:87)(cid:86)(cid:12)(cid:3)
(cid:51)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)
(cid:68)(cid:86)(cid:3)(cid:51)(cid:68)(cid:85)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:51)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:79)(cid:92)(cid:3)
(cid:36)(cid:81)(cid:81)(cid:82)(cid:88)(cid:81)(cid:70)(cid:72)
(cid:71)(cid:3)(cid:51)(cid:79)(cid:68)(cid:81)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)
(cid:51)(cid:85)(cid:82)(cid:74)(cid:85)(cid:68)(cid:80)(cid:86)(cid:3)
(cid:48)(cid:68)(cid:91)(cid:76)(cid:80)(cid:88)(cid:80)(cid:3)
(cid:49)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:11)(cid:82)(cid:85)(cid:3)
(cid:36)(cid:83)(cid:83)(cid:85)(cid:82)(cid:91)(cid:76)(cid:80)(cid:68)(cid:87)
(cid:72)(cid:3)(cid:39)(cid:82)(cid:79)(cid:79)(cid:68)(cid:85)(cid:3)
(cid:57)(cid:68)(cid:79)(cid:88)(cid:72)(cid:12)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:11)(cid:82)(cid:85)(cid:3)
(cid:56)(cid:81)(cid:76)(cid:87)(cid:86)(cid:12)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)
(cid:48)(cid:68)(cid:92)(cid:3)(cid:60)(cid:72)(cid:87)(cid:3)(cid:37)(cid:72)(cid:3)
(cid:51)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)
(cid:56)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)
(cid:51)(cid:79)(cid:68)(cid:81)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)
(cid:51)(cid:85)(cid:82)(cid:74)(cid:85)(cid:68)(cid:80)(cid:86)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)
(cid:49)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)
(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:11)(cid:82)(cid:85)(cid:3)
(cid:56)(cid:81)(cid:76)(cid:87)(cid:86)(cid:12)(cid:3)
(cid:51)(cid:88)(cid:85)(cid:70)(cid:75)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)
(cid:36)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)
(cid:51)(cid:85)(cid:76)(cid:70)(cid:72)(cid:3)
(cid:51)(cid:68)(cid:76)(cid:71)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)
(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)
(cid:11)(cid:82)(cid:85)(cid:3)(cid:56)(cid:81)(cid:76)(cid:87)(cid:12)(cid:3)
(cid:20)(cid:24)(cid:15)(cid:26)(cid:22)(cid:24)(cid:3)
(cid:7)(cid:20)(cid:17)(cid:25)(cid:22)(cid:3)
(cid:51)(cid:72)(cid:85)(cid:76)(cid:82)(cid:71)(cid:3)
(cid:48)(cid:68)(cid:85)(cid:17)(cid:3)(cid:20)(cid:16)(cid:22)(cid:20)(cid:17)(cid:3)
(cid:21)(cid:19)(cid:20)(cid:23)(cid:3)
(cid:45)(cid:88)(cid:81)(cid:17)(cid:3)(cid:20)(cid:16)(cid:22)(cid:19)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:23)(cid:3)
(cid:20)(cid:24)(cid:26)(cid:15)(cid:28)(cid:20)(cid:28)(cid:3)
(cid:7)(cid:20)(cid:17)(cid:25)(cid:20)(cid:3)
(cid:54)(cid:72)(cid:83)(cid:17)(cid:3)(cid:20)(cid:16)(cid:22)(cid:19)(cid:15)(cid:3)
(cid:21)(cid:19)(cid:20)(cid:23)(cid:3)
(cid:39)(cid:72)(cid:70)(cid:17)(cid:3)(cid:20)(cid:16)(cid:22)(cid:20)(cid:15)(cid:3)
(cid:21)(cid:19)(cid:20)(cid:23)(cid:3)
(cid:24)(cid:19)(cid:15)(cid:26)(cid:25)(cid:26)(cid:3)
(cid:7)(cid:19)(cid:17)(cid:28)(cid:26)(cid:3)
(cid:25)(cid:26)(cid:15)(cid:21)(cid:19)(cid:21)(cid:3)
(cid:7)(cid:19)(cid:17)(cid:28)(cid:22)(cid:3)
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)
(cid:3)(cid:3)(cid:3)(cid:21)(cid:28)(cid:20)(cid:15)(cid:25)(cid:21)(cid:22)(cid:11)(cid:68)(cid:12)(cid:3)
(cid:3)(cid:3)(cid:3)
The above table includes:
Acquisition of stock by the Company as payment of withholding taxes in connection with the vesting
(a)
of restricted stock awards, in an aggregate amount of 291,623 shares during the periods set forth in the table.
All of the shares were cancelled when they were acquired. (cid:3)
(cid:3)
22
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1010)(cid:856)(cid:3)(cid:94)(cid:28)(cid:62)(cid:28)(cid:18)(cid:100)(cid:28)(cid:24)(cid:3)(cid:18)(cid:75)(cid:69)(cid:94)(cid:75)(cid:62)(cid:47)(cid:24)(cid:4)(cid:100)(cid:28)(cid:24)(cid:3)(cid:38)(cid:47)(cid:69)(cid:4)(cid:69)(cid:18)(cid:47)(cid:4)(cid:62)(cid:3)(cid:24)(cid:4)(cid:100)(cid:4)(cid:3)
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 (loss) data for the years ended December 31, 2014, 2013 and 2012, and the
consolidated balance sheet data at December 31, 2014 and 2013, have been derived from audited consolidated
financial statements included elsewhere in this Annual Report. The consolidated statement of comprehensive
income (loss) data presented below for the years ended December 31, 2011 and 2010, and the consolidated
balance sheet data at December 31, 2012, 2011 and 2010 are derived from audited consolidated financial
statements that are not included in this Annual Report.
2014
Year Ended December 31,
2012
2011
2013
2010
Consolidated Statement of Comprehensive Income (Loss) Data (in thousands, except per share data):
Revenues
36,979
42,675
43,329
$
$
$
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 (expense), 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
9,317
27,662
9,559
14,192
13,218
2,435
-
39,404
(11,742)
-
(8)
(11,750)
49
(11,799)
9,707
32,968
15,675
21,305
18,216
5,602
-
60,798
(27,830)
-
30
(27,800)
153
(27,953)
8,448
34,881
16,666
24,767
20,211
238
-
61,882
(27,001)
1,210
94
(25,697)
(234)
(25,463)
$
57,767
$
130,501
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
-
-
-
(11,799)
$
7
-
7
(27,946)
$
33
(24)
(14)
6
27
(25,436)
$
1
(25)
(159,631)
$
(6)
(8)
12,338
$
$
$
(0.29)
(0.29)
$
$
(0.76)
(0.76)
$
$
(0.71)
(0.71)
$
$
(4.48)
(4.48)
$
$
0.36
0.36
40,649
40,649
36,982
36,982
35,849
35,849
35,617
35,617
34,204
34,615
23
2014
2013
As of December 31,
2012
2011
2010
Consolidated Balance Sheet Data (in thousands):
Total assets
Total liabilities
Accumulated comprehensive (deficit) earnings
Total stockholders' equity
$
27,390
12,488
(208,284)
$
14,902
$
31,538
13,367
(196,485)
18,171
$
$
54,395
11,733
(168,539)
42,662
$
$
79,941
15,081
(143,103)
64,860
$
$
$
234,892
16,627
16,528
218,265
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3) (cid:1011)(cid:856)(cid:3) (cid:68)(cid:4)(cid:69)(cid:4)(cid:39)(cid:28)(cid:68)(cid:28)(cid:69)(cid:100)(cid:918)(cid:94)(cid:3) (cid:24)(cid:47)(cid:94)(cid:18)(cid:104)(cid:94)(cid:94)(cid:47)(cid:75)(cid:69)(cid:3) (cid:4)(cid:69)(cid:24)(cid:3) (cid:4)(cid:69)(cid:4)(cid:62)(cid:122)(cid:94)(cid:47)(cid:94)(cid:3) (cid:75)(cid:38)(cid:3) (cid:38)(cid:47)(cid:69)(cid:4)(cid:69)(cid:18)(cid:47)(cid:4)(cid:62)(cid:3)
(cid:18)(cid:75)(cid:69)(cid:24)(cid:47)(cid:100)(cid:47)(cid:75)(cid:69)(cid:3)(cid:4)(cid:69)(cid:24)(cid:3)(cid:90)(cid:28)(cid:94)(cid:104)(cid:62)(cid:100)(cid:94)(cid:3)(cid:75)(cid:38)(cid:3)(cid:75)(cid:87)(cid:28)(cid:90)(cid:4)(cid:100)(cid:47)(cid:75)(cid:69)(cid:94)(cid:3)
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: our dependence upon the large carrier customers for a significant portion of our
revenues; deriving revenues from a small number of customers and products; being delisted from the NASDAQ;
changes in demand for our products; 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; the availability of third party
intellectual property and licenses; failure to maintain strategic relationships with our customers; potential
fluctuations in quarterly results; our failure to protect intellectual property; exposure to intellectual property
claims; our inability to raise more funds to meet our capital needs; undetected software defects; security and
privacy breaches in our systems or interruptions or delays in the services we provide which could damage client
relations; and doing business internationally.
(cid:47)(cid:374)(cid:410)(cid:396)(cid:381)(cid:282)(cid:437)(cid:272)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:75)(cid:448)(cid:286)(cid:396)(cid:448)(cid:349)(cid:286)(cid:449)(cid:3)
Smith Micro provides software solutions to simplify and enhance the mobile experience. As a leader in
wireless connectivity, our applications ensure the best Quality of Experience for mobile users while
optimizing networks for wireless service providers and enterprises. Using our intelligent policy-on-device
platform, along with premium voice, video and content monetization services, we create new opportunities
to engage consumers and capitalize on the growth of connected devices. In addition to wireless and mobility
software, Smith Micro develops and distributes personal, professional and educational productivity and
graphics products and tools for consumers, artists, animators and designers worldwide.
Over the past three decades, the Company has developed deep expertise in(cid:3)embedded software for networked
devices, policy-based management platforms, and highly-scalable mobile applications and hosted services.
For organizations struggling to reduce costs and complexity in the fragmented, rapidly evolving mobile
market, Smith Micro offers proven solutions that increase reliability and efficiency while accelerating
delivery and value of mobile services to consumers.
For the year ended December 31, 2014, revenues to one customer and their respective affiliates in the
Wireless business segment accounted for 68.0% of the Company’s total revenues, and one customer in the
Productivity & Graphics business segment accounted for 11.2% of the Company’s total revenues. These two
customers accounted for 87% of accounts receivable for the year ended December 31, 2014. For the year
ended December 31, 2013, revenues to two customers and their respective affiliates in the Wireless business
segment accounted for 53.1% and 13.0% of the Company’s total revenues, and one customer in the
Productivity & Graphics business segment accounted for 11.4% of the Company’s total revenues. These
three customers accounted for 83% of accounts receivable for the year ended December 31, 2013. For the
24
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.
(cid:90)(cid:286)(cid:400)(cid:437)(cid:367)(cid:410)(cid:400)(cid:3)(cid:381)(cid:296)(cid:3)(cid:75)(cid:393)(cid:286)(cid:396)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:400)(cid:3)
The following table sets forth certain consolidated statement of comprehensive income (loss) data as a
percentage of total revenues for the periods indicated:
Revenues
100.0 %
100.0 %
100.0 %
Year Ended December 31,
2013
2012
2014
Cost of revenues
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring expenses
Total operating expenses
Operating loss
Non-operating income:
Change in fair value of contigent liability
Interest and other income (expense), net
Loss before provision for income taxes
Provision for income tax expense (benefit)
Net loss
25.2
74.8
25.9
38.4
35.7
6.6
106.6
(31.8)
22.7
77.3
36.7
49.9
42.7
13.2
142.5
(65.2)
19.5
80.5
38.5
57.2
46.6
0.5
142.8
(62.3)
-
-
(31.8)
0.1
(31.9) %
-
0.1
(65.1)
0.4
(65.5) %
2.8
0.2
(59.3)
(0.5)
(58.8) %
(cid:90)(cid:286)(cid:448)(cid:286)(cid:374)(cid:437)(cid:286)(cid:400)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:28)(cid:454)(cid:393)(cid:286)(cid:374)(cid:400)(cid:286)(cid:3)(cid:18)(cid:381)(cid:373)(cid:393)(cid:381)(cid:374)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)
The following is a description of the primary components of our revenues and expenses:
Revenues. Revenues are net of sales returns and allowances. Our operations are organized into two
business segments:
• Wireless, which includes our 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):
25
Wireless
Productivity & Graphics
Total revenues
Cost of revenues
Gross profit
Year Ended December 31,
2013
2014
2012
$
31,276
$
35,853
$
37,154
5,703
6,822
6,175
36,979
9,317
27,662
$
42,675
9,707
32,968
$
43,329
8,448
34,881
$
Cost of revenues. Cost of revenues consists of direct product and assembly, maintenance, and royalty
costs.
Selling and marketing. Selling and marketing expenses consist primarily of personnel costs,
advertising costs, sales commissions, and trade show expenses. 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.
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.
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 (expense), net. Interest and other income are 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.
Interest and other expense are primarily related to the credit-adjusted risk-free interest rate used to
measure our operating lease termination liabilities in restructuring.
Provision for income tax expense (benefit). The Company accounts for income taxes as required by
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic
No. 740, Income Taxes. This statement requires the recognition of deferred tax assets and liabilities
for the future consequences of events that have been recognized in the Company’s financial statements
or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of the Company’s assets
and liabilities result in a deferred tax asset, we are required to evaluate the probability of being able to
realize the future benefits indicated by such asset. The deferred tax assets are reduced by a valuation
allowance if, based upon all available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. Establishing, reducing or increasing a valuation allowance in
an accounting period generally results in an increase or decrease in tax expense in the statement of
operations. We must make significant judgments to determine the provision for income taxes, deferred
tax assets and liabilities, unrecognized tax benefits and any valuation allowance to be recorded against
deferred tax assets. Because of our loss position, the current provision for income tax expense consists
of state income tax minimums, foreign tax withholdings and foreign income taxes. After consideration
of the Company’s continuing cumulative loss position as of December 31, 2014, the Company retained
a valuation allowance related to its U.S.-based deferred tax assets of $75.7 million at December 31,
2014. During fiscal years 2014, 2013 and 2012, the valuation allowance on deferred tax assets
increased by $3.2 million, $12.1 million and $7.2 million, respectively.
26
(cid:122)(cid:286)(cid:258)(cid:396)(cid:3)(cid:28)(cid:374)(cid:282)(cid:286)(cid:282)(cid:3)(cid:24)(cid:286)(cid:272)(cid:286)(cid:373)(cid:271)(cid:286)(cid:396)(cid:3)(cid:1007)(cid:1005)(cid:853)(cid:3)(cid:1006)(cid:1004)(cid:1005)(cid:1008)(cid:3)(cid:18)(cid:381)(cid:373)(cid:393)(cid:258)(cid:396)(cid:286)(cid:282)(cid:3)(cid:410)(cid:381)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:122)(cid:286)(cid:258)(cid:396)(cid:3)(cid:28)(cid:374)(cid:282)(cid:286)(cid:282)(cid:3)(cid:24)(cid:286)(cid:272)(cid:286)(cid:373)(cid:271)(cid:286)(cid:396)(cid:3)(cid:1007)(cid:1005)(cid:853)(cid:3)(cid:1006)(cid:1004)(cid:1005)(cid:1007)(cid:3)
Revenues. Revenues of $37.0 million for fiscal year 2014 decreased $5.7 million, or 13.3%, from
$42.7 million for fiscal year 2013. Wireless revenues of $31.3 million decreased $4.6 million, or
12.8%, primarily due to lower sales of our legacy connection manager products of $7.6 million partially
offset by higher sales of our CommSuite products of $3.0 million. Productivity & Graphics sales
decreased $1.1 million, or 16.4%, primarily due to lower customer demand and fewer new releases this
year as we shift our future focus from consumers to new professional markets such as gaming and
industrial design. While we have launched new wireless products, 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 $9.3 million for fiscal year 2014 decreased $0.4 million, or 4.0%,
from $9.7 million for fiscal year 2013. Cost reduction savings as a result of our restructuring of $1.2
million was partially offset by increased royalties of $0.4 million due to product mix and $0.4 million of
maintenance costs associated with new product releases.
Gross profit. Gross profit of $27.7 million or 74.8% of revenues for fiscal year 2014 decreased $5.3
million, or 16.1%, from $33.0 million, or 77.3% of revenues for fiscal year 2013. The 2.5 percentage
point decrease was primarily due to the lower revenues.
Selling and marketing. Selling and marketing expenses of $9.6 million for fiscal year 2014 decreased
$6.1 million, or 39.0%, from $15.7 million for fiscal year 2013. This decrease was primarily due cost
reduction savings as a result of our restructuring; headcount reductions of $4.4 million and travel and
other cost reductions of $1.2 million. Stock-based compensation decreased from $0.8 million to $0.3
million, or $0.5 million.
Research and development. Research and development expenses of $14.2 million for fiscal year 2014
decreased $7.1 million, or 33.4%, from $21.3 million for fiscal year 2013. Lower headcount accounted
for the decrease of $6.9 million primarily due to our restructuring. Stock-based compensation
decreased from $0.9 million to $0.7 million, or $0.2 million.
General and administrative. General and administrative expenses of $13.2 million for fiscal year 2014
decreased $5.0 million, or 27.4%, from $18.2 million for fiscal year 2013. This decrease was primarily
due to lower space and occupancy costs as a result of our restructuring of $1.7 million, headcount and
other cost reductions as a result of our restructuring of $1.3 million, lower depreciation of $1.0 million,
and lower legal and accounting fees of $0.4 million. Stock-based compensation expense decreased
from $2.1 million to $1.5 million, or $0.6 million.
Restructuring expenses. Restructuring expense was $2.4 million for fiscal year 2014 due to one-time
employee terminations of $1.3 million of non-cash stock-based compensation and $0.4 million of
severance costs, $0.6 million for lease terminations, and $0.1 million of other related expenses.
Restructuring expenses were $5.6 million for fiscal year 2013. These charges were for lease/rental
terminations of $3.2 million, severance costs for affected employees of $1.2 million, fixed asset write-
offs as a result of our lease/rental terminations of $1.0 million and other related costs of $0.2 million.
Interest and other income (expense), net. Interest and other income (expense), net was de minimis for
both fiscal years 2014 and 2013.
Provision for income tax expense (benefit). We recorded income tax expense of $49,000 and $153,000
for fiscal years 2014 and 2013, respectively, primarily related to foreign income taxes.
(cid:122)(cid:286)(cid:258)(cid:396)(cid:3)(cid:28)(cid:374)(cid:282)(cid:286)(cid:282)(cid:3)(cid:24)(cid:286)(cid:272)(cid:286)(cid:373)(cid:271)(cid:286)(cid:396)(cid:3)(cid:1007)(cid:1005)(cid:853)(cid:3)(cid:1006)(cid:1004)(cid:1005)(cid:1007)(cid:3)(cid:18)(cid:381)(cid:373)(cid:393)(cid:258)(cid:396)(cid:286)(cid:282)(cid:3)(cid:410)(cid:381)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:122)(cid:286)(cid:258)(cid:396)(cid:3)(cid:28)(cid:374)(cid:282)(cid:286)(cid:282)(cid:3)(cid:24)(cid:286)(cid:272)(cid:286)(cid:373)(cid:271)(cid:286)(cid:396)(cid:3)(cid:1007)(cid:1005)(cid:853)(cid:3)(cid:1006)(cid:1004)(cid:1005)(cid:1006)(cid:3)
Revenues. Revenues of $42.7 million for fiscal year 2013 decreased $0.6 million, or 1.5%, from $43.3
million for fiscal year 2012. Wireless revenues of $35.9 million decreased $1.3 million, or 3.5%,
primarily due to lower sales of our legacy connection manager products of $5.2 million partially offset
by higher sales of our CommSuite products of $3.2 million and NetWise products of $0.7 million.
27
Productivity & Graphics sales increased $0.7 million, or 10.5%, primarily due to increases in our core
product lines of Poser and Manga Studio. Due to the introduction and market acceptance of mobile
hotspot devices, tablets and smartphones capable of functioning as a WWAN hotspot, our legacy
connection management products continue to experience 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 $9.7 million for fiscal year 2013 increased $1.3 million, or 14.9%,
from $8.4 million for fiscal year 2012. The increase was primarily due to the product mix in Wireless of
$1.1 million and product mix in Productivity & Graphics of $0.2 million.
Gross profit. Gross profit of $33.0 million or 77.3% of revenues for fiscal year 2013 decreased $1.9
million, or 5.5%, from $34.9 million, or 80.5% of revenues for fiscal year 2012. The 3.2 percentage
point decrease was primarily due to the lower revenues and product mix.
Selling and marketing. Selling and marketing expenses of $15.7 million for fiscal year 2013 decreased
$1.0 million, or 5.9%, from $16.7 million for fiscal year 2012. This decrease was primarily due to lower
personnel related expenses and severance of $0.4 million and lower travel and trade shows of $0.5
million. Stock-based compensation decreased from $0.9 million to $0.8 million, or $0.1 million.
Research and development. Research and development expenses of $21.3 million for fiscal year 2013
decreased $3.5 million, or 14.0%, from $24.8 million for fiscal year 2012. This decrease was primarily
due to lower headcount. Stock-based compensation increased from $0.8 million to $0.9 million, or
$0.1 million due to stock options being issued to many of the engineers late in fiscal year 2012.
General and administrative. General and administrative expenses of $18.2 million for fiscal year 2013
decreased $2.0 million, or 9.9%, from $20.2 million for fiscal year 2012. This decrease was primarily
due to lower space and occupancy costs as a result of our restructuring of $1.3 million and lower legal
and accounting fees of $0.6 million partially offset by increased travel and other expenses of $0.2
million. Stock-based compensation expense decreased from $2.4 million to $2.1 million, or $0.3
million.
Restructuring expenses. Restructuring expenses of $5.6 million for fiscal year 2013 were related to
lease/rental terminations of $3.3 million, severance costs for affected employees of $1.1 million,
equipment and improvements write-offs as a result of our lease/rental terminations of $1.0 million and
other related costs of $0.2 million. 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.
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 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 de minimis for fiscal year 2013 and
$0.1 million for fiscal year 2012.
Provision for income tax expense (benefit). We recorded income tax expense of $0.2 million for fiscal
year 2013 primarily related to foreign income taxes. 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.
(cid:62)(cid:349)(cid:395)(cid:437)(cid:349)(cid:282)(cid:349)(cid:410)(cid:455)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:18)(cid:258)(cid:393)(cid:349)(cid:410)(cid:258)(cid:367)(cid:3)(cid:90)(cid:286)(cid:400)(cid:381)(cid:437)(cid:396)(cid:272)(cid:286)(cid:400)(cid:3)
28
At December 31, 2014, we had $13.0 million in cash and cash equivalents and short-term investments and
$14.0 million of working capital.
Capital expenditures were $0.2 million for the fiscal year 2014 versus $0.8 million for the fiscal year 2013.
The 2014 expenditures were primarily for computer hardware and software.
In August 2014, the Company entered into a common stock purchase agreement (see Note 9) with a number
of accredited investors in a private placement pursuant to which the Company agreed to issue and sell to the
investors an aggregate of 6,845,830 shares of its common stock at a price per share of $0.816. The transaction
closed on August 20, 2014 and the Company realized gross proceeds of $5.6 million before deducting
commissions and other expenses of $0.4 million.
In May 2014, the Board approved a restructuring plan (see Note 2) that was implemented during the fiscal
quarter ended June 30, 2014 which lowered our overall cost structure by approximately $2.0 million per
quarter.
Based on the Company’s current financial revenue and profit projections, our reduced cost structure as a
result of our 2014 restructuring mentioned above, and the proceeds from the sale of our common stock in a
private placement mentioned above, management believes that the Company’s existing cash, cash
equivalents and short-term investment will be sufficient to fund the its operations through at least the next
twelve months.
(cid:75)(cid:393)(cid:286)(cid:396)(cid:258)(cid:410)(cid:349)(cid:374)(cid:336)(cid:3)(cid:4)(cid:272)(cid:410)(cid:349)(cid:448)(cid:349)(cid:410)(cid:349)(cid:286)(cid:400)(cid:3)
In 2014, net cash used in operations was $6.8 million primarily due to our net loss adjusted for
depreciation, amortization, non-cash stock-based compensation, inventory and accounts receivable
reserves of $4.7 million, decreases in accounts payable and accrued expenses of $2.2 million, and an
increase in accounts receivable of $1.0 million. This usage was partially offset by an increase in
deferred revenue of $1.0 million and a decrease in prepaid expenses of $0.1 million.
In 2013, net cash used in operations was $16.6 million primarily due to our net loss adjusted for
depreciation, amortization, write-off of fixed assets related to our restructuring, non-cash stock-based
compensation, inventory and accounts receivable reserves, and other assets of $18.7 million. This
usage was partially offset by an increase in accounts payable and accrued liabilities of $1.4 million
and a decrease in accounts receivable of $0.7 million.
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.
(cid:47)(cid:374)(cid:448)(cid:286)(cid:400)(cid:410)(cid:349)(cid:374)(cid:336)(cid:3)(cid:4)(cid:272)(cid:410)(cid:349)(cid:448)(cid:349)(cid:410)(cid:349)(cid:286)(cid:400)(cid:3)
In 2014, cash used by investing activities was de minimis as the sale of short-term investments of $0.2
million was offset by capital expenditures of $0.2 million.
In 2013, cash provided by investing activities of $9.4 million was due to the sale of short-term
investments of $10.2 million, partially offset by capital expenditures of $0.8 million.
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.
29
(cid:38)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:374)(cid:336)(cid:3)(cid:4)(cid:272)(cid:410)(cid:349)(cid:448)(cid:349)(cid:410)(cid:349)(cid:286)(cid:400)(cid:3)
In 2014, cash provided by financing activities was $5.3 million. We received $5.2 million from the
sale of our common stock in a private placement. We also received $21,000 from the stock sale for the
employee stock purchase plan and $6,000 from the exercise of stock options.
In 2013, cash provided by financing activities was $36,000 as a result of cash received from the sale
of stock for our employee stock purchase plan.
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.
(cid:18)(cid:381)(cid:374)(cid:410)(cid:396)(cid:258)(cid:272)(cid:410)(cid:437)(cid:258)(cid:367)(cid:3)(cid:75)(cid:271)(cid:367)(cid:349)(cid:336)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:400)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:18)(cid:381)(cid:373)(cid:373)(cid:286)(cid:396)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:18)(cid:381)(cid:373)(cid:373)(cid:349)(cid:410)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)
As of December 31, 2014, we had no debt. The following table summarizes our contractual obligations
as of December 31, 2014 (in thousands):
Payments due by period
Contractual obligations:
Operating lease obligations
Purchase obligations
Total
Total
11,734
2,143
13,877
$
$
Less than
1 year
2,188
2,143
4,331
1-3 years
3,424
-
3,424
3-5 years
3,042
-
3,042
More than
5 years
3,080
-
3,080
$
$
$
$
$
$
$
$
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.
(cid:90)(cid:286)(cid:258)(cid:367)(cid:3)(cid:87)(cid:396)(cid:381)(cid:393)(cid:286)(cid:396)(cid:410)(cid:455)(cid:3)(cid:62)(cid:286)(cid:258)(cid:400)(cid:286)(cid:400)(cid:3)
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 33,600 square feet of space pursuant to lease that expires on May 31,
2016. 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. Internationally, we lease space in Belgrade, Serbia that expires
December 30, 2016.
We lease an additional 19,100 square feet in Aliso Viejo, California under a lease that expires January
31, 2022. In August 2014, we signed an addendum to sublease all of the space commencing on
September 15, 2014 for a three year period, with two, two-year renewal options. The remaining lease
expense, net of sublease income, has been accrued for in our 2013 restructuring liability account.
30
We lease approximately 15,300 square feet in Watsonville, California under a lease that expires
September 30, 2018. In March 2014, we signed an addendum to sublease all of the space commencing
on May 1, 2014. We continued to pay our current monthly rent through June 30, 2014. Beginning on
July 1, 2014, we are paying the landlord a minimum amount of rent, with annual escalations, through the
end of the lease. This lease expense has been accrued for in our 2013 restructuring liability account. We
have moved into a significantly smaller facility in Santa Cruz, California and are paying month-to-month
rent.
(cid:75)(cid:296)(cid:296)(cid:882)(cid:17)(cid:258)(cid:367)(cid:258)(cid:374)(cid:272)(cid:286)(cid:3)(cid:94)(cid:346)(cid:286)(cid:286)(cid:410)(cid:3)(cid:4)(cid:396)(cid:396)(cid:258)(cid:374)(cid:336)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)
As of December 31, 2014, we did not have any off-balance sheet arrangements.
(cid:18)(cid:396)(cid:349)(cid:410)(cid:349)(cid:272)(cid:258)(cid:367)(cid:3)(cid:4)(cid:272)(cid:272)(cid:381)(cid:437)(cid:374)(cid:410)(cid:349)(cid:374)(cid:336)(cid:3)(cid:87)(cid:381)(cid:367)(cid:349)(cid:272)(cid:349)(cid:286)(cid:400)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:28)(cid:400)(cid:410)(cid:349)(cid:373)(cid:258)(cid:410)(cid:286)(cid:400)(cid:3)
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:
(cid:90)(cid:286)(cid:448)(cid:286)(cid:374)(cid:437)(cid:286)(cid:3)(cid:90)(cid:286)(cid:272)(cid:381)(cid:336)(cid:374)(cid:349)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)
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
31
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.
On occasion, we enter into fixed fee arrangements, i.e. for trials, in which customer payments are tied
to the achievement of specific milestones. Revenue for these contracts is recognized based on
customer acceptance of certain milestones as they are achieved. We also enter hosting arrangements
that sometimes include up-front, non-refundable set-up fees. Revenue is recognized for these fees
over the term of the agreement.
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.
(cid:94)(cid:258)(cid:367)(cid:286)(cid:400)(cid:3)(cid:47)(cid:374)(cid:272)(cid:286)(cid:374)(cid:410)(cid:349)(cid:448)(cid:286)(cid:400)(cid:3)
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. 605-50,
Revenue Recognition-Customer Payments and Incentives. We use historical redemption rates to
estimate the cost of customer incentives. Total sales incentives were $0.5 million, $1.2 million, and
$0.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.
(cid:4)(cid:272)(cid:272)(cid:381)(cid:437)(cid:374)(cid:410)(cid:400)(cid:3)(cid:90)(cid:286)(cid:272)(cid:286)(cid:349)(cid:448)(cid:258)(cid:271)(cid:367)(cid:286)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:4)(cid:367)(cid:367)(cid:381)(cid:449)(cid:258)(cid:374)(cid:272)(cid:286)(cid:3)(cid:296)(cid:381)(cid:396)(cid:3)(cid:24)(cid:381)(cid:437)(cid:271)(cid:410)(cid:296)(cid:437)(cid:367)(cid:3)(cid:4)(cid:272)(cid:272)(cid:381)(cid:437)(cid:374)(cid:410)(cid:400)(cid:3)
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.
(cid:47)(cid:374)(cid:410)(cid:286)(cid:396)(cid:374)(cid:258)(cid:367)(cid:3)(cid:94)(cid:381)(cid:296)(cid:410)(cid:449)(cid:258)(cid:396)(cid:286)(cid:3)(cid:24)(cid:286)(cid:448)(cid:286)(cid:367)(cid:381)(cid:393)(cid:373)(cid:286)(cid:374)(cid:410)(cid:3)(cid:18)(cid:381)(cid:400)(cid:410)(cid:400)(cid:3)
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,
2014, software has been substantially completed concurrently with the establishment of technological
feasibility; accordingly, no costs have been capitalized to date.
32
(cid:47)(cid:374)(cid:272)(cid:381)(cid:373)(cid:286)(cid:3)(cid:100)(cid:258)(cid:454)(cid:286)(cid:400)(cid:3)
We account for income taxes as required by FASB ASC Topic No. 740, Income Taxes. This Topic
clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements and prescribes a recognition threshold and measurement process for financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. The Topic
also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Topic requires an entity to recognize the financial statement
impact of a tax position when it is more likely than not that the position will be sustained upon
examination. The amount recognized is measured as the largest amount of benefit that is greater than
fifty percent likely of being realized upon ultimate settlement. In addition, the Topic permits an entity
to recognize interest and penalties related to tax uncertainties either as income tax expense or operating
expenses. The Company has chosen to recognize interest and penalties related to tax uncertainties as
income tax expense.
The Company assesses whether a valuation allowance should be recorded against its deferred tax
assets based on the consideration of all available evidence, using a “more likely than not” realization
standard. The four sources of taxable income that must be considered in determining whether deferred
tax assets will be realized are: (1) future reversals of existing taxable temporary differences (i.e., offset
of gross deferred tax liabilities against gross deferred tax assets); (2) taxable income in prior carryback
years, if carryback is permitted under the applicable tax law; (3) tax planning strategies and (4) future
taxable income exclusive of reversing temporary differences and carryforwards.
In assessing whether a valuation allowance is required, significant weight is to be given to evidence
that can be objectively verified. A significant factor in the Company’s assessment is that the Company
has been in a four-year historical cumulative loss as of the end of fiscal year 2014. These facts,
combined with uncertain near-term market and economic conditions, reduced the Company’s ability
to rely on projections of future taxable income in assessing the realizability of its deferred tax assets.
After a review of the four sources of taxable income as of December 31, 2014 (as described above),
and after consideration of the Company’s continuing cumulative loss position as of December 31,
2014, the Company will continue to reserve it’s U.S.-based deferred tax amounts, which total $75.7
million, as of December 31, 2014.
The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions.
Federal income tax returns of the Company are subject to IRS examination for the 2012 and 2013 tax
years. State income tax returns are subject to examination for a period of three to four years after filing.
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. We may
from time to time be assessed interest or penalties by major tax jurisdictions, although any such
assessments historically have been minimal and immaterial to our financial results. It is the Company’s
policy to classify any interest and/or penalties in the financial statements as a component of income
tax expense.
(cid:94)(cid:410)(cid:381)(cid:272)(cid:364)(cid:882)(cid:17)(cid:258)(cid:400)(cid:286)(cid:282)(cid:3)(cid:18)(cid:381)(cid:373)(cid:393)(cid:286)(cid:374)(cid:400)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)
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.
33
(cid:3)
(cid:90)(cid:286)(cid:272)(cid:286)(cid:374)(cid:410)(cid:3)(cid:4)(cid:272)(cid:272)(cid:381)(cid:437)(cid:374)(cid:410)(cid:349)(cid:374)(cid:336)(cid:3)(cid:87)(cid:396)(cid:381)(cid:374)(cid:381)(cid:437)(cid:374)(cid:272)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)
In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation
of Financial Statements-Going Concern (Subtopic 205-40). The Update provides U.S. GAAP
guidance on management’s responsibility in evaluating whether there is substantial doubt about a
company’s ability to continue as a going concern and about related footnote disclosures. For each
reporting period, management will be required to evaluate whether there are conditions or events that
raise substantial doubt about a company’s ability to continue as a going concern within one year from
the date the financial statements are issued. The amendments in this Update are effective for the
annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.
Early application is permitted. We will be evaluating the impact of this guidance on our consolidated
financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606). The amendments to this Update supersede nearly all existing revenue recognition guidance
under U.S. GAAP. The core principle of this Topic is to recognize revenues when promised goods or
services are transferred to customers in an amount that reflects the consideration that is expected to be
received for those goods or services. This Topic defines a five step process to achieve this core
principle and, in doing so, it is possible more judgment and estimates may be required within the
revenue recognition process than required under existing U.S. GAAP including identifying
performance obligations in the contract, estimating the amount of variable consideration to include in
the transaction price and allocating the transaction price to each separate performance obligation. For
all entities, the amendments in this Update are effective for annual periods and interim periods within
those annual periods beginning after December 15, 2016. Earlier adoption is not permitted. An entity
will be able to use either of two adoption methods: (1) retrospective to each prior reporting period
presented with the option to elect certain practical expedients as defined within this Topic; or (2)
retrospective with the cumulative effect of initially applying this Topic recognized at the date of initial
application and providing certain additional disclosures as defined per this Topic. We will be
evaluating the impact of this guidance on our consolidated financial statements.
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1011)(cid:4)(cid:856)(cid:3)(cid:89)(cid:104)(cid:4)(cid:69)(cid:100)(cid:47)(cid:100)(cid:4)(cid:100)(cid:47)(cid:115)(cid:28)(cid:3)(cid:4)(cid:69)(cid:24)(cid:3)(cid:89)(cid:104)(cid:4)(cid:62)(cid:47)(cid:100)(cid:4)(cid:100)(cid:47)(cid:115)(cid:28)(cid:3)(cid:24)(cid:47)(cid:94)(cid:18)(cid:62)(cid:75)(cid:94)(cid:104)(cid:90)(cid:28)(cid:94)(cid:3)(cid:4)(cid:17)(cid:75)(cid:104)(cid:100)(cid:3)(cid:68)(cid:4)(cid:90)(cid:60)(cid:28)(cid:100)(cid:3)(cid:90)(cid:47)(cid:94)(cid:60)(cid:3)
(cid:47)(cid:374)(cid:410)(cid:286)(cid:396)(cid:286)(cid:400)(cid:410)(cid:3)(cid:90)(cid:258)(cid:410)(cid:286)(cid:3)(cid:90)(cid:349)(cid:400)(cid:364)(cid:3)
Our financial instruments include cash and cash equivalents and short-term investments. At December 31,
2014, the carrying values of our financial instruments approximated fair values based on current market
prices and rates.
(cid:38)(cid:381)(cid:396)(cid:286)(cid:349)(cid:336)(cid:374)(cid:3)(cid:18)(cid:437)(cid:396)(cid:396)(cid:286)(cid:374)(cid:272)(cid:455)(cid:3)(cid:90)(cid:349)(cid:400)(cid:364)(cid:3)
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, 2014, 2013 and 2012, our revenues denominated in
foreign currencies were $43,000, $0.1 million, and $0.6 million, respectively. Fluctuations in the rate of
exchange between the U.S. dollar and certain other currencies may affect our results of operations and period-
to-period comparisons of our operating results. We do not currently engage in hedging or similar transactions
to reduce these risks. The operational expenses of our foreign entities reduce the currency exposure we have
because our foreign currency revenues are offset in part by expenses payable in foreign currencies. As such,
we do not believe we have a material exposure to foreign currency rate fluctuations at this time.
34
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1012)(cid:856)(cid:3)(cid:38)(cid:47)(cid:69)(cid:4)(cid:69)(cid:18)(cid:47)(cid:4)(cid:62)(cid:3)(cid:94)(cid:100)(cid:4)(cid:100)(cid:28)(cid:68)(cid:28)(cid:69)(cid:100)(cid:94)(cid:3)(cid:4)(cid:69)(cid:24)(cid:3)(cid:94)(cid:104)(cid:87)(cid:87)(cid:62)(cid:28)(cid:68)(cid:28)(cid:69)(cid:100)(cid:4)(cid:90)(cid:122)(cid:3)(cid:24)(cid:4)(cid:100)(cid:4)(cid:3)
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.
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3) (cid:1013)(cid:856)(cid:3) (cid:18)(cid:44)(cid:4)(cid:69)(cid:39)(cid:28)(cid:94)(cid:3) (cid:47)(cid:69)(cid:3) (cid:4)(cid:69)(cid:24)(cid:3) (cid:24)(cid:47)(cid:94)(cid:4)(cid:39)(cid:90)(cid:28)(cid:28)(cid:68)(cid:28)(cid:69)(cid:100)(cid:94)(cid:3) (cid:116)(cid:47)(cid:100)(cid:44)(cid:3) (cid:4)(cid:18)(cid:18)(cid:75)(cid:104)(cid:69)(cid:100)(cid:4)(cid:69)(cid:100)(cid:94)(cid:3) (cid:75)(cid:69)(cid:3)
(cid:4)(cid:18)(cid:18)(cid:75)(cid:104)(cid:69)(cid:100)(cid:47)(cid:69)(cid:39)(cid:3)(cid:4)(cid:69)(cid:24)(cid:3)(cid:38)(cid:47)(cid:69)(cid:4)(cid:69)(cid:18)(cid:47)(cid:4)(cid:62)(cid:3)(cid:24)(cid:47)(cid:94)(cid:18)(cid:62)(cid:75)(cid:94)(cid:104)(cid:90)(cid:28)(cid:3)
None.
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1013)(cid:4)(cid:856)(cid:3)(cid:18)(cid:75)(cid:69)(cid:100)(cid:90)(cid:75)(cid:62)(cid:94)(cid:3)(cid:4)(cid:69)(cid:24)(cid:3)(cid:87)(cid:90)(cid:75)(cid:18)(cid:28)(cid:24)(cid:104)(cid:90)(cid:28)(cid:94)(cid:3)
(cid:28)(cid:448)(cid:258)(cid:367)(cid:437)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)(cid:381)(cid:296)(cid:3)(cid:24)(cid:349)(cid:400)(cid:272)(cid:367)(cid:381)(cid:400)(cid:437)(cid:396)(cid:286)(cid:3)(cid:18)(cid:381)(cid:374)(cid:410)(cid:396)(cid:381)(cid:367)(cid:400)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:87)(cid:396)(cid:381)(cid:272)(cid:286)(cid:282)(cid:437)(cid:396)(cid:286)(cid:400)(cid:3)
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, 2014. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer have determined that as of December 31, 2014, 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.
(cid:68)(cid:258)(cid:374)(cid:258)(cid:336)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:859)(cid:400)(cid:3)(cid:90)(cid:286)(cid:400)(cid:393)(cid:381)(cid:374)(cid:400)(cid:349)(cid:271)(cid:349)(cid:367)(cid:349)(cid:410)(cid:455)(cid:3)(cid:296)(cid:381)(cid:396)(cid:3)(cid:38)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:94)(cid:410)(cid:258)(cid:410)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)(cid:3)
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.
35
(cid:18)(cid:346)(cid:258)(cid:374)(cid:336)(cid:286)(cid:400)(cid:3)(cid:349)(cid:374)(cid:3)(cid:47)(cid:374)(cid:410)(cid:286)(cid:396)(cid:374)(cid:258)(cid:367)(cid:3)(cid:18)(cid:381)(cid:374)(cid:410)(cid:396)(cid:381)(cid:367)(cid:3)(cid:381)(cid:448)(cid:286)(cid:396)(cid:3)(cid:38)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:90)(cid:286)(cid:393)(cid:381)(cid:396)(cid:410)(cid:349)(cid:374)(cid:336)(cid:3)
There have been no changes in our internal controls over financial reporting during the quarter ended
December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
(cid:90)(cid:286)(cid:393)(cid:381)(cid:396)(cid:410)(cid:3)(cid:381)(cid:296)(cid:3)(cid:68)(cid:258)(cid:374)(cid:258)(cid:336)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:3)(cid:381)(cid:374)(cid:3)(cid:47)(cid:374)(cid:410)(cid:286)(cid:396)(cid:374)(cid:258)(cid:367)(cid:3)(cid:18)(cid:381)(cid:374)(cid:410)(cid:396)(cid:381)(cid:367)(cid:3)(cid:75)(cid:448)(cid:286)(cid:396)(cid:3)(cid:38)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:90)(cid:286)(cid:393)(cid:381)(cid:396)(cid:410)(cid:349)(cid:374)(cid:336)(cid:3)
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, 2014. Management based
this assessment on criteria for effective internal control over financial reporting described in “Internal
Control—Integrated Framework 2013” issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Based on this assessment, management determined that, as of December 31, 2014, we maintained effective
internal control over financial reporting.
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1013)(cid:17)(cid:856)(cid:3)(cid:75)(cid:100)(cid:44)(cid:28)(cid:90)(cid:3)(cid:47)(cid:69)(cid:38)(cid:75)(cid:90)(cid:68)(cid:4)(cid:100)(cid:47)(cid:75)(cid:69)(cid:3)
None.
36
(cid:87)(cid:4)(cid:90)(cid:100)(cid:3)(cid:47)(cid:47)(cid:47)(cid:3)
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1005)(cid:1004)(cid:856)(cid:3)(cid:24)(cid:47)(cid:90)(cid:28)(cid:18)(cid:100)(cid:75)(cid:90)(cid:94)(cid:853)(cid:3)(cid:28)(cid:121)(cid:28)(cid:18)(cid:104)(cid:100)(cid:47)(cid:115)(cid:28)(cid:3)(cid:75)(cid:38)(cid:38)(cid:47)(cid:18)(cid:28)(cid:90)(cid:94)(cid:3)(cid:4)(cid:69)(cid:24)(cid:3)(cid:18)(cid:75)(cid:90)(cid:87)(cid:75)(cid:90)(cid:4)(cid:100)(cid:28)(cid:3)(cid:39)(cid:75)(cid:115)(cid:28)(cid:90)(cid:69)(cid:4)(cid:69)(cid:18)(cid:28)(cid:3)
The following table sets forth certain information regarding our executive officers and certain key officers as of
February 20, 2015:
Name
William W. Smith, Jr.
Rick Carpenter
Carla Fitzgerald
Jim Mains
Ken Shebek
David P. Sperling
Steven M. Yasbek
Age
67
51
50
52
52
46
61
Position
Chairman of the Board, President and Chief Executive Officer
Senior Vice President, Engineering
Vice President, Chief Marketing Officer
Vice President, Chief Strategy Officer
Vice President, Operations
Vice President, Chief Technology Officer
Vice President, Chief Financial 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. Carpenter joined the Company in May 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.
Ms. Fitzgerald joined the Company in March 2011 as Vice President, Corporate Marketing and has been the Chief
Marketing Officer since January 2014. As a veteran of the technology industry, Ms. Fitzgerald has held executive
positions in marketing, product management, technical sales and business development positions with Bitfone,
WebVisible, LogicalApps, Quest Software, Octave Software and CA (formerly Computer Associates, Systems &
Network Management software). She holds a B.A. degree in Economics and Computer Studies from Claremont
McKenna College, and sits on the Board of Advisors for the UC Irvine Marketing Extension program.
Mr. Mains joined the Company in November 2009 and has been the Chief Strategy Officer since January 2014.
Previously, Mr. Mains has held various positions (Senior Vice President of Products, Solution Engineering, Support,
and Program Management) where he focused on innovation and transformation. Prior to joining Smith Micro, Mr.
Mains held executive/management positions at Openwave Systems, EMC Corporation, IBM Management
Consulting, and several management positions in the Aerospace Industry. He earned his B.S. in Mechanical
Engineering at the Pennsylvania State University and M.S. in Interactive Technology and Psychology (AI focus) at
the University of Southern California with additional course work at the Wharton School of Business.
Mr. Shebek joined the Company in December 2010 as the Vice President of Operations where he led the Enterprise
Mobility Product platform. Mr. Shebek currently is responsible for Information Technology throughout the
Company as well as overseeing the Pittsburgh facility. Prior to joining Smith Micro, he was Vice President of
Operations for Tollgrade Communications. He also served as Vice President of Supply & Logistics for Ericsson,
Inc. and worked for Marconi as Vice President of Supply Chain and served as its Vice President of North American
37
Operations. He joined Fore Systems in 1994, and previously held management positions with IBM. He holds a B.S.
in Mechanical Engineering degree from Pennsylvania State University.
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. He holds a B.S. degree in Computer Science and an MBA from the
University of California, Irvine.
Mr. Yasbek joined the Company in May 2008 as the Chief Accounting Officer and assumed the Vice President
and Chief Financial Officer position in May 2014. Mr. Yasbek has held executive finance and information
technology positions with REMEC, Paradigm Wireless Systems, Intellisys Group, Pacific Scientific Company,
Symbol Technologies, and TRW. Prior to joining the Company, Mr. Yasbek was the 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 2015 Annual Meeting of Stockholders, which is hereby incorporated by reference.
The section titled “Corporate Governance” appearing in our Proxy Statement for our 2015 Annual Meeting of
Stockholders is hereby incorporated by reference.
(cid:4)(cid:437)(cid:282)(cid:349)(cid:410)(cid:3)(cid:18)(cid:381)(cid:373)(cid:373)(cid:349)(cid:410)(cid:410)(cid:286)(cid:286)(cid:854)(cid:3)(cid:4)(cid:437)(cid:282)(cid:349)(cid:410)(cid:3)(cid:18)(cid:381)(cid:373)(cid:373)(cid:349)(cid:410)(cid:410)(cid:286)(cid:286)(cid:3)(cid:38)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:28)(cid:454)(cid:393)(cid:286)(cid:396)(cid:410)(cid:3)
Our Board of Directors has a standing Audit Committee. The members of the Audit Committee are Messrs.
Campbell, 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).
(cid:94)(cid:286)(cid:272)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)(cid:1005)(cid:1010)(cid:894)(cid:258)(cid:895)(cid:3)(cid:17)(cid:286)(cid:374)(cid:286)(cid:296)(cid:349)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:75)(cid:449)(cid:374)(cid:286)(cid:396)(cid:400)(cid:346)(cid:349)(cid:393)(cid:3)(cid:90)(cid:286)(cid:393)(cid:381)(cid:396)(cid:410)(cid:349)(cid:374)(cid:336)(cid:3)(cid:18)(cid:381)(cid:373)(cid:393)(cid:367)(cid:349)(cid:258)(cid:374)(cid:272)(cid:286)(cid:3)
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 2014, with the exception
of a Form 3 for one director that was filed late.
(cid:18)(cid:381)(cid:282)(cid:286)(cid:3)(cid:381)(cid:296)(cid:3)(cid:28)(cid:410)(cid:346)(cid:349)(cid:272)(cid:400)(cid:3)
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.
38
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1005)(cid:1005)(cid:856)(cid:3)(cid:28)(cid:121)(cid:28)(cid:18)(cid:104)(cid:100)(cid:47)(cid:115)(cid:28)(cid:3)(cid:18)(cid:75)(cid:68)(cid:87)(cid:28)(cid:69)(cid:94)(cid:4)(cid:100)(cid:47)(cid:75)(cid:69)(cid:3)
The section titled “Executive Compensation and Related Information” appearing in our Proxy Statement for our
2015 Annual Meeting of Stockholders is hereby incorporated by reference.
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3) (cid:1005)(cid:1006)(cid:856)(cid:3) (cid:94)(cid:28)(cid:18)(cid:104)(cid:90)(cid:47)(cid:100)(cid:122)(cid:3) (cid:75)(cid:116)(cid:69)(cid:28)(cid:90)(cid:94)(cid:44)(cid:47)(cid:87)(cid:3) (cid:75)(cid:38)(cid:3) (cid:18)(cid:28)(cid:90)(cid:100)(cid:4)(cid:47)(cid:69)(cid:3) (cid:17)(cid:28)(cid:69)(cid:28)(cid:38)(cid:47)(cid:18)(cid:47)(cid:4)(cid:62)(cid:3) (cid:75)(cid:116)(cid:69)(cid:28)(cid:90)(cid:94)(cid:3) (cid:4)(cid:69)(cid:24)(cid:3)
(cid:68)(cid:4)(cid:69)(cid:4)(cid:39)(cid:28)(cid:68)(cid:28)(cid:69)(cid:100)(cid:3)(cid:4)(cid:69)(cid:24)(cid:3)(cid:90)(cid:28)(cid:62)(cid:4)(cid:100)(cid:28)(cid:24)(cid:3)(cid:94)(cid:100)(cid:75)(cid:18)(cid:60)(cid:44)(cid:75)(cid:62)(cid:24)(cid:28)(cid:90)(cid:3)(cid:68)(cid:4)(cid:100)(cid:100)(cid:28)(cid:90)(cid:94)(cid:3)
The section titled “Ownership of Securities and Related Stockholder Matters” appearing in our Proxy Statement
for our 2015 Annual Meeting of Stockholders is hereby incorporated by reference.
(cid:94)(cid:286)(cid:272)(cid:437)(cid:396)(cid:349)(cid:410)(cid:349)(cid:286)(cid:400)(cid:3)(cid:4)(cid:437)(cid:410)(cid:346)(cid:381)(cid:396)(cid:349)(cid:460)(cid:286)(cid:282)(cid:3)(cid:296)(cid:381)(cid:396)(cid:3)(cid:47)(cid:400)(cid:400)(cid:437)(cid:258)(cid:374)(cid:272)(cid:286)(cid:3)(cid:104)(cid:374)(cid:282)(cid:286)(cid:396)(cid:3)(cid:4)(cid:374)(cid:3)(cid:28)(cid:395)(cid:437)(cid:349)(cid:410)(cid:455)(cid:3)(cid:18)(cid:381)(cid:373)(cid:393)(cid:286)(cid:374)(cid:400)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)(cid:87)(cid:367)(cid:258)(cid:374)(cid:3)(cid:3)
The following table provides information as of December 31, 2014 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
2,134
-
2,134
$5.29
-
$5.29
1,571
-
1,571
(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.
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3) (cid:1005)(cid:1007)(cid:856)(cid:3) (cid:18)(cid:28)(cid:90)(cid:100)(cid:4)(cid:47)(cid:69)(cid:3) (cid:90)(cid:28)(cid:62)(cid:4)(cid:100)(cid:47)(cid:75)(cid:69)(cid:94)(cid:44)(cid:47)(cid:87)(cid:94)(cid:3) (cid:4)(cid:69)(cid:24)(cid:3) (cid:90)(cid:28)(cid:62)(cid:4)(cid:100)(cid:28)(cid:24)(cid:3) (cid:100)(cid:90)(cid:4)(cid:69)(cid:94)(cid:4)(cid:18)(cid:100)(cid:47)(cid:75)(cid:69)(cid:94)(cid:853)(cid:3) (cid:4)(cid:69)(cid:24)(cid:3)
(cid:24)(cid:47)(cid:90)(cid:28)(cid:18)(cid:100)(cid:75)(cid:90)(cid:3)(cid:47)(cid:69)(cid:24)(cid:28)(cid:87)(cid:28)(cid:69)(cid:24)(cid:28)(cid:69)(cid:18)(cid:28)(cid:3)
The section titled “Related Party Transactions” and “Director Independence” appearing in our Proxy Statement
for our 2015 Annual Meeting of Stockholders is incorporated herein by reference.
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1005)(cid:1008)(cid:856)(cid:3)(cid:87)(cid:90)(cid:47)(cid:69)(cid:18)(cid:47)(cid:87)(cid:4)(cid:62)(cid:3)(cid:4)(cid:18)(cid:18)(cid:75)(cid:104)(cid:69)(cid:100)(cid:47)(cid:69)(cid:39)(cid:3)(cid:38)(cid:28)(cid:28)(cid:94)(cid:3)(cid:4)(cid:69)(cid:24)(cid:3)(cid:94)(cid:28)(cid:90)(cid:115)(cid:47)(cid:18)(cid:28)(cid:94)(cid:3)
The section titled “Ratification of Appointment of Independent Registered Public Accounting Firm – Principal
Accountant Fees and Services” appearing in our Proxy Statement for our 2015 Annual Meeting of Stockholders
is incorporated herein by reference.
39
(cid:87)(cid:4)(cid:90)(cid:100)(cid:3)(cid:47)(cid:115)(cid:3)
(cid:47)(cid:410)(cid:286)(cid:373)(cid:3)(cid:1005)(cid:1009)(cid:856)(cid:3)(cid:28)(cid:121)(cid:44)(cid:47)(cid:17)(cid:47)(cid:100)(cid:94)(cid:3)(cid:4)(cid:69)(cid:24)(cid:3)(cid:38)(cid:47)(cid:69)(cid:4)(cid:69)(cid:18)(cid:47)(cid:4)(cid:62)(cid:3)(cid:94)(cid:100)(cid:4)(cid:100)(cid:28)(cid:68)(cid:28)(cid:69)(cid:100)(cid:3)(cid:94)(cid:18)(cid:44)(cid:28)(cid:24)(cid:104)(cid:62)(cid:28)(cid:94)(cid:3)
(cid:894)(cid:258)(cid:895)(cid:3)(cid:894)(cid:1005)(cid:895)(cid:3)(cid:38)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:94)(cid:410)(cid:258)(cid:410)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)
Smith Micro’s financial statements appear in a separate section of this Annual Report on Form 10-K
beginning on the pages referenced below:
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ....................................................... F-1(cid:3)
CONSOLIDATED BALANCE SHEETS ..................................................................................................................... F-2(cid:3)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS .......................................................................... F-3(cid:3)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY ...................................................................... F-4(cid:3)
CONSOLIDATED STATEMENTS OF CASH FLOWS ............................................................................................. F-5(cid:3)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................................................................... F-6(cid:3)
Page
(cid:894)(cid:1006)(cid:895)(cid:3)(cid:38)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:94)(cid:410)(cid:258)(cid:410)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:3)(cid:94)(cid:272)(cid:346)(cid:286)(cid:282)(cid:437)(cid:367)(cid:286)(cid:3)
Smith Micro’s financial statement schedule appears in a separate section of this Annual Report on Form 10-
K on the pages referenced below. All other schedules have been omitted as they are not applicable, not
required or the information is included in the consolidated financial statements or the notes thereto.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ......................................................................... S-1(cid:3)
Page
(cid:894)(cid:1007)(cid:895)(cid:3)(cid:28)(cid:454)(cid:346)(cid:349)(cid:271)(cid:349)(cid:410)(cid:400)(cid:3)
Exhibit No.
Title
Method of Filing
3.1
3.1.1
3.1.2
Amended and Restated Certificate of
Incorporation.
Amendment
Certificate
to
Incorporation dated July 11, 2000.
of
Amendment
to
Incorporation dated August 18, 2005.
Certificate
of
Incorporated by reference to Exhibit 3.1 to
the Registrant's Registration Statement
No. 33-95096.
Incorporated by reference to Exhibit 3.1.1
to the Registrant’s Quarterly Report on
Form 10-Q for the period ended June 30,
2000.
Incorporated by reference to Exhibit 3.1.2
to the Registrant’s Annual Report on Form
10-K for the period ended December 31,
2005.
40
Exhibit No.
Title
Method of Filing
3.1.3
3.1.4
3.2
3.3
4.1
4.2
10.1
10.2
10.3
10.5
10.6
10.7
10.8
Certificate of Designations of Series A
Junior Participating Preferred Stock
dated April 25, 2012.
Incorporated by reference to Exhibit 3.1 to
the Registrant’s Current Report on Form
8-K filed on April 25, 2012.
Amendment
to
Incorporation dated June 25, 2012.
Certificate
of
Amended and Restated Bylaws.
Amendment to Amended and Restated
Bylaws.
Specimen certificate representing shares
of Common Stock.
Stockholder Rights Agreement, dated as
of April 24, 2012, between the Registrant
and Computershare Trust Company,
N.A., as Rights Agent.
Form of Indemnification Agreement.
1995 Stock Option/Stock Issuance Plan
through
as Amended and Restated
February 7, 2001.
Amended and Restated 2005 Stock
Option / Stock Issuance Plan.
Incorporated by reference to Appendix B
to
the Registrant’s Definitive Proxy
Statement on Schedule 14A filed on April
27, 2012.
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.
Incorporated by reference to Exhibit 10.1
to the Registrant's Registration Statement
No. 33-95096.
Incorporated by reference to Appendix to
Proxy
the Registrant’s Definitive
Statement on Schedule 14A filed on April
25, 2001.
Incorporated by reference to Exhibit 10.7
to the Registrant’s Registration Statement
on Form S-8 (Reg. No. 333-149222).
Letter Agreement, dated June 13, 2005,
by and between the Registrant and
Andrew Schmidt.
Incorporated by reference to Exhibit 10.5
to the Registrant’s Current Report on
Form 8-K filed on November 30, 2006.
Summary of oral agreement dated June
2005 by and between William W. Smith,
Jr. and the Registrant.
Amended & Restated Employee Stock
Purchase Plan.
Incorporated by reference to Exhibit 10.10
to 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.
Agreement and Mutual General Release,
by and between Andrew C. Schmidt and
the Registrant.
Incorporated by reference to Exhibit 99.1
to the Registrant’s Current Report on
Form 8-K filed on May 23, 2014.
41
10.9
10.10
10.11
10.12
Exhibit No.
Title
Method of Filing
Agreement and Mutual General Release,
by
and between Christopher G.
Lippincott and the Registrant.
Incorporated by reference to Exhibit 99.2
to the Registrant’s Current Report on
Form 8-K filed on May 23, 2014.
Agreement and Mutual General Release,
by and between Daniel Rawlings and the
Registrant.
Incorporated by reference to Exhibit 99.1
to the Registrant’s Current Report on
Form 8-K filed on June 9, 2014.
Form of Common Stock Purchase
Agreement dated August 15, 2014
Form of Registration Rights Agreement
dated August 15, 2014.
14.1
Code of Ethics.
14.1.1
Attachment 1 to Code of Ethics.
Incorporated by reference to Exhibit 10.1
to the Registrant’s Current Report on
Form 8-K filed on August 20, 2014.
Incorporated by reference to Exhibit 10.2
to the Registrant’s Current Report on
Form 8-K filed on August 20, 2014.
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.
21.1
23.1
31.1
31.2
32.1
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Subsidiaries.
Consent of
Public Accounting Firm.
Independent Registered
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.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Furnished herewith.
XBRL Instance Document.
XBRL Taxonomy Extension Schema
Document.
Filed herewith.
Filed herewith.
XBRL Taxonomy Extension Calculation
Linkbase Document.
Filed herewith.
XBRL Taxonomy Extension Definition
Linkbase Document.
Filed herewith.
XBRL Taxonomy Extension Label
Linkbase Document.
Filed herewith.
XBRL
Presentation Linkbase Document.
Taxonomy
Extension
Filed herewith.
42
(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.
43
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.
(cid:94)(cid:47)(cid:39)(cid:69)(cid:4)(cid:100)(cid:104)(cid:90)(cid:28)(cid:94)(cid:3)
Date: February 27, 2015
Date: February 27, 2015
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/ Steven M. Yasbek
Steven M. Yasbek
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/ Steven M. Yasbek
Steven M. Yasbek
/s/ Andrew Arno
Andrew Arno
/s/ Thomas G. Campbell
Thomas G. Campbell
/s/ Steven Elfman
Steven Elfman
/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
Director
Date
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
February 27, 2015
44
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, 2014 and 2013, and the related consolidated statements of
comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December
31, 2014. Our audits also included the financial statement schedule of the Company listed in Item 15(a). 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 and schedule 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. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, 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, 2014 and 2013, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2014, 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.
/s/ SingerLewak LLP
Los Angeles, California
February 27, 2015
F-1
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 $602 (2014) and $617 (2013)
Income tax receivable
Inventories, net of reserves for excess and obsolete inventory
of $151 (2014) and $301 (2013)
Prep aid exp enses and other current assets
Deferred tax asset
Total current assets
Equip ment and imp rovements, net
Other assets
Deferred tax asset
Total assets
Liabilities and S tockholders' Equity
Current liabilities:
Accounts p ay able
Accrued liabilities
Deferred revenue
Deferred tax liability
Total current liabilities
Non-current liabilities:
Deferred rent and other long term liabilities
Deferred tax liability
Total non-current liabilities
Commitments and contingencies (Note 5)
Stockholders' equity :
Preferred stock, p ar value $0.001 p er share; 5,000,000 shares
authorized; none issued or outstanding
Common stock, p ar value $0.001 p er share; 100,000,000 shares authorized;
45,000,891 and 36,994,318 shares issued and outstanding at December 31,
2014 and December 31, 2013, resp ectively
Additional p aid-in cap ital
Accumulated comp rehensive deficit
Total stockholders’ equity
Total liabilities and stockholders' equity
December 31,
2014
2013
$
10,165
2,880
$
11,763
3,078
8,216
706
97
765
-
22,829
4,273
214
74
27,390
$
$
1,521
5,752
1,498
74
8,845
3,643
-
3,643
7,563
699
167
871
152
24,293
7,023
222
-
31,538
$
$
1,632
7,734
464
-
9,830
3,383
154
3,537
-
-
45
223,141
(208,284)
14,902
27,390
$
37
214,619
(196,485)
18,171
31,538
$
See accompanying notes to the consolidated financial statements.
F-2
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(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
Total operating expenses
Operating loss
Non-operating income:
Change in fair value of contingent liability
Interest and other income (expense), net
Loss before provision for income taxes
Provision for income tax expense (benefit)
Net loss
Other comprehensive income (loss), before tax:
Unrealized holding gains on available-for-sale securities
Income tax expense related to items of other
comprehensive income
Other comprehensive income, net of tax
Comprehensive loss
Net loss per share:
Basic and diluted
Weighted average shares outstanding:
Basic and diluted
Year ended December 31,
2013
2012
2014
$
36,979
9,317
27,662
$
42,675
9,707
32,968
$
43,329
8,448
34,881
9,559
14,192
13,218
2,435
39,404
(11,742)
-
(8)
(11,750)
49
(11,799)
15,675
21,305
18,216
5,602
60,798
(27,830)
-
30
(27,800)
153
(27,953)
16,666
24,767
20,211
238
61,882
(27,001)
1,210
94
(25,697)
(234)
(25,463)
-
7
33
-
-
$
(11,799)
-
7
(27,946)
$
6
27
(25,436)
$
$
(0.29)
$
(0.76)
$
(0.71)
40,649
36,982
35,849
See accompanying notes to the consolidated financial statements.
F-3
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
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
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
Comprehensive loss
BALANCE, December 31, 2013
Common stock
Shares
35,612
Amount
$
36
Additional
paid-in
capital
Accumulated
comprehensive
income (deficit)
Total
$
207,927
$
(143,103)
$
64,860
32
-
16
-
-
574
-
-
(23)
53
(375)
-
35,873
-
-
-
-
$
36
66
3,883
(40)
66
(753)
-
-
-
-
-
-
$
211,165
$
(25,436)
(168,539)
16
66
3,883
(40)
66
(753)
(25,436)
42,662
$
-
1,179
-
1
168
3,364
-
-
168
3,365
(96)
38
-
36,994
-
-
-
37
$
(114)
36
-
214,619
$
-
-
(27,946)
(196,485)
$
(114)
36
(27,946)
18,171
$
Exercise of common stock options
4
-
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
Issuance of common stock in a private placement
Comprehensive loss
BALANCE, December 31, 2014
-
1,421
(292)
27
6,846
-
45,000
-
1
-
-
7
-
45
$
6
157
3,494
(391)
21
5,235
-
223,141
$
-
-
-
-
-
$
(11,799)
(208,284)
6
157
3,495
(391)
21
5,242
(11,799)
14,902
$
See accompanying notes to the consolidated financial statements.
F-4
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2013
2014
2012
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization
Long-lived assets write-off due to restructuring
Change in fair value of contingent liability
Loss on disposal of fixed assets
Provision for adjustments to accounts receivable and doubtful accounts
Provision for excess and obsolete inventory
Non cash compensation related to stock options and restricted stock
Deferred income taxes
Change in operating accounts:
Accounts receivable
Income tax receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Deferred revenue
Net cash used in operating activities
Investing activities:
Capital expenditures
Sales of short-term investments
Net cash provided by (used in) investing activities
Financing activities:
Cash received from issuance of common stock, net of offering costs
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
$
(11,799)
$
(27,953)
$
(25,463)
2,931
-
-
-
347
124
3,652
(2)
(1,000)
(7)
(54)
114
(2,189)
1,034
(6,849)
4,006
1,011
-
-
730
76
3,533
-
660
(18)
(67)
(9)
2,429
(972)
(16,574)
4,430
-
(1,210)
163
1,045
73
3,949
-
(1,473)
7,612
60
268
(2,992)
733
(12,805)
(216)
198
(18)
(829)
10,257
9,428
(322)
25,196
24,874
5,242
21
6
-
5,269
(1,598)
11,763
10,165
$
-
36
-
-
36
(7,110)
18,873
11,763
$
-
66
16
(753)
(671)
11,398
7,475
18,873
$
$
75
$
165
$
257
See accompanying notes to the consolidated financial statements.
F-5
SMITH MICRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(cid:1005)(cid:856)(cid:3) (cid:75)(cid:396)(cid:336)(cid:258)(cid:374)(cid:349)(cid:460)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:853)(cid:3) (cid:17)(cid:258)(cid:400)(cid:349)(cid:400)(cid:3) (cid:381)(cid:296)(cid:3) (cid:87)(cid:396)(cid:286)(cid:400)(cid:286)(cid:374)(cid:410)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3) (cid:258)(cid:374)(cid:282)(cid:3) (cid:94)(cid:437)(cid:373)(cid:373)(cid:258)(cid:396)(cid:455)(cid:3) (cid:381)(cid:296)(cid:3) (cid:94)(cid:349)(cid:336)(cid:374)(cid:349)(cid:296)(cid:349)(cid:272)(cid:258)(cid:374)(cid:410)(cid:3)
(cid:4)(cid:272)(cid:272)(cid:381)(cid:437)(cid:374)(cid:410)(cid:349)(cid:374)(cid:336)(cid:3)(cid:87)(cid:381)(cid:367)(cid:349)(cid:272)(cid:349)(cid:286)(cid:400)(cid:3)
(cid:100)(cid:346)(cid:286)(cid:3)(cid:18)(cid:381)(cid:373)(cid:393)(cid:258)(cid:374)(cid:455)(cid:3)
Smith Micro provides software solutions to simplify and enhance the mobile experience. As a leader
in wireless connectivity, our applications ensure the best Quality of Experience for mobile users while
optimizing networks for wireless service providers and enterprises. Using our intelligent policy-on-
device platform, along with premium voice, video and content monetization services, we create new
opportunities to engage consumers and capitalize on the growth of connected devices. In addition to
wireless and mobility software, Smith Micro develops and distributes personal, professional and
educational productivity and graphics products and tools for consumers, artists, animators and
designers worldwide.
Over the past three decades, the Company has developed deep expertise in embedded software for
networked devices, policy-based management platforms, and highly-scalable mobile applications and
hosted services. For organizations struggling to reduce costs and complexity in the fragmented,
rapidly evolving mobile market, Smith Micro offers proven solutions that increase reliability and
efficiency while accelerating delivery and value of mobile services to consumers.
The proliferation of mobile broadband technology continues to provide new opportunities for Smith
Micro on a global scale. Smith Micro’s mission is to help our customers thrive in a connected world
with software solutions that:
1. Simplify wireless connectivity to reduce costs and deliver “best-connected” experiences;
2. Optimize network and device resources for maximum performance, efficiency and flexibility;
3. Provide greater insight and control over the quality of service (“QoS”) delivered to users; and
4. Engage and grow high-value relationships with end customers using mobile devices.
(cid:17)(cid:258)(cid:400)(cid:349)(cid:400)(cid:3)(cid:381)(cid:296)(cid:3)(cid:87)(cid:396)(cid:286)(cid:400)(cid:286)(cid:374)(cid:410)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)
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.
(cid:38)(cid:381)(cid:396)(cid:286)(cid:349)(cid:336)(cid:374)(cid:3)(cid:18)(cid:437)(cid:396)(cid:396)(cid:286)(cid:374)(cid:272)(cid:455)(cid:3)(cid:100)(cid:396)(cid:258)(cid:374)(cid:400)(cid:258)(cid:272)(cid:410)(cid:349)(cid:381)(cid:374)(cid:400)(cid:3)
The Company has international operations resulting from acquisitions in prior years. The countries in
which the Company has a subsidiary or branch office in are 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 (measured from the transaction date or the
most recent intervening balance sheet date, whichever is later) realized upon settlement of a foreign
F-6
currency transaction is included in determining net income for the period in which the transaction is
settled.
(cid:104)(cid:400)(cid:286)(cid:3)(cid:381)(cid:296)(cid:3)(cid:28)(cid:400)(cid:410)(cid:349)(cid:373)(cid:258)(cid:410)(cid:286)(cid:400)(cid:3)
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.
(cid:38)(cid:258)(cid:349)(cid:396)(cid:3)(cid:115)(cid:258)(cid:367)(cid:437)(cid:286)(cid:3)(cid:381)(cid:296)(cid:3)(cid:38)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:47)(cid:374)(cid:400)(cid:410)(cid:396)(cid:437)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)
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.
(cid:94)(cid:349)(cid:336)(cid:374)(cid:349)(cid:296)(cid:349)(cid:272)(cid:258)(cid:374)(cid:410)(cid:3)(cid:18)(cid:381)(cid:374)(cid:272)(cid:286)(cid:374)(cid:410)(cid:396)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:400)(cid:3)
For the year ended December 31, 2014, two customers, each accounting for over 10% of revenues,
made up 79.2% of revenues and 87% of accounts receivable, and one service provider with more than
10% of purchases totaled 27% of accounts payable. For the year ended December 31, 2013, three
customers, each accounting for over 10% of revenues, made up 77.5% of revenues and 83% of
accounts receivable, and one service provider with more than 10% of purchases totaled 28% of
accounts payable. For the year ended December 31, 2012, two customers, each accounting for over
F-7
10% of revenues, made up 61.2% of revenues and 78% of accounts receivable, and no service provider
accounted for more than 10% of purchases.
The Company currently outsources a key information technology service, an important component of
one of its products, from one supplier. Although there are a limited number of third party providers
for this type of service, management believes that other suppliers could provide similar services on
comparable terms. A change in suppliers, however, could cause a disruption or delay in services which
could result in a possible loss of revenues and customer confidence, all of which would adversely
affect our operating results.
(cid:18)(cid:258)(cid:400)(cid:346)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:18)(cid:258)(cid:400)(cid:346)(cid:3)(cid:28)(cid:395)(cid:437)(cid:349)(cid:448)(cid:258)(cid:367)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)
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, 2014 and 2013, bank balances totaling
approximately $9.9 million and $11.6 million, respectively, were uninsured.
(cid:94)(cid:346)(cid:381)(cid:396)(cid:410)(cid:882)(cid:100)(cid:286)(cid:396)(cid:373)(cid:3)(cid:47)(cid:374)(cid:448)(cid:286)(cid:400)(cid:410)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)
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.
(cid:4)(cid:272)(cid:272)(cid:381)(cid:437)(cid:374)(cid:410)(cid:400)(cid:3)(cid:90)(cid:286)(cid:272)(cid:286)(cid:349)(cid:448)(cid:258)(cid:271)(cid:367)(cid:286)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:4)(cid:367)(cid:367)(cid:381)(cid:449)(cid:258)(cid:374)(cid:272)(cid:286)(cid:3)(cid:296)(cid:381)(cid:396)(cid:3)(cid:24)(cid:381)(cid:437)(cid:271)(cid:410)(cid:296)(cid:437)(cid:367)(cid:3)(cid:4)(cid:272)(cid:272)(cid:381)(cid:437)(cid:374)(cid:410)(cid:400)(cid:3)
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.
(cid:47)(cid:374)(cid:448)(cid:286)(cid:374)(cid:410)(cid:381)(cid:396)(cid:349)(cid:286)(cid:400)(cid:3)
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, 2014, our net inventory of $0.1 million consisted mostly of components. At December 31, 2013,
our net inventory of $0.2 million consisted of $0.1 million of assembled products and $0.1 million of
components.
(cid:28)(cid:395)(cid:437)(cid:349)(cid:393)(cid:373)(cid:286)(cid:374)(cid:410)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:47)(cid:373)(cid:393)(cid:396)(cid:381)(cid:448)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)
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.
F-8
Leasehold improvements are amortized using the straight-line method over the shorter of the estimated
useful life of the asset or the lease term.
(cid:47)(cid:374)(cid:410)(cid:286)(cid:396)(cid:374)(cid:258)(cid:367)(cid:3)(cid:94)(cid:381)(cid:296)(cid:410)(cid:449)(cid:258)(cid:396)(cid:286)(cid:3)(cid:24)(cid:286)(cid:448)(cid:286)(cid:367)(cid:381)(cid:393)(cid:373)(cid:286)(cid:374)(cid:410)(cid:3)(cid:18)(cid:381)(cid:400)(cid:410)(cid:400)(cid:3)
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, 2014, software has
been substantially completed concurrently with the establishment of technological feasibility;
accordingly, no costs have been capitalized to date.
(cid:24)(cid:286)(cid:296)(cid:286)(cid:396)(cid:396)(cid:286)(cid:282)(cid:3)(cid:90)(cid:286)(cid:374)(cid:410)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:75)(cid:410)(cid:346)(cid:286)(cid:396)(cid:3)(cid:62)(cid:381)(cid:374)(cid:336)(cid:882)(cid:100)(cid:286)(cid:396)(cid:373)(cid:3)(cid:62)(cid:349)(cid:258)(cid:271)(cid:349)(cid:367)(cid:349)(cid:410)(cid:349)(cid:286)(cid:400)(cid:3)
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, restructuring expenses, and sublease deposits.
(cid:90)(cid:286)(cid:448)(cid:286)(cid:374)(cid:437)(cid:286)(cid:3)(cid:90)(cid:286)(cid:272)(cid:381)(cid:336)(cid:374)(cid:349)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)
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.
On occasion, we enter into fixed fee arrangements, i.e. for trials, in which customer payments are tied
to the achievement of specific milestones. Revenue for these contracts is recognized based on customer
F-9
acceptance of certain milestones as they are achieved. We also enter hosting arrangements that
sometimes include up-front, non-refundable set-up fees. Revenue is recognized for these fees over
the term of the agreement.
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.
(cid:94)(cid:258)(cid:367)(cid:286)(cid:400)(cid:3)(cid:47)(cid:374)(cid:272)(cid:286)(cid:374)(cid:410)(cid:349)(cid:448)(cid:286)(cid:400)(cid:3)
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. 605-50,
Revenue Recognition-Customer Payments and Incentives. We use historical redemption rates to
estimate the cost of customer incentives. Total sales incentives were $0.5 million, $1.2 million and
$0.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.
(cid:4)(cid:282)(cid:448)(cid:286)(cid:396)(cid:410)(cid:349)(cid:400)(cid:349)(cid:374)(cid:336)(cid:3)(cid:28)(cid:454)(cid:393)(cid:286)(cid:374)(cid:400)(cid:286)(cid:3)
Advertising costs are expensed as incurred. Advertising expenses were $0.3 million, $0.4 million, and
$0.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
(cid:94)(cid:410)(cid:381)(cid:272)(cid:364)(cid:882)(cid:17)(cid:258)(cid:400)(cid:286)(cid:282)(cid:3)(cid:18)(cid:381)(cid:373)(cid:393)(cid:286)(cid:374)(cid:400)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)
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.
(cid:69)(cid:286)(cid:410)(cid:3)(cid:47)(cid:374)(cid:272)(cid:381)(cid:373)(cid:286)(cid:3)(cid:894)(cid:62)(cid:381)(cid:400)(cid:400)(cid:895)(cid:3)(cid:87)(cid:286)(cid:396)(cid:3)(cid:94)(cid:346)(cid:258)(cid:396)(cid:286)(cid:3)
The Company calculates earnings per share (“EPS”) as required by FASB ASC Topic No. 260,
Earning Per Share. Basic EPS is calculated by dividing the net income available to common
stockholders by the weighted average number of common shares outstanding for the period, excluding
common stock equivalents. Diluted EPS is computed by dividing the net income available to common
stockholders by the weighted average number of common shares outstanding for the period plus the
weighted average number of dilutive common stock equivalents outstanding for the period determined
using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase
by the Company and options are considered to be common stock equivalents and are only included in
the calculation of diluted earnings per share when their effect is dilutive.
F-10
Numerator:
Net loss available to common stockholders
Denominator:
Weighted average shares outstanding - basic
Year Ended December 31,
2012
2013
2014
(in thousands, except per share amounts)
($11,799)
($27,953)
($25,463)
40,649
36,982
35,849
Potential common shares - options (treasury stock method)
-
-
-
Weighted average shares outstanding - diluted
40,649
36,982
35,849
Shares excluded (anti-dilutive)
150
2
174
Shares excluded due to an exercise price greater than
weighted average stock price for the period
1,511
2,150
1,453
Net loss per common share:
Basic
Diluted
($0.29)
($0.29)
($0.76)
($0.76)
($0.71)
($0.71)
(cid:90)(cid:286)(cid:272)(cid:286)(cid:374)(cid:410)(cid:3)(cid:4)(cid:272)(cid:272)(cid:381)(cid:437)(cid:374)(cid:410)(cid:349)(cid:374)(cid:336)(cid:3)(cid:87)(cid:396)(cid:381)(cid:374)(cid:381)(cid:437)(cid:374)(cid:272)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)
In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation
of Financial Statements-Going Concern (Subtopic 205-40). The Update provides U.S. GAAP
guidance on management’s responsibility in evaluating whether there is substantial doubt about a
company’s ability to continue as a going concern and about related footnote disclosures. For each
reporting period, management will be required to evaluate whether there are conditions or events that
raise substantial doubt about a company’s ability to continue as a going concern within one year from
the date the financial statements are issued. The amendments in this Update are effective for the
annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.
Early application is permitted. We will be evaluating the impact of this guidance on our consolidated
financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606). The amendments to this Update supersede nearly all existing revenue recognition guidance
under U.S. GAAP. The core principle of this Topic is to recognize revenues when promised goods or
services are transferred to customers in an amount that reflects the consideration that is expected to be
received for those goods or services. This Topic defines a five step process to achieve this core
principle and, in doing so, it is possible more judgment and estimates may be required within the
revenue recognition process than required under existing U.S. GAAP including identifying
performance obligations in the contract, estimating the amount of variable consideration to include in
the transaction price and allocating the transaction price to each separate performance obligation. For
all entities, the amendments in this Update are effective for annual periods and interim periods within
those annual periods beginning after December 15, 2016. Earlier adoption is not permitted. An entity
will be able to use either of two adoption methods: (1) retrospective to each prior reporting period
presented with the option to elect certain practical expedients as defined within this Topic; or (2)
retrospective with the cumulative effect of initially applying this Topic recognized at the date of initial
application and providing certain additional disclosures as defined per this Topic. We will be
evaluating the impact of this guidance on our consolidated financial statements.
F-11
(cid:1006)(cid:856)(cid:3)(cid:90)(cid:286)(cid:400)(cid:410)(cid:396)(cid:437)(cid:272)(cid:410)(cid:437)(cid:396)(cid:349)(cid:374)(cid:336)(cid:3)
(cid:1006)(cid:1004)(cid:1005)(cid:1008)(cid:3)(cid:90)(cid:286)(cid:400)(cid:410)(cid:396)(cid:437)(cid:272)(cid:410)(cid:437)(cid:396)(cid:349)(cid:374)(cid:336)(cid:3)
On May 6, 2014, the Board of Directors approved a plan of restructuring intended to streamline and
flatten the Company’s organization, reduce overall headcount by approximately 20% and reduce its
overall cost structure by approximately $2.0 million per quarter. The restructuring plan resulted in
special charges totaling $1.8 million recorded during the three month period ended June 30, 2014.
These charges were for non-cash stock-based compensation expense of $1.3 million, severance costs
for affected employees of $0.4 million, and other related costs of $0.1 million.
The restructuring plan was implemented primarily during the three month period ending June 30, 2014
and resulted in a negative cash impact of approximately $0.4 million through December 31, 2014.
Following is the activity in our restructuring liability account through the period ended December 31,
2014 (in thousands).
December 31, 2013
Balance
-
$
-
$
-
Provision, net
1,697
$
104
1,801
$
One-time employee termination benefits
Fixed asset write-offs, transition travel, other
Total
(cid:1006)(cid:1004)(cid:1005)(cid:1007)(cid:3)(cid:90)(cid:286)(cid:400)(cid:410)(cid:396)(cid:437)(cid:272)(cid:410)(cid:437)(cid:396)(cid:349)(cid:374)(cid:336)(cid:3)
December 31, 2014
Balance
-
$
89
89
$
(1,697)
(15)
(1,712)
Usage
$
$
On July 25, 2013, the Board of Directors approved a plan of restructuring intended to bring the
Company’s operating expenses better in line with revenues. The restructuring plan involved a
realignment of organizational structures, facility consolidations/closures and headcount reductions of
approximately 26% of the Company’s worldwide workforce. The restructuring plan was implemented
primarily during the three month period ended September 30, 2013 and resulted in annualized savings
of approximately $16.0 million.
The restructuring plan resulted in special charges totaling $5.6 million recorded in the year ended
December 31, 2013. These charges were for lease/rental terminations of $3.3 million, severance costs
for affected employees of $1.1 million, equipment and improvements write-offs as a result of our
lease/rental terminations of $1.0 million and other related costs of $0.2 million. All are cash
expenditures except for the equipment and improvements write-offs. Approximately $1.1 million of
cash expenditures were paid out in 2014, and the remaining cash expenditures will be paid in future
years.
In the year ended December 31, 2014, we increased the reserve by $0.6 million due to changes in our
assumptions on future sublease income on our lease terminations of $0.8 million, partially offset by
adjustments to our one-time employee termination benefits.
Following is the activity in our restructuring liability for the year ended December 31, 2014 (in
thousands):
One-time employee termination benefits
Lease/rental terminations
Fixed asset write-offs, transition travel, other
Total
December 31, 2013
Balance
$
Provision-net
(194)
$
817
15
638
$
215
3,115
38
3,368
Usage
$
December 31, 2014
Balance
-
$
2,800
0
2,800
$
(21)
(1,132)
(53)
(1,206)
$
$
F-12
(cid:1006)(cid:1004)(cid:1005)(cid:1006)(cid:3)(cid:90)(cid:286)(cid:400)(cid:410)(cid:396)(cid:437)(cid:272)(cid:410)(cid:437)(cid:396)(cid:349)(cid:374)(cid:336)(cid:3)
We undertook a restructuring in the fiscal year 2012. Following is the activity in our restructuring
liability account for the year ended December 31, 2014 (in thousands):
One-time employee termination benefits
Total
December 31, 2013
Balance
$
4
$
4
Provision,net
$
$
(4)
(4)
Usage
$
-
$
-
December 31, 2014
Balance
-
$
$
-
For all of these restructuring liabilities, those to be paid within 12 months are included in the accrued
liabilities line item on the balance sheet and total $0.9 million. $2.0 million of restructuring is included
in the deferred rent and other long-term liabilities line item on the balance sheet.
(cid:3)
(cid:1007)(cid:856)(cid:3)(cid:17)(cid:258)(cid:367)(cid:258)(cid:374)(cid:272)(cid:286)(cid:3)(cid:94)(cid:346)(cid:286)(cid:286)(cid:410)(cid:3)(cid:24)(cid:286)(cid:410)(cid:258)(cid:349)(cid:367)(cid:400)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:94)(cid:346)(cid:381)(cid:396)(cid:410)(cid:882)(cid:100)(cid:286)(cid:396)(cid:373)(cid:3)(cid:47)(cid:374)(cid:448)(cid:286)(cid:400)(cid:410)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)
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):
Corp orate bonds and notes
Government securities/money market
December 31, 2014
Amortized
Gross
cost basis unrealized loss Fair value
999
$
$
1,881
-
1,000
1,881
$
(1)
Amortized
cost basis
919
$
2,160
December 31, 2013
Gross
unrealized loss
$
-
(1)
Fair value
918
$
2,160
Total
$
2,881
$
(1)
$
2,880
$
3,079
$
(1)
$
3,078
There were no realized gains (losses) recognized in interest and other income for the years ended
December 31, 2014 and 2013. There was a de minimis amount of realized gains recognized for the
year ended December 31 2012.
(cid:28)(cid:395)(cid:437)(cid:349)(cid:393)(cid:373)(cid:286)(cid:374)(cid:410)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:47)(cid:373)(cid:393)(cid:396)(cid:381)(cid:448)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)
(cid:3)
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
F-13
$
2014
16,143
5,170
1,213
22,526
(18,253)
4,273
$
$
2013
16,529
5,317
1,213
23,059
(16,036)
7,023
$
Depreciation and amortization expense on equipment and improvements was $2.9 million, $4.0
million and $4.4 million for the years ended December 31, 2014, 2013 and 2012 respectively.
The Company recorded an impairment charge related to our restructuring against certain equipment
and improvements in the amount of $1.0 million for the year ended December 31, 2013. See Note 2
above, “Restructuring.”
(cid:75)(cid:410)(cid:346)(cid:286)(cid:396)(cid:3)(cid:4)(cid:400)(cid:400)(cid:286)(cid:410)(cid:400)(cid:3)
These are office rent deposits.
(cid:4)(cid:272)(cid:272)(cid:396)(cid:437)(cid:286)(cid:282)(cid:3)(cid:62)(cid:349)(cid:258)(cid:271)(cid:349)(cid:367)(cid:349)(cid:410)(cid:349)(cid:286)(cid:400)(cid:3)
Accrued liabilities consist of the following (in thousands):
Salaries and benefits
Restructuring
Pennsylvania grant liability
Royalties and revenue sharing
Income taxes
Marketing expenses, rebates and other
December 31,
2014
$
2,779
2013
$
3,651
912
1,000
835
160
66
1,978
1,000
803
176
126
Total accrued liabilities
$
5,752
$
7,734
(cid:24)(cid:286)(cid:296)(cid:286)(cid:396)(cid:396)(cid:286)(cid:282)(cid:3)(cid:90)(cid:286)(cid:374)(cid:410)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:75)(cid:410)(cid:346)(cid:286)(cid:396)(cid:3)(cid:62)(cid:381)(cid:374)(cid:336)(cid:3)(cid:100)(cid:286)(cid:396)(cid:373)(cid:3)(cid:62)(cid:349)(cid:258)(cid:271)(cid:349)(cid:367)(cid:349)(cid:410)(cid:349)(cid:286)(cid:400)(cid:3)
Deferred rent and other long term liabilities consist of the following (in thousands):
December 31,
2014
Deferred rent
Restructuring - beyond one year
Sublease deposits
Deferred revenue - long term
Total deferred rent and other long term liabilities
$
$
1,643
1,977
23
-
3,643
2013
$
1,986
1,394
-
3
3,383
$
(cid:1008)(cid:856)(cid:3)(cid:47)(cid:374)(cid:272)(cid:381)(cid:373)(cid:286)(cid:3)(cid:100)(cid:258)(cid:454)(cid:286)(cid:400)(cid:3)
Income (loss) before provision for income taxes was generated from the following sources (in thousands):
Domestic
Foreign
Total income (loss) before provision for income taxes
Year Ended December 31,
2013
(27,968)
168
(27,800)
$
$
$
$
2014
(11,867)
117
(11,750)
$
$
2012
(25,269)
(428)
(25,697)
F-14
A summary of the income tax expense is as follows (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Total provision
Year Ended December 31,
2013
2012
2014
$ -
5
44
49
-
-
-
-
$
49
$ -
(19)
172
153
-
-
-
-
$
153
$
50
(440)
156
(234)
-
-
-
-
$
(234)
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:
Federal statutory rate
State tax, net of federal benefit
Equity compensation
R&D tax credit
Other
Change in valuation allowance
Year Ended December 31,
2014
35%
(1)
(7)
2013
35%
4
(3)
2012
35%
3
(2)
-
-
(28)
(1)%
-
-
(4)
2
(39)
(31)
(1)% 1%
The major components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
F-15
Deferred income tax assets
Net operating loss carry forwards
Credit carry forwards
Fixed Assets
Intangibles
Equity based compensation
Nondeductible accruals
Various reserves
Other
Valuation Allowance
Total deferred income taxes - net
Deferred income tax liabilities
Prepaid expenses
Total deferred income liabilties
Year Ended December 31,
2014
2013
$
44,754
3,708
1,466
23,029
279
2,382
149
51
(75,744)
74
$
38,204
3,708
1,498
26,287
301
2,485
162
36
(72,582)
99
(74)
(74)
(101)
(101)
Net deferred income tax assets (liabilities)
$ -
$
(2)
The Company has federal and state net operating loss (“NOL”) carryforwards of approximately $101.2
million and $110.4 million, respectively, at December 31, 2014, to reduce future cash payments for income
taxes. Of the $101.2 million of NOL carryforwards at December 31, 2014, $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 NOL carryforwards will expire from 2024 through 2034
and state NOL carryforwards will expire 2015 through 2034. 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 $2.5 million and $0.7 million,
respectively, at December 31, 2014. These tax credits will begin to expire in 2027.
To the extent that an ownership change has occurred under Internal Revenue Code Sections 382 and 383, the
Company’s use of its loss carryforwards and credit carryforwards to offset future taxable income may be
limited.
At December 31, 2014 and 2013, the Company had unrecognized tax benefits, including interest and penalties
of approximately $0.6 million for both years.
The Company’s gross unrecognized tax benefits as of December 31, 2014 and 2013 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
Gross Unrecognized tax benefits, ending balance
Year Ended December 31,
2013
$
2014
$
592
592
-
-
$
592
-
-
$
592
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
F-16
transition. The Topic requires an entity to recognize the financial statement impact of a tax position when it
is more likely than not that the position will be sustained upon examination. The amount recognized is
measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. In addition, the Topic permits an entity to recognize interest and penalties related to tax
uncertainties either as income tax expense or operating expenses. The Company has chosen to recognize
interest and penalties related to tax uncertainties as income tax expense.
The Company assesses whether a valuation allowance should be recorded against its deferred tax assets based
on the consideration of all available evidence, using a “more likely than not” realization standard. The four
sources of taxable income that must be considered in determining whether deferred tax assets will be realized
are: (1) future reversals of existing taxable temporary differences (i.e., offset of gross deferred tax liabilities
against gross deferred tax assets); (2) taxable income in prior carryback years, if carryback is permitted under
the applicable tax law; (3) tax planning strategies and (4) future taxable income exclusive of reversing
temporary differences and carryforwards.
In assessing whether a valuation allowance is required, significant weight is to be given to evidence that can
be objectively verified. A significant factor in the Company’s assessment is that the Company has been in a
three-year historical cumulative loss as of the end of fiscal 2012. In addition, the Company is also in a loss
for the year ending December 31, 2013 as well as the year ending December 31, 2014. These facts, combined
with uncertain near-term market and economic conditions, reduced the Company’s ability to rely on
projections of future taxable income in assessing the realizability of its deferred tax assets.
After a review of the four sources of taxable income as of December 31, 2014 (as described above), and after
consideration of the Company’s continuing cumulative loss position as of December 31, 2014, the Company
recorded a valuation allowance related to its U.S.-based deferred tax assets of $75.7 million at December 31,
2014. During fiscal years 2014, 2013 and 2012, the valuation allowance on deferred tax assets increased by
$3.2 million, $12.1 million and $7.2 million, respectively.
We recognized interest and penalties accrued related to unrecognized tax benefits in income tax expense.
During the fiscal years 2014 and 2013, we recognized approximately $3,000 of interest and penalties each
year. The cumulative interest and penalties at December 31, 2014 and 2013 were $44,000 and $41,000,
respectively.
Unrecognized tax benefits of $0.2 million at December 31, 2014 would impact the effective tax rate. We
anticipate a decrease in gross unrecognized tax benefits of approximately $0.2 million within the next twelve
months based on federal, state, and foreign statute expirations.
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 2012 and 2013 tax years.
State income tax returns are subject to examination for a period of three to four years after filing. The
Company closed their federal audit of 2011 loss carry back claim during the year with no impact to the
financial statements. As of December 31, 2014, the Company had no outstanding tax audits. The outcome
of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are
resolved in a manner not consistent with management’s expectations, the Company could be required to
adjust its provision for income tax in the period such resolution occurs.
(cid:1009)(cid:856)(cid:3)(cid:18)(cid:381)(cid:373)(cid:373)(cid:349)(cid:410)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:18)(cid:381)(cid:374)(cid:410)(cid:349)(cid:374)(cid:336)(cid:286)(cid:374)(cid:272)(cid:349)(cid:286)(cid:400)(cid:3)
(cid:62)(cid:286)(cid:258)(cid:400)(cid:286)(cid:400)(cid:3)
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, 2014 are as follows (in
thousands):
F-17
Year Ending December 31,
2015
2016
2017
2018
2019
Beyond
Total
Operating
2,188
$
1,888
1,536
1,534
1,508
3,080
11,734
$
As of December 31, 2014, $5.6 million of the remaining lease commitments expense has been accrued
as part of the 2013 Restructuring Plan, partially offset by future estimated sublease income of $3.0
million.
Total rent expense was $1.2 million, $2.4 million and $2.7 million for the years ended December 31,
2014, 2013 and 2012, 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.
(cid:87)(cid:286)(cid:374)(cid:374)(cid:400)(cid:455)(cid:367)(cid:448)(cid:258)(cid:374)(cid:349)(cid:258)(cid:3)(cid:75)(cid:393)(cid:393)(cid:381)(cid:396)(cid:410)(cid:437)(cid:374)(cid:349)(cid:410)(cid:455)(cid:3)(cid:39)(cid:396)(cid:258)(cid:374)(cid:410)(cid:3)(cid:87)(cid:396)(cid:381)(cid:336)(cid:396)(cid:258)(cid:373)(cid:3)
On September 26, 2011, we received $1.0 million from the State of Pennsylvania to help fund our
agreement to start-up a new facility. The grant carried with it an obligation, or commitment, to employ
at least 232 people within a three-year time period that ended on December 31, 2013. We received an
extension of time to meet this employment commitment. The new deadline is now February 28, 2015.
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 accrued
liabilities line item on the balance sheet until we are irrevocably entitled to retain the monies, or until
it is determined that we need to return a portion or all of the monies received.
(cid:62)(cid:349)(cid:410)(cid:349)(cid:336)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)
The Company may become involved in various legal proceedings arising from its business activities.
While management does not believe the ultimate disposition of these matters will have a material
adverse impact on the Company’s consolidated results of operations, cash flows or financial position,
litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an
unfavorable resolution could materially affect the Company’s future consolidated results of
operations, cash flows or financial position in a particular period.
(cid:75)(cid:410)(cid:346)(cid:286)(cid:396)(cid:3)(cid:18)(cid:381)(cid:374)(cid:410)(cid:349)(cid:374)(cid:336)(cid:286)(cid:374)(cid:410)(cid:3)(cid:18)(cid:381)(cid:374)(cid:410)(cid:396)(cid:258)(cid:272)(cid:410)(cid:437)(cid:258)(cid:367)(cid:3)(cid:75)(cid:271)(cid:367)(cid:349)(cid:336)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:400)(cid:3)
During its normal course of business, the Company has made certain indemnities, commitments and
guarantees under which it may be required to make payments in relation to certain transactions. These
include: intellectual property indemnities to the Company’s customers and licensees in connection
with the use, sale and/or license of Company products; indemnities to various lessors in connection
with facility leases for certain claims arising from such facility or lease; indemnities to vendors and
service providers pertaining to claims based on the negligence or willful misconduct of the Company;
indemnities involving the accuracy of representations and warranties in certain contracts; and
indemnities to directors and officers of the Company to the maximum extent permitted under the laws
of the State of Delaware. In addition, the Company has made contractual commitments to employees
providing for severance payments upon the occurrence of certain prescribed events. The Company
may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities
under certain customer contracts. The duration of these indemnities, commitments and guarantees
F-18
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.
(cid:1010)(cid:856)(cid:3)(cid:94)(cid:286)(cid:336)(cid:373)(cid:286)(cid:374)(cid:410)(cid:853)(cid:3)(cid:18)(cid:437)(cid:400)(cid:410)(cid:381)(cid:373)(cid:286)(cid:396)(cid:3)(cid:18)(cid:381)(cid:374)(cid:272)(cid:286)(cid:374)(cid:410)(cid:396)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:39)(cid:286)(cid:381)(cid:336)(cid:396)(cid:258)(cid:393)(cid:346)(cid:349)(cid:272)(cid:258)(cid:367)(cid:3)(cid:47)(cid:374)(cid:296)(cid:381)(cid:396)(cid:373)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)
(cid:94)(cid:286)(cid:336)(cid:373)(cid:286)(cid:374)(cid:410)(cid:3)(cid:47)(cid:374)(cid:296)(cid:381)(cid:396)(cid:373)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)
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.
The following table shows the revenues generated by each business unit (in thousands):
2014
Year Ended December 31,
2013
2012
Wireless
$
31,276
$
35,853
$
37,154
Productivity & Graphics
5,703
6,822
6,175
Total revenues
Cost of revenues
Gross profit
36,979
9,317
27,662
$
42,675
9,707
32,968
$
43,329
8,448
34,881
$
(cid:18)(cid:437)(cid:400)(cid:410)(cid:381)(cid:373)(cid:286)(cid:396)(cid:3)(cid:18)(cid:381)(cid:374)(cid:272)(cid:286)(cid:374)(cid:410)(cid:396)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)(cid:47)(cid:374)(cid:296)(cid:381)(cid:396)(cid:373)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)
A summary of the Company’s customers that represent 10% or more of the Company’s net revenues
is as follows:
Wireless:
Sprint (& affiliates)
Verizon Wireless (& affiliates)
Productivity & Graphics:
FastSpring
Year Ended December 31,
2013
2012
2014
68.0%
7.8%
53.1%
13.0%
40.7%
20.5%
11.2%
11.4%
-
The customers listed above comprised 87%, 83% and 78% of our accounts receivable as of December
31, 2014, 2013 and 2012, respectively. 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-19
(cid:39)(cid:286)(cid:381)(cid:336)(cid:396)(cid:258)(cid:393)(cid:346)(cid:349)(cid:272)(cid:258)(cid:367)(cid:3)(cid:47)(cid:374)(cid:296)(cid:381)(cid:396)(cid:373)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)
During the years ended December 31, 2014, 2013 and 2012, 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,
2013
2012
2014
Americas
Asia Pacific
EM EA
Total revenues
$
$
$
35,689
326
964
36,979
38,532
928
3,215
42,675
37,724
2,871
2,734
43,329
$
$
$
The Company does not separately allocate specific assets to these geographic locations.
(cid:1011)(cid:856)(cid:3)(cid:87)(cid:396)(cid:381)(cid:296)(cid:349)(cid:410)(cid:3)(cid:94)(cid:346)(cid:258)(cid:396)(cid:349)(cid:374)(cid:336)(cid:3)
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 $0.2 million, $0.3
million and $0.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
(cid:1012)(cid:856)(cid:3)(cid:94)(cid:410)(cid:381)(cid:272)(cid:364)(cid:882)(cid:17)(cid:258)(cid:400)(cid:286)(cid:282)(cid:3)(cid:18)(cid:381)(cid:373)(cid:393)(cid:286)(cid:374)(cid:400)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)
(cid:94)(cid:410)(cid:381)(cid:272)(cid:364)(cid:3)(cid:87)(cid:367)(cid:258)(cid:374)(cid:400)(cid:3)
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).
(cid:28)(cid:373)(cid:393)(cid:367)(cid:381)(cid:455)(cid:286)(cid:286)(cid:3)(cid:94)(cid:410)(cid:381)(cid:272)(cid:364)(cid:3)(cid:87)(cid:437)(cid:396)(cid:272)(cid:346)(cid:258)(cid:400)(cid:286)(cid:3)(cid:87)(cid:367)(cid:258)(cid:374)(cid:3)
The Company has a shareholder approved employee stock purchase plan (“ESPP”), under which
substantially all employees may purchase the Company’s common stock through payroll deductions
at a price equal to 85% of the lower of the fair market values of the stock as of the beginning and end
of six-month offering periods. An employee’s payroll deductions under the ESPP are limited to 10%
F-20
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 purchase period. Additionally, no more than 1,000,000 shares may be
purchased under the plan.
(cid:94)(cid:410)(cid:381)(cid:272)(cid:364)(cid:3)(cid:18)(cid:381)(cid:373)(cid:393)(cid:286)(cid:374)(cid:400)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)(cid:28)(cid:454)(cid:393)(cid:286)(cid:374)(cid:400)(cid:286)(cid:3)
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.
(cid:115)(cid:258)(cid:367)(cid:437)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)(cid:381)(cid:296)(cid:3)(cid:94)(cid:410)(cid:381)(cid:272)(cid:364)(cid:3)(cid:75)(cid:393)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:90)(cid:286)(cid:400)(cid:410)(cid:396)(cid:349)(cid:272)(cid:410)(cid:286)(cid:282)(cid:3)(cid:94)(cid:410)(cid:381)(cid:272)(cid:364)(cid:3)(cid:4)(cid:449)(cid:258)(cid:396)(cid:282)(cid:400)(cid:3)
The assumptions used to compute the share-based compensation costs for the stock options granted
during the years ended December 31, 2014, 2013 and 2012, 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 yield
Weighted average expected life (years)
Volatility (weighted average)
Forfeiture rate
Year Ended December 31,
2013
$0.63
2012
$0.80
2014
$0.57
1.2%
-
4
82.9%
25.5%
0.6%
-
4
68.1%
11.4%
0.5%
-
4
80.0%
13.7%
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, 2014, a total of 50,000 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, 1.6 million shares of restricted stock, with a total value of
$2.8 million, were granted to key officers and employees of the Company. This cost will be amortized
over a period of 48 months.
(cid:115)(cid:258)(cid:367)(cid:437)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)(cid:381)(cid:296)(cid:3)(cid:28)(cid:94)(cid:87)(cid:87)(cid:3)
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-21
O ffe ring Pe riod Ende d
Shares purchased for offering period
Fair value per share
(Ending)
March 31, S eptember 30, March 31, S eptember 30, March 31,
2014
13,734
$0.30
2013
19,490
$0.44
2013
18,594
$0.65
2014
13,619
$0.83
$0.43
2015
Assumptions
Risk-free interest rate (average)
Expected dividend yield
Weighted average expected life (years)
Volatility (average)
0.40%
-
0.5
109.0%
0.80%
-
0.5
74.0%
0.40%
-
0.5
44.0%
0.11%
-
0.5
45.0%
0.14%
-
0.5
74.0%
(cid:18)(cid:381)(cid:373)(cid:393)(cid:286)(cid:374)(cid:400)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)(cid:18)(cid:381)(cid:400)(cid:410)(cid:400)(cid:3)
Stock-based non-cash compensation expenses related to stock options, restricted stock grants and the
ESPP were recorded in the financial statements as follows (in thousands):
2014
$
Year Ended December 31,
2013
$
2012
$
Cost of revenues
Selling and marketing
Research and development
General and administrative
Restructuring expense
Total non-cash stock compensation expense
13
270
659
1,437
1,273
3,652
20
766
809
1,938
-
3,533
13
865
765
2,306
-
3,949
$
$
$
Total share-based compensation for each year includes cash payment of income taxes related to grants
of restricted stock in the amounts of $0.2 million, $0.4 million and $0.4 million for the years ended
December 31, 2014, 2013 and 2012, respectively.
(cid:94)(cid:410)(cid:381)(cid:272)(cid:364)(cid:3)(cid:75)(cid:393)(cid:410)(cid:349)(cid:381)(cid:374)(cid:400)(cid:3)
A summary of the Company’s stock options outstanding under the 2005 Plan as of December 31, 2014
and the activity during the years ended herein are as follows (in thousands except per share amounts):
F-22
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
(1,474 options exercisable at a weighted average exercise
price of $10.09)
Granted (weighted average fair value of $0.63)
Exercised
Cancelled
Outstanding as of December 31, 2013
(1,573 options exercisable at a weighted average exercise
price of $8.81)
Granted (weighted average fair value of $0.57)
Exercised
Cancelled
Outstanding as of December 31, 2014
Shares
Weighted Ave.
Exercise Price
2,167
$
11.03
Aggregate
Intrinsic Value
$
-
826
(32)
(686)
2,275
120
-
(225)
2,170
633
(4)
(665)
2,134
$
$
$
$
1.39
0.50
12.37
7.02
$
1.31
$
-
$
6.52
$
6.76
$
$
$
$
0.95
1.38
5.98
5.29
$
-
$
-
$
-
Exercisable as of December 31, 2014
1,291
$
8.04
$
-
Vested and expected to vest at December 31, 2014
1,963
$
5.66
$
-
During the year ended December 31, 2014, options to acquire 4,000 shares were exercised resulting
in cash proceeds to the Company of $6,000. The weighted-average grant-date fair value of options
granted during the year ended December 31, 2014 was $0.57. As of December 31, 2014, there is $3.3
million of unrecognized compensation costs related to non-vested stock options and restricted stock
granted under the Plan. At December 31, 2014, there were 1.6 million shares available for future
grants under the 2005 Stock Issuance / Stock Option Plan.
(cid:90)(cid:286)(cid:400)(cid:410)(cid:396)(cid:349)(cid:272)(cid:410)(cid:286)(cid:282)(cid:3)(cid:94)(cid:410)(cid:381)(cid:272)(cid:364)(cid:3)(cid:4)(cid:449)(cid:258)(cid:396)(cid:282)(cid:400)(cid:3)
A summary of the Company’s restricted stock awards outstanding under the 2005 Plan as of December
31, 2014, and the activity during years ended therein, are as follows (in thousands):
Unvested at December 31, 2011
Granted
Vested
Cancelled and forfeited
Unvested at December 31, 2012
Granted
Vested
Cancelled and forfeited
Unvested at December 31, 2013
Granted
Vested
Cancelled and forfeited
Unvested at December 31, 2014
Number
of shares
1,355
995
(611)
(420)
1,319
1,495
(752)
(316)
1,746
1,625
(1,442)
(204)
1,725
Weighted average
grant date fair value
$
$
$
$
$
$
$
$
$
$
$
$
$
3.21
2.64
6.42
8.73
4.60
1.70
4.43
3.00
2.48
1.79
2.48
1.79
1.91
F-23
(cid:1013)(cid:856)(cid:3)(cid:3)(cid:28)(cid:395)(cid:437)(cid:349)(cid:410)(cid:455)(cid:3)(cid:100)(cid:396)(cid:258)(cid:374)(cid:400)(cid:258)(cid:272)(cid:410)(cid:349)(cid:381)(cid:374)(cid:400)(cid:3)
On August 15, 2014, the Company entered into a common stock purchase agreement with a number of
accredited investors (“Investors”) in a private placement pursuant to which the Company issued and sold to the
Investors 6,845,830 shares of its common stock at a price per share of $0.816. The transaction closed on August
20, 2014 and the Company realized gross proceeds of $5.6 million before deducting commissions and other
expenses. Offering costs related to the transaction totaled $0.4 million, comprised of $0.2 million of
commissions and $0.2 million of legal and other expenses, resulting in net proceeds of $5.2 million. The
Company filed a registration statement with the SEC providing for the resale of the shares of Common Stock
issued pursuant to the Purchase Agreement. The registration statement became effective on September 25,
2014.
(cid:1005)(cid:1004)(cid:856)(cid:3)(cid:94)(cid:410)(cid:381)(cid:272)(cid:364)(cid:3)(cid:90)(cid:286)(cid:393)(cid:437)(cid:396)(cid:272)(cid:346)(cid:258)(cid:400)(cid:286)(cid:3)(cid:87)(cid:396)(cid:381)(cid:336)(cid:396)(cid:258)(cid:373)(cid:3)
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.
The Company repurchased 375,000 shares at a cost of $0.8 million during fiscal year 2012. The Company
did not repurchase any shares in fiscal year 2013. The program ended on November 1, 2013.
(cid:1005)(cid:1005)(cid:856)(cid:3)(cid:94)(cid:437)(cid:271)(cid:400)(cid:286)(cid:395)(cid:437)(cid:286)(cid:374)(cid:410)(cid:3)(cid:28)(cid:448)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)
The Company evaluates and discloses subsequent events as required by ASC Topic No. 855, Subsequent
Events. The Topic establishes general standards of accounting for and disclosure of events that occur after
the balance sheet date but before the financial statements are issued or are available to be issued.
Subsequent events have been evaluated as of the date of this filing and there are no further disclosures
required.
F-24
(cid:1005)(cid:1005)(cid:856)(cid:3)(cid:89)(cid:437)(cid:258)(cid:396)(cid:410)(cid:286)(cid:396)(cid:367)(cid:455)(cid:3)(cid:38)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:24)(cid:258)(cid:410)(cid:258)(cid:3)(cid:894)(cid:104)(cid:374)(cid:258)(cid:437)(cid:282)(cid:349)(cid:410)(cid:286)(cid:282)(cid:895)(cid:3)
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 2014 and 2013 are as follows (in thousands, except per share data):
Selected quarterly financial data:
Revenues
Gross profit
Operating income (loss)
Net income (loss)
1st Quarter
Year ended December 31, 2014
2nd Quarter
3rd Quarter
4th Quarter
$
$
$
$
8,449
6,029
(5,134)
(5,167)
$
$
$
$
8,528
6,077
(5,681)
(5,695)
$
$
$
$
9,448
7,247
(1,144)
(1,142)
$
$
$
$
10,544
8,309
217
205
Net (loss) per share, basic (1)
$
(0.14)
$
(0.15)
$
(0.03)
$
0.00
Weighted average shares outstanding, basic
37,714
38,518
41,225
45,053
Net (loss) per share, diluted (1)
$
(0.14)
$
(0.15)
$
(0.03)
$
0.00
Weighted average shares outstanding, diluted
37,714
38,518
41,225
45,053
Selected quarterly financial data:
Revenues
Gross profit
Operating (loss)
Net (loss)
1st Quarter
Year ended December 31, 2013
2nd Quarter
3rd Quarter
4th Quarter
$
$
$
$
11,602
9,158
(6,101)
(6,158)
$
$
$
$
10,484
8,083
(7,248)
(7,244)
$
$
$
$
8,746
6,254
(12,980)
(13,049)
$
$
$
$
11,843
9,473
(1,501)
(1,502)
Net (loss) per share, basic (1)
$
(0.17)
$
(0.19)
$
(0.35)
$
(0.04)
Weighted average shares outstanding, basic
36,614
37,247
37,036
37,027
Net (loss) per share, diluted (1)
$
(0.17)
$
(0.19)
$
(0.35)
$
(0.04)
Weighted average shares outstanding, diluted
36,614
37,247
37,036
37,027
(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-25
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2014
(In thousands)
Balance at
beginning of
period
Additions
charged to
costs and
expenses
Balance at
end of
period
Deductions
Allowance for accounts receivable (1):
2014
2013
2012
Allowance for excess and obsolete inventory:
2014
2013
2012
$
617
482
1,382
$
301
352
417
$
347
730
1,045
$
124
76
73
$
(362)
(595)
(1,945)
$
(274)
(127)
(138)
$
602
617
482
$
151
301
352
(1) Allowances are for retail return reserves, marketing development funds and doubtful accounts.
S-1
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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.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 and Registration
Statement (Nos. 333-123821, 333-128695, 333-134611, 333-137408 and 333-198728) on Form S-3 and Registration
Statement (No. 333-161659) on Form S-4 of Smith Micro Software, Inc. and subsidiaries of our report dated February
27, 2015, relating to our audit of the consolidated financial statements and the financial statement schedule, which
appear in this Annual Report on Form 10-K of Smith Micro Software, Inc. and subsidiaries for the year ended
December 31, 2014.
/s/ SingerLewak LLP
Los Angeles, California
February 27, 2015
(This Page Intentionally Left Blank)
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, William W. Smith, Jr., certify that:
1.
I have reviewed this annual report on Form 10-K of Smith Micro Software, Inc.;
EXHIBIT 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 27, 2015
/s/ William W. Smith, Jr.
William W. Smith, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
(This Page Intentionally Left Blank)
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
EXHIBIT 31.2
I, Steven M. Yasbek, certify that:
1.
I have reviewed this annual report on Form 10-K of Smith Micro Software, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 27, 2015
/s/ Steven M. Yasbek
Steven M. Yasbek
Vice President and Chief Financial Officer
(Principal Financial Officer)
(This Page Intentionally Left Blank)
EXHIBIT 32.1
CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Smith Micro Software, Inc., that, to his
knowledge, the Annual Report of Smith Micro Software, Inc. on Form 10-K for the period ended December 31,
2014, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the
information contained in such report fairly presents, in all material respects, the financial condition and results of
operation of the company.
Date: February 27, 2015
Date: February 27, 2015
/s/ William W. Smith, Jr.
William W. Smith, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Steven M. Yasbek
Steven M. Yasbek
Vice President and Chief Financial Officer
(Principal Financial Officer)
A signed original of this written statement required by Section 906 has been provided to Smith Micro Software,
Inc. and will be retained by Smith Micro Software, Inc. and furnished to the Securities and Exchange Commission
or its staff upon request.
(This Page Intentionally Left Blank)
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
Steven L. Elfman
Director
Andrew Arno
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
Rick Carpenter
Carla Fitzgerald
Senior Vice President of Engineering
Chief Marketing Officer
Thomas G. Campbell
Director
Gregory J. Szabo
Director
Jeff Hornung
Vice President of
Product Management
Jim Mains
Ken Shebek
David P. Sperling
Chief Strategy Officer
Chief Information Officer
Chief Technology Officer
Steven M. Yasbek
Chief Financial 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 90071
Auditors
SingerLewak
Los Angeles, CA 90024
A D D I T I O N A L I N F O R M A T I O N
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:
Todd Kehrli
MKR Group, Inc.
12198 Ventura Blvd., Suite 200
Los Angeles, CA 91604
(323) 468-2300
smsi@mkr-group.com
Smith Micro Software, Inc. • 51 Columbia, Aliso Viejo, California 92656 USA • +1 949 362 5800 • www.smithmicro.com • NASDAQ: SMSI