e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-26536
SMITH MICRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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33-0029027
(I.R.S. Employer Identification Number) |
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51 Columbia, Aliso Viejo, CA
(Address of principal executive offices)
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92656
(Zip Code) |
Registrants telephone number, including area code: (949) 362-5800
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Common Stock, $.001 par value
(Title of each class)
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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 o NO þ
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 o NO þ
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 þ NO o
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 o No o
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 registrants 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 o.
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):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). YES o NO þ
As of June 30, 2009, the last business day of the registrants most recently completed second
quarter, the aggregate market value of the common stock of the registrant held by non-affiliates
was $281,770,002 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 registrants outstanding common stock are deemed to be
affiliates.
As of February 11, 2010, there were 33,380,496 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for the 2010 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.
2009 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
2
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
In this document, the terms Smith Micro, Company, we, us, and our refer to Smith
Micro Software, Inc. and, where appropriate, its subsidiaries.
This report contains forward-looking statements regarding Smith Micro which include, but are
not limited to, statements concerning projected revenues, expenses, gross profit and income, the
competitive factors affecting our business, market acceptance of products, customer concentration,
the success and timing of new product introductions and the protection of our intellectual
property. These forward-looking statements are based on our current expectations, estimates and
projections about our industry, managements 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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the duration and depth of the current economic slowdown and its effects on
capital expenditures by our customers and their end users; |
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our ability to predict consumer needs, introduce new products, gain broad market
acceptance for such products and ramp up manufacturing in a timely manner; |
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changes in demand for our products from our customers and their end-users; |
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the intensity of the competition and our ability to successfully compete; |
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the pace at which the market for new products develop; |
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the response of competitors, many of whom are bigger and better financed than
us; |
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our ability to successfully execute our business plan and control costs and
expenses; |
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our ability to protect our intellectual property and our ability to not infringe
on the rights of others; and |
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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.
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PART I
Item 1. BUSINESS
General
Smith Micro Software, Inc. designs, develops and markets software products and services
primarily for the mobile computing and communications industries. The Company is focused on
developing connectivity, communications, and content management solutions for a converging world of
wireless and wired networks. The Companys portfolio of wireless software products and services
includes a wide range of software solutions including our QuickLink® family of products. We
provide mobile voice and data connectivity across 3G, 4G and Wi-Fi networks. Our mobile
communications portfolio includes solutions for Push-To-Talk, Visual Voicemail and mobile device
management. We also offer user-friendly solutions for the management of mobile content, contacts
and calendar data.
Our patented compression technologies are utilized within various Smith Micro products
including our line of Personal Computer (PC) and Smartphones compression products and our new
file-transfer solution.
We sell our products and services to many of the worlds leading mobile network operators,
original equipment manufacturers (OEM), device manufacturers and enterprise businesses, as well
as directly to consumers. The proliferation of broadband mobile wireless technologies is providing
new opportunities for our products and services on a global basis. When these broadband wireless
technologiesEVDO, UMTS/HSPA, Wi-Fi, LTE and WiMAXare combined with new devices such as mobile
phones, PCs, Smartphones, Netbooks, and tablets and emerging Machine-to-Machine (M2M) devices, opportunities emerge for
new communications software products. Our core technologies are designed to address these emerging
mobile convergence opportunities.
Our innovative line of productivity and graphics products are distributed through a variety of
consumer channels worldwide, our online stores, and third-party wholesalers, retailers and
value-added resellers. We offer products that operate on Windows, Mac, UNIX, Linux, Windows
Mobile, Symbian and Java platforms.
The underlying design concept common to all of our products is our ability to improve the
customers experience. This philosophy is based on the combination of solid engineering and
exceptional design that reinforces our brands competitive differentiation. We have over 25 years
of experience in design, creation and custom engineering services for software products.
We continue to invest significantly in our leading-edge technologies. Our research and
development investments for the years ending December 31, 2009, 2008 and 2007 were $36.5 million,
$30.8 million and $14.8 million, respectively. Our research and development expenses consist
primarily of personnel and equipment costs required to conduct our software development efforts.
We remain focused on wireless connectivity and communications, compression and content creation.
We were incorporated in California in November 1983, and we reincorporated in Delaware in June
1995. Our principal executive offices are located at 51 Columbia, Aliso Viejo, California 92656.
Our telephone number is (949) 362-5800. Our website address is www.smithmicro.com. We make our
SEC filings available on the Investor Relations page of our website. Information contained on our
website is not part of this Annual Report on Form 10-K.
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Business Segments
Our operations are organized into two business segments: Wireless and Productivity & Graphics.
We do not separately allocate operating expenses, nor do we allocate specific assets to these
groups. Therefore, segment information reported includes only revenues and cost of revenues. See
Note 6 of Notes to Consolidated Financial Statements for financial information related to our
business segments.
Wireless
The Wireless Groups primary focus is to develop mobile connectivity, mobile information
management and mobile security solutions. QuickLink® Mobile, the groups leading product, provides
mobile users the ability to easily connect a notebook or other wireless device to wireless wide
area networks (WWANs) and wireless local area networks (WLANs) or Wi-Fi hotspots. Many of the
largest mobile operators worldwide including AT&T, Bouygues, Orange, Sprint, T-Mobile USA, Verizon
Wireless, Vodafone and the newest 4G operators including Clear, Comcast and Time Warner, rely on
QuickLink® Mobile technology to help their subscribers easily connect to their wireless networks
every day. One of the reasons more mobile operators rely on our connection management solution for
their subscribers is our patented technology to seamlessly switch a wireless device between WWANs
and WLANs.
We provide services to leading device manufacturers such as HTC, Motorola and Nokia.
In addition to marketing products to wireless carriers and device manufacturers, the Wireless
Group also delivers wireless mobility solutions designed to address security and mobility needs of
enterprises rapidly becoming more reliant on remote access to many types of wireless networks. In
addition to addressing the need for robust security, the QuickLink® Mobility suite allows
persistent connectivity for the user operating on WWANs, corporate Local Area Networks (LANs)
and Wi-Fi networks. The applications support most IP services and interoperate with approximately
200 carriers worldwide, as well as hundreds of the popular broadband mobile devices and embedded
WWAN PC notebooks.
As a result of network and device proliferation, there is an emerging need for smarter
connectivity. Our latest solutions to emerge utilize our unique blend of Adaptive Connectivity to
streamline network access and improve usability.
Smith Micro continues to introduce solutions for mobile device communications. These include
synchronization, back-up and restore of critical user data, push-to-talk software and visual
voicemail services. This portfolio serves wireless carriers and device manufacturers with mobile
handset software, as well as hosted software-as-a-service solutions. These products are designed to
work across a broad spectrum of handset operating systems and platforms, including a rich array of
feature phones and todays most popular Smartphones.
Wireless carriers and mobile device manufacturers incorporate our products into their branded
product and service offerings, selling directly to their market segments. Our technologies are
utilized in many major wireless networks to facilitate data communications via mobile devices,
multimedia solutions and device management. Our primary products for connection management are
QuickLink® Mobile and QuickLink® Mobility. For managing the media on mobile devices, we have
QuickLink® Multimedia. Our Device Management Suite provides intelligent, automated mobile device
provisioning and configuration. Rounding out our wireless portfolio, we also offer Push-To-Talk and
Visual Voicemail solutions.
Productivity & Graphics
The Productivity & Graphics Group focuses on developing a variety of software for the
consumer, prosumer, and professional markets. Our solutions span compression, graphics and
utilities including diagnostics, performance, security and content creation. This group also
republishes and markets third party software titles that complement our existing line of products.
All of these products are available through direct sales on the Smith Micro websites
(smithmicro.com, mysmithmicro.com and contentparadise.com), on partner websites, direct through
customer service order desks, on-line resellers and through traditional retail outlets.
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The lead product line in this area is StuffIt®, driven by its patented and patent-pending
image compression, with a focus on our innovative lossless JPEG compression technology. StuffIt®
provides superior lossless compression, encryption and archiving. We have enhanced this
industry-leading products feature set with new, online file transfer capabilities.
In addition to compression technology, the Company is focused on growing its line of graphic
titles, in particular Poser®, Anime Studio and Manga Studio.
Industry Background
Smith Micro offers products in the following technology and communications related markets:
Wireless and mobility In order to capitalize on the emerging adoption trends for wireless
Internet services and connectivity to global networks, mobile operators and service providers are
introducing a wide array of data services and new mobile devices. Traditional mobile phone devices,
Smartphones, laptops, tablet devices, Netbooks and other wirelessly connected devices are being
deployed at escalating rates. Wireless data access service plans for these multimedia-enabled
devices are being adopted at such a fast pace that global infrastructure for wireless networks is
rapidly being updated to support higher speeds and greater capacity. The burgeoning demand for
pervasive connectivity is driven by a need to access information anytime and from anywhere. In
addition to this trend, there is an evolving and changing pattern of media being consumed
on-demand from multiple different device types, including handheld terminals. Creating software
that can enable capabilities to meet this demand for wireless access via 3G, 4G and Wi-Fi, in a way
that enhances the users enjoyment of their online experience, represents the primary opportunity
and area of focus for Smith Micro.
Smith Micro offers a variety of products that fit into our primary area of focus which enables
connectivity to networks, devices, information and data. Providing software that connects
devices in a simple and secure way to wireless networks using our QuickLink® Mobile family of
products for mobile operators continues to expand. Wireless carriers are facing increased
complexity in trying to serve customers connectivity needs as they move from 3G networks to
beginning to support new higher speed technologies such as HSPA+, LTE and WiMAX network protocols
which enable new capacity and higher speeds for the wireless subscribers. The increase in the
amount of data traffic on the carrier networks is being fueled by new subscriber growth and higher
bandwidth applications, such as video services. These developments, along with mobile devices that
combine multiple radio chip-sets including Wi-Fi, 3G and 4G, are creating an increased interest in
software that can support intelligent and adaptive connectivity and service continuity across
these differing network technologies. The QuickLink® Mobile family of connectivity software has
been designed to help mobile operators meet the challenges of serving their subscriber base in this
evolving and increasingly complex world of broadband wireless access.
These rapid changes in wireless technology including higher speed networks, improved
intelligent connected devices and increasing demands for access to digital content and critical
information, is fueling the evolution of a new connected digital lifestyle. Software that
simplifies the complexity associated with serving this digital lifestyle and managing access to
data from many sources, from any network type and via multiple devices is in demand for both the
service providers and their end-user customers. Smith Micro products such as QuickLink® Multimedia
enables simplified access to digital content across a wide segment of the complex matrix of devices
and networks, and offers ease of management and synchronization of data to allow for an improved
user experience. As wireless carriers continue to seek new ways to offer premium services that
allow their subscribers to better access the information, data and communications services that are
becoming so vital to the way they lead their lives, Smith Micros portfolio of connectivity
software, media management, device management and messaging solutions are addressing this demand.
Productivity and graphic software Smith Micro also offers a secondary line of software that
centers on serving the growing demand for improved graphic related products for 2D and 3D design.
The Companys products include Poser®, a 3D figure design and animation program, Manga Studio, the
number one selling Manga software worldwide and Anime Studio, a complete solution for creating 2D
movies, cartoons, anime or cut-out animations and is ideal for animators of any caliber. Many of
the animations that people create with Anime Studio can be seen on social networking websites and
YouTube. In addition to the graphics products, the growing
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prevalence and complexity of personal computers and mobile device operating systems require
increasingly sophisticated diagnostic and utility software solutions to improve the consumers
overall computing and mobile experience. Consumers demand products that can enhance PC performance,
protect against spam, spyware, and computer hacking and remove malicious code. Businesses rely on
cross-platform solutions that can quickly identify and repair a broad range of computer-related
problems. The Companys software solution for Windows and Mac platforms perform diagnostics,
maximizes performance and helps to protect consumers online identity.
Products and Services
Our primary products consist of the following:
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Product Groups |
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Description |
Wireless
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QuickLink® Mobile
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Centralized
connection management
application to
control, customize
and automate wireless
connections of all
types. |
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QuickLink® Mobility
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A mobile VPN and
connection management
solution delivering
network session
persistence. |
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QuickLink® Multimedia
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An intuitive music
and multimedia
manager to sync
digital content to
and from mobile
devices. |
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StuffIt® Wireless
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Enables compression
of data files to
facilitate storage on
mobile devices and
the Internet. |
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Device Management Suite
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Provides intelligent,
automated mobile
device provisioning
and configuration. |
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Push-To-Talk
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A data service that
uses a mobile
Internet connection
to send and receive
walkie-talkie style
calls. |
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Visual Voicemail
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Voicemail is
delivered directly to
your mobile phone and
stored in a visual
inbox. |
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Productivity & Graphics
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StuffIt Deluxe®
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Patented, lossless
compression solution
for documents and
media. |
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CheckIt® Diagnostics &
CheckIt® Netbook Suite
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A diagnosis and
troubleshooting
solution for many
hardware and system
problems. |
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Poser®
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A solution for
creating 3D character
art and animations. |
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Anime Studio
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An animation tool for
professionals and
digital artists. |
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Manga Studio
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A solution for
creating manga and
comic art. |
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Marketing and Sales Strategy
Our primary focus is on developing the next mobile software experience. Because of our broad
product offerings, we are able to capitalize on technology synergies across our portfolio and
quickly bring to market solutions that resonate with our target customers.
We continue to develop innovative, enabling technology and infrastructure products that
facilitate the usage of wireless data and other premium mobile services, thereby providing our
customers with additional revenue opportunities and differentiated services that encourage customer
loyalty.
A core strategy is our ability to enable our wireless carrier and device manufacturer
customers to introduce new products to their markets that generate revenue more quickly. Our
industry knowledge and our research are used to help determine the next market opportunities for
our customers in the mobile market.
Our sales strategy is as follows:
Leverage Carrier and OEM Relationships. We continue to capitalize on our strong relationships
with the worlds leading wireless carriers and mobile device manufacturers. For example, our
carrier customers serve as a valuable distribution channel, providing access to millions of
end-users and also providing market feedback for future product offerings.
Focus on Multiple High-Growth Markets. We continue to focus on wireless connectivity,
communications and content management. Within these markets, we see ongoing enhancement of networks
and services by wireless carriers and an increasing availability of rich media and
application-oriented Smartphones. This represents a remarkable alignment between our product
portfolio and market opportunity.
Expand our Customer Base. In addition to introducing new products to new customers, we intend
to grow our domestic and international business through cross-selling our portfolio of products to
our current customer base.
Selectively Pursue Acquisitions of Complementary Products and Services. In line with the
Companys strategy, we will continue to pursue selected acquisition opportunities in an effort to
expand our product and technological abilities, enter complementary markets and extend our
geographic reach. In the past, we have used acquisitions to enhance our technology features and
customer base, and to extend our product offerings into new markets.
Smith Micro is expanding its ability to serve wireless carriers, OEMs and enterprise customers
in Europe and Asia through international sales and support offices based in Sweden, the United
Kingdom, Australia, Hong Kong and Singapore.
Our four largest customers are in the Wireless segment and each exceeded 10% of revenues for
fiscal year 2009. Verizon Wireless, Dell, Sprint and AT&T accounted for 65.7% of our revenues in
fiscal 2009. In 2008, our three largest customers (Verizon Wireless, AT&T and Sprint) accounted
for 48.1% of our revenues. In 2007, our three largest customers (Verizon Wireless, UTStarcom and
Sprint) accounted for 68.5% of our revenues. Our major customers could reduce their orders of our
products in favor of a competitors product or for any other reason. The loss of any of our major
customers or decisions by a significant customer to substantially reduce purchases could have a
material adverse effect on our business.
Sales to Verizon Wireless and their affiliates amounted to 32.8%, 32.0%, and 64.4% of the
Companys revenues for fiscal years 2009, 2008 and 2007, respectively. We have a master software
and license distribution agreement with Verizon Wireless whereas Smith Micro grants them
non-exclusive licenses to reproduce and have produced, market, and distribute the software, in
object form only, to distributors, re-sellers, OEM customers of Verizon Wireless and end users.
The license term for end users continues in perpetuity unless otherwise stated in subsequent
amendments. The master agreement commenced in December 2000 and has been consistently extended
through subsequent amendments. They can cancel the agreement at any time. Products and services
sold to Verizon include per unit license fees for connectivity and security, V CAST Music and Media
Managers and VZAccess
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manager software, engineering design and development fees, customization and adaptation fees
and website hosting. The master agreement and subsequent amendments are detailed in Exhibit 10.4 in
this document.
Integration Initiatives
Smith Micro is committed to the integration of recent acquisitions for engineering, sales and
marketing within the Company. The Company continues to drive greater productivity, flexibility and
cost savings by integrating its own business processes and functions, thereby eliminating
redundancies.
Customer Service and Technical Support
We provide technical support and customer service through our online knowledge base, via email
and by telephone. OEM customers generally provide their own primary customer support functions and
rely on us for support to their own technical support personnel.
Product Development
The software industry, particularly the wireless market, is characterized by rapid and
frequent changes in technology and user needs. We work closely with industry groups and customers,
both current and potential, to help us anticipate changes in technology and determine future
customer needs. Software functionality depends upon the capabilities of the hardware. Accordingly,
we maintain engineering relationships with various hardware manufacturers and we develop our
software in tandem with their product development. Our engineering relationships with
manufacturers, as well as with our major customers, are central to our product development efforts.
We remain focused on the development and expansion of our technology, particularly in the wireless
space. Research and development expenditures amounted to $36.5 million, $30.8 million, and $14.8
million for the years ended December 2009, 2008 and 2007, respectively.
Manufacturing
Although we primarily deliver our software via electronic downloads, we do deliver our
software in several other forms. We offer a package or kit that may include CD-ROM(s), a cable 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 an outside vendor or in our
Aliso Viejo, California facility.
Competition
The markets in which we operate are highly competitive and subject to rapid changes in
technology. Rapidly changing technology combined with relatively low barriers to entry in the
mobile software market is constantly creating new opportunities, and we expect new competitors to
enter the market. We also believe that competition from established and emerging software companies
will continue to intensify as the emerging mobile, wireless and Internet markets evolve. We
compete with other software vendors for the attention of customers as well as in our efforts to
acquire technology and qualified personnel.
We believe that the principal competitive factors affecting the mobile software market include
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
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our competitive position against current and potential competitors. We believe that the
market for our software products has been and will continue to be characterized by significant
price competition. A material reduction in the price of our products could negatively affect our
profitability.
Many existing and potential OEM customers have technological capabilities to develop products
that compete directly with our products. These customers may discontinue the purchase of our
products. Our future performance is substantially dependent upon the extent to which existing OEM
customers elect to purchase communications software from us rather than design and develop their
own software. Because our customers are not contractually obligated to purchase any of our
products, they may cease to rely, or fail to expand their reliance on us as a source for
communications software in the future.
Proprietary Rights and Licenses
Our success and ability to compete is dependent upon our software code base, our programming
methodologies and other intellectual properties. To protect our proprietary technology, 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, 2009, we owned 35 issued U.S. patents and
42 patent applications are currently pending. These patents provide generalized protection to our
intellectual property base and we will continue to apply for various patents and trademarks in the
future.
We seek to avoid unauthorized 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 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 an adverse claim to software 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 use currently to protect our proprietary
rights may not be adequate. Moreover, our competitors may independently develop 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 if we experience substantial increases in royalty payments under these third party
licenses, our business could be materially and adversely affected.
Employees
As of December 31, 2009, we had a total of 486 employees within the following departments: 319
in engineering, 100 in sales and marketing, 41 in management and administration, 16 in customer
support and 10 in manufacturing. We utilize temporary labor to assist during peak periods of
manufacturing volume. We believe that our future success will depend in large part upon our
continuing ability to attract and retain highly skilled managerial, sales, marketing, customer
support, research and development personnel and consulting staff. Like other software companies,
we face intense competition for such personnel, and we have at times experienced and continue to
experience difficulty in recruiting qualified personnel. There can be no assurance that we will be
successful in attracting, assimilating and retaining other qualified personnel in the future. We
are not subject to any collective bargaining agreement and we believe that our relationships with
our employees are good.
Item 1A. RISK FACTORS
Our future operating results are highly uncertain. Before deciding to invest in our common
stock or to maintain or increase your investment, you should carefully consider the risks described
below, in addition to the other information contained in this report and in our other filings with
the SEC, including our reports on Forms 10-
10
K, 10-Q and 8-K. The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we currently deem immaterial
may also affect our business operations. If any of these risks actually occur, that could
seriously harm our business, financial condition or results of operations. In that event, the
market price for our common stock could decline and you may lose all or part of your investment.
Our operating results may be adversely impacted by the current worldwide economic slowdown and
uncertainties in the marketplace.
Since the second half of 2008, economic conditions worldwide and in the United States have
experienced a general deterioration, resulting in slower economic activity, decreased consumer
confidence, reduced corporate profits and capital spending and generally adverse business
conditions. These conditions make it difficult for our wireless carrier and OEM customers and
their end users to accurately forecast and plan future business activities and capital
expenditures, which could cause them to slow spending on our products and services. Furthermore,
during challenging economic times our customers may face issues gaining timely access to sufficient
credit, which could result in an impairment of their ability to make timely payments to us. We
cannot predict the timing, strength or duration of the current economic slowdown or subsequent
economic recovery, or to what extent it will continue to affect us. If the economy or markets in
which we operate do not continue at their present levels or continue to deteriorate, we may need to
record charges related to restructuring costs and the impairment of goodwill and other long-lived
assets, and our business, financial condition and results of operations will likely be materially
and adversely affected.
Our quarterly revenues and operating results are difficult to predict and could fall below analyst
or investor expectations, which could cause the price of our common stock to fall.
Our quarterly revenue 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; |
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the size and timing of orders from and shipments to our major customers; |
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the size and timing of any return product requests for our products; |
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our ability to maintain or increase gross margins; |
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variations in our sales channels or the mix of our product sales; |
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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; |
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the availability and pricing of competing products and technologies and the
resulting effect on sales and pricing of our products; |
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acquisitions; |
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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; |
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deferrals of orders by our customers in anticipation of new products, applications,
product enhancements or operating systems; and |
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general economic and market conditions. |
We have difficulty predicting the volume and timing of orders. In any given quarter, our sales
have involved, and we expect will continue to involve, large financial commitments from a
relatively small number of customers. As a result, the cancellation or deferral of even a small
number of orders would reduce our revenues, which would adversely affect our quarterly financial
performance. Also, we have often booked a large amount of our sales in the last month of the
quarter and often in the last week of that month. Accordingly, delays in the closing of sales near
the end of a quarter could cause quarterly revenues to fall substantially short of anticipated
levels. Significant sales may also occur earlier than expected, which could cause operating results
for later quarters to compare unfavorably with operating results from earlier quarters.
11
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.
Our total revenues currently depend on a small number of products and customers, so our operating
results are vulnerable to unexpected shifts in demand.
A significant portion of our total revenues are derived from sales of our wireless
connectivity and security software products. Although our strategy is to continue to introduce new
products, these efforts may not reduce the extent to which our total revenues are dependent on one
or more of our products in future periods.
We also derive a significant portion of our revenues from a few vertical markets. 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 seriously harm our results of operations, financial condition and prospects.
To increase our sales outside our core vertical markets, for example to large enterprises,
requires us to devote time and resources to hire and train sales employees familiar with those
industries. Even if we are successful in hiring and training sales teams, customers in other
vertical markets may not need or sufficiently value our current products or new product
introductions.
In addition, because we sell primarily to large carriers and OEMs, there are a limited number
of actual and potential customers for our products, resulting in customer concentration for sales
of our products and services. For the year ended December 31, 2009, one customer, Verizon
Wireless, comprised 32.8% of our total revenues. Three other customers (Dell, Sprint, and AT&T)
individually comprised of at least 10% of our total revenues. Because of our customer
concentration, our largest customers may have significant pricing power over us. Furthermore, a
substantial decrease in sales to any of our largest customers could materially affect our revenues
and profitability. Additionally, these customers are not the end-users of our products. If any of
these customers efforts to market their products which incorporate our software are unsuccessful
in the marketplace, our revenues and profitability could be adversely affected.
Competition within our target markets is intense and includes numerous established competitors,
which could negatively affect our revenues and results of operations.
We operate in markets that are extremely competitive and subject to rapid changes in
technology. Specifically, Microsoft Corporation poses a significant competitive threat to us
because Microsofts operating systems may include some capabilities now provided by certain of our
OEM and retail software products. If users are satisfied relying on the capabilities of
Windows-based systems or other hardware or operating systems, sales of our products are likely to
decline. In addition, because there are low barriers to entry into the software markets in which we
participate and may participate in the future, we expect significant competition from both
established and emerging software companies in the future. 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.
Microsoft and 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 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 large competitors such as Microsoft or other vendors could
result in the cancellation of orders by customers in anticipation of the introduction of such new
products. In addition, some of our competitors currently make 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
12
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.
Acquisitions of companies or technologies may disrupt our business and divert management attention
and cause our current operations to suffer.
In the fourth quarter of 2009, we completed the acquisition of Core Mobility, Inc. In
addition, 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 managements attention from our
companys 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.
We have recently entered 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 technologies such as
HSPA+, LTE and WiMAX network protocols, and our recent acquisition of Core Mobility, have allowed
us to enter new markets. A viable market for these products may not develop or be sustainable, and
we may face intense competition in these markets. In addition, our success in these markets
depends on our carrier customers ability to successfully introduce new mobile services enabled by
our products and our ability to broaden our carrier customer base, which we believe will be
difficult and time-consuming. If the expected benefits from entering new markets do not
materialize our revenues will suffer and the price of our common stock would likely decline. In
addition, to the extent we enter new markets through acquisitions of companies or technologies, our
financial condition could be harmed or our stockholders could suffer dilution without a
corresponding benefit to our company if we do not realize expected benefits of entering such new
markets.
If the adoption of and investments in new technologies and services grows more slowly than
anticipated in our product planning and development, our operating results, financial condition and
prospects may be negatively affected.
If the adoption of and investments in new technologies and services does not grow or grows
more slowly than anticipated, we will not obtain the anticipated returns from our planning and
development investments. For example, our Device Management Suite of products allows our customers
to update mobile devices from a home office and incorporates technology that provides a mechanism
to allow for efficient firmware updates for mobile devices. Future sales and any future profits
from these and related products are substantially dependent upon the acceptance and use of Wi-Fi,
and on the continued adoption of mobile device services.
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
13
that have failed or have been delayed or not deployed, our operating results, financial
condition and prospects may be negatively affected.
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 are critical to our
future success. Our ability to generate revenues from sales of our software is also constrained by
our carrier customers ability to attract and retain customers. We have no input into or influence
upon their marketing efforts and sales and customer retention activities. If our carrier customers,
particularly our largest customer, Verizon Wireless, 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.
Our gross margins may continue to change due to shifts in our sales mix.
Our gross margins can change quarter to quarter and year to year due to a change in our sales
mix. Gross margins have ranged from 71.9% in 2007 to 79.6% in 2008 to 85.6% in 2009. As we have
shifted to more downloads and license revenue, our gross margins have increased. Gross margins on
our music kits increased due to a shift in how the product was merchandised by our primary music
customers. In early 2007, this product was sold primarily as a higher revenue, lower margin music
kit (including software, cable and ear buds). In late 2007 and in 2008, the music product was
being delivered more as downloadable software or as a software-only CD, resulting in lower revenue
per unit, but at a much higher margin per unit. Our future gross margin could fluctuate based on
the mix of products sold in a quarter and how our products are delivered to the customer.
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.
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 operating systems with which our products are designed to be
compatible, and to promote those products successfully. The communications and utilities software
markets in which we operate are characterized by rapid technological change, changing customer
needs, frequent new product introductions, evolving industry standards and short product life
cycles. Any of these factors could render our existing products obsolete and unmarketable. In
addition, new products and product enhancements can require long development and testing periods as
a result of the complexities inherent
14
in todays 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.
Regulations affecting our customers and us and future regulations, to which they or we may become
subject to, may harm our business.
Certain of our customers in the communications industry are subject to regulation by the
Federal Communications Commission, which could have an indirect effect on our business. In
addition, the United States telecommunications industry has been subject to continuing deregulation
since 1984. We cannot predict when, or upon what terms and conditions, further regulation or
deregulation might occur or the effect regulation or deregulation may have on demand for our
products from customers in the communications industry. Demand for our products may be indirectly
affected by regulations imposed upon potential users of those products, which may increase our
costs and expenses.
We may be unable to adequately protect our intellectual property and other proprietary rights,
which could negatively impact our revenues.
Our success is dependent upon our software code base, our programming methodologies and other
intellectual properties and proprietary rights. In order to protect our proprietary technology, we
rely on a combination of trade secrets, nondisclosure agreements, patents, and copyright and
trademark law. We currently own U.S. trademark registrations for certain of our trademarks and
U.S. patents for certain of our technologies. However, these measures afford us only limited
protection. Furthermore, we rely primarily on shrink wrap licenses that are not signed by the
end user and, therefore, may be unenforceable under the laws of certain jurisdictions.
Accordingly, it is possible that third parties may copy or otherwise obtain our rights without our
authorization. It is also possible that third parties may independently develop technologies
similar to ours. It may be difficult for us to detect unauthorized use of our intellectual
property and proprietary rights.
We may be subject to claims of intellectual property infringement as the number of trademarks,
patents, copyrights and other intellectual property rights asserted by companies in our industry
grows and the coverage of these patents and other rights and the functionality of software products
increasingly overlap. From time to time, we have received communications from third parties
asserting that our trade name or features, content, or trademarks of certain of our products
infringe upon intellectual property rights held by such third parties. We have also received
correspondence from third parties separately asserting that our products may infringe on certain
patents held by each of the parties. Although we are not aware that any of our products infringe
on the proprietary rights of others, third parties may claim infringement by us with respect to our
current or future products. Additionally, our customer agreements require that we indemnify our
customers for infringement claims made by third parties involving our intellectual property
embedded in their products. Infringement claims, whether with or without merit, could result in
time-consuming and costly litigation, divert the attention of our management, cause product
shipment delays or require us to enter into royalty or licensing agreements with third parties. If
we are required to enter into royalty or licensing agreements, they may not be on terms that are
acceptable to us. Unfavorable royalty or licensing agreements could seriously impair our ability
to market our products.
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
15
remains high and employee retention is a common problem in our industry. Our inability to attract
and retain the highly trained technical personnel that are essential to our product development,
marketing, service and support teams may limit the rate at which we can generate revenue, develop
new products or product enhancements and generally would have an adverse effect on our business,
financial condition and results of operations.
If we fail to continue to establish and maintain strategic relationships with mobile device
manufacturers, market acceptance of our products and our profitability, may suffer.
Most of our strategic relationships with mobile device manufacturers are not subject to
written contract, but rather are in the form of informal working relationships. We believe these
relationships are valuable to our success. In particular, these relationships provide us with
insights into product development and emerging technologies, which allows us to keep abreast of, or
anticipate, market trends and helps us serve our current and prospective customers. Because these
relationships are not typically governed by written agreements, there is no obligation for many of
our partners to continue working with us. If we are unable to maintain our existing strategic
relationships with mobile device manufacturers or if we fail to enter into additional strategic
relationships or the parties with whom we have strategic relationships favor one of our
competitors, our ability to provide products that meet our current and prospective customers needs
could be compromised and our reputation and future revenue prospects could suffer. For example, if
our software does not function well with a popular mobile device because we have not maintained a
relationship with its manufacturer, carriers seeking to provide that device to their respective
customers could choose a competitors software over ours or develop their own. Even if we succeed
in establishing these relationships, they may not result in additional customers or revenues.
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, cash equivalents and short-term investments on hand and the cash we
expect to generate from operations will be sufficient to meet our capital needs for at least the
next twelve months. However, it is possible that we may need or choose to obtain additional
financing to fund our activities in the future. We could raise these funds by selling more stock
to the public or to selected investors, or by borrowing money. We may not be able to obtain
additional funds on favorable terms, or at all. If adequate funds are not available, we may be
required to curtail our operations or other business activities significantly or to obtain funds
through arrangements with strategic partners or others that may require us to relinquish rights to
certain technologies or potential markets.
We have on file with the SEC a shelf Form S-3 to sell from time to time up to 4,000,000 shares
of our common stock in one or more offerings in amounts, at prices and on the terms that we will
determine at the time of offering. In addition, we have on file with the SEC a shelf Form S-4 to
sell from time to time up to 1,000,000 shares of our common stock in connection with our future
acquisitions of other businesses, assets or securities. If we raise additional funds by issuing
additional equity or convertible debt securities, the ownership percentages of existing
stockholders would be reduced. In addition, the equity or debt securities that we issue may have
rights, preferences or privileges senior to those of the holders of our common stock. We currently
have no established line of credit or other business borrowing facility in place.
It is possible that our future capital requirements may vary materially from those now
planned. The amount of capital that we will need in the future will depend on many factors,
including:
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the market acceptance of our products; |
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the levels of promotion and advertising that will be required to launch our
products and achieve and maintain a competitive position in the marketplace; |
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our business, product, capital expenditure and research and development plans
and product and technology roadmaps; |
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the levels of inventory and accounts receivable that we maintain; |
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capital improvements to new and existing facilities; |
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technological advances; |
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our competitors response to our products; and |
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our relationships with suppliers and customers. |
16
In addition, we may raise additional capital to accommodate planned growth, hiring,
infrastructure and facility needs or to consummate acquisitions of other businesses, products or
technologies.
Our business, financial condition and operating results could be adversely affected as a result of
legal, business and economic risks specific to international operations.
In recent years, our revenues derived from sales to customers outside the U.S. have not been
material. Our revenues derived from such sales can vary from quarter to quarter and from year to
year. We also frequently ship products to our domestic customers international manufacturing
divisions and subcontractors. In the future, we may expand these international business activities.
International operations are subject to many inherent risks, including:
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general political, social and economic instability; |
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trade restrictions; |
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the imposition of governmental controls; |
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exposure to different legal standards, particularly with respect to intellectual
property; |
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burdens of complying with a variety of foreign laws; |
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import and export license requirements and restrictions of the United States and
any other country in which we operate; |
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unexpected changes in regulatory requirements; |
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foreign technical standards; |
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changes in tariffs; |
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difficulties in staffing and managing international operations; |
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difficulties in securing and servicing international customers; |
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difficulties in collecting receivables from foreign entities; |
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fluctuations in currency exchange rates and any imposition of currency exchange
controls; and |
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potentially adverse tax consequences. |
These conditions may increase our cost of doing business. Moreover, as our customers are
adversely affected by these conditions, our business with them may be disrupted and our results of
operations could be adversely affected.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Our corporate headquarters, including our principal administrative, sales and marketing,
customer support and research and development facility, is located in Aliso Viejo, California,
where we currently lease and occupy approximately 40,900 square feet of space pursuant to leases
that expire May 31, 2016.
We lease approximately 17,100 square feet in Mountain View, California under a lease that
expired January 31, 2010. We recently entered into a new lease for approximately 21,000 square
feet that expires February 28, 2014. We lease approximately 14,400 square feet in Chicago,
Illinois under a lease that expires August 31, 2012. We lease approximately 15,300 square feet in
Watsonville, California under a lease that expires September 30, 2018. We lease approximately
7,700 square feet in Herndon, Virginia under a lease that expires May 31, 2011. We lease
approximately 4,200 square feet in Austin, Texas under a lease that expires June 30, 2011.
Internationally, we lease space in Stockholm, Sweden; Belgrade, Serbia; Oslo, Norway; and
Vancouver, Canada. These leases are for one to three-year terms.
We believe that suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
17
Item 3. LEGAL PROCEEDINGS
The Company is not involved in any pending material legal proceedings at this time although we
may become subject to legal proceedings or claims that arise in the ordinary course of business or
otherwise.
Item 4.
RESERVED
18
PART II
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Item 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES |
Market Information
Our common stock is traded on the NASDAQ Global Market under the symbol SMSI. The high and
low sale prices for our common stock as reported by NASDAQ are set forth below for the periods
indicated.
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High |
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Low |
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YEAR ENDED DECEMBER 31, 2009: |
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First Quarter |
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$ |
6.17 |
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$ |
3.64 |
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Second Quarter |
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10.62 |
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5.19 |
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Third Quarter |
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12.87 |
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8.96 |
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Fourth Quarter |
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12.37 |
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6.26 |
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YEAR ENDED DECEMBER 31, 2008: |
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First Quarter |
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$ |
8.68 |
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$ |
4.44 |
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Second Quarter |
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9.15 |
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5.68 |
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Third Quarter |
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8.44 |
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5.37 |
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Fourth Quarter |
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7.39 |
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4.00 |
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On February 11, 2010, the closing sale price for our common stock as reported by NASDAQ was
$7.91.
For information regarding Securities Authorized for Issuance under Equity Compensation Plans,
please refer to Item 12.
Stock Performance Graph
The following graph and information compares the cumulative total stockholder return on our
common stock against the cumulative total return of the S&P Midcap 400 Index and the S&P Midcap
Applications Software Index (Peer Group) for the same period.
The graph covers the period from December 31, 2004 through December 31, 2009. The graph
assumes that $100 was invested in our common stock on December 31, 2004, 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.
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12/04 |
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12/05 |
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12/06 |
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12/07 |
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12/08 |
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12/09 |
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Smith Micro Software, Inc. |
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100.00 |
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65.36 |
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158.55 |
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94.64 |
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62.12 |
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102.23 |
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S&P Midcap 400 |
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100.00 |
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112.55 |
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124.17 |
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134.08 |
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85.50 |
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117.46 |
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S&P MidCap Application Software |
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100.00 |
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111.49 |
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127.82 |
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133.87 |
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83.85 |
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121.59 |
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Holders
As of February 11, 2010, there were approximately 263 holders of record of our common stock
based on information provided by our transfer agent.
Dividends
We have never paid any cash dividends on our common stock and we have no current plans to do
so.
20
Recent Sales of Unregistered Securities
On October 26, 2009, we completed the acquisition of Core Mobility, Inc. In this transaction
we issued 700,000 shares of Smith Micro common stock as partial consideration for the acquisition.
Such shares were issued pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended.
Purchases of Equity Securities by the Company
None.
21
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Item 6. |
|
SELECTED CONSOLIDATED FINANCIAL DATA |
The following selected consolidated financial data should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations and our
consolidated financial statements and the related notes thereto appearing elsewhere in this Annual
Report. The following selected consolidated statement of operations data for the years ended
December 31, 2009, 2008 and 2007, and the consolidated balance sheet data at December 31, 2009 and
2008, have been derived from audited consolidated financial statements included elsewhere in this
Annual Report. The consolidated statement of operations data presented below for the years ended
December 31, 2006 and 2005, and the consolidated balance sheet data at December 31, 2007, 2006 and
2005 are derived from audited consolidated financial statements that are not included in this
Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Consolidated Statement of Operations Data
(in thousands, except per share data): |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
107,279 |
|
|
$ |
98,424 |
|
|
$ |
73,377 |
|
|
$ |
54,469 |
|
|
$ |
20,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
15,486 |
|
|
|
20,108 |
|
|
|
20,644 |
|
|
|
20,259 |
|
|
|
4,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
91,793 |
|
|
|
78,316 |
|
|
|
52,733 |
|
|
|
34,210 |
|
|
|
16,155 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
24,999 |
|
|
|
24,814 |
|
|
|
18,394 |
|
|
|
9,057 |
|
|
|
3,410 |
|
Research and development |
|
|
36,530 |
|
|
|
30,811 |
|
|
|
14,772 |
|
|
|
7,899 |
|
|
|
3,963 |
|
General and administrative |
|
|
19,155 |
|
|
|
19,990 |
|
|
|
15,318 |
|
|
|
8,467 |
|
|
|
4,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
80,684 |
|
|
|
75,615 |
|
|
|
48,484 |
|
|
|
25,423 |
|
|
|
11,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
11,109 |
|
|
|
2,701 |
|
|
|
4,249 |
|
|
|
8,787 |
|
|
|
4,161 |
|
Interest and other income |
|
|
381 |
|
|
|
739 |
|
|
|
4,254 |
|
|
|
1,403 |
|
|
|
667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit before taxes |
|
|
11,490 |
|
|
|
3,440 |
|
|
|
8,503 |
|
|
|
10,190 |
|
|
|
4,828 |
|
Income tax expense |
|
|
6,738 |
|
|
|
4,172 |
|
|
|
5,342 |
|
|
|
1,234 |
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,752 |
|
|
$ |
(732 |
) |
|
$ |
3,161 |
|
|
$ |
8,956 |
|
|
$ |
4,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.15 |
|
|
$ |
(0.02 |
) |
|
$ |
0.11 |
|
|
$ |
0.38 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.14 |
|
|
$ |
(0.02 |
) |
|
$ |
0.10 |
|
|
$ |
0.35 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
32,438 |
|
|
|
30,978 |
|
|
|
29,768 |
|
|
|
23,753 |
|
|
|
21,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
32,897 |
|
|
|
30,978 |
|
|
|
30,998 |
|
|
|
25,330 |
|
|
|
22,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Consolidated Balance Sheet Data (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
205,934 |
|
|
$ |
176,995 |
|
|
$ |
162,421 |
|
|
$ |
131,026 |
|
|
$ |
42,716 |
|
Total liabilities |
|
|
17,955 |
|
|
|
11,591 |
|
|
|
7,907 |
|
|
|
4,969 |
|
|
|
3,759 |
|
Accumulated earnings (deficit) |
|
|
4,192 |
|
|
|
(560 |
) |
|
|
172 |
|
|
|
(2,989 |
) |
|
|
(11,945 |
) |
Total stockholders equity |
|
$ |
187,979 |
|
|
$ |
165,404 |
|
|
$ |
154,514 |
|
|
$ |
126,057 |
|
|
$ |
38,957 |
|
22
|
|
|
Item 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion of our financial condition and results of operations should be read
in conjunction with our consolidated financial statements and the related notes and other financial
information appearing elsewhere in this Annual Report. Readers are also urged to carefully review
and consider the various disclosures made by us which attempt to advise interested parties of the
factors which affect our business, including without limitation the disclosures made in Item 1A of
Part I of this Annual Report under the caption Risk Factors.
Risk factors that could cause actual results to differ from those contained in the
forward-looking statements including but are not limited to: the duration and depth of the current
economic slowdown and its effects on the capital expenditures by our customers and their end users;
our dependence upon a single customer for a significant portion of our revenues; potential
fluctuations in quarterly results; deriving revenues from a small number of products; failure to
successfully compete; failure to successfully integrate acquisitions; entry into new markets;
failure of our customers to adopt new technologies; dependence upon relationships with carrier
customers; declines in gross margins; undetected software defects; changes in technology; delays or
failure in deliveries from component suppliers; failure of our products to achieve broad
acceptance; failure to protect intellectual property; exposure to intellectual property claims; and
loss of key personnel.
Introduction and Overview
Smith Micro Software, Inc. designs, develops and markets software products and services
primarily for the mobile computing and communications industries. The Company is focused on
developing connectivity, communications and content management solutions for a converging world of
wireless and wired networks. The Companys portfolio of wireless software products and services
includes a wide range of software solutions including our QuickLink® family of products. We
provide mobile voice and data connectivity across 3G, 4G and Wi-Fi networks. Our mobile
communications portfolio includes solutions for Push-To-Talk, Visual Voicemail and mobile device
management. We also offer user-friendly solutions for the management of mobile content, contacts
and calendar data.
Our patented compression technologies are utilized within various Smith Micro products
including our line of Personal Computer (PC) and Smartphones compression products and our new
file-transfer solution.
We sell our products and services to many of the worlds leading mobile network operators,
original equipment manufacturers (OEM), device manufacturers and enterprise businesses, as well
as directly to consumers. The proliferation of broadband mobile wireless technologies is providing
new opportunities for our products and services on a global basis. When these broadband wireless
technologiesEVDO, UMTS/HSPA, Wi-Fi, LTE and WiMAXare combined with new devices such as mobile
phones, PCs, Smartphones, Netbooks, and tablets and emerging Machine-to-Machine (M2M) devices, opportunities emerge for
new communications software products. Our core technologies are designed to address these emerging
mobile convergence opportunities.
Our innovative line of productivity and graphics products are distributed through a variety of
consumer channels worldwide, our online stores, and third-party wholesalers, retailers and
value-added resellers. We offer products that operate on Windows, Mac, UNIX, Linux, Windows
Mobile, Symbian and Java platforms.
The underlying design concept common to all of our products is our ability to improve the
customers experience. This philosophy is based on the combination of solid engineering and
exceptional design that reinforces our brands competitive differentiation. We have over 25 years
of experience in design, creation and custom engineering services for software products.
We continue to invest in research and development and have built one of the industrys leading
wireless product lines. We believe that we are well positioned to capitalize on market
opportunities as we leverage the strength of our technology capabilities with our growing global
reach and expanding product lines.
23
For the year ended December 31, 2009, four customers, each accounting for over 10% of
revenues, made up 65.7% of revenues and 75% of accounts receivable. For the year ended December
31, 2008, one customer accounted for 32.0% of revenues and 21% of accounts receivable.
Results of Operations
The following table sets forth certain consolidated statement of operating data as a
percentage of total revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
14.4 |
% |
|
|
20.4 |
% |
|
|
28.1 |
% |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
85.6 |
% |
|
|
79.6 |
% |
|
|
71.9 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
23.3 |
% |
|
|
25.2 |
% |
|
|
25.1 |
% |
Research and development |
|
|
34.0 |
% |
|
|
31.3 |
% |
|
|
20.1 |
% |
General and administrative |
|
|
17.9 |
% |
|
|
20.3 |
% |
|
|
20.9 |
% |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
75.2 |
% |
|
|
76.8 |
% |
|
|
66.1 |
% |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
10.4 |
% |
|
|
2.8 |
% |
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
Interest and other income |
|
|
0.3 |
% |
|
|
0.7 |
% |
|
|
5.8 |
% |
Profit before taxes |
|
|
10.7 |
% |
|
|
3.5 |
% |
|
|
11.6 |
% |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
6.3 |
% |
|
|
4.2 |
% |
|
|
7.3 |
% |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
4.4 |
% |
|
|
-0.7 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
Revenues and Expense Components
The following is a description of the primary components of our revenues and expenses:
Revenues. Revenues are net of sales returns and allowances. Our operations are organized into
two business segments:
|
|
|
Wireless, which includes our connection manager solutions, mobile VPN, music and
multimedia manager, device management suite, Push-To-Talk and Visual Voicemail; and |
|
|
|
|
Productivity & Graphics, which includes retail and direct sales of our
compression and broad consumer-based software. |
|
|
|
|
Corporate/Other refers to the consulting portion of our services sector which has been
de-emphasized and is no longer considered a strategic element of our future plans. |
The following table shows the revenues generated by each business segment (in thousands):
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Wireless |
|
$ |
89,420 |
|
|
$ |
73,219 |
|
|
$ |
57,819 |
|
Productivity & Graphics |
|
|
17,014 |
|
|
|
23,925 |
|
|
|
14,368 |
|
Corporate/Other |
|
|
845 |
|
|
|
1,280 |
|
|
|
1,190 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
107,279 |
|
|
|
98,424 |
|
|
|
73,377 |
|
Cost of revenues |
|
|
15,486 |
|
|
|
20,108 |
|
|
|
20,644 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
91,793 |
|
|
$ |
78,316 |
|
|
$ |
52,733 |
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues. Cost of revenues consists of direct product costs, royalties, and the
amortization of purchased intangibles and capitalized software.
Selling and marketing. Selling and marketing expenses consist primarily of personnel costs,
advertising costs, sales commissions, trade show expenses, and the amortization of certain
purchased intangibles. These expenses vary significantly from quarter to quarter based on the
timing of trade shows and product introductions.
Research and development. Research and development expenses consist primarily of personnel and
equipment costs required to conduct our software development efforts and the amortization of
acquired intangibles. We remain focused on the development and expansion of our technology,
particularly our wireless, compression and multimedia software technologies.
General and administrative. General and administrative expenses consist primarily of
personnel costs, professional services and fees paid for external service providers, travel, legal
and other public company costs.
Interest and other income. Interest and other income are directly related to our average cash
and short term investment balances during the period and vary among periods. In June 2008, we
changed our investment strategy to include short-term investments in equity and debt securities
with maturity dates within three to 12 months. Our other excess cash is invested in short term
marketable equity and debt securities classified as cash equivalents.
Income tax expense. The Company accounts for income taxes as required by the Income Taxes
Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification. This
statement requires the recognition of deferred tax assets and liabilities for the future
consequences of events that have been recognized in the Companys 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 Companys 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. A valuation allowance related
to a deferred tax asset is recorded when it is more likely than not that some portion or the entire
deferred tax asset will not be realized. Based on our evaluation, we believe all of the deferred
tax assets at December 31, 2009 are likely to be realized.
In July 2006, the FASB clarified the accounting for uncertainty in income taxes recognized in
the financial statements. A tax benefit from an uncertain tax position may be recognized when it
is more likely than not that the position will be sustained upon examination, including resolutions
of any related appeals or litigation process, based on the technical merits.
Income tax positions must meet a more likely-than-not recognition threshold at the effective
date to be recognized upon the adoption of new FASB guidance, and in subsequent periods. The
interpretation also provides guidance on measurement, derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. We adopted this FASB guidance
effective January 1, 2007. Based on our evaluation, we have concluded that there are no
significant uncertain tax positions requiring recognition on our financial statements.
25
Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
Revenues. Revenues of $107.3 million for fiscal year 2009 increased $8.9 million, or 9.0%,
from $98.4 million for fiscal year 2008. Wireless revenues of $89.4 million increased $16.2
million, or 22.1%, primarily due to new connectivity and security product OEM licenses of $24.4
million. These increases were partially offset by a $8.2 million decrease in revenues primarily
due to a change in how our multimedia products were merchandised by our primary music customers,
which changed from higher revenue, lower margin music kits (including software, cable and ear buds)
to downloadable software or a software-only CD, resulting in lower revenue per unit but a much
higher margin per unit. The first generation music product has now been phased out.
Productivity & Graphics sales decreased $6.9 million, or 28.9%, primarily due to the continued
consumer economic downturn. Corporate/Other sales decreased $0.4 million as we have de-emphasized
this business.
Cost of revenues. Cost of revenues of $15.5 million for fiscal year 2009 decreased $4.6
million, or 23.0%, from $20.1 million for fiscal year 2008. Direct product costs decreased $5.5
million primarily due to a shift in product mix and overhead cost reductions. The product mix was
due to a decrease in sales of lower margin multimedia and productivity and graphics products and an
increase of sales of higher margin OEM license products. Amortization of intangibles increased
from $3.7 million to $4.9 million, or $1.2 million, primarily due to several small acquisitions
made in the fourth quarter of 2008 resulting in amortization expense of $0.9 million and our
acquisition of Core Mobility resulting in amortization expense of $0.3 million. Stock-based
compensation expense decreased from $0.4 million to $0.1 million, or $0.3 million.
Gross profit. Gross profit of $91.8 million or 85.6% of revenues for fiscal year 2009
increased $13.5 million, or 17.2%, from $78.3 million, or 79.6% of revenues for fiscal year 2008.
The 6.0 percentage point increase in gross profit was primarily due to improved product margins of
6.5 points as a result of the change in product mix mentioned above and overhead cost reductions
and lower stock-based compensation expense as a percentage of revenues of 0.3 points. These items
were partially offset by higher amortization of intangibles due to several small acquisitions of
0.8 points.
Selling and marketing. Selling and marketing expenses of $25.0 million for fiscal year 2009
increased $0.2 million, or 0.7%, from $24.8 million for fiscal year 2008. This increase was
primarily due to costs associated with headcount increases of $1.1 million and higher amortization
of intangibles due to our acquisitions which increased from $2.4 million to $2.7 million, or $0.3
million. These increases were partially offset by lower stock-based compensation which decreased
from $3.7 million to $2.8 million, or $0.9 million, and reduced spending in all other areas of $0.3
million.
Research and development. Research and development expenses of $36.5 million for fiscal year
2009 increased $5.7 million, or 18.6%, from $30.8 million for fiscal year 2008. This increase was
primarily due to increased personnel and recruiting costs associated with acquired and new hired
headcount of $6.1 million and other related expense increases of $0.3 million. These increases
were partially offset by lower stock-based compensation which decreased from $3.4 million to $2.7
million, or $0.7 million. Amortization of purchased technologies remained flat year-over-year at
$1.2 million.
General and administrative. General and administrative expenses of $19.2 million for fiscal
year 2009 decreased $0.8 million, or 4.2%, from $20.0 million for fiscal year 2008. This decrease
was primarily due to lower stock-based compensation which decreased from $5.5 million to $4.1
million, or $1.4 million and reduced spending in all other areas of $0.9 million. These decreases
were partially offset by a $1.5 million increase in building rent, infrastructure and depreciation
associated with our acquisitions and office expansions.
Interest and other income. Interest and other income of $0.4 million for fiscal
year 2009 decreased $0.3 million from $0.7 million for fiscal year 2008. This decrease was due to
lower interest and investment income realized from our short-term investments.
Income tax expense. We recorded income tax expense for fiscal year 2009 in the amount of $6.7
million as a result of our pre-tax operating profit for the period and the relatively large amount
of incentive stock option expense which is not deductible for tax purposes. The provision for
income taxes was $4.2 million for fiscal year 2008 as a result of our pre-tax operating profit for
the period and the relatively large amount of incentive stock option expense which is not
deductible for tax purposes. We began fiscal year 2009 with a net operating loss
26
carryforward of
approximately $1.2 million for Federal and $6.3 million for States. Cash basis income taxes
related to 2009 are estimated to be $5.0 million.
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
Revenues. Revenues of $98.4 million for fiscal year 2008 increased $25.0 million, or 34.1%,
from $73.4 million for fiscal year 2007. Wireless revenues of $73.2 million increased $15.4
million, or 26.6%, primarily due to the
PCTEL MSG group acquisition that occurred in January 2008 of $17.2 million, new customer
licenses of $7.9 million, and continued strong demand from our existing key customers of $5.4
million. These increases were partially offset by a $15.1 million sales decrease in our music kits
due to a shift in how the product was merchandised by our primary music customers. In early 2007,
this product was sold primarily as a higher revenue, lower margin music kit (including software,
cable and ear buds). In late 2007 and in 2008, the music product was being delivered more as
downloadable software or as a software-only CD, resulting in lower revenue per unit, but at a much
higher margin per unit. Productivity & Graphics revenues of $23.9 million increased $9.6 million,
or 66.5%, primarily due to new product sales of VMware Fusion and the acquisition of eFrontier in
December 2007.
Cost of revenues. Cost of revenues of $20.1 million for fiscal year 2008 decreased $0.5
million, or 2.6%, from $20.6 million for fiscal year 2007. Direct product costs decreased $2.7
million even on the higher overall sales volume primarily due to the lower sales and cost of
revenues associated with the change in how we are delivering music kits to the customer. This
decrease was partially offset by higher amortization of intangibles due to the PCTEL MSG group and
Insignia acquisitions which increased from $1.6 million to $3.7 million, or $2.1 million, and
higher stock based compensation expense which increased from $0.3 million to $0.4 million, or $0.1
million.
Gross profit. Gross profit of $78.3 million or 79.6% of revenues for fiscal year 2008
increased $25.6 million, or 48.5%, from $52.7 million, or 71.9% of revenues for fiscal year 2007.
The 7.7 percentage point increase was primarily due to improved product margins of 9.4 points on
higher music product margins due to the change in how the product was delivered, a favorable
product mix, and additional license income. This increase was partially offset by higher
amortization of intangibles due to the PCTEL MSG group and Insignia acquisitions of 1.7 points.
Selling and marketing. Selling and marketing expenses of $24.8 million for fiscal year 2008
increased $6.4 million, or 34.9%, from $18.4 million for fiscal year 2007. This increase was
primarily due to increased personnel, recruiting and travel costs associated with higher headcount
driven by acquisitions of $5.8 million, higher amortization of intangibles due to our acquisitions
which increased from $0.7 million to $2.4 million, or $1.7 million, more trade shows and product
advertising due to our acquired product lines of $0.6 million, and higher commissions due to the
increased volume of $0.3 million. These cost increases were partially offset by lower stock-based
compensation which decreased from $5.7 million to $3.7 million, or $2.0 million.
Research and development. Research and development expenses of $30.8 million for fiscal year
2008 increased $16.0 million, or 108.6%, from $14.8 million for fiscal year 2007. This increase
was primarily due to increased personnel and recruiting costs associated with acquired and new
hired headcount of $12.5 million, increased consulting and travel associated with our various new
projects of $1.7 million, amortization of purchased technologies which increased from $0.6 million
to $1.2 million, or $0.6 million, stock-based compensation which increased from $2.6 million to
$3.4 million, or $0.8 million, and other cost increases of $0.4 million.
General and administrative. General and administrative expenses of $20.0 million for fiscal
year 2008 increased $4.7 million, or 30.5%, from $15.3 million for fiscal year 2007. This increase
was primarily due to increased personnel and recruiting costs associated with higher headcount of
$2.0 million, increased building rent, infrastructure, and depreciation associated with our
acquisitions of $2.1 million, and all other cost increases of $1.0 million. These cost increases
were partially offset by lower stock-based compensation which decreased from $6.0 million to $5.6
million, or $0.4 million.
Interest and other income. Interest and other income of $0.7 million for fiscal
year 2008 decreased $3.5 million from $4.2 million for fiscal year 2007. This decrease was due to
having less cash on hand as a result of our acquisition of the PCTEL MSG group in January 2008.
27
Income tax expense. We recorded income tax expense for fiscal year 2008 in the amount of $4.2
million as a result of our pre-tax operating profit for the period and the relatively large amount
of incentive stock option expense which is not deductible for tax purposes. The provision for
income taxes was $5.3 million for fiscal year 2007 as a result of our operating profit for that
period. We began fiscal year 2008 with a net operating loss carryforward of approximately $11.3
million for Federal and $6.3 million for States. Cash basis income taxes in 2008 were estimated to
be $2.2 million.
Liquidity and Capital Resources
At December 31, 2009, we had $45.9 million in cash and cash equivalents and short-term
investments and $58.7 million of working capital. On October 26, 2009, we acquired Core Mobility,
Inc. (Core Mobility) for $10 million in cash ($6.9 million upon closing and $3.1 million held
back as security against possible indemnification obligations) and 700,000 shares of Smith Micro
common stock.
On January 4, 2008, we acquired the Mobile Solutions Group of PCTEL at a cost of $60.9 million
in cash which includes $1.2 million of acquisition costs. We currently have no other significant
capital commitments, and currently anticipate that capital expenditures will not vary significantly
from recent periods. We believe that our existing cash, cash equivalents, and short-term
investment balances and cash flow from operations will be sufficient to finance our working capital
and capital expenditure requirements through at least the next twelve months. We may require
additional funds to support our working capital requirements or for other purposes and may seek to
raise additional funds through public or private equity or debt financing or from other sources.
If additional financing is needed, we cannot assure that such financing will be available to us at
commercially reasonable terms or at all.
Stock offerings
On December 14, 2006, we completed a public offering, issuing 4 million shares of our common
stock, at a purchase price of $14.75 per share, resulting in aggregate gross cash proceeds to the
Company of $59.0 million before deducting commissions and other expenses. Offering costs related
to the transaction totaled $4.0 million comprised of $3.3 million in underwriting discounts and
commissions and $0.7 million cash payments for legal and investment services, resulting in net
proceeds to the Company of $55.0 million.
On January 18, 2007, an additional 0.4 million shares were sold in the overallotment option
granted to the underwriters, resulting in additional gross proceeds of $5.7 million before
deducting commissions and other expenses. Offering costs incurred in 2007 include underwriting
discounts and commissions of $0.3 million and $0.1 million cash payments for legal and accounting
services, resulting in additional net proceeds to the Company of $5.3 million.
Operating Activities
In 2009, net cash provided by operations was $18.5 million primarily due to our net income
adjusted for depreciation, amortization, non-cash stock-based compensation, and inventory and
accounts receivable reserves of $25.8 million and a decrease in deferred income tax assets of $0.9
million. These increases were partially offset by an increase of accounts receivable due to our
increased revenue of $6.0 million and an increase of all other net assets of $2.2million.
In 2008, net cash provided by operations was $16.4 million primarily due to our net loss
adjusted for depreciation, amortization, non-cash stock-based compensation, and inventory and
accounts receivable reserves of $21.2 million and a decrease in deferred income tax assets of $2.0
million. These increases were partially offset by an increase of accounts receivable due to our
increased revenue of $6.6 million and an increase of all other net assets of $0.2 million.
In 2007, net cash provided by operations was $18.3 million primarily due to our net income
adjusted for depreciation, amortization, non-cash stock-based compensation, and inventory and
accounts receivable reserves of $15.7 million, a decrease in deferred income tax assets of $5.3
million, and a decrease of all other net assets of $0.1 million. These increases were partially
offset by an increase of accounts receivable due to our increased revenue of $2.8 million.
28
Investing Activities
In 2009, we used cash of $20.4 million for investing activities to purchase short-term
investments of $8.7 million, acquire Core Mobility for $6.9 million, and for capital expenditures
which primarily were leasehold improvements, computers, and upgrading our data centers and business
systems of $4.8 million.
In 2008, we used cash of $90.2 million for investing activities to acquire the net assets of
PCTELs Mobile Solutions Group of $60.9 million, purchase short-term investments of $22.6 million,
and for capital expenditures which primarily were leasehold improvements of $3.5 million, and for
other acquisitions of $3.2 million.
In 2007, cash used for investing activities of $36.2 million was to acquire Insignia of $17.4
million, acquire Ecutel of $8.0 million, acquire eFrontier of $5.1 million, acquire PhoTags of $3.5
million, other increases to intangible assets of $1.2 million, and capital expenditures of $1.0
million.
Financing Activities
In 2009, cash provided by financing activities of $2.5 million was related to the exercise of
stock options of $1.6 million and tax benefits associated with stock-based compensation of $0.9
million.
In 2008, cash provided by financing activities of $0.2 million was related to the exercise of
stock options of $0.1 million and tax benefits associated with stock-based compensation of $0.1
million.
In 2007, cash provided by financing activities of $12.9 million was related to the issuance of
common stock as a result of our overallotment as mentioned above of $5.3 million, the exercise of
stock options of $3.8 million, and tax benefits associated with stock-based compensation of $3.8
million.
Contractual Obligations and Commercial Commitments
As of December 31, 2009, we had no debt. The following table summarizes our contractual
obligations as of December 31, 2009 (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
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|
|
|
|
|
|
Less than |
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|
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More than |
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Contractual obligations: |
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Total |
|
|
1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
Operating lease obligations |
|
$ |
9,402 |
|
|
$ |
1,838 |
|
|
$ |
3,116 |
|
|
$ |
2,094 |
|
|
$ |
2,354 |
|
Purchase obligations |
|
|
1,323 |
|
|
|
1,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,725 |
|
|
$ |
3,161 |
|
|
$ |
3,116 |
|
|
$ |
2,094 |
|
|
$ |
2,354 |
|
|
|
|
|
|
|
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|
During our normal course of business, we have made certain indemnities, commitments and
guarantees under which we may be required to make payments in relation to certain transactions.
These include: intellectual property indemnities to our customers and licensees in connection with
the use, sale and/or license of our products; indemnities to various lessors in connection with
facility leases for certain claims arising from such facility or lease; indemnities to vendors and
service providers pertaining to claims based on the negligence or willful misconduct; indemnities
involving the accuracy of representations and warranties in certain contracts; and indemnities to
directors and officers of the Company to the maximum extent permitted under the laws of the State
of Delaware. We may also issue a guarantee in the form of a standby letter of credit as security
for contingent liabilities under certain customer contracts. The duration of these indemnities,
commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these
indemnities, commitments and guarantees may not provide for any limitation of the maximum potential
for future payments we could be obligated to make. We have not recorded any liability for these
indemnities, commitments and guarantees in the accompanying consolidated balance sheets.
Real Property Leases
Our corporate headquarters, including our principal administrative, sales and marketing,
customer support and research and development facility, is located in Aliso Viejo, California,
where we currently lease and occupy
29
approximately 40,900 square feet of space pursuant to leases
that expire May 31, 2016. We lease approximately 17,100 square feet in Mountain View, California
under a lease that expired January 31, 2010. We recently entered into a new lease for
approximately 21,000 square feet that expires February 28, 2014. We lease approximately 14,400
square feet in Chicago, Illinois under a lease that expires August 31, 2012. We lease
approximately 15,300 square feet
in Watsonville, California under a lease that expires September 30, 2018. We lease approximately
7,700 square feet in Herndon, Virginia under a lease that expires May 31, 2011. We lease
approximately 4,200 square feet in Austin, Texas under a lease that expires June 30, 2011.
Internationally, we lease space in Stockholm, Sweden; Belgrade, Serbia; Oslo, Norway; and
Vancouver, Canada. These leases are for one to three-year terms.
Off-Balance Sheet Arrangements
As of December 31, 2009, we did not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our discussion and analysis of results of operations, financial condition and liquidity are
based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
We base our estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances. Actual results may materially differ from these estimates
under different assumptions or conditions. On an on-going basis, we review our estimates to ensure
that the estimates appropriately reflect changes in our business or new information as it becomes
available.
We believe the following critical accounting policies affect our more significant estimates
and assumptions used in the preparation of our consolidated financial statements:
Revenue Recognition
We currently report our net revenues under two operating groups: Wireless and Productivity &
Graphics. Within each of these groups software revenue is recognized based on the customer and
contract type. We recognize revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed and determinable, and collectibility is probable as required by the
Software-Revenue Recognition Topic of the FASB Accounting Standards Codification. We recognize
revenues from sales of our software to OEM customers or end users as completed products are shipped
and titles 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. Returns from OEM customers are limited
to defective goods or goods shipped in error. Historically, OEM customer returns have not exceeded
the very nominal estimates and reserves. 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. Within the Productivity & Graphics group
certain revenues are booked net of revenue sharing payments. 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 multiple element agreements, vendor specific objective evidence of
fair value for all contract elements is reviewed and the timing of the individual element revenue
streams is determined and recognized as required. Sales directly to end-users are recognized upon
delivery. End users have a thirty day right of return, but such returns are reasonably estimable
and have historically been immaterial. We also provide technical support to our customers. Such
costs have historically been insignificant.
Sales Incentives
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
30
required by the Software-Revenue Recognition Topic of
the FASB Accounting Standards Codification. We use historical redemption rates to estimate the
cost of customer incentives. Total sales incentives were $1.2 million, $0.8 million, and $0.6
million for the years ended December 31, 2009, 2008 and 2007, respectively.
Accounts Receivable and Allowance for Doubtful Accounts
We sell our products worldwide. We perform ongoing credit evaluations of our customers and
adjust credit limits based upon payment history, the customers current credit worthiness and
various other factors, as determined by our review of their current credit information. We
continuously monitor collections and payments from our customers. We estimate credit losses and
maintain an allowance for doubtful accounts reserve based upon these estimates. While such credit
losses have historically been within our estimated reserves, we cannot guarantee that we will
continue to experience the same credit loss rates that we have in the past. If not, this could
have an adverse effect on our consolidated financial statements.
Internal Software Development Costs
Development costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until technological feasibility
has been established. The Company considers technological feasibility to be established when all
planning, designing, coding and testing has been completed according to design specifications.
After technological feasibility is established, any additional costs are capitalized. Through
December 31, 2009, software has been substantially completed concurrently with the establishment of
technological feasibility; and, accordingly, no costs have been capitalized to date.
In-Process Research and Development
In
2009 we capitalized $1.0 million of IPR&D costs related to our acquisition of Core
Mobility in accordance with accounting standards that became effective in 2009. Upon completion,
the related IPR&D asset will be amortized over its estimated useful life. If the project is
abandoned, we will be required to impair the related IPR&D asset.
The fair value of the IPR&D was determined using the discounted cash flow approach. The
expected future cash flows were estimated and discounted to their net present values at an
appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the
rate of return were the weighted average cost of capital and return on assets, as well as the risks
inherent in the development process, including the likelihood of achieving technological success
and market acceptance. Future cash flows were estimated based on forecasted revenue and costs,
taking into account the expected product life cycle, market penetration and growth rates.
Capitalized Software and Amortization
We capitalize internally developed software and software purchased from third parties if the
related software product under development has reached technological feasibility or if there are
alternative future uses for the purchased software as required by the Software-Costs of Software to
be Sold, Leased, or Marketed Topic of the FASB Accounting Standards Codification. These costs are
amortized on a product-by-product basis, typically over an estimated life of five to seven years,
using the larger of the amount calculated using the straight-line method or the amount calculated
using the ratio between current period gross revenues and the total of current period gross
revenues and estimated future gross revenues. At each balance sheet date, we evaluate on a
product-by-product basis the unamortized capitalized cost of computer software compared to the net
realizable value of that product. The amount by which the unamortized capitalized costs of a
computer software product exceed its net realizable value is written off.
Intangible Assets and Amortization
Amortization expense related to other intangibles acquired in previous acquisitions is
calculated on a straight line basis over various useful lives.
31
Impairment or Disposal of Long Lived Assets
Long-lived assets to be held are reviewed for events or changes in circumstances which
indicate that their carrying value may not be recoverable. They are tested for recoverability
using undiscounted cash flows to determine whether or not impairment to such value has occurred as
required by the Property, Plant, and Equipment Topic of the FASB Accounting Standards Codification.
The Company has determined that there was no impairment at December 31, 2009.
Valuation of Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets as required by the
Intangibles-Goodwill and Other Topic of the FASB Accounting Standards Codification. This statement
requires us to periodically assess the impairment of our goodwill and intangible assets, which
requires us to make assumptions and judgments regarding the carrying value of these assets. These
assets are considered to be impaired if we determine that their carrying value may not be
recoverable based upon our assessment of the following events or changes in circumstances:
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a determination that the carrying value of such assets cannot be recovered through undiscounted cash flows; |
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loss of legal ownership or title to the assets; |
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significant changes in our strategic business objectives and utilization of the assets; or |
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the impact of significant negative industry or economic trends. |
If the intangible assets are considered to be impaired, the impairment we recognize is the
amount by which the carrying value of the intangible assets exceeds the fair value of the
intangible assets. In addition, we base the useful lives and the related amortization expense on
our estimate of the useful life of the intangible assets. Due to the numerous variables associated
with our judgments and assumptions relating to the carrying value of our intangible assets and the
effects of changes in circumstances affecting these valuations, both the precision and reliability
of the resulting estimates are subject to uncertainty, and as additional information becomes known,
we may change our estimate, in which case, the likelihood of a material change in our reported
results would increase.
In accordance with the Intangibles-Goodwill and Other Topic of the FASB Accounting Standards
Codification, we review the recoverability of the carrying value of goodwill at least annually or
whenever events or circumstances indicate a potential impairment. Our annual impairment testing
date is December 31. Recoverability of goodwill is determined by comparing the estimated fair
value of our reporting units to the carrying value of the underlying net assets in the reporting
units. If the estimated fair value of a reporting unit is determined to be less than the fair value
of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent
that the carrying value of goodwill exceeds the difference between the estimated fair value of the
reporting unit and the fair value of its other assets and liabilities. We determined that we did
not have any impairment of goodwill at December 31, 2009, 2008, or 2007. Estimates of reporting
unit fair value are based upon market capitalization and therefore are volatile being sensitive to
market fluctuations. To the extent that our market capitalization decreases significantly or the
allocation of value to our reporting units change, we could be required to write off some or all of
our goodwill.
Deferred Income and Income Taxes
We account for income taxes as required by the Income Taxes Topic of the FASB Accounting
Standards Codification. This statement requires the recognition of deferred tax assets and
liabilities for the future consequences of events that have been recognized in our financial
statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In
the event the future consequences of differences between financial reporting bases and the tax
bases of our 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. A valuation
allowance related to a deferred tax asset is recorded when it is more likely than not that some
portion or the entire deferred tax asset will not be realized. The Companys net deferred tax
assets were not reduced by a tax valuation allowance at December 31, 2009. Management evaluated
the positive and negative evidence in determining the realizability of the net deferred tax assets
at December 31, 2009 and concluded it is more likely than not that the Company should realize its
net deferred tax assets through future operating results and the reversal of taxable temporary
differences.
32
Stock-Based Compensation
Effective January 1, 2006, the Company started to measure and recognize compensation expense
for all stock-based payment awards made to employees and directors, including stock options based
on their fair values as required by the Compensation-Stock Compensation Topic of the FASB
Accounting Standards Codification. The Company used the modified prospective transition method as
of January 1, 2006. In accordance with the modified prospective transition method, the Companys
financial statements for prior periods have not been restated to reflect, and do not include, the
impact of stock compensation expense.
Stock-based compensation expense recognized is based on the value of the portion of
stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense
recognized in the Companys consolidated statement of operations during the fiscal years ended
December 31, 2009, 2008, and 2007 includes compensation expense for stock-based payment awards
granted prior to, but not yet vested as of, December 31, 2005 based on the grant date fair value
estimated in accordance with the pro forma provisions.
Recent Accounting Pronouncements
In January 2010, the FASB issued the Fair Value Measurements and Disclosures Topic of the
FASB Accounting Standards Codification. This guidance amends the disclosure requirements related
to recurring and nonrecurring fair value measurements and requires new disclosures on the transfers
of assets and liabilities between Level 1 (quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance
requires a roll forward of activities on purchases, sales, issuance and settlements of the assets
and liabilities measured using significant unobservable inputs (Level 3 fair value measurements).
The guidance will become effective for the reporting period beginning January 1, 2010, except for
the disclosure on the roll forward activities for Level 3 fair value measurements, which will
become effective for the reporting period beginning January 1, 2011. The Company will adopt this
guidance on its effective date and since it currently only has Level 1 assets and liabilities; it
does not expect its adoption to have an impact on its consolidated results of operations and
financial condition.
In October 2009, the FASB issued amended revenue recognition guidance for arrangements with
multiple deliverables. The new guidance eliminates the residual method of revenue recognition and
allows the use of managements best estimate of selling price for individual elements of an
arrangement when vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or
third-party evidence (TPE) is unavailable. For the Company, this guidance is effective for all
new or materially modified arrangements entered into on or after January 1, 2011 with earlier
application permitted as of the beginning of a fiscal year. Full retrospective application of the
new guidance is optional. The Company is currently assessing its implementation of this new
guidance, but does not expect a material impact on the consolidated financial statements.
In October 2009, the FASB issued guidance which amends the scope of existing software revenue
recognition accounting. Tangible products containing software components and non-software
components that function together to deliver the products essential functionality would be scoped
out of the accounting guidance on software and accounted for based on other appropriate revenue
recognition guidance. For the Company, this guidance is effective for all new or materially
modified arrangements entered into on or after January 1, 2011 with earlier application permitted
as of the beginning of a fiscal year. Full retrospective application of the new guidance is
optional. This guidance must be adopted in the same period that the company adopts the amended
accounting for arrangements with multiple deliverables described in the preceding paragraph. The
Company is currently assessing its implementation of this new guidance, but does not expect a
material impact on the consolidated financial statements.
In August 2009, the FASB issued guidance on the measurement of liabilities at fair value. The
guidance provides clarification that in circumstances in which a quoted market price in an active
market for an identical liability is not available, an entity is required to measure fair value
using a valuation technique that uses the quoted price of an identical liability when traded as an
asset or, if unavailable, quoted prices for similar liabilities or similar assets when traded as
assets. If none of this information is available, an entity should use a valuation technique in
accordance with existing fair valuation principles. The Company adopted this guidance in the
quarter ended December 31, 2009 and there was no material impact on the consolidated financial
statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 168,
The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted
Accounting Principlesa replacement of FASB Statement No. 162. SFAS No. 168 became the source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification
superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered
non-SEC accounting literature not included in the Codification became nonauthoritative. This
Statement is effective for financial statements issued for interim and annual periods ending after
September 15, 2009. The Company adopted SFAS No. 168 on its effective date.
33
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS
No. 167 addresses (1) the effects on certain provisions of Financial Accounting Standards Board
Interpretation (FIN) No. 46 (revised December 2003), Consolidation of Variable Interest Entities,
as a result of the elimination of the
qualifying special-purpose entity concept in SFAS No. 166, Accounting for Transfers of
Financial Assets, and (2) constituent concerns about the application of certain key provisions of
FIN No. 46(R), including those in which the accounting and disclosures under the Interpretation do
not always provide timely and useful information about an enterprises involvement in a variable
interest entity. This Statement shall be effective as of the beginning of each reporting entitys
first annual reporting period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The Company will adopt SFAS No. 167 on its effective date and does not
expect its adoption to have an impact on its consolidated results of operations and financial
condition.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assetsan
amendment of FASB Statement No. 140. SFAS No. 166 was issued to improve the relevance,
representational faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a transferors
continuing involvement, if any, in transferred financial assets. This Statement must be applied as
of the beginning of each reporting entitys first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting period and for interim
and annual reporting periods thereafter. Earlier application is prohibited. This Statement must
be applied to transfers occurring on or after the effective date. The Company will adopt SFAS No.
166 on its effective date and does not expect its adoption to have an impact on its consolidated
results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141(R) (Revised 2007), Business Combinations which
has since been superseded by the Business Combinations Topic of the FASB Accounting Standards
Codification. The Topic is to improve reporting by creating greater consistency in the accounting
and financial reporting of business combinations, resulting in more complete, comparable and
relevant information for investors and other users of financial statements. The Topic requires the
acquiring entity in a business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to
disclose to investors and other users all of the information they need to evaluate and understand
the nature and financial effect of the business combination. The Topic is effective as of the start
of fiscal years beginning after December 15, 2008. Early adoption is not allowed. The Company has
adopted this Topic and its adoption did not have a material impact its consolidated results of
operations and financial condition.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements which has since been superseded by the Consolidation Topic of the FASB
Accounting Standards Codification. This Topic improves the relevance, comparability, and
transparency of financial information provided to investors by requiring all entities to report
non-controlling (minority) interests in subsidiaries in the same wayas equity in the consolidated
financial statements. Moreover, it eliminates the diversity that currently exists in accounting for
transactions between an entity and non-controlling interests by requiring they be treated as equity
transactions. The Topic is effective as of the start of fiscal years beginning after December 15,
2008. Early adoption is not allowed. The Company has adopted this Topic and its adoption did not
impact its consolidated results of operations and financial condition.
|
|
|
Item 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk
Our financial instruments include cash and cash equivalents, and short-term investments. At
December 31, 2009, the carrying values of our financial instruments approximated fair values based
on current market prices and rates.
34
Foreign Currency Risk
While the majority of our business is denominated in U.S. dollars, we do invoice in foreign
currencies. For the three years ended December 31, 2009, 2008, and 2007, our revenues denominated
in foreign currencies were $1.6 million, $1.8 million, and $1.6 million, respectively.
Fluctuations in the rate of exchange between the U.S.
dollar and certain other currencies may affect our results of operations and period-to-period
comparisons of our operating results. We do not currently engage in hedging or similar
transactions to reduce these risks. The operational expenses of our foreign entities reduce the
currency exposure we have because our foreign currency revenues are offset in part by expenses
payable in foreign currencies. As such, we do not believe we have a material exposure to foreign
currency rate fluctuations at this time.
|
|
|
Item 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Our consolidated financial statements and schedule appear in a separate section of this Annual
Report on Form 10-K beginning on page F-1 and S-1, respectively.
|
|
|
Item 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
|
Item 9A. |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under
the Securities Exchange Act of 1934 (Exchange Act)) as of December 31, 2009. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer have determined that as of
December 31, 2009, 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 Commissions 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.
Managements responsibility for financial statements
Our management is responsible for the integrity and objectivity of all information presented
in this report. The consolidated financial statements were prepared in conformity with accounting
principles generally accepted in the United States of America and include amounts based on
managements 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 Companys 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
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting during the
quarter ended December 31, 2009 that have materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
Report of Management on Internal Control Over Financial Reporting
Our management, including the Chief Executive Officer and Chief Financial Officer, is
responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
Our management, including the Chief Executive Officer and Chief Financial Officer, assessed
the effectiveness of our internal control over financial reporting as of December 31, 2009.
Management based this assessment on criteria for effective internal control over financial
reporting described in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management determined that, as of December 31, 2009, we maintained
effective internal control over financial reporting.
SingerLewak LLP, an independent registered public accounting firm, who audited the
consolidated financial statements included in this Annual Report on Form 10-K, has also audited the
effectiveness of our internal control over financial reporting as stated in its report appearing
elsewhere in this Annual Report on Form 10-K.
|
|
|
Item 9B. |
|
OTHER INFORMATION |
None.
36
PART III
|
|
|
Item 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The following table sets forth certain information regarding our executive officers as of
February 19, 2010.
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
William W. Smith, Jr.
|
|
|
62 |
|
|
Chairman of the Board, President and Chief
Executive Officer |
|
|
|
|
|
|
|
Andrew C. Schmidt
|
|
|
48 |
|
|
Vice President and Chief Financial Officer |
|
|
|
|
|
|
|
David P. Sperling
|
|
|
41 |
|
|
Vice President and Chief Technical Officer |
|
|
|
|
|
|
|
Jonathan Kahn
|
|
|
52 |
|
|
Executive Vice President Productivity &
Graphics |
|
|
|
|
|
|
|
Robert E. Elliott
|
|
|
58 |
|
|
Vice President and Chief Marketing Officer |
|
|
|
|
|
|
|
Von Cameron
|
|
|
46 |
|
|
Executive Vice President Worldwide Sales |
|
|
|
|
|
|
|
Steven M. Yasbek
|
|
|
56 |
|
|
Chief Accounting Officer |
Mr. Smith co-founded Smith Micro and has served as the Chairman of the Board, President and
Chief Executive Officer since inception in 1982. Mr. Smith was employed by Rockwell International
Corporation in a variety of technical and management positions from 1975 to 1984. Mr. Smith served
with Xerox Data Systems from 1972 to 1975 and RCA Computer Systems Division from 1969 to 1972 in
mainframe sales and pre-sale technical roles. Mr. Smith received a B.A. in Business Administration
from Grove City College.
Mr. Schmidt joined the Company in June 2005 and serves as the Companys Chief Financial
Officer. Prior to joining Smith Micro, Mr. Schmidt was the Chief Financial Officer of Genius
Products, Inc., a publicly traded entertainment company from August 2004 to June 2005. From April
2003 to June 2004, he was Vice President (Finance) and acting Chief Accounting Officer of Peregrine
Systems, Inc., a publicly held provider of enterprise level software then in Chapter 11
reorganization. From July 2000 to January 2003, he was Executive Vice President and Chief
Financial Officer of Mad Catz Interactive, Inc., a publicly traded provider of console video game
accessories. He holds a B.B.A. in Finance from the University of Texas and an M.S. in Accountancy
from San Diego State University.
Mr. Sperling joined the Company in April 1989 and has been the Director of Software
Engineering since April 1992. He assumed the Chief Technology Officer position in September 1999.
Mr. Sperling began his professional career as a software engineer with us and he currently has two
patents and three patents pending for various telephony and Internet technologies. Mr. Sperling
holds a B.S. degree in Computer Science and an MBA from the University of California, Irvine.
Mr. Kahn joined the Company with the acquisition of Allume Systems, Inc. in July 2005. Prior
to the acquisition, Mr. Kahn was President of the company. Mr. Kahn was one of the co-founders of
Aladdin Systems, Inc. which later became Allume Systems. Mr. Kahn was Chairman, President and Chief
Executive Officer of Monterey Bay Tech, Inc (OTC BB:MBYI), a public company from 1999 to May 2005
until its merger with SecureLogic Inc. Mr. Kahn is a member of the Digital River Advisory Board and
is a graduate of the University of Rhode Island with a B.A. in Economics. Mr. Kahn assumed the
position as Executive Vice President Productivity & Graphics in late 2009.
37
Mr. Elliott joined the Company in May of 1999 and soon after was appointed General Manager
of Smith Micros Mac Division, then later as Vice President of Corporate Marketing and Chief
Marketing Officer, which he has held to date. An experienced technology and marketing leader
with over fifteen years of executive level experience managing business units in the information
technology industry, he has held executive level positions with Informix Software, DataStorm
Technologies and QuarterDeck Corporation. Mr. Elliott is a graduate of Northwood University,
Midland, Missouri.
Mr. Cameron joined the Company in April of 2008 as the Executive Vice President of
Worldwide Sales. Mr. Cameron has held executive management positions with Openwave, Oracle, FoxT
and Booz Allen & Hamilton. Mr. Cameron served proudly in the United States Air Force and earned
his B.S. in MathOperations Research from the United States Air Force Academy in Colorado,
Springs, CO and an M.B.A. from Golden Gate University in San Francisco, California.
Mr. Yasbek joined the Company in May of 2008 as the Chief Accounting Officer. Mr. Yasbek has
held executive finance and information technology positions with REMEC, Paradigm Wireless Systems,
Intellisys Group, Pacific Scientific Company, Symbol Technologies, TRW, and most recently as Chief
Financial Officer of Alphatec Spine. He holds a B.S. in Accounting and M.B.A from Loyola Marymount
University, and is a Certified Public Accountant.
Officers are elected by, and serve at the discretion of, the Board of Directors.
For information about our Directors, please see the section titled Directors and Executive
Officers appearing in our Proxy Statement for our 2010 Annual Meeting of Stockholders, which is
hereby incorporated by reference.
The section titled Corporate Governance appearing in our Proxy Statement for our 2010 Annual
Meeting of Stockholders is hereby incorporated by reference.
Audit Committee; Audit Committee Financial Expert
Our Board of Directors has a standing Audit Committee. The members of the Audit Committee are
Messrs. Campbell, Gulko, Keiper and Szabo. Our Board has determined that Mr. Gulko, Chairman of
the Audit Committee, is an audit committee financial expert as defined by Item 401(h) of Regulation
S-K and that each member of the Audit Committee is independent within the meaning of Nasdaq
Marketplace Rule 4200(a)(15).
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires certain of the companys executive officers, as
well as its directors and persons who own more than then percent (10%) of a registered class of the
Companys 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 with the exception of one Form 4 disclosing one transaction each for each executive officer
and each director which were filed late.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our employees, including our
principal executive officer, our principal financial officer, and all members of our finance
department performing similar functions. Our Code of Ethics was filed as Exhibit 14 to the Annual
Report on Form 10-K for the year ended December 31, 2003 which was filed on March 25, 2004. In the
event of an amendment to, or a waiver from, certain provisions of our Code of
Ethics, we intend, to the extent possible, to satisfy Form 8-K disclosure requirements by
disclosing this information on our website at www.smithmicro.com.
38
|
|
|
Item 11. |
|
EXECUTIVE COMPENSATION |
The section titled Executive Compensation and Related Information appearing in our Proxy
Statement for our 2010 Annual Meeting of Stockholders is hereby incorporated by reference.
|
|
|
Item 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
The section titled Ownership of Securities and Related Stockholder Matters appearing in our
Proxy Statement for our 2010 Annual Meeting of Stockholders is hereby incorporated by reference.
Securities Authorized for Issuance Under An Equity Compensation Plan
The following table provides information as of December 31, 2009 with respect to the shares of
common stock that may be issued under our existing equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares to be |
|
|
Weighted average |
|
|
Number of shares |
|
|
|
issued upon exercise of |
|
|
exercise price of |
|
|
remaining available for |
|
(in thousands, except per share amounts) |
|
outstanding options |
|
|
outstanding options |
|
|
future issuance |
|
|
|
|
Equity compensation plan approved
by shareholders (1) |
|
|
3,536 |
|
|
$ |
11.29 |
|
|
|
1,434 |
|
Equity compensation plan not approved
by shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,536 |
|
|
$ |
11.29 |
|
|
|
1,434 |
|
|
|
|
|
|
|
(1) |
|
The number of shares to be issued upson exercise includes options granted under both the |
|
|
|
1995 Stock Option/Stock Issuance Plan and the 2005 Stock Option/Stock Issuance Plan. |
|
|
|
The number of shares remaining available for future issuance consists only of the 2005 Plan. |
|
|
|
Item 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The section titled Related Party Transactions and Director Independence appearing in our
Proxy Statement for our 2010 Annual Meeting of Stockholders is incorporated herein by reference.
|
|
|
Item 14. |
|
PRINCIPAL ACCOUNTING FEES AND SERVICES |
The section titled Ratification of Appointment of Independent Registered Public Accounting
Firm Principal Accountant Fees and Services appearing in our Proxy Statement for our 2010 Annual
Meeting of Stockholders is incorporated herein by reference.
39
PART IV
|
|
|
Item 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial Statements
Smith Micros financial statements appear in a separate section of this Annual Report on Form
10-K beginning on the pages referenced below:
|
|
|
|
|
Page |
|
|
F-1 |
|
|
F-3 |
|
|
F-4 |
|
|
F-5 |
|
|
F-6 |
|
|
F-7 |
(2) Financial Statement Schedule
Smith Micros 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.
(3) Exhibits
|
|
|
|
|
Exhibit |
|
|
|
|
No. |
|
Title |
|
Method of Filing |
2.1 |
|
Agreement and Plan of Merger, dated
September 9, 2009, by and among Smith Micro Software, Inc., Mobility
Acquisition Corp., Core Mobility, Inc., Konstantin Othmer, as
stockholders agent, and the founders of Core Mobility. |
|
Incorporated by reference to
Exhibit 2.1 to the Registrants Quarterly Report on Form 10-Q
filed on November 5, 2009. |
|
|
|
|
|
3.1 |
|
Amended and Restated Certificate of Incorporation of the Registrant. |
|
Incorporated by reference to
Exhibit 3.1 to the Registrants Registration Statement No. 33-95096. |
|
|
|
|
|
3.1.1 |
|
Amendment to the Amended and
Restated Certificate of Incorporation of the Registrant. |
|
Incorporated by reference to
Exhibit 3.1.1 to the Registrants Quarterly Report on Form 10-Q
for the period ended June 30, 2000. |
|
|
|
|
|
3.1.2 |
|
Certificate of Amendment to Amended
and Restated Certificate of Incorporation of Registrant as filed
August 18, 2005 with Delaware Secretary of State. |
|
Incorporated by reference to
Exhibit 3.1.2 to the Registrants Annual Report on Form 10-K for
the period ended December 31, 2005. |
|
|
|
|
|
3.2 |
|
Amended and Restated Bylaws of the Registrant. |
|
Incorporated by reference to
Exhibit 3.2 to the Registrants Registration Statement No. 33-95096. |
40
|
|
|
|
|
Exhibit |
|
|
|
|
No. |
|
Title |
|
Method of Filing |
3.3 |
|
Certificate of Amendment of Amended
and Restated Bylaws of Smith Micro Software, Inc. |
|
Incorporated by reference to
Exhibit 3.3 to the Registrants Current Report on Form 8-K filed
on October 31, 2007. |
|
|
|
|
|
4.1 |
|
Specimen certificate representing
shares of Common Stock of the Registrant. |
|
Incorporated by reference to
Exhibit 4.1 to the Registrants Registration Statement No. 33-95096. |
|
|
|
|
|
10.1 |
|
Form of Indemnification Agreement. |
|
Incorporated by reference to
Exhibit 10.1 to the Registrants Registration Statement No. 33-95096. |
|
|
|
|
|
10.2 |
|
1995 Stock Option/Stock Issuance
Plan as Amended and Restated through February 7, 2001. |
|
Incorporated by reference to the
Appendix attached to the Definitive Proxy Statement for the 2001
Annual Meeting of Stockholders filed on April 27, 2001. |
|
|
|
|
|
10.3 |
|
Amended and Restated 2005 Stock Option / Stock Issuance Plan. |
|
Incorporated by reference to
Exhibit 10.7 to the Registrants Registration Statement on Form S-8 (Reg. No.333-149222). |
|
|
|
|
|
10.4 |
|
Master Software License and
Distribution Agreement (Contract No. 220-00-0134) effective as of
December 1, 2000, between Cellco Partnership (d/b/a Verizon Wireless) and the Registrant. |
|
Incorporated by reference to
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003. |
|
|
|
|
|
10.4.1 |
|
Amendment of Master Software
License and Distribution Agreement (Contract No. 220-00-0134). |
|
Incorporated by reference to
Exhibit 10.1.1 to the Registrants Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003. |
|
|
|
|
|
10.4.2 |
|
Amendment No. 2 to the Master
Software License and Distribution Agreement (Contract No. 220-00-0134). |
|
Incorporated by reference to
Exhibit 10.1.2 to the Registrants Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003. |
|
10.4.3 |
|
Amendment No. 6 to the Master
Software License and Distribution Agreement (Contract No. 220-00-0134). |
|
Filed herewith. |
|
10.4.4 |
|
Amendment No. 7 to the Master
Software License and Distribution Agreement (Contract No. 220-00-0134). |
|
Filed herewith. |
|
10.4.5 |
|
Amendment No. 9 to the Master
Software License and Distribution Agreement (Contract No. 220-00-0134). |
|
Filed herewith. |
|
|
|
|
|
10.5 |
|
Letter Agreement, dated June 13,
2005, by and between Smith Micro Software, Inc. and Andrew Schmidt. |
|
Incorporated by reference to
Exhibit 10.5 to the Registrants Current Report on Form 8-K
filed on November 30, 2006. |
|
|
|
|
|
10.6 |
|
Employment Agreement dated April 9,
1999 by and between Smith Micro Software, Inc. and William Wyand. |
|
Incorporated by reference to
Exhibit 10.6 to the Registrants Current Report on Form 8-K
filed on November 30, 2006. |
|
|
|
|
|
10.7 |
|
Employment Agreement effective as
of January 4, 2008 by and between Smith Micro Software, Inc. and Biju Nair. |
|
Incorporated by reference to
Exhibit 10.7 to the Registrants Current Report on Form 8-K
filed on January 9, 2008. |
41
|
|
|
|
|
Exhibit |
|
|
|
|
No. |
|
Title |
|
Method of Filing |
10.8 |
|
Management Retention Agreement effective as of January 4, 2008 by and between Smith Micro Software, Inc. and Biju Nair. |
|
Incorporated by reference to
Exhibit 10.7 to the Registrants Current Report on Form 8-K
filed on January 9, 2008.
|
|
|
|
|
|
10.9 |
|
Executive Employment Agreement dated July 1, 2005 by and between Smith Micro Software, Inc. and Jonathan Kahn. |
|
Incorporated by reference to Exhibit 10.9 to the Registrants Annual Report on Form 10-K/A filed on April 29, 2008. |
|
|
|
|
|
10.10 |
|
Summary of oral agreement dated June 2005 by and between William W. Smith, Jr. and the Registrant. |
|
Incorporated by reference to Exhibit 10.10 to the Registrants Quarterly Report on Form 10-Q filed on August 4, 2009. |
|
|
|
|
|
14.1 |
|
Code of Ethics. |
|
Incorporated by reference to
Exhibit 14.1 to the Registrants Annual Report on Form 10-K for
the fiscal year ended December 31, 2003. |
|
|
|
|
|
14.1.1 |
|
Attachment 1 to Code of Ethics. |
|
Incorporated by reference to
Exhibit 14.1 to the Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2003. |
|
|
|
|
|
21.1 |
|
Subsidiaries. |
|
Filed herewith. |
|
|
|
|
|
23.1 |
|
Consent of Independent Registered Public Accounting Firm. |
|
Filed herewith. |
|
|
|
|
|
31.1 |
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
Filed herewith. |
|
|
|
|
|
31.2 |
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
Filed herewith. |
|
|
|
|
|
32.1 |
|
Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
Furnished herewith. |
|
|
|
|
|
Confidential treatment has been granted with respect to certain confidential portions of this
exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, which confidential
portions have been omitted from the exhibit and filed separately with the Securities and Exchange
Commission. |
|
|
|
Confidential treatment has been requested with respect to certain confidential portions of this
exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, which confidential
portions have been omitted from the exhibit and filed separately with the Securities and Exchange
Commission. |
(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.
42
SIGNATURES
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.
|
|
|
|
|
|
SMITH MICRO SOFTWARE, INC.
|
|
Date: March 2, 2010 |
By: |
/s/ William W. Smith, Jr.
|
|
|
|
William W. Smith, Jr. |
|
|
|
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: March 2, 2010 |
By: |
/s/ Andrew C. Schmidt
|
|
|
|
Andrew C. Schmidt, |
|
|
|
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
/s/ William W. Smith, Jr.
William W. Smith, Jr.
|
|
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive
Officer)
|
|
March 2, 2010 |
|
|
|
|
|
/s/ Andrew C. Schmidt
|
|
Vice President and Chief Financial Officer
|
|
March 2, 2010 |
|
|
|
|
|
Andrew C. Schmidt
|
|
(Principal Financial and Accounting Officer) |
|
|
|
|
|
|
|
/s/ Thomas G. Campbell
|
|
Director
|
|
March 2, 2010 |
|
|
|
|
|
Thomas G. Campbell
|
|
|
|
|
|
|
|
|
|
/s/ Samuel Gulko
|
|
Director
|
|
March 2, 2010 |
|
|
|
|
|
Samuel Gulko
|
|
|
|
|
|
|
|
|
|
/s/ Ted L. Hoffman
|
|
Director
|
|
March 2, 2010 |
|
|
|
|
|
Ted L. Hoffman
|
|
|
|
|
|
|
|
|
|
/s/ William C. Keiper
|
|
Director
|
|
March 2, 2010 |
|
|
|
|
|
William C. Keiper
|
|
|
|
|
|
|
|
|
|
/s/ Gregory J. Szabo
|
|
Director
|
|
March 2, 2010 |
|
|
|
|
|
Gregory J. Szabo
|
|
|
|
|
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Smith Micro Software, Inc.
We have audited the consolidated balance sheets of Smith Micro Software, Inc. and subsidiaries
(collectively, the Company) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity and cash flows for each of the three years in the
period ended December 31, 2009. Our audits also included the financial statement schedule of the
Company listed in Item 15(a)(2). These financial statements and financial statement schedule are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2009 and 2008, and the
results of their operations and their cash flows for each of the three years in the period ended
December 31, 2009, 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.
As
discussed in Note 1 to the consolidated financial statements,
the Company has adopted the provisions of Accounting Standards
Codification (ASC) Topic No. 805, Business
Combinations on January 1, 2009.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and
our report dated March 2,
2010 expressed an unqualified opinion on the effectiveness of the Companys internal control over
financial reporting.
|
|
|
|
|
|
|
/s/ SINGERLEWAK LLP
|
|
Los Angeles, California |
|
March 2, 2010 |
|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Smith Micro Software, Inc.
We have
audited Smith Micro Software Inc. and subsidiaries
(collectively, the Company) internal control over financial reporting as of December 31, 2009 based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Report of Management on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (a)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (b) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as of December 31, 2009 and 2008, and the
related consolidated statements of operations, stockholders equity, and cash flows, and the
financial statement schedule, for each of the three years in the period ended December 31, 2009 of
the Company, and our report dated March 2, 2010 expressed an unqualified opinion.
|
|
|
|
|
|
|
/s/ SINGERLEWAK LLP
|
|
Los Angeles, California |
|
March 2, 2010 |
|
|
F-2
SMITH
MICRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
14,577 |
|
|
$ |
13,966 |
|
Short-term investments |
|
|
31,284 |
|
|
|
22,649 |
|
Accounts receivable, net of allowances for doubtful accounts
and other adjustments of $1,045 (2009) and $1,204 (2008) |
|
|
24,147 |
|
|
|
18,424 |
|
Income tax receivable |
|
|
980 |
|
|
|
|
|
Inventories, net of reserves for excess and obsolete inventory
of $1,221 (2009) and $404 (2008) |
|
|
406 |
|
|
|
1,097 |
|
Prepaid expenses and other current assets |
|
|
1,506 |
|
|
|
869 |
|
Deferred tax asset |
|
|
2,696 |
|
|
|
1,698 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
75,596 |
|
|
|
58,703 |
|
Equipment and improvements, net |
|
|
8,193 |
|
|
|
4,289 |
|
Goodwill |
|
|
94,320 |
|
|
|
83,483 |
|
Intangible assets, net |
|
|
27,662 |
|
|
|
27,603 |
|
Other assets |
|
|
163 |
|
|
|
157 |
|
Deferred tax asset |
|
|
|
|
|
|
2,760 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
205,934 |
|
|
$ |
176,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
4,215 |
|
|
$ |
3,492 |
|
Accrued liabilities |
|
|
11,359 |
|
|
|
6,710 |
|
Deferred revenue |
|
|
1,317 |
|
|
|
923 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
16,891 |
|
|
|
11,125 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
Long term liabilities |
|
|
70 |
|
|
|
466 |
|
Deferred tax liability |
|
|
994 |
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities |
|
|
1,064 |
|
|
|
466 |
|
Commitments and contingencies (Note 5) |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001 per share; 5,000,000 shares
authorized; none issued or outstanding |
|
|
|
|
|
|
|
|
Common stock, par value $0.001 per share; 50,000,000 shares authorized;
33,380,496 and 31,399,593 shares issued and outstanding at December 31, 2009
and December 31, 2008, respectively |
|
|
33 |
|
|
|
31 |
|
Additional paid-in capital |
|
|
183,756 |
|
|
|
165,864 |
|
Accumulated other comprehensive (expense) income |
|
|
(2 |
) |
|
|
69 |
|
Accumulated earnings (deficit) |
|
|
4,192 |
|
|
|
(560 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
187,979 |
|
|
|
165,404 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
205,934 |
|
|
$ |
176,995 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-3
SMITH
MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amount)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
$ |
107,279 |
|
|
$ |
98,424 |
|
|
$ |
73,377 |
|
Cost of revenues |
|
|
15,486 |
|
|
|
20,108 |
|
|
|
20,644 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
91,793 |
|
|
|
78,316 |
|
|
|
52,733 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
24,999 |
|
|
|
24,814 |
|
|
|
18,394 |
|
Research and development |
|
|
36,530 |
|
|
|
30,811 |
|
|
|
14,772 |
|
General and administrative |
|
|
19,155 |
|
|
|
19,990 |
|
|
|
15,318 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
80,684 |
|
|
|
75,615 |
|
|
|
48,484 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
11,109 |
|
|
|
2,701 |
|
|
|
4,249 |
|
Interest and other income |
|
|
381 |
|
|
|
739 |
|
|
|
4,254 |
|
|
|
|
|
|
|
|
|
|
|
Profit before taxes |
|
|
11,490 |
|
|
|
3,440 |
|
|
|
8,503 |
|
Income tax expense |
|
|
6,738 |
|
|
|
4,172 |
|
|
|
5,342 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,752 |
|
|
$ |
(732 |
) |
|
$ |
3,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.15 |
|
|
$ |
(0.02 |
) |
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.14 |
|
|
$ |
(0.02 |
) |
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
32,438 |
|
|
|
30,978 |
|
|
|
29,768 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
32,897 |
|
|
|
30,978 |
|
|
|
30,998 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-4
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
|
|
|
Common stock |
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
income (expense) |
|
|
income (deficit) |
|
|
Total |
|
|
|
|
BALANCE, December 31, 2006 |
|
|
28,444 |
|
|
|
28 |
|
|
|
129,018 |
|
|
|
|
|
|
|
(2,989 |
) |
|
|
126,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in secondary
offering, net of offering costs |
|
|
387 |
|
|
|
|
|
|
|
5,341 |
|
|
|
|
|
|
|
|
|
|
|
5,341 |
|
Exercise of common stock options |
|
|
900 |
|
|
|
2 |
|
|
|
3,806 |
|
|
|
|
|
|
|
|
|
|
|
3,808 |
|
Non cash compensation recognized on stock options |
|
|
|
|
|
|
|
|
|
|
6,929 |
|
|
|
|
|
|
|
|
|
|
|
6,929 |
|
Restricted stock grants |
|
|
527 |
|
|
|
|
|
|
|
5,443 |
|
|
|
|
|
|
|
|
|
|
|
5,443 |
|
Tax benefit related to the exercise of stock options |
|
|
|
|
|
|
|
|
|
|
3,775 |
|
|
|
|
|
|
|
|
|
|
|
3,775 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,161 |
|
|
|
3,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2007 |
|
|
30,258 |
|
|
|
30 |
|
|
|
154,312 |
|
|
|
|
|
|
|
172 |
|
|
|
154,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options |
|
|
49 |
|
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
129 |
|
Non cash compensation recognized on stock options |
|
|
|
|
|
|
|
|
|
|
6,935 |
|
|
|
|
|
|
|
|
|
|
|
6,935 |
|
Restricted stock grants |
|
|
1,093 |
|
|
|
1 |
|
|
|
5,041 |
|
|
|
|
|
|
|
|
|
|
|
5,042 |
|
Tax benefit related to the exercise of stock options |
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
72 |
|
Tax benefit deficiencies related to restricted stock expense |
|
|
|
|
|
|
|
|
|
|
(625 |
) |
|
|
|
|
|
|
|
|
|
|
(625 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
69 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(732 |
) |
|
|
(732 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2008 |
|
|
31,400 |
|
|
|
31 |
|
|
|
165,864 |
|
|
|
69 |
|
|
|
(560 |
) |
|
|
165,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for acquisition |
|
|
700 |
|
|
|
1 |
|
|
|
6,880 |
|
|
|
|
|
|
|
|
|
|
|
6,881 |
|
Exercise of common stock options |
|
|
414 |
|
|
|
|
|
|
|
1,664 |
|
|
|
|
|
|
|
|
|
|
|
1,664 |
|
Non cash compensation recognized on stock options |
|
|
|
|
|
|
|
|
|
|
5,266 |
|
|
|
|
|
|
|
|
|
|
|
5,266 |
|
Restricted stock grants, net of cancellations |
|
|
888 |
|
|
|
1 |
|
|
|
3,457 |
|
|
|
|
|
|
|
|
|
|
|
3,458 |
|
Cancellation
of shares for payment of
withholding tax |
|
|
(22 |
) |
|
|
|
|
|
|
(180 |
) |
|
|
|
|
|
|
|
|
|
|
(180 |
) |
Tax benefit related to the exercise of stock options |
|
|
|
|
|
|
|
|
|
|
871 |
|
|
|
|
|
|
|
|
|
|
|
871 |
|
Tax benefit deficiencies related to restricted stock expense |
|
|
|
|
|
|
|
|
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
(66 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71 |
) |
|
|
|
|
|
|
(71 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,752 |
|
|
|
4,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2009 |
|
|
33,380 |
|
|
$ |
33 |
|
|
$ |
183,756 |
|
|
$ |
(2 |
) |
|
$ |
4,192 |
|
|
$ |
187,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-5
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
4,752 |
|
|
$ |
(732 |
) |
|
$ |
3,161 |
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities, net of the effect of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
10,540 |
|
|
|
8,446 |
|
|
|
3,198 |
|
Provision for adjustments to accounts receivable and doubtful accounts |
|
|
1,596 |
|
|
|
1,170 |
|
|
|
574 |
|
Provision for excess and obsolete inventory |
|
|
1,063 |
|
|
|
435 |
|
|
|
178 |
|
Tax benefits from stock-based compensation |
|
|
(871 |
) |
|
|
(72 |
) |
|
|
(3,775 |
) |
Non cash compensation related to stock options & restricted stock |
|
|
8,724 |
|
|
|
11,977 |
|
|
|
12,372 |
|
Change in operating accounts, net of effect from acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(5,998 |
) |
|
|
(6,625 |
) |
|
|
(2,826 |
) |
Deferred income taxes |
|
|
914 |
|
|
|
2,000 |
|
|
|
5,313 |
|
Income tax receivable |
|
|
(980 |
) |
|
|
180 |
|
|
|
(58 |
) |
Inventories |
|
|
(372 |
) |
|
|
473 |
|
|
|
(912 |
) |
Prepaid expenses and other assets |
|
|
(507 |
) |
|
|
(19 |
) |
|
|
(642 |
) |
Accounts payable and accrued liabilities |
|
|
(384 |
) |
|
|
(784 |
) |
|
|
1,673 |
|
|
|
|
Net cash provided by operating activities |
|
|
18,477 |
|
|
|
16,449 |
|
|
|
18,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of eFrontier America, net of cash received |
|
|
|
|
|
|
(623 |
) |
|
|
(5,092 |
) |
Acquisition of Ecutel Systems, Inc., net of cash received |
|
|
|
|
|
|
|
|
|
|
(8,000 |
) |
Acquisition of Insignia Solutions, net of cash received |
|
|
|
|
|
|
245 |
|
|
|
(17,379 |
) |
Acquisition of PhoTags, Inc., net of cash received |
|
|
|
|
|
|
|
|
|
|
(3,500 |
) |
Acquisition of PCTels Mobile Solutions Group, net of cash received |
|
|
|
|
|
|
(60,931 |
) |
|
|
|
|
Acquisition of Core Mobility, Inc., net of cash received |
|
|
(6,907 |
) |
|
|
|
|
|
|
|
|
Acquisitions other |
|
|
|
|
|
|
(2,306 |
) |
|
|
|
|
Other intangibles |
|
|
|
|
|
|
(500 |
) |
|
|
(1,227 |
) |
Capital expenditures |
|
|
(4,809 |
) |
|
|
(3,538 |
) |
|
|
(997 |
) |
Gain on disposal of assets |
|
|
20 |
|
|
|
|
|
|
|
|
|
Purchase of short-term investments |
|
|
(8,706 |
) |
|
|
(22,580 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(20,402 |
) |
|
|
(90,233 |
) |
|
|
(36,195 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from issuance of common stock, net of offering costs |
|
|
|
|
|
|
|
|
|
|
5,341 |
|
Tax benefits from stock-based compensation |
|
|
871 |
|
|
|
72 |
|
|
|
3,775 |
|
Cash received from exercise of stock options |
|
|
1,665 |
|
|
|
129 |
|
|
|
3,808 |
|
|
|
|
Net cash provided by financing activities |
|
|
2,536 |
|
|
|
201 |
|
|
|
12,924 |
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
611 |
|
|
|
(73,583 |
) |
|
|
(5,015 |
) |
Cash and cash equivalents, beginning of period |
|
|
13,966 |
|
|
|
87,549 |
|
|
|
92,564 |
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
14,577 |
|
|
$ |
13,966 |
|
|
$ |
87,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
6,612 |
|
|
$ |
1,308 |
|
|
$ |
41 |
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-6
SMITH MICRO SOFTWARE, INC.
Notes to the Consolidated Financial Statements
1. Organization, Basis of Presentation and Summary of Significant Accounting Policies
The Company
Smith Micro Software, Inc. designs, develops and markets software products and services
primarily for the mobile computing and communications industries. The Company is focused on
developing connectivity, communications, and content management solutions for a converging world of
wireless and wired networks. The Companys portfolio of wireless software products and services
includes a wide range of software solutions including our QuickLink® family of products. We
provide mobile voice and data connectivity across 3G, 4G and Wi-Fi networks. Our mobile
communications portfolio includes solutions for Push-To-Talk, Visual Voicemail and mobile device
management. We also offer user-friendly solutions for the management of mobile content, contacts
and calendar data.
Our patented compression technologies are utilized within various Smith Micro products
including our line of Personal Computer (PC) and Smartphones compression products and our new
file-transfer solution.
We sell our products and services to many of the worlds leading mobile network operators,
original equipment manufacturers (OEM), device manufacturers and enterprise businesses, as well
as directly to consumers. The proliferation of broadband mobile wireless technologies is providing
new opportunities for our products and services on a global basis. When these broadband wireless
technologiesEVDO, UMTS/HSPA, Wi-Fi, LTE and WiMAXare combined with new devices such as mobile
phones, PCs, Smartphones, Netbooks, and tablets and emerging
Machine-to-Machine (M2M) devices, opportunities emerge for
new communications software products. Our core technologies are designed to address these emerging
mobile convergence opportunities.
Our innovative line of productivity and graphics products are distributed through a variety of
consumer channels worldwide, our online stores and third-party wholesalers, retailers and
value-added resellers. We offer products that operate on Windows, Mac, UNIX, Linux, Windows
Mobile, Symbian and Java platforms.
The underlying design concept common to all of our products is our ability to improve the
customers experience. This philosophy is based on the combination of solid engineering and
exceptional design that reinforces our brands competitive differentiation. We have over 25 years
of experience in design, creation and custom engineering services for software products.
On October 26, 2009, the Company acquired Core Mobility, Inc. (Core Mobility), a developer
of mobility software and solutions, for $10 million in cash and 700,000 shares of Smith Micro
common stock. Core Mobility became a wholly-owned subsidiary of Smith Micro. Of the $10 million
of cash consideration, $3.0 million was held back (Holdback) as security against possible
indemnification obligations.
On December 10, 2007, Smith Micro entered into an Asset Purchase Agreement with PCTEL, Inc.
pursuant to which Smith Micro agreed to acquire substantially all of the assets of PCTELs Mobility
Solutions Group (MSG). The acquisition was completed on January 4, 2008. Pursuant to the terms
of the Asset Purchase Agreement, Smith Micro paid $59.7 million in cash to PCTEL at the closing on
January 4, 2008.
Basis of Presentation
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 168, The FASB Accounting Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162.
SFAS No. 168 became the source of authoritative U.S. generally accepted accounting principles
(GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this
Statement, the Codification superseded all then-existing non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting literature not included in the
Codification became
F-7
nonauthoritative. This Statement is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The Company has adopted SFAS No. 168 on its
effective date and it is incorporated in this 10-K SEC filing.
The accompanying consolidated financial statements reflect the operating results and financial
position of Smith Micro Software, Inc. and its wholly owned subsidiaries in accordance with
accounting principles generally accepted in the United States of America. All intercompany amounts
have been eliminated in consolidation.
Foreign Currency Transactions
The Company has international operations resulting from several acquisitions over the past
five years. The countries in which the Company has a subsidiary or branch office in are Sweden,
Norway, Hong Kong, Serbia, the United Kingdom, and Canada. The functional currency for all of
these foreign entities is the U.S. dollar in accordance with the Foreign Currency
Matters-Translation of Financial Statements Topic of the FASB Accounting Standards Codification.
Foreign currency transactions that increase or decrease expected functional currency cash flows is
a foreign currency transaction gain or loss that are included in determining net income for the
period in which the exchange rate changes. Likewise, a transaction gain or loss (measured from the
transaction date or the most recent intervening balance sheet date, whichever is later) realized
upon settlement of a foreign currency transaction is included in determining net income for the
period in which the transaction is settled.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and assumptions that affect
the reported amounts in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Fair Value of Financial Instruments
The Company measures and discloses fair value measurements as required by the Fair Value
Measurements and Disclosures Topic of the FASB Accounting Standards Codification.
The carrying value of accounts receivable, foreign cash accounts, prepaid expenses, other
current assets, accounts payable, and accrued expenses 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 the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification,
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 the Financial Instruments Topic of the FASB Accounting Standards Codification,
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
F-8
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 the Investments-Debt and Equity Topic
of the FASB Accounting Standards Codification. We have made this election because the nature of
our financial assets and liabilities are not of such complexity that they would benefit from a
change in valuation to fair value.
Significant Concentrations
For the year ended December 31, 2009, four customers, each accounting for over 10% of
revenues, made up 65.7% of revenues and 75% of accounts receivable, and four suppliers, each with
more than 10% of inventory purchases, totaled 3% of accounts payable. For the year ended December
31, 2008, one customer, Verizon Wireless, made up 32.0% of revenues and 21% of accounts receivable,
and four suppliers, each with more than 10% of inventory purchases, totaled 10% of accounts
payable. For the year ended December 31, 2007, one customer, Verizon Wireless, made up 64.4% of
revenues and 49% of accounts receivable, and three suppliers, each with more than 10% of inventory
purchases, totaled 13% of accounts payable.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash, government securities, mutual funds, and
money market funds. These securities are primarily held in two financial institutions and are
uninsured except for the minimum Federal Deposit Insurance Corporation (FDIC) coverage, and have
original maturity dates of three months or less. As of December 31, 2009 and 2008, bank balances
totaling approximately $4.6 million and $14.0 million, respectively, were uninsured. On January 1,
2010, our primary United States bank exited the Federal Deposit Insurance Corp.s Transaction
Account Guarantee Program. Our uninsured bank balances would have been $14.3 million for the year
ended December 31, 2009 if our primary United States bank exited Federal Deposit Insurance Corp.s
Transaction Account Guarantee Program prior to January 1, 2010.
Short-Term Investments
Short-term investments consist of U.S. government agency and government sponsored enterprise
obligations. The Company accounts for these short-term investments as required by the
Investments-Debt and Equity Topic of the FASB Accounting Standards Codification 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 shareholders equity until realized.
Accounts Receivable and Allowance for Doubtful Accounts
We sell our products worldwide. We perform ongoing credit evaluations of our customers and
adjust credit limits based upon payment history, the customers 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
managements estimates.
Inventories
Inventories consist principally of cables, 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 managements forecast of product demand and production requirements.
At December 31, 2009, our net inventory balance of $0.4 million consisted of approximately $0.1
million of assembled products and $0.3 million of components.
F-9
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation is computed using the
straight-line method based on the estimated useful lives of the assets, generally ranging from
three to seven years. Leasehold improvements are amortized using the straight-line method over the
shorter of the estimated useful life of the asset or the lease term.
In-Process Research and Development
In
2009 we capitalized $1.0 million of IPR&D costs related to our acquisition of Core
Mobility in accordance with accounting standards that became effective in 2009. Upon completion,
the related IPR&D asset will be amortized over its estimated useful life. If the project is
abandoned, we will be required to impair the related IPR&D asset.
The fair value of the IPR&D was determined using the discounted cash flow approach. The
expected future cash flows were estimated and discounted to their net present values at an
appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the
rate of return were the weighted average cost of capital and return on assets, as well as the risks
inherent in the development process, including the likelihood of achieving technological success
and market acceptance. Future cash flows were estimated based on forecasted revenue and costs,
taking into account the expected product life cycle, market penetration and growth rates.
Intangible Assets and Amortization
Amortization expense related to other intangibles acquired in acquisitions is calculated on a
straight line basis over their useful lives. Certain assets acquired in the Allume acquisition in
2005 had previously been amortized on a discounted cash flow basis through 2007. Effective January
1, 2008, we changed to the straight line basis of amortization as these assets have been integrated
into our core operations and as such it is no longer feasible to separate the cash flows generated
by such assets to allow us to update the discounted cash flow analysis originally developed. This
change is classified as a change in estimate and was accounted for on a prospective basis.
Impairment or Disposal of Long Lived Assets
Long-lived assets to be held are reviewed for events or changes in circumstances which
indicate that their carrying value may not be recoverable. They are tested for recoverability
using undiscounted cash flows to determine whether or not impairment to such value has occurred as
required by the Property, Plant, and Equipment Topic of the FASB Accounting Standards Codification.
The Company has determined that there was no impairment at December 31, 2009.
Valuation of Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets as required by the
Intangibles-Goodwill and Other Topic of the FASB Accounting Standards Codification. This statement
requires us to periodically assess the impairment of our goodwill and intangible assets, which
requires us to make assumptions and judgments regarding the carrying value of these assets. These
assets are considered to be impaired if we determine that their carrying value may not be
recoverable based upon our assessment of the following events or changes in circumstances:
|
|
|
a determination that the carrying value of such assets cannot be recovered through undiscounted cash
flows; |
|
|
|
|
loss of legal ownership or title to the assets; |
|
|
|
|
significant changes in our strategic business objectives and utilization of the assets; or |
|
|
|
|
the impact of significant negative industry or economic trends. |
If the intangible assets are considered to be impaired, the impairment we would recognize is
the amount by which the carrying value of the intangible assets exceeds the fair value of the
intangible assets. In addition, we base the useful lives and the related amortization expense on
our estimate of the useful life of the intangible assets. Due to
F-10
the numerous variables associated with our judgments and assumptions relating to the
carrying value of our intangible assets and the effects of changes in circumstances affecting these
valuations, both the precision and reliability of the resulting estimates are subject to
uncertainty, and as additional information becomes known, we may change our estimate, in which
case, the likelihood of a material change in our reported results would increase. The Company has
not recognized any impairment loss through December 31, 2009.
In accordance with the Intangibles-Goodwill and Other Topic of the FASB Accounting Standards
Codification, we review the recoverability of the carrying value of goodwill at least annually or
whenever events or circumstances indicate a potential impairment. Our annual impairment testing
date is December 31. Recoverability of goodwill is determined by comparing the estimated fair
value of our reporting units to the carrying value of the underlying net assets in the reporting
units. If the estimated fair value of a reporting unit is determined to be less than the fair value
of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent
that the carrying value of goodwill exceeds the difference between the estimated fair value of the
reporting unit and the fair value of its other assets and liabilities. We determined that we did
not have any impairment of goodwill at December 31, 2009, 2008, or 2007. Estimates of reporting
unit fair value are based upon market capitalization and therefore are volatile being sensitive to
market fluctuations. To the extent that our market capitalization decreases significantly or the
allocation of value to our reporting units change, we could be required to write off some or all of
our goodwill.
Deferred Income Taxes
We account for income taxes as required by the Income Taxes Topic of the FASB Accounting
Standards Codification. This statement requires the recognition of deferred tax assets and
liabilities for the future consequences of events that have been recognized in our financial
statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In
the event the future consequences of differences between financial reporting bases and the tax
bases of our 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. A valuation
allowance related to a deferred tax asset is recorded when it is more likely than not that some
portion or the entire deferred tax asset will not be realized. The Companys net deferred tax
assets were not reduced by a tax valuation allowance at December 31, 2009. Management evaluated
the positive and negative evidence in determining the realizability of the net deferred tax assets
at December 31, 2009 and concluded it is more likely than not that the Company should realize its
net deferred tax assets through future operating results and the reversal of taxable temporary
differences.
In July 2006, the FASB clarified the accounting for uncertainty in income taxes recognized in
the financial statements. A tax benefit from an uncertain tax position may be recognized when it
is more likely than not that the position will be sustained upon examination, including resolutions
of any related appeals or litigation process, based on the technical merits.
Income tax positions must meet a more likely-than-not recognition threshold at the effective
date to be recognized upon the adoption of new FASB guidance, and in subsequent periods. The
interpretation also provides guidance on measurement, derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. We adopted this FASB guidance
effective January 1, 2007. Based on our evaluation, we have concluded that there are no
significant uncertain tax positions requiring recognition on our financial statements.
Long-Term Liabilities
The long-term liabilities are for deferred rent to account for the difference between
straight-line and bargain rents and an earn-out accrual that extends beyond one year for one of our
prior year acquisitions.
Revenue Recognition
We currently report our net revenues under two operating groups: Wireless and Productivity &
Graphics. Within each of these groups software revenue is recognized based on the customer and
contract type. We recognize revenue when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed and determinable, and collectibility is probable as required by the
Software-Revenue Recognition Topic of the FASB
Accounting Standards Codification. We recognize revenues from sales of our software to OEM
customers or end
F-11
users as completed products are shipped and titles 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. Returns from OEM customers are limited to defective goods or goods shipped
in error. Historically, OEM customer returns have not exceeded the very nominal estimates and
reserves. 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. Within the Productivity & Graphics group certain revenues are booked net
of revenue sharing payments. 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
multiple element agreements, vendor specific objective evidence of fair value for all contract
elements is reviewed and the timing of the individual element revenue streams is determined and
recognized as required. Sales directly to end-users are recognized upon delivery. End users have a
thirty day right of return, but such returns are reasonably estimable and have historically been
immaterial. We also provide technical support to our customers. Such costs have historically been
insignificant.
Sales Incentives
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 the Software-Revenue Recognition Topic of
the FASB Accounting Standards Codification. We use historical redemption rates to estimate the
cost of customer incentives. Total sales incentives were $1.2 million, $0.8 million and $0.6
million for the years ended December 31, 2009, 2008 and 2007, respectively.
Internal Software Development Costs
Development costs incurred in the research and development of new software products and
enhancements to existing software products are expensed as incurred until technological feasibility
has been established. The Company considers technological feasibility to be established when all
planning, designing, coding and testing has been completed according to design specifications.
After technological feasibility is established, any additional costs are capitalized. Through
December 31, 2009, software has been substantially completed concurrently with the establishment of
technological feasibility; and, accordingly, no costs have been capitalized to date.
Capitalized Software and Amortization
We capitalize internally developed software and software purchased from third parties if the
related software product under development has reached technological feasibility or if there are
alternative future uses for the purchased software as required by the Software-Costs of Software to
be Sold, Leased, or Marketed Topic of the FASB Accounting Standards Codification. These costs are
amortized on a product-by-product basis, typically over an estimated life of five to seven years,
using the larger of the amount calculated using the straight-line method or the amount calculated
using the ratio between current period gross revenues and the total of current period gross
revenues and estimated future gross revenues. At each balance sheet date, we evaluate on a
product-by-product basis the unamortized capitalized cost of computer software compared to the net
realizable value of that product. The amount by which the unamortized capitalized costs of a
computer software product exceed its net realizable value is written off.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expenses were $0.8 million, $0.9
million, and $0.5 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Income Taxes
The Company accounts for income taxes as required by the Income Taxes Topic of the FASB
Accounting Standards Codification. This Topic clarifies the accounting for uncertainty in income
taxes recognized in an
F-12
enterprises financial statements and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Topic also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
In the event the future consequences of differences between financial reporting bases and the tax
bases of the Companys 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. A
valuation allowance related to a deferred tax asset is recorded when it is more likely than not
that some portion or the entire deferred tax asset will not be realized. In 2006, the Company
reversed all of its valuation allowance on its deferred tax assets as a result of the Companys
improving financial performance and projected income in future years.
In July 2006, the FASB clarified the accounting for uncertainty in income taxes recognized in
the financial statements. A tax benefit from an uncertain tax position may be recognized when it
is more likely than not that the position will be sustained upon examination, including resolutions
of any related appeals or litigation process, based on the technical merits. Based on our
evaluation, we have concluded that there are no significant uncertain tax positions requiring
recognition on our financial statements.
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. In the event we have received an assessment for interest and/or penalties, it has been
classified in the financial statements as general and administrative expense.
Stock-Based Compensation
Effective January 1, 2006, the Company started to measure and recognize compensation expense
for all stock-based payment awards made to employees and directors, including stock options based
on their fair values as required by the Compensation-Stock Compensation Topic of the FASB
Accounting Standards Codification. The Company used the modified prospective transition method as
of January 1, 2006. In accordance with the modified prospective transition method, the Companys
financial statements for prior periods have not been restated to reflect, and do not include, the
impact of stock compensation expense.
Stock-based compensation expense recognized is based on the value of the portion of
stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense
recognized in the Companys consolidated statement of operations during the fiscal years ended
December 31, 2009, 2008, and 2007 includes compensation expense for stock-based payment awards
granted prior to, but not yet vested as of, December 31, 2005 based on the grant date fair value
estimated in accordance with the pro forma provisions.
Net Income (Loss) Per Share
The Company calculates earnings per share (EPS) as required by the Earning Per Share Topic
of the FASB Accounting Standards Codification. Basic EPS is calculated by dividing the net
income/loss 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-13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands, except per share amounts) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders |
|
$ |
4,752 |
|
|
|
($732 |
) |
|
$ |
3,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
32,438 |
|
|
|
30,978 |
|
|
|
29,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential common shares options (treasury stock method) |
|
|
459 |
|
|
|
|
|
|
|
1,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
32,897 |
|
|
|
30,978 |
|
|
|
30,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares excluded (anti-dilutive) |
|
|
|
|
|
|
4,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares excluded due to an exercise price greater than weighted average stock price for the period |
|
|
2,496 |
|
|
|
|
|
|
|
1,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.15 |
|
|
|
($0.02 |
) |
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.14 |
|
|
|
($0.02 |
) |
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In January 2010, the FASB issued the Fair Value Measurements and Disclosures Topic of the
FASB Accounting Standards Codification. This guidance amends the disclosure requirements related
to recurring and nonrecurring fair value measurements and requires new disclosures on the transfers
of assets and liabilities between Level 1 (quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable inputs) of the fair value measurement
hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance
requires a roll forward of activities on purchases, sales, issuance and settlements of the assets
and liabilities measured using significant unobservable inputs (Level 3 fair value measurements).
The guidance will become effective for the reporting period beginning January 1, 2010, except for
the disclosure on the roll forward activities for Level 3 fair value measurements, which will
become effective for the reporting period beginning January 1, 2011. The Company will adopt this
guidance on its effective date and since it currently only has Level 1 assets and liabilities; it
does not expect its adoption to have an impact on its consolidated results of operations and
financial condition.
In October 2009, the FASB issued amended revenue recognition guidance for arrangements with
multiple deliverables. The new guidance eliminates the residual method of revenue recognition and
allows the use of managements best estimate of selling price for individual elements of an
arrangement when vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or
third-party evidence (TPE) is unavailable. For the Company, this guidance is effective for all
new or materially modified arrangements entered into on or after January 1, 2011 with earlier
application permitted as of the beginning of a fiscal year. Full retrospective application of the
new guidance is optional. The Company is currently assessing its implementation of this new
guidance, but does not expect a material impact on the consolidated financial statements.
In October 2009, the FASB issued guidance which amends the scope of existing software revenue
recognition accounting. Tangible products containing software components and non-software
components that function together to deliver the products essential functionality would be scoped
out of the accounting guidance on software and accounted for based on other appropriate revenue
recognition guidance. For the Company, this guidance is effective for all new or materially
modified arrangements entered into on or after January 1, 2011 with earlier application permitted
as of the beginning of a fiscal year. Full retrospective application of the new guidance is
optional. This guidance must be adopted in the same period that the company adopts the amended
accounting for arrangements with multiple deliverables described in the preceding paragraph. The
Company is currently assessing its implementation of this new guidance, but does not expect a
material impact on the consolidated financial statements.
In August 2009, the FASB issued guidance on the measurement of liabilities at fair value. The
guidance provides clarification that in circumstances in which a quoted market price in an active
market for an identical liability is not available, an entity is required to measure fair value
using a valuation technique that uses the quoted price of an identical liability when traded as an
asset or, if unavailable, quoted prices for similar liabilities or similar assets when traded as
assets. If none of this information is available, an entity should use a valuation technique in
accordance with existing fair valuation principles. The Company adopted this guidance in the
quarter ended December 31, 2009 and there was no material impact on the consolidated financial
statements.
F-14
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principlesa
replacement of FASB Statement No. 162. SFAS No. 168 became the source of authoritative U.S. GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this Statement, the Codification superseded all
then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC
accounting literature not
included in the Codification became nonauthoritative. This Statement is effective for
financial statements issued for interim and annual periods ending after September 15, 2009. The
Company adopted SFAS No. 168 on its effective date.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS
No. 167 addresses (1) the effects on certain provisions of Financial Accounting Standards Board
Interpretation (FIN) No. 46 (revised December 2003), Consolidation of Variable Interest
Entities, as a result of the elimination of the qualifying special-purpose entity concept in SFAS
No. 166, Accounting for Transfers of Financial Assets, and (2) constituent concerns about the
application of certain key provisions of FIN No. 46(R), including those in which the accounting
and disclosures under the Interpretation do not always provide timely and useful information about
an enterprises involvement in a variable interest entity. This Statement shall be effective as
of the beginning of each reporting entitys first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting period, and for interim
and annual reporting periods thereafter. Earlier application is prohibited. The Company will
adopt SFAS No. 167 on its effective date and does not expect its adoption to have an impact on its
consolidated results of operations and financial condition.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assetsan
amendment of FASB Statement No. 140. SFAS No. 166 was issued to improve the relevance,
representational faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a transferors
continuing involvement, if any, in transferred financial assets. This Statement must be applied
as of the beginning of each reporting entitys first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting period and for interim
and annual reporting periods thereafter. Earlier application is prohibited. This Statement must
be applied to transfers occurring on or after the effective date. The Company will adopt SFAS No.
166 on its effective date and does not expect its adoption to have an impact on its consolidated
results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 141(R) (Revised 2007), Business Combinations which
has since been superseded by the Business Combinations Topic of the FASB Accounting Standards
Codification. The Topic is to improve reporting by creating greater consistency in the
accounting and financial reporting of business combinations, resulting in more complete,
comparable and relevant information for investors and other users of financial statements. The
Topic requires the acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities assumed; and requires
the acquirer to disclose to investors and other users all of the information they need to evaluate
and understand the nature and financial effect of the business combination. The Topic is effective
as of the start of fiscal years beginning after December 15, 2008. Early adoption is not allowed.
The Company has adopted this Topic and its adoption did not have a material impact its
consolidated results of operations and financial condition.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements which has since been superseded by the Consolidation Topic of the FASB
Accounting Standards Codification. This Topic improves the relevance, comparability, and
transparency of financial information provided to investors by requiring all entities to report
non-controlling (minority) interests in subsidiaries in the same wayas equity in the consolidated
financial statements. Moreover, it eliminates the diversity that currently exists in accounting
for transactions between an entity and non-controlling interests by requiring they be treated as
equity transactions. The Topic is effective as of the start of fiscal years beginning after
December 15, 2008. Early adoption is not allowed. The Company has adopted this Topic and its
adoption did not impact its consolidated results of operations and financial condition.
F-15
2. Acquisitions
Core Mobility, Inc.
On October 26, 2009, the Company acquired Core Mobility, Inc. (Core Mobility), a developer
of mobility software and solutions, for $10 million in cash and 700,000 shares of Smith Micro
common stock. Core Mobility became a wholly-owned subsidiary of Smith Micro. In addition, the
former shareholders of Core Mobility
have the ability to earn additional cash consideration of up to $1.9 million in the form of
earn-out payments, contingent on Core Mobility achieving certain milestone deliverables for product
development and deployment. Of the $10 million of cash consideration, $3.0 million was held back
(Holdback) as security against possible indemnification obligations. Assuming there are no
claims, 50% of the Holdback will be paid on the eight month anniversary of the closing, and the
remaining 50% on the one year anniversary. Acquisition-related costs of $0.2 million were recorded
as expense in the fiscal year ended December 31, 2009 in the general and administrative section of
the consolidated statement of operations.
The total purchase price is summarized as follows (in thousands):
|
|
|
|
|
Cash paid at closing |
|
$ |
6,970 |
|
Holdback (including interest) |
|
|
3,041 |
|
Common stock issued |
|
|
6,881 |
|
Milestone payments |
|
|
1,839 |
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
18,731 |
|
|
|
|
|
The Companys allocation of the purchase price is summarized as follows (in thousands):
|
|
|
|
|
Assets: |
|
|
|
|
Cash |
|
$ |
63 |
|
Accounts receivable |
|
|
997 |
|
Unbilled receivable |
|
|
324 |
|
Prepaid and other assets |
|
|
136 |
|
Fixed assets |
|
|
856 |
|
Deferred tax assets |
|
|
1,735 |
|
Intangible assets |
|
|
8,858 |
|
Goodwill |
|
|
10,837 |
|
Total assets |
|
|
23,806 |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Accounts payable |
|
|
26 |
|
Accrued expenses |
|
|
258 |
|
Deferred revenue |
|
|
1,280 |
|
Deferred tax liability |
|
|
3,511 |
|
Total liabilities |
|
|
5,075 |
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
18,731 |
|
|
|
|
|
The results of operations of Core Mobility have been included in the Companys consolidated
financial statements from the date of acquisition. The pro-forma effect of the acquisition on
historical periods is not material and therefore is not included.
F-16
PCTELS Mobility Solutions Group
On January 4, 2008, the Company acquired substantially all of the assets of PCTELS Mobility
Solutions Group in exchange for $59.7 million in cash. The direct acquisition costs incurred to
date include $1.2 million of legal and professional services.
The results of operations of the business acquired have been included in the Companys
consolidated financial statements from the date of acquisition. Depreciation and amortization
related to the acquisition were calculated based on the estimated fair market values and estimated
lives for property and equipment and certain identifiable intangible assets acquired.
The total purchase price is summarized as follows (in thousands):
|
|
|
|
|
Cash consideration |
|
$ |
59,700 |
|
Acquisition related costs |
|
|
1,231 |
|
Total purchase price |
|
$ |
60,931 |
|
|
|
|
|
The Companys allocation of the purchase price is summarized as follows (in thousands):
|
|
|
|
|
Assets: |
|
|
|
|
Property & equipment |
|
$ |
718 |
|
Intangible assets |
|
|
13,050 |
|
Goodwill |
|
|
50,319 |
|
Total assets |
|
|
64,087 |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Deferred revenue |
|
|
3,156 |
|
Total liabilities |
|
|
3,156 |
|
|
|
|
|
|
|
|
|
|
Total purchase price |
|
$ |
60,931 |
|
|
|
|
|
Unaudited pro forma consolidated results of operations for the year ended December 31, 2007 as
if the acquisition had occurred as of January 1, 2007 is as follows (in thousands, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, 2007 |
|
|
|
Historical |
|
|
Proforma |
|
Net revenues |
|
$ |
73,377 |
|
|
$ |
83,714 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
3,161 |
|
|
$ |
(1,774 |
) |
|
|
|
|
|
|
|
Net income (loss) per share, basic |
|
$ |
0.11 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
Net income (loss) per share, diluted |
|
$ |
0.10 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
Weighted average shares
outstanding, basic |
|
|
29,768 |
|
|
|
29,768 |
|
|
|
|
|
|
|
|
Weighted average shares
outstanding, diluted |
|
|
30,998 |
|
|
|
29,768 |
|
|
|
|
|
|
|
|
Pro forma adjustments include $2.7 million for additional amortization related to intangible
assets acquired, $0.5 million for reduced stock based compensation expense and the elimination of
interest income earned on the cash used in the acquisition.
F-17
3. Balance Sheet Details
Short-Term Investments
Available-for-sale securities with contractual maturities of less than 12 months were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Fair value |
|
|
Unrealized (loss) |
|
|
Fair value |
|
|
Unrealized gain |
|
Corporate bonds and notes |
|
$ |
3,499 |
|
|
$ |
|
|
|
$ |
8,320 |
|
|
$ |
26 |
|
Government securities |
|
|
27,785 |
|
|
|
(2 |
) |
|
|
14,329 |
|
|
|
43 |
|
Total |
|
$ |
31,284 |
|
|
$ |
(2 |
) |
|
$ |
22,649 |
|
|
$ |
69 |
|
Realized
(losses) recognized in interest and other income were $(0.2) million for the year
ended December 31, 2009. Realized gains recognized in interest
and other income were $0.2 million
for the year ended December 31, 2008.
Equipment and Improvements
Equipment and improvements consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Computer hardware, software, and equipment |
|
$ |
6,551 |
|
|
$ |
3,393 |
|
Leasehold improvements |
|
|
4,081 |
|
|
|
3,073 |
|
Office furniture and fixtures |
|
|
737 |
|
|
|
566 |
|
|
|
|
|
|
|
|
|
|
|
11,369 |
|
|
|
7,032 |
|
Less accumulated depreciation and amortization |
|
|
(3,176 |
) |
|
|
(2,743 |
) |
Equipment and improvements, net |
|
$ |
8,193 |
|
|
$ |
4,289 |
|
|
|
|
|
|
|
|
Depreciation
and amortization expense on equipment and improvements was $1.7 million, $1.1
million, and $0.4 million for the years ended December 31, 2009, 2008, and 2007 respectively.
Intangible Assets
The following table sets forth our acquired intangible assets by major asset class as of
December 31, 2009 and 2008 (in thousands except useful life data):
F-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful |
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
life |
|
|
|
|
|
|
Accumulated |
|
|
Net book |
|
|
|
|
|
|
Accumulated |
|
|
Net book |
|
|
|
(years) |
|
|
Gross |
|
|
amortization |
|
|
value |
|
|
Gross |
|
|
amortization |
|
|
value |
|
Amortizing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technology |
|
|
2 |
|
|
$ |
6,667 |
|
|
$ |
(3,349 |
) |
|
$ |
3,318 |
|
|
$ |
3,047 |
|
|
$ |
(1,836 |
) |
|
$ |
1,211 |
|
In process R&D |
|
|
2 |
|
|
|
990 |
|
|
|
|
|
|
|
990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software |
|
|
5-7 |
|
|
|
23,846 |
|
|
|
(11,485 |
) |
|
|
12,361 |
|
|
|
23,846 |
|
|
|
(6,899 |
) |
|
|
16,947 |
|
Distribution rights |
|
|
5 |
|
|
|
482 |
|
|
|
(447 |
) |
|
|
35 |
|
|
|
482 |
|
|
|
(377 |
) |
|
|
105 |
|
Customer lists |
|
|
5 |
|
|
|
1,484 |
|
|
|
(1,048 |
) |
|
|
436 |
|
|
|
1,484 |
|
|
|
(676 |
) |
|
|
808 |
|
Database |
|
|
10 |
|
|
|
182 |
|
|
|
(38 |
) |
|
|
144 |
|
|
|
182 |
|
|
|
(20 |
) |
|
|
162 |
|
Trademarks |
|
|
5-10 |
|
|
|
926 |
|
|
|
(445 |
) |
|
|
481 |
|
|
|
809 |
|
|
|
(375 |
) |
|
|
434 |
|
Trade names |
|
|
1-2 |
|
|
|
2,121 |
|
|
|
(807 |
) |
|
|
1,314 |
|
|
|
2,121 |
|
|
|
(406 |
) |
|
|
1,715 |
|
Non-compete |
|
|
2 |
|
|
|
21 |
|
|
|
(2 |
) |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer agreements |
|
|
4-7 |
|
|
|
1,135 |
|
|
|
(1,135 |
) |
|
|
|
|
|
|
1,135 |
|
|
|
(650 |
) |
|
|
485 |
|
Customer relationships |
|
|
1-9 |
|
|
|
11,130 |
|
|
|
(2,566 |
) |
|
|
8,564 |
|
|
|
7,020 |
|
|
|
(1,284 |
) |
|
|
5,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
|
$ |
48,984 |
|
|
$ |
(21,322 |
) |
|
$ |
27,662 |
|
|
$ |
40,126 |
|
|
$ |
(12,523 |
) |
|
$ |
27,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense on intangible assets was $8.8 million, $7.3 million, and $2.8
million for the years ended December 31, 2009, 2008, and 2007 respectively. Expected future
amortization expense is as follows: $8.8 million for 2010, $8.5 million for 2011, $6.3 million
for 2012, $3.3 million for 2013, $0.7 million for 2014 and $0.1 million thereafter.
Goodwill
The Company determined that it did not have any impairment of goodwill at December 31, 2009.
The carrying amount of the Companys goodwill was $94.3 million as of December 31, 2009 and
$83.5 million as of December 31, 2008.
Other
Assets
Deposits
have been reclassified from prepaid expenses and other current
assets. These are primarily office rent deposits.
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Salaries and benefits |
|
$ |
5,390 |
|
|
$ |
4,006 |
|
Income taxes payable |
|
|
106 |
|
|
|
867 |
|
Royalties and Revenue Sharing |
|
|
239 |
|
|
|
606 |
|
Earnouts/holdbacks |
|
|
5,220 |
|
|
|
540 |
|
Marketing expenses and rebates |
|
|
181 |
|
|
|
437 |
|
Other |
|
|
223 |
|
|
|
254 |
|
Total accrued liabilities |
|
$ |
11,359 |
|
|
$ |
6,710 |
|
|
|
|
|
|
|
|
F-19
4. Income Taxes
A summary of the income tax expense is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
3,662 |
|
|
$ |
855 |
|
|
$ |
|
|
State |
|
|
1,215 |
|
|
|
1,255 |
|
|
|
|
|
Foreign |
|
|
65 |
|
|
|
101 |
|
|
|
|
|
Total current |
|
|
4,942 |
|
|
|
2,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
2,734 |
|
|
|
2,784 |
|
|
|
526 |
|
State |
|
|
22 |
|
|
|
(230 |
) |
|
|
339 |
|
Foreign |
|
|
|
|
|
|
(148 |
) |
|
|
|
|
Excess tax benefits related to stock based compensation |
|
|
871 |
|
|
|
72 |
|
|
|
3,775 |
|
Tax deficiencies related to restricted stock expense |
|
|
(66 |
) |
|
|
(625 |
) |
|
|
|
|
Purchase accounting adjustment Core Mobility |
|
|
(1,765 |
) |
|
|
|
|
|
|
|
|
Other adjustments |
|
|
|
|
|
|
(40 |
) |
|
|
674 |
|
Change in valuation allowance |
|
|
|
|
|
|
148 |
|
|
|
|
|
Total deferred |
|
|
1,796 |
|
|
|
1,961 |
|
|
|
5,314 |
|
|
|
|
|
|
|
|
|
|
|
Total provision |
|
$ |
6,738 |
|
|
$ |
4,172 |
|
|
$ |
5,314 |
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007, in addition to the $5,314,000 income tax provision
detailed in the table above, the Company also paid approximately $28,000 in foreign withholding
taxes for a total of $5,342,000 as shown on the consolidated statement of operations.
A reconciliation of the provision for income taxes to the amount of income tax expense that
would result from applying the federal statutory rate (35% in 2009 and 34% in 2008 and 2007) to the
profit before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Federal statutory rate |
|
|
35 |
% |
|
|
34 |
% |
|
|
34 |
% |
State tax, net of federal benefit |
|
|
7 |
|
|
|
17 |
|
|
|
9 |
|
Equity compensation |
|
|
13 |
|
|
|
69 |
|
|
|
19 |
|
Other |
|
|
4 |
|
|
|
(3 |
) |
|
|
|
|
Change in valuation allowance |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59 |
% |
|
|
121 |
% |
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
|
F-20
The major components of the Companys deferred tax assets and liabilities are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Current |
|
|
|
|
|
|
|
|
Various reserves |
|
$ |
660 |
|
|
$ |
340 |
|
Nondeductible accruals |
|
|
1,193 |
|
|
|
851 |
|
Deferred state taxes |
|
|
542 |
|
|
|
384 |
|
Prepaid expenses |
|
|
(246 |
) |
|
|
(1 |
) |
Other |
|
|
59 |
|
|
|
(19 |
) |
Equity compensation |
|
|
488 |
|
|
|
171 |
|
Valuation allowance |
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
|
Total Current |
|
|
2,696 |
|
|
|
1,698 |
|
|
|
|
|
|
|
|
|
|
Non- current |
|
|
|
|
|
|
|
|
Credit carryforwards |
|
|
1,583 |
|
|
|
1,718 |
|
Net operating loss carryforwards |
|
|
1,178 |
|
|
|
1,107 |
|
State tax |
|
|
(563 |
) |
|
|
(554 |
) |
Fixed assets |
|
|
(512 |
) |
|
|
(95 |
) |
Amortization |
|
|
710 |
|
|
|
602 |
|
Identifiable intangibles acquired |
|
|
(3,585 |
) |
|
|
(189 |
) |
Equity based compensation |
|
|
192 |
|
|
|
161 |
|
Other |
|
|
3 |
|
|
|
129 |
|
Valuation allowance |
|
|
|
|
|
|
(119 |
) |
|
|
|
|
|
|
|
Total Non-current |
|
|
(994 |
) |
|
|
2,760 |
|
|
|
$ |
1,702 |
|
|
$ |
4,458 |
|
|
|
|
|
|
|
|
The Company has federal and state net operating loss carryforwards of approximately $1.9
million and $7.3 million respectively, at December 31, 2009. These federal and state net operating
loss carryforwards will expire from 2011 through 2029.
In addition, the Company has federal and state tax credit carryforwards of approximately $0.5
million and $1.1 million, respectively, at December 31, 2009. These tax credits will begin to
expire in 2025.
The Company accounts for income taxes as required by the Income Taxes Topic of the FASB
Accounting Standards Codification. This Topic clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Topic also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Topic requires an entity to recognize the financial statement impact of a tax position
when it is more likely than not that the position will be sustained upon examination. The
amount recognized is measured as the largest amount of benefit that is greater than fifty percent
likely of being realized upon ultimate settlement. In addition, the Topic permits an entity to
recognize interest and penalties related to tax uncertainties either as income tax expense or
operating expenses. The Company has chosen to recognize interest and penalties related to tax
uncertainties as operating expense.
The Company has concluded that there are no significant uncertain tax positions requiring
recognition in its financial statements. As a result, the adoption of this Topic did not have a
material impact on the Companys results of operation and financial position.
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
2006 through 2008 tax years. State income tax returns are subject to examination for a period of
three to four years after filing.
5. Commitments and Contingencies
Leases
The Company leases its buildings under operating leases that expire on various dates through
2016. Future minimum annual lease payments under such leases as of December 31, 2009 are as follows
(in thousands):
F-21
|
|
|
|
|
Year Ending December 31, |
|
Operating |
|
2010 |
|
$ |
1,838 |
|
2011 |
|
|
1,684 |
|
2012 |
|
|
1,432 |
|
2013 |
|
|
1,033 |
|
2014 |
|
|
1,061 |
|
Beyond |
|
|
2,354 |
|
Total |
|
$ |
9,402 |
|
Total rent expense was $1.9 million, $1.8 million, and $1.0 million for the years ended
December 31, 2009, 2008, and 2007, respectively.
Litigation
From time to time the Company is subject to litigation in the normal course of business, none
of which management believes will likely have a material adverse effect on the Companys
consolidated financial condition or results of operations.
Other Contingent Contractual Obligations
During its normal course of business, the Company has made certain indemnities, commitments
and guarantees under which it may be required to make payments in relation to certain transactions.
These include: intellectual property indemnities to the Companys customers and licensees in
connection with the use, sale and/or license of Company products; indemnities to various lessors in
connection with facility leases for certain claims arising from such facility or lease; indemnities
to vendors and service providers pertaining to claims based on the negligence or willful misconduct
of the Company; indemnities involving the accuracy of representations and warranties in certain
contracts; and indemnities to directors and officers of the Company to the maximum extent permitted
under the laws of the State of Delaware. In addition, the Company has made contractual commitments
to employees providing for severance payments upon the occurrence of certain prescribed events.
The Company may also issue a guarantee in the form of a standby letter of credit as security for
contingent liabilities under certain customer contracts. The duration of these indemnities,
commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these
indemnities, commitments and guarantees may not provide for any limitation of the maximum potential
for future payments the Company could be obligated to make. The Company has not
recorded any liability for these indemnities, commitments and guarantees in the accompanying
consolidated balance sheets.
6. Segment and Geographical Information
Segment Information
Public companies are required to report financial and descriptive information about their
reportable operating segments as required by the Segment Reporting Topic of the FASB Accounting
Standards Codification. The Company identifies its operating segments based on how management
internally evaluates separate financial information, business activities and management
responsibility. During the quarter ending December 31, 2008, the Company re-organized our
operations into two primary business units. Wireless includes our connection manager
solutions for the OEM and Enterprise channels, music, photo and video content management, firmware
over the air and products for the IMS application layer. The Company aggregated the Connectivity &
Security, Multimedia, and Mobile Device Solutions operating units into one business segment. The
reason for this was because their economic characteristics are similar, as are the nature of the
products and services, the software engineering and development (production), and the type/class of
customers. It was becoming increasingly difficult to separate these operating segments from a
reporting and management viewpoint. Productivity & Graphics includes retail and direct
sales of our compression and broad consumer-based software. Corporate/Other revenue includes the
consulting portion of our services sector which has been de-emphasized and is no longer considered
a strategic element of our future plans.
F-22
The Company does not separately allocate operating expenses to these business units, nor does
it allocate specific assets. Therefore, business unit information reported includes only revenues.
The following table shows the revenues generated by each business unit (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Wireless |
|
$ |
89,420 |
|
|
$ |
73,219 |
|
|
$ |
57,819 |
|
Productivity & Graphics |
|
|
17,014 |
|
|
|
23,925 |
|
|
|
14,368 |
|
Corporate/Other |
|
|
845 |
|
|
|
1,280 |
|
|
|
1,190 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
107,279 |
|
|
|
98,424 |
|
|
|
73,377 |
|
Cost of revenues |
|
|
15,486 |
|
|
|
20,108 |
|
|
|
20,644 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
91,793 |
|
|
$ |
78,316 |
|
|
$ |
52,733 |
|
|
|
|
|
|
|
|
|
|
|
Our four largest customers are in the Wireless segment and each exceeded 10% of revenues for
fiscal year 2009. Verizon Wireless, Dell, Sprint and AT&T accounted for 65.7% of our revenues in
fiscal 2009. One customer in the Wireless business segment, Verizon Wireless, accounted for 32.0%
of total revenues in for the year ended December 31, 2008, and 64.4% for the year ended December
31, 2007.
Geographical Information
During the years ended December 31, 2009, 2008, and 2007, 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 customers bill-to address, were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Americas |
|
$ |
99,172 |
|
|
$ |
88,350 |
|
|
$ |
68,974 |
|
Asia Pacific |
|
|
3,705 |
|
|
|
5,011 |
|
|
|
2,151 |
|
EMEA |
|
|
4,402 |
|
|
|
5,063 |
|
|
|
2,252 |
|
Total revenues |
|
$ |
107,279 |
|
|
$ |
98,424 |
|
|
$ |
73,377 |
|
The Company does not separately allocate specific assets to these geographic locations.
7. Profit Sharing
The Company offers its employees a 401(k) plan, in which the Company matches the employee
contribution at a rate of 20%, subject to a vesting schedule. Total employer contributions
amounted to $0.4 million, $0.3 million and $0.2 million for the years ended December 31, 2009, 2008
and 2007, respectively.
8. Stock-Based Compensation
Stock Plans
On July 28, 2005, our Shareholders approved the 2005 Stock Option / Stock Issuance Plan (2005
Plan). The 2005 Plan, which became effective the same date, replaced the 1995 Stock Option /
Stock Issuance Plan (1995 Plan), which expired on May 24, 2005. All outstanding options under
the 1995 Plan remained outstanding, but no further grants will be made under that Plan.
The 2005 Plan provides for the issuance of non-qualified or incentive stock options and
restricted stock to employees, non-employee members of the board and consultants. The exercise
price per share for option grants is
F-23
not to be less than the fair market value per share of the Companys 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 Companys 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).
SFAS 123(R)
Effective January 1, 2006, the Company started to measure and recognize compensation expense
for all stock-based payment awards made to employees and directors, including stock options based
on their fair values as required by the Compensation-Stock Compensation Topic of the FASB
Accounting Standards Codification. The Company used the modified prospective transition method as
of January 1, 2006. In accordance with the modified prospective transition method, the Companys
financial statements for prior periods have not been restated to reflect, and do not include, the
impact of stock compensation expense.
Stock-based compensation expense recognized is based on the value of the portion of
stock-based payment awards that is ultimately expected to vest. Share-based compensation expense
recognized in the Companys consolidated statement of operations during the years ended December
31, 2009, 2008 and 2007 includes compensation expense for share-based payment awards granted prior
to, but not yet vested as of, December 31, 2005 based on the grant date fair value estimated in
accordance with the pro forma provisions.
Valuation of Stock Option and Restricted Stock Awards
The weighted average grant-date fair value of stock options granted during the years ended
December 31, 2009, 2008, and 2007 was $3.23, $3.74 and $7.70, respectively. The assumptions used
to compute the share-based compensation costs for the stock options granted during the years ended
December 31, 2009, 2008 and 2007, respectively, using the Black-Scholes option pricing model, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
Assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate (average) |
|
|
0.5 |
% |
|
|
2.8 |
% |
|
|
4.6 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average expected life (years) |
|
|
1 |
|
|
|
4 |
|
|
|
4 |
|
Volatility (average) |
|
|
71.0 |
% |
|
|
71.0 |
% |
|
|
66.0 |
% |
Forfeiture rate |
|
|
|
|
|
|
3.5 |
% |
|
|
10.0 |
% |
The risk-free interest rate assumption was based on the United States Treasurys 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.
Grants of restricted stock are valued using the closing stock price on the date of grant. In
the year ended December 31, 2009, a total of 50,000 shares of restricted stock, with a total value
of $0.2 million, were granted to non-employee members of the Board of Directors. This cost will be
amortized over a period of 12 months. In addition, 1.0 million shares of restricted stock, with a
total value of $5.0 million, were granted to key officers and employees of the Company. This cost
will be amortized over a period of 48 months.
F -24
Compensation Costs
As required by the Compensation-Stock Compensation Topic of the FASB Accounting Standards
Codification, the Company elected to attribute the value of stock-based compensation to expense
using the straight-line method over the requisite service period for each award, which was
previously used for its pro forma information. Stock-based non-cash compensation expenses related
to stock options and restricted stock grants were recorded in the financial statements as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cost of revenues |
|
$ |
184 |
|
|
$ |
430 |
|
|
$ |
295 |
|
Selling and marketing |
|
|
2,498 |
|
|
|
3,460 |
|
|
|
4,920 |
|
Research and development |
|
|
2,514 |
|
|
|
3,201 |
|
|
|
2,353 |
|
General and administrative |
|
|
3,528 |
|
|
|
4,886 |
|
|
|
4,804 |
|
|
|
|
|
|
|
|
|
|
|
Total non-cash stock compensation expense |
|
$ |
8,724 |
|
|
$ |
11,977 |
|
|
$ |
12,372 |
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation for each year includes cash payment of income taxes related to
grants of restricted stock in the amounts of $1.1 million, $1.2 million and $2.2 million for the
years ended December 31, 2009, 2008, and 2007, respectively.
Stock Options
A summary of the Companys stock options outstanding under the 2005 Plan as of December 31,
2009 and the activity during the years ended herein are as follows (in thousands except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Ave. |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Intrinsic Value |
|
Outstanding as of December 31, 2006 |
|
|
2,518 |
|
|
$ |
4.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(914 options, exercisable at a weighted average exercise
price of $3.91) |
|
|
|
|
|
|
|
|
|
|
|
|
Granted (weighted average fair value of $7.70) |
|
|
3,142 |
|
|
$ |
14.61 |
|
|
|
|
|
Exercised |
|
|
(900 |
) |
|
$ |
4.23 |
|
|
|
|
|
Cancelled |
|
|
(106 |
) |
|
$ |
13.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2007 |
|
|
4,654 |
|
|
$ |
11.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(911 options, exercisable at a weighted average exercise
price of $4.93) |
|
|
|
|
|
|
|
|
|
|
|
|
Granted (weighted average fair value of $3.74) |
|
|
135 |
|
|
$ |
7.51 |
|
|
|
|
|
Exercised |
|
|
(49 |
) |
|
$ |
2.64 |
|
|
|
|
|
Cancelled |
|
|
(451 |
) |
|
$ |
14.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2008 |
|
|
4,289 |
|
|
$ |
10.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,481 options, exercisable at a weighted average exercise
price of $9.31) |
|
|
|
|
|
|
|
|
|
|
|
|
Granted (weighted average fair value of $3.23) |
|
|
25 |
|
|
$ |
11.59 |
|
|
|
|
|
Exercised |
|
|
(414 |
) |
|
$ |
4.02 |
|
|
|
|
|
Cancelled |
|
|
(364 |
) |
|
$ |
14.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009 |
|
|
3,536 |
|
|
$ |
11.29 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2009 |
|
|
2,754 |
|
|
$ |
10.55 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2009 |
|
|
3,536 |
|
|
$ |
11.29 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2009, options to acquire 414,000 shares were exercised
with an intrinsic value of $2.1 million, resulting in cash proceeds to the Company of $1.7 million.
The weighted-average
F -25
grant-date fair value of options granted during the year ended December 31,
2009 was $3.23. For the year ended December 31, 2009 there were $5.4 million of total unrecognized
compensation costs related to non-vested stock options granted under the Plan, which will be
recognized over the next two years. At December 31, 2009, there were 1.4 million shares available
for future grants under the 2005 Stock Issuance / Stock Option Plan.
Additional information regarding options outstanding as of December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
Options exercisable |
|
|
|
|
|
|
Weighted average |
|
Weighted |
|
|
|
|
|
Weighted |
Range of |
|
Number |
|
remaining |
|
average |
|
Number |
|
average |
exercise |
|
outstanding |
|
contractual |
|
exercise |
|
exercisable |
|
exercise |
prices |
|
(in thousands) |
|
life (years) |
|
price |
|
(in thousands) |
|
price |
$0.24 - $4.00 |
|
|
188 |
|
|
|
4.1 |
|
|
$ |
1.56 |
|
|
|
188 |
|
|
$ |
1.56 |
|
$4.01 - $6.00 |
|
|
684 |
|
|
|
5.6 |
|
|
$ |
4.95 |
|
|
|
684 |
|
|
$ |
4.95 |
|
$6.01 - $12.00 |
|
|
306 |
|
|
|
7.1 |
|
|
$ |
8.99 |
|
|
|
247 |
|
|
$ |
9.11 |
|
$12.01 - $14.00 |
|
|
1,310 |
|
|
|
7.1 |
|
|
$ |
12.68 |
|
|
|
932 |
|
|
$ |
12.69 |
|
$14.01 - $16.00 |
|
|
668 |
|
|
|
7.2 |
|
|
$ |
15.18 |
|
|
|
463 |
|
|
$ |
15.18 |
|
$16.01 - $19.00 |
|
|
380 |
|
|
|
7.4 |
|
|
$ |
17.73 |
|
|
|
240 |
|
|
$ |
17.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,536 |
|
|
|
6.7 |
|
|
$ |
11.29 |
|
|
|
2,754 |
|
|
$ |
10.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
A summary of the Companys restricted stock awards outstanding under the 2005 Plan as of
December 31, 2009, and the activity during years ended therein, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
Number |
|
grant date |
|
|
of shares |
|
fair value |
Unvested at December 31, 2006 |
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
527 |
|
|
|
|
|
Vested |
|
|
(440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2007 |
|
|
350 |
|
|
$ |
12.32 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,164 |
|
|
$ |
7.73 |
|
Vested |
|
|
(444 |
) |
|
$ |
10.59 |
|
Cancelled |
|
|
(72 |
) |
|
$ |
11.16 |
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2008 |
|
|
998 |
|
|
$ |
7.82 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,031 |
|
|
$ |
5.06 |
|
Vested |
|
|
(472 |
) |
|
$ |
7.17 |
|
Cancelled |
|
|
(142 |
) |
|
$ |
5.26 |
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2009 |
|
|
1,415 |
|
|
$ |
6.28 |
|
|
|
|
|
|
|
|
|
|
9. Comprehensive Income
Comprehensive income includes unrealized gains and losses on short-term investments of U.S.
government agency and government sponsored enterprise debt and equity securities. The following
table sets forth the calculation of comprehensive income (in thousands):
F -26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
4,752 |
|
|
$ |
(732 |
) |
|
$ |
3,161 |
|
Change in unrealized gain (loss) on investments, after tax |
|
|
(71 |
) |
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
4,681 |
|
|
$ |
(663 |
) |
|
$ |
3,161 |
|
|
|
|
|
|
|
|
|
|
|
10. Equity Transactions
On December 14, 2006, the Company completed a fully marketed secondary, issuing 4 million
shares of our common stock, $0.001 par value, at a price of $14.75 per share, resulting in
aggregate gross cash proceeds to the Company of $59.0 million before deducting commissions and
other expenses. Offering costs related to the transaction incurred in 2006 totaled $4.0 million,
comprised of $3.3 million in underwriting discounts and commissions and $0.7 million cash payments
for legal and investment services, resulting in net proceeds to the Company of $55.0 million as of
December 31, 2006. On January 18, 2007 an additional 0.4 million shares were sold under the same
agreement. Offering costs related to the transaction incurred in 2007 totaled $0.4 million,
comprised of $0.3 million in underwriting discounts and commissions and $0.1 million cash payments
for legal and investment services, resulting in additional net proceeds to the Company of $5.3
million as of December 31, 2007.
A Special Meeting of the Stockholders of the Company was held on September 28, 2007. This
meeting was adjourned, and reconvened on October 11, 2007. At the reconvened Special Meeting, the
Stockholders voted to approve an amendment to the 2005 Stock Option / Stock Issuance plan to
increase the maximum number of shares of common stock that may be issued under the 2005 Plan from 5
million shares (plus an annual increase) to 7 million shares (plus an annual increase).
11. Subsequent Events
In May
2009, the FASB issued new accounting guidance found under the Subsequent Events Topic of the FASB Accounting Standards Codification.
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. The Company has adopted this Topic.
Subsequent events have been evaluated as of March 2, 2010 and no further
disclosures were required and its adoption did not impact its consolidated
results of operations and financial condition.
F -27
12. Quarterly Financial Data (Unaudited)
The following financial information reflects all normal recurring adjustments, which are, in
the opinion of management, necessary for a fair statement of the results of the interim periods.
Summarized quarterly data for fiscal 2009 and 2008 are as follows (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009 |
|
|
1st Quarter |
|
2nd Quarter |
|
3rd Quarter |
|
4th Quarter |
Selected quarterly financial data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
23,788 |
|
|
$ |
25,986 |
|
|
$ |
27,820 |
|
|
$ |
29,685 |
|
Gross profit |
|
$ |
19,265 |
|
|
$ |
22,064 |
|
|
$ |
24,280 |
|
|
$ |
26,184 |
|
Operating income |
|
$ |
389 |
|
|
$ |
2,683 |
|
|
$ |
4,138 |
|
|
$ |
3,899 |
|
Net income |
|
$ |
278 |
|
|
$ |
1,277 |
|
|
$ |
1,981 |
|
|
$ |
1,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic (1) |
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
$ |
0.06 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding, basic |
|
|
31,675 |
|
|
|
32,338 |
|
|
|
32,523 |
|
|
|
33,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, diluted (1) |
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
$ |
0.06 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding, diluted |
|
|
31,904 |
|
|
|
32,955 |
|
|
|
33,145 |
|
|
|
33,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
|
1st Quarter |
|
2nd Quarter |
|
3rd Quarter |
|
4th Quarter |
Selected quarterly financial data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
21,880 |
|
|
$ |
23,452 |
|
|
$ |
26,641 |
|
|
$ |
26,451 |
|
Gross profit |
|
$ |
16,764 |
|
|
$ |
17,989 |
|
|
$ |
21,444 |
|
|
$ |
22,119 |
|
Operating income (loss) |
|
$ |
(1,888 |
) |
|
$ |
(469 |
) |
|
$ |
2,026 |
|
|
$ |
3,032 |
|
Net income (loss) |
|
$ |
(317 |
) |
|
$ |
(158 |
) |
|
$ |
(1,576 |
) |
|
$ |
1,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic (1) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding, basic |
|
|
30,406 |
|
|
|
30,855 |
|
|
|
31,289 |
|
|
|
31,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, diluted (1) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding, diluted |
|
|
30,406 |
|
|
|
30,855 |
|
|
|
31,289 |
|
|
|
31,658 |
|
|
|
|
(1) |
|
Basic and diluted net income (loss) per share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly per share amounts will not
necessarily equal the total for the year. |
F -28
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 2009
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
Balance at |
|
charged to |
|
|
|
|
|
Balance at |
|
|
beginning of |
|
costs and |
|
|
|
|
|
end of |
|
|
period |
|
expenses |
|
Deductions |
|
period |
Allowance for accounts receivable (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
1,204 |
|
|
$ |
1,596 |
|
|
$ |
(1,755 |
) |
|
$ |
1,045 |
|
2008 |
|
|
684 |
|
|
|
1,170 |
|
|
|
(650 |
) |
|
|
1,204 |
|
2007 |
|
|
500 |
|
|
|
574 |
|
|
|
(390 |
) |
|
|
684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for excess and obsolete inventory: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
404 |
|
|
$ |
1,063 |
|
|
$ |
(246 |
) |
|
$ |
1,221 |
|
2008 |
|
|
102 |
|
|
|
435 |
|
|
|
(133 |
) |
|
|
404 |
|
2007 |
|
|
82 |
|
|
|
178 |
|
|
|
(158 |
) |
|
|
102 |
|
|
|
|
(1) |
|
Allowances are for retail return reserves, marketing development funds and doubtful accounts. |
S -1