e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-26536
SMITH MICRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
|
|
|
DELAWARE
|
|
33-0029027 |
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
51 COLUMBIA
ALISO VIEJO, CA 92656
(Address of principal executive offices, including zip code)
(949) 362-5800
(Registrants telephone number, including area code)
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 whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o
(Do not check if a smaller reporting company)
|
|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2).
Yes o No þ
As of April 29, 2011 there were 35,870,291 shares of common stock outstanding.
SMITH MICRO SOFTWARE, INC.
QUARTERLY REPORT ON FORM 10-Q
March 31, 2011
TABLE OF CONTENTS
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value data)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(unaudited) |
|
(audited) |
Assets |
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
7,689 |
|
|
$ |
17,856 |
|
Short-term investments |
|
|
56,683 |
|
|
|
54,694 |
|
Accounts receivable, net of allowances for doubtful accounts
and other adjustments of $774 (2011) and $855 (2010) |
|
|
24,810 |
|
|
|
29,812 |
|
Income tax receivable |
|
|
2,872 |
|
|
|
2,872 |
|
Inventories, net of reserves for excess and obsolete inventory
of $474 (2011) and $558 (2010) |
|
|
352 |
|
|
|
370 |
|
Prepaid expenses and other current assets |
|
|
1,407 |
|
|
|
1,167 |
|
Deferred tax asset |
|
|
1,852 |
|
|
|
2,565 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
95,665 |
|
|
|
109,336 |
|
Equipment and improvements, net |
|
|
17,478 |
|
|
|
11,623 |
|
Goodwill |
|
|
94,231 |
|
|
|
94,231 |
|
Intangible assets, net |
|
|
17,429 |
|
|
|
19,459 |
|
Other assets |
|
|
240 |
|
|
|
243 |
|
Deferred tax asset |
|
|
6,253 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
231,296 |
|
|
$ |
234,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
7,224 |
|
|
$ |
4,592 |
|
Accrued liabilities |
|
|
8,253 |
|
|
|
8,444 |
|
Deferred revenue |
|
|
438 |
|
|
|
1,667 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
15,915 |
|
|
|
14,703 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
Long-term liabilities |
|
|
525 |
|
|
|
197 |
|
Deferred tax liability |
|
|
1,727 |
|
|
|
1,727 |
|
|
|
|
|
|
|
|
Total non-current liabilities |
|
|
2,252 |
|
|
|
1,924 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001 per share; 5,000,000 shares
authorized; none issued or outstanding |
|
|
|
|
|
|
|
|
Common stock, par value $0.001 per share; 50,000,000 shares authorized;
35,880,291 and 34,971,108 shares issued and outstanding at March 31, 2011
and December 31, 2010, respectively |
|
|
36 |
|
|
|
35 |
|
Additional paid-in capital |
|
|
204,314 |
|
|
|
201,702 |
|
Accumulated other comprehensive loss |
|
|
(6 |
) |
|
|
(10 |
) |
Accumulated earnings |
|
|
8,785 |
|
|
|
16,538 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
213,129 |
|
|
|
218,265 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
231,296 |
|
|
$ |
234,892 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
2
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
Revenues |
|
$ |
17,791 |
|
|
$ |
29,862 |
|
Cost of revenues |
|
|
3,776 |
|
|
|
3,732 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
14,015 |
|
|
|
26,130 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
8,362 |
|
|
|
7,290 |
|
Research and development |
|
|
11,680 |
|
|
|
10,128 |
|
General and administrative |
|
|
6,985 |
|
|
|
5,806 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
27,027 |
|
|
|
23,224 |
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(13,012 |
) |
|
|
2,906 |
|
Interest and other income |
|
|
43 |
|
|
|
40 |
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
(12,969 |
) |
|
|
2,946 |
|
Income tax expense (benefit) |
|
|
(5,216 |
) |
|
|
1,354 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(7,753 |
) |
|
$ |
1,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.22 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.22 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
35,263 |
|
|
|
33,730 |
|
|
|
|
|
|
|
|
Diluted |
|
|
35,263 |
|
|
|
34,176 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
3
SMITH
MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
|
|
|
Common stock |
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
capital |
|
|
loss |
|
|
income |
|
|
Total |
|
BALANCE, December 31, 2010 |
|
|
34,971 |
|
|
$ |
35 |
|
|
$ |
201,702 |
|
|
$ |
(10 |
) |
|
$ |
16,538 |
|
|
$ |
218,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options |
|
|
6 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Non cash compensation recognized on stock options
and ESPP |
|
|
|
|
|
|
|
|
|
|
708 |
|
|
|
|
|
|
|
|
|
|
|
708 |
|
Restricted stock grants, net of cancellations |
|
|
869 |
|
|
|
1 |
|
|
|
1,398 |
|
|
|
|
|
|
|
|
|
|
|
1,399 |
|
Cancellation of shares for payment of withholding tax |
|
|
(9 |
) |
|
|
|
|
|
|
(130 |
) |
|
|
|
|
|
|
|
|
|
|
(130 |
) |
Employee stock purchase plan (ESPP) |
|
|
43 |
|
|
|
|
|
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
345 |
|
Excess tax benefits from stock-based compensation |
|
|
|
|
|
|
|
|
|
|
284 |
|
|
|
|
|
|
|
|
|
|
|
284 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
4 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,753 |
) |
|
|
(7,753 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,749 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March 31, 2011 (unaudited) |
|
|
35,880 |
|
|
$ |
36 |
|
|
$ |
204,314 |
|
|
$ |
(6 |
) |
|
$ |
8,785 |
|
|
$ |
213,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited consolidated financial statements.
4
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(unaudited) |
|
|
(unaudited) |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(7,753 |
) |
|
$ |
1,592 |
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating activities, net of the effect of acquisitions: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,736 |
|
|
|
2,880 |
|
Provision for doubtful accounts and other adjustments to accounts receivable |
|
|
193 |
|
|
|
389 |
|
Provision for excess and obsolete inventory |
|
|
26 |
|
|
|
48 |
|
Excess tax benefits from stock-based compensation |
|
|
(284 |
) |
|
|
(407 |
) |
Non-cash compensation related to stock options and restricted stock |
|
|
2,107 |
|
|
|
2,257 |
|
Change in operating accounts, net of effect from acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
4,809 |
|
|
|
(2,693 |
) |
Deferred taxes |
|
|
(5,540 |
) |
|
|
3 |
|
Inventories |
|
|
(8 |
) |
|
|
(13 |
) |
Prepaid expenses and other assets |
|
|
(237 |
) |
|
|
228 |
|
Accounts payable and accrued liabilities |
|
|
1,694 |
|
|
|
616 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(2,257 |
) |
|
|
4,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Acquisitions, net of cash received |
|
|
|
|
|
|
(675 |
) |
Capital expenditures |
|
|
(6,561 |
) |
|
|
(1,304 |
) |
Purchase of short-term investments |
|
|
(1,985 |
) |
|
|
(6,541 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(8,546 |
) |
|
|
(8,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Excess tax benefits from stock-based compensation |
|
|
284 |
|
|
|
407 |
|
Cash received from stock sale for employee stock purchase plan |
|
|
345 |
|
|
|
|
|
Cash received from exercise of stock options |
|
|
7 |
|
|
|
153 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
636 |
|
|
|
560 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(10,167 |
) |
|
|
(3,060 |
) |
Cash and cash equivalents, beginning of period |
|
|
17,856 |
|
|
|
14,577 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
7,689 |
|
|
$ |
11,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
224 |
|
|
$ |
49 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
5
SMITH MICRO SOFTWARE, INC.
Notes to the Consolidated Financial Statements
1. The Company
Smith Micro Software, Inc. (we, us, our, Smith Micro, or the Company) 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, Visual Voicemail to Text, mobile device management and video. We also offer
user-friendly solutions for the management of mobile content, contacts and calendar data and
managed file transfers. 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.
2. Basis of Presentation
The accompanying interim consolidated
balance sheet and statement of stockholders equity as of March 31,
2011, and the related statements of operations and cash flows for the three months ended March 31,
2011 and 2010 are unaudited. The unaudited consolidated financial statements have been prepared
according to the rules and regulations of the Securities and Exchange Commission (SEC) and,
therefore, certain information and disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States have been omitted.
In the opinion of management, the accompanying unaudited consolidated financial statements for
the periods presented reflect all adjustments, which are normal and recurring, necessary to fairly
state the financial position, results of operations and cash flows. These unaudited consolidated
financial statements should be read in conjunction with the audited financial statements included
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on
February 25, 2011.
Intercompany balances and transactions have been eliminated in consolidation.
Operating results for the three months ended March 31, 2011 are not necessarily indicative of
the results that may be expected for any other interim period or for the fiscal year ending
December 31, 2011.
3. Net Income (Loss) Per Share
The Company calculates earnings per share (EPS) as required by Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) Topic No. 260, Earning Per
Share. Basic EPS is calculated by dividing the net income available to common stockholders by the
weighted average number of common shares outstanding for the period, excluding common stock
equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by
the weighted average number of common shares outstanding for the period plus the weighted average
number of dilutive common stock equivalents outstanding for the period determined using the
treasury-stock method. For periods with a net loss, the dilutive common stock equivalents are
excluded from the diluted EPS calculation. 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.
6
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(unaudited, in thousands, except per share amounts) |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income (loss) available to common
stockholders |
|
$ |
(7,753 |
) |
|
$ |
1,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
35,263 |
|
|
|
33,730 |
|
Potential common shares options (treasury
stock method) |
|
|
|
|
|
|
446 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding
diluted |
|
|
35,263 |
|
|
|
34,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares excluded (anti-dilutive) |
|
|
429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares excluded due to an exercise price
greater than weighted average stock price for the period |
|
|
1,934 |
|
|
|
2,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.22 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(0.22 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
4. 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 is 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 could not
exceed 5,000,000 shares, plus that number of additional shares equal to 2.5% of the number of
shares of common stock outstanding on the last trading day of the calendar year commencing with
calendar year 2006 (but not in excess of 750,000 shares). On October 11, 2007, our shareholders
voted to approve an amendment to the 2005 Plan to increase the maximum number of shares of common
stock that may be issued under the 2005 Plan from 5,000,000 shares (plus an annual increase) to
7,000,000 shares (plus an annual increase).
Employee Stock Purchase Plan
The Company has a shareholder approved employee stock purchase plan (ESPP), under which
substantially all employees may purchase the Companys common stock through payroll deductions at a
price equal to 85% of the lower of the fair market values of the stock as of the beginning and end
of six-month offering periods. An employees payroll deductions under the ESPP are limited to 10%
of the employees compensation and employees may not purchase more than the lesser of $25,000 of
stock, or 1,000 shares, for any calendar year. Additionally, no more than 1,000,000 shares may be
purchased under the plan.
Stock Compensation
The Company accounts for all stock-based payment awards made to employees and directors based
on their fair values and recognized as compensation expense over the vesting period using the
straight-line method over the requisite service period for each award as required by FASB ASC Topic
No. 718, Compensation-Stock Compensation.
7
Valuation of Stock Option and Restricted Stock Awards
There were no stock options granted during the three months ended March 31, 2011 or March 31,
2010.
Grants of restricted stock are valued using the closing stock price on the date of grant. In
the three months ended March 31, 2011, a total of 50,000 shares of restricted stock, with a total
value of $0.4 million, were granted to members of the Board of Directors. This cost will be amortized over a period of 12 months. In addition, 0.9 million
shares of restricted stock, with a total value of $8.1 million, were granted to key officers and
employees of the Company. This cost will be amortized over a period of 48 months.
Valuation of ESPP
The Companys initial six-month offering period began on October 1, 2010. A total of 43,335
shares were purchased/granted in the offering period. The fair value of the offering was $3.98 per
share and was estimated on the date of grant using a Black-Scholes valuation model that uses the
assumptions noted in the following table. The risk-free rate is based on the U.S. treasury yield
curve in effect at the time of grant. Expected volatility was based on the historical volatility on
the day of grant.
|
|
|
|
|
|
|
Offering Period Ended |
|
|
|
March 31, 2011 |
|
Assumptions |
|
|
|
|
Risk-free interest rate (average) |
|
|
.18 |
% |
Expected dividend yield |
|
|
|
|
Weighted average expected life (years) |
|
|
.5 |
|
Volatility (average) |
|
|
72.0 |
% |
Compensation Costs
As required by FASB ASC Topic No. 718, Compensation-Stock Compensation, 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, restricted stock grants and
the employee stock purchase plan were recorded in the financial statements as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
(unaudited) |
|
|
|
2011 |
|
|
2010 |
|
Cost of revenues |
|
$ |
17 |
|
|
$ |
28 |
|
Selling and marketing |
|
|
584 |
|
|
|
632 |
|
Research and development |
|
|
505 |
|
|
|
586 |
|
General and administrative |
|
|
1,001 |
|
|
|
1,011 |
|
|
|
|
|
|
|
|
Total non-cash stock compensation expense |
|
$ |
2,107 |
|
|
$ |
2,257 |
|
|
|
|
|
|
|
|
Total stock-based compensation for each quarter includes cash payment of income taxes related
to grants of restricted stock in the amount of $0.9 million in the three months ended March 31,
2011 and $0.5 million in the three months ended March 31, 2010.
Stock Options
A summary of the Companys stock options outstanding under the 2005 Plan as of March 31, 2011,
and the activity during the three months then ended, are as follows:
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Ave. |
|
|
Aggregate |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Intrinsic Value |
|
|
|
(in thousands except per share amounts) |
|
Outstanding as of December 31, 2010 |
|
|
2,706 |
|
|
$ |
11.69 |
|
|
|
|
|
Granted (unaudited) |
|
|
|
|
|
$ |
|
|
|
|
|
|
Exercised (unaudited) |
|
|
(6 |
) |
|
$ |
1.29 |
|
|
|
|
|
Cancelled (unaudited) |
|
|
(1 |
) |
|
$ |
12.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2011 (unaudited) |
|
|
2,699 |
|
|
$ |
11.71 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2011 (unaudited) |
|
|
2,653 |
|
|
$ |
11.68 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2011, options to acquire 5,688 shares were exercised
with an intrinsic value of $46,000, resulting in cash proceeds to the Company of $7,000. There
were no stock options granted during the three months ended March 31, 2011. For the quarter ended
March 31, 2011, there was $0.1 million of total unrecognized compensation costs related to
non-vested stock options granted under the Plan, which will be recognized by December 31, 2011. At
March 31, 2011, 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 March 31, 2011 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 |
|
|
157 |
|
|
|
3.0 |
|
|
$ |
1.62 |
|
|
|
157 |
|
|
$ |
1.62 |
|
$4.01 - $6.00 |
|
|
469 |
|
|
|
4.3 |
|
|
$ |
4.95 |
|
|
|
468 |
|
|
$ |
4.95 |
|
$6.01 - $12.00 |
|
|
180 |
|
|
|
6.5 |
|
|
$ |
8.81 |
|
|
|
165 |
|
|
$ |
8.90 |
|
$12.01 - $14.00 |
|
|
894 |
|
|
|
5.9 |
|
|
$ |
12.65 |
|
|
|
891 |
|
|
$ |
12.65 |
|
$14.01 - $16.00 |
|
|
630 |
|
|
|
6.0 |
|
|
$ |
15.18 |
|
|
|
626 |
|
|
$ |
15.18 |
|
$16.01 - $19.00 |
|
|
369 |
|
|
|
6.2 |
|
|
$ |
17.77 |
|
|
|
346 |
|
|
$ |
17.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,699 |
|
|
|
5.5 |
|
|
$ |
11.71 |
|
|
|
2,653 |
|
|
$ |
11.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
A summary of the Companys restricted stock awards outstanding under the 2005 Plan as of March
31, 2011, and the activity during the three months then ended, are as follows (in thousands):
|
|
|
|
|
|
|
Shares |
|
Unvested at December 31, 2010 |
|
|
1,604 |
|
Granted (unaudited) |
|
|
910 |
|
Cancelled/forfeited (unaudited) |
|
|
(41 |
) |
Vested (unaudited) |
|
|
(261 |
) |
|
|
|
|
Unvested at March 31, 2011 (unaudited) |
|
|
2,212 |
|
|
|
|
|
9
5. Fair Value of Financial Instruments
The Company measures and discloses fair value measurements as required by FASB ASC Topic No.
820, Fair Value Measurements and Disclosures.
The carrying value of accounts receivable, foreign cash accounts, prepaid expenses, other
current assets, accounts payable, and accrued 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 FASB ASC Topic No. 820, we measure our cash equivalents and short-term
investments at fair value. Our cash equivalents and short-term investments are classified within
Level 1 by using quoted market prices utilizing market observable inputs.
As required by FASB ASC Topic No. 825, Financial Instruments, an entity can choose to measure
at fair value many financial instruments and certain other items that are not currently required to
be measured at fair value. Subsequent changes in fair value for designated items are required to be
reported in earnings in the current period. This Topic also establishes presentation and disclosure
requirements for similar types of assets and liabilities measured at fair value. As permitted, the
Company has elected not to use the fair value option to measure our available-for-sale securities
under this Topic and will continue to report as required by FASB ASC Topic No. 320,
Investments-Debt and Equity Securities. We have made this election because the nature of our
financial assets and liabilities are not of such complexity that they would benefit from a change
in valuation to fair value.
6. 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 March 31, 2011 and December 31, 2010,
bank balances totaling approximately $2.9 million and $17.6 million, respectively, were uninsured.
7. Short-Term Investments
Short-term investments consist of U.S. government agency and government sponsored enterprise
obligations. The Company accounts for these short-term investments as required by FASB ASC Topic
No. 320, Investments-Debt and Equity Securities. These debt and equity securities are not
classified as either held-to-maturity securities or trading securities. As such, they are
classified as available-for-sale securities. Available-for-sale securities are recorded at fair
value, with unrealized gains or losses recorded as a separate component of accumulated other
comprehensive income in stockholders equity until realized. Available-for-sale securities with
contractual maturities of less than 12 months were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Amortized |
|
|
Net unrealized |
|
|
|
|
|
|
Amortized |
|
|
Net unrealized |
|
|
|
Fair value |
|
|
cost basis |
|
|
gain (loss) |
|
|
Fair value |
|
|
cost basis |
|
|
gain (loss) |
|
Corporate notes, bonds and paper |
|
$ |
48,271 |
|
|
$ |
48,279 |
|
|
$ |
(5 |
) |
|
$ |
39,691 |
|
|
$ |
39,704 |
|
|
$ |
(8 |
) |
Government securities |
|
|
8,412 |
|
|
|
8,414 |
|
|
|
(1 |
) |
|
|
15,003 |
|
|
|
15,007 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
56,683 |
|
|
$ |
56,693 |
|
|
$ |
(6 |
) |
|
$ |
54,694 |
|
|
$ |
54,711 |
|
|
$ |
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
8. Accounts Receivable
The Company performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for estimated credit losses, and those losses
have been within managements estimates. 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.
9. 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 March 31, 2011, our net inventory balance consisted of approximately $0.2 million of assembled
products and $0.2 million of components.
10. 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.
11. Goodwill
In accordance with FASB ASC Topic No. 350, Intangibles-Goodwill and Other, we review the
recoverability of the carrying value of goodwill at least annually or whenever events or
circumstances indicate a potential impairment. The Companys annual impairment testing date is
December 31. Recoverability of goodwill is determined by comparing the fair value of the Companys
reporting units to the carrying value of the underlying net assets in the reporting units. If the
fair value of a reporting unit is determined to be less than the carrying value of its net assets,
goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying
value of goodwill exceeds the difference between the fair value of the reporting unit and the fair
value of its other assets and liabilities. We determined that we did not have any impairment of
goodwill at December 31, 2010 and we have not noted any triggering events that would indicate
impairment as of March 31, 2011.
The carrying amount of the Companys goodwill was $94.2 million as of March 31, 2011 and
December 31, 2010.
12. Intangible Assets
The following table sets forth our acquired intangible assets by major asset class as of March
31, 2011 and December 31, 2010 (in thousands except useful life data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful |
|
|
March 31, 2011 |
|
|
December 31, 2010 |
|
|
|
life |
|
|
|
|
|
|
Accumulated |
|
|
Net book |
|
|
|
|
|
|
Accumulated |
|
|
Net book |
|
|
|
(years) |
|
|
Gross |
|
|
amortization |
|
|
value |
|
|
Gross |
|
|
amortization |
|
|
value |
|
Amortizing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technology |
|
|
1-3 |
|
|
$ |
7,347 |
|
|
$ |
(5,824 |
) |
|
$ |
1,523 |
|
|
$ |
7,347 |
|
|
$ |
(5,344 |
) |
|
$ |
2,003 |
|
In process R&D |
|
|
2 |
|
|
|
990 |
|
|
|
(124 |
) |
|
|
866 |
|
|
|
990 |
|
|
|
(62 |
) |
|
|
928 |
|
Capitalized software |
|
|
1-7 |
|
|
|
23,846 |
|
|
|
(16,117 |
) |
|
|
7,729 |
|
|
|
23,846 |
|
|
|
(15,336 |
) |
|
|
8,510 |
|
Customer lists |
|
|
3-5 |
|
|
|
1,484 |
|
|
|
(1,372 |
) |
|
|
112 |
|
|
|
1,484 |
|
|
|
(1,328 |
) |
|
|
156 |
|
Database |
|
|
10 |
|
|
|
182 |
|
|
|
(61 |
) |
|
|
121 |
|
|
|
182 |
|
|
|
(56 |
) |
|
|
126 |
|
Trademarks |
|
|
5-10 |
|
|
|
926 |
|
|
|
(559 |
) |
|
|
367 |
|
|
|
926 |
|
|
|
(537 |
) |
|
|
389 |
|
Trade names |
|
|
1-7 |
|
|
|
2,121 |
|
|
|
(1,307 |
) |
|
|
814 |
|
|
|
2,121 |
|
|
|
(1,208 |
) |
|
|
913 |
|
Non-compete |
|
|
2 |
|
|
|
21 |
|
|
|
(15 |
) |
|
|
6 |
|
|
|
21 |
|
|
|
(13 |
) |
|
|
8 |
|
Customer
relationships |
|
|
4-7 |
|
|
|
11,130 |
|
|
|
(5,239 |
) |
|
|
5,891 |
|
|
|
11,130 |
|
|
|
(4,704 |
) |
|
|
6,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
|
$ |
48,047 |
|
|
$ |
(30,618 |
) |
|
$ |
17,429 |
|
|
$ |
48,047 |
|
|
$ |
(28,588 |
) |
|
$ |
19,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Aggregate amortization expense on intangible assets was $2.0 million for the three months
ended March 31, 2011. Expected future amortization expense is as follows: $5.8 million for the
remainder of 2011, $5.7 million for 2012, $4.8 million for 2013, $1.1 million thereafter.
We
determined that we did not have any impairment of long-lived assets
at December 31, 2010 and we have not noted any triggering events that
would indicate impairment as of March 31, 2011.
13. 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 (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
(unaudited) |
|
|
|
2011 |
|
|
2010 |
|
Net income (loss) |
|
$ |
(7,753 |
) |
|
$ |
1,592 |
|
Change in unrealized gain (loss) on investments, net |
|
|
4 |
|
|
|
(19 |
) |
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(7,749 |
) |
|
$ |
1,573 |
|
|
|
|
|
|
|
|
14.
Segment, Customer Concentration and Geographical Information
Segment
Information:
Public companies are required to report financial and descriptive information about their
reportable operating segments as required by FASB ASC Topic No. 280, Segment Reporting. The Company
has two primary business units based on how management internally evaluates separate financial
information, business activities and management responsibility. Wireless includes our
connectivity and security management, mobile VPN, media and content management, device management,
Push-To-Talk, Visual Voicemail, Visual Voicemail to Text, contact and calendar syncing and video
content delivery and optimization solutions. Productivity & Graphics includes retail and
direct sales of our compression and broad consumer-based software. Corporate/Other revenue
includes the consulting portion of our services sector which has been de-emphasized and is no
longer considered a strategic element of our future plans.
The 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):
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, (unaudited) |
|
|
|
2011 |
|
|
2010 |
|
Wireless |
|
$ |
15,981 |
|
|
$ |
26,962 |
|
Productivity & Graphics |
|
|
1,742 |
|
|
|
2,774 |
|
Corporate/Other |
|
|
68 |
|
|
|
126 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
17,791 |
|
|
|
29,862 |
|
|
|
|
|
|
|
|
Customer
Concentration:
Sales to four customers and their respective affiliates in the Wireless business segment
accounted for 21.4%, 20.0%, 13.3% and 12.7% of the Companys total revenues for the three months
ended March 31, 2011. Sales to four customers and their respective affiliates in the Wireless
business segment accounted for 28.3%, 22.2%, 12.7% and 10.0% of the Companys total revenues for
the three months ended March 31, 2010.
Geographical Information:
During the three months ended March 31, 2011 and 2010, the Company operated in three
geographic locations; the Americas, Asia Pacific, and EMEA (Europe, the Middle East, and Africa).
Revenues, attributed to the geographic location of the customers bill-to address, were as follows
(in thousands):
12
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31,
(unaudited) |
|
|
|
2011 |
|
|
2010 |
|
Americas |
|
$ |
16,457 |
|
|
$ |
28,015 |
|
EMEA |
|
|
860 |
|
|
|
1,483 |
|
Asia Pacific |
|
|
474 |
|
|
|
364 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
17,791 |
|
|
$ |
29,862 |
|
|
|
|
|
|
|
|
The Company does not separately allocate specific assets to these geographic locations.
15. Recent Accounting Pronouncements
In December 2010, the FASB issued ASU No. 2010-28, Intangibles-Goodwill and Other (Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU
modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists. In determining
whether it is more likely than not that a goodwill impairment exists, an entity should consider
whether there are any adverse qualitative factors indicating that an impairment may exist. The
qualitative factors are consistent with the existing guidance which requires that goodwill of a
reporting unit be tested for impairment between annual tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying
amount. For the Company, this guidance is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2010. Early adoption is not permitted. The Company
adopted ASU No. 2010-28 this period and its adoption did not have an impact on its consolidated
results of operations and financial condition.
In October 2009, the FASB issued ASU No. 2009-14, Software (Topic 985): Certain Revenue
Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force).
This new guidance amends the scope of existing software revenue recognition accounting. Tangible
products containing software components and non-software components that function
together to deliver the 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 next paragraph. The Company adopted ASU
No. 2009-14 this period and its adoption did not have an impact on its consolidated results of
operations and financial condition.
In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements. ASU No. 2009-13 amends revenue recognition guidance for
arrangements with multiple deliverables. The new guidance eliminates the residual method of revenue
recognition and allows the use of 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 adopted ASU No. 2009-13 this period and
its adoption did not have an impact on its consolidated results of operations and financial
condition.
16. Commitments and Contingencies
Leases
The Company leases its buildings under operating leases that expire on various dates through
2022. Future minimum annual lease payments under such leases as of March 31, 2011 are as follows
(in thousands):
13
|
|
|
|
|
Year Ending December 31, |
|
Operating |
|
2011-9 months |
|
$ |
2,119 |
|
2012 |
|
|
3,054 |
|
2013 |
|
|
2,770 |
|
2014 |
|
|
2,426 |
|
2015 |
|
|
2,383 |
|
2016 |
|
|
2,127 |
|
Beyond |
|
|
7,239 |
|
|
|
|
|
Total |
|
$ |
22,118 |
|
|
|
|
|
Rent expense under operating leases for the three months ended March 31, 2011 and 2010
was $0.7 million and $0.6 million, respectively.
17. Income Taxes
We account for income taxes as required FASB ASC Topic No. 740, Income Taxes. This Topic
clarifies the accounting for uncertainty in income taxes recognized in an 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. Based on our evaluation, we believe all of the deferred tax assets as of March
31, 2011 are more likely than not to be realized and that no valuation allowance is required at
this time.
We recorded an income tax benefit of $5.2 million for the three months ended March 31, 2011.
We recorded income tax expenses of $1.4 million for the three months ended March 31, 2010. The
effective tax rate for the three months ended March 31, 2011 was 40%, which was lower than the 46%
for the three months ended March 31, 2010, primarily due to the ability to claim income tax
benefits for state tax credits.
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. The Company adopted this
FASB guidance effective January 1, 2007 and did not record any unrecognized tax benefits from
uncertain tax positions at adoption. Based on our evaluation for the three months ended March 31, 2011, we have concluded
that there are no significant uncertain tax positions requiring recognition on our financial
statements. Our evaluation was performed for the tax years ended December 31, 2006, 2007, 2008,
and 2009, the tax years which remain subject to examination by major tax jurisdictions as of March
31, 2011.
We may from time to time be assessed interest or penalties by major tax jurisdictions,
although any such assessments historically have been minimal and immaterial to our financial
results. It is the Companys policy to classify any interest and/or penalties in the financial
statements as a component of general and administrative expense.
In
March 2011, the Internal Revenue Service began its examination of the
Companys U.S. federal tax return for the year ended December
31, 2008. The exam is expected to be completed by year-end 2011.
18. Subsequent Events
The Company evaluates and discloses subsequent events as required by ASC Topic No. 855,
Subsequent Events. The Topic establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before the financial statements are issued or
are available to be issued. Subsequent events have been evaluated as of the date of this filing and
no further disclosures were required.
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
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:
|
|
|
the continued economic slowdown and uncertainty and its effects on capital
expenditures by our customers and their end users; |
|
|
|
our ability to predict consumer needs, introduce new products, gain broad market
acceptance for such products and ramp up manufacturing in a timely manner; |
|
|
|
changes in demand for our products from our customers and their end-users; |
|
|
|
the intensity of the competition and our ability to successfully compete; |
|
|
|
the pace at which the market for new products develop; |
|
|
|
the response of competitors, many of whom are bigger and better financed than us; |
|
|
|
our ability to successfully execute our business plan and control costs and
expenses; |
|
|
|
our ability to protect our intellectual property and our ability to not infringe
on the rights of others; and |
|
|
|
those additional factors which are listed under the section Risk Factors in our
Annual Report on Form 10-K for the year ended December 31, 2010. |
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.
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, Visual Voicemail to Text, mobile
device management and video. We also offer user-friendly solutions for the management of mobile
content, contacts, and calendar data and managed file transfers.
We sell our products and services to many of the worlds leading mobile network operators,
original equipment manufacturers (OEM), device manufacturers and enterprise businesses. 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, Personal
Computers, Smartphones,
15
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 connectivity and 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, Apple
iPhone/iPad, Android, Windows Mobile, Symbian and Java platforms.
Sales to four customers and their respective affiliates in the Wireless business segment
accounted for 21.4%, 20.0%, 13.3% and 12.7% of the Companys total revenues for the three months
ended March 31, 2011. Sales to four customers and their respective affiliates in the Wireless
business segment accounted for 28.3%, 22.2%, 12.7% and 10.0% of the Companys total revenues for
the three months ended March 31, 2010.
Results of Operations
The table below sets forth certain statements of operations data expressed as a percentage of
revenues for the three months ended March 31, 2011 and 2010. Our historical results are not
necessarily indicative of the operating results that may be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenues |
|
|
21.2 |
|
|
|
12.5 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
78.8 |
|
|
|
87.5 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
47.0 |
|
|
|
24.4 |
|
Research and development |
|
|
65.6 |
|
|
|
33.9 |
|
General and administrative |
|
|
39.3 |
|
|
|
19.5 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
151.9 |
|
|
|
77.8 |
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
-73.1 |
|
|
|
9.7 |
|
Interest and other income |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
-72.9 |
|
|
|
9.9 |
|
Income tax expense (benefit) |
|
|
-29.3 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
-43.6 |
% |
|
|
5.3 |
% |
|
|
|
|
|
|
|
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 connectivity and security management,
mobile VPN, media and content management, device management, Push-To-Talk,
Visual Voicemail, Visual Voicemail to Text, contact and calendar syncing, video
content delivery and optimization solutions and managed file transfers; and |
|
|
|
Productivity & Graphics, which includes retail and direct sales of
our compression and broad consumer-based software. |
The following table shows the revenues generated by each business segment (in thousands):
16
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
Wireless |
|
$ |
15,981 |
|
|
$ |
26,962 |
|
Productivity & Graphics |
|
|
1,742 |
|
|
|
2,774 |
|
Corporate/Other |
|
|
68 |
|
|
|
126 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
17,791 |
|
|
|
29,862 |
|
Cost of revenues |
|
|
3,776 |
|
|
|
3,732 |
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
14,015 |
|
|
$ |
26,130 |
|
|
|
|
|
|
|
|
Corporate/Other refers to the consulting portion of our services sector which has been
de-emphasized and is no longer considered a strategic element of our future plans.
Cost of revenues. Cost of revenues consists of direct product costs, royalties, and the
amortization of purchased intangibles and capitalized software.
Selling and marketing. Selling and marketing expenses consist primarily of personnel costs,
advertising costs, sales commissions, trade show expenses, and the amortization of certain
purchased intangibles. These expenses vary significantly from quarter to quarter based on the
timing of trade shows and product introductions.
Research and development. Research and development expenses consist primarily of personnel and
equipment costs required to conduct our software development efforts and the amortization of
certain acquired intangibles.
General and administrative. General and administrative expenses consist primarily of
personnel costs, professional services and fees paid for external service providers, space and
occupancy costs, and legal and other public company costs.
Interest and other income. Interest and other income are directly related to our average cash
and short term investment balances during the period and vary among periods. Our other excess cash
is invested in short term marketable equity and debt securities classified as cash equivalents.
Income tax expense. The Company accounts for income taxes as required by FASB ASC Topic No.
740, Income Taxes. This statement requires the recognition of deferred tax assets and liabilities
for the future consequences of events that have been recognized in the 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 March 31, 2011 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.
Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010
Revenues. Revenues were $17.8 million and $29.9 million for the three months ended March 31,
2011 and 2010, respectively, representing a decrease of $12.1 million, or 40.4%. Wireless revenues
decreased $11.0 million, or 40.7%, primarily due to low current period orders as a result of high
inventory levels of our connection manager product at a key customer. Productivity & Graphics
revenues decreased $1.0 million, or 37.2% due to continued low consumer spending. Corporate/Other
sales decreased $0.1 million as we have de-emphasized this business.
17
Cost of revenues. Cost of revenues was $3.8 million and $3.7 million for the three months
ended March 31, 2011 and 2010, representing an increase of $0.1 million, or 1.2%. Direct product
costs increased $0.3 million primarily due to a shift in product mix and increased costs related to
our backup and messaging products. Amortization of intangibles decreased from $1.5 million to $1.3
million, or $0.2 million.
Gross profit. Gross profit was $14.0 million, or 78.8% of revenues for the three months ended
March 31, 2011, a decrease of $12.1 million, or 46.4%, from $26.1 million, or 87.5% of revenues for
the three months ended March 31, 2010. The 8.7 percentage point decrease was primarily due to
lower product margins of 6.6 points as a result of the change in product mix and the lower revenues
not absorbing our datacenter-related fixed costs associated with our backup and messaging products.
Amortization of intangibles as a percentage of revenues increased 2.1 points due to the lower
revenues.
Selling and marketing. Selling and marketing expenses were $8.4 million and $7.3 million for
the three months ended March 31, 2011 and 2010, respectively, representing an increase of $1.1
million, or 14.7%. This increase was primarily due to higher personnel costs of $0.5 million,
higher travel of $0.4 million and higher promotion expense for our new products of $0.3 million.
Amortization of intangibles decreased from $0.8 million to $0.7 million, or $0.1 million.
Stock-based compensation expense was $0.8 million for both of the three months ended March 31, 2011
and 2010.
Research and development. Research and development expenses were $11.7 million and $10.1
million for the three months ended March 31, 2011 and 2010, respectively, representing an increase
of $1.6 million, or 15.3%. This increase was primarily due to additional headcount of $1.2 million
to support our new product initiatives and higher travel and supplies related to these new projects
of $0.3 million. Amortization of intangibles increased from zero to $0.1 million. Stock-based
compensation was $0.6 million for both of the three months ended March 31, 2011 and 2010.
General and administrative. General and administrative expenses were $7.0 million and $5.8
million for the three months ended March 31, 2011 and 2010, respectively, representing an increase
of $1.2 million, or 20.3%. This increase was primarily due to increased space and occupancy costs
associated with facility expansions of $0.5 million, personnel costs of $0.3 million, other cost
increases of $0.2 million and higher stock-based compensation expense which increased from $1.3
million to $1.5 million, or $0.2 million.
Interest and other income. Interest and other income was $0.1 million for both of the three
months ended March 31, 2011, and 2010.
Income tax provision. We recorded an income tax benefit of $5.2 million for the three months
ended March 31, 2011. We recorded income tax expense of $1.4 million for the three months ended
March 31, 2010. The effective tax rate for the three months ended March 31, 2011 was 40%, which
was lower than the 46% for the three months ended March 31, 2010, primarily due to the ability to
claim income tax benefits for state tax credits.
Liquidity and Capital Resources
At March 31, 2011, we had $64.4 million in cash and cash equivalents and short-term
investments and $79.8 million of working capital. Capital expenditures increased $5.3 million for
the three months ended March 31, 2011 versus the three months ended March 31, 2010 as we expanded
our Aliso Viejo datacenter and built out our new Pittsburgh facility. We anticipate additional
datacenter capital expenditures throughout the year to increase the capacity for our product
offerings. 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.
Operating activities
Net cash used by operating activities was $2.3 million for the three months ended March 31,
2011. The primary uses of operating cash were our net loss of $7.8 million, the increase of
deferred tax assets of $5.5 million and other assets increasing by $0.3
million. These were partially offset by a decrease in accounts receivable of $4.8 million,
non-cash expenses including depreciation and amortization of $2.7 million, stock-based compensation
of $2.1 million and increases of current liabilities of $1.7 million. Net cash provided by
operating activities was $4.9 million for the three months ended March 31, 2010. The primary
sources of operating cash were adjustments for non-cash expenses including depreciation and
amortization of $2.9 million, stock-based compensation of $2.3 million, net income and other
non-cash expenses of $1.6 million, increases of current liabilities of $0.6 million, and decreases
of other assets of $0.2 million. The primary use of cash affecting operating cash flow was an
increase in accounts receivable of $2.7 million.
18
Investing activities
During the three months ended March 31, 2011, we used $8.5 million in investing activities due
to investing in capital expenditures of $6.5 million as we expanded our Aliso Viejo datacenter and
built out our new Pittsburgh facility and short-term investments of $2.0 million. During the three
months ended March 31, 2010, we used $8.5 million in investing activities due to investing in
short-term investments of $6.5 million, capital expenditures of $1.3 million, and for a small
acquisition of $0.7 million.
Financing activities
During the three months ended March 31, 2011, we received $0.3 million from the stock sale for
the employee stock purchase plan and $0.3 million from tax benefits related to stock-based
compensation. During the three months ended March 31, 2010, we received $0.2 million in cash from
the exercise of stock options and $0.4 million from tax benefits related to stock-based
compensation.
Contractual obligations and commercial commitments
As of March 31, 2011 we had no debt. The following table summarizes our contractual
obligations as of March 31, 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
1 year |
|
|
|
|
|
|
|
|
|
|
More than |
|
Contractual obligations: |
|
Total |
|
|
or less |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
Operating Lease
Obligations |
|
$ |
22,118 |
|
|
$ |
2,914 |
|
|
$ |
5,688 |
|
|
$ |
4,750 |
|
|
$ |
8,766 |
|
Purchase Obligations |
|
|
1,738 |
|
|
|
1,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23,856 |
|
|
$ |
4,652 |
|
|
$ |
5,688 |
|
|
$ |
4,750 |
|
|
$ |
8,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During our normal course of business, we have made certain indemnities, commitments and
guarantees under which we may be required to make payments in relation to certain transactions.
These include: intellectual property indemnities to our customers and licensees in connection with
the use, sale and/or license of our products; indemnities to various lessors in connection with
facility leases for certain claims arising from such facility or lease; indemnities to vendors and
service providers pertaining to claims based on the negligence or willful misconduct; indemnities
involving the accuracy of representations and warranties in certain contracts; and indemnities to
directors and officers of the Company to the maximum extent permitted under the laws of the State
of Delaware. We may also issue a guarantee in the form of a standby letter of credit as security
for contingent liabilities under certain customer contracts. The duration of these indemnities,
commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these
indemnities, commitments and guarantees may not provide for any limitation of the maximum potential
for future payments we could be obligated to make. We have not recorded any liability for these
indemnities, commitments and guarantees in the accompanying consolidated balance sheets.
Real Property Leases
Our corporate headquarters, including our principal administrative, sales and marketing,
customer support and research and development facility, is located in Aliso Viejo, California,
where we currently lease and occupy approximately 52,700 square feet of space pursuant to leases
that expire on May 31, 2016 and January 31, 2022. We lease approximately 55,600 square feet in
Pittsburgh, Pennsylvania under a lease that expires December 31, 2021. We lease approximately
21,000 square feet in Mountain View, California under a lease 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 six-year terms.
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
19
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 FASB
ASC Topic No. 985-605, Software-Revenue Recognition. We recognize revenues from sales of our
software to our customers or end users as completed products are shipped and 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 customers are limited to defective goods or goods
shipped in error. Historically, customer returns have not exceeded the very nominal estimates and
reserves. We also provide some technical support to our customers. Such costs have historically
been insignificant.
We have a few multiple element agreements for which we have contracted to provide a perpetual
license for use of proprietary software, to provide non-recurring engineering, and in some cases to
provide software maintenance (post contract support). As of January 1, 2011, we adopted ASU No.
2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements which amends
revenue recognition guidance for arrangements with multiple deliverables. The new guidance
eliminated the residual method of revenue recognition and allows the use of 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 most of our multiple element agreements, VSOE for all contract elements is used
and the timing of the individual element revenue streams is determined and recognized as delivered.
For Productivity & Graphics sales, management reviews available retail channel information and
makes a determination of a return provision for sales made to distributors and retailers based on
current channel inventory levels and historical return patterns. Certain sales to distributors or
retailers are made on a consignment basis. Revenue for consignment sales are not recognized until
sell through to the final customer is established. Certain revenues are booked net of revenue
sharing payments. Sales directly to end-users are recognized upon shipment. End users have a thirty
day right of return, but such returns are reasonably estimable and have historically been
immaterial. We also provide technical support to our customers. Such costs have historically been
insignificant.
Sales Incentives
For our Productivity & Graphics sales, the cost of sales incentives the Company offers without
charge to customers that can be used in, or that are exercisable by a customer as a result of, a
single exchange transaction is accounted for as a reduction of revenue as required by FASB ASC
Topic No. 985-605, Software-Revenue Recognition. We use historical redemption rates to estimate
the cost of customer incentives. Total sales incentives were $0.1 million for the both of the
three months ended March 31, 2011 and 2010.
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.
In-Process Research and Development
In 2009, we capitalized $1.0 million of IPR&D costs related to our acquisition of Core
Mobility in accordance with accounting standards that became effective in 2009. This IPR&D project
was completed during the fourth quarter of 2010. As such, amortization has commenced and will
continue over its estimated useful life.
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
20
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 FASB ASC Topic No. 985-20,
Software-Costs of Software to be Sold, Leased, or Marketed. 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.
Impairment or Disposal of Long Lived Assets
Long-lived assets to be held are reviewed for events or changes in circumstances which
indicate that their carrying value may not be recoverable. They are tested for recoverability
using undiscounted cash flows to determine whether or not impairment to such value has occurred as
required by FASB ASC Topic No. 360, Property, Plant, and Equipment. The Company has determined
that there was no impairment at March 31, 2011.
Valuation of Goodwill and Intangible Assets
The Company accounts for goodwill and intangible assets as required by FASB ASC Topic No. 350,
Intangibles-Goodwill and Other. This statement requires us to periodically assess the impairment
of our goodwill and intangible assets, which requires us to make assumptions and judgments
regarding the carrying value of these assets. These assets are considered to be impaired if we
determine that their carrying value may not be recoverable based upon our assessment of the
following events or changes in circumstances:
|
|
|
a determination that the carrying value of such assets cannot be recovered through undiscounted cash flows; |
|
|
|
|
loss of legal ownership or title to the assets; |
|
|
|
|
significant changes in our strategic business objectives and utilization of the assets; or |
|
|
|
|
the impact of significant negative industry or economic trends. |
If the intangible assets are considered to be impaired, the impairment we recognize is the
amount by which the carrying value of the intangible assets exceeds the fair value of the
intangible assets. In addition, we base the useful lives and the related amortization expense on
our estimate of the useful life of the intangible assets. Due to the numerous variables associated
with our judgments and assumptions relating to the carrying value of our intangible assets and the
effects of changes in circumstances affecting these valuations, both the precision and reliability
of the resulting estimates are subject to uncertainty, and as additional information becomes known,
we may change our estimate, in which case, the likelihood of a material change in our reported
results would increase.
In accordance with FASB ASC Topic No. 350, Intangibles-Goodwill and Other, we review the
recoverability of the carrying value of goodwill at least annually or whenever events or
circumstances indicate a potential impairment. 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. In accordance with FASB issued ASU No. 2010-28,
Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test
for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues
Task Force, reporting units with zero or negative carrying amounts are required to perform Step 2
of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that a goodwill impairment exists, an entity should
consider whether there are any adverse qualitative factors indicating that
21
impairment may exist. The qualitative factors are consistent with the existing guidance which
requires that goodwill of a reporting unit be tested for impairment between annual tests if an
event occurs or circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. We determined that we did not have any impairment of
goodwill at March 31, 2011 or December 31, 2010. 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 carrying value changes, we
could be required to write off some or all of our goodwill.
Income Taxes
We account for income taxes as required by FASB ASC Topic No. 740, Income Taxes. This
statement requires the recognition of deferred tax assets and liabilities for the future
consequences of events that have been recognized in 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 March 31, 2011. Management evaluated the positive and negative
evidence in determining the realizability of the net deferred tax assets at March 31, 2011 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.
Stock-Based Compensation
The Company accounts for all stock-based payment awards made to employees and directors based
on their fair values and recognized as compensation expense over the vesting period using the
straight-line method over the requisite service period for each award as required by FASB ASC Topic
No. 718, Compensation-Stock Compensation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Our financial instruments include cash and cash equivalents and short-term investments. At
March 31, 2011, the carrying values of our financial instruments approximated fair values based on
current market prices and rates.
Foreign Currency Risk
While a majority of our business is denominated in U.S. dollars, we do invoice in foreign
currencies. For the three months ended March 31, 2011 and 2010, our revenues denominated in
foreign currencies were $0.2 million and $0.4 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 4. 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 March 31, 2011. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer have determined that as of
March 31, 2011, our disclosure controls and procedures were effective to ensure that the
information required to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange 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
22
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.
Changes in internal control over financial reporting
There have been no changes in our internal controls over financial reporting during the
quarter ended March 31, 2011 that have materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time we may be party to litigation incidental to our business, none of which is
expected to have a material adverse effect on us.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for our
fiscal year ended December 31, 2010. The risks discussed in our Annual Report on Form 10-K could
materially affect our business, financial condition and future results. The risks described in our
Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may materially and adversely
affect our business, financial condition or operating results.
Item 6. Exhibits.
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1
|
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
24
SIGNATURES
Pursuant to the requirements 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.
|
|
May 5, 2011 |
By |
/s/ William W. Smith, Jr.
|
|
|
|
William W. Smith, Jr. |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
May 5, 2011 |
By |
/s/ Andrew C. Schmidt
|
|
|
|
Andrew C. Schmidt |
|
|
|
Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
25