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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 01-35525

 

 

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

(Registrant’s 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark 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   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Small reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

As of October 26, 2012 there were 35,882,941 shares of common stock outstanding.

 

 

 


Table of Contents

SMITH MICRO SOFTWARE, INC.

QUARTERLY REPORT ON FORM 10-Q

September 30, 2012

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (Unaudited)

  
 

Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011

     2   
 

Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2012 and 2011

     3   
 

Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2012

     4   
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011

     5   
 

Notes to Consolidated Financial Statements

     6   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     23   

Item 4.

 

Controls and Procedures

     24   

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     25   

Item 1A.

 

Risk Factors

     25   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     26   

Item 6.

 

Exhibits

     26   

SIGNATURES

     27   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value data)

 

     September 30,
2012
    December 31,
2011
 
     (unaudited)     (audited)  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 10,073      $ 7,475   

Short-term investments

     16,972        38,497   

Accounts receivable, net of allowances for doubtful accounts and other adjustments of $391 (2012) and $1,382 (2011)

     9,342        8,525   

Income tax receivable

     7,543        8,293   

Inventories, net of reserves for excess and obsolete inventory of $321 (2012) and $417 (2011)

     224        309   

Prepaid expenses and other current assets

     1,329        1,138   

Deferred tax asset

     8        8   
  

 

 

   

 

 

 

Total current assets

     45,491        64,245   

Equipment and improvements, net

     12,277        15,482   

Other assets

     182        214   
  

 

 

   

 

 

 

Total assets

   $ 57,950      $ 79,941   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 2,014      $ 3,181   

Accrued liabilities

     4,699        7,641   

Deferred revenue

     1,867        703   
  

 

 

   

 

 

 

Total current liabilities

     8,580        11,525   

Non-current liabilities:

    

Long-term liabilities

     3,432        3,546   

Deferred tax liability

     10        10   
  

 

 

   

 

 

 

Total non-current liabilities

     3,442        3,556   

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; 100,000,000 shares authorized; 35,883,267 and 35,611,976 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

     36        36   

Additional paid-in capital

     210,276        207,927   

Accumulated comprehensive deficit

     (164,384     (143,103
  

 

 

   

 

 

 

Total stockholders’ equity

     45,928        64,860   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 57,950      $ 79,941   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands, except per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  
     (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Revenues

   $ 11,012      $ 12,632      $ 31,297      $ 46,528   

Cost of revenues

     2,120        3,699        6,111        11,035   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     8,892        8,933        25,186        35,493   

Operating expenses:

        

Selling and marketing

     4,062        6,456        12,608        21,915   

Research and development

     5,845        10,696        19,122        33,692   

General and administrative

     5,011        5,876        15,664        20,039   

Restructuring expense (income)

     (19     984        238        984   

Goodwill and long-lived asset impairment

     —          112,904        —          112,904   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     14,899        136,916        47,632        189,534   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (6,007     (127,983     (22,446     (154,041

Non-operating income:

        

Change in fair value of contingent liability

     1,210        —          1,210        —     

Interest and other income, net

     30        13        84        98   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (4,767     (127,970     (21,152     (153,943

Provision for income tax expense (benefit)

     46        6,511        168        (3,862
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (4,813     (134,481     (21,320     (150,081
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

        

Unrealized holding gains (losses) on available-for-sale securities

     8        (48     45        (49

Income tax expense (benefit) related to items of other comprehensive income (expense)

     —          (19     6        (19
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (expense), net of tax

     8        (29     39        (30
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (4,805   $ (134,510   $ (21,281   $ (150,111
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share:

        

Basic and diluted

   $ (0.13   $ (3.76   $ (0.59   $ (4.22
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic and diluted

     35,879        35,728        35,838        35,590   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

 

                  Additional     Accumulated        
     Common stock      paid-in     Comprehensive        
     Shares     Amount      capital     deficit     Total  

BALANCE, December 31, 2011

     35,612      $ 36       $ 207,927      $ (143,103   $ 64,860   

Exercise of common stock options

     32        —           16        —          16   

Non cash compensation recognized on stock options and ESPP

     —          —           37        —          37   

Restricted stock grants, net of cancellations

     579        —           3,015        —          3,015   

Cancellation of shares for payment of withholding tax

     (18     —           (32     —          (32

Employee stock purchase plan (ESPP)

     53        —           66        —          66   

Shares repurchased and cancelled

     (375     —           (753     —          (753

Comprehensive loss

     —          —           —          (21,281     (21,281
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

BALANCE, September 30, 2012 (unaudited)

     35,883      $ 36       $ 210,276      $ (164,384   $ 45,928   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Nine Months Ended September 30  
     2012     2011  
     (unaudited)     (unaudited)  

Operating activities:

    

Net loss

   $ (21,320   $ (150,081

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     3,321        9,078   

Goodwill and long-lived asset impairment

     —          112,904   

Change in fair value of contingent liability

     (1,210     —     

Loss on disposal of fixed assets

     161        108   

Lease incentives

     —          2,223   

Provision for doubtful accounts and other adjustments to accounts receivable

     578        372   

Provision for excess and obsolete inventory

     41        121   

Non-cash compensation related to stock options and restricted stock

     3,052        5,131   

Change in operating accounts:

    

Accounts receivable

     (1,395     20,404   

Income tax receivable

     750        (5,178

Deferred taxes

     —          841   

Inventories

     44        (72

Prepaid expenses and other assets

     (159     (475

Accounts payable and accrued liabilities

     (1,881     (1,150
  

 

 

   

 

 

 

Net cash used in operating activities

     (18,018     (5,774
  

 

 

   

 

 

 

Investing activities:

    

Capital expenditures

     (277     (13,100

Sale of short-term investments

     21,564        20,673   
  

 

 

   

 

 

 

Net cash provided by investing activities

     21,287        7,573   
  

 

 

   

 

 

 

Financing activities:

    

Cash received from stock sale for employee stock purchase plan

     66        412   

Cash received from exercise of stock options

     16        12   

Repurchase of common stock

     (753     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (671     424   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     2,598        2,223   

Cash and cash equivalents, beginning of period

     7,475        17,856   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 10,073      $ 20,079   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid for income taxes

   $ 199      $ 519   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

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”) provides software and services that simplify, secure and enhance the mobile experience. The Company’s portfolio of wireless solutions includes a wide range of client and server applications that manage voice, data, video and connectivity over mobile broadband networks. Our primary customers are the world’s leading mobile network operators, mobile device manufacturers and enterprise businesses. In addition to our wireless and mobility software, Smith Micro offers personal productivity and graphics products distributed through a variety of consumer channels worldwide.

2. Basis of Presentation

The accompanying interim consolidated balance sheet and statement of stockholders’ equity as of September 30, 2012, and the related statements of comprehensive loss for the three and nine months ended September 30, 2012 and the related cash flows for the nine months ended September 30, 2012 and 2011 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, 2011 filed with the SEC on February 27, 2012.

Intercompany balances and transactions have been eliminated in consolidation.

Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2012.

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.

 

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Table of Contents
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2012     2011     2012     2011  
    (unaudited, in thousands, except per share
amounts)
 

Numerator:

       

Net loss available to common stockholders

  $ (4,813   $ (134,481   $ (21,320   $ (150,081
 

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

       

Weighted average shares outstanding - basic

    35,879        35,728        35,838        35,590   

Potential common shares - options (treasury stock method)

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding - diluted

    35,879        35,728        35,838        35,590   
 

 

 

   

 

 

   

 

 

   

 

 

 

Shares excluded (anti-dilutive)

    —          56        3        231   
 

 

 

   

 

 

   

 

 

   

 

 

 

Shares excluded due to an exercise price greater than weighted average stock price for the period

    1,453        2,237        1,453        1,738   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share:

       

Basic

  ($ 0.13   ($ 3.76   ($ 0.59   ($ 4.22
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  ($ 0.13   ($ 3.76   ($ 0.59   ($ 4.22
 

 

 

   

 

 

   

 

 

   

 

 

 

4. Stock-Based Compensation

Stock Plans

During the nine months ended September 30, 2012, the Company granted options to purchase 20,000 shares of common stock and 1.0 million shares of restricted stock, with a total value of $2.6 million. This cost will be amortized over a period of 12 to 48 months.

As of September 30, 2012 there were 3.1 million shares available for future grants under the 2005 Plan.

Employee Stock Purchase Plan

The Company has a shareholder approved employee stock purchase plan (“ESPP”), under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning and end of six-month offering periods. An employee’s payroll deductions under the ESPP are limited to 10% of the employee’s compensation and employees may not purchase more than the lesser of $25,000 of stock, or 1,000 shares, for any calendar year. Additionally, no more than 1,000,000 shares may be purchased under the plan. Shares purchased under the plan are valued using a Black-Scholes valuation model.

The Company’s most recent six-month offering period ended September 30, 2012 and resulted in 8,052 shares being purchased/granted at a fair value of $0.93 per share.

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. Restricted stock is valued using the closing stock price on the date of the grant. Options are valued using a Black-Scholes valuation model.

 

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Table of Contents

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 September 30,     Nine Months Ended September 30,  
    2012     2011     2012     2011  
    (unaudited)     (unaudited)  

Cost of revenues

  $ 3      $ 5      $ 9      $ 27   

Selling and marketing

    212        336        651        1,431   

Research and development

    187        153        568        1,003   

General and administrative

    496        661        1,818        2,670   

Restructuring expense

    —          —          6        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-cash stock compensation expense

  $ 898      $ 1,155      $ 3,052      $ 5,131   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total share-based compensation for each quarter includes cash payment of income taxes related to grants of restricted stock in the amount of $0.1 million for both of the three months ended September 30, 2012 and 2011. The cash payment of income taxes related to grants of restricted stock totaled $0.3 million and $1.4 million for the nine months ended September 30, 2012 and 2011, respectively.

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 September 30, 2012 and December 31, 2011, bank balances totaling approximately $5.1 million and $3.3 million, respectively, were uninsured.

 

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Table of Contents

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):

 

     September 30, 2012     December 31, 2011  
            Amortized      Gross unrealized            Amortized      Gross unrealized  
     Fair value      cost basis      gain(loss)     Fair value      cost basis      gain(loss)  

Corporate notes, bonds and paper

   $ 13,414       $ 13,409       $ 5      $ 31,180       $ 31,217       $ (37

Government securities

     3,558         3,559         (1     7,317         7,321         (4
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 16,972       $ 16,968       $ 4      $ 38,497       $ 38,538       $ (41
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

There was a de minimis amount of realized gains recognized for the three months and nine months ended September 30, 2012.

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 management’s 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 management estimations.

9. Inventories

Inventories consist primarily of compact disks (“CDs”), boxes and manuals and are stated at the lower of cost (determined by the first-in, first-out method) or market. The Company regularly reviews its inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on management’s forecast of product demand and production requirements. At September 30, 2012, our net inventory balance consisted of approximately $0.1 million of assembled products and $0.1 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. 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 connection management, mobile VPN, media and content management, device management, Push-To-Talk, Visual Voicemail, Voicemail to Text, video content delivery and network traffic 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.

 

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The following table shows the revenues generated by each business unit (in thousands):

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2012     2011     2012     2011  
    (unaudited)     (unaudited)  

Wireless

  $ 9,559      $ 10,211      $ 26,865      $ 40,000   

Productivity & Graphics

    1,411        2,365        4,281        6,339   

Corporate/Other

    42        56        151        189   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 11,012      $ 12,632      $ 31,297      $ 46,528   
 

 

 

   

 

 

   

 

 

   

 

 

 

Customer Concentration Information

Revenues to two customers and their respective affiliates in the Wireless business segment accounted for 46.1% and 19.4% of the Company’s total revenues for the three months ended September 30, 2012. Revenues to three customers and their respective affiliates in the Wireless business segment accounted for 24.8%, 20.6% and 11.6% of the Company’s total revenues for the three months ended September 30, 2011. Revenues to two customers and their respective affiliates in the Wireless business segment accounted for 39.6% and 20.2% of the Company’s total revenues for the nine months ended September 30, 2012. Revenues to three customers and their respective affiliates in the Wireless business segment accounted for 23.5%, 19.6% and 11.9% of the Company’s total revenues for the nine months ended September 30, 2011.

Geographical Information

During the three and nine months ended September 30, 2012 and 2011, the Company operated in three geographic locations; the Americas, Asia Pacific, and EMEA (Europe, the Middle East, and Africa). Revenues, attributed to the geographic location of the customer’s bill-to address, were as follows (in thousands):

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2012     2011     2012     2011  
    (unaudited)     (unaudited)  

Americas

  $ 9,863      $ 11,153      $ 26,855      $ 42,085   

Asia Pacific

    369        816        2,224        1,953   

EMEA

    780        663        2,218        2,490   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

  $ 11,012      $ 12,632      $ 31,297      $ 46,528   
 

 

 

   

 

 

   

 

 

   

 

 

 

The Company does not separately allocate specific assets to these geographic locations.

12. Recent Accounting Pronouncements

In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-12, Comprehensive Income (Topic 220). The amendments in this Update supersede certain pending paragraphs in ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to effectively defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to redeliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments to this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company has implemented this guidance.

 

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In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements and Disclosures (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The Company has implemented this guidance and its adoption has not had an impact on its consolidated results of operations and financial condition.

13. 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 September 30, 2012 are as follows (in thousands):

 

Year Ending December 31,

   Operating  

2012-3 months

   $ 645   

2013

     2,608   

2014

     2,602   

2015

     2,420   

2016

     2,125   

2017

     1,787   

Beyond

     6,314   
  

 

 

 

Total

   $ 18,501   
  

 

 

 

Rent expense under operating leases for the three months ended September 30, 2012 and 2011 was $0.8 million and $0.7 million, respectively. Rent expense under operating leases for the nine months ended September 30, 2012 and 2011 was $2.1 million and $2.2 million, respectively.

As a condition of our Pittsburgh lease that was signed in November 2010, the landlord agreed to incentives of $40.00 per square foot, or a total of $2.2 million, for improvements to the space. These costs have been included in deferred rent in our long-term liabilities and are being amortized over the ten year lease term.

Pennsylvania Opportunity Grant Program

On September 26, 2011, we received $1.0 million from the State of Pennsylvania to help fund our agreement to start-up a new facility. The grant carries with it an obligation, or commitment, to employ at least 232 people within a three-year time period. This grant contains conditions that would require us to return a pro-rata amount of the monies received if we fail to meet these conditions. As such, the monies have been recorded as a liability in the long-term liabilities line item on the balance sheet until we are irrevocably entitled to retain the monies.

Litigation

On June 29, 2011, a complaint was filed in the U.S. District Court for the Central District of California against us and certain of our current officers on behalf of certain purchasers of our common stock. The complaint was brought as a purported stockholder class action, and, in general, included allegations that we and certain of our officers violated federal securities laws by making materially false and misleading statements regarding our business prospects and financial results, thereby artificially inflating the price of our common stock. The plaintiff sought unspecified monetary damages and other relief. Defendants filed a motion to dismiss the consolidated amended complaint and, on May 21, 2012, the Court granted defendants’ motion to dismiss without prejudice and afforded plaintiffs leave to amend their complaint. Co-lead plaintiffs did not file an amended complaint, and instead agreed to dismiss the action with prejudice. On July 19, 2012, the parties stipulated to dismiss the action with prejudice, with each side to bear its own attorney’s fees and costs. The stipulation fully, finally and forever releases defendants from any and all claims asserted by co-lead plaintiffs in the federal class action. The Court entered the stipulation into order on August 16, 2012.

 

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On August 11, 2011, a shareholder derivative complaint was filed in the Superior Court of California for the County of Orange against the Company’s directors and certain of its executive officers. Thereafter, two additional similar complaints, also styled as shareholder derivative actions, were filed in state court (collectively, the “State Derivative Actions”). On March 29, 2012, the Court consolidated the three State Derivative Actions and appointed lead counsel. Following the stipulated dismissal of the federal stockholder class action, the parties filed, on July 30, 2012, a stipulation to dismiss the State Derivative Actions with prejudice. The Court entered that stipulation into order on July 31, 2012.

On September 12, 2011, a shareholder derivative complaint was filed in the U.S. District Court for the Central District of California against certain of the officers and directors named in the State Derivative Actions but also against additional officers of the Company. Thereafter, the matter was consolidated with two additional similar complaints that were also filed in federal court (collectively, the “Federal Derivative Actions”). Following the stipulated dismissal of the federal stockholder class action, the parties filed, on July 30, 2012, a stipulation to dismiss the Federal Derivative Actions with prejudice. The Court entered that stipulation into order on July 31, 2012.

The Company is and may become involved in various other legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position, litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.

14. Income Taxes

We account for income taxes as required by FASB ASC Topic No. 740, Income Taxes. This Topic clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company’s assets and liabilities result in a deferred tax asset, we are required to evaluate the probability of being able to realize the future benefits indicated by such asset. The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.

The Company assesses whether a valuation allowance should be recorded against its deferred tax assets based on the consideration of all available evidence, using a “more likely than not” realization standard. The four sources of taxable income that must be considered in determining whether deferred tax assets will be realized are: (1) future reversals of existing taxable temporary differences (i.e., offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the applicable tax law; (3) tax planning strategies and (4) future taxable income exclusive of reversing temporary differences and carryforwards.

In assessing whether a valuation allowance is required, significant weight is to be given to evidence that can be objectively verified. A significant factor in the Company’s assessment is that the Company is in a three-year historical cumulative loss as of the end of fiscal 2011. This fact, combined with uncertain near-term market and economic conditions, reduced the Company’s ability to rely on projections of future taxable income in assessing the realizability of its deferred tax assets.

After a review of the four sources of taxable income as of December 31, 2011 (as described above), and after consideration of the Company’s three-year cumulative loss position as of December 31, 2011, the Company recorded a valuation allowance related to its U.S.-based deferred tax amounts, with a corresponding charge to income tax expense, of $53.2 million during the year ended December 31, 2011.

We recorded income tax expense of $46,000 and $0.2 million for the three and nine months ended September 30, 2012, respectively. Income tax expense for 2012 only reflects state income tax minimums and foreign income taxes since we are unable to record and utilize any income tax benefits. We recorded an income tax provision of $6.5 million and income tax benefit $3.9 million for the three and nine months ended September 30, 2011, respectively. The effective tax rate for 2011 was impacted by the valuation allowance and carryback of losses to offset taxable income in prior years.

We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. It is the Company’s policy to classify any interest and/or penalties in the financial statements as a component of general and administrative expense.

 

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15. Restructuring Expenses

In July 2011, we announced that our Chicago facility would be permanently closed as of September 30, 2011. In addition, we had a small reduction of headcount in other areas of the Company. In October 2011, we announced a material Restructuring Plan that was approved by our Board of Directors. This Restructuring Plan involved a realignment of organizational structures, facility consolidations/closures and headcount reductions of approximately 20% of the Company’s worldwide workforce. Since the charges for the Restructuring Plan approved on October 18, 2011 were material, we chose to start reporting these expenses separately for the three months ended September 30, 2011, and recorded a charge of $1.0 million in that period. Of the total charges, all but approximately $0.4 million would be cash expenditures.

In February 2012, we undertook an additional Restructuring Plan that included a further reduction of headcount of 7-8% and other cost reductions that would result in annualized savings of approximately $7.0 million. One-time employee termination and other costs resulted in additional restructuring expenses of $0.3 million that was recorded in the three month period ended March 31, 2012. For the six month period from April 1, 2012 through September 30, 2012, we returned to profit $0.1 million of the restructuring reserve as a result of lower one-time employee termination benefits and relocation expenses.

The following is the activity in our restructuring liability account which is included in the accrued liabilities line item on the balance sheet for the period ended September 30, 2012 (in thousands):

 

     December 31, 2011                  September 30, 2012  
     Balance      Provision-net     Usage     Balance  

One-time employee termination benefits

   $ 1,101       $ 145      $ (1,238   $ 8   

Lease/rental terminations

     448         (12     (436     —     

Relocation, move, other expenses

     116         105        (221     —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 1,665       $ 238      $ (1,895   $ 8   
  

 

 

    

 

 

   

 

 

   

 

 

 

The remaining balance in the restructuring reserve is estimated to be used during the fiscal quarter ending December 31, 2012.

16. Goodwill and Long-Lived Asset Impairment

During the period ended September 30, 2011, the Company concluded that a decline in its stock price and market capitalization was representative of the fair value of the reporting unit as a whole. The triggering events that led us to this conclusion were:

 

   

Revenues - declined for the third consecutive quarter.

 

   

New product launches – although we were in trials for several of our new products, as of September 30, 2011 we had not realized any revenues from these new products.

 

   

Profitability – declined for the third consecutive quarter.

 

   

Stock price – remained at depressed prices.

As such, the Company performed Step 1 of the goodwill impairment test which failed, triggering Step 2. As a result of this analysis, the excess of the carrying value of goodwill was compared to the implied fair value of goodwill and resulted in an impairment loss of $94.2 million in the fiscal quarter ended September 30, 2011.

As a result of the triggering events described above in our goodwill impairment analysis, the Company reviewed its long-lived assets for recoverability. As a result of this analysis, the Company recognized a long-lived asset impairment charge of $18.7 million in the fiscal quarter ended September 30, 2011 which was allocated pro-rata to the intangible assets of $13.4 million and $5.3 million to equipment and improvements, primarily related to our leasehold improvements.

As a result of the $112.9 million goodwill and long-lived asset impairment charge recorded in the fiscal quarter ended September 30, 2011, there were no more goodwill or intangible assets on the balance sheet as of that date.

 

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17. Fair Value of Contingent Liability

When we acquired Core Mobility in October 2009, we set up a pre-acquisition contingency for two milestone payments that were part of the purchase price of the business. The first milestone payment of $0.6 million was met and paid in March 2010. The second milestone payment of $1.2 million was not met and therefore not paid. The Core Mobility shareholders disputed this claim in a lawsuit which was settled in August 2012, when the plaintiffs chose not to appeal our court victory.

As a result of the litigation victory, we were no longer liable to pay this second milestone payment and the $1.2 million contingent liability was returned to profit as required by FASB ASC Topic No. 805, Business Combinations. In accordance with FASB ASC Topic No. 820, Fair Value Measurement, the fair value of this contingent liability became zero once it was determined that we did not have to pay it. The fair value of this contingent liability is as follows (in thousands):

 

            Fair Value Measurements Using         

Description

   Period Ended
September 30, 2012
     Quoted Prices
in Acitve
Markets for
dentical Asset
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total
Gains
 

Contingent liability

   $ —         $ —         $ —         $ —         $ 1,210   

18. Stock Repurchase Program

In November 2011, the Company announced that its Board of Directors had approved a program authorizing the repurchase of up to five million shares of the Company’s common stock over a period of up to two years. Under this program, stock repurchases may be made from time to time and the actual amount expended will depend on a variety of factors including market conditions, regulatory and legal requirements, corporate cash generation and other factors. The stock repurchases may be made in both open market and privately negotiated transactions, and may include the use of Rule 10b5-1 trading plans. The program does not obligate Smith Micro to repurchase any particular amount of common stock during any period and the program may be modified or suspended at any time at the Company’s discretion. The Company did not repurchase any shares during the three month period ended September 30, 2012. During the nine months ended September 30, 2012, we repurchased 375,000 shares at a cost of $0.8 million.

19. 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.

 

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Item 2. Management’s 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, management’s beliefs, and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “estimates,” “should,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed or implied in any forward-looking statements as a result of various factors. Such factors include, but are not limited to, the following:

 

   

changes in demand for our products from our customers and their end-users;

 

   

our ability to predict consumer needs, introduce new products, gain broad market acceptance for such products and ramp up manufacturing in a timely manner;

 

   

our business and stock price may decline further which could cause an additional impairment of long-lived assets or restructuring charge resulting in a material adverse effect on our financial condition and results of operations;

 

   

the intensity of the competition and our ability to successfully compete;

 

   

the pace at which the market for new products develop;

 

   

the response of competitors, many of whom are bigger and better financed than us;

 

   

our ability to protect our intellectual property and our ability to not infringe on the rights of others;

 

   

our ability to successfully execute our business plan and control costs and expenses;

 

   

the continued economic slowdown and uncertainty and its effects on capital expenditures by our customers and their end users;

 

   

the amount of our legal expenses and our financial exposure to any adverse judgments or settlements associated with any future litigation that may arise, and the adequacy of our insurance policy coverage regarding those expenses and any damages or settlement payments related to such litigation; and

 

   

those additional factors which are listed under the section “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 and in this Form 10-Q listed on Page 25.

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. provides software and services that simplify, secure and enhance the mobile experience. The Company’s portfolio of wireless solutions includes a wide range of client and server applications that manage voice, data, video and connectivity over mobile broadband networks. Our primary customers are the world’s leading mobile network operators, mobile device manufacturers and enterprise businesses. In addition to our wireless and mobility software, Smith Micro offers personal productivity and graphics products distributed through a variety of consumer channels worldwide.

 

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The proliferation of mobile broadband technology continues to provide new opportunities for Smith Micro on a global basis. Over the last decade, the Company has developed extensive expertise in embedded software for networked devices (both wireless and wired), and we have leveraged that expertise to solve an unending tide of connectivity and mobile service challenges for our customers. As network operators and businesses struggle to reduce costs and complexity in a market that is characterized by rapid evolution and fragmentation, Smith Micro answers with innovative solutions that increase reliability, security, performance, efficiency, and usability of wireless services over a wide variety of networks and device platforms.

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.

Revenues to two customers and their respective affiliates in the Wireless business segment accounted for 46.1% and 19.4% of the Company’s total revenues for the three months ended September 30, 2012. Revenues to three customers and their respective affiliates in the Wireless business segment accounted for 24.8%, 20.6% and 11.6% of the Company’s total revenues for the three months ended September 30, 2011. Revenues to two customers and their respective affiliates in the Wireless business segment accounted for 39.6% and 20.2% of the Company’s total revenues for the nine months ended September 30, 2012. Revenues to three customers and their respective affiliates in the Wireless business segment accounted for 23.5%, 19.6% and 11.9% of the Company’s total revenues for the nine months ended September 30, 2011.

Results of Operations

The table below sets forth certain statements of comprehensive loss data expressed as a percentage of revenues for the three and nine months ended September 30, 2012 and 2011. Our historical results are not necessarily indicative of the operating results that may be expected in the future.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Revenues

     100.0     100.0     100.0     100.0

Cost of revenues

     19.3        29.3        19.5        23.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     80.7        70.7        80.5        76.3   

Operating expenses:

        

Selling and marketing

     36.9        51.1        40.3        47.1   

Research and development

     53.1        84.7        61.1        72.4   

General and administrative

     45.5        46.5        50.0        43.1   

Restructuring expense (income)

     (0.2     7.8        0.8        2.1   

Goodwill and long-lived asset impairment

     —          893.8        —          242.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     135.3        1083.9        152.2        407.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (54.6     (1013.2     (71.7     (331.1

Non-operating income:

        

Change in fair value of contingent liability

     11.0        —          3.9        —     

Interest and other income, net

     0.3        0.1        0.2        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (43.3     (1013.1     (67.6     (330.9

Provision for income tax expense (benefit)

     0.4        51.5        0.5        (8.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (43.7 )%      (1064.6 )%      (68.1 )%      (322.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

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 management, mobile VPN, media and content management, device management, Push-To-Talk, Visual Voicemail, Voicemail to Text, video content delivery and network traffic optimization solutions; and

 

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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):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2012      2011      2012      2011  

Wireless

   $ 9,559       $ 10,211       $ 26,865       $ 40,000   

Productivity & Graphics

     1,411         2,365         4,281         6,339   

Corporate/Other

     42         56         151         189   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     11,012         12,632         31,297         46,528   

Cost of revenues

     2,120         3,699         6,111         11,035   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

   $ 8,892       $ 8,933       $ 25,186       $ 35,493   
  

 

 

    

 

 

    

 

 

    

 

 

 

“Corporate/Other” refers to the consulting portion of our services sector which has been de-emphasized and is no longer considered a strategic element of our future plans.

Cost of revenues. Cost of revenues consists of direct product costs, royalties, and the amortization of purchased intangibles and capitalized software.

Selling and marketing. Selling and marketing expenses consist primarily of personnel costs, advertising costs, sales commissions, trade show expenses, and the amortization of certain purchased intangibles. These expenses vary significantly from quarter to quarter based on the timing of trade shows and product introductions.

Research and development. Research and development expenses consist primarily of personnel and equipment costs required to conduct our software development efforts and the amortization of certain acquired intangibles.

General and administrative. General and administrative expenses consist primarily of personnel costs, professional services and fees paid for external service providers, space and occupancy costs, and legal and other public company costs.

Restructuring expense (income). Restructuring expenses consist primarily of one-time employee termination benefits, lease and other contract terminations and costs to consolidate facilities and relocate employees.

Goodwill and long-lived asset impairment. Goodwill and long-lived asset impairment charges are a result of determining that the recoverability of the carrying value of goodwill, intangible assets, and fixed assets will not be realized.

Change in fair value of contingent liability. This is the return-to-profit of a milestone payment accrual that we did not have to pay.

Interest and other income, net. Interest and other income, net is primarily related to our average cash and short term investment balances during the period and vary among periods. Our other excess cash is invested in short term marketable equity and debt securities classified as cash equivalents.

Provision for income tax expense (benefit). The Company accounts for income taxes as required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 740, Income Taxes. This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets and liabilities result in a deferred tax asset, we are required to evaluate the probability of being able to realize the future benefits indicated by such asset. The deferred tax assets are reduced by a valuation allowance if, based upon all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Establishing, reducing or increasing a valuation allowance in an accounting period generally results in an increase or decrease in tax expense in the statement of comprehensive loss. We must make significant judgments to determine the provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits and any valuation allowance to be recorded against deferred tax assets. After consideration of the Company’s three year cumulative loss position as of December 31, 2011 and sources of taxable income, the Company recorded a valuation allowance related to its U.S.-based deferred tax amounts, with a corresponding charge to income tax expense, of $53.2 million for the year ended December 31, 2011.

 

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Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Revenues. Revenues were $11.0 million and $12.6 million for the three months ended September 30, 2012 and 2011, respectively, representing a decrease of $1.6 million, or 12.8%. Wireless revenues decreased $0.6 million, or 6.4%, primarily due to lower sales of our connection manager products of $3.2 million partially offset by increased revenues in our NetWise Director and visual voicemail and voicemail to text product lines of $2.6 million. Productivity & Graphics revenues decreased $1.0 million, or 40.3% due to lower sell through at large retailers and lower overall demand. Due to the introduction and market acceptance of mobile hotspot devices, Tablets and Smartphones capable of functioning as a WWAN hotspot, our core connection management products continue to experience lower demand in our North American marketplace. While we have launched new wireless products that address this technology shift, they are new to the market and their rate of adoption and deployment is unknown at this time causing material uncertainty regarding the timing of our future wireless revenues.

Cost of revenues. Cost of revenues was $2.1 million and $3.7 million for the three months ended September 30, 2012 and 2011, representing a decrease of $1.6 million, or 42.7%. Direct product costs decreased $0.3 million primarily due to the lower volume and cost reductions. Amortization of intangibles decreased $1.3 million as all intangibles were fully impaired at the end of the fiscal third quarter of 2011.

Gross profit. Gross profit was $8.9 million, or 80.7% of revenues for the three months ended September 30, 2012. This was essentially the same in dollars but the percent to revenues were 70.7% for the three months ended September 30, 2011. The 10.0 percentage point increase was primarily due to lower product margins of 0.1 points being offset by the amortization of intangibles that decreased as a percentage of revenues by 9.9 points due to no amortization this fiscal quarter versus the same fiscal period last year.

Selling and marketing. Selling and marketing expenses were $4.1 million and $6.5 million for the three months ended September 30, 2012 and 2011, respectively, representing a decrease of $2.4 million, or 37.1%. This decrease was primarily due to lower headcount of $1.2 million, lower travel of $0.3 million, and lower third party commissions/distribution fees of $0.1 million, partially offset by higher trade shows of $0.1 million. Amortization of intangibles decreased $0.7 million as all intangibles were fully impaired at the end of the fiscal third quarter of 2011. Stock-based compensation decreased from $0.4 million to $0.2 million, or $0.2 million.

Research and development. Research and development expenses were $5.8 million and $10.7 million for the three months ended September 30, 2012 and 2011, respectively, representing a decrease of $4.9 million, or 45.4%. This decrease was primarily due to lower headcount of $4.5 million, less small equipment of $0.2 million, and less travel of $0.1 million. Amortization of intangibles decreased $0.1 million as all intangibles were fully impaired at the end of the fiscal third quarter of 2011. Stock-based compensation was $0.2 million for both three months ended September 30, 2012 and 2011.

General and administrative. General and administrative expenses were $5.0 million and $5.9 million for the three months ended September 30, 2012 and 2011, respectively, representing a decrease of $0.9 million, or 14.7%. This decrease was primarily due to headcount and other cost reductions of $0.4 million, lower depreciation $0.2 million, and a payment of a bad debt of $0.1 million. Stock-based compensation decreased from $0.7 million to $0.5 million, or $0.2 million.

Restructuring expense (income). Restructuring income was $19,000 for the three months ended September 30, 2012 to reflect reserve adjustments from estimates to actuals. Restructuring expense was $1.0 million for the three months ended September 30, 2011 related to the Chicago facility shutdown of $0.8 million and other one-time employee termination benefits of $0.2 million.

Goodwill and long-lived asset impairment. There have been no impairment charges in 2012. Goodwill and long-lived asset impairment charges of $112.9 million for the three months ended September 30, 2011 were related to goodwill of $94.2 million, intangible assets of $13.4 million, and fixed assets of $5.3 million.

Change in fair value of contingent liability. When we acquired Core Mobility in October 2009, we set up a pre-acquisition contingency for two milestone payments that were part of the purchase price of the business. The first milestone payment of $0.6 million was met and paid in March 2010. The second milestone payment of $1.2 million was not met and therefore not paid. The Core Mobility shareholders disputed this claim in a lawsuit which was settled in August 2012, when the plaintiffs chose not to appeal our court victory. As a result of the litigation victory, we were no longer liable to pay this second milestone payment and the $1.2 million contingent liability was returned to profit.

Interest and other income, net. Interest and other income was de minimis for both of the three months ended September 30, 2012, and 2011.

 

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Provision for income tax expense (benefit). We recorded income tax expense of $46,000 for the three months ended September 30, 2012. We recorded income tax expense of $6.5 million for the three months ended September 30, 2011. The income tax expense for the three months ended September 30, 2012 only reflects state income tax minimums and foreign income taxes. For 2012, we have reserved our income tax benefit due to consecutive quarterly losses. The effective tax rate for the three months ended September 30, 2011 was impacted by the valuation allowance and carryback of losses to offset taxable income in prior years.

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

Revenues. Revenues were $31.3 million and $46.5 million for the nine months ended September 30, 2012 and 2011, respectively, representing a decrease of $15.2 million, or 32.7%. Wireless revenues decreased $13.1 million, or 32.8%, primarily due to lower sales of our connection manager products of $17.8 million partially offset by increased revenues in our NetWise Director and visual voicemail and voicemail to text product lines of $4.7 million. Productivity & Graphics revenues decreased $2.1 million, or 32.5% due to lower sell through at large retailers and lower overall demand. Due to the introduction and market acceptance of mobile hotspot devices, Tablets and Smartphones capable of functioning as a WWAN hotspot, our core connection management products continue to experience lower demand in our North American marketplace. While we have launched new wireless products that address this technology shift, they are new to the market and their rate of adoption and deployment is unknown at this time causing material uncertainty regarding the timing of our future wireless revenues.

Cost of revenues. Cost of revenues was $6.1 million and $11.0 million for the nine months ended September 30, 2012 and 2011, representing a decrease of $4.9 million, or 44.6%. Direct product costs decreased $1.1 million primarily due to the lower volume, lower maintenance, and other cost reductions. Amortization of intangibles decreased $3.8 million as all intangibles were fully impaired at the end of the fiscal third quarter of 2011.

Gross profit. Gross profit was $25.2 million, or 80.5% of revenues for the nine months ended September 30, 2012, a decrease of $10.3 million, or 29.0%, from $35.5 million, or 76.3% of revenues for the nine months ended September 30, 2011. The 4.2 percentage point increase was primarily due to lower product margins of 4.0 points as a result of the decrease in revenues being more than offset by the amortization of intangibles that decreased as a percentage of revenues by 8.2 points due to no amortization for the nine months ended September 30, 2012 versus the same fiscal period last year.

Selling and marketing. Selling and marketing expenses were $12.6 million and $21.9 million for the nine months ended September 30, 2012 and 2011, respectively, representing a decrease of $9.3 million, or 42.5%. This decrease was primarily due to lower headcount of $4.2 million, lower travel expense of $1.0 million, lower third party commissions/distribution fees of $0.6 million, and other cost reductions of $0.3 million. Amortization of intangibles decreased $2.1 million as all intangibles were fully impaired at the end of the fiscal third quarter of 2011. Stock-based compensation decreased from $1.8 million to $0.7 million, or $1.1 million.

Research and development. Research and development expenses were $19.1 million and $33.7 million for the nine months ended September 30, 2012 and 2011, respectively, representing a decrease of $14.6 million, or 43.2%. This decrease was primarily due to lower headcount of $13.0 million, less travel of $0.5 million, and less small equipment and software maintenance of $0.4 million. Amortization of intangibles decreased $0.2 million as all intangibles were fully impaired at the end of the fiscal third quarter of 2011. Stock-based compensation decreased from $1.1 million to $0.6 million, or $0.5 million.

General and administrative. General and administrative expenses were $15.6 million and $20.0 million for the nine months ended September 30, 2012 and 2011, respectively, representing a decrease of $4.4 million, or 21.8%. This decrease was primarily due to lower headcount and people related cost of $1.8 million, lower legal fees of $0.6 million, and other cost reductions of $0.3 million. Stock-based compensation decreased from $3.5 million to $1.8 million, or $1.7 million.

Restructuring expense (income). Restructuring expense was $0.2 million for the nine months ended September 30, 2012 primarily related to severance and relocation costs. Restructuring expense was $1.0 million for the nine months ended September 30, 2011 related to the Chicago facility shutdown of $0.8 million and other one-time employee termination benefits of $0.2 million.

Goodwill and long-lived asset impairment. There have been no impairment charges in 2012. Goodwill and long-lived asset impairment charges of $112.9 million for the nine months ended September 30, 2011 were related to goodwill of $94.2 million, intangible assets of $13.4 million, and fixed assets of $5.3 million.

 

 

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Change in fair value of contingent liability. When we acquired Core Mobility in October 2009, we set up a pre-acquisition contingency for two milestone payments that were part of the purchase price of the business. The first milestone payment of $0.6 million was met and paid in March 2010. The second milestone payment of $1.2 million was not met and therefore not paid. The Core Mobility shareholders disputed this claim in a lawsuit which was settled in August 2012, when the plaintiffs chose not to appeal our court victory. As a result of the litigation victory, we were no longer liable to pay this second milestone payment and the $1.2 million contingent liability was returned to profit.

Interest and other income, net. Interest and other income was $0.1 million for both of the nine months ended September 30, 2012, and 2011.

Income tax provision. We recorded income tax expense of $0.2 million for the nine months ended September 30, 2012. We recorded an income tax benefit of $3.9 million for the nine months ended September 30, 2011. The income tax expense for the nine months ended September 30, 2012 only reflects state income tax minimums and foreign income taxes. For 2012, we have reserved our income tax benefit due to consecutive quarterly losses. The effective tax rate for the nine months ended September 30, 2011 was impacted by the valuation allowance and carryback of losses to offset taxable income in prior years.

Liquidity and Capital Resources

At September 30, 2012, we had $27.0 million in cash and cash equivalents and short-term investments and $36.9 million of working capital.

In October 2012, we received a federal tax refund of $7.5 million as a result of carrying back net operating losses to our 2010 and 2009 income tax returns.

In November 2011, the Company announced that its Board of Directors had approved a program authorizing the repurchase of up to five million shares of the Company’s common stock over a period of up to two years. Under this program, stock repurchases may be made from time to time and the actual amount expended will depend on a variety of factors including market conditions, regulatory and legal requirements, corporate cash generation and other factors. The stock repurchases may be made in both open market and privately negotiated transactions, and may include the use of Rule 10b5-1 trading plans. The program does not obligate Smith Micro to repurchase any particular amount of common stock during any period and the program may be modified or suspended at any time at the Company’s discretion. During the three months ended September 30, 2012 we did not repurchase any shares. During the nine months ended September 30, 2012, we have repurchased 375,000 shares at a cost of $0.8 million.

Capital expenditures were only $0.3 million for the nine months ended September 30, 2012 versus $13.1 million for the nine months ended September 30, 2011 as we expanded our Aliso Viejo datacenter and built out our new Pittsburgh facility last year. Capital expenditures will be considerably lower in 2012 from 2011.

We believe that our existing cash, cash equivalents and short-term investment balances will be sufficient to finance our working capital and capital expenditure requirements through at least the next twelve months. We are hopeful that our new products will gain market acceptance in order to increase our revenues in upcoming quarters. If our new products do not gain market acceptance, or market acceptance is slower than anticipated, then we anticipate that it will be necessary to undertake additional restructuring to lower costs to bring them more in line with actual revenues, thus slowing the usage of cash. We may require additional funds to support our working capital requirements or for other purposes and may seek to raise additional funds through public or private equity or debt financing or from other sources. If additional financing is needed, we cannot assure that such financing will be available to us at commercially reasonable terms or at all.

Operating activities

Net cash used in operating activities was $18.0 million for the nine months ended September 30, 2012. The primary uses of operating cash were to fund our net loss of $21.3 million, increases in our accounts payable and other accrued liabilities of $1.9 million, decreases in our accounts receivable of $1.4 million, and a non-cash change in fair value of a contingent liability of $1.2 million. These were partially offset by non-cash expenses including depreciation and amortization of $3.3 million, stock-based compensation of $3.1 million, state income tax refunds of $0.8 million, and other account adjustments of $0.6 million.

Net cash used by operating activities was $5.8 million for the nine months ended September 30, 2011. The primary uses of operating cash were our net loss (excluding asset impairment) of $37.2 million, the increase of income tax receivables of $5.2 million and other net assets increasing by $0.8 million. These uses were partially offset with cash provided by accounts receivable of $20.4 million, non-cash expenses including depreciation and amortization of $9.1 million, stock-based compensation of $5.1 million, lease incentives of $2.2 million and other account adjustments of $0.6 million.

 

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Investing activities

During the nine months ended September 30, 2012, we were provided with $21.3 million in investing activities due to the sale of short-term investments of $21.6 million, partially offset by capital expenditures of $0.3 million.

During the nine months ended September 30, 2011, we were provided cash of $7.6 million using our short-term investments of $20.7 million partially offset by investing in capital expenditures of $13.1 million to expand our Aliso Viejo datacenter and build out our new Pittsburgh facility and datacenter.

Financing activities

During the nine months ended September 30, 2012, we used $0.8 million to repurchase our common stock and received $0.1 million from the stock sales for the employee stock purchase plan.

We received $0.4 million in cash during the nine months ended September 30, 2011 from the stock sale for the employee stock purchase plan.

Contractual obligations and commercial commitments

As of September 30, 2012 we had no debt. The following table summarizes our contractual obligations as of September 30, 2012 (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

   $ 18,501       $ 2,597       $ 5,080       $ 4,062       $ 6,762   

Purchase Obligations

     1,023         1,023         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,524       $ 3,620       $ 5,080       $ 4,062       $ 6,762   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During our normal course of business, we have made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These include: intellectual property indemnities to our customers and licensees in connection with the use, sale and/or license of our products; indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease; indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct; indemnities involving the accuracy of representations and warranties in certain contracts; and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. We may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain customer contracts. The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees may not provide for any limitation of the maximum potential for future payments we could be obligated to make. We have not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.

Real Property Leases

Our corporate headquarters, including our principal administrative, sales and marketing, customer support and research and development facility, is located in Aliso Viejo, California, where we currently lease and occupy approximately 52,700 square feet of space pursuant to leases that expire on May 31, 2016 and January 31, 2022. We lease approximately 55,600 square feet in Pittsburgh, Pennsylvania under a lease that expires December 31, 2021. We lease approximately 16,000 square feet in Sunnyvale, California under a lease that expires February 28, 2015. We lease approximately 15,300 square feet in Watsonville, California under a lease that expires September 30, 2018. Internationally, we lease space in Belgrade, Serbia that expires December 30, 2016 and Vancouver, Canada that expires March 31, 2014.

 

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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 FASB ASC Topic No. 985-605, Software-Revenue Recognition. We recognize revenues from sales of our software to our customers or end users as completed products are shipped and title passes; or from royalties generated as authorized customers duplicate our software, if the other requirements are met. If the requirements are not met at the date of shipment, revenue is not recognized until these elements are known or resolved. Returns from customers are limited to defective goods or goods shipped in error. Historically, customer returns have not exceeded the very nominal estimates and reserves. We also provide some technical support to our customers. Such costs have historically been insignificant.

We have a few multiple element agreements for which we have contracted to provide a perpetual license for use of proprietary software, to provide non-recurring engineering, and in some cases to provide software maintenance (post contract support). As of January 1, 2011, we adopted ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements which amends revenue recognition guidance for arrangements with multiple deliverables. The new guidance eliminated the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence (“VSOE”), vendor objective evidence (“VOE”) or third-party evidence (“TPE”) is unavailable. For most of our multiple element agreements, VSOE for all contract elements is used and the timing of the individual element revenue streams is determined and recognized as delivered.

For Productivity & Graphics sales, management reviews available retail channel information and makes a determination of a return provision for sales made to distributors and retailers based on current channel inventory levels and historical return patterns. Certain sales to distributors or retailers are made on a consignment basis. Revenue for consignment sales are not recognized until sell through to the final customer is established. Certain revenues are booked net of revenue sharing payments. Sales directly to end-users are recognized upon shipment. End users have a thirty day right of return, but such returns are reasonably estimable and have historically been immaterial. We also provide technical support to our customers. Such costs have historically been insignificant.

Accounts Receivable and Allowance for Doubtful Accounts

We sell our products worldwide. We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history, the customer’s current credit worthiness and various other factors, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers. We estimate credit losses and maintain an allowance for doubtful accounts reserve based upon these estimates. While such credit losses have historically been within our estimated reserves, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. If not, this could have an adverse effect on our consolidated financial statements.

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 September 30, 2012.

 

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Income Taxes

We account for income taxes as required by FASB ASC Topic No. 740, Income Taxes. This Topic clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. In the event the future consequences of differences between financial reporting bases and the tax bases of the Company’s assets and liabilities result in a deferred tax asset, we are required to evaluate the probability of being able to realize the future benefits indicated by such asset. The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.

The Company assesses whether a valuation allowance should be recorded against its deferred tax assets based on the consideration of all available evidence, using a “more likely than not” realization standard. The four sources of taxable income that must be considered in determining whether deferred tax assets will be realized are: (1) future reversals of existing taxable temporary differences (i.e., offset of gross deferred tax assets against gross deferred tax liabilities); (2) taxable income in prior carryback years, if carryback is permitted under the applicable tax law; (3) tax planning strategies and (4) future taxable income exclusive of reversing temporary differences and carryforwards.

In assessing whether a valuation allowance is required, significant weight is to be given to evidence that can be objectively verified. A significant factor in the Company’s assessment is that the Company is in a three-year historical cumulative loss as of the end of fiscal 2011. This fact, combined with uncertain near-term market and economic conditions, reduced the Company’s ability to rely on projections of future taxable income in assessing the realizability of its deferred tax assets.

After a review of the four sources of taxable income as of December 31, 2011 (as described above), and after consideration of the Company’s three-year cumulative loss position as of December 31, 2011, the Company recorded a valuation allowance related to its U.S.-based deferred tax amounts, with a corresponding charge to income tax expense, of $53.2 million during the year ended December 31, 2011.

 

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 September 30, 2012, the carrying values of our financial instruments approximated fair values based on current market prices and rates.

Foreign Currency Risk

While a majority of our business is denominated in U.S. dollars, we do invoice in foreign currencies. For the three months ended September 30, 2012 and 2011, our revenues denominated in foreign currencies were $0.2 million and $0.2 million, respectively. For the nine months ended September 30, 2012 and 2011, our revenues denominated in foreign currencies were $0.4 million and $1.0 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.

 

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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 September 30, 2012. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have determined that as of September 30, 2012, our disclosure controls and procedures were effective to ensure that the information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Management’s responsibility for financial statements

Our management is responsible for the integrity and objectivity of all information presented in this report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s financial position and results of operations for the periods and as of the dates stated therein.

The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with our independent registered public accounting firm, SingerLewak LLP, and representatives of management to review accounting, financial reporting, internal control and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors have free access to the Audit Committee.

Changes in internal control over financial reporting

There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2012 that have materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

On June 29, 2011, a complaint was filed in the U.S. District Court for the Central District of California against us and certain of our current officers on behalf of certain purchasers of our common stock. The complaint was brought as a purported stockholder class action, and, in general, included allegations that we and certain of our officers violated federal securities laws by making materially false and misleading statements regarding our business prospects and financial results, thereby artificially inflating the price of our common stock. The plaintiff sought unspecified monetary damages and other relief. Defendants filed a motion to dismiss the consolidated amended complaint and, on May 21, 2012, the Court granted defendants’ motion to dismiss without prejudice and afforded plaintiffs leave to amend their complaint. Co-lead plaintiffs did not file an amended complaint, and instead agreed to dismiss the action with prejudice. On July 19, 2012, the parties stipulated to dismiss the action with prejudice, with each side to bear its own attorney’s fees and costs. The stipulation fully, finally and forever releases defendants from any and all claims asserted by co-lead plaintiffs in the federal class action. The Court entered the stipulation into order on August 16, 2012.

On August 11, 2011, a shareholder derivative complaint was filed in the Superior Court of California for the County of Orange against the Company’s directors and certain of its executive officers. Thereafter, two additional similar complaints, also styled as shareholder derivative actions, were filed in state court (collectively, the “State Derivative Actions”). On March 29, 2012, the Court consolidated the three State Derivative Actions and appointed lead counsel. Following the stipulated dismissal of the federal stockholder class action, the parties filed, on July 30, 2012, a stipulation to dismiss the State Derivative Actions with prejudice. The Court entered that stipulation into order on July 31, 2012.

On September 12, 2011, a shareholder derivative complaint was filed in the U.S. District Court for the Central District of California against certain of the officers and directors named in the State Derivative Actions but also against additional officers of the Company. Thereafter, the matter was consolidated with two additional similar complaints that were also filed in federal court (collectively, the “Federal Derivative Actions”). Following the stipulated dismissal of the federal stockholder class action, the parties filed, on July 30, 2012, a stipulation to dismiss the Federal Derivative Actions with prejudice. The Court entered that stipulation into order on July 31, 2012.

The Company is and may become involved in various other legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position, litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.

 

Item 1A. Risk Factors

In addition to the information set forth elsewhere 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, 2011 and the risk factor set forth below. These risks could materially affect our business, financial condition and future results, but 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.

We rely directly and indirectly on third-party intellectual property and licenses, which may not be available on commercially reasonable terms or at all.

Many of the Company’s products and services include third-party intellectual property, which requires licenses from those third parties directly to us or to unrelated companies which provide us with sublicenses and/or execution of services for the operation of our business. These products and services include our wireless suite of products as well as our productivity and graphics products. Based on past experience and industry practice, the Company believes such licenses generally could be obtained on reasonable terms. There is however no assurance that the necessary licenses could be obtained on acceptable terms or at all. If the Company or our third party service providers are unable to obtain or renew critical licenses on reasonable terms, we may be forced to terminate or curtail our products and services which rely on such intellectual property and our financial condition and operating results may be materially adversely affected.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The table set forth below shows all repurchases of securities by us during the three months ended September 30, 2012:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

   Total
Number of

Shares (or
Units)
Purchased
    Average
Price
Paid per
Share (or
Unit)
     Total Number
of Shares (or
Units)
Purchased as
Part of
Publicly
Announced
Plans or
Programs
     Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs
 

July 1-31, 2012

     —          —           —           —     

Aug. 1-31, 2012

     6,046      $ 1.76         —           —     

Sep. 1-30, 2012

     326      $ 1.65         —           —     
  

 

 

      

 

 

    

 

 

 

Total

     6,372 (a)         —           4,625,000 (b) 
  

 

 

      

 

 

    

 

 

 

The above table includes:

 

(a) Acquisition of stock by the Company as payment of withholding taxes in connection with the vesting of restricted stock awards, in an aggregate amount of 6,372 shares during the periods set forth in the table.

 

(b) Repurchases of stock under a program announced on November 2, 2011 authorizing the repurchase by the Company of up to 5,000,000 shares over a period of up to two years. Under this program, stock repurchases may be made from time to time and the actual amount expended will depend on a variety of factors including market conditions, regulatory and legal requirements, corporate cash generation and other factors. The stock repurchases may be made in both open market and privately negotiated transactions, and may include the use of Rule 10b5-1 trading plans. The program does not obligate the Company to repurchase any particular amount of common stock during any period and the program may be modified or suspended at any time at the Company’s discretion. During the three months ended September 30, 2012, we did not repurchase any shares.

 

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.
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema Document
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document

 

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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Table of Contents

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.
November 2, 2012     By  

/s/ William W. Smith, Jr.

      William W. Smith, Jr.
      President and Chief Executive Officer
      (Principal Executive Officer)
November 2, 2012     By  

/s/ Andrew C. Schmidt

      Andrew C. Schmidt
      Vice President and Chief Financial Officer
      (Principal Financial Officer)

 

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