Form 10-Q
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, 2015

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   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller 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 23, 2015 there were 46,094,048 shares of common stock outstanding.

 

 

 


Table of Contents

SMITH MICRO SOFTWARE, INC.

QUARTERLY REPORT ON FORM 10-Q

September 30, 2015

TABLE OF CONTENTS

 

PART I.  FINANCIAL INFORMATION   
Item 1.   

Financial Statements (Unaudited)

  
  

Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

     2   
  

Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2015 and 2014

     3   
  

Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2015

     4   
  

Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014

     5   
  

Notes to Consolidated Financial Statements

     6   
Item 2.   

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

     14   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     21   
Item 4.   

Controls and Procedures

     22   
PART II. OTHER INFORMATION   
Item 1.   

Legal Proceedings

     23   
Item 1A.   

Risk Factors

     23   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     23   
Item 6.   

Exhibits

     24   
SIGNATURES      25   

 

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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,     December 31,  
     2015     2014  
     (unaudited)     (audited)  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 8,531      $ 10,165   

Short-term investments

     4,080        2,880   

Accounts receivable, net of allowances for doubtful accounts and other adjustments of $136 (2015) and $602 (2014)

     8,005        8,216   

Income tax receivable

     9        706   

Inventories, net of reserves for excess and obsolete inventory of $165 (2015) and $151 (2014)

     64        97   

Prepaid expenses and other current assets

     934        765   
  

 

 

   

 

 

 

Total current assets

     21,623        22,829   

Equipment and improvements, net

     2,956        4,273   

Other assets

     196        214   

Deferred tax asset

     74        74   
  

 

 

   

 

 

 

Total assets

   $ 24,849      $ 27,390   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 1,470      $ 1,521   

Accrued liabilities

     5,030        5,752   

Deferred revenue

     650        1,498   

Deferred tax liability

     74        74   
  

 

 

   

 

 

 

Total current liabilities

     7,224        8,845   

Non-current liabilities:

    

Deferred rent and other long-term liabilities

     3,476        3,643   
  

 

 

   

 

 

 

Total non-current liabilities

     3,476        3,643   

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; 46,094,048 and 45,000,891 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively

     46        45   

Additional paid-in capital

     224,397        223,141   

Accumulated comprehensive deficit

     (210,294     (208,284
  

 

 

   

 

 

 

Total stockholders’ equity

     14,149        14,902   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 24,849      $ 27,390   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2015     2014     2015     2014  
     (unaudited)     (unaudited)     (unaudited)     (unaudited)  

Revenues

   $ 9,586      $ 9,448      $ 29,501      $ 26,425   

Cost of revenues

     1,959        2,201        6,148        7,072   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     7,627        7,247        23,353        19,353   

Operating expenses:

        

Selling and marketing

     2,220        2,139        6,639        7,471   

Research and development

     3,480        3,188        10,268        11,046   

General and administrative

     2,695        3,064        8,437        10,360   

Restructuring expense

                          2,435   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,395        8,391        25,344        31,312   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (768     (1,144     (1,991     (11,959

Interest and other income (expense), net

     4        (3     3        (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (764     (1,147     (1,988     (11,964

Provision for income tax expense (benefit)

     6        (5     23        40   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (770     (1,142     (2,011     (12,004
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) , before tax:

        

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

            (1     1          

Income tax expense related to items of other comprehensive income

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

       (1     1     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (770   $ (1,143   $ (2,010   $ (12,004
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share:

        

Basic and diluted

   $ (0.02   $ (0.03   $ (0.04   $ (0.31
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic and diluted

     46,160        41,225        45,975        39,165   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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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, 2014

     45,000      $ 45       $ 223,141      $ (208,284   $ 14,902   

Exercise of common stock options

     9                10               10   

Non cash compensation recognized on stock options and ESPP

                    142               142   

Restricted stock grants, net of cancellations

     1,375        1         1,484               1,485   

Cancellation of shares for payment of withholding tax

     (314             (397            (397

Employee stock purchase plan (ESPP)

     24                17               17   

Comprehensive loss

                           (2,010     (2,010
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

BALANCE, September 30, 2015 (unaudited)

     46,094      $ 46       $ 224,397      $ (210,294   $ 14,149   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Nine Months Ended September 30,  
     2015     2014  
     (unaudited)     (unaudited)  

Operating activities:

    

Net loss

   $ (2,011   $ (12,004

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     1,447        2,375   

Provision for doubtful accounts and other adjustments to accounts receivable

     (289     347   

Provision for excess and obsolete inventory

     34        38   

Loss on disposal of fixed assets

     1          

Non-cash compensation related to stock options, ESPP and restricted stock

     1,627        3,095   

Change in operating accounts:

    

Accounts receivable

     500        (139

Income tax receivable

     697        (2

Inventories

     (1     (36

Prepaid expenses and other assets

     (151     (240

Accounts payable and accrued liabilities

     (1,337     (1,082

Deferred revenue

     (848     267   
  

 

 

   

 

 

 

Net cash used in operating activities

     (331     (7,381
  

 

 

   

 

 

 

Investing activities:

    

Capital expenditures

     (131     (84

Sales (purchases) of short-term investments

     (1,199     877   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (1,330     793   
  

 

 

   

 

 

 

Financing activities:

    

Cash received from issuance of common stock, net of offering costs

            5,291   

Cash received from stock sale under employee stock purchase plan

     17        21   

Cash received from exercise of stock options

     10        6   
  

 

 

   

 

 

 

Net cash provided by financing activities

     27        5,318   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (1,634     (1,270

Cash and cash equivalents, beginning of period

     10,165        11,763   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 8,531      $ 10,493   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid for income taxes

   $ 16      $ 61   
  

 

 

   

 

 

 

Change in unrealized gain on short-term investments

   $ 1      $   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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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 solutions to simplify and enhance the mobile experience. As a leader in wireless connectivity, our applications ensure the best Quality of Experience for mobile users while optimizing networks for wireless service providers and enterprises. Using our intelligent policy-on-device platform, along with premium voice, video and content monetization services, we create new opportunities to engage consumers and capitalize on the growth of connected devices. In addition to wireless and mobility software, Smith Micro develops and distributes personal, professional and educational productivity and graphics products and tools for consumers, artists, animators and designers worldwide.

2. Basis of Presentation

The accompanying interim consolidated balance sheet and statement of stockholders’ equity as of September 30, 2015, and the related statements of operations and comprehensive loss and cash flows for the three and nine months ended September 30, 2015 and 2014 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, 2014 filed with the SEC on February 27, 2015.

Intercompany balances and transactions have been eliminated in consolidation.

Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2015.

3. Recent Accounting Pronouncements

In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40). The Update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments to this Update supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of this Topic is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This Topic defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. We will be evaluating the impact of this guidance on our consolidated financial statements.

4. 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, Earnings 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

 

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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.

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  
     (unaudited, in thousands, except per share amounts)  

Numerator:

           

Net loss available to common stockholders

   $ (770    $ (1,142    $ (2,011    $ (12,004
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average shares outstanding - basic

     46,160         41,225         45,975         39,165   

Potential common shares - options (treasury stock method)

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding - diluted

     46,160         41,225         45,975         39,165   
  

 

 

    

 

 

    

 

 

    

 

 

 

Shares excluded (anti-dilutive)

     1         2         113         13   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     2,038         1,596         1,520         1,536   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss per common share:

           

Basic

   ($ 0.02    ($ 0.03    ($ 0.04    ($ 0.31
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   ($ 0.02    ($ 0.03    ($ 0.04    ($ 0.31
  

 

 

    

 

 

    

 

 

    

 

 

 

5. Stock-Based Compensation

Stock Plans

During the nine months ended September 30, 2015, the Company granted options to purchase 65,000 shares of common stock and 1.4 million shares of restricted stock, with a total value of $2.1 million. This cost will be amortized ratably over a period of 12 to 48 months.

As of September 30, 2015, there were 8.5 million shares available for future grants under the new 2015 Omnibus Equity Incentive Plan which was approved by the shareholders on June 18, 2015.

The new plan replaced the 2005 Stock Option / Stock Issuance Plan, which was terminated on the same date. All outstanding options under the 2005 Plan will remain outstanding, but no further grants will be made under that Plan.

Employee Stock Purchase Plan

The Company’s most recent six-month offering period ended September 30, 2015 and resulted in 12,451 shares being purchased/granted at a fair value of $0.74 per share. The next six-month offering period began on October 1, 2015 and will end on March 31, 2016. These shares will have a fair value of $0.69 per share.

Stock Compensation

The Company accounts for all stock-based payment awards made to employees and directors based on their fair values which is 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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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,  
     2015      2014      2015      2014  
     (unaudited)      (unaudited)  

Cost of revenues

   $ 3       $ 2       $ 9       $ 10   

Selling and marketing

     84         63         242         201   

Research and development

     153         160         473         491   

General and administrative

     287         307         903         1,120   

Restructuring expense

                             1,273   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-cash stock compensation expense

   $ 527       $ 532       $ 1,627       $ 3,095   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation for each quarter included cash payments of income taxes related to grants of restricted stock in the amount of $16,000 and $27,000 for the three month periods ended September 30, 2015 and 2014, respectively. The cash payments of income taxes related to grants of restricted stock totaled $70,000 and $145,000 for the nine month periods ended September 30, 2015 and 2014, respectively.

6. 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 and accounts payable 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.

7. 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, 2015 and December 31, 2014, bank balances totaling approximately $8.2 million and $9.9 million, respectively, were uninsured.

8. 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

 

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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, 2015      December 31, 2014  
     Amortized      Gross unrealized             Amortized      Gross unrealized        
     cost basis      gain(loss)      Fair value      cost basis      gain(loss)     Fair value  

Corporate notes, bonds and paper

   $       $       $       $ 1,000       $ (1   $ 999   

Government securities/money market

     4,080                 4,080         1,881                1,881   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 4,080       $       $ 4,080       $ 2,881       $ (1   $ 2,880   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Realized gains were zero for both three and nine months ended September 30, 2015 and 2014.

9. 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 in the accompanying consolidated balance sheets. Product returns are estimated based on historical experience and management estimations.

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 QuickLink®, NetWise® and CommSuite® family of products. Productivity & Graphics includes our consumer-based products: Poser®, Anime Studio®, Manga Studio®, MotionArtist® and StuffIt®.

The Company does not separately allocate operating expenses to these business units, nor does it allocate specific assets. Therefore, business unit information reported includes only revenues.

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  
     (unaudited)      (unaudited)  

Wireless

   $ 8,302       $ 8,355       $ 25,408       $ 22,205   

Productivity & Graphics

     1,284         1,093         4,093         4,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 9,586       $ 9,448       $ 29,501       $ 26,425   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Customer Concentration Information

A summary of the Company’s customers that represent 10% or more of the Company’s net revenues is as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2015     2014     2015     2014  

Wireless:

        

Sprint (& affiliates)

     72.8     67.1     67.5     67.3

Productivity & Graphics:

        

FastSpring

     11.2     10.0     10.4     11.8

The two customers listed above comprised 86% and 87% of our accounts receivable at September 30, 2015 and 2014, respectively.

Geographical Information

During the three and nine months ended September 30, 2015 and 2014, the Company operated in three geographic locations; the Americas, EMEA (Europe, the Middle East, and Africa) and Asia Pacific. 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,  
     2015      2014      2015      2014  
     (unaudited)      (unaudited)  

Americas

   $ 9,514       $ 8,859       $ 29,079       $ 25,447   

EMEA

     46         541         171         719   

Asia Pacific

     26         48         251         259   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 9,586       $ 9,448       $ 29,501       $ 26,425   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

12. 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, 2015 are as follows (in thousands):

 

Year Ending December 31,

   Operating  

2015-3 months remaining

   $ 533   

2016

     1,863   

2017

     1,536   

2018

     1,534   

2019

     1,508   

2020

     1,519   

Beyond

     1,561   
  

 

 

 

Total

   $ 10,054   
  

 

 

 

As of September 30, 2015, $5.0 million of the remaining lease commitments expense has been accrued as part of the 2013 Restructuring Plan, partially offset by future estimated sublease income of $2.6 million.

Rent expense under operating leases was $0.3 million for both the three months ended September 30, 2015 and 2014. Rent expense under operating leases was $1.0 million for both the nine months ended September 30, 2015 and 2014.

 

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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 carried with it an obligation, or commitment, to employ at least 232 people within a three-year time period that ended on December 31, 2013. We received two extensions of time to meet this employment commitment. The new deadline is April 30, 2016. This grant contains conditions that would require us to return a pro-rata amount of the monies received if we fail to meet these conditions. As such, the monies have been recorded as a liability in the accrued liabilities line item on the balance sheet until we are irrevocably entitled to retain the monies, or until it is determined that we need to return a portion or all of the monies received.

Litigation

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

Other Contingent Contractual Obligations

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

13. Equity Transactions

On August 15, 2014, the Company entered into a common stock purchase agreement with a number of accredited investors (“Investors”) in a private placement pursuant to which the Company issued and sold to the Investors 6,845,830 shares of its common stock at a price per share of $0.816. The transaction closed on August 20, 2014 and the Company realized gross proceeds of $5.6 million before deducting commissions and other expenses. Offering costs related to the transaction totaled $0.3 million, comprised of $0.2 million of commissions and $0.1 million of legal and other expenses, resulting in net proceeds of $5.3 million. The Company filed a registration statement with the SEC providing for the resale of the shares of Common Stock issued pursuant to the Purchase Agreement. The registration statement became effective on September 25, 2014.

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. The Topic requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. In addition, the Topic permits an entity to recognize interest and penalties related to tax uncertainties either as income tax expense or operating expenses. The Company has chosen to recognize interest and penalties related to tax uncertainties as income tax expense.

 

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

In assessing whether a valuation allowance is required, significant weight is to be given to evidence that can be objectively verified. A significant factor in the Company’s assessment is that the Company has been in a four-year historical cumulative loss as of the end of fiscal year 2014. These facts, combined with uncertain near-term market and economic conditions, reduced the Company’s ability to rely on projections of future taxable income in assessing the realizability of its deferred tax assets.

After a review of the four sources of taxable income as of December 31, 2014 (as described above), and after consideration of the Company’s continuing cumulative loss position as of December 31, 2014, the Company will continue to reserve its U.S.-based deferred tax amounts, which total $75.7 million, as of September 30, 2015.

The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Federal income tax returns of the Company are subject to IRS examination for the 2012, 2013 and 2014 tax years. State income tax returns are subject to examination for a period of three to four years after filing. The outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. It is the Company’s policy to classify any interest and/or penalties in the financial statements as a component of income tax expense.

15. Restructuring Expenses

2014 Restructuring

On May 6, 2014, the Board of Directors approved a plan of restructuring intended to streamline and flatten the Company’s organization, reduce overall headcount by approximately 20% and reduce its overall cost structure by approximately $2.0 million per quarter. The restructuring plan resulted in special charges totaling $1.8 million recorded during the three month period ended June 30, 2014. These charges were for non-cash stock-based compensation expense of $1.3 million, severance costs for affected employees of $0.4 million, and other related costs of $0.1 million.

2013 Restructuring

On July 25, 2013, the Board of Directors approved a plan of restructuring intended to bring the Company’s operating expenses better in line with revenues. The restructuring plan involved a realignment of organizational structures, facility consolidations/closures and headcount reductions of approximately 26% of the Company’s worldwide workforce. The restructuring plan was implemented primarily during the three month period ended September 30, 2013 and resulted in annualized savings of approximately $16.0 million.

The restructuring plan resulted in special charges totaling $5.6 million recorded in the year ended December 31, 2013. These charges were for lease/rental terminations of $3.3 million, severance costs for affected employees of $1.1 million, equipment and improvements write-offs as a result of our lease/rental terminations of $1.0 million and other related costs of $0.2 million.

In the year ended December 31, 2014, we increased the reserve by $0.6 million due to changes in our assumptions on future sublease income on our lease terminations of $0.8 million, partially offset by adjustments to our one-time employee termination benefits.

 

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Following is the activity in our restructuring liability account for the period ended September 30, 2015 (in thousands):

 

     December 31, 2014                    September 30, 2015  
     Balance      Provision-net      Usage      Balance  

Lease/rental terminations

     2,800         (13      (583      2,204   

Relocation, move, transition travel, other

     89         13         (16      86   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,889       $       $ (599    $ 2,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

16. 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 other than the following:

On October 16, 2015, the Company entered into a Preferred Shares Rights Agreement (“Rights Agreement”) with Computershare Trust Company, N.A., as rights agent, in connection with a dividend distribution declared by the Company’s Board of Directors of one right (“Right”) for each outstanding share of common stock, par value $0.001 (“Common Shares”), per common share of the Company to stockholders of record as of the close of business on October 26, 2015 (“Record Date”). Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock, par value $0.001 per share (“Preferred Shares”), of the Company at an exercise price of $6.69 per one one-thousandth of a Preferred Share, subject to adjustment.

The Board adopted the Rights Agreement to protect stockholders from coercive or otherwise unfair takeover tactics. In general terms, it works by imposing a significant penalty upon any person or group that acquires 20% or more of the Common Shares without the approval of the Board. As a result, the overall effect of the Rights Agreement and the issuance of the Rights may be to render more difficult or discourage a merger, tender or exchange offer or other business combination involving the Company that is not approved by the Board. However, neither the Rights Agreement nor the Rights should interfere with any merger, tender or exchange offer or other business combination approved by the Board.

 

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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:

 

    our customer concentration given that the majority of our sales depend on a few large client relationships, including Sprint;

 

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

 

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

 

    the pace at which the market for new products develops;

 

    our ability to hire and retain key personnel;

 

    the availability of third party intellectual property and licenses which may not be on commercially reasonable terms, or not at all;

 

    our ability to establish and maintain strategic relationships with our customers;

 

    our quarterly revenues and operating results are difficult to predict and could fall below analyst or investor expectations, which could cause the price of our common stock to fall;

 

    our risk of being delisted from NASDAQ if our stock does not trade over $1.00 per share for 10 straight business days by March 8, 2016;

 

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

 

    our ability to raise additional capital to fund our operations and such capital may not be available to us at commercially reasonable terms or at all;

 

    security and privacy breaches in our systems may damage client relations and inhibit our ability to grow;

 

    interruptions or delays in the services we provide from our data center hosting facilities could harm our business; and

 

    those additional factors which are listed under the “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014.

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 solutions to simplify and enhance the mobile experience. As a leader in wireless connectivity, our applications ensure the best Quality of Experience for mobile users while optimizing networks for wireless service providers and enterprises. Using our intelligent policy-on-device platform, along with premium voice, video and content monetization services, we create new opportunities to engage consumers and capitalize on the growth of connected devices. In addition to wireless and mobility software, Smith Micro develops and distributes personal, professional and educational productivity and graphics products and tools for consumers, artists, animators and designers worldwide.

 

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A summary of the Company’s customers that represent 10% or more of the Company’s net revenues is as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2015     2014     2015     2014  

Wireless:

        

Sprint (& affiliates)

     72.8     67.1     67.5     67.3

Productivity & Graphics:

        

FastSpring

     11.2     10.0     10.4     11.8

The two customers listed above comprised 86% and 87% of our accounts receivable at September 30, 2015 and 2014, respectively.

Results of Operations

The table below sets forth certain statements of operations data expressed as a percentage of revenues for the three and nine months ended September 30, 2015 and 2014. Our historical results are not necessarily indicative of the operating results that may be expected in the future.

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2015     2014     2015     2014  

Revenues

     100.0     100.0     100.0     100.0

Cost of revenues

     20.4        23.3        20.8        26.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     79.6        76.7        79.2        73.2   

Operating expenses:

        

Selling and marketing

     23.2        22.7        22.5        28.3   

Research and development

     36.3        33.7        34.8        41.8   

General and administrative

     28.1        32.4        28.6        39.2   

Restructuring expense

                          9.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     87.6        88.8        85.9        118.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (8.0     (12.1     (6.7     (45.3

Interest and other income, net

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (8.0     (12.1     (6.7     (45.3

Provision for income tax expense

                   0.1        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (8.0 )%      (12.1 )%      (6.8 )%      (45.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

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 QuickLink®, NetWise® and CommSuite® family of products; and

 

    Productivity & Graphics, which includes our consumer-based products: Poser®, Anime Studio®, Manga Studio®, MotionArtist® and StuffIt®.

 

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Wireless

   $ 8,302       $ 8,355       $ 25,408       $ 22,205   

Productivity & Graphics

     1,284         1,093         4,093         4,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     9,586         9,448         29,501         26,425   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of revenues

     1,959         2,201         6,148         7,072   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

   $ 7,627       $ 7,247       $ 23,353       $ 19,353   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of revenues. Cost of revenues consists of direct product and assembly, maintenance, data center, royalties and technical support expenses.

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

Research and development. Research and development expenses consist primarily of personnel and equipment costs required to conduct our software development efforts.

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

Restructuring expense. Restructuring expense consists primarily of one-time employee termination benefits, lease and other contract terminations and costs to consolidate facilities and relocate employees.

Interest and other income (expense), net. Interest and other income are primarily related to our average cash and short term investment balances during the period and vary among periods. Our other excess cash is invested in short term marketable equity and debt securities classified as cash equivalents. Interest and other expense are primarily related to the credit-adjusted risk-free interest rate used to measure our operating lease termination liabilities in restructuring.

Provision for income tax expense. The Company accounts for income taxes as required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 740, Income Taxes. This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets and liabilities result in a deferred tax asset, we are required to evaluate the probability of being able to realize the future benefits indicated by such asset. The deferred tax assets are reduced by a valuation allowance if, based upon all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Establishing, reducing or increasing a valuation allowance in an accounting period generally results in an increase or decrease in tax expense in the statement of operations. We must make significant judgments to determine the provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits and any valuation allowance to be recorded against deferred tax assets. The current provision for income tax expense consists of state income tax minimums, foreign tax withholdings and foreign income taxes.

Three Months Ended September 30, 2015 Compared to the Three Months Ended September 30, 2014

Revenues. Revenues were $9.6 million and $9.4 million for the three months ended September 30, 2015 and 2014, respectively, representing an increase of $0.2 million, or 1.5%. Wireless revenues of $8.3 million were essentially flat with the same quarter last year. NetWise and CommSuite revenues were up $0.8 million and $0.2 million, respectively. This increase was offset by decreases in our legacy connection manager business. Productivity & Graphics revenues were $1.3 million and $1.1 million for the three months ended September 30, 2015 and 2014, respectively. The increase was due to strong demand of our Clip Studio product. While we have launched new wireless products, they are new to the market and their rate of adoption and deployment is unknown at this time causing material uncertainty regarding the timing of our future wireless revenues.

Cost of revenues. Cost of revenues were $2.0 million and $2.2 million for the three months ended September 30, 2015 and 2014, respectively, representing a decrease of $0.2 million, or 11.0%. This decrease was primarily due to reduced spending.

 

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Gross profit. Gross profit was $7.6 million, or 79.6% of revenues for the three months ended September 30, 2015, an increase of $0.4 million, or 5.2%, from $7.2 million, or 76.7% of revenues for the three months ended September 30, 2014. The 2.9 percentage point increase was primarily due to increased revenues and cost reductions.

Selling and marketing. Selling and marketing expenses were $2.2 million and $2.1 million for the three months ended September 30, 2015 and 2014, respectively, representing an increase of $0.1 million, or 3.8%. This increase was primarily due to increased travel and consulting expenses. Stock-based compensation remained flat at $0.1 million for the three months ended September 30, 2015 and 2014.

Research and development. Research and development expenses were $3.5 million and $3.2 million for the three months ended September 30, 2015 and 2014, respectively, representing an increase of $0.3 million, or 9.2%. This increase was primarily due to increased headcount. Stock-based compensation remained flat at $0.1 million for the three months ended September 30, 2015 and 2014.

General and administrative. General and administrative expenses were $2.7 million and $3.1 million for the three months ended September 30, 2015 and 2014, respectively, representing a decrease of $0.4 million, or 12.0%. This decrease was primarily due to lower depreciation of $0.1 million, space and occupancy costs of $0.2 million and other cost reductions of $0.1 million. Stock-based compensation remained flat at $0.3 million for the three months ended September 30, 2015 and 2014.

Provision for income tax expense. We recorded income tax expense of $6,000 and a benefit of $5,000 for the three months ended September 30, 2015 and 2014, respectively. The income tax expenses for both periods only reflect state income tax minimums and foreign income taxes.

Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014

Revenues. Revenues were $29.5 million and $26.4 million for the nine months ended September 30, 2015 and 2014, respectively, representing an increase of $3.1 million, or 11.6%. Wireless revenues increased $3.2 million, or 14.4%, primarily due to increases in our NetWise product family due to new business at Comcast and increases at Sprint of $3.5 million and CommSuite $0.8 million, partially offset by a decrease in our legacy connection manager business of $1.1 million. Productivity & Graphics revenues decreased $0.1 million, or 3.0%, primarily due to a planned reduction of our low margin retail channel. While we have launched new wireless products, they are new to the market and their rate of adoption and deployment is unknown at this time causing material uncertainty regarding the timing of our future wireless revenues.

Cost of revenues. Cost of revenues was $6.1 million and $7.1 million for the nine months ended September 30, 2015 and 2014, respectively, representing a decrease of $1.0 million, or 13.1%. This decrease was primarily due to cost savings as a result of our 2014 restructuring, lower spending, and lower third party royalty costs due to the product mix.

Gross profit. Gross profit was $23.4 million, or 79.2% of revenues for the nine months ended September 30, 2015, an increase of $4.1 million, or 20.7%, from $19.3 million, or 73.2% of revenues for the nine months ended September 30, 2014. The 6.0 percentage point increase was primarily due to increased revenues and lower costs.

Selling and marketing. Selling and marketing expenses were $6.7 million and $7.5 million for the nine months ended September 30, 2015 and 2014, respectively, representing a decrease of $0.8 million, or 11.1%. This decrease was primarily due to headcount reductions resulting from our 2014 restructuring. Stock-based compensation remained flat at $0.2 million for the nine months ended September 30, 2015 and 2014.

Research and development. Research and development expenses were $10.2 million and $11.0 million for the nine months ended September 30, 2015 and 2014, respectively, representing a decrease of $0.8 million, or 7.0%. This decrease was primarily due to headcount reductions resulting from our 2014 restructuring. Stock-based compensation remained flat at $0.5 million for the nine months ended September 30, 2015 and 2014.

General and administrative. General and administrative expenses were $8.5 million and $10.4 million for the nine months ended September 30, 2015 and 2014, respectively, representing a decrease of $1.9 million, or 18.6%. This decrease was primarily due to lower depreciation of $0.6 million, headcount reductions resulting from our 2014 restructuring of $0.4 million, space and occupancy costs of $0.4 million, and other cost reductions of $0.2 million. Stock-based compensation decreased from $1.2 million to $0.9 million, or $0.3 million.

 

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Restructuring expense. There was no restructuring expense in the nine months ended September 30, 2015. Restructuring expense was $2.4 million for the nine months ended September 30, 2014 due to one-time employee terminations of $1.3 million of non-cash stock-based compensation and $0.4 million of severance costs, $0.6 million for lease terminations, and $0.1 million of other related expenses.

Provision for income tax expense. We recorded income tax expense of $23,000 and $40,000 for the nine months ended September 30, 2015 and 2014, respectively. The income tax expenses for both periods only reflect state income tax minimums and foreign income taxes.

Liquidity and Capital Resources

At September 30, 2015, we had $12.6 million in cash and cash equivalents and short-term investments and $14.4 million of working capital.

Based on the Company’s current financial revenue and profit projections, our reduced cost structure as a result of our 2014 restructuring, and the proceeds from the sale of our common stock in a private placement in 2014, management believes that the Company’s existing cash, cash equivalents and short-term investments will be sufficient to fund its operations through at least the next twelve months. If market acceptance of our strategy and products is slower than anticipated, then we will need to:

 

    undertake additional restructuring to lower costs to bring them in line with actual revenues;

 

    raise additional funds to support the Company’s operations. There is no assurance that the Company will be able to raise such additional funds on acceptable terms, if at all. If the Company raises additional funds by issuing securities, existing stockholders may be diluted; and

 

    review strategic alternatives for one or more of our product lines.

If adequate funds are not available, we may be required to curtail our operations or other business activities or obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain technologies or potential markets.

Operating activities

Net cash used in operating activities was $0.3 million for the nine months ended September 30, 2015. The primary uses of operating cash were to fund our net loss of $2.0 million and decreases in accounts payable and accrued expenses of $1.3 million, deferred revenue of $0.8 million, decreases in accounts receivable provisions of $0.3 million and prepaid expenses of $0.1 million. These were partially offset by non-cash expenses including stock-based compensation of $1.6 million, depreciation and amortization of $1.4 million, income tax refunds of $0.7 million, and a decrease of accounts receivable of $0.5 million.

Net cash used in operating activities was $7.4 million for the nine months ended September 30, 2014. The primary uses of operating cash were to fund our net loss of $12.0 million, decreases in accounts payables and accrued liabilities of $1.1 million, increases in prepaid expenses of $0.3 million, and increases of accounts receivable of $0.1 million. These were partially offset by non-cash expenses including stock-based compensation of $3.1 million, depreciation and amortization of $2.4 million, and accounts receivable and inventory reserves of $0.4 million, and increases in deferred revenue of $0.2 million.

Investing activities

Net cash used in investing activities was $1.3 million for the nine months ended September 30, 2015 due to the purchase of short-term investments of $1.2 million and capital expenditures of $0.1 million.

Net cash provided by investing activities was $0.8 million for the nine months ended September 30, 2014 due to the sale of short-term investments of $0.9 million, less capital expenditures of $0.1 million.

Financing activities

During the nine months ended September 30, 2015, we received $17,000 from the stock sale for the employee stock purchase plan and $10,000 from the exercise of stock options.

 

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During the nine months ended September 30, 2014, we received $5.3 million from the sale of our common stock in a private placement. We also received $21,000 from the stock sale for the employee stock purchase plan and $6,000 from the exercise of stock options.

Contractual obligations and commercial commitments

As of September 30, 2015 we had no debt. The following table summarizes our contractual obligations as of September 30, 2015 (in thousands):

 

     Payments due by period  
     Total      1 year
or less
     1-3 years      3-5 years      More than
5 years
 

Contractual obligations:

              

Operating Lease Obligations

   $ 10,054       $ 1,986       $ 3,105       $ 3,021       $ 1,942   

Purchase Obligations

     1,666         1,666                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,720       $ 3,652       $ 3,105       $ 3,021       $ 1,942   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 33,600 square feet of space pursuant to lease that expires on May 31, 2016. We lease approximately 55,600 square feet in Pittsburgh, Pennsylvania under a lease that expires December 31, 2021. Internationally, we lease space in Belgrade, Serbia that expires December 30, 2016.

In February 2015, we signed an addendum to sublease approximately 19,965 square feet of our Pittsburgh, Pennsylvania facility for a term that expires on December 31, 2021 which is concurrent with our current lease.

We lease an additional 19,100 square feet in Aliso Viejo, California under a lease that expires January 31, 2022. In August 2014, we signed an addendum to sublease all of the space commencing on September 15, 2014 for a three year period, with two, two-year renewal options. The remaining lease expense, net of sublease income, has been accrued for in our 2013 restructuring liability account.

We lease approximately 15,300 square feet in Watsonville, California under a lease that expires September 30, 2018. In March 2014, we signed an addendum to sublease all of the space commencing on May 1, 2014. We are paying the landlord a minimum amount of rent, with annual escalations, through the end of the lease. This lease expense has been accrued for in our 2013 restructuring liability account. We have moved into a significantly smaller facility in Santa Cruz, California and are paying month-to-month rent.

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.

 

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We believe the following critical accounting policies affect our more significant estimates and assumptions used in the preparation of our consolidated financial statements:

Revenue Recognition

We currently report our net revenues under two operating groups: Wireless and Productivity & Graphics. Within each of these groups software revenue is recognized based on the customer and contract type. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectability is probable as required by FASB ASC Topic No. 985-605, Software-Revenue Recognition. We recognize revenues from sales of our software to our customers or end users as completed products are shipped and title passes; or from royalties generated as authorized customers duplicate our software, if the other requirements are met. If the requirements are not met at the date of shipment, revenue is not recognized until these elements are known or resolved. For Wireless sales, returns from customers are limited to defective goods or goods shipped in error. Historically, customer returns have not exceeded the very nominal estimates and reserves. We also provide some technical support to our customers. Such costs have historically been insignificant.

We have a few multiple element agreements for which we have contracted to provide a perpetual license for use of proprietary software, to provide non-recurring engineering, and in some cases to provide software maintenance (post contract support). For these software and software-related multiple element arrangements, we must: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essential to the functionality of the delivered products and services; (3) determine the fair value of each undelivered element using vendor-specific objective evidence (“VSOE”), and (4) allocate the total price among the various elements. VSOE of fair value is used to allocate a portion of the price to the undelivered elements and the residual method is used to allocate the remaining portion to the delivered elements. Absent VSOE, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements of the arrangement have been delivered. However, if the only undelivered element is post contract support, the entire arrangement fee is recognized ratably over the performance period. We determine VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. We have established VSOE for our post contract support services and non-recurring engineering.

On occasion, we enter into fixed fee arrangements, i.e. for trials, in which customer payments are tied to the achievement of specific milestones. Revenue for these contracts is recognized based on customer acceptance of certain milestones as they are achieved. We also enter hosting arrangements that sometimes include up-front, non-refundable set-up fees. Revenue is recognized for these fees over the term of the agreement.

For Productivity & Graphics sales, management reviews available retail channel information and makes a determination of a return provision for sales made to distributors and retailers based on current channel inventory levels and historical return patterns. Certain sales to distributors or retailers are made on a consignment basis. Revenue for consignment sales is 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 determined there was no impairment as of September 30, 2015.

 

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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. The Topic requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. In addition, the Topic permits an entity to recognize interest and penalties related to tax uncertainties either as income tax expense or operating expenses. The Company has chosen to recognize interest and penalties related to tax uncertainties as income tax expense.

Recent Accounting Pronouncements

In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40). The Update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments to this Update supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of this Topic is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This Topic defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. We will be evaluating the impact of this guidance on our consolidated financial statements.

 

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, 2015, 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, 2015 and 2014, our revenues denominated in foreign currencies were $8,000 and $13,000, respectively. For the nine months ended September 30, 2015 and 2014, our revenues denominated in foreign currencies were $24,000 and $35,000, 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, 2015. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have determined that as of September 30, 2015, 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, 2015 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

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

 

Item 1A. Risk Factors

Except for the additional disclosures set forth below, for additional information about our risk factors, see Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on February 27, 2015 (“the Form 10-K”) .

We may not be able to regain compliance with the continued listing requirements of The NASDAQ Global Select Market.

On September 10, 2015, we received a letter from The NASDAQ Stock Market (“Nasdaq”) notifying us that, for 30 consecutive business days, the bid price for the Company’s common stock was below the minimum $1.00 per share requirement for continued listing on The Nasdaq Global Select Market under Nasdaq Listing Rule 5450(a)(1). We have 180 days, or until March 8, 2016, to regain compliance with the minimum bid price requirement. To regain compliance, the minimum bid price of our common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during the 180-day grace period as determined by Nasdaq staff. In the event we receive notice that our common stock is being delisted, Nasdaq rules permit us to appeal any delisting determination by the Nasdaq staff to a hearings panel. We actively monitor the price of our common stock and will consider all available options to regain compliance with the continued listing standards.

However, if we fail to regain compliance with the minimum bid price listing requirement or fail to maintain compliance with all other applicable continued listing requirements and Nasdaq determines to delist our common stock, the delisting could adversely impact us by, among other things, reducing the liquidity and market price of our common stock; reducing the number of investors willing to hold or acquire our common stock; limiting our ability to issue additional securities in the future; and limiting our ability to fund our operations.

 

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, 2015:

 

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, 2015

          

Aug 1-31, 2015

     59,661      $ 1.17         

Sep 1-30, 2015

     59,682      $ 0.84         
  

 

 

   

 

 

       

Total

     119,343 (a)    $ 1.00         

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 119,343 shares during the periods set forth in the table.

 

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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

 

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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.
October 30, 2015   By  

/s/ William W. Smith, Jr.

    William W. Smith, Jr.
    President and Chief Executive Officer
    (Principal Executive Officer)
October 30, 2015   By  

/s/ Steven M. Yasbek

    Steven M. Yasbek
    Vice President and Chief Financial Officer
    (Principal Financial Officer)

 

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