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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26536
SMITH MICRO SOFTWARE, INC.
DELAWARE (STATE OR OTHER JURISDICTION OF ORGANIZATION) | 33-0029027 (I.R.S. EMPLOYER INCORPORATION OR IDENTIFICATION NUMBER) | |
51 COLUMBIA, SUITE 200, ALISO VIEJO, CA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) | 92656 (ZIP CODE) |
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 362-5800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK,
$.001 PAR VALUE
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 ( )
As of October 31, 2002, there were 16,235,416 shares of Common Stock outstanding.
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SMITH MICRO SOFTWARE, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION | |||||
Item 1. Financial Statements | |||||
Unaudited Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 | 3 | ||||
Unaudited Consolidated Statements of Operations For The Three and Nine Months Ended September 30, 2002 and September 30, 2001 | 4 | ||||
Unaudited Consolidated Statements of Cash Flows For The Nine Months Ended September 30, 2002 and September 30, 2001 | 5 | ||||
Notes to Unaudited Consolidated Financial Statements | 7 | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | ||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 24 | ||||
Item 4. Controls and Procedures | 25 | ||||
Part II. OTHER INFORMATION | |||||
Item 1. Legal Proceedings | 26 | ||||
Item 2. Changes In Securities and Use of Proceeds | 26 | ||||
Item 3. Defaults Upon Senior Securities | 26 | ||||
Item 4. Submission of Matters To A Vote Of Security Holders | 26 | ||||
Item 5. Other Information | 26 | ||||
Item 6. Exhibits and Reports On Form 8-K | 26 | ||||
Signatures | 29 | ||||
Certifications | 30 |
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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SMITH MICRO SOFTWARE, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
September 30, | December 31, | ||||||||
2002 | 2001 | ||||||||
ASSETS | |||||||||
CURRENT ASSETS: | |||||||||
Cash and cash equivalents | $ | 3,853 | $ | 3,226 | |||||
Accounts receivable, net of allowances for doubtful accounts and other adjustments of $669 (2002) and $533 (2001) | 937 | 2,724 | |||||||
Inventories, net | 41 | 295 | |||||||
Prepaid expenses and other current assets | 124 | 265 | |||||||
Total current assets | 4,955 | 6,510 | |||||||
EQUIPMENT AND IMPROVEMENTS, net | 284 | 482 | |||||||
OTHER ASSETS | 46 | 42 | |||||||
INTANGIBLE ASSETS, net | 298 | 508 | |||||||
GOODWILL | 1,715 | 1,715 | |||||||
$ | 7,298 | $ | 9,257 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
CURRENT LIABILITIES: | |||||||||
Accounts payable | $ | 579 | $ | 1,160 | |||||
Accrued liabilities | 816 | 1,795 | |||||||
Total current liabilities | 1,395 | 2,955 | |||||||
STOCKHOLDERS’ EQUITY: | |||||||||
Preferred stock, par value $0.001 per share; 5,000,000 shares authorized; none issued and outstanding | |||||||||
Common stock, par value $0.001 per share; 30,000,000 shares authorized; 16,235,000 and 16,232,000 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively | 16 | 16 | |||||||
Additional paid-in capital | 24,792 | 24,789 | |||||||
Accumulated deficit | (18,905 | ) | (18,503 | ) | |||||
Net stockholders’ equity | 5,903 | 6,302 | |||||||
$ | 7,298 | $ | 9,257 | ||||||
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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SMITH MICRO SOFTWARE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
Three Months Ended | Nine Months Ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||||
NET REVENUES | ||||||||||||||||||
Products | $ | 1,637 | $ | 1,754 | $ | 4,447 | $ | 4,284 | ||||||||||
Services | 209 | 554 | 909 | 2,038 | ||||||||||||||
Total Net Revenues | 1,846 | 2,308 | 5,356 | 6,322 | ||||||||||||||
COST OF REVENUES | ||||||||||||||||||
Products | 507 | 268 | 1,111 | 1,160 | ||||||||||||||
Services | 110 | 543 | 660 | 1,630 | ||||||||||||||
Total Cost of Revenues | 617 | 811 | 1,771 | 2,790 | ||||||||||||||
GROSS PROFIT | 1,229 | 1,497 | 3,585 | 3,532 | ||||||||||||||
OPERATING EXPENSES: | ||||||||||||||||||
Selling and marketing | 516 | 876 | 1,748 | 3,828 | ||||||||||||||
Research and development | 503 | 636 | 1,563 | 2,475 | ||||||||||||||
General and administrative | 602 | 752 | 1,713 | 3,074 | ||||||||||||||
Restructuring costs | 35 | 380 | ||||||||||||||||
Total operating expenses | 1,621 | 2,299 | 5,024 | 9,757 | ||||||||||||||
OPERATING LOSS | (392 | ) | (802 | ) | (1,439 | ) | (6,225 | ) | ||||||||||
INTEREST INCOME (EXPENSE) | (3 | ) | 11 | (25 | ) | 76 | ||||||||||||
LOSS BEFORE INCOME TAXES | (395 | ) | (791 | ) | (1,464 | ) | (6,149 | ) | ||||||||||
INCOME TAX (BENEFIT) EXPENSE | (1,070 | ) | 3 | (1,062 | ) | 92 | ||||||||||||
NET INCOME (LOSS) | $ | 675 | $ | (794 | ) | $ | (402 | ) | $ | (6,241 | ) | |||||||
NET INCOME (LOSS) PER SHARE, basic and diluted | $ | 0.04 | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.38 | ) | |||||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, basic and diluted | 16,235 | 16,232 | 16,234 | 16,232 | ||||||||||||||
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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SMITH MICRO SOFTWARE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
For The Nine Months | |||||||||||
Ended September 30, | |||||||||||
2002 | 2001 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
Net loss | $ | (402 | ) | $ | (6,241 | ) | |||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
Depreciation and amortization | 448 | 966 | |||||||||
Provision for doubtful accounts and other adjustments to accounts receivable | (375 | ) | (1,218 | ) | |||||||
Change in operating accounts: | |||||||||||
Accounts receivable | 2,162 | 4,423 | |||||||||
Inventories | 254 | (52 | ) | ||||||||
Prepaid expenses and other assets | 108 | 41 | |||||||||
Accounts payable and accrued liabilities | (1,560 | ) | (250 | ) | |||||||
Net cash provided by (used in) operating activities | 635 | (2,331 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
Capital expenditures | (11 | ) | (100 | ) | |||||||
Net cash used in investing activities | (11 | ) | (100 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
Proceeds from the exercise of stock options | 3 | — | |||||||||
Net cash provided by financing activities | 3 | — | |||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 627 | (2,431 | ) | ||||||||
CASH AND CASH EQUIVALENTS, beginning of period | 3,226 | 6,178 | |||||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 3,853 | $ | 3,747 | |||||||
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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SMITH MICRO SOFTWARE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS — continued
(In Thousands)
For The Nine Months | ||||||||
Ended September 30, | ||||||||
2002 | 2001 | |||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
Cash (received) paid for income taxes | $ | (1,063 | ) | $ | 163 | |||
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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SMITH MICRO SOFTWARE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business- Smith Micro Software, Inc. (“Smith Micro” or the “Company”) develops and markets wireless communication and utility software products. The Company designs integrated, cross platform, easy-to-use software for personal computing and business solutions around the world. With a focus on the Internet, wireless, and broadband technologies, the Company’s products and services enable eCommerce, eBusiness, Internet communications (voice-over-IP), video conferencing, wireless communications, and network fax, along with traditional computer telephony. Smith Micro’s complete line of products is available through direct sales, retail stores, value-added resellers (VARs) and original equipment manufacturers (OEMs). The Company also offers professional services consulting which include methodologies to help clients focus, define and prioritize Internet investments; develop eCommerce sites and custom eBusiness applications; implement tools to increase revenue per online transaction and transactions per customer; warehouse, mine and integrate data for enhanced accessibility and effective decision support; and select the right technology infrastructure to support eBusiness. An extension of the Company’s eBusiness activity includes the offering of fulfillment services for customer web stores. A portion of the Company’s sales are made direct to hardware device and personal computer manufacturers under Original Equipment Manufacturer (OEM) agreements. The Company sells communication and diagnostic utility products through independent distributors and retail channels. The Company’s eCommerce products enable websites to be created with standard HTML text and provide fully automated payment processing and order accounting.
Basis of Presentation- The accompanying unaudited interim consolidated financial statements reflect adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of the Company at September 30, 2002, and the results of its operations and cash flows for the three and nine month periods ended September 30, 2002 and 2001. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”), although the Company believes that the disclosures in the unaudited consolidated financial statements are adequate to ensure the information presented is not misleading. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001. The results of operations of interim periods are not necessarily indicative of the operating results for the year.
Cash and Cash Equivalents- Cash and cash equivalents generally consist of cash, government securities and money market funds. These securities are all held in one financial institution. All have original maturity dates of three months or less.
Accounts Receivable- The Company sells its products worldwide. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses, and those losses have been within management’s expectations. Allowances for product returns and price protection are included in other adjustments to accounts receivable on the accompanying consolidated balance sheets.
Inventories- Inventories consist principally of manuals and CDs 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 estimated forecast of product demand and production requirements.
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.
Long Lived Assets -The Company accounts for the impairment and disposition of long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144,Accounting for Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment of long-lived assets and for the disposal of long-lived assets. SFAS No. 144 superseded SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,and is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 on January 1, 2002. In accordance with SFAS No. 144, long-lived assets to be held are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. The Company periodically reviews the carrying value of long-lived assets to determine whether or not an impairment to such value has occurred.
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Goodwill and Other Intangibles- Goodwill represents the excess purchase cost over the net assets acquired, and until January 1, 2002, was amortized over three to seven years using the straight-line method. Other intangible assets include acquired technology, which is being amortized using the straight-line method over three years. In June 2001, the FASB issued SFAS No. 142,Goodwill and Other Intangible Assets, which the Company adopted January 1, 2002. SFAS No. 142 requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually and written down when impaired. SFAS No. 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. In accordance with this Standard, the Company no longer amortizes goodwill and indefinite life intangible assets but will evaluate their carrying value at least on an annual basis or when events or circumstances indicate that their carrying value may be impaired. The Company ceased amortizing goodwill as of the beginning of fiscal 2002. In accordance with SFAS No. 142, the Company was required to perform a two-step transitional impairment review. The first step of this review was completed by June 30, 2002 with the determination of the fair value of the Company’s reporting units in order to identify whether the fair value of each reporting unit is less than its carrying amount. In the event that the fair value of the reporting unit is less than the carrying amount, the second step of the test would be required to determine if the carrying value of goodwill exceeds the implied value. The Company completed its review and determined that it did not have a transitional impairment of goodwill. The Company has no indefinite life intangibles. If estimates or conditions change, a materially different impairment conclusion could result.
Revenue Recognition- Software revenue is recognized in accordance with the Statement of Position (SOP) 97-2,Software Revenue Recognition,as amended. SOP 97-2 provides guidance on when revenue should be recognized for licensing, selling, leasing or otherwise marketing computer software. The Company generally recognizes revenues from sales of its software as completed products are shipped and title passes and from royalties generated as authorized customers duplicate the Company’s software, assuming collectibility is reasonably assured. The Company may permit customers to return or exchange product and may provide price protection on products unsold by a customer. In accordance with SFAS No. 48,Revenue Recognition when Right of Return Exists, revenue is recorded net of an allowance for estimated returns, exchanges, markdowns, price concessions, and warranty costs. Such reserves are based upon management’s evaluation of historical experience, current industry trends and estimated costs. While returns and other concessions have historically been within management’s estimates, the amount of estimated reserves could change as new information becomes available. In July of 2002, the Company signed a new distribution agreement with its primary distributor. As a result of the new distribution agreement and other related factors, the Company has decided to begin recording revenue from distributors only upon sell-through, rather than upon shipment to the distributor. The impact of this change was to defer recognition certain sales during the quarter and increase reserves for inventory currently in the channel, totaling approximately $200,000. The Company also provides technical support to its customers. Such costs have historically been insignificant.
Consulting services and hosting revenues are recognized as services are provided or as milestones are delivered and accepted by customers.
Sales Incentives- In 2001 the Emerging Issues Task Force issued EITF 01-09,Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Product).Effective January 1, 2002, the Company has adopted EITF 01-09. Pursuant to the consensus of Issue 01-09, the cost of sales incentives the Company offers without charge to customers that can be used in, or that are exercisable by a customer as a result of, a single exchange transaction is required to be accounted for as a reduction of revenue. The Company’s consolidated financial statements for prior periods presented for comparative purposes have been reclassified to comply with the revised income statement display requirements. The result of this adoption was a decrease in revenue with a corresponding decrease in selling and marketing expense of $214,000 and $526,000 in the three and nine months ended September 30, 2001, respectively. There were no significant sales incentives in the three months ended September 30, 2002. The impact for the nine months ended September 30, 2002 is lower revenue and lower selling and marketing expense of $227,000.
Software Development Costs- Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. The Company considers technological feasibility to be established when all planning, designing, coding and testing has been completed according to design specifications. After technological feasibility is established, any additional costs are capitalized. Through June 30, 2002, software has been substantially completed concurrently with the establishment of technological feasibility; and, accordingly, no costs have been capitalized to date.
Income Taxes- The Company accounts for income taxes under SFAS No. 109,Accounting for 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. The measurement of the deferred items is based on enacted tax laws. In the event the
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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, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized. During the three months ended September 30, 2002, the Company was able to quantify and recognize a tax benefit of $1,070,000 related to previously reserved net operating loss carryforwards. The related refund was received in September, 2002.
Stock-Based Compensation- The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees.
Net Income (Loss) per Share- Pursuant to SFAS No. 128,Earnings per Share,the Company is required to provide dual presentation of “basic” and “diluted” earnings (loss) per share (EPS). Basic EPS amounts are based upon the weighted average number of common shares outstanding. Diluted EPS amounts are based upon the weighted average number of common and common equivalent shares outstanding. Common equivalent shares include stock options using the treasury stock method. Common equivalent shares are excluded from the calculation of diluted EPS in loss years, as the impact is antidilutive. Therefore, there was no difference between basic and diluted EPS for each period presented. Additionally, Due to the relationship between the current market price of the Company’s common stock and the exercise price of outstanding stock options, all stock options were antidilutive for the period ended September 30, 2002.
Fulfillment Services- The Company currently holds approximately $500,000 of consigned inventory for a customer, which is used to fulfill internet orders. As the Company does not hold title to the inventory, it is not recorded in the accompanying consolidated balance sheet. In addition, the Company receives cash for internet fulfillment orders which is paid out to the fulfillment customer on a monthly basis. Such cash and the related payable are recorded on a net basis due to the right of offset.
Segment Information- The Company operates in two business segments: software products and Internet solutions. The software products operating segment develops and markets the Company’s software products, except for eCommerce software. Within software products the Company further concentrates on wireless and broadband products, Macintosh products and the related retail products for each of these concentrations. The Internet solutions segment provides eCommerce software solutions, eBusiness strategy and integration of new infrastructure solutions into existing systems. The Internet solutions segment also includes hosting revenue. The Company does not separately allocate operating expenses to these segments, nor does it allocate specific assets to these segments. Therefore, segment information reported includes only revenues, cost of sales and gross profit, as this information and the geographic information described below are the primary information provided to the chief executive officer.
The following table shows the net revenues, cost of revenues and gross profit (in thousands) generated by each segment.
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Three Months Ended September 30, 2002
Software Products | ||||||||||||||||||||||||
Wireless | Total Software | Internet | Total | |||||||||||||||||||||
& Broadband | Macintosh | Retail | Products | Solutions | Company | |||||||||||||||||||
Net Revenue | $ | 1,320 | $ | 356 | $ | (144 | ) | $ | 1,532 | $ | 314 | $ | 1,846 | |||||||||||
Cost of Revenue | 474 | 143 | 617 | |||||||||||||||||||||
Gross Profit | $ | 1,058 | $ | 171 | $ | 1,229 | ||||||||||||||||||
Three Months Ended September 30, 2001
Software Products | ||||||||||||||||||||||||
Wireless | Total Software | Internet | Total | |||||||||||||||||||||
& Broadband | Macintosh | Retail | Products | Solutions | Company | |||||||||||||||||||
Net Revenue | $ | 678 | $ | 284 | $ | 747 | $ | 1,709 | $ | 599 | $ | 2,308 | ||||||||||||
Cost of Revenue | 259 | 552 | 811 | |||||||||||||||||||||
Gross Profit | $ | 1,450 | $ | 47 | $ | 1,497 | ||||||||||||||||||
Nine Months Ended September 30, 2002
Software Products | ||||||||||||||||||||||||
Wireless | Total Software | Internet | Total | |||||||||||||||||||||
& Broadband | Macintosh | Retail | Products | Solutions | Company | |||||||||||||||||||
Net Revenue | $ | 2,734 | $ | 1,174 | $ | 357 | $ | 4,265 | $ | 1,091 | $ | 5,356 | ||||||||||||
Cost of Revenue | 1,064 | 707 | 1,771 | |||||||||||||||||||||
Gross Profit | $ | 3,201 | $ | 384 | $ | 3,585 | ||||||||||||||||||
Nine Months Ended September 30, 2001
Software Products | ||||||||||||||||||||||||
Wireless | Total Software | Internet | Total | |||||||||||||||||||||
& Broadband | Macintosh | Retail | Products | Solutions | Company | |||||||||||||||||||
Net Revenue | $ | 2,600 | $ | 804 | $ | 649 | $ | 4,053 | $ | 2,269 | $ | 6,322 | ||||||||||||
Cost of Revenue | 1,116 | 1,674 | 2,790 | |||||||||||||||||||||
Gross Profit | $ | 2,937 | $ | 595 | $ | 3,532 | ||||||||||||||||||
Use of Estimates- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions 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 years. Actual results could differ from those estimates.
Comprehensive Income- SFAS No. 130,Reporting Comprehensive Income establishes standards for the reporting of comprehensive income and its components. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from nonowner sources. For each of the periods ended September 30, 2002 and 2001, there was no difference between net income (loss), as reported, and comprehensive income (loss).
Reclassifications- Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation.
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2. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued two new pronouncements: SFAS No. 141,Business Combinations, and SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 141 prohibits the use of the pooling-of-interest method for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. The adoption of SFAS No. 141, did not have a material impact on the consolidated financial statements. There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS No. 142 requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually and written down when impaired. SFAS No. 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. In accordance with this Standard, the Company no longer amortizes goodwill and indefinite life intangible assets but will evaluate their carrying value at least on an annual basis or when events or circumstances indicate that their carrying value may be impaired. The Company ceased amortizing goodwill as of the beginning of fiscal 2002. In accordance with SFAS No. 142, the Company is required to perform a two-step transitional impairment review. The first step of this review was completed by June 30, 2002 with the determination of the fair value of the Company’s reporting units in order to identify whether the fair value of each reporting unit is less than its carrying amount. In the event that the fair value of the reporting unit is less than the carrying amount, the second step of the test would be required to determine if the carrying value of goodwill exceeds the implied value. The Company determined that it did not have a transitional impairment of goodwill. The Company had no indefinite life intangibles as of January 1, 2002. If estimates change, a materially different impairment conclusion could result. In accordance with this pronouncement, effective January 1, 2002, Smith Micro no longer amortizes goodwill. For comparison, goodwill amortization expense was $136,000 and $408,000 in the three and nine months ended September 30, 2001.
In October 2001, the FASB issued SFAS No. 144,Accounting for Impairment or Disposal of Long-Lived Assets.SFAS No. 144 supersedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,and addresses financial accounting and reporting for the impairment and disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material impact on the consolidated financial statements.
In July 2002, the FASB issued SFAS 146,Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. We will adopt the provisions of SFAS 146 for exit or disposal activities that are initiated after December 31, 2002.
3. GOODWILL
In connection with the Company’s acquisitions of all the outstanding capital stock of STF Technologies, Inc. the total excess cost over the fair value of the net assets acquired of $2.3 million was allocated to goodwill and was being amortized over a useful life of seven years. In connection with the Company’s acquisition of the eBusiness consulting practice of Quickstart Technologies, Inc., the excess cost over the fair value of the net assets acquired of $600,000 was allocated to goodwill and was being amortized over a useful life of three years. These amortization costs were recorded in general and administrative expense. The Company ceased amortizing goodwill as of the January 1, 2002 in accordance with SFAS No. 142 and did not recognize approximately $136,000 and $408,000 of amortization expense that was recognized in the three and nine months ended September 30, 2001. As of June 30, 2002 the Company completed the required initial step of a transitional impairment test and has determined that goodwill is not impaired. Any impairment loss resulting from the transitional impairment test would have been recorded retroactively as a cumulative effect of a change in accounting principle. Subsequent impairment losses, if any, will be reflected in operating income (loss) in the statement of operations. The Company will evaluate the carrying value of goodwill of $1.7 million at least annually or when events or circumstances indicate that their carrying value may be impaired.
At September 30, 2002 the amount of goodwill allocated to Products is $1,380,000. The amount of goodwill allocated to Services is $335,000.
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Summarized below are the effects on net loss per share data, if the Company had followed the amortization provisions of SFAS 142 for all periods presented (in thousands, except per share amounts):
Three Months Ended | Nine Months Ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||||
Net income (loss): | ||||||||||||||||||
As reported | $ | 675 | ($794 | ) | ($402 | ) | ($6,241 | ) | ||||||||||
Add: goodwill amortization | 0 | 136 | 0 | 408 | ||||||||||||||
Adjusted net income (loss) | $ | 675 | ($658 | ) | ($402 | ) | ($5,833 | ) | ||||||||||
Basic net income (loss) per share: | ||||||||||||||||||
As reported | $ | 0.04 | ($0.05 | ) | ($0.02 | ) | ($0.38 | ) | ||||||||||
Add: goodwill amortization | 0 | 0.01 | 0 | 0.03 | ||||||||||||||
Adjusted basic and diluted net income (loss) per share | $ | 0.04 | ($0.04 | ) | ($0.02 | ) | ($0.35 | ) | ||||||||||
Financial Accounting Standards Board Standards Nos. 141 and 142 onBusiness CombinationsandGoodwill and Other Intangible Assetsalso require that the Company disclose the following information related to its intangible assets still subject to amortization. Amortized intangible assets balance as of September 30, 2002 and December 31, 2001 (in thousands):
September 30, 2002 | December 31, 2001 | ||||||||
Amortized intangibles: | |||||||||
Acquired technology | $ | 851 | $ | 851 | |||||
Accumulated amortization | (553 | ) | (343 | ) | |||||
Net Intangibles | $ | 298 | $ | 508 | |||||
The estimated amortization expense for acquired technology for each of the remaining useful lives of the acquired technology is approximately $283,000, $125,000 and $40,000 for fiscal years ending December 31, 2002, 2003 and 2004, respectively.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS REGARDING THE COMPANY’S STRATEGY, FINANCIAL PERFORMANCE AND REVENUE SOURCES, ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATES SECURITIES LITIGATION REFORM ACT OF 1995, SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND ARE SUBJECT TO THE SAFE HARBORS CREATED BY THOSE SECTIONS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND ENTAIL VARIOUS RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY’S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS SET FORTH UNDER “RISK FACTORS” AND ELSEWHERE IN THIS REPORT. READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE COMPANY IN THIS REPORT AND IN THE COMPANY’S OTHER REPORTS FILED WITH THE SEC, INCLUDING THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001 AND OUR SUBSEQUENT REPORTS ON FORMS 10-Q AND 8-K, THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF CERTAIN RISKS AND FACTORS THAT MAY AFFECT THE COMPANY’S BUSINESS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES OCCURRING AFTER THE DATE HEREOF. YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH THE COMPANY’S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED ELSEWHERE IN THIS REPORT.
Overview
We are a developer and marketer of wireless, communications, diagnostic, utility and eCommerce software products as well as a provider of Internet consulting and hosting services. We design integrated, cross platform, easy-to-use software for personal computing and business solutions. Our software includes products developed for the wireless, Internet and broadband technologies, products that enable wireless communications, eCommerce, Internet communications (voice-over-IP), video conferencing, general system utility and diagnostic products and network fax along with traditional computer telephony. An extension of the Company’s eBusiness activity includes the offering of fulfillment services for customer web stores.
We continue to develop new products that leverage off our core technologies. We also leverage our experience and position with original equipment manufacturers, commonly known as OEM’s, to deploy these new product releases. Additionally, we are expanding our customer base to include wireless service providers and manufacturers that produce wireless handsets and produce devices that take advantage of the high bandwidth Internet connectivity such as cable and xDSL modems. Our corporate products are designed to provide cost effective and efficient methods of communicating that take advantage of corporate local and wide area networks, including the Internet or intranets.
We were first incorporated in California in 1983 and later reincorporated in Delaware in 1995. In 1985, we shipped our first data communication software product. At that time, we generated revenues primarily from the market acceptance of our OEM fax and data communication software products. We began providing video communication products in 1996 to both OEM and retail customers. In January 1998, we purchased certain fax software assets of Mitek Systems, Inc. to provide LAN, Internet and Internet fax transmission solutions designed for the corporate market. In September 1998, we shipped our first Internet communications software product. This multi-purpose product provides for integrated telephony, multimedia e-mail, video surety, fax, video conferencing and text based chat functionality over the Internet and other IP protocol services such as LAN’s and WAN’s. Designed to take advantage of high bandwidth technology, this product functions over a variety of IP connectivity hardware including xDSL modems, cable modems, network interface devices and analog modems.
In April 1999, we expanded our Macintosh products with the acquisition of STF Technologies, Inc. This acquisition enhanced our ability to develop and sell communications (primarily fax) software to the Macintosh market. In September 1999, we acquired Pacific Coast Software so that we could offer eCommerce business solutions. In July 2000, we acquired the TouchStone CheckIt® product line. We market these products under the Smith Micro CheckIt® brand including CheckIt® Firewall. Finally, in September 2000 we acquired the consulting practice unit of QuickStart Technologies, Inc., a provider of integrated Internet business services to middle market companies.
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Our products for the consumer and business markets are available through Internet sales, retail stores, direct sales, eTailers and value-added resellers (VARs). Retail outlets that sell our products include CompUSA, Office Depot, Micro Center, Staples, Circuit City, PC Connections, Multiplezones, and Fry’s Electronics. Our products can be purchased at many online locations, including Buy.com, Beyond.com and Amazon.com. In the original equipment manufacturers (or OEM) market we are a supplier of communication and diagnostic utility software, having shipped over 40 million copies of products. Our OEM customers include manufacturers of wireless devices and services, personal computers, digital cameras and data modems. We currently maintain OEM relationships with several companies including Verizon, Tektronix, Hughes Network Systems, Apple, Hewlett Packard, Gateway, Brother International, Philips Consumer Electronics, Viking Components, Zoom, D-Link, Audiovox, LGIC, and Kyocera.
The Internet Solutions Division services include supporting our WebCatalog product, complete website design and installation, website hosting and co-location services and application service provider services for WebCatalog. Our eCommerce customers include Kyocera/Infocomm, Harmon Multimedia, Diedrich’s Coffee and Boomtown Casino, among others. An extension of the Company’s eBusiness activity includes the offering of fulfillment services for customer web stores.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of total revenue.
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||||||||
Net Revenues: | |||||||||||||||||
Products | 88.7 | % | 76.0 | % | 83.0 | % | 67.8 | % | |||||||||
Services | 11.3 | % | 24.0 | % | 17.0 | % | 32.2 | % | |||||||||
Total net revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
Cost of revenues: | |||||||||||||||||
Products | 27.4 | % | 11.6 | % | 20.8 | % | 18.3 | % | |||||||||
Services | 6.0 | % | 23.5 | % | 12.3 | % | 25.8 | % | |||||||||
Total cost of revenues | 33.4 | % | 35.1 | % | 33.1 | % | 44.1 | % | |||||||||
Gross profit | 66.6 | % | 64.9 | % | 66.9 | % | 55.9 | % | |||||||||
Operating expenses: | |||||||||||||||||
Selling and marketing | 27.9 | % | 38.0 | % | 32.6 | % | 60.6 | % | |||||||||
Research and development | 27.3 | % | 27.6 | % | 29.2 | % | 39.2 | % | |||||||||
General and administrative | 32.6 | % | 32.6 | % | 32.0 | % | 48.6 | % | |||||||||
Restructuring costs | 0.0 | % | 1.5 | % | 0.0 | % | 6.0 | % | |||||||||
Total operating expenses | 87.8 | % | 99.7 | % | 93.8 | % | 154.4 | % | |||||||||
Operating loss | -21.2 | % | -34.8 | % | -26.9 | % | -98.5 | % | |||||||||
Interest income, net | -0.2 | % | 0.5 | % | -0.4 | % | 1.2 | % | |||||||||
Loss before income taxes | -21.4 | % | -34.3 | % | -27.3 | % | -97.3 | % | |||||||||
Income tax benefit (expense) | -58.0 | % | 0.1 | % | -19.8 | % | 1.4 | % | |||||||||
Net income (loss) | 36.6 | % | -34.4 | % | -7.5 | % | -98.7 | % | |||||||||
Three and nine months ended September 30, 2002 and 2001
Revenues
Total net revenues were $1.8 million and $2.3 million for the three months ended September 30, 2002 and 2001, respectively, representing a decrease of $462,000, or 20.0%, from 2001 to 2002. Total net revenues were $5.4 million and $6.3 million for the nine months ended September 30, 2002 and 2001, respectively, representing a decrease of $966,000, or 15.3%, from 2001 to 2002.
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Products.Net product revenues were $1.6 million and $1.7 in the three months ended September 30, 2002 and 2001, respectively, representing a decrease of $117,000, or 6.7%, from 2001 to 2002. Wireless and Broadband sales increased quarter to quarter as the result of increased sales and the absence of the significant order delays experienced in 2001. Sales by the Macintosh division increased as a result of the release of FaxSTF for OS X. These increases were offset by the decreased revenue in our Internet Solutions Division caused by the cessation of Microsoft products consulting announced in the first quarter of 2002 and the decrease in Retail sales due to the overall sluggishness of the retail software sector and the increase in our retail reserves discussed in Footnote 1. Products revenue accounted for 88.7% of total revenues in the three months ended September 30, 2002 compared with 76.0% of total revenues in the comparable period of 2001.
Net product revenues were $4.4 million and $4.3 million in the nine months ended September 30, 2002 and 2001, respectively, representing an increase of $163,000, or 3.8%, from 2001 to 2002. Wireless and Broadband sales increased in the nine months ended September 30, 2002 as result increased sales and the absence of the significant order delays experienced in 2001. The delays were related to carrier and handset manufacturer issues relating to the rollout of new high-speed data services and supporting handsets. In addition, sales in our Macintosh division increased as a result of the release of FaxSTF for OS X. These increases were offset by decreases in Retail sales and sales in the Internet Solutions Division discussed previously. Products revenue accounted for 83.0% of total revenues in the nine months ended September 30, 2002 compared with 67.8% of total revenues in the comparable period of 2001.
Services.Services revenues were $209,000 and $554,000 in the three months ended September 30, 2002 and 2001, respectively, representing a decrease of $345,000 or 62.3%, from 2001 to 2002. The announcement of a new strategic direction for our Internet Solutions Division has resulted in the cessation of significant Microsoft Product consulting in 2002, which amounted to 86% of service revenue in the comparable period of 2001. Services revenue accounted for 11.3% of total revenues in the three months ended September 30, 2002 compared with 24.0% of total revenues in the comparable period of 2001.
Services revenues were $909,000 and $2.0 million in the nine months ended September 30, 2002 and 2001, respectively, representing a decrease of $1.1 million or 55.4%, from 2001 to 2002. As discussed, the announcement of a new strategic direction for our Internet Solutions Division has resulted in the cessation of significant Microsoft Product consulting in 2002, which amounted to 85% of service revenue in the comparable period of 2001. Services revenue accounted for 17.0% of total revenues in the nine months ended September 30, 2002 compared with 32.2% of total revenues in 2001.
Cost of Revenues
Cost of Product Revenues. Cost of product revenues was $507,000 and $268,000 in the three months ended September 30, 2002 and 2001, respectively, representing an increase of $239,000, or 89.2%, from 2001 to 2002. Cost of product revenue as a percentage of product revenues was 31.0% and 15.3% for 2002 and 2001, respectively. Cost of product revenues was $1.1 million and $1.2 million in the nine months ended September 30, 2002 and 2001, respectively, representing a decrease of $49,000, or 4.2%, from 2001 to 2002. Cost of product revenue as a percentage of product revenues was 25.0% and 27.1% for 2002 and 2001, respectively. The increase in the cost of product revenue in 2002 highlights the sales of QuickLink Mobile wireless data connectivity kits that include a cable, resulting in higher costs of revenue than pure software sales.
Cost of Service Revenues.Cost of service revenues was $110,000 and $543,000 in the three months ended September 30, 2002 and 2001, respectively, representing a decrease of $433,000 or 79.8%, from 2001 to 2002. Cost of service revenue as a percentage of service revenues was 52.6% and 98.0% for 2002 and 2001, respectively. Cost of service revenues was $660,000 and $1.6 million in the nine months ended September 30, 2002 and 2001, respectively, representing a decrease of $970,000 or 59.5%, from 2001 to 2002. Cost of service revenue as a percentage of service revenues was 72.6% and 80.0% for 2002 and 2001, respectively. Cost of service revenues includes the cost of our consulting personnel and the cost of hiring outside contractors to support our staff of consultants. The absolute dollar decrease in the total cost of service revenues was primarily the result of our cost reduction measures, which consisted primarily of reductions in headcount. In addition, with many of our consulting projects being deferred by our customers, our consulting workforce was under utilized in the three and nine months ended September 30, 2001.
Operating Expenses
Selling and Marketing.Selling and marketing expenses were $516,000 and $876,000 in the three months ended September 30, 2002 and 2001, respectively, representing a decrease of $360,000, or 41.1%, from 2001 to 2002. Our 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. Selling and marketing expenses were
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$1.7 million and $3.8 million in the nine months ended September 30, 2002 and 2001, respectively, representing a decrease of $2.1 million, or 54.3%, from 2001 to 2002. The decrease in our selling and marketing expenses in both the three and nine months ended September 30, 2002 over the comparable periods of 2001 were primarily the result of the cost reduction measures undertaken beginning in the second quarter of 2001 which consisted of reductions in headcount, compensation and professional services.
Research and Development.Research and development expenses were $503,000 and $636,000 in the three months ended September 30, 2002 and 2001, respectively, representing a decrease of $133,000, or 20.1%, from 2001 to 2002. Our research and development expenses consist primarily of personnel and equipment costs required to conduct our software development efforts. We remain focused on the development and expansion of our technology, particularly our wireless, diagnostic, utility and Internet software technologies. Research and development expenses were $1.6 million and $2.5 million in the nine months ended September 30, 2002 and 2001, respectively, representing a decrease of $912,000, or 36.9%, from 2001 to 2002. The decrease in our research and development expenses in both the three and nine month ended September 30, 2002 over 2001 is primarily due to the cost reduction efforts implemented in 2001, most notably a reduction in headcount and the closure of our Oregon and Colorado offices in the second quarter of 2001. This reduction realigns our research and development cost base consistent with current revenues.
General and Administrative.General and administrative expenses were $602,000 and $752,000 in the three months ended September 30, 2002 and 2001, respectively, representing a decrease of $150,000, or 20.0%, from 2001 to 2002. General and administrative expenses were $1.7 million and $3.1 million in the nine months ended September 30, 2002 and 2001, respectively, representing a decrease of $1.4 million, or 44.3%, from 2001 to 2002. The decrease in our general and administrative expenses in the both periods ended September 30, 2002 over 2001 is due primarily to cost reductions efforts undertaken in 2001, which consisted of reductions in headcount, compensation and professional services. In addition, the three and nine months ended September 30, 2001 included amortization of goodwill of $136,000 and $408,000, respectively, not included in 2002 as a result of the adoption of SFAS No. 142.
Restructuring Costs.In the three months ended September 30, 2001, we reported a restructuring charge in the amount of $35,000. In the nine months ended September 30, 2001, we reported a restructuring charge in the amount of $380,000. This amount includes a $230,000 lease payment commitment on the office space in Beaverton, Oregon, which was closed, and personnel costs incurred as a result of a company wide reduction in staff of 40 people or 37.8%. As of September 30, 2002, $221,000 has been paid and $159,000 remains in accrued liabilities. The accrued liability will be paid over the remaining lease term for the facility closed in the second quarter of 2001.
Interest Income (Expense).Net interest expense was $3,000 in the three months ended September 30, 2002 and net interest income was $11,000 in the three months ended September 30, 2001, representing a decrease of $14,000, or 127.3%, from 2001 to 2002. Net interest expense was $25,000 in the nine months ended September 30, 2002 and net interest income was $76,000 in the nine months ended September 30, 2001, representing a decrease of $101,000, or 132.9%, from 2001 to 2002. The decrease in our net interest income is directly related to our lower cash balance and declining interest rates. We have not changed our investment strategy during the periods being reported on, with our excess cash consistently being invested in short term marketable securities. Interest expenses in each period consist of credit card processing fees.
Provision for Income Taxes.In the three months ended September 30, 2002, we reported an income tax benefit in the amount of $1.1 million. This benefit is the result of a net operating loss carryback, which allowed the Company to file for a refund of income taxes paid in 1996. The provision for income taxes was $3,000 in the three months ended September 30, 2001, which related to taxes paid on foreign sales. The income tax benefit was $1.1 million while the provision for income taxes was $92,000 in the nine months ended September 30, 2002 and 2001, respectively, representing an increase of $1.2 million, from 2001 to 2002. The tax expense for the nine months ended September 30, 2001 relates to amounts assessed as the result of an audit of the Company’s 1996 Federal tax return.
Liquidity and Capital Resources
Since our inception, we have financed operations primarily through cash generated from operations and from proceeds of $18.1 million generated by our initial public offering in 1995. Our principal sources of liquidity as of September 30, 2002 consisted primarily of cash and cash equivalents of $3.9 million.
Net cash provided by operating activities was $635,000 in the nine months ended September 30, 2002 compared to $2.3 million used in operating activities in the comparable period of 2001. Net cash provided during the nine months ended September 30, 2002 primarily related to decreases in accounts receivable and the income tax refund, partially offset by operating losses and the decrease in
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current liabilities. The primary operating use of cash during the 2001 period was funding our net loss, partially offset by the decrease in accounts receivable.
During the nine months ended September 30, 2002, we used $11,000 in investing activities compared to $100,000 in the same period of 2001.
At September 30, 2002, we had $3.9 million in cash and cash equivalents and $3.6 million of working capital. Our accounts receivable balance, net of allowance for doubtful accounts and other adjustments was $937,000 at September 30, 2002. We have no significant capital commitments, and currently anticipate that capital expenditures will not vary significantly from recent periods. We believe that our existing cash, cash equivalents and investment balances and cash flow from operations will be sufficient to finance our working capital and capital expenditure requirements through at least the next 12 months. We may require additional funds to support our working capital requirements or for other purposes and may seek to raise additional funds through public or private equity or debt financing or from other sources. If additional financing is needed, we cannot assure you that such financing will be available to us at commercially reasonable terms or at all.
RISK FACTORS
BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS REPORT AND IN OUR OTHER FILINGS WITH THE SEC, INCLUDING OUR SUBSEQUENT REPORTS ON FORMS 10-Q AND 8-K. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO AFFECT OUR BUSINESS OPERATIONS. IF ANY OF THESE RISKS ACTUALLY OCCUR, THAT COULD SERIOUSLY HARM OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS. IN THAT EVENT, THE MARKET PRICE FOR OUR COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
Our quarterly operating results may fluctuate and cause the price of our common stock to fall.
Our quarterly revenues and operating results have fluctuated significantly in the past and may continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. If our operating results do not meet the expectations of securities analysts or investors, our stock price may decline. Fluctuations in our operating results may be due to a number of factors, including the following:
• | the volume of our product sales and pricing concessions on volume sales; | ||
• | the size and timing of orders from and shipments to our major customers, including our largest distributor; | ||
• | the size and timing of any return product requests for our products; | ||
• | our ability to maintain or increase gross margins; | ||
• | general economic and market conditions; | ||
• | variations in the our sales channels or the mix of our product sales; | ||
• | the gain or loss of a key customer; | ||
• | our ability to specify, develop, complete, introduce, market and transition to volume production new products and technologies in a timely manner; | ||
• | the availability and pricing of competing products and technologies and the resulting effect on sales and pricing of our products; | ||
• | the effect of new and emerging technologies; |
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• | deferrals of orders by our customers in anticipation of new products, applications, product enhancements or operating systems; and | ||
• | the success of our cost-cutting measures. |
A large portion of our operating expenses, including rent, depreciation, amortization, and capital lease expenditures, is fixed and difficult to reduce or change. Accordingly, if our total revenue does not meet our expectations, we probably would not be able to adjust our expenses quickly enough to compensate for the shortfall in revenue. In that event, our business, financial condition and results of operations would be materially and adversely affected.
Due to all of the foregoing factors, and the other risks discussed in this report, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of future performance.
If we are unable to comply with NASDAQ’s continued listing requirements, our Common Stock could be delisted from the NASDAQ.
In June 2002, our common stock failed to meet the minimum bid price of $1.00 per share for 30 consecutive days, which caused our stock price to fail to meet one of the minimum standards required by Nasdaq for continued listing as a Nasdaq National Market security. On July 25, 2002, we announced that we had voluntarily submitted an application to Nasdaq to transfer from the Nasdaq National Market to the Nasdaq SmallCap Market. Our application has been approved and we became a SmallCap Market company effective August 5, 2002. This change increases the bid price grace period another 90 days. At that time an additional 180-day grace period is available for SmallCap companies that comply with the core initial listing standards of the SmallCap market – that is, either net income of $750,000, stockholders equity of $5 million or market capitalization of $50 million. If our stock cannot maintain trading at prices over $1.00 or we cannot meet the additional grace period requirements, we may become subject to the delisting process.
There can be no assurance that we will satisfy all requirements for continued listing of our common stock on the Nasdaq. If we are unable to meet the continued listing requirements in the future, our common stock will be subject to delisting, which may have a material adverse effect on the price of our common stock and the levels of liquidity currently available to our stockholders.
Technology and customer needs change rapidly in our market, which could render our products obsolete and negatively affect our revenues.
Our future success will depend on our ability to anticipate and adapt to changes in technology and industry standards. We will also need to continue to develop and introduce new and enhanced products to meet our customers’ changing demands, keep up with evolving industry standards, including changes in the Microsoft operating systems with which our products are designed to be compatible, and to promote those products successfully. The communications and utilities software markets in which we operate are characterized by rapid technological change, changing customer needs, frequent new product introductions, evolving industry standards and short product life cycles. Any of these factors could render our existing products obsolete and unmarketable. In addition, new products and product enhancements can require long development and testing periods as a result of the complexities inherent in today’s computing environments and the performance demanded by customers. If our software markets do not develop as we anticipate or our products do not gain widespread acceptance in these markets, or if we are unable to develop new versions of our software products that can operate on future operating systems, our business, financial condition and results of operations could be materially and adversely affected.
Competition within our product markets is intense and includes numerous established competitors, which could negatively affect our revenues.
We operate in markets that are extremely competitive and subject to rapid changes in technology. Microsoft Corporation poses a significant competitive threat to us because Microsoft operating systems, Windows XP, Windows ME, Windows 2000, Windows 98, Windows 95 and Windows NT, may include some capabilities now provided by certain of our OEM and retail software
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products. If users are satisfied relying on the capabilities of Windows XP, Windows ME, Windows 2000, Windows 98, Windows 95, Windows NT or other operating systems, sales of our products are likely to decline. In addition, our principal fax related retail products, HotFax MessageCenter and HotFax, currently compete directly with Symantec’s WinFax Pro. In addition, because there are low barriers to entry into the software market, we expect significant competition from other established and emerging software companies in the future. Furthermore, many of our existing and potential OEM customers may acquire or develop products that compete directly with our products.
Microsoft Corporation and many of our other current and prospective competitors have significantly greater financial, marketing, service, support, technical and other resources than we do. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their products. There is also a substantial risk that announcements of competing products by large competitors such as Microsoft and Symantec could result in the cancellation of orders by retailers, distributors or other customers in anticipation of the introduction of such new products. In addition, some of our competitors, such as Symantec, currently make complementary products that are sold separately. Such competitors could decide to enhance their competitive position by bundling their products to attract customers seeking integrated, cost-effective software applications. Some competitors have a retail emphasis and offer OEM products with a reduced set of features. The opportunity for retail upgrade sales may induce these and other competitors to make OEM products available at their own cost or even at a loss. We also expect competition to increase as a result of software industry consolidations, which may lead to the creation of additional large and well-financed competitors. Increased competition is likely to result in price reductions, fewer customer orders, reduced margins and loss of market share.
We maintain relationships with multiple distributors and retailers to sell our retail software products. Loss of a distributor, retailer or unanticipated retail product returns could have a negative impact on our revenues.
In addition to our direct sales efforts including our web store, we depend on distributors and retailers to sell our retail software products. Our relationships with these distributors and retailers depend upon a number of factors, including sales volume. Our agreements with distributors and retailers are not exclusive and may be terminated by either party without cause. Distributors or retailers may purchase fewer products from us or return product to us in any given quarter with little or no advanced notice to us for reasons beyond our control such as a change in their inventory strategies. Although we maintain a reserve for these products, if any of these events were to occur, our retail sales would be adversely affected.
Acquisitions of companies or technologies may disrupt our business and divert management attention and cause our current operations to suffer.
We have in the past made and we expect to continue to consider acquisitions of complementary companies, products or technologies. If we make any additional acquisitions, we will be required to assimilate the operations, products and personnel of the acquired businesses and train, retain and motivate key personnel from the acquired businesses. We may be unable to maintain uniform standards, controls, procedures and policies if we fail in these efforts. Similarly, acquisitions may cause disruptions in our operations and divert management’s attention from our company’s day-to-day operations, which could impair our relationships with our current employees, customers and strategic partners. Acquisitions may also subject us to liabilities and risks that are not known or identifiable at the time of the acquisition.
We may also have to incur debt or issue equity securities in order to finance future acquisitions. The issuance of equity securities for any acquisition could be substantially dilutive to our existing stockholders. In addition, we expect our profitability could be adversely affected because of acquisition-related accounting costs and write offs. In consummating acquisitions, we are also subject to risks of entering geographic and business markets in which we have had limited or no prior experience. If we are unable to fully integrate acquired businesses, products or technologies within existing operations, we may not receive the intended benefits of acquisitions.
Our stock price is highly volatile. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid for them.
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The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. These fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including:
• | quarter-to-quarter variations in our operating results; | ||
• | announcements of technological innovations or new products by our competitors, customers or us; | ||
• | market conditions within our retail and OEM software markets; | ||
• | general global economic and political instability; | ||
• | changes in earnings estimates or investment recommendations by analysts; | ||
• | changes in investor perceptions; or | ||
• | changes in expectations relating to our products, plans and strategic position or those of our competitors or customers. |
In addition, the market prices of securities of high technology companies have been especially volatile. This volatility has significantly affected the market prices of securities of many technology companies. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid. In the past, companies that have experienced volatility in the market price of their securities have been the subjects of securities class action litigation. If we were the object of a securities class action litigation, it could result in substantial losses and divert management’s attention and resources from other matters.
Our products may contain undetected software errors, which could negatively affect our revenues.
Our software products are complex and may contain undetected errors. In the past, we have discovered software errors in certain of our products and have experienced delayed or lost revenues during the period it took to correct these errors. Although we and our OEM customers test our products, it is possible that errors may be found in our new or existing products after we have commenced commercial shipment of those products. These undetected errors could result in adverse publicity, loss of revenues, delay in market acceptance of our products or claims against us by customers.
We may need to raise additional capital in the future through the issuance of additional equity or convertible debt securities or by borrowing money, in order to meet our capital needs. Additional funds may not be available on terms acceptable to us to allow us to meet our capital needs.
We believe that the cash, cash equivalents and investments on hand and the cash we expect to generate from operations will be sufficient to meet our capital needs for at least the next twelve months. However, it is possible that we may need or choose to obtain additional financing to fund our activities. We could raise these funds by selling more stock to the public or to selected investors, or by borrowing money. We may not be able to obtain additional funds on favorable terms, or at all. If adequate funds are not available, we may be required to curtail our operations or other business activities significantly or to obtain funds through arrangements with strategic partners or others that may require us to relinquish right to certain technologies or potential markets. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock. We currently have no established line of credit or other business borrowing facility in place.
It is possible that our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors, including:
• | the market acceptance of our products; |
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• | the levels of promotion and advertising that will be required to launch our products and achieve and maintain a competitive position in the marketplace; | ||
• | our business, product, capital expenditure and research and development plans and product and technology roadmaps; | ||
• | the levels of inventory and accounts receivable that we maintain; | ||
• | capital improvements to new and existing facilities; | ||
• | technological advances; | ||
• | our competitors’ response to our products; and | ||
• | our relationships with suppliers and customers. |
In addition, we may require additional capital to accommodate planned growth, hiring, infrastructure and facility needs or to consummate acquisitions of other businesses, products or technologies.
Marketing efforts for our retail software products require substantial investments that may adversely affect our operating margins.
Maintaining product recognition distribution channels for our retail software products, including our new CheckIt® line of products, requires significant investments in marketing and sales related to these products. We expect to have to continue to incur these costs and perhaps even to increase them in the future. Accordingly, our retail sales may not provide us with the same contribution margin to operating income that we have historically achieved on our OEM sales.
Inability or delays in deliveries from our component suppliers could damage our reputation and could cause our net revenues to decline and harm our results of operations.
We rely on third party suppliers to provide us with the components for our product kits. These components include CDs and printed manuals. We also rely on third parties for CD-ROM replication. We do not have long-term supply arrangements with any vendor to obtain these necessary components for our products. If we are unable to purchase components from these suppliers or if the CD-ROM replication facilities that we use do not deliver our requirements on schedule, we may not be able to deliver products in a CD-ROM format to our customers on a timely basis or enter into new orders because of a shortage in components. Any delays that we experience in delivering our products to customers could impair our customer relationships and adversely impact our reputation and our business. In addition, if our third party suppliers raise their prices for components or CD-ROM replication services, our gross margins would be reduced.
Because we currently operate with little or no backlog, our ability to predict our revenues and operating results is extremely limited.
We operate with little backlog because we generally ship our software products as we receive orders and because our royalty revenue is based upon our customers’ actual usage in a given period. Accordingly, we recognize revenue shortly after orders are received or royalty reports are generated. As a result, our sales in any quarter are dependent on orders that we book and ship in that quarter. This makes it difficult for us to predict what our revenues and operating results will be in any quarter.
We may be unable to adequately protect our intellectual property and other proprietary rights, which could negatively impact our revenues.
Our success is dependent upon our software code base, our programming methodologies and other intellectual properties and proprietary rights. In order to protect our proprietary technology, we rely on a combination of trade secret, nondisclosure and
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copyright and trademark law. However, these measures afford us only limited protection. We currently own United States trademark registrations for certain of our trademarks, but we have not yet obtained registrations for all of our trademarks in the United States or other countries. In addition, prior to becoming a publicly held entity, we did not require our employees to sign proprietary information and inventions agreements stipulating to our software ownership rights. We only recently started the patent application process for a number of technologies relating to our existing products and products under development. Furthermore, we rely primarily on “shrink wrap” licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. Accordingly, despite the precautions we have taken to protect our intellectual property and proprietary rights, it is possible that third parties may copy or otherwise obtain our rights without our authorization. It is also possible that third parties may independently develop technologies similar to ours. It may be difficult for us to detect unauthorized use of our intellectual property and proprietary rights.
We may be subject to claims of intellectual property infringement as the number of trademarks, patents, copyrights and other intellectual property rights asserted by companies in our industry grows and the coverage of these patents and other rights and the functionality of software products increasingly overlap. From time to time, we have received communications from third parties asserting that our trade name or features, content, or trademarks of certain of our products infringe upon intellectual property rights held by such third parties. We have also received correspondence from third parties separately asserting that our fax products may infringe on certain patents held by each of the parties. Although we are not aware that any of our products infringe on the proprietary rights of others, third parties may claim infringement by us with respect to our current or future products. Infringement claims, whether with or without merit, could result in time-consuming and costly litigation, divert the attention of our management, cause product shipment delays or require us to enter into royalty or licensing agreements with third parties. If we are required to enter into royalty or licensing agreements, they may not be on terms that are acceptable to us. Unfavorable royalty or licensing agreements could seriously impair our ability to market our products.
If we are unable to retain key personnel, the loss of their services could materially and adversely affect our business, financial condition and results of operations.
Our future performance depends in significant part upon the continued service of our senior management and other key technical and consulting personnel. We do not have employment agreements with our key employees that govern the length of their service. The loss of the services of our key employees would likely materially and adversely affect our business, financial condition and results of operations. Our future success also depends on our ability to continue to attract, retain and motivate qualified personnel, particularly highly skilled engineers involved in the ongoing research and development required to develop and enhance our communication software products as well those in our highly specialized consulting business. Competition for these employees remains high and employee retention is a common problem in our industry. Our inability to attract and retain the highly trained technical personnel that are essential to our product development, consulting services, marketing, service and support teams may limit the rate at which we can generate revenue, develop new products or product enhancements and generally have an adverse effect on our business, financial condition and results of operations. Additionally, retaining key employees during restructuring efforts is critical to company success.
If commerce conducted over the Internet grows more slowly than in the past, our future sales and future profits may decline.
If eCommerce does not continue to grow or grows more slowly than in the past, demand for certain of our products and services will be reduced. Certain of our products, including WebCatalog, enhance companies’ abilities to transact business and conduct Web-based operations. As a result, future sales and any future profits from those products are substantially dependent upon the widespread acceptance and use of the Internet as an effective medium of commerce by consumers and businesses. To be successful we must rely on consumers and businesses who have not historically used the Internet to transact business and exchange information.
Our business, financial condition and operating results could be adversely affected as a result of legal, business and economic risks specific to international operations.
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Approximately 7.8% and 10.0% of our revenues in the nine months ended September 30, 2002 and 2001, respectively, were derived from sales to customers outside the United States. We also frequently ship products to our domestic customers’ international manufacturing divisions and subcontractors. In the future, we may expand these international business activities. International operations are subject to many inherent risks, including:
• | general political, social and economic conditions causing instability; | ||
• | trade restrictions; | ||
• | the imposition of governmental controls; | ||
• | exposure to different legal standards, particularly with respect to intellectual property; | ||
• | burdens of complying with a variety of foreign laws; | ||
• | import and export license requirements and restrictions of the United States and each other country in which we operate; | ||
• | unexpected changes in regulatory requirements; | ||
• | foreign technical standards; | ||
• | changes in tariffs; | ||
• | difficulties in staffing and managing international operations; | ||
• | difficulties in collecting receivables from foreign entities; and | ||
• | potentially adverse tax consequences. |
Our officers and directors could control matters submitted to our stockholders and affect the outcome of any vote.
As of October 31, 2002, William W. Smith Jr., the President, Chief Executive Officer and Chairman of the Board of our company, and Rhonda L. Smith, the Secretary, Treasurer and Vice-Chairman of the Board of our company, beneficially owned approximately 60.2% of our outstanding shares of common stock. William W. Smith Jr. and Rhonda L. Smith are married to one another and, acting together, will have the ability to elect our directors and determine the outcome of any corporate action requiring stockholder approval, including a sale of the company, irrespective of how other stockholders may vote. This concentration of ownership may discourage a potential acquirer from making an offer to buy our company, which, in turn, could adversely affect the market price of our common stock.
Future sales of our common stock could cause the price of our shares to decline.
As of October 31, 2002, we had 16,235,416 shares of Common Stock outstanding. Of this amount, the 9,770,670 shares held by William W. Smith, Jr. and Rhonda L. Smith is available for sale in the public market (subject to the volume and other applicable restrictions of Rule 144). Overall, our trading volume fluctuates widely and at times is relatively limited. Sales of a substantial number of shares of our common stock by William W. Smith, Jr., Rhonda L. Smith or any other person, including through any directed selling plan, either individually or when aggregated with sales by other persons, could adversely affect the market price of our common stock. William W. Smith and Rhonda L. Smith have established a written sales plan under SEC Rule 10b5-1, pursuant to which up to 50,000 shares of our common stock may be sold each month during 2002, subject to certain conditions.
Provisions of our charter and bylaws and Delaware law could make a takeover of our company difficult.
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Our certificate of incorporation and bylaws contain provisions that may discourage or prevent a third party from acquiring us, even if doing so would be beneficial to our stockholders. For instance, our certificate of incorporation authorizes the board of directors to fix the rights and preferences of shares of any series of preferred stock, without action by our stockholders. As a result, the board can authorize and issue shares of preferred stock, which could delay or prevent a change of control because the rights given to the holders of such preferred stock may prohibit a merger, reorganization, sale or other extraordinary corporate transaction. In addition, we are organized under the laws of the State of Delaware and certain provisions of Delaware law may have the effect of delaying or preventing a change in our control.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued two new pronouncements: SFAS No. 141,Business Combinations, and SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 141 prohibits the use of the pooling-of-interest method for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. The adoption of SFAS No. 141, did not have a material impact on the consolidated financial statements. There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS No. 142 requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually and written down when impaired. SFAS No. 142 requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite. In accordance with this Standard, the Company no longer amortizes goodwill and indefinite life intangible assets but will evaluate their carrying value at least on an annual basis or when events or circumstances indicate that their carrying value may be impaired. The Company ceased amortizing goodwill as of the beginning of fiscal 2002. In accordance with SFAS No. 142, the Company is required to perform a two-step transitional impairment review. The first step of this review was completed by June 30, 2002 with the determination of the fair value of the Company’s reporting units in order to identify whether the fair value of each reporting unit is less than its carrying amount. In the event that the fair value of the reporting unit is less than the carrying amount, the second step of the test would be required to determine if the carrying value of goodwill exceeds the implied value. The Company determined that it did not have a transitional impairment of goodwill. The Company had no indefinite life intangibles as of January 1, 2002. If estimates change, a materially different impairment conclusion could result. In accordance with this pronouncement, effective January 1, 2002, Smith Micro no longer amortizes goodwill. For comparison, goodwill amortization expense was $136,000 and $408,000 in the three and nine months ended September 30, 2001.
In October 2001, the FASB issued SFAS No. 144,Accounting for Impairment or Disposal of Long-Lived Assets.SFAS No. 144 supersedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,and addresses financial accounting and reporting for the impairment and disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a material impact on the consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. We will adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Smith Micro’s financial instruments include cash and cash equivalents. At September 30, 2002, the carrying values of our financial instruments approximated fair values based on current market prices and rates.
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It is our policy not to enter into derivative financial instruments. We do not currently have any significant foreign currency exposure as we do not transact business in foreign currencies. As such, we do not have significant currency exposure at September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
a) | The principal executive officer and principal financial officer of the Company have evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of a date within 90 days prior to the filing date of this report. Based on that evaluation, such officers have concluded that the Company’s disclosure controls and procedures are effective to ensure that material information relating to the Company and its subsidiaries is made known to such officers in a timely manner for inclusion in the Company’s periodic filings with the SEC. | ||
b) | There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation by the Company’s principal executive officer and principal financial officer. |
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit | ||||
No. | Title | Method of Filing | ||
3.1 | Amended and Restated Certificate of Incorporation of the Company. | Incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement No. 33-95096 | ||
3.1.1 | Amendment to the Amended and Restated Certificate of Incorporation of the Company. | Incorporated by reference to Exhibit 3.1.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2000. | ||
3.2 | Amended and Restated Bylaws of the Company. | Incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement No. 33-95096 | ||
4.1 | Specimen certificate representing shares of Common Stock of the Company. | Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement No. 33-95096 | ||
10.1 | Form of Indemnification Agreement. | Incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement No. 33-95096 | ||
10.2 | 1995 Stock Option/Stock Issuance Plan, as amended. | Incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement No. 33-95096 | ||
10.3 | Form of Notice of Grant of Stock Option under 1995 Stock Option/Stock Issuance Plan. | Incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement No. 33-95096 | ||
10.4 | Form of 1995 Stock Option Agreement under 1995 Stock Option /Stock Issuance Plan. | Incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement No. 33-95096 | ||
10.5 | Form of 1995 Stock Purchase Agreement under 1995 Stock Option/Stock Issuance Plan. | Incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement No. 33-95096 |
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Exhibit | ||||
No. | Title | Method of Filing | ||
10.6 | Distribution License Agreement dated September 30, 1991, by and between the Company and Crandell Development Corporation. | Incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement No. 33-95096 | ||
10.7 | Application Program Interface Retail License Agreement July 28, 1992 by and between the Company and Rockwell International Corporation. | Incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement No. 33-95096 | ||
10.8 | Application Program Interface License Agreement July 28, 1992 by and between the Company and Rockwell International Corporation. | Incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement No. 33-95096 | ||
10.9 | Rockwell High Speed Interface License Agreement dated June 2, 1994, by and between the Company and Rockwell International Corporation. | Incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement No. 33-95096 | ||
10.10 | Letter Agreement dated February 22, 1994, by and between the Company and Rockwell International Corporation. | Incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement No. 33-95096 | ||
10.11 | Letter Agreement dated April 22, 1993, by and between the Company and Rockwell International Corporation. | Incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement No. 33-95096 | ||
10.12 | Software Distribution Agreement dated May 8, 1995, by and between the Company and International Business Machines Corporation. | Incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement No. 33-95096 | ||
10.13 | Office Building Lease, dated June 10, 1992, by and between the Company and Developers Venture Capital Corporation. | Incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement No. 33-95096 | ||
10.14 | Amendment No. 1 To Office Building Lease, dated July 9, 1993, by and between the Company and Pioneer Bank. | Incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement No. 33-95096 | ||
10.15 | Amendment No. 2 To Office Building Lease, dated August 15, 1994, by and between the Company and T&C Development. | Incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement No. 33-95096 | ||
10.16 | Fourth Addendum to Office Building Lease, dated April 21, 1995, by and between the Company and T&C Development. | Incorporated by reference to Exhibit 10.16 to the Registrant’s Registration Statement No. 33-95096 | ||
10.17 | Form of Promissory Note related to S Corporation Distribution. | Incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement No. 33-95096 | ||
10.18 | Smith Micro Software, Inc. Amended and Restated Software Licensing and Distribution Agreement, dated April 18, 1996, by and between the Company and U.S. Robotics Access Corp. | Incorporated by reference to Exhibit 10.21 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 |
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Exhibit | ||||
No. | Title | Method of Filing | ||
10.19 | Office Building Lease, dated March 1, 1994, by and between Performance Computing Incorporated and Petula Associates, Ltd./KC Woodside. | Incorporated by reference to Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 3l, 1995 | ||
10.20 | Agreement and Plan of Merger by and between Smith Micro Software, Inc., Performance Computing Incorporated and PCI Video Products, Inc. dated as of March 14, 1996. | Incorporated by reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K filed with the Commission on March 28, 1996 | ||
10.21 | Amendment No. 1, dated as of March 10, 1997, to Agreement and Plan of Merger by and between Smith Micro Software, Inc., Performance Computing Incorporated and PCI Video Products, Inc. dated as of March 14, 1996. | Incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996 | ||
10.22 | Amendment No. 6 to Office Building Lease, dated February 19, 1998, by and between the Company and World Outreach Center. | Incorporated by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 | ||
10.23 | Software licensing and Distribution Agreement dated December 1, 1998, by and between the Company and 3Com Corporation. | Incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 | ||
10.24 | Stock Purchase Agreement dated as of April 9, 1999 by and among Smith Micro Software, Inc. STF Technologies, Inc. and the Shareholders of STF Technologies, Inc. | Incorporated by reference to Exhibit 2 to the Registrant’s Current Report on Form 8-K filed with the Commission on April 23, 1999 | ||
10.25 | Amendment No. 7 to Office Building Lease, dated November 5, 1999, by and between the Company and World Outreach Center. | Incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 | ||
21.1 | Subsidiaries | Incorporated by reference to Exhibit 21.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 |
(B) REPORTS ON FORM 8-K
No such reports were filed during the three months ended September 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SMITH MICRO SOFTWARE, INC. | ||
November 13, 2002 | By: /s/ William W. Smith, Jr. William W. Smith, Jr. Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | |
November 13, 2002 | By: /s/ Robert W. Scheussler Robert W. Scheussler Chief Operating Officer and Chief Financial Officer (Principal Financial Officer) |
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CERTIFICATIONS
I, William W. Smith, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smith Micro Software, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
By: /s/ William W. Smith, Jr.
William W. Smith, Jr.
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
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I, Robert W. Scheussler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Smith Micro Software, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
By: /s/ Robert W. Scheussler
Robert W. Scheussler
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)
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Each of the undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Smith Micro Software, Inc., that, to his knowledge, the Quarterly Report of Smith Micro Software, Inc. on Form 10-Q for the period ended September 30, 2002, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of the company.
November 13, 2002 | By /s/ William W. Smith, Jr. William W. Smith, Jr. Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | |
November 13, 2002 | By /s/ Robert W. Scheussler Robert W. Scheussler Chief Operating Officer and Chief Financial Officer (Principal Financial Officer) |
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