This prospectus relates to the resale, from time to time, of up to 203,583 shares of our common stock, par value $0.001 per share, being offered by the
selling stockholders identified in this prospectus. The selling stockholders acquired the shares held by them in connection with our acquisition of iMobileMagic – Mobile Experiences, LDA, a Portuguese limited liability company
(“IMM”), on July 19, 2016. This prospectus may be used by the former stockholders of IMM to resell shares of our common stock issued to them in the acquisition.
We will not receive any of the proceeds from the sale of the shares by the selling stockholders. The selling stockholders may sell the shares as set forth
herein under “Plan of Distribution.”
We have agreed to pay certain expenses in connection with the registration of the shares.
Our common stock is listed on the NASDAQ Capital Market under the symbol “SMSI.” On September 15, 2016, the last reported sale price of our common
stock on the NASDAQ Capital Market was $2.36.
RISK FACTORS
Investing in our securities involves risk. Before making an investment decision, you should carefully consider the following risk factors as well as the risks
described in our most recent Annual Report on Form 10-K, or any updates to our risk factors in our Quarterly Reports on Form 10-Q, together with all of the other information appearing in or incorporated by reference into this prospectus, in light of
your particular investment objectives and financial circumstances. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of our securities could decline due to any
of these risks, and you may lose all or part of your investment.
We derive a significant portion of our revenues from sales of a small number of
products to Sprint, so our revenues and operating results are highly vulnerable to shifts in demand and may decline.
In our Wireless business
segment, we sell primarily to large carriers, cable operators, and original equipment manufacturers (“OEMs”), so there are a limited number of actual and potential customers for our products, resulting in customer concentration for sales
of our products and services. For the year ended December 31, 2015, sales to Sprint and their affiliates comprised 65.4% of our total revenues. Sprint has been going through several cost reduction and restructurings over the past several years,
the latest being their announcement to reduce expenses by two billion dollars in 2016. As such, our revenues with Sprint are projected to be down approximately 25-34% in 2016 versus 2015.
Because of our customer concentration, this carrier and other large customers may have significant pricing power over us, and any material decrease in sales
to any of them would materially affect our revenues and profitability. Additionally, carriers, cable operators, and OEMs are not the end users of our products. If any of their efforts to market products and services incorporating our software are
unsuccessful in the marketplace, our revenues and profitability could be adversely affected.
We also derive a significant portion of our revenues from a
few vertical markets, such as wireless carriers, cable operators, and handset manufacturers. In order to sustain and grow our business, we must continue to sell our software products in these vertical markets. Shifts in the dynamics of these
vertical markets, such as new product introductions by our competitors, could materially harm our results of operations, financial condition and prospects. To increase our sales outside our core vertical markets, for example to large enterprises,
requires us to devote time and resources to hire and train sales employees familiar with those industries. Even if we are successful in hiring and training sales teams, customers in other vertical markets may not need or sufficiently value our
current products or new product introductions.
We have a history of net losses, may incur substantial net losses in the future, and may not achieve
profitability.
We expect to continue to incur increased expenses as we implement initiatives designed to grow our business, including, among other
things, the development and marketing of new products and services, further international and domestic expansion, and general and administrative expenses associated with being a public company. If our revenues do not increase to offset these
expected increases in operating expenses, we will continue to incur significant losses and will not become profitable. Our revenues could decline and accordingly, we may not be able to achieve profitability in the foreseeable future.
If there are delays in the distribution of our products or if customer negotiations for our new products cannot occur on a timely basis, we may not be able to
generate revenues sufficient to meet the needs of the business in the foreseeable future or at all.
If we fail to meet the requirements for
continued listing on the NASDAQ Stock Market, our common stock would likely be delisted from trading on NASDAQ, which would likely reduce the liquidity of our common stock and could cause our trading price to decline.
Our common stock is currently listed for quotation on the NASDAQ Stock Market. We are required to meet specified financial requirements in order to maintain
our listing on NASDAQ. If we fail to satisfy NASDAQ’s
3
continued listing requirements, our common stock would likely be delisted from NASDAQ and our common stock may trade on the OTC Market. Any potential delisting of our common stock from NASDAQ
would likely result in decreased liquidity and increased volatility of our common stock, and would likely cause our trading price to decline.
During
2015, we failed to comply with NASDAQ’s Marketplace Rule 5450(a)(1) because the bid price for the Company’s common stock over a 30 consecutive business day period had closed below the minimum $1.00 per share requirement for continued
listing. On September 10, 2015, we received written notice from the Listing Qualifications Department of NASDAQ notifying us that for the preceding 30 consecutive business days, our common stock did not maintain a minimum closing bid price of
$1.00 per share as required for continued inclusion on The NASDAQ Global Select Market under NASDAQ Listing Rule 5450(a)(1). The notification letter stated that pursuant to NASDAQ Listing Rule 5810(c)(3)(A), we would be afforded 180 calendar days,
or until March 8, 2016, to regain compliance with the minimum bid price requirement.
On March 9, 2016, we were informed that NASDAQ had
approved the transfer of our listing to the NASDAQ Capital Market from the NASDAQ Global Select Market effective March 11, 2016 and our compliance plan, and agreed to allow the continued listing of our common stock on NASDAQ until
September 6, 2016, at which time we must be in compliance.
The Company has filed a Proxy Statement calling for a Special Meeting of Stockholders to
be held on August 15, 2016 in order to approve a reverse stock split of 1 for 3, or 1 for 4, in the discretion of our Board of Directors. The reverse split is intended to enable us to remain listed on NASDAQ by having our stock trade at over
$1.00 per share for 10 consecutive trading days prior to September 6, 2016. On August 15, 2016, our Board of Directors and our stockholders approved a reverse split of 1 to 4.
There can be no assurance that the Company will regain compliance or be able to achieve in the future or maintain compliance with the Minimum
Stockholders’ Equity Rule, the minimum $1.00 per share rule, or other requirements for continued listing on NASDAQ. A delisting of our common stock from NASDAQ could substantially reduce the liquidity of our common stock and result in a
corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of
confidence by investors, suppliers, customers and employees and fewer business development opportunities.
Our quarterly revenues and operating
results are difficult to predict and could fall below analyst or investor expectations, which could cause the price of our common stock to fall.
Our quarterly 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 gain or loss of a key customer;
|
|
|
•
|
|
the size and timing of orders from and shipments to our major customers;
|
|
|
•
|
|
the size and timing of any product return requests;
|
|
|
•
|
|
our ability to maintain or increase gross margins;
|
|
|
•
|
|
variations in our sales channels or the mix of our product sales;
|
|
|
•
|
|
our ability to anticipate market needs and to identify, develop, complete, introduce, market and produce new products and technologies in a timely manner to address those needs;
|
|
|
•
|
|
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;
|
4
|
|
•
|
|
the timing of acceptance of new mobile services by users of our customers’ services;
|
|
|
•
|
|
deferrals of orders by our customers in anticipation of new products, applications, product enhancements or operating systems; and
|
|
|
•
|
|
general economic and market conditions.
|
We have difficulty predicting the volume and timing of orders. In any
given quarter, our sales have involved, and we expect will continue to involve, large financial commitments from a relatively small number of customers. As a result, the cancellation or deferral of even a small number of orders would reduce our
revenues, which would adversely affect our quarterly financial performance. Also, we have often recorded a large amount of our sales in the last month of the quarter and often in the last week of that month. Accordingly, delays in the closing of
sales near the end of a quarter could cause quarterly revenues to fall substantially short of anticipated levels. Significant sales may also occur earlier than expected, which could cause operating results for later quarters to compare unfavorably
with operating results from earlier quarters.
Future orders may come from new customers or from existing customers for new products. The sales cycles may
be greater than what we have experienced in the past, increasing the difficulty to predict quarterly revenues.
Because we sell primarily to large
carriers, cable/MSOs and OEM customers, we have no direct relationship with most end users of our products. This indirect relationship delays feedback and blurs signals of change in the quick-to-evolve wireless ecosystem, and is one of the reasons
we have difficulty predicting demand.
A large portion of our operating expenses, including rent, depreciation and amortization, is fixed and difficult to
reduce or change. Accordingly, if our total revenue does not meet our expectations, we may not be able to adjust our expenses quickly enough to compensate for the shortfall in revenue. In that event, our business, financial condition, and results of
operations would be materially and adversely affected.
Due to all of the foregoing factors, and the other risks discussed in this prospectus, you should
not rely on quarter-to-quarter comparisons of our operating results as an indication of future performance.
Technology and customer needs change
rapidly in our market, which could render our products obsolete and negatively affect our business, financial condition and results of operations.
Our success depends on our ability to anticipate and adapt to changes in technology and industry standards. We will also need to continue to develop and
introduce new and enhanced products to meet our target markets’ changing demands, keep up with evolving industry standards, including changes in the Microsoft, Google, and Apple 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. In addition, the technology we market, which has been sold as software in the past, can be integrated at the chipset level by the leading mobile chipset manufacturers. 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 and called for by evolving wireless networking technologies. If our target markets do not develop as we anticipate, our products do not gain widespread acceptance in these markets, or we are unable to develop new
versions of our software products that can operate on future wireless networks and PC and mobile device operating systems and interoperate with other popular applications, our business, financial condition and results of operations could be
materially and adversely affected.
Competition within our target markets is intense and includes numerous established competitors and new entrants,
which could negatively affect our revenues and results of operations.
We operate in markets that are extremely competitive and subject to rapid
changes in technology. Because there are low barriers to entry into the software markets in which we participate and may participate in the future, we expect significant competition to continue from both established and emerging software companies
in the future, both
5
domestic and international. In fact, our growth opportunities in new product markets could be limited to the extent established and emerging software companies enter or have entered those
markets. Furthermore, our existing and potential OEM customers may acquire or develop products that compete directly with our products.
Many of our other
current and prospective competitors have significantly greater financial, marketing, service, support, technical and other resources than we do. As a result, they may be able to adapt more quickly than we can to new or emerging technologies and
changes in customer requirements or to devote greater resources to the promotion and sale of their products. Announcements of competing products by competitors could result in the cancellation of orders by customers in anticipation of the
introduction of such new products. In addition, some of our competitors are currently making 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 are entering new,
emerging markets in which we have limited experience; if these markets do not develop or we are unable to otherwise succeed in them, our revenues will suffer and the price of our common stock will likely decline.
Our recent and planned product introductions to support new higher speed networking and 4G technologies have allowed us to enter new markets, such as mobile
marketing and analytics (Big Data). A viable market for these products may not develop or be sustainable, and we may face intense competition in these markets. In addition, our success in these markets depends on our carrier, MSO, and enterprise
customers’ ability to successfully introduce new mobile services enabled by our products and our ability to broaden our carrier customer base, which we believe will be difficult and time-consuming. If the expected benefits from entering new
markets do not materialize, our revenues will suffer and the price of our common stock would likely decline. In addition, to the extent we enter new markets through acquisitions of companies or technologies, our financial condition could be harmed
or our stockholders could suffer dilution without a corresponding benefit to our company if we do not realize expected benefits of entering such new markets.
If the adoption of and investments in new technologies and services grows more slowly than anticipated in our product planning and development, our
operating results, financial condition, and prospects may be negatively affected.
If the adoption of and investments in new networking and 4G
technologies and services does not grow or grows more slowly than anticipated, we will not obtain the anticipated returns from our planning and development investments. We have introduced new high-speed networking and 4G products, but the pace of
the market introduction of such technologies is uncertain. Future sales and any future profits from these and related products are substantially dependent upon the acceptance and use of these new technologies, and on the continued adoption and use
of mobile data services by end users.
Many of our customers and other communications service providers have made and continue to make major investments
in next generation networks that are intended to support more complex applications. If communications service providers delay their deployment of networks or fail to deploy such networks successfully, demand for our products could decline, which
would adversely affect our revenues. Also, to the extent we devote substantial resources and incur significant expenses to enable our products to be interoperable with new networks that have failed or have been delayed or not deployed, our operating
results, financial condition, and prospects may be negatively affected.
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
6
govern the length of their service. The loss of the services of our key employees would materially and adversely affect our business, financial condition and results of operations. Our future
success also depends on our ability to continue to attract, retain, and motivate qualified personnel, particularly highly skilled engineers involved in the ongoing research and development required to develop and enhance our products. Competition
for these employees remains high and employee retention is a common problem in our industry. Our inability to attract and retain the highly trained technical personnel that are essential to our product development, marketing, service and support
teams may limit the rate at which we can generate revenue, develop new products or product enhancements and generally would have an adverse effect on our business, financial condition and results of operations.
We rely directly and indirectly on third-party intellectual property and licenses, which may not be available on commercially reasonable terms or at
all.
Many of the Company’s products and services include third-party intellectual property, which requires licenses from those third parties
directly to us or to unrelated companies which provide us with sublicenses and/or execution of services for the operation of our business. These products and services include our wireless suite of products, as well as our graphics products. The
Company has historically been able to obtain such licenses on reasonable terms. There is however no assurance that in the future the necessary licenses could be obtained on acceptable terms or at all. If the Company or our third party service
providers are unable to obtain or renew critical licenses on reasonable terms, we may be forced to terminate or curtail our products and services which rely on such intellectual property, and our financial condition and operating results may be
materially adversely affected.
If we fail to continue to establish and maintain strategic relationships with mobile device manufacturers, wireless
carriers, cable MSOs and network infrastructure manufacturers, market acceptance of our products, and our profitability may suffer.
Most of our
strategic relationships with mobile device manufacturers are not subject to written contract, but rather are in the form of informal working relationships. We believe these relationships are valuable to our success. In particular, these
relationships provide us with insights into product development and emerging technologies, which allows us to keep abreast of, or anticipate, market trends, and helps us serve our current and prospective customers. Because these relationships are
not typically governed by written agreements, there is no obligation for many of our partners to continue working with us. If we are unable to maintain our existing strategic relationships with mobile device manufacturers or if we fail to enter into
additional strategic relationships or the parties with whom we have strategic relationships favor one of our competitors, our ability to provide products that meet our current and prospective customers’ needs could be compromised and our
reputation and future revenue prospects could suffer. For example, if our software does not function well with a popular mobile device because we have not maintained a relationship with its manufacturer, carriers seeking to provide that device to
their respective customers could choose a competitor’s software over ours or develop their own. Even if we succeed in establishing these relationships, they may not result in additional customers or revenues.
Our growth depends in part on our customers’ ability and willingness to promote services and attract and retain new customers or achieve other
goals outside of our control.
We sell our products for use on handheld devices primarily through our carrier, cable/MSO, and enterprise customers.
Losing the support of these customers may limit our ability to compete in existing and potential markets and could negatively affect our revenues. In addition, the success of these customers, and their ability and willingness to market services
supported by our products, is critical to our future success. Our ability to generate revenues from sales of our software is also constrained by our carrier customers’ ability to attract and retain customers. We have no input into or influence
upon their marketing efforts and sales and customer retention activities. If our large carrier customers fail to maintain or grow demand for their services, revenues or revenue growth from our products designed for use on mobile devices will decline
and our results of operations will suffer.
Acquisitions of companies or technologies may disrupt our business and divert management attention and
cause our current operations to suffer.
We have historically made targeted acquisitions of smaller companies with important technology and expect
to continue to do so in the future. As part of any acquisition, we will be required to assimilate the operations, products
7
and personnel of the acquired businesses and train, retain, and motivate key personnel from the acquired businesses. We may not be able to maintain uniform standards, controls, procedures and
policies if we fail in these efforts. Similarly, acquisitions may cause disruptions in our operations and divert 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. Our financial condition could be harmed to the extent we
incur substantial debt or use significant amounts of our cash resources in acquisitions. The issuance of equity securities for any acquisition could be substantially dilutive to our existing stockholders. In addition, we expect our profitability
could be adversely affected because of acquisition-related accounting costs, write offs, amortization expenses, and charges related to acquired intangible assets. In consummating acquisitions, we are also subject to risks of entering geographic and
business markets in which we have had limited or no prior experience. If we are unable to fully integrate acquired businesses, products, or technologies within existing operations, we may not receive the intended benefits of acquisitions.
Our operating income or loss may continue to change due to shifts in our sales mix and variability in our operating expenses.
Our operating income or loss can change quarter to quarter and year to year due to a change in our sales mix and the timing of our continued investments in
research and development and infrastructure. We continue to invest in research and development, which is the lifeline of our technology portfolio. The timing of these additional expenses can vary significantly quarter to quarter and even from year
to year.
Our products may contain undetected software defects, which could negatively affect our revenues.
Our software products are complex and may contain undetected defects. In the past, we have discovered software defects in certain of our products and have
experienced delayed or lost revenues during the period it took to correct these problems. Although we and our OEM customers test our products, it is possible that errors may be found or occur in our new or existing products after we have commenced
commercial shipment of those products. Defects, whether actual or perceived, could result in adverse publicity, loss of revenues, product returns, a delay in market acceptance of our products, loss of competitive position, or claims against us by
customers. Any such problems could be costly to remedy and could cause interruptions, delays, or cessation of our product sales, which could cause us to lose existing or prospective customers and could negatively affect our results of operations. In
addition, some of our software contains open source components that are licensed under the GNU General Public License and similar open source licenses. These components may contain undetected defects or incompatibilities, may cause us to lose
control over the development of portions of our software code, and may expose us to claims of infringement if these components are, or incorporate, infringing materials, the licenses are not enforceable or are modified to become incompatible with
other open source licenses, or exposure to misappropriation claims if these components include unauthorized materials from a third party.
Regulations affecting our customers and us and future regulations, to which they or we may become subject to, may harm our business.
Certain of our customers in the communications industry are subject to regulation by the Federal Communications Commission, which could have an indirect effect
on our business. In addition, the United States telecommunications industry has been subject to continuing deregulation since 1984. We cannot predict when, or upon what terms and conditions, further regulation or deregulation might occur or the
effect regulation or deregulation may have on demand for our products from customers in the communications industry. Demand for our products may be indirectly affected by regulations imposed upon potential users of those products, which may increase
our costs and expenses.
8
We may be unable to adequately protect our intellectual property and other proprietary rights, which could
negatively impact our revenues.
Our success is dependent upon our software code base, our programming methodologies and other intellectual
properties and proprietary rights. In order to protect our proprietary technology, we rely on a combination of trade secrets, nondisclosure agreements, patents, and copyright and trademark law. We currently own U.S. trademark registrations for
certain of our trademarks and U.S. patents for certain of our technologies. However, these measures afford us only limited protection. Furthermore, we rely primarily on “shrink wrap” licenses that are not signed by the end user and,
therefore, may be unenforceable under the laws of certain jurisdictions. Accordingly, it is possible that third parties may copy or otherwise obtain our rights without our authorization. It is also possible that third parties may independently
develop technologies similar to ours. It may be difficult for us to detect unauthorized use of our intellectual property and proprietary rights.
We may
be subject to claims of intellectual property infringement as the number of trademarks, patents, copyrights and other intellectual property rights asserted by companies in our industry grows and the coverage of these patents and other rights and the
functionality of software products increasingly overlap. From time to time, we have received communications from third parties asserting that our trade name or features, content, or trademarks of certain of our products infringe upon intellectual
property rights held by such third parties. We have also received correspondence from third parties separately asserting that our products may infringe on certain patents held by each of the parties. Although we are not aware that any of our
products infringe on the proprietary rights of others, third parties may claim infringement by us with respect to our current or future products. Additionally, our customer agreements require that we indemnify our customers for infringement claims
made by third parties involving our intellectual property embedded in their products. Infringement claims, whether with or without merit, could result in time-consuming and costly litigation, divert the attention of our management, cause product
shipment delays, or require us to enter into royalty or licensing agreements with third parties. If we are required to enter into royalty or licensing agreements, they may not be on terms that are acceptable to us. Unfavorable royalty or licensing
agreements could seriously impair our ability to market our products.
We may raise additional capital through the issuance of additional equity or
convertible debt securities or by borrowing money, in order to meet our capital needs. Additional funds may not be available on terms acceptable to us to allow us to meet our capital needs.
Based on our current financial revenue and profit projections, we believe that our existing cash, cash equivalents, and short-term investments will be
sufficient to fund our operations through at least the next five months. The Company is in the process of securing a debt instrument that will raise an additional $4-6 million of cash which should be sufficient to fund operations through at
least the next twelve months. However, it is possible that we may need or choose to obtain additional financing to fund our activities in the future. We could raise these funds by selling more stock to the public or to selected investors, or by
borrowing money. We may not be able to obtain additional funds on favorable terms, or at all. If adequate funds are not available, we may be required to curtail our operations or other business activities significantly or to obtain funds through
arrangements with strategic partners or others that may require us to relinquish rights to certain technologies or potential markets.
In addition, we may
file with the SEC a shelf registration statement to sell from time to time additional shares of our common stock in one or more offerings in amounts, at prices and on the terms that we will determine at the time of offering. If we raise additional
funds by issuing additional equity or convertible debt securities (whether in a public offering or private placement), 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;
|
|
|
•
|
|
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;
|
9
|
|
•
|
|
the levels of working capital that we maintain;
|
|
|
•
|
|
capital improvements to new and existing facilities;
|
|
|
•
|
|
our ability to meet our headcount hiring commitment to the state of Pennsylvania;
|
|
|
•
|
|
technological advances;
|
|
|
•
|
|
our competitors’ response to our products; and
|
|
|
•
|
|
our relationships with suppliers and customers.
|
In addition, we may raise additional capital to accommodate
planned growth, hiring, and infrastructure needs or to consummate acquisitions of other businesses, products or technologies.
Our business,
financial condition and operating results could be adversely affected as a result of legal, business and economic risks specific to international operations.
In recent years, our revenues derived from sales to customers outside the U.S. have not been material. Our revenues derived from such sales can vary from
quarter to quarter and from year to year. We also frequently ship products to our domestic customers’ international manufacturing divisions and subcontractors. In the future, we may expand these international business activities. International
operations are subject to many inherent risks, including:
|
|
•
|
|
general political, social and economic instability;
|
|
|
•
|
|
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 any other country in which we operate;
|
|
|
•
|
|
unexpected changes in regulatory requirements;
|
|
|
•
|
|
foreign technical standards;
|
|
|
•
|
|
difficulties in staffing and managing international operations;
|
|
|
•
|
|
difficulties in securing and servicing international customers;
|
|
|
•
|
|
difficulties in collecting receivables from foreign entities;
|
|
|
•
|
|
fluctuations in currency exchange rates and any imposition of currency exchange controls; and
|
|
|
•
|
|
potentially adverse tax consequences.
|
These conditions may increase our cost of doing business. Moreover, as
our customers are adversely affected by these conditions, our business with them may be disrupted and our results of operations could be adversely affected.
Security and privacy breaches may harm our business.
The uninterrupted operation of our hosted solutions and the confidentiality and security of third-party information is critical to our business. Any failures
in our security and privacy measures, such as “hacking” of our systems by outsiders, could have a material adverse effect on our financial position and results of operations. If we are unable to protect, or our customers perceive that we
are unable to protect, the security and privacy of our electronic information, our growth could be materially adversely affected. A security or privacy breach may:
10
|
|
•
|
|
cause our customers to lose confidence in our solutions;
|
|
|
•
|
|
expose us to liability; and
|
|
|
•
|
|
increase our expense from potential remediation costs.
|
While we believe we use proven applications designed
for data security and integrity to process electronic transactions, there can be no assurance that our use of these applications will be sufficient to address changing market conditions or the security and privacy concerns of existing and potential
customers. In addition, our customers and end users may use our products and services in a manner which violates security or data privacy laws in one or more jurisdictions. Any significant or high profile data privacy breaches or violations of data
privacy laws, whether directly through our hosted solutions or by third parties using our products and services, could result in the loss of business and reputation, litigation against us and regulatory investigations and penalties that could
adversely affect our operating results and financial condition.
Interruptions or delays in service from data center hosting facilities could impair
the delivery of our service and harm our business.
We currently serve our customers from data center hosting facilities. Any damage to, or failure
of, our systems generally could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their on-demand services, and adversely affect our
renewal rates and our ability to attract new customers.
We may have exposure to additional tax liabilities.
As a multinational corporation, we are subject to income taxes as well as sales, use, and other non-income based taxes, in both the United States and various
foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes, sales and use taxes, and other tax liabilities. Changes in tax laws or tax rulings may have a significantly adverse impact on our
effective tax rate.
We are also subject to non-income based taxes, such as payroll, sales, use, value-added, net worth, property, and goods and services
taxes, in both the United States and various foreign jurisdictions. We are regularly under audit by tax authorities with respect to these non-income based taxes and may have exposure to additional non-income based tax liabilities. An increasing
number of states have considered or have adopted laws that attempt to impose obligations on out-of-state retailers to collect sales and use taxes on their behalf. A successful assertion by one or more states or foreign countries requiring us to
collect sales and use taxes where we do not do so could result in substantial tax liabilities, including for past sales, as well as penalties and interest.
Although we believe that our income and non-income based tax estimates are reasonable, there is no assurance that our provisions for taxes are correct, or
that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals. If we are required to pay substantially more taxes in the future or for prior periods, our
operating results and financial condition could be adversely affected.
11