Smith Micro Software(SMSI) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's discussion and analysis for the company Item 1. Financial Statements (Unaudited) This section presents Smith Micro Software, Inc.'s unaudited consolidated financial statements and detailed notes for Q1 2022 and 2021 Consolidated Balance Sheets This section provides a snapshot of the company's financial position at specific points in time Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2022 | December 31, 2021 | Change (vs. Dec 31, 2021) | | :-------------------------- | :------------- | :---------------- | :------------------------ | | Cash and cash equivalents | $9,831 | $16,078 | -$6,247 | | Accounts receivable, net | $12,058 | $10,590 | +$1,468 | | Total current assets | $24,086 | $28,656 | -$4,570 | | Intangible assets, net | $40,987 | $42,631 | -$1,644 | | Goodwill | $35,041 | $35,041 | $0 | | Total assets | $108,509 | $115,356 | -$6,847 | | Total current liabilities | $9,342 | $9,368 | -$26 | | Total non-current liabilities | $4,984 | $5,428 | -$444 | | Total stockholders' equity | $94,183 | $100,560 | -$6,377 | Consolidated Statements of Operations This section details the company's revenues, expenses, and net loss over a specific period Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :-------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Revenues | $12,735 | $11,381 | +$1,354 | | Cost of revenues | $3,637 | $1,545 | +$2,092 | | Gross profit | $9,098 | $9,836 | -$738 | | Total operating expenses | $16,077 | $13,073 | +$3,004 | | Operating loss | $(6,979) | $(3,237) | -$(3,742) | | Net loss | $(7,002) | $(3,225) | -$(3,777) | | Basic and diluted loss per share | $(0.13) | $(0.07) | -$(0.06) | Consolidated Statements of Stockholders' Equity This section outlines changes in the company's equity due to net loss, stock grants, and other transactions Consolidated Stockholders' Equity Highlights (in thousands) | Metric | December 31, 2021 | March 31, 2022 | | :-------------------------------- | :---------------- | :------------- | | Total Stockholders' Equity | $100,560 | $94,183 | | Net loss | — | $(7,002) | | Restricted stock grants, net | — | $1,045 | | Cancellation of shares for payment of withholding tax | — | $(474) | - Total stockholders' equity decreased from $100,560 thousand at December 31, 2021, to $94,183 thousand at March 31, 2022, primarily due to a net loss of $7,002 thousand[14] Consolidated Statements of Cash Flows This section reports on the cash generated and used by operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(6,589) | $3,700 | | Net cash used in investing activities | $(51) | $(179) | | Net cash provided by financing activities | $393 | $59,972 | | Net (decrease) increase in cash and cash equivalents | $(6,247) | $63,493 | | Cash and cash equivalents, end of period | $9,831 | $89,247 | - The company experienced a net decrease in cash and cash equivalents of $6,247 thousand for the three months ended March 31, 2022, a significant shift from the $63,493 thousand increase in the prior year, primarily driven by cash used in operating activities[17] Notes to the Consolidated Financial Statements This section provides detailed disclosures on accounting policies, credit facilities, intangible assets, revenue, and other financial notes Note 1. The Company This note describes Smith Micro Software, Inc.'s business, focusing on mobile experience enhancement solutions - Smith Micro Software, Inc. develops software to simplify and enhance the mobile experience, offering solutions to wireless and cable service providers globally. Its portfolio includes products for family digital lifestyle, visual voice messaging, and retail content display optimization[20][26] Note 2. Accounting Policies This note outlines the significant accounting principles used in preparing the unaudited interim financial statements - The unaudited interim consolidated financial statements are prepared in accordance with SEC rules and US GAAP, with certain disclosures omitted. Management confirms all adjustments are normal and recurring, and prior period amounts have been reclassified for comparability[21][22][23] Note 3. Credit Facility This note details the company's revolving credit facility with Wells Fargo Bank for working capital needs - On March 31, 2022, the Company entered into a $7.0 million secured revolving credit facility with Wells Fargo Bank, National Association, maturing on March 31, 2023, for working capital and general corporate purposes. As of March 31, 2022, there were no outstanding borrowings[24][25][27] Note 4. Goodwill and Intangible Assets This note provides information on the company's goodwill and intangible assets, including amortization schedules - Goodwill is reviewed annually for impairment on December 31, with no impairment identified as of March 31, 2022, or December 31, 2021. Intangible assets, net, totaled $40,987 thousand as of March 31, 2022, amortized over a weighted average period of approximately 10 years[28][29] Intangible Assets, Net (in thousands) | Intangible Asset | March 31, 2022 Net Book Value | December 31, 2021 Net Book Value | | :----------------- | :---------------------------- | :------------------------------- | | Purchased technology | $9,241 | $9,765 | | Customer relationships | $24,623 | $25,144 | | Customer contracts | $2,190 | $2,559 | | Software license | $4,436 | $4,626 | | Non-compete | $68 | $87 | | Patents | $429 | $450 | | Total | $40,987 | $42,631 | Estimated Amortization Expense (in thousands) | Year Ending December 31, | Amortization Expense | | :----------------------- | :------------------- | | 2022 (remainder) | $4,666 | | 2023 | $5,874 | | 2024 | $5,635 | | 2025 | $5,402 | | 2026 | $5,007 | | 2027 and thereafter | $14,403 | | Total | $40,987 | Note 5. Earnings Per Share This note explains the calculation of basic and diluted earnings per share, especially during periods of net loss - Basic and diluted EPS are calculated based on net income available to common stockholders and weighted average shares outstanding. For periods with a net loss, dilutive common stock equivalents are excluded from diluted EPS calculation[31][32] Basic and Diluted Loss Per Share (in thousands, except per share amounts) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(7,002) | $(3,225) | | Weighted average shares outstanding – basic | 54,501 | 43,368 | | Weighted average shares outstanding – diluted | 54,501 | 43,368 | | Basic loss per common share | $(0.13) | $(0.07) | | Diluted loss per common share | $(0.13) | $(0.07) | Note 6. Stock-Based Compensation This note details the company's stock-based compensation plans, including restricted stock grants - During the three months ended March 31, 2022, the Company granted 1.2 million shares of restricted stock under its 2015 Omnibus Equity Incentive Plan. Approximately 2.6 million shares remained available for future grants as of March 31, 2022[34] Note 7. Revenues This note describes the company's revenue recognition policies and disaggregates revenue by type - Revenue is recognized based on a five-step analysis, depicting the transfer of promised goods or services to customers. The Company primarily generates revenue from usage-based fees, and considers software licenses and cloud services as a single performance obligation due to their integrated nature[35][36][37] Disaggregation of Revenues (in thousands) | Revenue Type | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :----------------------- | :-------------------------------- | :-------------------------------- | | License and service fees | $828 | $1,587 | | Hosted environment usage fees | $1,429 | $4,141 | | Cloud based usage fees | $9,878 | $4,963 | | Consulting services and other | $600 | $690 | | Total revenues | $12,735 | $11,381 | Note 8. Segment, Customer Concentration and Geographical Information This note provides details on the company's operating segment, customer concentration, and geographical revenue distribution - The Company operates with one primary business unit, Wireless, which includes SafePath®, CommSuite®, and ViewSpot® products. Revenues are not allocated to specific product lines or geographic locations beyond the Wireless segment[40][41] Wireless Revenues by Product Line (in thousands) | Product Line | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :----------- | :-------------------------------- | :-------------------------------- | | SafePath | $10,366 | $6,267 | | CommSuite | $1,429 | $4,128 | | ViewSpot | $935 | $930 | | Other | $5 | $56 | | Total wireless revenues | $12,735 | $11,381 | - Customer concentration is significant, with three customers accounting for 40%, 37%, and 10% of revenues for Q1 2022. Geographically, the Americas generated $12,193 thousand in revenue, while EMEA generated $542 thousand for the three months ended March 31, 2022[43][44] Note 9. Commitments and Contingencies This note discusses potential legal proceedings, indemnities, and other commitments the company faces - The Company may be involved in various legal proceedings, but management does not anticipate a material adverse impact on financial results. It also has various indemnities, commitments, and guarantees in its normal course of business, for which no liability has been recorded[45][46] Note 10. Leases This note outlines the company's lease obligations for office space and equipment, including lease costs and maturities - The Company leases office space and equipment, recording leases with terms greater than twelve months on the balance sheet. Operating lease cost for the three months ended March 31, 2022, was $416 thousand, with a weighted average remaining lease term of 3.8 years[47][48][49] Maturity of Operating Lease Liabilities (in thousands) | Year Ending December 31, | Lease Payments | | :----------------------- | :------------- | | 2022 | $1,261 | | 2023 | $1,687 | | 2024 | $1,526 | | 2025 | $1,168 | | 2026 | $481 | | Total lease payments | $6,123 | | Present value of lease liabilities | $5,473 | Note 11. Income Taxes This note details the company's accounting for income taxes, including deferred tax amounts and valuation allowances - The Company accounts for income taxes under FASB ASC Topic No. 740, recognizing the financial statement impact of a tax position when it is more likely than not to be sustained. Due to a three-year historical cumulative loss as of fiscal 2021, the Company continues to reserve its U.S.-based deferred tax amounts, totaling $57.3 million as of March 31, 2022[50][51][53][54] Note 12. Subsequent Events This note confirms the evaluation of events occurring after the balance sheet date, with no further disclosures required - Subsequent events have been evaluated as of the filing date, and no further disclosures are required[56] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition, operational results, liquidity, and critical accounting policies Forward-Looking Statements and Risk Factors This section highlights forward-looking statements and key risks that could impact the company's future performance - The report contains forward-looking statements regarding projected revenues, market acceptance, competition, and profitability, which are subject to various risks and uncertainties. Key risk factors include customer concentration, ability to maintain strategic relationships, security breaches, failure to realize acquisition benefits, and rapid technological evolution[59][60] Overview This section provides a general business description and summarizes key financial highlights for the reporting period - Smith Micro provides software solutions to wireless and cable service providers, focusing on digital lifestyle services and online safety. In Q1 2022, revenues increased by 12% to $12.7 million, driven by a 64% increase in family safety products due to the Avast Family Safety Mobile Business acquisition in April 2021[62][63][64] - The acquisition led to a decline in gross margin and higher development costs due to maintaining multiple family safety platforms during integration. The company aims to fully migrate customers to its SafePath platform within the next year to improve gross margins and reduce development costs[64][65] - Net loss for Q1 2022 was $7.0 million, or $0.13 per basic and diluted share. CommSuite revenues decreased by $2.7 million due to T-Mobile winding down Sprint's legacy premium visual voicemail service[64] Results of Operations This section analyzes the company's revenues, cost of revenues, gross profit, and operating expenses for the period Key Financial Metrics as a Percentage of Revenues | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Revenues | 100.0 % | 100.0 % | | Cost of revenues | 28.6 % | 13.6 % | | Gross profit | 71.4 % | 86.4 % | | Selling and marketing | 23.4 % | 19.7 % | | Research and development | 58.1 % | 42.8 % | | General and administrative | 31.8 % | 32.1 % | | Amortization of intangible assets | 12.9 % | 20.2 % | | Total operating expenses | 126.2 % | 94.6 % | | Operating loss | (54.8)% | (8.2)% | | Net loss | (54.9)% | (8.1)% | - Revenues increased by $1.4 million (12%) to $12.7 million in Q1 2022, primarily due to the Family Safety Mobile Business acquisition, offset by declines in CommSuite and legacy family safety products[69] - Cost of revenues increased by $2.1 million to $3.6 million, mainly due to supporting the acquired Family Safety Mobile Business and maintaining multiple family safety platforms. This led to a decrease in gross profit margin from 86% to 71%[70][71] - Operating expenses increased by $3.0 million, with selling and marketing up $0.8 million, research and development up $2.5 million (due to Family Safety Mobile Business and SafePath development), and general and administrative up $0.3 million. Amortization of intangible assets decreased by $0.7 million due to accelerated amortization in 2021[72][73][74][75][76] Liquidity and Capital Resources This section discusses the company's cash position, credit facilities, and cash flow from operating, investing, and financing activities - The Company's liquidity sources include cash and cash equivalents ($9.8 million as of March 31, 2022) and a $7.0 million secured revolving credit facility, with $6.97 million net availability. No borrowings were outstanding under the credit facility as of March 31, 2022[77][78] - Net cash used in operating activities was $6.6 million for Q1 2022, compared to $3.7 million provided in Q1 2021, primarily due to a net loss and increases in accounts receivable[79][80] - Net cash provided by financing activities was $0.4 million in Q1 2022, mainly from an insurance premium financing arrangement, significantly lower than the $60.0 million in Q1 2021 which included proceeds from a common stock offering[82][83] Off-Balance Sheet Arrangements This section confirms the absence of off-balance sheet arrangements and notes certain indemnities and commitments - The Company does not have any off-balance sheet arrangements. It has made certain indemnities, commitments, and guarantees in the normal course of business, for which no liability has been recorded[84][85] Recent Accounting Guidance This section refers to disclosures regarding recently adopted or issued accounting pronouncements - Information regarding recent accounting guidance is provided in Note 2 of the Notes to the Consolidated Financial Statements[87] Critical Accounting Policies and Estimates This section highlights the significant accounting policies and estimates requiring management judgment - The Company's financial statements require estimates and judgments affecting reported amounts. Critical accounting policies and estimates are detailed in Note 1 of the Annual Report on Form 10-K[88] Item 4. Controls and Procedures This section evaluates the company's disclosure controls and procedures and reports on changes in internal control over financial reporting Evaluation of disclosure controls and procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of the reporting date - As of March 31, 2022, management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective in ensuring timely and accurate reporting of information required in Exchange Act reports[89] Management's responsibility for financial statements This section outlines management's responsibility for the integrity and objectivity of the financial statements - Management is responsible for the integrity and objectivity of the financial statements, which are prepared in conformity with U.S. GAAP and reflect management's best estimates and judgments. The Audit Committee oversees financial reporting and internal controls[90][91] Changes in internal control over financial reporting This section reports on any material changes in the company's internal control over financial reporting - There have been no changes in internal controls over financial reporting during the quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company's internal controls[92] PART II. OTHER INFORMATION This section includes disclosures on legal proceedings, equity security sales, and a list of exhibits Item 1. Legal Proceedings This section addresses potential legal proceedings and their anticipated impact on the company's financial results - The Company may be involved in various legal proceedings, but management does not believe their ultimate disposition will have a material adverse impact on the Company's consolidated results of operations, cash flows, or financial position[95] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's repurchases of equity securities, primarily for withholding taxes on restricted stock Issuer Purchases of Equity Securities (Three Months Ended March 31, 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------- | :----------------------------- | :--------------------------- | | January 1 - 31, 2022 | 30,466 | $4.37 | | February 1 - 28, 2022 | 27,123 | $4.04 | | March 1 - 31, 2022 | 63,283 | $3.65 | | Total | 120,872 | $3.92 | - The Company repurchased 120,872 shares of stock during the three months ended March 31, 2022, at an average price of $3.92 per share. These repurchases were for the payment of withholding taxes related to the vesting of restricted stock awards and were subsequently cancelled[96] Item 6. Exhibits This section lists all key exhibits filed as part of the Form 10-Q report, including bylaws and credit agreements - Key exhibits include the Certificate of Amendment of Amended and Restated Bylaws, Credit Agreement with Wells Fargo Bank, Security Agreements, and Certifications of the Chief Executive Officer and Chief Financial Officer[97] SIGNATURES This section contains the official signatures of the company's authorized officers, certifying the Form 10-Q filing - The report was signed on May 5, 2022, by William W. Smith, Jr., Chairman of the Board, President and Chief Executive Officer, and James M. Kempton, Vice President and Chief Financial Officer[101]