Smith Micro Software(SMSI) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited statements show declining revenue and profit, a larger net loss, and negative operating cash flow for the first half of 2022 Consolidated Balance Sheets Total assets and stockholders' equity decreased as of June 30, 2022, driven by a significant reduction in cash and cash equivalents Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 (unaudited) | December 31, 2021 (audited) | | :--- | :--- | :--- | | Cash and cash equivalents | $5,357 | $16,078 | | Total current assets | $19,433 | $28,656 | | Goodwill | $35,041 | $35,041 | | Total assets | $100,845 | $114,512 | | Total current liabilities | $10,160 | $9,368 | | Total liabilities | $13,917 | $13,952 | | Total stockholders' equity | $86,928 | $100,560 | Consolidated Statements of Operations Revenues declined and net losses widened for both the second quarter and first six months of 2022 compared to the prior year Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $12,674 | $15,919 | $25,409 | $27,300 | | Gross Profit | $9,057 | $12,561 | $18,156 | $22,397 | | Operating Loss | ($8,479) | ($5,210) | ($15,459) | ($8,447) | | Net Loss | ($8,493) | ($5,203) | ($15,496) | ($8,428) | | Loss Per Share (Basic & Diluted) | ($0.15) | ($0.10) | ($0.28) | ($0.17) | Consolidated Statements of Cash Flows Net cash from operations turned negative in the first half of 2022, contributing to a substantial decrease in cash and cash equivalents Cash Flow Summary for the Six Months Ended June 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($11,627) | $1,496 | | Net cash used in investing activities | ($29) | ($57,132) | | Net cash provided by financing activities | $935 | $59,818 | | Net (decrease) increase in cash | ($10,721) | $4,182 | | Cash and cash equivalents, end of period | $5,357 | $29,936 | Notes to the Consolidated Financial Statements Notes highlight significant customer concentration, revenue disaggregation, and a post-quarter private placement of convertible notes - The company has significant customer concentration, with two customers accounting for 44% and 37% of revenues in Q2 2022, and three customers representing 47%, 26%, and 14% of accounts receivable[54][55] - On August 11, 2022, the company entered into a private placement for $15 million in senior secured convertible notes and also sold common stock and warrants, raising additional capital[68] - The company's credit facility with Wells Fargo was terminated on August 11, 2022, in connection with the new financing transactions[31] Disaggregation of Revenues for the Six Months Ended June 30 (in thousands) | Revenue Type | 2022 | 2021 | | :--- | :--- | :--- | | Cloud based usage fees | $19,548 | $15,602 | | Hosted environment usage fees | $2,863 | $8,097 | | License and service fees | $1,861 | $2,382 | | Consulting services and other | $1,137 | $1,219 | | Total revenues | $25,409 | $27,300 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the revenue decline driven by T-Mobile's subscriber migration, its impact on margins, and the need for recent financing - Q2 2022 revenues declined by 20% to $12.7 million compared to Q2 2021, primarily due to a $2.5 million decrease in CommSuite revenues and a $1.0 million decrease in the family safety product line[78] - The revenue decline is attributed to T-Mobile's accelerated migration of legacy Sprint subscribers, with CommSuite services expected to end-of-life before the end of 2022[78] - Gross margin decreased in Q2 2022 due to the costs of maintaining multiple family safety platforms, with improvement expected once migrations to the flagship SafePath platform are complete[78][80] Comparison of Operating Results (in thousands) | Metric | Q2 2022 | Q2 2021 | Change | Reason for Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $12,674 | $15,919 | ($3,245) | Decrease in CommSuite and legacy family safety products | | Gross Profit | $9,057 | $12,561 | ($3,504) | Lower revenue and higher costs from maintaining multiple platforms | | R&D Expenses | $8,213 | $7,063 | $1,150 | Increased contractor costs for SafePath development | | Net Loss | ($8,493) | ($5,203) | ($3,290) | Lower gross profit and higher operating expenses | Item 4. Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - Management determined that as of June 30, 2022, the company's disclosure controls and procedures were effective[107] - No changes in internal controls over financial reporting occurred during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, these controls[110] PART II. OTHER INFORMATION Item 1. Legal Proceedings Management does not expect current legal proceedings to have a material adverse impact on the company's financial condition - While the company may become involved in legal proceedings, management does not currently expect them to have a material adverse impact on its consolidated financial results[113] Item 1A. Risk Factors New risks related to the August 2022 convertible notes issuance have been added, concerning financing, dilution, and asset security - New risks have been introduced related to the recently issued convertible notes[114][115] - The notes may restrict the ability to obtain additional financing and dedicate cash flow to debt repayment[115] - Conversion of the notes and exercise of associated warrants will dilute the ownership interest of existing stockholders[116] - The company's obligations under the notes are secured by a security interest in substantially all of its assets, and noteholders could foreclose on these assets in case of a default[118] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased over 163,000 shares during Q2 2022 to satisfy employee tax withholding obligations on vested stock awards Issuer Purchases of Equity Securities (Q2 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 1 - 30, 2022 | 27,835 | $3.67 | | May 1 - 31, 2022 | 116,133 | $2.56 | | June 1 - 30, 2022 | 19,766 | $2.61 | | Total | 163,734 | $2.95 | - The repurchased shares were acquired by the company to cover withholding taxes for employees upon the vesting of restricted stock awards[121] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including bylaws, agreements, and required officer certifications Signatures - The report was signed on August 12, 2022, by William W. Smith, Jr. (CEO) and James M. Kempton (CFO)[127]