Smith Micro Software(SMSI) - 2022 Q3 - Quarterly Report

Explanatory Note This section details adjustments made to the previously issued earnings release for the three and nine months ended September 30, 2022, resulting in a $1.5 million decrease in the reported net loss - Adjustments were made to the earnings release for the three and nine months ended September 30, 2022, affecting Convertible notes payable, Warrant and derivative liabilities, General and administrative expense, Interest expense, and Change in fair value of warrant and derivative liabilities[8] - The net impact of these adjustments was a decrease in the reported net loss by $1.5 million, which represented a decrease in the net loss per share (basic and diluted) of $0.03[8] PART I. FINANCIAL INFORMATION Presents the unaudited consolidated financial statements and management's discussion and analysis for the reporting period Item 1. Financial Statements Provides the unaudited consolidated balance sheets, statements of operations, stockholders' equity, and cash flows Consolidated Balance Sheets Presents the company's financial position, including assets, liabilities, and equity, as of September 30, 2022, and December 31, 2021 Consolidated Balance Sheet Highlights (in thousands): | Metric | September 30, 2022 (unaudited) | December 31, 2021 (audited) | | :--------------------------------- | :----------------------------- | :-------------------------- | | Total assets | $109,496 | $114,512 | | Total current liabilities | $12,765 | $9,368 | | Total non-current liabilities | $13,348 | $4,584 | | Total liabilities | $26,113 | $13,952 | | Total stockholders' equity | $83,383 | $100,560 | - Current portion of convertible notes payable increased from $0 in 2021 to $3,435 thousand in 2022, and long-term portion increased to $3,873 thousand[12] - Warrant and derivative liabilities increased from $0 in 2021 to $6,121 thousand in 2022[12] Consolidated Statements of Operations Details the company's revenues, gross profit, operating loss, and net loss for the three and nine months ended September 30, 2022 and 2021 Consolidated Statements of Operations Highlights (in thousands, except per share data): | Metric | For the Three Months Ended Sep 30, 2022 | For the Three Months Ended Sep 30, 2021 | For the Nine Months Ended Sep 30, 2022 | For the Nine Months Ended Sep 30, 2021 | | :--------------------------------- | :-------------------------------------- | :-------------------------------------- | :------------------------------------- | :------------------------------------- | | Revenues | $11,699 | $16,443 | $37,108 | $43,743 | | Gross profit | $8,070 | $12,751 | $26,226 | $35,148 | | Operating loss | $(8,317) | $(18,461) | $(23,777) | $(26,908) | | Net loss | $(5,812) | $(18,607) | $(21,307) | $(27,035) | | Basic and diluted loss per share | $(0.10) | $(0.34) | $(0.39) | $(0.54) | - Change in fair value of warrant and derivative liabilities was $3,457 thousand for both the three and nine months ended September 30, 2022, compared to $0 in 2021[14] - Interest expense, net, was $(896) thousand for the three months and $(898) thousand for the nine months ended September 30, 2022, compared to $1 thousand and $25 thousand income in 2021, respectively[14] Consolidated Statements of Stockholders' Equity Outlines changes in common stock, additional paid-in capital, and accumulated comprehensive deficit for the reporting periods Stockholders' Equity Summary (in thousands): | Metric | September 30, 2022 (unaudited) | December 31, 2021 (audited) | | :--------------------------------- | :----------------------------- | :-------------------------- | | Common Stock (Shares) | 56,261 | 54,259 | | Common Stock (Amount) | $56 | $54 | | Additional Paid-in Capital | $356,907 | $352,779 | | Accumulated Comprehensive Deficit | $(273,580) | $(252,273) | | Total Stockholders' Equity | $83,383 | $100,560 | - Net loss for the nine months ended September 30, 2022, was $(21,307) thousand, contributing to the accumulated comprehensive deficit[17] - Common shares in stock offering, net of offering costs, added 1,132 thousand shares and $1,309 thousand to total equity for the nine months ended September 30, 2022[17] Consolidated Statements of Cash Flows Summarizes cash flows from operating, investing, and financing activities for the nine months ended September 30, 2022 and 2021 Consolidated Statements of Cash Flows Highlights (in thousands): | Activity | For the Nine Months Ended Sep 30, 2022 | For the Nine Months Ended Sep 30, 2021 | | :--------------------------------- | :------------------------------------- | :------------------------------------- | | Net cash (used in) provided by operating activities | $(14,478) | $2,275 | | Net cash provided by (used in) investing activities | $9 | $(57,529) | | Net cash provided by financing activities | $17,392 | $61,872 | | Net increase in cash and cash equivalents | $2,923 | $6,618 | | Cash and cash equivalents, end of period | $19,001 | $32,372 | - Financing activities in 2022 included $15.0 million from notes and warrants offering and $3.0 million from stock and warrants offering[23] - Investing activities in 2021 included $(56,865) thousand for acquisitions, net[23] Notes to the Consolidated Financial Statements Provides detailed explanations and disclosures supporting the consolidated financial statements 1. The Company Describes Smith Micro Software, Inc.'s business, products, and services for wireless and cable service providers - Smith Micro Software, Inc. develops software to simplify and enhance the mobile experience for wireless and cable service providers[25] - The company's solutions include family location services, parental controls, consumer IoT devices, visual voicemail, and retail content display optimization[25][30] 2. Accounting Policies Outlines the significant accounting principles and recent guidance adopted in preparing the financial statements - Unaudited consolidated financial statements are prepared according to SEC rules and US GAAP[26] - ASU 2016-13 (Credit Losses) becomes effective for the Company in fiscal year 2023, with no material impact anticipated[29] - ASU 2020-06 (Convertible Instruments) was adopted in the current period with no impact to the prior period, simplifying accounting for convertible instruments and affecting diluted EPS calculation[30][31] 3. Debt and Fair Value of Financial Instruments Details the company's debt instruments, including convertible notes and warrants, and their fair value measurements - On August 11, 2022, the Company completed a Notes and Warrants Offering, selling $15.0 million in senior secured convertible notes and warrants to acquire 2,238,806 shares of common stock[33] - The warrants and embedded derivatives (make-whole feature, change in control redemption right) are classified as liability instruments and measured at fair value, with changes recognized in the consolidated statements of operations[35][36][41] Notes Net Balance as of September 30, 2022 (in thousands): | Component | Current | Long term | Total | | :------------------------ | :------ | :-------- | :------ | | Gross Balance | $10,500 | $4,500 | $15,000 | | Unamortized Discount | $(6,687) | $(585) | $(7,272) | | Unamortized Issuance Costs | $(378) | $(42) | $(420) | | Net Balance | $3,435 | $3,873 | $7,308 | Fair Value of Financial Liabilities at September 30, 2022 (in thousands): | Instrument | Level 3 Fair Value | | :--------------------------------- | :----------------- | | Notes and Warrants Offering Derivatives | $2,173 | | Notes and Warrants Offering Warrants | $2,462 | | Stock and Warrants Offering Warrants | $1,486 | | Total | $6,121 | - The $7.0 million secured revolving credit facility with Wells Fargo Bank was terminated on August 11, 2022, in connection with the Notes and Warrants Offering[47] 4. Equity Transactions Describes recent equity offerings, including common stock and warrant sales, and their financial impact - On August 11, 2022, the Company completed a registered direct offering (Stock and Additional Warrants Offering), selling 1,132,075 shares of common stock and warrants to purchase an equal number of shares[48] - The offering raised net cash proceeds of $2.8 million[49] - The Additional Warrants were assessed as liability instruments with an estimated initial fair value of $1.6 million, recognized on the balance sheet as Warrant and Derivative Liabilities[50] 5. Goodwill and Intangible Assets Provides information on goodwill impairment testing and the carrying values and amortization of intangible assets - The Company performs annual goodwill impairment testing on December 31 and determined no impairment indicators existed at September 30, 2022, or December 31, 2021[52] Intangible Assets, Net (in thousands): | Asset Type | September 30, 2022 (unaudited) | December 31, 2021 (audited) | | :---------------------- | :----------------------------- | :-------------------------- | | Purchased technology | $8,209 | $9,765 | | Customer relationships | $23,580 | $25,144 | | Customer contracts | $1,604 | $2,559 | | Software license | $4,057 | $4,626 | | Non-compete | $29 | $87 | | Patents | $386 | $450 | | Total Intangible Assets, Net | $37,865 | $42,631 | Estimated Amortization Expense (in thousands): | Year Ending December 31, | Amortization Expense | | :----------------------- | :------------------- | | 2022 (remainder) | $1,545 | | 2023 | $5,874 | | 2024 | $5,635 | | 2025 | $5,402 | | 2026 | $5,007 | | 2027 and thereafter | $14,402 | | Total | $37,865 | 6. Earnings Per Share Presents the calculation of basic and diluted loss per share, including anti-dilutive common stock equivalents Basic and Diluted Loss Per Share (in thousands, except per share amounts): | Metric | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :--------------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Net loss | $(5,812) | $(18,607) | $(21,307) | $(27,035) | | Weighted average shares outstanding – basic and diluted | 55,722 | 53,939 | 55,140 | 50,147 | | Loss per common share (Basic and Diluted) | $(0.10) | $(0.34) | $(0.39) | $(0.54) | Anti-Dilutive Shares Excluded (in thousands): | Item | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :-------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Convertible notes, as if converted | 2,460 | — | 823 | — | | Outstanding stock options | 138 | 144 | 143 | 105 | | Outstanding warrants | 5,499 | 1,135 | 1,215 | 1,228 | | Total anti-dilutive | 8,097 | 1,279 | 2,182 | 1,333 | - For periods with a net loss, dilutive common stock equivalents are excluded from the diluted EPS calculation as their effect would be anti-dilutive[56] 7. Stock-Based Compensation Details stock-based compensation expense, restricted stock grants, and unrecognized compensation costs - The Company granted 1.4 million shares of restricted stock under the 2015 Omnibus Equity Incentive Plan (2015 OEIP) during the nine months ended September 30, 2022[59] - Approximately 2.4 million shares were available for future grants under the 2015 Plan as of September 30, 2022[59] Total Non-Cash Stock Compensation Expense (in thousands): | Expense Category | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :-------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Cost of sales | $— | $— | $2 | $1 | | Sales and marketing | $179 | $238 | $915 | $663 | | Research and development | $279 | $270 | $808 | $705 | | General and administrative | $637 | $818 | $2,124 | $2,254 | | Total | $1,095 | $1,326 | $3,849 | $3,623 | - Unrecognized compensation costs related to non-vested stock options and restricted stock totaled approximately $8.5 million as of September 30, 2022[65] 8. Revenues Explains the company's revenue recognition policies and disaggregates revenues by type for the reporting periods - Revenue recognition follows FASB ASC Topic No. 606, based on a five-step analysis of transactions[68][69] - For MNO customers, software license and cloud-based services are considered a single performance obligation[70] Disaggregated Revenues (in thousands): | Revenue Type | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :-------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | License and service fees | $957 | $818 | $2,818 | $3,199 | | Hosted environment usage fees | $1,074 | $3,475 | $3,937 | $11,573 | | Cloud based usage fees | $9,388 | $11,446 | $28,936 | $27,047 | | Consulting services and other | $280 | $704 | $1,417 | $1,924 | | Total Revenues | $11,699 | $16,443 | $37,108 | $43,743 | 9. Segment, Customer Concentration and Geographical Information Provides details on the company's operating segment, product line revenues, customer concentration, and geographical revenues - The Company operates in one primary business unit: Wireless, which includes Family Safety (SafePath®), CommSuite®, and ViewSpot® product families[73] Wireless Revenues by Product Line (in thousands): | Product Line | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :---------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Family Safety | $9,625 | $11,969 | $30,153 | $29,355 | | CommSuite | $1,070 | $3,463 | $3,932 | $11,535 | | ViewSpot | $989 | $971 | $3,003 | $2,717 | | Other | $15 | $40 | $20 | $136 | | Total Wireless Revenues | $11,699 | $16,443 | $37,108 | $43,743 | - For the three and nine months ended September 30, 2022, two customers made up 40% and 37% of total revenues[75][76] Geographical Revenues (in thousands): | Region | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Americas | $11,247 | $15,825 | $35,654 | $41,323 | | EMEA | $452 | $618 | $1,454 | $2,420 | | Total Revenues | $11,699 | $16,443 | $37,108 | $43,743 | 10. Commitments and Contingencies Discusses potential legal proceedings, indemnities, and other commitments that may impact the company - The Company may become involved in various legal proceedings[78] - Management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company's consolidated results of operations, cash flows, or financial position[79] - The Company has made various indemnities, commitments, and guarantees (e.g., intellectual property, confidentiality, facility leases, director/officer indemnities) for which no liability has been recorded[80] 11. Leases Presents information on the company's operating lease costs, liabilities, and weighted average lease terms - Leases with initial terms greater than twelve months are recorded on the consolidated balance sheet[82] Total Lease Cost (in thousands): | Period | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :-------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Lease cost | $400 | $609 | $1,219 | $1,724 | | Sublease income | $— | $(151) | $(18) | $(452) | | Total lease cost | $400 | $458 | $1,201 | $1,272 | Maturity of Operating Lease Liabilities as of September 30, 2022 (in thousands): | Year | Amount | | :-------------------- | :----- | | 2022 (remainder) | $415 | | 2023 | $1,630 | | 2024 | $1,485 | | 2025 | $1,133 | | 2026 | $459 | | Total lease payments | $5,122 | | Less imputed interest | $(483) | | Present value of lease liabilities | $4,639 | - Weighted average remaining lease term is 3.30 years, and the weighted average discount rate is 6.3% as of September 30, 2022[83] 12. Income Taxes Details the company's deferred tax assets, valuation allowances, and tax audit status - The Company assesses valuation allowances against deferred tax assets based on a 'more likely than not' realization standard[84] - A reserve of $57.3 million for U.S.-based deferred tax amounts is maintained as of September 30, 2022, due to a three-year historical cumulative loss position[85][86] - No outstanding tax audits from federal or state authorities as of September 30, 2022[87] 13. Subsequent Events Confirms the evaluation of events occurring after the balance sheet date and the absence of required disclosures - Subsequent events have been evaluated as of the filing date, and no further disclosures are required[88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes the company's financial performance, liquidity, and capital resources for the reported periods Overview Provides a high-level summary of the company's financial performance, key revenue drivers, and strategic outlook - Revenues declined by 29% to $11.7 million in Q3 2022 compared to Q3 2021, primarily due to decreases in CommSuite ($2.4 million) and Family Safety ($2.3 million) revenues[97] - The decline in CommSuite revenues is attributed to T-Mobile's migration of legacy Sprint subscribers and the expected end-of-life for Sprint's legacy premium visual voicemail services before the end of 2022[97] - Net loss for Q3 2022 was $5.8 million, or $0.10 per basic and diluted share[97] - The Company provides white label family safety applications to all three Tier 1 wireless carriers in the U.S. and expects overall family safety platform revenue to increase[98] - Development costs are expected to decline, and gross margins are anticipated to increase as migrations to the SafePath platform are completed over the next year[98] Results of Operations Analyzes the company's revenues, gross profit, and operating expenses for the reported periods Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021 Compares the company's financial performance for the three-month periods, highlighting key changes in revenues and expenses - Revenues decreased by $4.7 million (29%) to $11.7 million, driven by declines in CommSuite ($2.4 million) and Family Safety ($2.3 million)[102] - Gross profit decreased by $4.7 million to $8.1 million (69.0% of revenues) from $12.8 million (77.5% of revenues)[104] - Research and development expenses increased by $0.4 million to $7.5 million due to higher contractor costs for SafePath development[106] - Amortization of intangible assets decreased by $1.5 million due to lower amortization from the Family Safety Mobile Business acquisition and fully amortized assets[109] Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021 Compares the company's financial performance for the nine-month periods, detailing changes in revenues, costs, and profitability - Revenues decreased by $6.6 million (15%) to $37.1 million, primarily due to a $7.6 million decline in CommSuite revenues, partially offset by increases in Family Safety ($0.8 million) and ViewSpot ($0.3 million)[110] - Cost of revenues increased by $2.3 million to $10.9 million, driven by increased costs from the acquired Family Safety Mobile Business and maintaining multiple family safety platforms[111] - Gross profit decreased by $8.9 million to $26.2 million (70.7% of revenues) from $35.1 million (80.4% of revenues)[112] - Research and development expenses increased by $4.0 million to $23.1 million due to higher personnel and contractor costs for SafePath development[114] - Amortization of intangible assets decreased by $3.2 million due to fully amortized assets and lower amortization from the Family Safety Mobile Business acquisition[117] Liquidity and Capital Resources Assesses the company's cash position, operating cash flows, and financing activities impacting its liquidity - Cash and cash equivalents were approximately $19.0 million as of September 30, 2022[118] - Net cash used in operating activities was $14.5 million for the nine months ended September 30, 2022, compared to $2.3 million provided in the prior year[119][120] - Net cash provided by financing activities was $17.4 million for the nine months ended September 30, 2022, primarily from the $15.0 million convertible notes and warrants offering and $3.0 million stock and warrants offering[122] Recent Accounting Guidance Refers to disclosures on new accounting standards and their anticipated impact on the financial statements - Refer to Note 2 of the Notes to the Consolidated Financial Statements for information regarding recent accounting guidance[124] Critical Accounting Policies and Estimates Highlights key accounting policies and estimates requiring significant management judgment in financial reporting - The preparation of financial statements requires management to make estimates and judgments that affect reported amounts, based on historical experience and various assumptions[125][126] - Detailed information regarding critical accounting policies and estimates is available in Note 1 of the Company's Annual Report on Form 10-K[126] Item 4. Controls and Procedures Details management's evaluation of disclosure controls and internal control over financial reporting Evaluation of disclosure controls and procedures Confirms the effectiveness of the company's disclosure controls and procedures as of the reporting period - Management, including the CEO and CFO, determined that disclosure controls and procedures were effective as of September 30, 2022[127] Management's responsibility for financial statements Affirms management's accountability for the integrity and conformity of the financial statements with U.S. GAAP - Management is responsible for the integrity and objectivity of all information presented in this Report, with consolidated financial statements prepared in conformity with U.S. GAAP[128] Changes in internal control over financial reporting States that no material changes occurred in internal controls over financial reporting during the quarter - There have been no material changes in internal controls over financial reporting during the quarter ended September 30, 2022[130] PART II. OTHER INFORMATION Covers legal proceedings, risk factors, equity transactions, and required exhibits Item 1. Legal Proceedings This section states that the Company may be involved in various legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company's consolidated results of operations, cash flows, or financial position, it acknowledges the inherent unpredictability of litigation - The Company may become involved in various legal proceedings[133] - Management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company's consolidated results of operations, cash flows, or financial position[133] Item 1A. Risk Factors Outlines significant risks, particularly those related to convertible notes and their potential impact on the company Risks Related to Our Convertible Notes Details the financial and operational risks associated with the company's convertible notes, including dilution and default - The terms of the convertible notes may restrict the Company's ability to obtain additional financing and require a portion of cash flows to be dedicated to debt repayment[135] - Conversion of the notes and exercise of warrants will dilute the ownership interest of existing stockholders and may depress the common stock price[136] - The Company's obligations under the notes are secured by substantially all of its assets; a default could lead to foreclosure and liquidation of assets[138][139] - Upon an event of default, noteholders have rights including an increased interest rate (15%), demand for redemption at a premium (125%), or conversion into common stock at a discount[140] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section provides a table detailing the Company's repurchases of equity securities during the three months ended September 30, 2022. These repurchases were primarily for the payment of withholding taxes in connection with the vesting of restricted stock awards Issuer Purchases of Equity Securities (Three Months Ended September 30, 2022): | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------- | :----------------------------- | :--------------------------- | | July 1 - 31, 2022 | 22,783 | $2.48 | | August 1 - 31, 2022 | 19,723 | $2.69 | | September 1 - 30, 2022 | 19,901 | $2.54 | | Total | 62,407 | $2.57 | - Shares repurchased were for payment of withholding taxes in connection with the vesting of restricted stock awards and were subsequently cancelled[141] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including various legal and financial agreements related to the August 2022 Notes and Warrants Offering and Stock and Additional Warrants Offering, as well as certifications from the Chief Executive Officer and Chief Financial Officer - Exhibits include forms of warrants, securities purchase agreements, senior secured convertible notes, registration rights agreements, guaranty and security agreements, lock-up agreements, and voting agreements[143] - Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 are included[143] SIGNATURES Formal declaration by authorized officers confirming the accuracy and completeness of the report - The Report was signed on November 14, 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[147]