Smith Micro Software(SMSI) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents unaudited consolidated financial statements for Q1 2023 and 2022, including balance sheets, operations, equity, cash flows, and notes Consolidated Balance Sheets | Metric | March 31, 2023 (in millions) | December 31, 2022 (in millions) | | :-------------------------------- | :----------------------------- | :----------------------------- | | Cash and cash equivalents | $8.724 | $14.026 | | Total current assets | $23.233 | $26.510 | | Total assets | $98.258 | $103.581 | | Total current liabilities | $20.249 | $20.731 | | Total non-current liabilities | $4.125 | $6.471 | | Total stockholders' equity | $73.884 | $76.379 | - Total assets decreased from $103.581 million at December 31, 2022, to $98.258 million at March 31, 2023[9] - Cash and cash equivalents decreased by $5.302 million from $14.026 million to $8.724 million[9] Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Revenues | $10.930 | $12.735 | | Gross profit | $7.648 | $9.098 | | Operating loss | $(6.935) | $(7.038) | | Change in fair value of warrant and derivative liabilities | $2.984 | — | | Interest expense, net | $(2.260) | $(0.004) | | Net loss | $(6.887) | $(7.002) | | Basic and diluted loss per share | $(0.11) | $(0.13) | - Revenues decreased by 14.1% year-over-year, from $12.735 million in Q1 2022 to $10.930 million in Q1 2023[11] - Net loss improved slightly from $(7.002) million in Q1 2022 to $(6.887) million in Q1 2023, partly due to a $2.984 million gain from the change in fair value of warrant and derivative liabilities[11] Consolidated Statements of Stockholders' Equity | Metric | December 31, 2022 (in millions) | March 31, 2023 (in millions) | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Total Stockholders' Equity | $76.379 | $73.884 | | Additional Paid-in Capital | $357.875 | $362.262 | | Accumulated Comprehensive Deficit | $(281.552) | $(288.439) | | Common shares issued in settlement and prepayment of notes payable | — | $3.649 | - Total stockholders' equity decreased by $2.495 million from $76.379 million at December 31, 2022, to $73.884 million at March 31, 2023[14] - Common shares issued in settlement and prepayment of notes payable contributed $3.649 million to equity in Q1 2023[14] Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Net cash used in operating activities | $(5.335) | $(6.589) | | Net cash provided by (used in) investing activities | $0.003 | $(0.051) | | Net cash provided by financing activities | $0.030 | $0.393 | | Net decrease in cash and cash equivalents | $(5.302) | $(6.247) | | Cash and cash equivalents, end of period | $8.724 | $9.831 | - Net cash used in operating activities decreased by $1.254 million, from $(6.589) million in Q1 2022 to $(5.335) million in Q1 2023[18] - Cash and cash equivalents at the end of the period decreased to $8.724 million as of March 31, 2023, from $14.026 million at the beginning of the period[18] Notes to the Consolidated Financial Statements Note 1. The Company - Smith Micro Software, Inc. develops software to simplify and enhance the mobile experience for wireless and cable service providers globally[20] - The company's portfolio includes digital services for family safety (location, parental controls, IoT), visual voice messaging, and retail content display optimization[20][25] Note 2. Accounting Policies - The unaudited consolidated financial statements are prepared in accordance with SEC rules and US GAAP, omitting certain disclosures normally included in annual statements[21] - The adoption of ASU 2016-13, 'Financial Instruments - Credit Losses (Topic 326),' effective in fiscal year 2023, did not have a material impact on the financial statements[24] Note 3. Equity Transactions - In August 2022, the company completed a registered direct offering, selling 1,132,075 shares of common stock and warrants, raising net cash proceeds of $2.8 million[26] - During Q1 2023, 1,644,738 shares were issued to settle a $1.5 million convertible notes installment, and 1,592,359 shares were prefunded for a May 2023 installment[28] Note 4. Debt and Warrants Transactions - On August 11, 2022, the company sold $15.0 million in senior secured convertible notes and warrants to acquire 2,238,806 shares[29] - The notes accrue 6.0% annual interest (15.0% upon default) and mature on December 31, 2023, with monthly amortization payments[30] - Warrants and embedded derivative features are classified as liability instruments, with fair value changes recognized in the consolidated statements of operations[31][32] | Metric | Amount (in millions) | | :-------------------------- | :-------------------- | | Gross Balance as of March 31, 2023 | $13.500 | | Unamortized Discount | $(3.658) | | Unamortized Issuance Costs | $(0.218) | | Net Balance as of March 31, 2023 | $9.624 | Note 5. Fair Value of Financial Instruments | Financial Liability | March 31, 2023 (in millions) | | :-------------------------------- | :----------------------------- | | Notes and Warrants Offering Derivative | $0.532 | | Warrants | $0.830 | | Additional Warrants | $0.524 | | Total at March 31, 2023 | $1.886 | - The change in fair value for these liabilities resulted in a gain of $2.984 million for the three months ended March 31, 2023[40] Note 6. Goodwill and Intangible Assets - A U.S. Tier 1 customer agreement termination in February 2023 triggered an interim quantitative impairment analysis for goodwill and long-lived assets[42] - The impairment analysis concluded no impairment for goodwill or the Customer Relationships intangible asset as of February 28, 2023[44][45] | Intangible Asset | Net Book Value (March 31, 2023, in millions) | | :-------------------- | :------------------------------------------ | | Purchased technology | $7.257 | | Customer relationships | $22.382 | | Customer contracts | $1.198 | | Software license | $3.667 | | Patents | $0.343 | | Total | $34.847 | - Intangible asset amortization expense was $1.5 million for the three months ended March 31, 2023, compared to $1.6 million in the prior year period[47] Note 7. Earnings Per Share | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net loss (in millions) | $(6.887) | $(7.002) | | Weighted average shares outstanding – basic (in thousands) | 61,646 | 54,501 | | Basic and diluted net loss per common share | $(0.11) | $(0.13) | - 8,032 thousand anti-dilutive shares (convertible notes, stock options, and warrants) were excluded from the diluted net loss per share calculation for Q1 2023[51] Note 8. Stock-Based Compensation - The company granted 1.4 million shares of restricted stock under its 2015 Omnibus Equity Incentive Plan during Q1 2023[52] | Expense Category | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | | Sales and marketing | $0.162 | $0.083 | | Research and development | $0.224 | $0.261 | | General and administrative | $0.559 | $0.721 | | Total non-cash stock compensation expense | $0.945 | $1.065 | - As of March 31, 2023, there was approximately $8.3 million in unrecognized compensation costs related to non-vested stock options and restricted stock[57] - 2,627 thousand unvested restricted stock awards were outstanding as of March 31, 2023[59] Note 9. Revenues - The company recognizes revenue based on a five-step analysis, primarily from usage-based fees for perpetual licenses, hosted environment transactions, advertisement placements, and cloud-based services[60] | Revenue Type | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | | License and service fees | $1.000 | $0.828 | | Hosted environment usage fees | $0.819 | $1.429 | | Cloud based usage fees | $8.677 | $9.878 | | Consulting services and other | $0.434 | $0.600 | | Total revenues | $10.930 | $12.735 | Note 10. Segment, Customer Concentration and Geographical Information - The company operates as a single primary business unit: Wireless, which includes Family Safety (SafePath®), CommSuite®, and ViewSpot® products[64] | Product Line | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | | Family Safety | $9.089 | $10.366 | | CommSuite | $0.826 | $1.430 | | ViewSpot | $1.015 | $0.939 | | Total Wireless revenues | $10.930 | $12.735 | - Three customers accounted for 37%, 37%, and 14% of total revenues for Q1 2023[66] - Revenues from the Americas totaled $10.511 million in Q1 2023, down from $12.193 million in Q1 2022[68] Note 11. Commitments and Contingencies - Management does not believe the ultimate disposition of potential legal proceedings will have a material adverse impact on the company's consolidated results[69] - The company has various indemnities, commitments, and guarantees, for which no liability has been recorded in the consolidated balance sheets[70] Note 12. Leases | Metric | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | | Lease cost | $0.410 | $0.434 | | Sublease income | — | $(0.018) | | Total lease cost | $0.410 | $0.416 | - The present value of operating lease liabilities was $4.046 million as of March 31, 2023[74] - The weighted average remaining lease term was 2.85 years, with a weighted average discount rate of 6.2% as of March 31, 2023[75] Note 13. Income Taxes - The company maintains a valuation allowance against its U.S.-based deferred tax amounts, totaling $62.7 million as of March 31, 2023, due to a historical cumulative loss position[78] - There were no outstanding tax audits from federal or state authorities as of March 31, 2023[79] Note 14. Subsequent Events - Subsequent events have been evaluated as of the filing date, and no further disclosures are required[81] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of Q1 2023 financial condition, operations, liquidity, capital resources, and risks Overview - Q1 2023 revenues declined by 14% to $10.9 million, primarily due to decreases in the Family Safety and CommSuite product lines[90] - Net loss for Q1 2023 was $6.9 million, or $0.11 per basic and diluted share[90] - One U.S. Tier 1 customer terminated its Family Safety contract effective June 30, 2023, leading to a workforce reduction of approximately 26% and anticipated quarterly cost savings of $4 million by Q2 2023[91] - The company expects development costs to decline and gross margins to increase as customer migrations to the SafePath platform are completed[91] Results of Operations | Metric (as % of Revenues) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Revenues | 100.0 % | 100.0 % | | Cost of revenues | 30.0 % | 28.6 % | | Gross profit | 70.0 % | 71.4 % | | Operating loss | (63.4) % | (55.3) % | | Net loss | (63.0) % | (55.0) % | Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022 - Revenues decreased by $1.8 million (14%) to $10.9 million, primarily due to declines in Family Safety ($1.3 million) and CommSuite ($0.6 million) related to T-Mobile's subscriber migration[94] - Gross profit decreased by $1.5 million to $7.6 million, driven by lower revenue volume and $0.2 million in severance costs[96] - Research and development expenses decreased by $1.4 million to $5.9 million, mainly due to lower personnel and contractor costs, partially offset by $0.5 million in severance costs[98] - Interest expense, net, increased significantly by $2.3 million to $2.3 million, primarily due to amortization of debt discount and issuance costs from the August 2022 financing[103] - A $3.0 million income was recognized from the change in fair value of warrant and derivative liabilities in Q1 2023[101] Liquidity and Capital Resources - The company's principal sources of liquidity are existing cash and cash equivalents, and cash generated by operations[105] - Cash and cash equivalents were approximately $8.7 million as of March 31, 2023[105] - Management believes the company will be able to meet its financial obligations over the next twelve months[105] Operating activities - Net cash used in operating activities was $5.3 million for Q1 2023, an improvement from $6.6 million used in Q1 2022[106][107] - Primary uses of operating cash in Q1 2023 included a net loss of $6.9 million, an increase in accounts receivable of $0.7 million, and a decrease in accounts payable and accrued liabilities of $0.4 million[106] Investing activities - Net cash provided by investing activities was nominal for Q1 2023, compared to $0.1 million used in Q1 2022[109] Financing activities - Net cash provided by financing activities was nominal for Q1 2023, down from $0.4 million in Q1 2022, primarily due to the timing of borrowings and repayments from short-term insurance premium financing[110] Recent Accounting Guidance - Refer to Note 2 of the Notes to the Consolidated Financial Statements for information regarding recent accounting guidance[111] Critical Accounting Policies and Estimates - The preparation of financial statements requires management to make estimates and judgments that affect reported amounts, based on historical experience and reasonable assumptions[112] - Detailed information on critical accounting policies and estimates is available in Note 1 of the company's 2022 Form 10-K[112] Item 4. Controls and Procedures Assesses disclosure controls, management's financial statement responsibility, and internal control changes Evaluation of disclosure controls and procedures - Management, including the CEO and CFO, determined that disclosure controls and procedures were effective as of March 31, 2023[113] Management's responsibility for financial statements - 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[114] - The Audit Committee of the Board of Directors reviews accounting, financial reporting, internal control, and audit matters[115] Changes in internal control over financial reporting - There have been no material changes in internal controls over financial reporting during the quarter ended March 31, 2023[117] PART II. OTHER INFORMATION Item 1. Legal Proceedings Addresses potential legal proceedings, with no material adverse impact on financial position or results anticipated - Management does not believe the ultimate disposition of various legal proceedings will have a material adverse impact on the company's consolidated results of operations, cash flows, or financial position[120] Item 1A. Risk Factors Refers to 2022 Form 10-K risk factors and Item 2, confirming no material changes to previously disclosed risks - Readers should consider risk factors discussed in Part I, Item 1A of the 2022 Form 10-K and factors identified at the beginning of Part I, Item 2 of this Report[121] - There have been no material changes to the risk factors included in the 2022 Form 10-K for the year ended December 31, 2022[121] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details Q1 2023 equity security repurchases, primarily for withholding taxes on restricted stock awards | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------- | :----------------------------- | :--------------------------- | | January 1 - 31, 2023 | 23,993 | $2.63 | | February 1 - 28, 2023 | 21,931 | $3.20 | | March 1 - 31, 2023 | 65,179 | $1.17 | | Total | 111,103 | $2.33 | - Shares were repurchased for the payment of withholding taxes in connection with the vesting of restricted stock awards[122] Item 5. Other Information Discloses impairment review outcome after customer termination, confirming no goodwill or intangible asset impairment - Following an impairment review triggered by a customer agreement termination, the company determined there was no impairment of goodwill or long-lived intangible assets[123] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including certifications and Inline XBRL documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer, as well as Inline XBRL instance, schema, calculation, definition, label, and presentation documents[124] SIGNATURES SIGNATURES Contains official signatures of authorized officers, certifying due authorization and filing of the Form 10-Q - The Report was signed on May 12, 2023, by William W. Smith, Jr., Chairman of the Board, President and Chief Executive Officer, and James M. Kempton, Vice President and Chief Financial Officer[128]