Smith Micro Software(SMSI) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents Smith Micro Software's unaudited financial statements, management's discussion, and controls for the period Item 1. Financial Statements (Unaudited) This section provides Smith Micro Software's unaudited consolidated financial statements and detailed explanatory notes Consolidated Balance Sheets Total assets and stockholders' equity significantly increased due to the Avast acquisition and a common stock offering | Metric (in thousands) | June 30, 2021 | December 31, 2020 | Change | % Change | | :-------------------- | :------------ | :---------------- | :----- | :------- | | Cash and cash equivalents | $29,936 | $25,754 | $4,182 | 16.2% | | Total current assets | $46,923 | $39,290 | $7,633 | 19.4% | | Intangible assets, net | $41,255 | $12,698 | $28,557 | 224.9% | | Goodwill | $40,085 | $12,266 | $27,819 | 226.8% | | Total assets | $137,425 | $72,903 | $64,522 | 88.5% | | Total current liabilities | $12,712 | $8,370 | $4,342 | 51.9% | | Total stockholders' equity | $119,473 | $58,716 | $60,757 | 103.5% | Consolidated Statements of Operations Revenues increased, but higher costs and operating expenses led to a net loss for the three and six months ended June 30, 2021 | Metric (in thousands) | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | Change | % Change | | :-------------------- | :--------------------------- | :--------------------------- | :----- | :------- | | Revenues | $15,919 | $12,933 | $2,986 | 23.1% | | Cost of revenues | $3,358 | $1,269 | $2,089 | 164.6% | | Gross profit | $12,561 | $11,664 | $897 | 7.7% | | Total operating expenses | $17,771 | $10,287 | $7,484 | 72.7% | | Operating income (loss) | $(5,210) | $1,377 | $(6,587) | -478.4% | | Net income (loss) | $(5,203) | $1,379 | $(6,582) | -477.3% | | Basic and diluted EPS | $(0.10) | $0.03 | $(0.13) | -433.3% | | Metric (in thousands) | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | Change | % Change | | :-------------------- | :--------------------------- | :--------------------------- | :----- | :------- | | Revenues | $27,300 | $26,255 | $1,045 | 4.0% | | Cost of revenues | $4,903 | $2,441 | $2,462 | 100.9% | | Gross profit | $22,397 | $23,814 | $(1,417) | -5.9% | | Total operating expenses | $30,844 | $20,477 | $10,367 | 50.6% | | Operating income (loss) | $(8,447) | $3,337 | $(11,784) | -353.1% | | Net income (loss) | $(8,428) | $3,424 | $(11,852) | -346.2% | | Basic and diluted EPS | $(0.17) | $0.08 | $(0.25) | -312.5% | Consolidated Statements of Stockholders' Equity Stockholders' equity significantly increased due to a common stock offering and shares for the Avast acquisition, despite a net loss - Total stockholders' equity increased from $58,716 thousand at December 31, 2020, to $119,473 thousand at June 30, 2021[14] - Key contributors to the increase in additional paid-in capital include $59,701 thousand from a common stock offering and $8,380 thousand from common shares issued for the Avast Family Safety Mobile acquisition[14] - The company recognized a net loss of $(8,428) thousand for the six months ended June 30, 2021, impacting accumulated comprehensive deficit[14] Consolidated Statements of Cash Flows Cash and cash equivalents increased, driven by financing activities offsetting investing outflows and lower operating cash flow | Cash Flow Activity (in thousands) | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | Change | | :-------------------------------- | :--------------------------- | :--------------------------- | :----- | | Net cash provided by operating activities | $1,496 | $4,335 | $(2,839) | | Net cash used in investing activities | $(57,132) | $(13,206) | $(43,926) | | Net cash provided by financing activities | $59,818 | $4,217 | $55,601 | | Net increase (decrease) in cash and cash equivalents | $4,182 | $(4,654) | $8,836 | | Cash and cash equivalents, end of period | $29,936 | $23,614 | $6,322 | - Investing activities for the six months ended June 30, 2021, were primarily driven by a $56.9 million net cash payment for the acquisition of the Family Safety Mobile Business[19] - Financing activities for the six months ended June 30, 2021, were significantly boosted by $59.7 million in net proceeds from a common stock offering[19] Notes to the Consolidated Financial Statements These notes provide essential context and detailed information on the company's business, accounting policies, and financial activities 1. The Company Smith Micro Software develops mobile experience software solutions for wireless and cable service providers globally - Smith Micro develops software to simplify and enhance the mobile experience for leading wireless and cable service providers[21] - The company's product portfolio includes solutions for family digital lifestyle, powerful voice messaging, retail content display optimization, and performance analytics[21] 2. Accounting Policies This section details the basis of financial statement presentation, COVID-19 impact, revenue recognition, and fair value measurement policies - The unaudited consolidated financial statements are prepared in accordance with SEC rules and GAAP, with certain disclosures omitted[22] - COVID-19 has led to a reduction in SafePath® platform subscribers and delays in customer decisions for ViewSpot platform, impacting financial estimates and assumptions[26] - Revenue recognition follows FASB ASC Topic No. 606, recognizing revenue upon transfer of promised goods or services, with specific considerations for software licenses, usage-based revenue, and consulting services[28][29][31] - Fair value measurements are categorized into a three-tier hierarchy (Level 1, 2, 3) based on the observability of inputs, with cash equivalents in Level 1 and goodwill/acquisition-related contingent consideration in Level 3[35][36][37] 3. Acquisitions Smith Micro acquired Avast's Family Safety Mobile Business for $72.7 million, significantly impacting assets and future revenues - Smith Micro acquired substantially all assets of Avast's Family Safety Mobile Business on April 16, 2021[38] Acquisition Metric (in thousands) | Acquisition Metric (in thousands) | Amount | | :-------------------------------- | :----- | | Fair value of assets acquired | $75,626 | | Fair value of liabilities assumed | $2,893 | | Total purchase price | $72,733 | | Cash consideration | $63,216 | | Common stock consideration | $8,381 | | Contingent consideration | $1,136 | - The acquisition resulted in the recognition of $33.5 million in intangible assets and $27.8 million in goodwill[39] - From April 16 to June 30, 2021, the acquired business contributed approximately $6.0 million in revenues and $1.7 million in cost of revenues[41] 4. Goodwill and Intangible Assets Goodwill showed no impairment, but a customer contract termination resulted in a $1.5 million intangible asset impairment charge - Goodwill recoverability is reviewed annually, with no impairment found as of June 30, 2021, or December 31, 2020[44] - A customer contract acquired from Circle Media Labs Inc. was terminated effective April 15, 2021, leading to a $1.5 million impairment charge on the related intangible asset, recognized in selling and marketing expenses[45] 5. Earnings Per Share Basic and diluted EPS show a net loss per share for the current period, with anti-dilutive shares excluded | EPS Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | | :--------- | :--------------------------- | :--------------------------- | | Basic EPS | $(0.10) | $0.03 | | Diluted EPS | $(0.10) | $0.03 | | EPS Metric | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :--------- | :--------------------------- | :--------------------------- | | Basic EPS | $(0.17) | $0.08 | | Diluted EPS | $(0.17) | $0.08 | - For periods with a net loss, dilutive common stock equivalents are excluded from the diluted EPS calculation[46] 6. Stock-Based Compensation The company granted restricted stock and options, with 3.8 million shares remaining available for future grants - 100,000 shares of restricted stock and 10,000 incentive stock options were granted in the three months ended June 30, 2021[49] - 1,100,000 shares of restricted stock and 20,000 incentive stock options were granted in the six months ended June 30, 2021[49] - Approximately 3.8 million shares were available for future grants under the 2015 Plan as of June 30, 2021[49] 7. Revenues The company sells software, cloud services, and consulting, with revenue recognition following a five-step analysis, and experienced a $0.6 million deferred revenue recognition and $1.5 million impairment charge - Revenue recognition follows FASB ASC Topic 606, involving identifying contracts, performance obligations, transaction price, and allocation[51] - The company's cloud-based service, including software licenses, is considered a single performance obligation due to the integrated nature of the license and services[52] - Deferred revenue balance was $0.9 million as of June 30, 2021, with $0.7 million recognized as revenue during the six months ended June 30, 2021[55] Disaggregated Revenues (in thousands) | Revenue Type | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | License and service fees | $795 | $1,008 | $2,382 | $1,563 | | Hosted environment usage fees | $3,956 | $4,341 | $8,097 | $8,890 | | Cloud based usage fees | $10,555 | $6,705 | $15,602 | $14,352 | | Consulting services and other | $613 | $879 | $1,219 | $1,450 | | Total revenues | $15,919 | $12,933 | $27,300 | $26,255 | 8. Segment, Customer Concentration and Geographical Information The company operates in one Wireless segment, with significant customer concentration and the Americas as the dominant revenue source - The company has one primary business unit: Wireless, encompassing SafePath®, CommSuite®, and ViewSpot® products[58] Wireless Revenues by Product (in thousands) | Product | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Family Safety Mobile | $11,119 | $7,344 | $17,385 | $15,193 | | CommSuite | $3,944 | $4,330 | $8,073 | $8,869 | | ViewSpot | $817 | $971 | $1,746 | $1,716 | | Other | $39 | $288 | $96 | $477 | | Total wireless revenues | $15,919 | $12,933 | $27,300 | $26,255 | - Two customers accounted for 82% of revenues for the three months ended June 30, 2021, and 79% for the six months ended June 30, 2021[61] - The Americas region generated $15.4 million in revenue for the three months ended June 30, 2021, and $25.5 million for the six months ended June 30, 2021, representing the vast majority of total revenues[63] 9. Commitments and Contingencies The company faces potential legal proceedings and has various indemnities, but no material liabilities are recorded - The company may become involved in legal proceedings arising from business activities[64] - Management does not believe the ultimate disposition of these matters will have a material adverse impact[64] - Indemnities, commitments, and guarantees include intellectual property, facility leases, vendor claims, and director/officer indemnities, with no liability recorded as of the balance sheet date[65] 10. Leases The company leases office space and equipment, with a total lease cost of $819 thousand and a 4.06-year weighted average remaining lease term Operating Lease Cost (in thousands) | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Lease cost | $560 | $533 | $1,120 | $1,061 | | Sublease income | $(151) | $(151) | $(301) | $(301) | | Total lease cost | $409 | $382 | $819 | $760 | Operating Lease Liabilities (in thousands) | Year | Amount | | :--- | :----- | | 2021 | $916 | | 2022 | $1,621 | | 2023 | $1,606 | | 2024 | $1,227 | | 2025 | $867 | | Thereafter | $291 | | Total lease payments | $6,528 | | Less imputed interest | $(816) | | Present value of lease liabilities | $5,712 | - Weighted average remaining lease term is 4.06 years, with a weighted average discount rate of 6.75% as of June 30, 2021[68] 11. Income Taxes The company reserves $49.4 million in U.S.-based deferred tax assets due to historical losses, with no CARES Act impact - The company reserves its U.S.-based deferred tax amounts, totaling $49.4 million as of June 30, 2021, due to a five-year historical cumulative loss position[72] - The CARES Act changes regarding NOL carrybacks and interest expense limitation had no impact on the company's tax provision[74] 12. Equity Transactions A public offering of 9.5 million shares raised $59.7 million in net proceeds, partially funding the Avast acquisition - A registered public offering on March 15, 2021, issued 9,520,787 common shares at $6.85 per share[75] - The offering generated net cash proceeds of approximately $59.7 million[75] - Proceeds from the offering were used to partially fund the acquisition of the Family Safety Mobile Business[75] 13. Subsequent Events No further disclosures are required for subsequent events as of the filing date - No further disclosures are required for subsequent events as of the filing date[76] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, liquidity, and the Avast acquisition's impact, focusing on digital lifestyle services and off-balance sheet arrangements Overview Smith Micro develops mobile experience software, anticipating increased family safety platform revenue from the Avast acquisition - Smith Micro develops software to simplify and enhance the mobile experience, providing solutions to leading wireless and cable service providers[81] - The company's portfolio includes products for family digital lifestyle, voice messaging, retail content display optimization, and performance analytics[81] - Future family safety platform revenue is expected to increase due to the Avast acquisition, partially offset by reduced SafePath subscribers[83] Results of Operations Revenues increased due to the Avast acquisition, but higher operating expenses and lower gross profit led to a net operating loss Key Financial Ratios (as % of Revenues) | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Revenues | 100.0% | 100.0% | 100.0% | 100.0% | | Cost of revenues | 21.1% | 9.8% | 18.0% | 9.3% | | Gross profit | 78.9% | 90.2% | 82.0% | 90.7% | | Selling and marketing | 30.5% | 20.2% | 33.3% | 20.6% | | Research and development | 50.1% | 35.6% | 48.2% | 31.7% | | General and administrative | 31.1% | 23.7% | 31.5% | 25.7% | | Operating income (loss) | (32.8)% | 10.7% | (31.0)% | 12.7% | | Net income (loss) | (32.8)% | 10.7% | (31.0)% | 13.0% | - Revenues increased by $3.0 million (23%) for the three months and $1.0 million (4%) for the six months ended June 30, 2021, primarily due to the Avast Family Safety Mobile Business acquisition[86][92] - Gross profit percentage decreased from 90% to 79% for the three months and from 91% to 82% for the six months, driven by higher costs associated with operating the acquired business and the SafePath platform[88][94] - Operating expenses (selling & marketing, R&D, G&A) significantly increased due to additional costs from the Avast acquisition, related intangible asset amortization, increased headcount, and transaction costs[89][90][91][95][96][97] Liquidity and Capital Resources Cash and working capital stood at $29.9 million and $34.2 million, respectively, with financing offsetting acquisition-driven investing outflows - As of June 30, 2021, cash and cash equivalents were $29.9 million, and working capital was $34.2 million[98] - Net cash provided by operating activities was $1.5 million for the six months ended June 30, 2021, a decrease from $4.3 million in the prior year[99][100] - Net cash used in investing activities was $57.1 million for the six months ended June 30, 2021, primarily for the Avast acquisition[102] - Net cash provided by financing activities was $59.8 million for the six months ended June 30, 2021, mainly from a common stock offering[104] Off-Balance Sheet Arrangements The company has no off-balance sheet arrangements and has recorded no liabilities for indemnities or guarantees - The company does not have any off-balance sheet arrangements[105] - No liability has been recorded for indemnities, commitments, and guarantees, which include intellectual property, facility leases, and director/officer indemnities[106] Recent Accounting Guidance Refer to Note 2 of the Consolidated Financial Statements for recent accounting guidance information - Refer to Note 2 of the Notes to the Consolidated Financial Statements for information on recent accounting guidance[107] Critical Accounting Policies and Estimates Financial statements rely on management estimates and judgments, with further details in Note 2 of the Consolidated Financial Statements - The preparation of financial statements requires management to make estimates and judgments that affect reported amounts[108] - Estimates are based on historical experience and various assumptions, with actual results potentially differing materially[108] - Refer to Note 2 of the Notes to the Consolidated Financial Statements for information on critical accounting policies and estimates[108] Item 4. Controls and Procedures Management confirmed the effectiveness of disclosure controls and procedures, with no material changes in internal control over financial reporting Evaluation of disclosure controls and procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2021 - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2021[110] - The controls ensure information required for Exchange Act reports is recorded, processed, summarized, and reported within specified time periods[110] Management's responsibility for financial statements Management is responsible for the integrity and objectivity of financial statements, prepared in conformity with U.S. GAAP - Management is responsible for the integrity and objectivity of all information presented in the report[111] - Consolidated financial statements are prepared in conformity with U.S. GAAP and reflect management's best estimates and judgments[111] Changes in internal control over financial reporting No material changes in internal controls over financial reporting occurred during the quarter ended June 30, 2021 - No material changes in internal controls over financial reporting occurred during the quarter ended June 30, 2021[113] PART II. OTHER INFORMATION This section covers legal proceedings, equity security sales, and a list of exhibits filed with the report Item 1. Legal Proceedings The company may face legal proceedings, but management anticipates no material adverse impact on financial results - The company may be involved in legal proceedings arising from business activities[116] - Management does not believe the ultimate disposition of these matters will have a material adverse impact on consolidated results of operations, cash flows, or financial position[116] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 90,274 shares at $5.37 per share for withholding taxes on restricted stock awards Issuer Purchases of Equity Securities (3 Months Ended June 30, 2021) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :---------------- | :------------------------------- | :--------------------------- | | April 1 - 30, 2021 | 29,312 | $5.65 | | May 1 - 31, 2021 | 31,068 | $5.05 | | June 1 - 30, 2021 | 29,894 | $5.43 | | Total | 90,274 | $5.37 | - Shares were repurchased for payment of withholding taxes in connection with the vesting of restricted stock awards and were subsequently cancelled[117] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including agreements, certifications, and XBRL documents - Exhibits include the Registration Rights Agreement, CEO and CFO certifications (Sarbanes-Oxley Act), and Inline XBRL documents[118] SIGNATURES The report is duly signed by the CEO and CFO of Smith Micro Software, Inc SIGNATURES The report was signed by William W. Smith, Jr., CEO, and Timothy C. Huffmyer, CFO, on August 12, 2021 - The report was signed by William W. Smith, Jr., CEO, and Timothy C. Huffmyer, CFO, on August 12, 2021[122]