Smith Micro Software, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. The company develops software and cloud-based services for wireless and cable providers, including SafePath, CommSuite, and ViewSpot.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $11.4 million | $13.3 million |
| Gross profit / gross margin | $9.8 million / 86.4% | $12.1 million / 91.2% |
| Operating income (loss) | $(3.2) million | $2.0 million |
| Net income (loss) | $(3.2) million; $(0.07) per diluted share | $2.0 million; $0.05 per diluted share |
| Net cash provided by operating activities | $3.7 million | $2.3 million |
- At March 31, cash and cash equivalents were $89.2 million, working capital was $90.1 million, and total assets were $129.7 million.
- No borrowings are reported on the balance sheet. Operating lease liabilities totaled $6.1 million, including $1.4 million current.
- Cash increased by $63.5 million during the quarter, mainly from $59.9 million of net proceeds from a March common-stock offering. The offering issued about 9.52 million shares at $6.85 per share.
- Shares outstanding were 51.6 million at March 31 and 53.2 million as of May 6, 2021.
Material changes and unusual items
- Revenue declined 15% year over year. SafePath revenue was $6.3 million versus $7.8 million; CommSuite was $4.1 million versus $4.5 million; ViewSpot increased to $0.9 million from $0.7 million.
- Management attributed lower revenue primarily to fewer SafePath subscribers, which it associated with pandemic-related store closures and a major customer’s reduced marketing following a merger. A full quarter of Circle operator business revenue and a $0.6 million acceleration of deferred revenue partly offset the decline.
- Gross margin fell as revenue decreased and costs rose, including costs of maintaining the newer SafePath platform and integrating the Circle operator business. Research and development expense increased to $5.2 million from $3.7 million, primarily due to headcount and external development costs.
- Selling and marketing expense included a $1.5 million impairment charge and accelerated amortization of a Circle-related customer-contract intangible asset, following notice of early termination of that customer contract. The contract terminated effective April 15, 2021; the company expects wind-down services through Q2 2022 and expects to amortize the remaining $0.4 million asset over the remaining service period.
- Customer concentration was significant: three customers generated 91% of Q1 2021 revenue, compared with one customer generating 91% in Q1 2020. Two customers represented 80% of accounts receivable at March 31, 2021.
Outlook, risks, and contingencies
- No numerical revenue or earnings guidance is provided. Management expects family-safety platform revenue to increase with the acquired Avast Family Safety Mobile business, partly offset by fewer SafePath subscribers and reduced marketing initiatives from its largest customer.
- On April 16, 2021, Smith Micro completed the Avast Family Safety Mobile acquisition. The filing reports an aggregate purchase price of $66.0 million, net of a $5.0 million escrow, consisting of $51.1 million cash and 1,460,131 shares valued at $8.4 million. MD&A separately says $56.1 million cash was paid, excluding working-capital and other closing adjustments; investors should reconcile these disclosures. The company said the March offering proceeds helped fund the acquisition.
- Management said COVID-19’s duration and severity and its effects on customers remain uncertain. It may defer nonessential capital expenditures, reduce operating costs, or curtail discretionary spending if needed.
- Disclosed risks include dependence on a small number of customers, customer relationships and marketing decisions, acquisition integration and realization of benefits, competition, technology and security/privacy risks, and the ability to remain profitable and raise capital. The company reported no material litigation outcome expected but cautioned that litigation is unpredictable; it also disclosed uncapped or indefinite potential indemnity and guarantee obligations for which no liability was recorded.
- The company reported effective disclosure controls as of March 31, 2021, and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track SafePath subscriber levels and the largest customer’s marketing activity, as well as the impact of customer concentration on revenue.
- Reconcile the Avast acquisition’s cash consideration disclosures and assess post-acquisition liquidity, integration costs, and expected contribution.
- Monitor the terminated Circle customer contract’s wind-down revenue, remaining intangible amortization, and any further impairment.
- Assess whether operating cash generation is sustainable given the quarterly net loss and the contribution from reduced accounts receivable.
- Evaluate dilution from the equity offering and acquisition shares, and the company’s lease and other contingent obligations.