Smith Micro Software, Inc. — FY2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; quarterly figures below identify the fourth quarter. Smith Micro develops white-label software for wireless carriers and cable providers, including SafePath family safety and connected-device services, CommSuite voice messaging, and ViewSpot retail demonstrations and analytics. Wireless was its sole reportable segment. The company continued winding down non-core Graphics products, selling Moho and Motion Artist in December 2020.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $51.3 million | $43.3 million |
| Gross profit / margin | $46.1 million / 89.9% | $39.4 million / 90.9% |
| Operating income | $3.5 million | $10.1 million |
| Net income | $4.2 million | $10.7 million |
| Operating cash flow | $7.9 million | $10.0 million |
| Cash and cash equivalents at year-end | $25.8 million | $28.3 million |
Revenue grew 18%, principally from SafePath subscriber levels entering the year and the Circle acquisition. Operating expenses rose substantially, including research and development expense, up 63% to $19.1 million, contributing to lower operating and net income despite revenue growth. Gross margin eased about one percentage point.
FY2020 investing cash use was $14.7 million, including $13.5 million paid for Circle; financing provided $4.2 million, mainly from warrant exercises. Cash decreased $2.5 million during the year. Year-end working capital was $30.9 million; current assets were $39.3 million and current liabilities $8.4 million. Total liabilities were $14.2 million, including $6.2 million of operating lease liabilities. The balance sheet does not separately identify conventional borrowings.
Fourth quarter: revenue was $12.4 million versus $12.3 million in Q4 2019; gross profit was $11.0 million versus $11.3 million. Operating result was a loss of $12,000 versus income of $3.6 million, while net income was $580,000 versus $3.7 million. Diluted EPS was $0.01 versus $0.09.
Material changes and notable items
- SafePath revenue rose to $28.0 million from $17.8 million; CommSuite was $18.2 million versus $18.7 million; ViewSpot was essentially flat at $4.2 million. Netwise revenue fell to $0.2 million from $1.6 million.
- T-Mobile, including Sprint before its merger with T-Mobile, represented 81% of FY2020 revenue and 91% of year-end accounts receivable, compared with 84% and 92%, respectively, in 2019. The Sprint/T-Mobile merger and transfer of Boost Mobile assets to DISH created contract and product-roadmap uncertainty.
- The February 2020 Circle operator-business acquisition cost $13.5 million in cash and included customer contracts and parental-control software. Circle-related integration and amortization contributed to higher costs.
- The company recorded a $711,000 gain on the Moho and Motion Artist sale. It also received $4.2 million from warrant exercises. Outstanding common shares increased to 41.2 million at year-end from 38.5 million a year earlier.
Outlook, risks, and contingencies
The filing provides no quantified revenue or earnings guidance. Management said cash and expected operating cash flow should meet capital needs for the next twelve months, while noting that additional financing or cost reductions could be required if performance falls short of plans. It reported that the business remained profitable and generated operating cash in 2020, but also described profitability and going-concern ability as risks.
Management attributed SafePath subscriber pressure during the second through fourth quarters to COVID-19-related economic slowdown and retail-store closures, alongside the T-Mobile/Sprint merger. The duration and financial effects of the pandemic remained uncertain. Other principal risks include customer concentration, competition and pricing pressure, rapid technology change, security and privacy incidents, dependence on third-party platforms and hosting, and retention of key technical staff.
Subsequent to year-end, on March 8, 2021, Smith Micro agreed to acquire Avast’s Family Safety Mobile Software Business for $66 million, with part of the consideration potentially payable in company stock and the remainder in cash. Closing was expected in April 2021, and the company launched an underwritten public stock offering to help fund the acquisition. The filing reports legal proceedings but says management did not expect their disposition to materially affect results; outcomes remain uncertain. Certain contractual indemnities and guarantees are not recorded as liabilities, and their maximum potential payments may be unlimited.
Important facts for investors to verify
- Progress and contract terms with T-Mobile and DISH, and the effect of the merger and Boost divestiture on revenue and renewals.
- SafePath subscriber trends, customer adoption of the Circle software, and whether growth can offset elevated operating expenses.
- Funding, share dilution, closing conditions, and integration costs for the proposed $66 million Avast acquisition.
- Cash generation, liquidity, lease commitments, and management’s assumptions supporting its twelve-month funding outlook.
- Exposure to unrecorded indemnities, customer concentration, and cybersecurity, privacy, and COVID-19-related risks.