Business context and reporting period
Smith Micro Software, Inc. develops wireless software, including family safety, visual voicemail and retail demonstration solutions. This unaudited Form 10-Q covers the three and six months ended June 30, 2022. The company reports one operating segment, Wireless.
Financial performance and position
Amounts below are in millions, except per-share data and margins.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $12.674 | $15.919 | $25.409 | $27.300 |
| Gross profit / margin | $9.057 / 71.5% | $12.561 / 78.9% | $18.156 / 71.5% | $22.397 / 82.0% |
| Operating loss | $(8.479) | $(5.210) | $(15.459) | $(8.447) |
| Net loss | $(8.493) | $(5.203) | $(15.496) | $(8.428) |
| Loss per diluted share | $(0.15) | $(0.10) | $(0.28) | $(0.17) |
| Operating cash flow | Not separately stated | Not separately stated | $(11.627) | $1.496 |
At June 30, cash and cash equivalents were $5.357 million, down from $16.078 million at December 31, 2021. Current assets were $19.433 million and current liabilities $10.160 million. The company had no borrowings under its $7 million secured revolving credit facility at quarter-end; net availability was $6.973 million after letters of credit. The facility matured March 31, 2023, but was terminated August 11, 2022. There was no other conventional borrowing outstanding at June 30; operating lease liabilities totaled $5.040 million.
Material changes versus prior comparable periods
- Q2 revenue fell 20%, primarily from a $2.5 million decline in CommSuite and a $1.0 million decline in legacy family safety revenue. Management attributed the CommSuite decline to T-Mobile’s migration of legacy Sprint subscribers and winding down Sprint’s premium voicemail service.
- For the first half, revenue fell 7%; the approximately $5.2 million CommSuite decrease was partly offset by $3.1 million growth in Family Safety and $0.3 million in ViewSpot.
- Gross margin declined in both comparisons as the company maintained multiple family safety platforms during customer migrations and absorbed costs from the acquired Family Safety Mobile Business.
- First-half R&D expense rose $3.7 million, principally from personnel and contractor costs supporting SafePath development. Q2 selling and marketing included $0.7 million of severance-related charges, including stock compensation. Q2 G&A declined as prior-year acquisition costs subsided.
- Two customers represented 44% and 37% of Q2 revenue; three customers represented 47%, 26% and 14% of receivables at June 30.
Outlook, risks and unusual items
- Management expects overall family safety platform revenue to increase in future quarters, citing its position with all three U.S. Tier 1 wireless carriers. It expects SafePath development costs to begin declining in Q3 2022 and certain acquired-platform costs to fall as migrations are completed over the following year, supporting improved gross margins. No numerical revenue or earnings guidance is provided.
- Management expected the CommSuite deployment to reach end-of-life before the end of 2022. Migration timing and customer adoption remain important uncertainties.
- On August 11, 2022, after quarter-end, the company entered into a $15 million senior secured convertible note placement, convertible at $3.35 per share subject to adjustment, with warrants for 2,238,805 shares at $3.35. It also agreed to sell 1,132,075 shares at $2.65 per share with an equivalent number of warrants, exercisable after six months at $2.65. These transactions introduce secured debt, potential dilution and financing-related risks.
- The company reported a $57.3 million reserve against U.S.-based deferred tax amounts and a cumulative-loss history that limits reliance on future taxable-income projections. Litigation and contractual indemnities are disclosed; management did not expect litigation to have a material overall impact, but noted outcomes are unpredictable.
- Management identified risks including customer concentration, ability to raise capital, profitability and going-concern uncertainty, competition, technology and service interruptions, and privacy/security matters. Disclosure controls were deemed effective as of June 30, 2022.
Important facts for investors to verify
- Progress and timing of SafePath migrations, including expected effects on revenue, development expense and gross margin.
- Persistence of CommSuite revenue declines as T-Mobile winds down legacy Sprint services.
- Cash burn, liquidity needs and the terms, repayment obligations, security interests and dilution potential of the August 2022 financing.
- Customer concentration and the impact of any changes in major carrier relationships.
- Whether management’s expected family safety growth and cost reductions materialize; the filing provides no quantified guidance.