Smith Micro Software, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Smith Micro develops software for wireless and cable service providers, including family safety, visual voicemail, and retail solutions. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Revenue | $10.93 million | $12.74 million; down 14% |
| Gross profit / margin | $7.65 million / 70.0% | $9.10 million / 71.4% |
| Operating loss | $6.94 million | $7.04 million |
| Net loss | $6.89 million; $0.11 per share | $7.00 million; $0.13 per share |
| Cash used in operations | $5.34 million | $6.59 million |
| Cash and cash equivalents | $8.72 million | $14.03 million at Dec. 31, 2022 |
| Current assets / current liabilities | $23.23 million / $20.25 million | $26.51 million / $20.73 million at Dec. 31, 2022 |
Operating expenses fell to $14.58 million from $16.14 million. Research and development declined $1.40 million as SafePath development approached completion, while selling and marketing expense rose $0.57 million. Revenue mix included $9.09 million from Family Safety, $0.83 million from CommSuite, and $1.02 million from ViewSpot.
At March 31, the convertible notes had a gross principal balance of $13.50 million and a net carrying value of $9.62 million after unamortized discounts and issuance costs. The notes bear 6% compounding interest, mature December 31, 2023, and have monthly amortization payments scheduled from April through December. Q1 interest expense was $2.26 million, including substantial noncash discount and issuance-cost amortization. The company reported compliance with note covenants.
Material changes and unusual items
- Revenue fell $1.81 million, principally from Family Safety and CommSuite declines tied to T-Mobile’s migration of legacy Sprint subscribers.
- Q1 included a $2.98 million gain from changes in the fair value of warrant and derivative liabilities, a $0.63 million loss on debt derecognition, and $2.26 million of net interest expense. These items materially affected the net loss comparison and include noncash valuation and financing effects.
- The company issued shares in connection with note installments and prepayment: 3.24 million shares were recorded as issued in settlement and prepayment of notes during the quarter. Shares issued and outstanding were 60.60 million at March 31, versus 56.20 million at year-end.
- A Tier 1 U.S. customer gave notice that it would terminate its Family Safety contract effective June 30, 2023. The company performed an impairment review and recorded no goodwill or long-lived intangible asset impairment.
Outlook, management commentary, and risks
Management said it believed available liquidity would cover obligations as they became due over the next 12 months. It expected approximately $4 million of quarterly cost savings compared with Q4 2022, with the savings target expected to be achieved in Q2 2023. Following the customer termination notice, the company announced workforce actions expected to eliminate approximately 26% of its global workforce; related severance costs were recognized in Q1. Management also expected SafePath migration work to continue, with customer acceptance testing planned for Q2 and a potential carrier launch in the second half of 2023. These are expectations, not formal financial guidance.
Key risks include dependence on a small number of customers—three customers represented 37%, 37%, and 14% of Q1 revenue—customer contract losses, continuing operating cash use, and the near-term note maturity and scheduled repayments. The filing also identifies financing availability, potential dilution from convertible notes and warrants, competition, technology and privacy risks, and the company’s ability to achieve profitability and remain a going concern. Management reported disclosure controls were effective at March 31, 2023.
Important facts for investors to verify
- Progress and financial impact of the Tier 1 customer contract termination, including whether replacement revenue offsets the loss.
- Whether the anticipated $4 million quarterly cost savings were achieved, and the effect of workforce reductions on execution and service delivery.
- Cash burn, liquidity, and the company’s ability to make scheduled note payments through the December 2023 maturity.
- Share dilution from note settlements, conversions, and outstanding warrants; confirm updated share counts and instrument terms in subsequent filings.
- Customer concentration and revenue trends, particularly legacy Sprint migration effects and SafePath rollout timing.
- Assumptions underlying the no-impairment conclusion, given the customer termination and reliance on projected operating results.