Smith Micro Software, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report; the provided filing text does not give a standalone fourth-quarter financial summary.
Business context
Smith Micro develops wireless software, including family safety and parental-control services (SafePath), visual voicemail and messaging (CommSuite), and retail display management (ViewSpot). It reports one operating segment, Wireless, and sells primarily to wireless carriers and cable operators.
In April 2021, the Company acquired Avast’s Family Safety Mobile Business, expanding its carrier customer base and family-safety platform. The acquisition’s stated purchase price was $72.7 million including contingent consideration; the Company describes the base purchase price as $66 million. It was funded partly by a March 2021 stock offering that generated $59.7 million net proceeds.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $58.4 million | $51.3 million |
| Gross profit / gross margin | $45.7 million / 78.3% | $46.1 million / 89.9% |
| Operating income (loss) | $(30.9) million | $3.5 million |
| Net income (loss) | $(31.0) million | $4.2 million |
| Diluted earnings (loss) per share | $(0.61) | $0.10 |
| Operating cash flow | $(12.9) million | $7.9 million |
| Cash and cash equivalents at year-end | $16.1 million | $25.8 million |
Revenue increased 14%. Family Safety revenue rose to $41.0 million from $28.0 million, while CommSuite revenue fell $4.4 million (24%) to $13.7 million, primarily as T-Mobile migrated legacy Sprint customers. ViewSpot revenue was $3.6 million, down from $4.2 million.
Gross margin declined as the Company maintained multiple family-safety platforms during integration. Operating expenses increased $34.1 million to $76.7 million, including a $12.9 million contingent-consideration charge, $8.1 million of intangible amortization, and higher acquisition-related, staffing, and development costs.
Investing activities used $57.5 million, primarily for the acquisition. Financing activities provided $60.7 million, largely from the stock offering. Year-end net working capital was $19.3 million. The balance sheet reported $5.9 million of operating lease liabilities; the filing does not report borrowings or other funded debt. Management said cash and expected operating cash generation should meet capital needs for the next 12 months, while noting potential need for additional financing if performance falls short.
Material changes, outlook, and risks
- Acquisition and integration: The acquired business contributed $19.7 million of revenue and $6.2 million of cost of revenue from April 16 through year-end. The Company recorded and paid $14.0 million of acquisition earn-out consideration during 2021, including the $12.9 million charge after a customer contract extension became probable.
- Management outlook: The Company targeted migration of its largest family-safety customers to SafePath over the following year. It expected completed migrations to reduce development and platform costs, improve gross margin, and support family-safety revenue growth. These are expectations, not quantified guidance.
- Product and customer exposure: Management expected the CommSuite deployment tied to Sprint’s legacy premium visual voicemail service to reach end-of-life sometime in 2022. The two largest customers generated 80% of 2021 revenue (56% and 24%), versus one customer at 81% in 2020.
- Other notable items: The Company recorded a $1.5 million impairment charge on a customer-contract intangible asset following a contract termination notice. No goodwill impairment was recorded. A $57.3 million valuation allowance remained against U.S. deferred tax assets.
- Key risks: Customer concentration and carrier decisions; acquisition integration and platform migration; ongoing losses and cash use; competitive and pricing pressure; cybersecurity, privacy, and service interruptions; technology and app-store dependencies; COVID-19 effects; and the potential need to raise capital. Management also identified possible cost reductions or restructuring if revenue targets are not met.
- Contingencies and controls: Management said pending legal matters were not expected to have a material adverse effect, while acknowledging litigation uncertainty. Disclosure controls and internal control over financial reporting were assessed as effective; the independent auditor did not audit internal control effectiveness.
Most important facts for investors to verify
- Whether SafePath migrations were completed on schedule and produced the expected cost savings and margin recovery.
- Customer and subscriber trends, especially the largest two accounts and the remaining Sprint/T-Mobile legacy deployments.
- Cash burn, liquidity, and any subsequent financing needs; also review the acquisition’s full consideration and earn-out accounting.
- CommSuite’s expected 2022 end-of-life impact and any replacement revenue growth from Family Safety or other products.
- Whether acquisition-related intangible assets and goodwill remain recoverable, and how the large tax valuation allowance may change.