Smith Micro Software, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Smith Micro develops software for wireless and cable providers, including family safety, visual voicemail, and retail display solutions. Unless noted otherwise, amounts below are in millions; financial statement amounts are in thousands.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $10.3 | $12.7 | $21.3 | $25.4 |
| Gross profit / margin | $7.7 / 75.0% | $9.1 / 71.5% | $15.4 / 72.4% | $18.2 / 71.5% |
| Operating loss | $(3.2) | $(8.4) | $(10.2) | $(15.4) |
| Net loss | $(5.7) | $(8.5) | $(12.6) | $(15.5) |
| Loss per diluted share | $(0.09) | $(0.15) | $(0.21) | $(0.28) |
| Cash used in operating activities | Not separately provided | Not separately provided | $(7.5) | $(11.6) |
- At June 30, cash was $6.4, down from $14.0 at year-end 2022. Total assets were $94.7 and stockholders’ equity was $74.5.
- Current liabilities were $16.6 and current assets were $21.6. Convertible notes had a $9.0 gross balance and $7.1 net carrying value after discounts and issuance costs; the net amount is reported as current.
- Six-month investing cash flow was positive $0.1. The cash flow statement reports financing cash flow of $(0.2), while MD&A describes financing cash flow as positive $0.2; the filing text is inconsistent on this amount.
Material changes and business developments
- Q2 revenue fell 18% year over year; six-month revenue fell 16%. Management attributed the declines mainly to T-Mobile’s migration of legacy Sprint subscribers, affecting Family Safety and CommSuite.
- Q2 Family Safety revenue was $8.7, CommSuite $0.7, and ViewSpot $0.9. Three customers represented 40%, 37%, and 14% of Q2 revenue, underscoring significant customer concentration.
- Operating expenses declined to $11.0 in Q2 from $17.4, largely due to lower R&D costs following substantial completion of SafePath migration work, workforce reductions, and other cost measures. Management said actions had reduced quarterly costs by more than $4 compared with Q4 2022.
- Gross margin increased to 75.0% in Q2 from 71.5%, although gross profit declined with revenue.
- A Tier 1 customer’s Family Safety contract terminated effective June 30, 2023; Smith Micro expects to provide services during a post-termination period of up to 180 days. The customer represented approximately 34% of revenue for the six months ended June 30, 2023.
Debt, liquidity, outlook, and risks
- The senior secured convertible notes mature December 31, 2023, bear 6% compounding contractual interest, and had a stated effective interest rate of 155% for accounting purposes, reflecting discounts and issuance costs. The notes are secured by substantially all company assets and contain covenants; the company reported compliance at June 30. Principal amortization payments during the first half reduced principal by $6.0, with shares issued for payments. The company also prefunded shares for an August installment.
- Debt-related interest expense was $2.0 in Q2 and $4.3 for the first half. Q2 also included a $0.8 loss on debt derecognition. Fair-value changes in warrant and derivative liabilities contributed $0.4 of income in Q2 and $3.4 for the first half; these valuation gains are not operating cash flows.
- Common shares issued and outstanding rose to 65.2 million at June 30 from 56.2 million at December 31, 2022; the filing attributes 7.9 million shares issued during the first half to settlement and prepayment of notes. Weighted-average shares also increased year over year.
- Management stated it believes available liquidity will cover obligations over the next twelve months. No numerical revenue or earnings guidance was provided. Management expected a Tier 1 carrier to launch on SafePath in Q3 2023 after user acceptance testing and anticipated improved gross margins as acquired-platform transitions are completed.
- Management reported no goodwill or customer-relationship intangible impairment through June 30, but noted future impairment could result if projections or valuation assumptions change. Key disclosed risks include customer concentration, the terminated contract, the ability to raise capital, note maturity and secured-creditor remedies, dilution, profitability, and going-concern risk.
- The company reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter. It reported no material change to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Progress and revenue impact of the Tier 1 contract termination, including service revenue during the post-termination period and customer replacement or retention.
- Ability to fund operations and meet the December 2023 note maturity and remaining amortization obligations, including the effects of share-settled payments and potential dilution.
- Whether the anticipated Q3 SafePath launch occurred, and whether migrations deliver the expected cost savings and margin improvement.
- Customer concentration and legacy Sprint subscriber trends, which management identified as drivers of declining revenue.
- The conflicting MD&A and cash flow statement descriptions of first-half financing cash flow, and the company’s liquidity position after June 30.