Smith Micro Software, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Smith Micro develops mobile software for wireless providers, including family safety, visual voicemail, and retail experience solutions.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $11.0m | $11.7m | $32.3m | $37.1m |
| Gross profit / margin | $8.5m / 77.0% | $8.1m / 69.0% | $23.9m / 74.0% | $26.2m / 70.7% |
| Operating loss | $(2.2)m | $(8.4)m | $(12.4)m | $(23.8)m |
| Net loss | $(5.1)m | $(5.8)m | $(17.7)m | $(21.3)m |
| Loss per share | $(0.08) | $(0.10) | $(0.28) | $(0.39) |
- Q3 operating expenses were $10.7m, down from $16.4m, including R&D of $3.7m versus $7.4m. Management attributed the reductions primarily to workforce cuts and completion of SafePath migrations.
- Interest expense was $1.4m in Q3 and $5.7m year to date. Q3 also included a $1.6m loss on debt derecognition; the nine-month loss was $3.0m. Fair-value changes in warrant and derivative liabilities were a gain of $0.1m in Q3 and $3.5m year to date.
- Operating cash used was $6.0m for the nine months, versus $14.5m in 2022. Investing activities provided $0.1m and financing activities used $0.2m. Cash declined by $6.0m to $8.0m.
- At September 30, current assets were $21.2m and current liabilities $12.2m. Convertible notes, net, were $3.5m, classified as current; the notes are senior secured and mature December 31, 2023. Total lease liabilities were $3.2m. Management stated it expects to meet obligations as due over the next 12 months.
Material changes and business developments
- Revenue fell 6% in Q3 and 13% year to date. The principal stated driver was T-Mobile’s migration of legacy Sprint subscribers, reducing Family Safety and CommSuite revenue. Q3 Family Safety revenue was $9.2m and CommSuite $0.7m.
- Gross margin improved in Q3 as cost of revenue declined; year-to-date gross profit nevertheless decreased with lower revenue.
- A Tier 1 customer’s Family Safety contract terminated effective June 30, 2023, with service continuing through a post-termination period ending in November 2023. That customer represented approximately 36% of nine-month revenue. Management expects revenue to decline in Q4 2023 and expects no further material revenue from the contract in Q1 2024.
- Management reported approximately $6.6m in quarterly cost savings in Q3 versus Q3 2022, following workforce reductions of approximately 26% and other cost measures. Another U.S. Tier 1 carrier completed migration to SafePath during Q3; management sees potential to grow subscriber bases and revenue at migrated carriers.
- The company issued 11.4m shares for note amortization installments during the nine months, reducing note principal by $10.9m. Common shares outstanding rose from 56.2m at December 2022 to 70.4m at September 2023. The November installment was partly prefunded with shares.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance was provided. Management’s stated near-term outlook is for lower Q4 revenue and no further material Q1 2024 revenue from the terminated customer contract.
- Customer concentration is significant: three customers generated 45%, 32%, and 10% of Q3 revenue; three customers represented 33%, 32%, and 18% of accounts receivable at quarter-end.
- The 2022 convertible notes carry 6% contractual compounding interest, with a disclosed 155% effective interest rate reflecting discounts and issuance costs. Their terms include default-rate interest, change-in-control provisions, and security interests in substantially all company assets. The company reported covenant compliance at September 30, 2023.
- Management identified risks including customer concentration, continued legacy Sprint migration, ability to raise capital and achieve profitability, dilution from notes and warrants, and potential effects of customer or market changes. Goodwill and long-lived assets could be impaired if projections or valuation assumptions deteriorate; no impairment was recorded through September 30.
- The filing describes litigation and contractual indemnities but does not identify a specific proceeding expected by management to materially affect results. No liability was recorded for the described indemnities and guarantees. Management reported disclosure controls as effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Timing and revenue impact of the terminated Tier 1 customer relationship, including the Q4 decline and Q1 2024 transition.
- Cash burn, liquidity needs, and repayment or settlement of the remaining convertible notes at maturity, including any subsequent events.
- Future revenue trends at the migrated SafePath carrier customers and the extent to which they offset customer losses and legacy Sprint declines.
- Further share issuance, dilution, and potential warrant or convertible-note effects on existing shareholders.
- Whether customer concentration, operating forecasts, or valuation assumptions change enough to affect goodwill and intangible asset recoverability.