Smith Micro Software, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. Smith Micro develops wireless and mobile software and consumer/professional graphics products. Amounts below are in millions of dollars, except per-share data.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $7.214 | $10.529 |
| Gross profit / margin | $5.101 / 70.7% | $8.411 / 79.9% |
| Operating income (loss) | $(3.678) | $0.002 |
| Net income (loss) | $(3.706) | $(0.010) |
| Net loss per share, diluted | $(0.08) | $(0.00) |
| Cash flow from operations | $0.257 | $0.735 |
- Revenue fell 31.5% year over year. Wireless revenue declined 35.2% to $5.973 million; Graphics revenue fell 5.3% to $1.241 million.
- Gross margin contracted 9.2 percentage points, primarily due to lower revenue and product mix. Operating expenses rose to $8.779 million from $8.409 million, including increased research and development spending.
- At March 31, cash and cash equivalents were $11.398 million and short-term investments were $1.679 million, totaling $13.077 million. Working capital was $11.3 million. Total assets were $21.821 million and stockholders’ equity was $10.585 million.
- Operating cash flow was positive despite the net loss, supported chiefly by a $2.686 million reduction in accounts receivable and a $0.667 million increase in deferred revenue. Cash increased $2.579 million, including $2.401 million from sales of short-term investments.
- The company reported no debt. Contractual obligations included $8.987 million of operating lease payments and $1.295 million of purchase obligations. The balance sheet included $8.126 million of current liabilities.
Material changes and management commentary
- The principal revenue decline was in Wireless: NetWise revenue decreased $2.0 million, primarily from Sprint and Comcast; QuickLink declined $0.8 million and CommSuite declined $0.4 million. Management said future revenue volume and timing for new wireless products are difficult to predict.
- Selling and marketing expense increased 8.2% to $2.370 million, mainly from consulting and advertising. Research and development expense increased 17.4% to $3.923 million, mainly due to added headcount for new projects. General and administrative expense decreased 13.6% to $2.486 million.
- Management believed existing cash, cash equivalents and short-term investments would fund operations for at least the next 12 months, based on current revenue and profit projections. If product and strategy acceptance is slower than anticipated, the company may need additional capital, further restructuring, or to review product-line alternatives; funding may not be available on acceptable terms.
- On April 7, 2016, after quarter-end, Smith Micro completed its acquisition of Birdstep Technology AB for a net $2 million in cash. Approximately 21 employees were to continue with the subsidiary.
Risks, contingencies and unusual items
- Customer concentration is significant: Sprint and affiliates represented 65.0% of Q1 revenue; FastSpring represented 13.6%. The three listed customers accounted for 84% of accounts receivable at March 31, 2016.
- The company had $8.987 million of remaining operating lease commitments. A portion of lease expense was accrued under the 2013 restructuring plan, partially offset by estimated sublease income.
- A $1.0 million Pennsylvania employment grant remained conditional; the extended deadline to meet the employment commitment was April 30, 2016. Failure to meet conditions could require repayment of a pro-rata portion.
- The company maintained a full valuation allowance against $74.9 million of U.S. deferred tax assets, citing its cumulative loss history and uncertainty about near-term taxable income.
- Management reported no material change in risk factors from the 2015 Form 10-K, and stated disclosure controls were effective. It identified potential Nasdaq delisting if the stock failed to trade above $1.00 for 10 consecutive business days or other listing requirements were not met.
- Management did not expect pending legal matters to materially affect results, cash flows, or financial position, but noted litigation outcomes are inherently unpredictable. No liability was recorded for certain indemnities, guarantees and commitments.
Important facts for investors to verify
- Whether Wireless revenue, particularly sales tied to Sprint and NetWise, stabilizes or continues to decline.
- Whether the stated cash runway remains adequate given operating losses, cash flow, lease and purchase commitments, and the $2 million Birdstep acquisition payment.
- Birdstep’s contribution to revenue, costs and cash use after closing; the filing provides no quantified forecast for the acquisition.
- Whether the company met the Pennsylvania grant employment conditions by the extended April 30, 2016 deadline and whether any repayment was required.
- Potential dilution and share-count effects: shares issued and outstanding rose to 46,968,272 at March 31 from 45,729,272 at year-end; the filing also reports restricted-stock grants.