Smith Micro Software, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited consolidated results. Amounts below are in millions of dollars except per-share data, percentages, and where stated otherwise.
Business context
Smith Micro develops wireless connectivity and mobile software, hosted services, and consumer and professional graphics products. Its reportable business units are Wireless and Graphics. On April 7, 2016, it acquired Birdstep Technology AB for a net cash purchase price of $2.0 million; Birdstep results are included from the acquisition date.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $7.459 | $9.386 | $14.673 | $19.915 |
| Gross profit | $5.546 | $7.315 | $10.647 | $15.726 |
| Gross margin | 74.4% | 77.9% | 72.6% | 79.0% |
| Operating loss | $(3.909) | $(1.225) | $(7.587) | $(1.223) |
| Net loss | $(3.280) | $(1.231) | $(6.986) | $(1.241) |
| Net loss per share, basic and diluted | $(0.07) | $(0.03) | $(0.15) | $(0.03) |
| Cash used in operating activities | Not separately provided for the quarter | $(3.697) | $(1.506) |
- Q2 revenue fell 20.5% year over year; first-half revenue fell 26.3%. Wireless revenue was $6.303 million in Q2 and $12.276 million in the first half, down 20.1% and 28.2%, respectively. Graphics revenue also declined.
- Management attributed much of the Wireless decline to lower NetWise revenue, including reduced Sprint-related sales, and continuing declines in the legacy connection-manager business. First-half NetWise also declined due to Comcast; CommSuite revenue was lower as well.
- Gross margin contracted 3.5 percentage points in Q2 and 6.4 points in the first half. Operating expenses rose 10.7% in Q2 and 7.6% in the first half, with higher research and development spending among the main factors. Birdstep-related costs contributed to higher selling and marketing and R&D expenses.
- Q2 loss before tax was $3.269 million, including a $0.657 million gain from a change in fair value of a contingent liability related to the Pennsylvania grant. The grant correspondence stated that $0.7 million was earned and $0.3 million was to be reimbursed.
Financial position and liquidity
- At June 30, cash and cash equivalents were $6.410 million and short-term investments were $0.720 million, totaling $7.130 million; working capital was approximately $6.0 million. Cash and short-term investments totaled $12.897 million at December 31, 2015.
- Total assets were $18.417 million and stockholders’ equity was $7.631 million. Current liabilities were $7.816 million, including $1.069 million in deferred revenue.
- The company reported no debt. First-half operating cash use was $3.697 million, compared with $1.506 million in the prior-year period. Investing activities provided $1.281 million, mainly reflecting $3.360 million of short-term investment sales offset by the Birdstep acquisition and capital expenditures.
- Operating lease obligations were $11.388 million and purchase obligations were $0.870 million. The filing reports $4.4 million of remaining lease-commitment expense accrued under the 2013 restructuring plan, partially offset by estimated sublease income of $2.3 million.
Outlook, risks, and notable items
- Management said existing cash, cash equivalents, and short-term investments were expected to fund operations for at least five months, based on current revenue and profit projections. The company was seeking a $4–6 million debt instrument, which management expected could fund operations for at least twelve months. Financing was not assured; the filing warns that slower revenue or product acceptance could require additional funding, further restructuring, strategic alternatives, or curtailment of operations.
- Revenue timing and volume, particularly in Wireless, were described as difficult to predict. Sprint and affiliates represented 64.6% of Q2 revenue and 64.8% of first-half revenue. The two customers identified as representing at least 10% of revenue comprised 81% of accounts receivable at June 30, 2016.
- The company faced a NASDAQ minimum-bid-price compliance deadline of September 6, 2016. A proposed 1-for-3 or 1-for-4 reverse stock split was scheduled for shareholder consideration on August 15; delisting could reduce share liquidity and impair access to capital.
- After quarter-end, the company completed the acquisition of iMobileMagic on July 19, 2016. Consideration included €500,000 cash plus €20,238 cash adjustment, 814,339 initial shares valued at €500,000, and 1,628,676 escrow shares valued at €1.0 million, subject to the stated repurchase and indemnity terms. A reverse-split proposal was also disclosed as a subsequent event.
- The company maintained a full valuation allowance on U.S. deferred tax assets, which totaled $74.9 million. Management reported no material changes to previously disclosed risk factors other than the NASDAQ listing risk. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Whether the proposed $4–6 million financing was secured, on what terms, and whether it was sufficient to address cash burn.
- Subsequent revenue trends and customer activity, especially Sprint-related NetWise sales and the company’s high customer concentration.
- The outcome of the NASDAQ bid-price requirement and shareholder vote on the reverse stock split.
- Integration, costs, and financial contribution of Birdstep and iMobileMagic, including the terms and potential obligations attached to iMobileMagic’s escrow shares.
- Cash runway, lease-related commitments, and the $0.3 million Pennsylvania grant reimbursement.