Smith Micro Software, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 15, 2019. Smith Micro develops software and services for wireless carriers, cable operators, retail and consumer graphics markets. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $8.432 million | $5.463 million |
| Gross profit / margin | $7.516 million / 89.1% | $4.154 million / 76.0% |
| Operating expenses | $7.454 million | $6.175 million |
| Operating income (loss) | $62,000 | ($2.021 million) |
| Net income (loss) | $48,000 | ($2.381 million) |
| Basic and diluted EPS | $0.00 | ($0.16) |
| Cash used in operating activities | $654,000 | $1.859 million |
Revenue increased 54.3% year over year. Wireless revenue rose 69.7% to $8.172 million, while Graphics revenue fell 59.8% to $260,000. Revenue growth reflected increased SafePath subscribers and related revenue from Sprint, plus $786,000 from ViewSpot, acquired in January. Gross margin improved mainly because of lower variable costs and revenue mix. Selling and marketing, R&D and general and administrative expenses increased; Q1 included $104,000 of restructuring expense, primarily employee termination costs.
Liquidity, balance sheet and cash flow
- Cash and cash equivalents were $7.378 million at March 31, 2019, down $4.781 million from year-end. Working capital was $12.0 million.
- Operating cash use improved to $654,000 from $1.859 million. The main Q1 use was a $1.759 million increase in accounts receivable.
- Investing cash use was $4.084 million, including $3.974 million net cash consideration for Smart Retail and $110,000 of capital expenditures. Financing cash use was $43,000.
- The balance sheet reported no interest-bearing debt; current and long-term operating lease liabilities totaled $2.863 million. An additional office lease with approximately $1.5 million of lease liability was expected to commence in Q2 2019.
- Total assets were $33.598 million and stockholders’ equity was $26.038 million. Goodwill increased to $7.797 million, principally reflecting the acquisition.
Material changes and business developments
- Smith Micro acquired the Smart Retail product suite from ISM Connect on January 9, 2019, for $9.103 million: $3.974 million cash and $5.129 million in stock. The acquired product, branded ViewSpot, provides interactive in-store device demonstrations and analytics. Purchase-price allocation was preliminary and included $5.229 million in intangible assets and $4.112 million in goodwill.
- Common shares outstanding increased to approximately 32.065 million at quarter-end, including 2.700 million shares issued for the acquisition. The filing reports 32,067,956 shares outstanding as of May 13, 2019.
- Smith Micro adopted the new lease accounting standard in Q1, recording approximately $3.1 million of lease assets and liabilities at adoption and a $93,000 cumulative-effect equity adjustment. The adoption had no cash-flow impact and no material effect on net income or EPS.
- Revenue remained highly concentrated: Sprint and affiliates accounted for 77% of Q1 revenue, versus 75% a year earlier. The two customers identified in the filing represented 78% of accounts receivable at March 31, 2019.
Outlook, risks and contingencies
The company provided no quantified revenue or earnings guidance. Management stated it believed operating cash generation would be sufficient to meet obligations for the next 12 months from issuance of the financial statements. It also cited historical operating losses and negative operating cash flow, and listed potential responses if performance weakened: raising capital, short-term borrowing, restructuring or cost reductions, obtaining a bank credit line, or selling or licensing intellectual property.
Principal risks include dependence on a small number of customers, especially Sprint; the ability to grow and integrate acquisitions; competition and technology changes; capital availability; and the ability to achieve sustained profitability. Smith Micro reported no material litigation outcome expected, but noted that litigation is unpredictable. It had not recorded liabilities for certain indemnities and guarantees, many of which have no stated maximum exposure. The company reported no goodwill impairment at March 31, 2019.
Important facts for investors to verify
- Whether SafePath growth and Sprint-related revenue persist, given Sprint’s 77% share of quarterly revenue.
- ViewSpot’s ongoing revenue, profitability and integration progress; acquisition purchase accounting remained preliminary.
- Cash conversion and collection of receivables, given the $1.759 million quarterly increase in accounts receivable and continued operating cash outflow.
- Management’s 12-month liquidity assessment and whether additional financing or cost actions become necessary.
- The effect of lease commitments, including the additional lease expected to commence in Q2, and the company’s customer, litigation and contractual exposure.