Business context and reporting period
Smith Micro Software, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The company develops software for wireless providers, device manufacturers and enterprises, alongside consumer graphics products. Its reporting units are Wireless and Graphics.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $5.862 | $7.459 | $11.438 | $14.673 |
| Gross profit | $4.577 | $5.546 | $8.870 | $10.647 |
| Gross margin | 78.1% | 74.4% | 77.5% | 72.6% |
| Operating expenses | $6.196 | $9.455 | $13.067 | $18.234 |
| Operating loss | $(1.619) | $(3.909) | $(4.197) | $(7.587) |
| Net loss | $(2.574) | $(3.280) | $(4.806) | $(6.986) |
| Loss per share, basic and diluted | $(0.20) | $(0.28) | $(0.38) | $(0.60) |
| Cash used in operating activities | Not presented | Not presented | $(3.847) | $(3.697) |
At June 30, 2017, cash and cash equivalents were $2.377 million, working capital was $0.8 million, and stockholders’ equity was $0.468 million. Current assets totaled $7.853 million and current liabilities $7.076 million. Cash increased by $0.148 million from year-end, supported by $4.058 million in financing cash flow, including stock proceeds and insider loans.
Debt included $2.0 million of current secured related-party notes and long-term debt with a $2.316 million carrying value, net of discounts and issuance costs. The long-term notes had $4.0 million of aggregate principal and mature in September 2019; they bear 10% interest. Short-term insider notes totaling $2.0 million were refinanced on June 30 at 12%, secured by receivables and certain other assets, and due September 25, 2017. Contractual obligations totaled $15.795 million, including operating leases, notes payable and purchase obligations.
Material changes versus the prior comparable period
- Q2 revenue declined 21% year over year; first-half revenue declined 22%. Wireless revenue fell 27% in both comparisons, primarily due to lower Sprint revenue. Graphics revenue rose 7% in Q2 and was essentially flat for the first half.
- Gross margin improved to 78.1% in Q2 and 77.5% in the first half, attributed to cost reductions. Operating expenses fell 34% in Q2 and 28% in the first half, largely due to restructuring and lower headcount and other costs.
- Operating loss and net loss narrowed versus 2016, but losses continued. First-half operating cash use increased modestly from $3.697 million to $3.847 million.
- The company raised approximately $2.3 million gross, or $2.1 million net, in a May stock offering and private placements. It issued approximately 2.162 million shares in the offering and related transactions; common shares outstanding were 14.297 million at June 30, versus 12.298 million at December 31, 2016.
Outlook, risks and unusual items
- Going concern and liquidity: Management cited ten consecutive quarters of operating losses, six consecutive quarters of negative operating cash flow, and Nasdaq listing deficiencies. It believed cash from operations would cover obligations for the next 12 months, but identified substantial risks and possible mitigations including further cost cuts, additional financing, a bank line, product-line disposals or licensing/selling intellectual property.
- Nasdaq: The company received a May 8, 2017 notice for stockholders’ equity below the $2.5 million minimum and did not meet alternative continued-listing standards. It submitted a compliance plan and received an extension; delisting remained possible. The filing also cites a share-price deficiency against the $1.00 minimum.
- Restructuring: A 2017 plan targeted an approximately 16% headcount reduction and $0.9–$1.0 million of quarterly cost savings. First-half restructuring charges were $0.714 million, primarily severance, including $0.4 million of noncash stock-based compensation.
- Customer concentration: Sprint and affiliates generated 61.8% of Q2 revenue and 60.6% of first-half revenue. FastSpring accounted for 15.6% and 14.8%, respectively. Those two customers represented 76% of accounts receivable at June 30.
- Related-party financing: Short-term loans were provided by the CEO and a director, secured by company assets. The longer-term debt was also issued in part to the CEO and his spouse; its warrants are Level 3 fair-value liabilities. Q2 included a $0.561 million warrant-liability fair-value loss, while first-half results included a $0.147 million gain.
- Management reported no goodwill or long-lived asset impairment at June 30, 2017. It maintained a full valuation allowance against U.S. deferred tax assets, which totaled $76.3 million. No specific numerical revenue or earnings guidance was provided.
Important facts for investors to verify
- Progress against Nasdaq’s compliance plan and the company’s share-price and equity listing requirements.
- Whether operating cash flow, revenue trends and cash resources support management’s 12-month liquidity outlook, particularly as the $2.0 million short-term insider notes come due.
- Whether the targeted restructuring savings are achieved without impairing product development or customer retention.
- Revenue stability and receivables collection from Sprint and FastSpring, given the high customer concentration.
- The terms, repayment capacity and governance implications of related-party borrowing, as well as potential dilution from equity offerings and warrants.