Smith Micro Software, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Smith Micro develops software for wireless service providers and consumers, along with graphics and content-creation products. Financial statement amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $6.945 | $5.862 | $12.408 | $11.438 |
| Gross profit / margin | $5.829 / 83.9% | $4.577 / 78.1% | $9.983 / 80.5% | $8.870 / 77.5% |
| Operating income (loss) | $0.074 | ($1.619) | ($1.947) | ($4.197) |
| Net loss | ($2.177) | ($1.952) | ($4.558) | ($4.832) |
| Net loss per share | ($0.11) | ($0.15) | ($0.26) | ($0.38) |
Q2 revenue grew 18.5% year over year; first-half revenue increased 8.5%. Wireless revenue rose 40.5% in Q2 and 26.0% for the first half, primarily from Sprint-related growth in CommSuite and SafePath. Graphics revenue fell 64.4% in Q2 and 55.7% for the first half, primarily following the end of the Celsys reseller arrangement. Q2 operating results turned slightly positive, but the company remained loss-making for the first half. Net loss included a $2.085 million Q2 ($2.224 million first-half) noncash fair-value expense on warrants.
Cash, liquidity and debt
- Cash and cash equivalents were $8.745 million at June 30, 2018, versus $2.205 million at year-end 2017; reported working capital was $11.7 million.
- First-half operating cash use was $2.786 million, compared with $3.847 million in 2017. Investing cash use was $0.110 million, primarily capital expenditures.
- Financing provided $9.436 million, including net common-stock offering proceeds of $10.759 million, partly offset by $1.0 million of note repayments and $0.326 million of preferred dividends.
- Balance-sheet debt included $1.2 million of related-party long-term notes and $1.689 million of other long-term notes; the $1.0 million current related-party note reported at year-end was repaid. A $9.004 million warrant liability was recorded at June 30.
Material changes, outlook and risks
- Two 2018 private placements raised approximately $11.0 million net: March proceeds of approximately $4.5 million and May proceeds of approximately $6.3 million. Each offering included warrants to purchase shares equal to the shares sold, creating potential dilution. Common shares issued and outstanding increased from 14.27 million at year-end to 25.00 million at June 30.
- Management cited operating losses for 12 consecutive quarters and negative operating cash flow for nine consecutive quarters as going-concern risk factors. It believed recent capital raises and expected operating cash generation would fund obligations for the next 12 months from issuance of the statements. If projections weaken, potential actions include further cost reductions, additional financing, a bank line, or selling or licensing assets. No specific revenue or earnings guidance was provided.
- Customer concentration is significant: Sprint and affiliates accounted for 79.4% of Q2 revenue and 77.6% of first-half revenue; those customers represented 86% of accounts receivable at June 30. Dependence on Sprint is a material business risk.
- Warrant fair value is Level 3 and sensitive to stock-price volatility and valuation assumptions; future changes will affect reported earnings. The company also disclosed potential contractual indemnities and guarantees for which no liability was recorded, and noted that litigation outcomes are inherently uncertain.
- The company adopted revenue recognition standard Topic 606 in Q1 2018 with no financial-statement impact. Management reported disclosure controls were effective as of June 30 and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Confirm the sustainability and drivers of Sprint-related revenue growth, and assess the impact of customer concentration on future results and receivables.
- Review cash burn, liquidity forecasts and management’s stated going-concern assessment, including the assumptions behind expected operating cash generation.
- Assess potential dilution from the common-stock offerings and warrants, and monitor warrant valuation changes and related noncash earnings volatility.
- Track whether Wireless growth can offset the continuing decline in Graphics revenue after the Celsys arrangement ended.
- Verify debt maturities, related-party note terms, preferred-stock dividend obligations, and any developments in litigation or contingent commitments.