Smith Micro Software, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet amounts are as of March 31, 2018. Unless noted otherwise, figures below are in U.S. dollars.
Business context and results
Smith Micro develops mobile, wireless, IoT, and graphics software. It reports revenue in Wireless and Graphics; operating expenses and assets are not allocated by segment.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $5.463 million | $5.576 million |
| Gross profit / margin | $4.154 million / 76% | $4.293 million / 77% |
| Operating loss | $2.021 million | $2.578 million |
| Net loss | $2.381 million | $2.880 million |
| Basic and diluted loss per share | $0.16 | $0.24 |
| Operating cash flow | $(1.859) million | $(1.714) million |
Wireless revenue increased 10.5% to $4.816 million, primarily on growth in Sprint-related CommSuite and SafePath products. Graphics revenue declined 46.8% to $647,000, primarily following termination of the Clip Studio Paint reseller agreement. Total revenue fell 2.0%. Gross margin decreased one percentage point; operating loss improved as operating expenses fell, including no restructuring expense versus $392,000 in Q1 2017. Interest expense was $171,000, and the new warrant liability generated a $139,000 fair-value expense.
Cash, debt, and liquidity
- Cash and cash equivalents were $3.654 million, versus $2.205 million at December 31, 2017. Working capital was $5.5 million.
- Operating cash use was $1.859 million; investing cash use was $16,000. Financing provided $3.324 million, including approximately $4.5 million net proceeds from the March common-stock offering, offset in part by repayment of $1.0 million of related-party notes and $141,000 of preferred dividends.
- At quarter-end, notes payable comprised $1.2 million of related-party long-term debt and $1.623 million of other long-term debt; no short-term related-party notes remained. Separately, the company recorded a $3.047 million warrant liability.
- On March 6, the company sold 2.86 million common shares for $5.0 million gross proceeds and issued matching warrants with a $2.17 exercise price. Certain related-party notes were extended to March 25, 2020.
- After quarter-end, on May 3, the company raised approximately $7.0 million gross, or $6.3 million net, in another private placement, also with matching warrants. The company said proceeds were intended for working capital, dividends, and debt-related payments.
Material changes, outlook, and risks
- Management cited operating losses for 12 consecutive quarters and negative operating cash flow for eight consecutive quarters in its going-concern assessment. It believed available capital, including the May financing, and expected operating cash generation would fund obligations for the 12 months following issuance. If projections weaken, it identified possible additional financing, cost cuts, a credit line, or product-line or intellectual-property dispositions. No revenue or earnings guidance was provided.
- Customer concentration is significant: Sprint and affiliates represented 75.3% of Q1 revenue (61.8% a year earlier); FastSpring represented 10.0%. These two customers accounted for 80% of receivables at March 31, 2018.
- The warrant liability is a Level 3 fair-value estimate based on an option-pricing model and unobservable inputs; management noted that stock-price volatility may cause material future changes.
- The resale registration statement for the September 2017 Series B offering became effective April 19, 2018, later than the specified deadline, resulting in $48,000 of liquidated damages; certain holders waived payment.
- The company reported no material litigation impact expected, but cautioned that litigation outcomes are unpredictable. It also disclosed indemnities and guarantees for which potential payments may be uncapped; no liability was recorded. U.S. deferred tax assets of $52.9 million remained reserved. Adoption of the revenue-recognition standard Topic 606 in Q1 had no financial-statement impact.
- Management reported disclosure controls effective as of March 31, 2018, and no material quarter-to-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether post-quarter financing and actual operating cash flows support management’s 12-month liquidity assessment.
- Sprint’s ongoing contribution to revenue and receivables, and the sustainability of Wireless growth amid customer concentration.
- Progress toward reducing losses and cash burn, particularly given continued negative operating cash flow.
- Future warrant-liability remeasurement, potential share dilution, and terms or maturity of outstanding debt.
- Whether registration obligations, contingent commitments, or litigation create additional payments or liquidity needs.