Smith Micro Software, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited financial statements. Dollar amounts below are in millions unless stated otherwise.
Business context and financial results
Smith Micro develops wireless and graphics software. Wireless includes NetWise, CommSuite, SafePath and QuickLink; Graphics includes Poser, Moho, ClipStudio, MotionArtist and StuffIt.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $5.804 | $6.478 | $17.242 | $21.151 |
| Gross profit / margin | $4.645 / 80.0% | $4.680 / 72.2% | $13.515 / 78.4% | $15.327 / 72.5% |
| Operating loss | $(0.942) | $(4.557) | $(5.139) | $(12.144) |
| Net loss | $(1.670) | $(4.632) | $(6.501) | $(11.618) |
| Basic and diluted loss per share | $(0.12) | $(0.38) | $(0.49) | $(0.98) |
| Cash used in operating activities | Not provided for quarter | $(5.693) | $(7.995) |
At September 30, cash and cash equivalents were $3.939, compared with $2.229 at December 31, 2016; working capital was $2.8. Current assets were $9.871 and current liabilities $7.067. Debt carrying values included $2.2 of short-term related-party notes and $1.492 of long-term notes. Total contractual obligations were $13.403, including $8.543 of operating lease commitments.
Material changes versus comparable periods
- Q3 revenue fell 10% year over year; nine-month revenue fell 19%. The company attributed the decline primarily to lower Sprint activity. Wireless revenue declined 10% in Q3 and 22% year to date; Graphics revenue declined 10% in Q3 and 2% year to date.
- Gross margin improved to 80.0% in Q3 and 78.4% year to date, mainly reflecting cost reductions. Operating expenses fell substantially following restructurings: nine-month selling and marketing declined 37%, research and development 45%, and general and administrative 16%.
- Despite lower revenue, operating and net losses narrowed materially. Nine-month net cash used in operations improved to $5.693 from $7.995, while financing provided $7.471, chiefly from equity offerings and related-party borrowing.
- Cash increased by $1.710 during the first nine months. Investing used $0.068, primarily capital expenditures.
Outlook, risks, contingencies and unusual items
- Going concern: Management cited ten consecutive quarters of operating losses and six consecutive quarters of negative operating cash flow. It concluded that cash from operations should cover obligations for the next 12 months, but identified substantial risk factors and possible actions if results weaken, including additional financing, further cost reductions, asset sales or licensing intellectual property.
- Financing and listing: On September 29, the company issued $5.5 million of Series B preferred stock at stated value, consisting of approximately $2.7 million gross cash proceeds and conversion of $2.8 million of debt. The filing gives net cash proceeds as approximately $2.5 million in one note and $2.4 million in MD&A. The company said the transaction restored compliance with Nasdaq’s $2.5 million stockholders’ equity requirement; Nasdaq would continue monitoring compliance. The filing also cites a depressed share price and risk of delisting.
- The Series B preferred stock carries cumulative 10% dividends and is convertible at $1.14 per common share, representing approximately 4.82 million shares in aggregate before applicable limits. Certain triggering events permit holders to require cash redemption or increase the dividend rate to 12%.
- Related-party short-term notes were secured by accounts receivable and other assets, bore interest at 12% after refinancing (earlier notes bore 18%), and were due in January 2018. Lenders included the CEO/chairman and directors. Related-party debt conversion produced a $0.405 million extinguishment loss.
- Customer concentration is significant: Sprint and affiliates represented 58.8% of Q3 revenue and 60.0% year-to-date revenue; FastSpring represented 12.6% and 14.1%, respectively. These two customers accounted for 68% of accounts receivable at quarter-end.
- Restructuring activity resulted in $0.568 million of expense year to date; Q3 recorded $0.146 million of restructuring income, primarily from increased sublease income. Operating leases extend through 2022. Litigation and contractual indemnities are disclosed; no specific material litigation outcome is quantified.
- The company early adopted ASU 2017-11 retrospectively, changing accounting for certain warrants from liability to equity classification. The adoption did not affect 2017 net loss, but revised comparative 2016 results.
- Management reported disclosure controls were effective and no material changes in internal control over financial reporting during the quarter. No material changes to the 2016 Form 10-K risk factors were reported.
No specific revenue, earnings or cash-flow guidance is provided in the filing.
Most important facts for investors to verify
- Whether operating cash burn and losses decline enough to support management’s 12-month liquidity expectation, and whether additional financing is needed.
- The preferred offering’s actual net cash proceeds and related fees, given the filing’s $2.4 million versus $2.5 million figures.
- Nasdaq continued-listing compliance, including the stockholders’ equity and minimum share-price requirements.
- Sprint-related revenue trends, customer concentration, receivable collection and the company’s ability to diversify its customer base.
- Potential dilution, cumulative dividends, redemption triggers and other terms of the Series B preferred stock, alongside repayment or refinancing of remaining debt.