Smith Micro Software, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company develops software for wireless carriers, cable operators, retailers, and consumers. Financial amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $11.78 | $6.53 | $31.07 | $18.93 |
| Gross profit | $10.77 | $5.55 | $28.17 | $15.53 |
| Gross margin | 91.4% | 85.0% | 90.7% | 82.0% |
| Operating income (loss) | $3.48 | $0.06 | $6.47 | $(1.89) |
| Net income (loss) | $3.57 | $(0.98) | $7.05 | $(5.54) |
| Diluted EPS | $0.09 | $(0.04) | $0.20 | $(0.28) |
- Revenue grew 81% in Q3 and 64% for the nine-month period. Management said growth excluding acquired ViewSpot was 61% and 45%, respectively.
- Wireless revenue was $11.61 million in Q3, up 85%; Graphics revenue was $0.17 million, down 31%. SafePath growth with Sprint was the primary driver. ViewSpot contributed approximately $1.3 million in Q3 revenue and $3.7 million for the nine months.
- Operating expenses rose to $7.29 million in Q3 from $5.49 million, including higher selling, development, and administrative costs. Management attributed increases mainly to ViewSpot and SafePath headcount, commissions, compensation, and acquisition-related costs.
- Cash and equivalents were $23.87 million at September 30, versus $12.16 million at year-end 2018; working capital was $30.6 million. The company reported no outstanding debt on the balance sheet, but had $6.96 million of operating lease liabilities ($1.15 million current).
- Cash-flow disclosure conflict: The cash-flow statement reports $4.83 million provided by operating activities for the first nine months of 2019, while MD&A says $4.8 million was used. The filing text does not reconcile this difference. Investing activities used $4.44 million, including the Smart Retail acquisition; financing activities provided $11.32 million, largely from warrant exercises.
Material changes and unusual items
- The January 2019 Smart Retail acquisition (branded ViewSpot) had a $9.10 million purchase price: $3.97 million cash and $5.13 million in common stock. The preliminary allocation included $5.23 million of intangibles and $4.11 million of goodwill.
- During Q3, warrant exercises generated approximately $11.4 million in cash. Common shares issued and outstanding increased to about 38.5 million at September 30 from 28.2 million at December 31, 2018, indicating significant dilution.
- The company sold certain Poser software assets in June for $0.5 million, recording a $0.48 million gain; $0.35 million was paid at closing, with the balance due in quarterly installments over three years.
- The company adopted the lease accounting standard in 2019, recording right-of-use assets and lease liabilities. It also extended its Pittsburgh headquarters lease and began an Aliso Viejo office lease.
- There was no Q3 warrant-liability fair-value charge; the warrants had been reclassified to equity in connection with the November 2018 stock offering. The 2018 comparison included a $3.13 million nine-month warrant-liability expense.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management stated it expects operating cash generation to cover obligations for the 12 months after issuance of the financial statements. It identified possible actions if performance weakens, including raising capital, reducing costs, obtaining a credit line, or selling or licensing intellectual property.
- Management considered historical operating losses and negative operating cash-flow trends, alongside recent improvement, in its going-concern evaluation. The filing does not report a conclusion that substantial doubt remains.
- Customer concentration is significant: Sprint and affiliates represented 83% of Q3 revenue and 80% of accounts receivable at September 30. The company warned that the proposed Sprint–T-Mobile combination could adversely affect revenue if the combined company reduces or ends purchases.
- Other cited risks include competition, changing technology and customer requirements, acquisition integration, dependence on strategic relationships, security and privacy incidents, access to capital, and intellectual-property and regulatory matters.
- The company had $52.4 million of U.S. deferred tax amounts reserved. Litigation and contractual indemnities were disclosed; management did not expect current legal matters to have a material adverse effect, but noted outcomes are uncertain.
Important facts for investors to verify
- Reconcile the operating cash-flow sign and amount reported in the cash-flow statement versus MD&A.
- Assess Sprint concentration, renewal and purchasing exposure, and the possible effect of the Sprint–T-Mobile combination.
- Track SafePath and ViewSpot revenue growth, including growth excluding the acquisition, and the sustainability of improved margins and profitability.
- Evaluate dilution from warrant exercises and the resulting share-count increase, alongside available liquidity and lease commitments.
- Monitor Smart Retail integration, goodwill and intangible-asset recoverability, and the company’s stated ability to fund operations without additional capital.