Smith Micro Software, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial figures are in millions unless noted. The company develops software and cloud services for wireless carriers, cable operators and consumers, with Wireless and Graphics businesses.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $10.854 | $6.945 | $19.286 | $12.408 |
| Gross profit / margin | $9.880 / 91% | $5.829 / 84% | $17.395 / 90% | $9.983 / 81% |
| Operating income (loss) | $2.932 | $0.074 | $2.994 | $(1.947) |
| Net income (loss) | $3.436 | $(2.177) | $3.484 | $(4.558) |
| Diluted EPS | $0.10 | $(0.11) | $0.10 | $(0.26) |
- Q2 revenue rose 56% year over year; six-month revenue rose 55%. Management reported growth excluding the ViewSpot acquisition of 37% and 36%, respectively.
- Wireless revenue was $10.637 million in Q2 and $18.809 million for the six months, driven primarily by SafePath growth and increased subscribers at Sprint. Graphics revenue declined to $0.217 million in Q2 and $0.477 million for the six months.
- Operating expenses increased year over year, including higher selling and marketing and R&D costs associated with ViewSpot and SafePath. Gross margin improved, which management attributed primarily to revenue mix and lower variable costs.
- Q2 net income included a $0.483 million gain on the Poser software asset sale. The prior-year comparison included a $2.085 million warrant-liability fair-value expense; those warrants were reclassified to equity in November 2018.
Cash, liquidity and obligations
- At June 30, cash and cash equivalents were $6.611 million, versus $12.159 million at year-end 2018; working capital was $15.7 million. Accounts receivable was $13.017 million, up from $7.130 million.
- Six-month operating cash flow was negative $1.561 million, despite reported net income, principally reflecting a $5.842 million increase in accounts receivable. Investing cash flow was negative $3.911 million, including the Smart Retail acquisition; financing cash flow was negative $0.076 million. Cash declined $5.548 million in the period.
- No conventional borrowings are listed on the June 30 balance sheet. Operating lease liabilities totaled $7.192 million, including $1.057 million current; lease obligations increased following office lease extensions and a new office lease.
- Management said it expected operating cash to cover obligations for the next 12 months, while identifying possible steps if results weaken: raising capital or short-term loans, cost reductions, a bank credit line, or sale/licensing of intellectual property. The filing discusses historical operating losses and negative operating cash flow in its going-concern evaluation.
Material changes, outlook and risks
- The January 2019 Smart Retail acquisition added the ViewSpot product suite for a purchase price of $9.103 million: $3.974 million cash and $5.129 million in stock. The preliminary allocation included $5.229 million of intangible assets and $4.112 million of goodwill.
- In June, the company sold certain Poser 3D animation software assets for $0.5 million; $0.35 million was paid at closing and the balance is payable quarterly over three years.
- After quarter-end, holders exercised approximately 4.9 million warrants from July 26–31, 2019, providing approximately $10.5 million in cash. This was not included in June 30 cash.
- Sprint and affiliates accounted for 81% of Q2 revenue and 79% for the first half; they represented 80% of accounts receivable at June 30. Management cited customer concentration, competition, technology changes, acquisition integration, financing availability, profitability and going-concern status, cybersecurity/privacy, intellectual property, and Nasdaq listing requirements among principal risks.
- No numerical revenue or earnings guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- The filing’s ViewSpot revenue disclosures differ: the revenue table reports $0.735 million for Q2 and $1.521 million for the first half, while MD&A says approximately $1.4 million and $2.4 million, respectively. The source text does not reconcile the amounts.
Investor facts to verify
- Reconcile the differing ViewSpot revenue figures and assess how much reported growth is organic versus acquisition-related.
- Monitor Sprint concentration, receivables collection and the effect of the $5.842 million first-half receivables increase on operating cash flow.
- Confirm the proceeds and share-count impact of the post-quarter warrant exercises, and the resulting cash runway.
- Assess whether operating cash generation supports management’s 12-month liquidity expectation, including lease payments and acquisition-related costs.
- Review the Smart Retail purchase-price allocation and the performance of its acquired intangible assets and goodwill.