Smith Micro Software, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone Q4 filing; quarterly results below are unaudited. The company develops wireless and graphics software, including SafePath, CommSuite, NetWise, and consumer graphics products.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $26.285 million | $22.974 million |
| Gross profit / margin | $21.952 million / 83.5% | $17.892 million / 77.9% |
| Operating loss | $1.214 million | $5.674 million |
| Net loss | $2.740 million | $6.661 million |
| Loss per share, basic and diluted | $0.14 | $0.49 |
| Net cash used in operating activities | $2.874 million | $7.419 million |
- Wireless revenue rose 33.4% to $24.474 million, primarily from higher CommSuite demand and SafePath subscriber growth. Graphics revenue fell 60.9% to $1.811 million, primarily because of lower demand and the end of a reseller arrangement.
- At December 31, 2018, cash and cash equivalents were $12.159 million, versus $2.205 million a year earlier; working capital was $16.7 million. Total assets were $25.203 million, total liabilities $4.640 million, and stockholders’ equity $20.563 million.
- Interest-bearing notes payable were zero at year-end, following debt repayments. 2018 financing cash flow was $13.001 million, including $17.6 million of net common-stock offering proceeds, offset in part by debt repayments and preferred-stock dividends.
- Quarterly Q4 revenue was $7.352 million, operating income $0.679 million, and net income $2.801 million, or $0.10 per diluted share. The filing does not clearly explain the drivers of the Q4 net income in its quarterly-data summary.
Material changes and notable items
- Revenue increased 14.4% year over year and gross margin improved, while operating expenses declined modestly. Operating cash use also narrowed from 2017.
- Three 2018 private placements raised $17.6 million net in total. Common shares outstanding increased from 14.269 million at year-end 2017 to 28.241 million at year-end 2018, reflecting substantial dilution.
- The company entered an agreement in December 2018 to acquire ISM Connect’s Smart Retail product suite; the acquisition closed January 9, 2019. Disclosed purchase price was $9.103 million, comprising $3.974 million cash and $5.129 million common stock. The company’s unaudited pro forma FY 2018 results, assuming the acquisition occurred at the start of the year, were revenue of $30.086 million and net loss of $1.421 million.
- The company adopted ASC 606 revenue recognition in 2018; it reported no material impact. A $0.812 million warrant-liability fair-value expense was recorded for the year; warrants were reclassified from liabilities to equity in November 2018 after amendments.
Outlook, risks, and contingencies
- Management said cash and expected operating cash generation should cover obligations for the 12 months after issuance of the financial statements. It identified possible responses if performance weakens, including further cost reductions, additional financing, a bank credit line, asset or product-line dispositions, or licensing intellectual property. The company has a history of operating losses and negative operating cash flow; future profitability is not assured.
- Customer concentration is a major risk: Sprint and affiliates accounted for 81% of 2018 revenue and 82% of year-end accounts receivable. The proposed Sprint–T-Mobile combination could reduce or discontinue purchases. The filing states the transaction was expected to close in the first half of 2019.
- Other risks include intense competition, technology and customer-demand changes, customer pricing power, dependence on third-party licenses and platforms, cybersecurity and privacy requirements, acquisition integration, and potential NASDAQ listing compliance issues.
- Operating lease commitments totaled $5.705 million at year-end, partially offset by estimated sublease income. The company disclosed litigation and contractual indemnities, but recorded no liability for the described contingent indemnities and guarantees. Approximately $11.8 million of bank balances was uninsured.
- The auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor was not engaged to opine on internal-control effectiveness.
Important facts for investors to verify
- Whether Sprint/T-Mobile continued using Smith Micro’s solutions and how customer concentration evolved after the merger.
- Cash use, operating cash flow, and financing needs against management’s 12-month liquidity expectation.
- ViewSpot acquisition performance versus the disclosed purchase price and pro forma results, including integration costs and any additional share dilution.
- The drivers and sustainability of Q4 2018 net income, given the full-year net loss; the filing’s quarterly summary does not clearly reconcile the difference.
- Potential dilution from common-stock offerings, warrants, and remaining preferred-stock rights, including the preferred stock’s cumulative 10% dividend terms.