Smith Micro Software, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial amounts below are in millions unless otherwise noted. The company develops mobile and wireless software and services, alongside consumer graphics software.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $6.525 | $5.804 | $18.933 | $17.242 |
| Gross profit / margin | $5.546 / 85.0% | $4.645 / 80.0% | $15.529 / 82.0% | $13.515 / 78.4% |
| Operating income (loss) | $0.055 | $(0.942) | $(1.892) | $(5.139) |
| Net loss | $(0.983) | $(1.670) | $(5.541) | $(6.501) |
| Net loss per share | $(0.04) | $(0.12) | $(0.28) | $(0.49) |
- Q3 revenue increased 12.4%; nine-month revenue increased 9.8%. Wireless revenue drove growth, while Graphics revenue declined.
- Operating expenses declined year over year, which management attributed primarily to cost reductions announced in Q2 2018. Interest expense also decreased with lower outstanding debt.
- Q3 included a $0.902 million noncash loss from revaluing warrants; the nine-month warrant fair-value loss was $3.126 million. These charges contributed to net loss despite improved operating results.
- At September 30, cash and cash equivalents were $8.387 million, working capital was $11.9 million, and total assets were $20.926 million. Current liabilities were $3.540 million.
- Book debt consisted of $1.2 million of related-party long-term notes and $1.755 million of other long-term notes; the $9.918 million warrant liability is a separate fair-value liability, not borrowing. The warrant liability is Level 3 and sensitive to valuation assumptions and stock-price movements.
- Nine-month operating cash use was $3.030 million, versus $5.693 million in 2017; investing cash use was $0.172 million. Financing provided $9.384 million, including net common-stock offering proceeds. Cash rose from $2.205 million at year-end 2017 to $8.387 million.
Material changes and business drivers
- Wireless revenue rose 34.0% in Q3 and 28.7% for the first nine months, largely from Sprint-related growth in CommSuite and SafePath. Platform revenue increased to $5.908 million in Q3 from $3.603 million a year earlier.
- Graphics revenue fell 78.3% in Q3 and 62.7% year to date, primarily following the end of the Celsys reseller arrangement and associated Clip Studio distribution rights.
- Sprint and affiliates accounted for 86% of Q3 revenue and 81% of nine-month revenue, versus 59% and 60%, respectively, in the comparable 2017 periods. Two customers listed in the filing represented 88% of accounts receivable at September 30, 2018.
- March and May private placements generated approximately $10.7 million in combined net proceeds and issued 6.027 million common shares, each offering also including warrants. Common shares outstanding increased from 14.269 million at December 31, 2017 to 25.005 million at September 30, 2018.
- Related-party short-term notes of $1.0 million were repaid; certain related-party notes were extended to March 2020. Preferred-stock dividends paid during the first nine months were $0.370 million.
Outlook, risks and unusual items
- No specific revenue, earnings, or cash-flow guidance is provided. Management said it believed cash from operations and capital raised would be sufficient to meet obligations for the 12 months after issuance of the financial statements, while noting historical operating losses and negative operating cash flows. If performance trends unfavorably, management identified possible additional borrowing, restructuring and cost reductions, private placements, a bank credit line, product-line disposals, or IP sales or licenses.
- Customer concentration, particularly dependence on Sprint, is a major business risk. Other disclosed risks include the ability to raise capital and achieve profitability, competition and technology changes, key customer relationships, product defects, cybersecurity and privacy breaches, hosting interruptions, intellectual-property matters, and possible NASDAQ delisting if listing requirements are not met.
- The company’s U.S. deferred tax assets of $52.9 million remained reserved due to its cumulative loss history and uncertainty about future taxable income. Goodwill impairment was not identified at September 30, 2018.
- Management described litigation as arising in the ordinary course and said it did not expect current matters to have a material adverse effect, while cautioning that outcomes are unpredictable. The filing reports no recorded liability for specified indemnities and guarantees.
- Disclosure controls were deemed effective as of September 30, 2018; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Sprint-driven Wireless growth continues and how customer concentration affects revenue and receivables.
- Cash consumption and liquidity relative to management’s 12-month obligations assessment and reliance on future operating performance or additional financing.
- The potential dilution from the offerings and warrants, and how changes in stock price and valuation assumptions affect the $9.918 million warrant liability.
- Whether Graphics revenue stabilizes after the Celsys distribution arrangement ended, and whether cost reductions can support sustained operating profitability.
- Potential liabilities or cash demands from related-party debt, preferred dividends, litigation, tax examinations, and unrecorded contractual indemnities.