Smith Micro Software, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. Amounts below are in U.S. dollars; annual financial figures are in millions unless stated otherwise.
Business context
Smith Micro develops wireless software for mobile operators, cable providers, device manufacturers and enterprises, alongside graphics software for consumers and professional creators. Its two reportable segments are Wireless and Graphics. Sprint and affiliates represented 65.4% of FY2015 revenue, leaving the company highly dependent on a single customer.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $39.507 million | $36.979 million |
| Gross profit / margin | $31.355 million / 79.4% | $27.662 million / 74.8% |
| Operating loss | ($2.538 million) | ($11.742 million) |
| Net loss | ($2.602 million) | ($11.799 million) |
| Net loss per share | ($0.06) | ($0.29) |
| Cash used in operating activities | $0.055 million | $6.849 million |
- Revenue increased 6.8% year over year. Wireless revenue grew 7.3% to $33.553 million; Graphics revenue rose 4.4% to $5.954 million.
- Gross margin improved 4.6 percentage points, reflecting higher revenue and lower costs. Operating expenses fell to $33.893 million from $39.404 million; FY2015 included no restructuring charge versus $2.435 million in FY2014.
- FY2015 capital expenditures were $0.124 million. Investing activities used $1.323 million, largely for short-term investments; financing activities provided $0.032 million.
- At year-end, cash and cash equivalents were $8.819 million and short-term investments were $4.078 million. Working capital was $14.6 million. The company reported no debt; total liabilities were $10.447 million.
- Total assets were $24.473 million and stockholders’ equity was $14.026 million. Operating lease obligations totaled $9.521 million, with $1.863 million due within one year; purchase obligations were $1.378 million.
Fourth-quarter results and changes
FY2015 fourth-quarter revenue was $10.006 million, compared with $10.554 million in Q4 2014. Gross profit was $8.002 million versus $8.309 million. The company recorded an operating loss of $0.547 million and a net loss of $0.591 million, compared with operating income of $0.217 million and net income of $0.205 million in the year-earlier quarter.
For the full year, revenue rose from FY2014 but remained below FY2013’s $42.675 million. Net loss narrowed substantially from FY2014’s $11.799 million. Operating cash use also declined sharply from $6.849 million in FY2014 and $16.574 million in FY2013.
Outlook, risks and notable items
- Management said existing cash, cash equivalents and short-term investments were expected to fund operations for at least 12 months. It warned that slower product adoption could require further restructuring, additional financing or review of strategic alternatives; financing might be unavailable on acceptable terms and equity issuance could dilute shareholders.
- The filing forecasts a significant decline in Sprint business in 2016: the MD&A says approximately 25–32%, while the risk-factor discussion says approximately 25–34%. Management cited new mobile marketing and analytics opportunities, but said adoption and revenue timing were uncertain.
- NASDAQ minimum-bid-price compliance was at risk. The filing reports the stock had traded below the $1.00 minimum and that the company sought an extension and submitted a recovery plan. The February 26, 2016 closing price was $0.69.
- Other key risks include customer concentration, unpredictable order timing, competition and price pressure, rapid technology changes, dependence on partners and third-party intellectual property, and potential security or hosting-service disruptions.
- The company carried a $74.9 million valuation allowance against U.S. deferred tax assets. A Pennsylvania grant liability of $1.0 million remained subject to an employment commitment deadline of April 30, 2016; failure to meet conditions could require repayment of some or all of the grant.
- On March 8, 2016, the company announced a definitive agreement to acquire Birdstep Technology’s Swedish subsidiary for $2 million in cash, subject to shareholder approval and expected to close around April 1, 2016.
- A preferred-share rights agreement adopted in October 2015 was designed to discourage an unapproved acquisition of 20% or more of common shares. Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether Sprint revenue declines in 2016 as forecast, and which forecast range applies; assess the company’s ability to replace that revenue with new customers and products.
- Current cash and investment balances, operating cash trends, and whether the stated 12-month funding outlook remains valid.
- NASDAQ listing compliance status and any subsequent financing, dilution or restructuring.
- Adoption, timing and contribution of new mobile marketing and analytics products, alongside ongoing Wireless and Graphics segment trends.
- Outcome of the Birdstep transaction and the Pennsylvania employment-grant commitment.