Business context and reporting period
Smith Micro Software, Inc. develops wireless software and services, including family safety, visual voicemail, network optimization and IoT device management, as well as consumer graphics software. This Form 10-K reports the fiscal year ended December 31, 2017; the filing also provides unaudited fourth-quarter results. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $22.974 million | $28.235 million |
| Gross profit / margin | $17.892 million / 77.9% | $20.671 million / 73.2% |
| Operating loss | $5.674 million | $15.905 million |
| Net loss | $6.661 million | $15.343 million |
| Net loss per share | $0.49 | $1.28 |
| Cash used in operating activities | $7.419 million | $11.503 million |
| Cash and cash equivalents at year-end | $2.205 million | $2.229 million |
| Working capital at year-end | $3.1 million | Not stated here |
Wireless revenue was $18.342 million and Graphics revenue was $4.632 million in 2017. At December 31, 2017, total assets were $13.877 million, total liabilities $9.310 million and stockholders’ equity $4.567 million. Notes payable had a reported carrying amount of approximately $3.758 million, including $1.000 million of current related-party notes. The company funded operations in part with $7.472 million of financing cash flow during 2017.
Fourth quarter: Revenue was $5.732 million, gross profit $4.377 million, operating loss $0.535 million and net loss $0.160 million, or $0.01 per share. In Q4 2016, revenue was $7.084 million, operating loss $3.762 million and net loss $3.725 million, or $0.30 per share.
Material changes versus prior periods
- FY 2017 revenue declined 18.6% year over year. Management attributed the decrease mainly to lower CommSuite demand, reduced Sprint use of NetWise and slower Cable/MSO customer rollouts. Graphics revenue also declined, partly reflecting lower demand and the phaseout of Clip Studio Paint after the reseller agreement ended.
- Gross margin improved 4.7 percentage points to 77.9%, while operating expenses fell from $36.576 million to $23.566 million, principally following restructuring and cost reductions. The company reported restructuring income of $0.123 million in 2017, largely from revised sublease assumptions.
- The company reported a smaller annual net loss and lower operating cash use than in 2016, but continued to incur losses and negative operating cash flow.
- Sprint and affiliates represented 61% of 2017 revenue; FastSpring represented 14%. The two customers together accounted for 72% of year-end accounts receivable.
Outlook, risks and unusual items
- Management expected SafePath launches with Sprint and other near-term opportunities to help replace lost revenue in 2018, while noting SafePath revenue was ramping more slowly than expected. No quantified revenue or earnings guidance is provided.
- Management cited 11 consecutive quarters of operating losses and seven consecutive quarters of negative operating cash flow in its going-concern assessment. It said cash, financing raised and expected operating cash generation should enable the company to meet obligations for the next twelve months from issuance of the statements; continued financing access and performance against projections remain important uncertainties.
- After year-end, the company completed a March 2018 common-stock private placement for $5.0 million gross proceeds, expected to yield approximately $4.475 million net, issuing 2,857,144 shares and warrants. Proceeds were intended for working capital, dividends and debt service. This financing creates dilution.
- The September 2017 Series B preferred-stock transaction totaled $5.5 million, including $2.8 million of debt exchanged and approximately $2.7 million of gross cash proceeds. The preferred shares carry a 10% cumulative dividend and are convertible at an initial $1.14 per common share.
- Key risks include customer concentration, dependence on Sprint, potential need for additional capital, competition, product adoption and execution, and information security and privacy requirements. The filing notes the EU GDPR was due to take effect in May 2018. Legal proceedings are described generally; management did not expect their ultimate disposition to materially affect results, cash flows or financial position, while acknowledging litigation uncertainty.
- The independent auditor gave an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not express an opinion on internal control effectiveness.
Important facts for investors to verify
- Whether SafePath deployments generate the revenue growth management anticipated, and whether they offset continued declines in legacy wireless products.
- Current liquidity, operating cash burn, debt maturities and the terms or availability of additional financing; year-end cash was $2.205 million and 2017 operating cash use was $7.419 million.
- The effects of the March 2018 stock and warrant issuance, Series B conversion and preferred dividends on dilution and future cash requirements.
- Whether Sprint and other major customers maintain or expand purchases, given their substantial share of revenue and receivables.
- Progress toward profitability and compliance with Nasdaq listing requirements, including the filing’s discussion of prior stock-price and equity deficiencies.