Business context and reporting period
Smith Micro Software, Inc. develops wireless and graphics software. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the first quarter of 2016. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $5.576 | $7.214; down 22.7% |
| Gross profit / margin | $4.293 / 77.0% | $5.101 / 70.7% |
| Operating expenses | $6.871 | $8.779 |
| Operating loss | $(2.578) | $(3.678) |
| Net loss / diluted loss per share | $(2.232) / $(0.18) | $(3.706) / $(0.32) |
| Cash from (used in) operations | $(1.714) | $0.257 |
Wireless revenue was $4.359 million, down 27.0%, primarily due to a $1.2 million decline with Sprint and a $0.4 million decline in legacy businesses. Graphics revenue was $1.217 million, approximately flat. Sprint and affiliates represented 61.8% of revenue; FastSpring represented 13.9%. The two customers together comprised 75% of accounts receivable.
Gross margin improved by 6.3 percentage points, which management attributed to cost reductions. Operating expenses fell 21.7%, reflecting restructuring-related cost reductions, but remained above revenue. The net loss narrowed; a $0.708 million noncash gain from the lower fair value of warrant liabilities reduced the reported loss.
At March 31, cash and cash equivalents were $2.504 million, total current assets $7.731 million, and current liabilities $7.565 million (working capital about $0.166 million). Stockholders’ equity was $0.648 million. Related-party short-term notes payable were $2.0 million; long-term debt carrying value was $2.124 million, net of discounts and issuance costs. Operating cash use was funded in part by $2.0 million of related-party borrowing. Capital expenditures were $0.013 million.
Material changes, outlook, and risks
- Revenue fell $1.638 million year over year, largely from Wireless. Management said the timing and volume of future Wireless revenue are difficult to predict; large opportunities are being pursued, and revenue from 2016 acquisitions is expected, but adoption and deployment timing is uncertain. No specific revenue or earnings guidance was provided.
- A first-quarter 2017 restructuring targeted an approximately 16% headcount reduction and an additional $0.9–$1.0 million of quarterly cost reductions. It generated $0.392 million in charges, primarily severance, including $0.2 million of noncash stock compensation.
- Management cited eight consecutive quarters of operating losses, four consecutive quarters of negative operating cash flow, a share price below Nasdaq’s $1.00 minimum, and equity below Nasdaq’s $2.5 million requirement. Management said it expects operating cash to cover obligations for the next 12 months, while identifying substantial-doubt conditions and possible actions including further cost cuts, additional financing, a credit line, or asset/product-line sales.
- The company reported $2.0 million of short-term secured loans from directors at 18% interest, due in June 2017; one director is also CEO and board chair. Accounts receivable and certain other assets secure these loans. The $4.0 million 2016 subordinated notes mature in September 2019, bear 10% stated interest, and have an effective interest rate of 28.4% due to discounts and costs.
- Other risks include customer concentration, potential Nasdaq delisting, uncertain access to capital, competition, and product adoption. Operating lease commitments totaled $9.630 million; the company also disclosed litigation and contractual indemnities, without recording liabilities for the described indemnities. Management reported no material change in risk factors from its 2016 Form 10-K.
Important facts for investors to verify
- Whether Sprint-related demand and the timing of new customer, acquisition, and product deployments support revenue stabilization.
- Cash burn, collections, and the ability to meet near-term obligations, including repayment or refinancing of the 18% related-party notes.
- Progress toward Nasdaq’s minimum share-price and stockholders’ equity requirements and the availability and terms of additional financing.
- Whether restructuring savings are realized without impairing product development or customer delivery, and whether warrant remeasurement materially affects future reported earnings.