Smith Micro Software, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing was signed March 10, 2017. The company develops wireless and mobile software and consumer graphics products.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $28.2 million | $39.5 million |
| Gross profit / margin | $20.7 million / 73.2% | $31.4 million / 79.4% |
| Operating loss | $15.9 million | $2.5 million |
| Net loss | $14.5 million | $2.6 million |
| Net loss per share | $1.21 | $0.23 |
| Cash used in operating activities | $11.5 million | $0.1 million |
- FY2016 revenue fell 28.5%. Wireless revenue declined 31.2% to $23.1 million; Graphics revenue declined 13.5% to $5.1 million.
- Fourth-quarter revenue was $7.1 million, versus $10.0 million in Q4 2015. Q4 net loss was $3.2 million, versus $0.6 million.
- At year-end, cash and cash equivalents were $2.2 million, working capital was $2.4 million, total assets were $14.3 million, and total liabilities were $11.8 million. Cash was down from $8.8 million at year-end 2015.
- Operating cash outflow was partly offset by $3.8 million of financing cash inflow, principally debt proceeds, and $1.1 million of investing cash inflow, including proceeds from investment sales.
- The company issued $4.0 million principal of senior subordinated notes bearing 10% interest and maturing September 2019. The year-end balance sheet reports $1.9 million of notes payable net of discounts and issuance costs, plus a $1.2 million warrant liability. The notes were issued with five-year warrants to buy 1.7 million shares at $2.74 per share.
- Contractual obligations totaled $15.3 million, including $10.2 million of operating lease obligations. No off-balance-sheet arrangements were reported.
Material changes and unusual items
- Management attributed the revenue decline primarily to Sprint’s termination of a NetWise and connection-manager contract. Sprint revenue fell 32% year over year and represented 62.6% of total FY2016 revenue, compared with 65.4% in FY2015. Graphics distributor FastSpring represented a further 13.5%.
- FY2016 operating expenses rose to $36.6 million from $33.9 million. Research and development increased 14.7%, primarily reflecting acquisitions and added headcount; the company also recorded $0.3 million of restructuring expense and a $0.4 million impairment of a Birdstep-acquired intangible asset.
- Non-operating results included $0.9 million of income from the change in warrant fair value and $0.7 million of income from the Pennsylvania grant liability remeasurement. These items partly offset operating losses and are not operating revenue.
- The company acquired Birdstep Technology AB and iMobileMagic in 2016. The acquisitions added goodwill and intangible assets; the company impaired a Birdstep customer-relationships intangible.
- A 1-for-4 reverse stock split was completed in August 2016 after the share price fell below Nasdaq’s $1 minimum bid requirement. A February 2017 shelf registration permits potential future common-stock offerings.
Outlook, risks and contingencies
- Management said new deal opportunities and acquired products could contribute revenue, but the timing and pace of adoption and customer deployment were uncertain. The filing provides no specific revenue or earnings guidance; management said restructuring and new deals could return the company to profitability.
- The fourth-quarter 2016 restructuring targeted an approximately 30% workforce reduction and $2.5 million of quarterly cost savings. A further first-quarter 2017 plan targeted about 16% additional workforce reduction and $0.9–$1.0 million of quarterly savings. Management described quarterly expenses as reduced by approximately $3.5 million overall.
- Management cited seven consecutive quarters of operating losses, three consecutive quarters of negative operating cash flow, Sprint-related revenue loss, and Nasdaq listing pressure as going-concern risk factors. It nevertheless believed cash, operations and short-term borrowing capacity would be sufficient to meet obligations for the next 12 months from issuance. It identified additional borrowing, cost cuts, equity financing, a bank line, product disposals and IP licensing or sales as possible responses if results deteriorate.
- Customer concentration, dependence on carrier spending, unpredictable order timing, competition and pricing pressure, technology changes, acquisition integration, financing availability, intellectual-property claims, security and service interruptions, and Nasdaq compliance are significant stated risks.
- Subsequent to year-end, directors provided two secured short-term loans of $1.0 million each at 18% interest, due March 24, 2017. The filing also discloses a $0.3 million Pennsylvania grant repayment payable in quarterly installments through 2021 and ongoing legal proceedings whose outcome is described as unpredictable.
Important facts for investors to verify
- Whether Sprint-related revenue loss can be replaced and whether new customer deployments generate material, recurring revenue.
- Actual cash burn, financing access and the company’s ability to meet obligations as they fall due; management’s liquidity assessment depends partly on projections and short-term borrowing.
- The realized savings, severance costs and operational effects of the 2016 and 2017 restructurings.
- The full economic cost and terms of the notes, including 10% interest, warrant-related dilution, and any further related-party borrowing or equity issuance.
- Whether acquisitions deliver expected revenue and whether further impairment charges or integration costs arise.
- Nasdaq continued-listing compliance and the company’s ability to maintain sufficient liquidity without materially diluting shareholders.