Buying SMSI — Today Is Why I Haven’t Been Talking About Them Lately

Monday morning, Smith Micro (SMSI) finally announced the round of funding that is expected to get them through to profitability. In the press release, CEO Bill Smith said that he “expects to see a positive impact on revenues that will build throughout the year”, culminating in a return to profitability in the second half of 2018.

The financing raised $5 million at $1.75 per share and included a warrant at an exercise price of $2.17 per share. Personally, I don’t like the deal, but they needed the cash to get Sprint ramped up. To see what that Sprint deal is expected to deliver, see my note from a few weeks ago (hint: management is very bullish, which is why CEO Bill Smith upped his stake from 12% to 29%).

I haven’t been talking about SMSI lately because I was under NDA and knew a deal was coming (for about a month). Accordingly, I pretty much had to keep my shares throughout this period.

But now, the news is out. In response, I placed an order for my broker to buy 100,000 more shares in my ROTH IRA account, to be filled throughout the day.

For the record, I believe that management messed up by originally contacting known SMSI investors with an unattractive deal. Then, they moved forward with this deal without going back to the known SMSI investors with a sweetened offer. I personally think they could have done this deal at $2.25 with a $2.50 warrant. They just needed to pick up the phone and call the investors again. I would have invested $500,000 in this deal.

Dumb… but raising money and running a business are mutually exclusive skills (though preferably both strong; not the case this here). Ultimately, nobody got whacked more than Mr. Smith, so I guess justice is served (and everyone gets the opportunity to buy in for $1.60 a pop).

By the way, I believe the shares are trading under the $1.75 deal price because people who were offered the deal at $1.75 did the math and figured that the warrants are worth around $0.50. This gave them incentive to buy into the deal and sell the stock, thus getting / keeping the warrants for less than their $0.50 value.

Once that selling abates, the stock can (and should) start moving toward its true fair value.  UPDATE: The deal was for 2.8 million shares and 2 million share have already traded since it was announced (as of Tuesday at 1:15PM), so a lot of progress has been made on that front.

The consensus among my colleagues is that execution on the Sprint deal would justify a $5 share price. So, I view the risk as being 50% down (going back to its lows) and the potential reward being up 200%+ (an then a reassessment, based on how the Sprint deal positions the company for more / future wins).

So, this was not ideal, but it’s done. They have the money they need and a deal with Sprint to get them to profitability.

The last time SMSI did a financing, I immediately bought the stock and quickly made about 150% on my money. I’m doing the same thing today and expect a similar result in due course.

Next up, the earnings call, the Sprint ramp and divestiture of non-key units.

 

UPDATE: I briefly spoke to investor relations late Monday. The call went a long way toward easing some recent concerns. Reportedly, the financing deal only involved four institutional investors, all of whom are new to the story. I also heard that the World Mobile Congress conference was a successful trip. I’m looking to schedule a call with Mr. Bill Smith and CFO Tim Huffmyer to get more details, hopefully before the end of the week.

 

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Disclosures / Disclaimers: I am long SMSI. However, this is not a solicitation to buy, sell, or otherwise transact the stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.

I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.

I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter.  Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.

I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

The sole purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.

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16 thoughts on “Buying SMSI — Today Is Why I Haven’t Been Talking About Them Lately

  1. Any word on the “multi-country contract with the aforementioned European Tier-1 customer (which also operates in the Middle East and Asia)”?

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    1. I’m sure they’ll update us on the call. When I spoke to them last month, the feedback on that deal was very encouraging. That opportunity sounds much bigger than Sprint over the long term.

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        1. I don’t rate risk on the basis of near term events (that’s trading – not my specialty). Overall, I view the risk/reward as very favorable, but with relatively high risk (and risk is what position size should be based on).

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  2. Why do you feel this deal which was bad for shareholders was any better than the HMNY deal that hurt shareholders? I know dollars aren’t the same but end results are, why do they still have credibility MP mgmt. doesn’t?

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    1. Great question. I was waiting for someone to ask.

      The reason is that SMSI didn’t sell a piece of what they own (in the case of HMNY, MoviePass) in order to buy more shares of that same asset at a higher implied valuation (which HMNY did).

      Also, this is a one time event. The last round that SMSI did was quite favorable relative to the prevailing market price. They did well on that one, before doing poorly on this one. HMNY has done nothing but miss.

      Finally, SMSI shouldn’t need any more money after this. As for HMNY, stay tuned for my upcoming posts. Box office receipts are coming in well ahead of expectations (and more than 10% above last year’s levels), with lots of blockbusters coming before summer… so I believe that another nasty round of funding will be coming sooner than investors think.

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      1. It does have some of the same characteristics as HMNY, but I agree not the same thing. As far as HMNY future fund raises…….. They will happen and if investors are not expecting it, then they are not paying attention. I would not be surprised if we start seeing some things happen soon that will begin to improve things for MoviePass, but we will see. Thanks for the SMSI info. I bought a little of this today because owning some makes me spend time on it doing my own DD.

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  3. One concern for me is that they priced the deal at a deep discount only 9 days before reporting earnings. If earning/outlook bullish, why not wait and price post release at much higher levels? Unless that’s not the case. Then they have to do it now or face even greater dilution. Heavy selling down to $1.50 indicates the guys who did the deal don’t want to be long when the earnings print.

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    1. Good post. That’s possible, but nobody should be in this stock for this quarter or next quarter. I’m in it for the profitability event that Sprint is expected to bring (and the follow-on deals that should follow if they are successful there). High-risk, incredibly high reward.

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      1. I agree. If they execute it’s a home run. I’m just looking at it from a timing perspective (if the quarter doesn’t come in, I’ll buy it cheaper, if it does, then I’ll pay the deal price). In my experience most micro-cap management are lacking when it comes to capital management.

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      2. Why be in that stock this early if it is going to take that long? Do you see it going up quickly? I am almost expecting it to come down more after earnings, although earnings is always a gamble on how it might affect the price.

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  4. Picked up a bunch between $1.50 and $1.60. It’s bargain basement time!

    Re-read the last CC transcript and really like this comment about the wearables market: “I want to note that this last point represents a big opportunity for Smith Micro as the wearables market is in its infancy. Based on interest that is coming from carriers, we believe it is a market ready to explode. Our SafePath offering provides carriers a single, easily integrated platform to bring wearable devices to life. We are working closely with carriers and device OEMs to create a wearable story that will drive expansion of the Family Safety user base with real benefits for the consuming public. You will see in the coming quarters that SafePath will continue to progress with new feature upgrades, the expansion of addressable markets and, most importantly, the addition of new customers on the platform. As you can see, there is a lot of potential ahead for the SafePath solution.”

    This company is just in the beginning stages of unlocking the huge potential of their product offerings. My only concern is that they will be adequately funded to take advantage of these huge markets. Lots of golden nuggets in the last CC that include many catalysts for 2018. Perhaps a buyout in the near future to team up with another entity with deeper pockets? Of course, would prefer to hold on to take advantage of market acceptance of full product line.

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  5. So Mark, after the call how do you feel about SMSI? Better, no change, worse? I thought Mr. Smith did an excellent job and was very forthcoming with his answers.

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