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.

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