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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

2022

☐

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 01‑3552501-35525

SMITH MICRO SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

Delaware

33-0029027

Delaware

33-0029027
(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

51 Columbia, Aliso Viejo, CA

5800 Corporate Drive, Pittsburgh, PA

92656

15237

(Address of principal executive offices)

(Zip Code)

Registrant's telephone number, including area code: (949) 362-5800

(412) 837-5300

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.001 par value

The NASDAQ Stock Market LLC

(Title of each class)

class

(

Trading
Symbol(s)		Name of each exchange on which registered)

registered
Common Stock, par value $0.001 per shareSMSINASDAQ

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES  ☐    NO  ☒

Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 YES  ☐    NO  ☒

Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  ☒    NO  ☐

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  ☒    NO  ☐

Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10‑K  ☐

Indicate by check mark if whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “accelerated filer”, “large accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

☐

o

Accelerated filer

☐

o

Non-accelerated filer

☐  (Do not check if a smaller reporting company)

x

Smaller reporting company

☒

x

Emerging growth company

☐

o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. o
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES  ☐    NO  ☒

Yes o No x

As of June 30, 2017,2022, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of the common stock of the registrant held by non-affiliates was $18,910,405$120,823,459 based upon the closing sale price of such stock as reported on the Nasdaq Capital
Market on that date. For purposes of such calculation, only executive officers, board members, and beneficial owners of more than 10% of the registrant’s outstanding common stock are deemed to be affiliates.

As of March 23, 2018,15, 2023, there were 18,250,90958,676,684 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the 20182023 Annual Meeting of Stockholders to be filed under the Securities Exchange Act of 1934 are incorporated by reference in Part III of this report.


Table of Contents
SMITH MICRO SOFTWARE, INC.

2017

2022 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I

5

10

8

19

20

19

20

19

20

19

20

PART II

20

21

SELECTED CONSOLIDATED FINANCIAL DATA21

22

24

22

35

28

35

28

35

28

36

29

29
PART III

37

30

37

30

37

30

37

30

Item 14.

37

30

PART IV

38

31

42

34

43

35

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In this document, the terms “Smith Micro,” “Company,” “we,” “us,” and “our” refer to Smith Micro Software, Inc. and, where appropriate, its subsidiaries.

This Annual Report on Form 10-K (this “Report”) contains forward-looking statements regarding Smith Micro which include, but are not limited to, statements concerning our ability to remain a going concern, our ability to raise additional capital, customer concentration, projected revenues, expenses, gross profit and income, the competitive factors affecting our business, market acceptance of products, the success and timing of new product introductions, the competitive factors affecting our business, our ability to raise additional capital, gross profit and income, our expenses, the protection of our intellectual property.property, and our ability to remain a going concern. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “estimates,” “should,” “may,” “will,” and variations of these words or similar expressions are intended to identify forward-looking statements. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Therefore,predict and in many cases are beyond our control. These and other important factors, including those described in Part 1, Item 1A, "Risk Factors" of this Report may cause our actual results, couldperformance or achievements to differ materially from those expressed or implied in any forward-looking statements as a resultstatements. Some of various factors.  Suchthe factors that could cause actual results to differ materially from those expressed or implied by the forward looking statements include, but are not limited to, the following:

•our customer concentration given that the majority of our sales currently depend on a few large client relationships;

•our dependency of our growth in part upon our customers’ ability and willingness to timely launch and deliver products and services, to promote our products and services and to attract and retain new end user customers or achieve other goals;

•our ability to remainestablish and maintain strategic relationships with our customers and mobile device manufacturers, their ability to attract customers, and their willingness to promote our products;
•our ability to hire and retain key personnel;
•the possibility of security and privacy breaches in our systems and in the third-party software and/or systems that we use, damaging client relations and inhibiting our ability to grow;
•the disruption to our business and diversion of management’s attention caused by our acquisitions of companies or technologies
•interruptions or delays in the services we provide from our data center hosting facilities that could harm our business;
•our dependency upon effective operation with operating systems, devices, networks and standards that we do not control and on our continued relationships with mobile operating system providers, device manufacturers and mobile software application stores on commercially reasonable terms or at all;
•our ability and/or customers’ ability to distribute our mobile software applications to their end users through third party mobile software application stores, and the impact of their associated policies, terms of service and other barriers to distribution, which we do not control;
•the existence of undetected software defects in our products and our failure to resolve detected defects in a going concern;

timely manner;
•our current client concentration within the vertical wireless carrier market, and the potential impact to our business resulting from changes within this vertical market, or failure to penetrate new markets;
•the impact of the COVID-19 pandemic on our business and financial results;
•rapid technological evolution and resulting changes in demand for our products from our key customers and their end users;
•intense competition in our industry and the core vertical markets in which we operate, and our ability to successfully compete;
•the risks inherent with international operations;
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•the impact of evolving information security and data privacy laws, regulations, standards, policies and contractual obligations on our business and the effect of the actual or perceived failure to comply with such requirements;

•the impact of governmental regulations on our business and industry;

•our ability to protect our intellectual property and our ability to operate our business without infringing on the rights of others;
•the risk of being delisted from NASDAQ if we fail to meet any of its applicable listing requirements;
•our ability to raise additional capital to fund our operations and the risk of such capital not being available to us at commercially reasonable terms or at all;

our customer concentration given that the majority of our sales currently depend on a few large client relationships, including Sprint;

•our ability to becomebe profitable and the impact that our efforts to reduce operating expenses may have on our business;

•our ability to remain profitable;

a going concern;
•changes in our operating income due to shifts in our sales mix and variability in our operating expenses;

•the launch of our products by our customers being subject to the negotiation and completion of new agreements or amendments to existing agreements as well as lengthy design, qualification, and go-to-market processes;

•our ability to assimilate acquisitions without diverting management attention and impacting current operations;
•the availability of third-party intellectual property and licenses needed for our operations on commercially reasonable terms, or at all;
•the difficulty of predicting our quarterly revenues and operating results and the chance of such revenues and results falling below analyst or investor expectations, which could cause the price of our common stock to fall;

rapid technological evolution•obligations and resulting changes in demand forrestrictions related to our products from our key customers and their end users;

intense competition in our industry andAugust 2022 Senior Secured Convertible Notes (the “Convertible Notes”), including our ability to successfully compete;

the pace at which the markets for new products develop;

our ability to hire and retain key personnel;

the availability of third-party intellectual property and licenses needed for our operations on commercially reasonable terms, or at all;

our ability to establish and maintain strategic relationships with our customers and mobile device manufacturers;

our ability to assimilate acquisitions without diverting management attention and impacting current operations;

the existence of undetected software defects in our products;

the impact of U.S. regulations on our business and industry;

our ability to protect our intellectual property and our ability to operate our business without infringing on the rights of others;

the risks inherent with international operations;

the possibility of security and privacy breaches in our systems damaging client relations and inhibiting our ability to grow;

interruptions or delaysobtain additional financing in the services we provide fromfuture;

•the dilution of our data center hosting facilitiesoutstanding common stock as a result of the conversion of our Convertible Notes, payment of principal and interest owed pursuant to our Convertible Notes in shares of our common stock or exercise of warrants that could harm our business;

accompanied the Convertible Notes;

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•the risk of being delisted from NASDAQ if we fail to meet any of its applicable  listing requirements;

defaulting under our Convertible Notes; and

potential tax liabilities and other factors that may impact our effective tax rates;

the impact of evolving information security and data privacy laws on our business and industry; and

•those additional factors which are listed under Item 1A of Part I of this Report under the caption “RISK FACTORS.”

The forward-looking statements contained in this Report are made on the basis of the views and assumptions of management regarding future events and business performance as of the date this Report is filed with the Securities and Exchange Commission (the “SEC”). In addition, we operate in a highly competitive and rapidly changing environment; therefore, new risk factors can arise, and it is not possible for management to predict all such risk factors, nor to assess the impact of all such risk factors on our business or the extent to which any individual risk factor, or combination of risk factors, may cause results to differ materially from those contained in any forward-looking statement. We do not undertake any obligation to update these statements to reflect events or circumstances occurring after the date this Report is filed.

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Table of ContentsPART
PART I

Item 1. BUSINESS

General

Smith Micro develops software to simplify and enhance the mobile experience, providing solutions to leading wireless and cable service providers device manufacturers, and wireless users around the world. From optimizing wireless networksprotecting and securing the family digital lifestyle to uncovering customer experience insights, and from providing visual access to wireless voicemail to ensuring family safety, our solutionspowerful voice messaging capabilities, we enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones. We also provide a services platform for thethrough their smartphones and consumer Internet of Things (“IoT”) that enables comprehensive device management and firmware over-the-air (“FOTA”) updates for various types of connected devices. In addition, Smith Micro’sWe believe our portfolio includes the most robust white-label family safety platform on the market, and a wide range of products for creating, sharing, and monetizing rich content, such as visual voice messaging, and 2D/3D graphics applications. With this as a focus, it is Smith Micro’s mission to help our customers thrive in a connected world.

retail display management.

For more than three decades,over 40 years, Smith Micro has developed deep expertise in embeddedprovided software solutions for global businesses, evolving with the telecom industry, the internet and the shift to the wireless environment. Today the Company develops wireless standards-based software that is extensible, interoperable, scalable, and proven to meet the most dynamic and demanding mobile devices, policy-based management platforms, and highly-scalable client and server applications. Tier 1 mobile network operators, cable providers, original equipment manufacturers (“OEM”)/device manufacturers, and enterprise businesses across a wide range of industries use our software to capitalize on the growth of connected consumers, mobile apps, vehicle telematics, and smart cities.

In general, we help our customers:

Provide valuable digital lifestyle services, such as family location services, parental controls, and device security, to mobile consumers;

environments.

Manage mobile devices over-the-air for maximum performance, efficiency, reliability and cost-effectiveness;

Provide easy visual access to wirelessly delivered voicemail messages, while also providing easy conversion of voice messages to text messages;

Optimize wireless networks, reduce operational costs, and deliver “best-connected” user experiences;

Efficiently and securely manage connected devices comprising the IoT; and

Design and create 2D and 3D digital illustrations, animation and figure design with easy-to-use, professional-grade graphics software.

We continue to innovate and evolve our business to take advantage ofrespond to industry trends and maximize opportunities in emerging markets, such as digital lifestyle services and online safety, “Big Data” analytics, automotive telematics, and the industrial IoT.consumer IOT marketplace. The key to our longevity, however, is not simply technological innovation, but a never-endingour focus on customerlistening to our customers, understanding their unique needs and the needs of their customers, and delivering value.

During fiscal year 2017, we made several important steps toward profitability. We

In 2021, Smith Micro completed the largest acquisition in Company history by acquiring substantially all of the assets of the Family Safety Mobile Software business of Avast plc, and its subsidiaries, together with all of the outstanding membership interests of its then subsidiary, Location Labs LLC (the “Family Safety Mobile Business acquisition” or “Family Safety Mobile Business"). The acquisition, which closed in April 2021, further expanded our family safety user base, positioning Smith Micro as a major restructuringleading family safety software-as-a-service (“SaaS”) provider globally while adding critical headcount in the U.S. and Europe. Since the acquisition, the Company has been focused on integrating all of its Tier 1 US Wireless carriers onto its SafePath 7 platform from legacy platforms. In 2022, Smith Micro successfully launched SafePath 7 with one of our businessTier 1 US Wireless carrier customers. Operating expenses increased in 2022 as a result of the investment into these development activities; however as the migrations neared completion, the Company was able to bring expenses in-line with current revenues, decreasing expenses by approximately $3.5 million per quarter. Our new Chief Financial Officer, Timothy C. Huffmyer, brought an extensive background of financial planning and analysis, public-company experiencereduce its investment in the technology sector, as well as mergers and acquisition experience to Smith Micro’s management team.migrations in the second half of 2022.
In January 2023, Smith Micro ended 2017 onentered into a strong notenew contract to continue to provide digital family safety solutions with an existing Tier 1 carrier customer. On February 21, 2023, one of the Company's other Tier 1 carrier customers notified Smith Micro that it is terminating its family safety contract with the launchCompany, effective as of June 30, 2023, and electing to continue to receive services under the contract for a transitional period of up to 180 days following the effective date of termination. The Company is undertaking an evaluation of its flagship product, SafePath® Family, with Sprint, the first Tier 1, U.S.-based mobile network operator (“MNO”)cost structure, and expects to roll out the service.

In addition to these milestones, we also closed two private funding rounds in fiscal year 2017. These stock-based transactions helped the Companytake various actions so as to reduce debt, increase stockholder equity, and increase funds available for working capital purposes.

certain operational costs in light of this event.

The Company was incorporated in California in November 1983 and reincorporated in Delaware in June 1995. Our principal executive offices are located at 51 Columbia, Aliso Viejo, California 92656. Our5800 Corporate Drive, Pittsburgh, Pennsylvania 15237 and our telephone number is (949) 362-5800.(412) 837-5300. Our website address is www.smithmicro.com,, and we make our filings with the U.S. Securities and

5

Exchange Commission (the “SEC”) available on the Investor Relations page of our website. Information contained on our website does not constitute a part of this Report. Our common stock is traded on the NASDAQ under the symbol “SMSI”.

“SMSI.”

Business Segments

Our business is focused on two industry segments: Wireless and Graphics.

We do not separately allocatecurrently have one reportable operating expenses, nor do we allocate specific assets to these segments. Therefore, segment information reported includes only revenues. See Note 12 of Notes to Consolidated Financial Statements for financial information related to our business segments and geographical information.

Wireless Segment

segment: Wireless.

The wireless industry continues to undergo rapid change on all fronts from the ubiquity of Wi-Fi and cellular networks, to the vast array ofas connected devices, mobile applications, and digital content are consumed by users who want information, high-speed wireless connectivity and entertainment, anytime, anywhere. While most of us think about being “connected” in terms of computers, tablets and smartphones, the consumer IoT market is creating a world where almost anything can be connected to the wireless internet. Wearable devices such as smartwatches, fitness trackers, pet trackers and GPS locators, as well as smart home devices, are now commonplace, enabling people, pets, and petsthings to be connected to the “Internet of Everything” as well.Everything.” These devices have created an entire ecosystem of over-the-top (“OTT”) apps, while expanding how communication service providers can provide value to mobile consumers.

In addition, pervasive connectivity has changed the way businesses operate on small and grand scales.  For example, Wi-Fi hotspots are being deployed by neighborhood bookstores and coffee houses to keep customers on premise longer, as well as by large sports arenas to deliver real-time video feeds via social networks and online broadcasts.  Retailers are now spending more than 50%

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Table of their advertising budgets on mobile media, and targeting for those advertisements is driven by “Big Data” initiatives that collect consumer information from virtually every online or mobile interaction.

Contents

Although there are numerous business opportunities associated with pervasive connectivity, there are also manynumerous challenges, including:

•The average age by which most children use smartphones and other connected devices continues to decrease. As such, parents and guardians must be proactive in managing and combating digital lifestyle problemsissues such as excessexcessive screen time, cyberbullying, and online safety;

Complexity, congestion, and spectrum scarcity plague wireless networks, making it difficult and expensive to satisfy the demand for mobile services by consumers and businesses;

•As IoT use cases continue to proliferate and scale, management complexity, security and interoperability must be addressed efficiently and correctly;

MNOs•Mobile network operators (“MNO”) are being marginalized by messaging applications, and face growing competitive pressure from cable/cable multiple servicesystem operators (“MSO”) and others deploying Wi-Fi networks to attract mobile users;

•Enterprises face increasing pressure to mobilize workforces, operations, and customer engagement, but lack the expertise and technologies needed to leverage mobile technology securely and cost-effectively;

•The ubiquity and convenience of e-commerce has created the need for consumer-facing brands to reimagine brick-and-mortar retail experiences; and

Consumers, frustrated by slow, congested•The change in dynamics of work, school and home life has led to an increased use of mobile networksdevices for work, education and inconsistent device/app behavior, seek simpler network accessentertainment which has given rise to a new set of challenges and more personalized mobile experiences, while simultaneously demanding faster, cheaper, and more secure wireless services.

issues.

To address these challenges, Smith Micro offers multi-platform, modularthe following solutions:
Products
SafePath® – Comprised of SafePath Family, SafePath IoT, and SafePath Home, the SafePath product suite provides comprehensive and easy-to-use tools to protect family digital lifestyles and manage connected devices both inside and outside the home. As a carrier-grade, white-label platform, SafePath empowers MNO and cable operators to bring to market full-featured, on-brand family safety solutions such as:

SafePath® – The SafePath platform is a scalable, cloud-based platformthat provide in-demand services to mobile subscribers. These solutions include location tracking, parental controls, and driver safety functionality. Delivered to end-users as value-added services, SafePath-based solutions activate new revenue streams for MNOs while helping to increase brand affinity and enterprisesreduce subscriber churn.

ViewSpot®– Our retail display management platform provides wireless carriers and retailers with a way to provide device monitoringbring powerful on-screen, interactive demos to life. These engaging demo experiences deliver consistent, secure, and protection services fortargeted content that can be centrally managed and updated via ViewSpot Studio. With the feature set provided by ViewSpot, wireless carriers and other smartphone retailers can easily customize and optimize the content loops displayed on demo devices so that it resonates with in-store shoppers. Interactive demos created in ViewSpot can be experienced on Android smart devices. We continue to develop and expand functionality of ViewSpot in order to enhance the utility and usability of ViewSpot as well as giving MNOs greater control and autonomy over their subscribers, customers, employees and students. The platform’s flagship product, SafePath Family, is a next-generation location tracking and parental controls platform that enables mobile operators to provide comprehensive family safety functionalities to their subscribers as a white-labeled value-added service.

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QuickLink® IOT Services Platform – QuickLink IoT is a comprehensive device management solution for the Internet of Everything. Providing standards-based IoT device management functionality combinedcontent with robust support for FOTA and application over-the-air (“AOTA”) updates, QuickLink IoT simplifies and streamlines the complexity of IoT device management at scale.

Studio improvements.

CommSuite® – Smith Micro’sThe CommSuite premium messaging platform helps MNOsmobile service providers deliver a next-generation voicemail experience to mobile subscribers, while enabling them to monetizemonetizing a legacy cost-center. CommSuite Visual Voicemail (“VVM”) quickly and easily allows users to manage voice messages just like email or SMS – with reply, forwarding and social sharing options. CommSuite also enables multi-language Voice-to-Text (“VTT”) transcription messaging, which facilitates convenient message consumption for users by reading versus listening. In 2017, the CommSuite product was installed on more than 18 million mobile handsets.

NetWise® – NetWise is a policy-on-device platform that optimizes wireless Quality of Experience (“QoE”). Addressing challenges centralavailable to today's mobile lifestyle such as connection and network traffic management, Wi-Fi discovery, credential provisioning, user authentication and radio management, NetWise is a proven carrier-grade solution for communications service providers (“CSP”).

Captivate™ – Captivate is a mobile engagement and Big Data analytics platform that enables CSPs and business to consumer (“B2C”) enterprises to deliver contextual mobile promotions and advertising at the right time and place. Captivate provides mobile device-based consumer insights that are invaluable to all types of consumer-facing businesses in understanding, segmenting and targeting mobile consumers.

For 35 years, Smith Micro has provided software solutions for global businesses, evolving with the Telecom industry through the Internet age. Today, the Company develops wireless standards-based software that is extensible, interoperable, scalable, and proven to meet the most dynamic and demanding mobile environments.

Graphics Segment

Smith Micro’s graphics group develops a variety of software, including graphic design and animation, and compression and PC/Mac utilities, for consumers, professional artists, and educators. These products are available through direct sales on Smith Micro websites (smithmicro.com, mysmithmicro.com and contentparadise.com),both postpaid premium subscribers as well as through affiliate websites, resellers,prepaid subscribers and retail outlets.

The Company’s graphics portfolio includes Poser®, a professional solution for 3D Figure Design and Animation; Moho® (formerly Anime Studio®), a complete solution for 2D animation; and MotionArtist®, an easy-to-use tool that enables amateur and professional artists to bring comics to life with animated panels, text and word balloons. These programs are used by major entertainment studios, and world-renowned artists and graphics firms to create award-winning movies, television shows, TV advertising, internet media content, 3D gaming, and visual designs. Our reseller agreement with Japanese software developer Celsys, which permitted us to market, license and provide support for the English-language versionis installed on millions of Clip Studio® Paint (formerly Manga Studio), terminatedAndroid handsets in the fourth quarter of 2017. As such, Clip Studio Paint was phased out of our product portfolio in 2017.

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Products

Our primary products consist of the following:

United States.

Business Segment

Products

Description

Wireless

SafePath® Family

Real-time family location tracking app with easy-to-use parental controls, and built-in support for wearable devices such as GPS-enabled smartwatches, backpack locators, and pet trackers

CommSuite® VVM

Visual Voicemail delivered directly to a mobile phone app and managed like email

CommSuite® VTT

Voice-to-Text transcription of voicemail and voice SMS messages

NetWise® Optics

A mobile analytics solution that uncovers performance blind spots in wireless networks and helps CSPs optimize network quality and performance

NetWise® Passport

An automated user onboarding and Wi-Fi service provisioning solution

QuickLink® IoT
Services Platform

An end-to-end device management platform for fault & diagnostics management, device provisioning, device configuration, and over-the-air firmware and application updates

Captivate™

Mobile marketing and Big Data platform that uses real-time conditions, events, location, and analytics to better engage mobile consumers

Graphics

Poser®

3D rendering and animation software for photorealistic characters, art, illustration, and digital design

Moho®
(formerly Anime Studio®)

Complete 2D animation program for creating movies, cartoons, anime, and cut out animations

MotionArtist®

A fast, easy solution for creating animatics and interactive presentations

StuffIt Deluxe®

A patented, lossless compression solution for documents and media

Marketing and Sales Strategy

Because of our broad product portfolio, deep integration and product development experience and flexible business models, we can quickly bring to market innovative solutions that support our customers’ needs, to createwhich creates new revenue opportunities and differentiatedifferentiates their products and services amongfrom their competitors.

Our marketing and sales strategy is as follows:

Leverage Operator and OEM Relationships. We continue to capitalize on our strong relationships with the world’s leading MNOs MSOs, and device manufacturers.MSOs. These customers serve as our primary distribution channel, providing access to hundreds of millions of end usersend-users around the world.

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Focus on High-Growth Markets. We continue to focus on providing digital lifestyle solutions, analytics/Big Data solutions, premium messaging services, and wireless connectivity taking advantage of expanding 4G and Wi-Fi networks, as well as the explosive growth of smartphones, tablets, and IoT devices.

visual retail content management solutions.

Expand our Customer Base. In addition to growing our business with current customers, we are increasing penetration of the enterprise market, with particular focus on large B2C companies, such as retail brands, banking,look to expand our MNO and hospitality,MSO customers worldwide, as well as industrial IoT companies deployingto expand into new partnerships as we extend the reach of our product platforms within the connected devices.

lifestyle ecosystem.

Key Revenue Contributors

Revenues attributable

In our business, we sell primarily to Sprintlarge MNOs and their respective affiliatesMSOs, so there are a limited number of actual and potential customers for our current products, resulting in the Wireless business segment accounted for 61%, 63%, and 65%significant customer concentration.
As noted above, on February 21, 2023, one of the Company’s total revenuesCompany's Tier 1 carrier customers notified Smith Micro that it is terminating its family safety contract with Smith Micro, effective as of June 30, 2023, and electing to continue to receive services under the contract for fiscal years 2017, 2016, and 2015, respectively. Revenues attributablea transitional period of up to FastSpring in180 days following the Graphics business segment accounted for 14%, 14%, and 11%effective date of the Company’s total revenues for fiscal years 2017, 2016, and 2015, respectively. The loss of any of our major customers or decisions by a significant customer to substantially reduce purchases from us for any reason could have a material adverse effect on our business.

termination.

Customer Service and Technical Support

We provide technical support and customer service through our online knowledge base, email, and live chat. OEMMNO and MSO customers generally provide their own primary customer support functions and rely on us for support to their technical support personnel.

Product Development

The software industry, particularly the wireless market, is characterized by rapid and frequent changes in technology and user needs. We work closely with industry groups and customers, both current and potential, to help us anticipate changes in technology and determine future customer needs. Software functionality depends upon the capabilities of the related hardware. Accordingly, we maintain engineering relationships with various hardware manufacturers, and we develop our software in tandem with their product development. Our engineering relationships with manufacturers, as well as with our major customers, are central to our product development efforts. We remain focused on the development and expansion of our technology, particularly in the wireless space. Research and development expenditures amounted to $9.0 million, $15.9 million, and $13.9 million for the years ended December 31, 2017, 2016, and 2015, respectively.

Manufacturing

We utilize manufacturing capabilities for our Graphics physical products. Our product development group produces a product master for each product that is then duplicated and packaged into products by the manufacturing organization. All product components are purchased by our personnel in our Aliso Viejo, California facility. Our manufacturing is subcontracted to outside vendors and includes the replication of CD-ROMs and the printing of documentation materials. Assembly of the final package is completed by our Aliso Viejo, California facility.

Competition

The markets in which we operate are highly competitive and subject to rapid changes in technology. These conditions create new opportunities for Smith Micro, as well as for our competitors, and we expect new competitors to continue to enter the market. We not only compete with other software vendors for new customer contracts, in an increasingly competitive and fast-moving market we also compete to acquire technology and qualified personnel.

We believe that the principal competitive factors affecting the mobile software market include domain expertise, product features, usability, quality, price, customer service, speed to market and effective sales and marketing efforts. Although we believe that our products currently compete favorably with respect to these factors, there can be no assurance that we can maintain our competitive position against current and potential competitors. We also believe that the market for our software products has been and will continue to be characterized by significant price competition. A material reduction in the price we obtain for our products would negatively affect our profitability.

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Many of our existing and potential customers have the resources to develop products internally that would compete directly with our products.product offerings. As such, these customers may opt to discontinue the purchase of our products in the future. With this as background, ourOur future performance is therefore substantially dependent upon the extent to which existing customers elect to purchase software from us rather than designing and developing their own software.

Proprietary Rights and Licenses

We protect our intellectual property through a combination of patents, copyrights, trademarks, trade secrets, foreign intellectual property laws, confidentiality procedures and contractual provisions. We have United States and foreign patents and pending patent applications that relate to various aspects of our products and technology. We have also registered, and applied for the registration of, U.S. and international trademarks, service marks, domain names, and copyrights. We will continue to apply for such protections in the future as we deem necessary to protect our intellectual property. We seek to
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avoid unauthorized use and disclosure of our proprietary intellectual property by requiring employees and third parties with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code.

Our wirelessMNO/MSO customers license our products through software license agreements and/or access our offerings through software as a service (“SaaS”) agreements, and our graphics products are subject to “click-through” end user licensewritten agreements. Our licensecustomer agreements contain restrictions on reverse engineering, duplication, disclosure, and transfer of licensed software, and our SaaS agreements contain restrictions on access and use.

use of SaaS.

Despite our efforts to protect our proprietary technology and our intellectual property rights, unauthorized parties may attempt to copy or obtain and use our technology to develop applicationsproducts and technology with the same functionality as our applications.products and technology. Policing unauthorized use of our technology and intellectual property rights is difficult, and we may not be able to detect unauthorized use of our intellectual property rights or take effective steps to enforce our intellectual property rights.

Employees

Human Capital Resources
As of December 31, 2017,2022, we had a total of 161315 employees within the following departments: 103218 in engineering 28and operations, 60 in sales and marketing, 12 in operations and customer support, and 1837 in management and administration. We are not subject to any collective bargaining agreement, and we believe that our relationships with our employees are good.

We believe that our strength and competitive advantage is our people. We value the skills, strengths, and perspectives of our diverse team and foster a participatory workplace that enables people to get involved in making decisions. The Company provides training and development opportunities to ensure that our employees are creative thinkers who are driven, focused, and interested in ever-changing technology.

Item 1A. RISK FACTORS

Our future operating results are highly uncertain. Before deciding to invest in our common stock or to maintain or increasechange your investment, you should carefully consider the risks described below, in addition to the other information contained in this Report and in our other filings with the SEC, including our other Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occur, our business, financial condition or results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment.

If we are unable to meet our obligations as they become due over the next twelve months, the Company may not be able to continue as a going concern.

We currently believe that we will be able to meet our financial obligations as they become due over the next twelve months, primarily based on our current working capital levels, our current financial projections, and our ability to secure short-term loans and raise capital when necessary.  

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Our ability to continue as a going concern is substantially dependent upon these factors.  If our financial and cash flow position the Company unfavorably compared

Risks Related to our internal plans and projections, we may need to consider additional actions to mitigate conditions or events that would raise substantial doubt about our ability to continue as a going concern, including the following:

Raising additional capital through short-term loans.

Business Operations

Implementing additional restructuring and cost reductions.

Raising additional capital through a private placement or other transaction.

Disposing of or discontinuing one or more product lines.

Selling or licensing intellectual property.

Should our going concern assumption not be appropriate or should we become unable to continue in the normal course of operations, adjustments would be required to our consolidated financial statements to the amounts and classifications of assets and liabilities, and these adjustments could be significant. Our consolidated financial statements do not reflect the adjustments or reclassifications of assets and liabilities that would be necessary if we were to become unable to continue as a going concern.

We may raise additional capital through the issuance of equity or convertible debt securities or by borrowing money in order to meet our capital needs. Additional funds to allow us to meet our capital needs may not be available on terms acceptable to us or at all.

We believe that our cash and the cash we expect to generate from operations will be sufficient to meet our capital needs for the next twelve months. However, it is possible that we may need or choose to obtain additional financing to fund our future activities. We could raise these funds by selling more stock to the public or to selected investors, or by borrowing money. We may not be able to obtain additional funds on favorable terms, or at all. If adequate funds are not available, we may be required to curtail our operations or other business activities significantly or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain technologies or potential markets.

It is possible that our future capital requirements may vary materially from those currently anticipated. The amount of capital that we will need in the future will depend on many factors, including but not limited to:

the market acceptance of our products;

the levels of promotion and advertising that will be required to launch our products and achieve and maintain a competitive position in the marketplace;

our business, product, capital expenditure, and research and development plans and product and technology roadmaps;

the levels of working capital that we maintain;

capital improvements to new and existing facilities;

technological advances;

our competitors’ response to our products; and

our relationships with suppliers and customers.

In addition, we may raise additional capital to accommodate planned growth, hiring, and infrastructure needs or to consummate acquisitions of other businesses, products or technologies.

Our current customer profile, including the fact that we derive a significant portion of our revenues from sales to a concentrated number of clients, and a reduction in sales to any of them may adversely impact our revenues and operating results.

In

We sell our Wireless business segment, we sellwireless products and solutions primarily to large wireless carriers, cable operators, and OEMs, so there are a limited number of actual and potential customers for our products, resulting in significant customer

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concentration. For the year ended December 31, 2017,2022, sales to Sprintour two largest customers comprised 40% and their affiliates comprised 61%38% of our total revenues.

No other customer was greater than 10% of our revenues individually. As a result of the pending June 30, 2023 termination of our family safety contract with our second largest customer from 2022, the percentage of our revenues that will be attributable to our other two largest customers are likely to grow in future years if we are not successful in attracting new customers.

Because of our relatively high customer concentration, this carrier and other largea small number of significant customers possess a relative level of pricing and negotiating power over us, enabling them to achieve advantageous pricing and anyother contractual terms, including the ability to terminate their agreements with us with a limited amount of notice. Any material decrease in our sales to any of themthese customers, including the termination of contracts with any of these customers, would materially affect our revenue and profitability.

The reduction in sales or termination of relationships with any of these customers would also increase the customer concentration and risk as to our remaining large customers.

If there are delays in the distribution of our products or if customer negotiations for our new products cannot occur on a timely basis, we may not be able to generate sufficient revenues to meet the needs of the business in the foreseeable future or at all.
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Our growth depends in part on our customers’ ability and willingness to timely launch and deliver our products and services, to promote our products and services and to attract and retain new end user customers or achieve other goals outside of our control.
We sell our wireless products for use on handheld devices primarily to our wireless carrier cable operator, and OEM customers, are not thewho deploy our products for use by their end usersuser customers. Our wireless carrier customers’ launch of new or updated releases of our products and services may require that we enter into new or amended contracts with them and requires resource and scheduling commitments by our wireless carrier customers and the completion of their internal design, qualification, testing, and other go-to-market processes and approvals, many of which are outside of our control. In the event that we are unable to complete the necessary contract processes, or that our wireless carrier customers withhold or delay the commitment of resources or the completion of necessary internal processes or approvals, we may not be able to launch our new or updated products or services within the timeframes that we expected or at all, and our revenue and financial performance may be adversely affected. In addition, the success of our customers, and their ability and willingness to market to their end users the services that are supported by our products, is critical to our future success. Our ability to generate revenues from our software products and services is also constrained by our carrier customers’ ability to attract and retain customers. We have limited input into or influence upon their marketing efforts and sales and customer retention activities. If our large carrier customers fail to maintain or grow demand for their services, revenues or revenue growth from our products designed for use on mobile devices will decline and our results of operations will suffer.
If we are unable to retain key personnel, the loss of their services could materially and adversely affect our business, financial condition, and results of operations.
Our future performance depends in many instancessignificant part upon the continued service of our senior management and other key technical personnel. We do not have employment agreements with our key employees. The loss of the services of our key employees could materially and adversely affect our business, financial condition, and results of operations. Our future success also depends on our ability to continue to attract, retain, and motivate qualified personnel, particularly highly skilled engineers involved in the ongoing research and development required to develop and enhance our products. Competition for these employees remains high and employee retention is a common problem in our industry. Our inability to attract and retain the highly trained technical personnel that are essential to our product development, marketing, service, and support teams may limit the rate at which we can generate revenue, develop new products or product enhancements, and generally would have an adverse effect on our business, financial condition, and results of operations.
Security breaches, improper access to or disclosure of our data, our customers’ data or their end users’ data, other hacking attacks on our systems or the third-party systems that we use, or other cyber incidents and privacy breaches could harm our reputation and adversely affect our business.
We and/or the third-party systems that we use to deliver our products and services may be subject to cyber-attacks by third parties seeking unauthorized access to our data or our customers’ or their end users’ data or to disrupt our ability to provide service. Our products and services involve the collection, storage, processing, and transmission of data. The uninterrupted operation of our hosted solutions and the confidentiality and security of our data, our customers’ and their end users’ data, and other third-party information and materials is critical to our business. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data or our customers’ data or their users’ data, including personal information from users, or of the other third party information and materials in our possession or control, including pre-release mobile devices in our custody, could result in the loss, modification, disclosure, destruction, or other misuse of such data or materials, which could harm our business and reputation, subject us to material liability and diminish our competitive position. In addition, computer malware, viruses, and general hacking have become more prevalent and may occur on our systems or on the third-party systems that we use. Such breaches and attacks may cause interruptions to the services we provide, degrade the user experience, cause our customers and their users to lose confidence and trust in our products and services, impair our internal systems or the third-party systems that we use, and result in financial harm to us.
If we are unable to protect, or our customers and mobile device manufacturer partners perceive that we are unable to protect, the security and privacy of information, data and materials in our care, our growth could be materially adversely affected, and we could be subject to material liability. A security or privacy breach may:
•cause our customers to lose confidence in our solutions;
•cause our mobile device manufacturer partners to cease doing business with us;
•harm our reputation;
•expose us to material liability; and
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•increase our expense from potential remediation costs.
While we believe we use proven applications and have established adequate physical and technological safeguards designed for facility security, data security and integrity to process electronic transactions, there can be no assurance that these applications and safeguards will be adequate to prevent a security breach or that in the event of a security breach we will be able to react in a timely manner, or that our remediation efforts will be successful. We also cannot be certain that these applications and safeguards will be or remain sufficient to address changing market conditions or the security and privacy concerns of existing and potential customers and device manufacturer partners. Our efforts to protect our data, our customers’ and their end users' data and the other third party information and materials we receive, and to disable undesirable activities on our systems, may also be unsuccessful due to software bugs or other technical malfunctions, employee, contractor, or vendor error or malfeasance, including defects or vulnerabilities in our vendors’ information technology systems or offerings, breaches of security of our facilities or technical infrastructure, or other threats that may evolve in the future. In addition, our customers and end users may use our products and services in a manner which violates security or data privacy laws in one or more jurisdictions. Any significant or high-profile security breach, data privacy breach or violation of data privacy laws could result in the loss of business and reputation, litigation against us, liquidated and other damages, and regulatory investigations and penalties that could adversely affect our operating results and financial condition.
Interruptions or delays in service from data center hosting facilities could impair the delivery of our service and harm our business.
We currently serve our customers from data center hosting facilities. Any damage to, or failure of, such facilities generally could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their on-demand services, and adversely affect our renewal rates and our ability to attract new customers.
The success of our products depends upon effective operation with operating systems, devices, networks, and standards that we do not control and on our continued relationships with mobile operating system providers and device manufacturers. Changes in our products or to those operating systems, devices, networks, or standards, or interference with those relationships may seriously harm our customers’ ability to retain or attract new users and may harm our revenue and growth.
We are dependent on the interoperability of our products with popular operating systems, devices, networks, and standards that we do not control. For example, we depend upon the interoperability of our mobile products with the Android and iOS mobile operating systems. Any changes, bugs or technical issues in such systems, or changes in our relationships with mobile operating system partners, handset manufacturers or mobile carriers, or in their terms of service or policies that degrade our products’ functionality, reduce, or eliminate our ability to distribute our products, or give preferential treatment to competitive products could adversely affect the usage of our products.
We maintain relationships with mobile device manufacturers which provide us with insights into product development and emerging technologies. These insights allow us to keep abreast of, or to anticipate, market trends and help us to serve our current and prospective customers. Mobile device manufacturers are under no obligation to continue providing us with these valuable insights. If we are unable to maintain our existing relationships with mobile device manufacturers, if we fail to enter into relationships with additional mobile device manufacturers, or if mobile device manufacturers favor one of our competitors, our ability to provide products that meet our current and prospective customers’ needs could be compromised and our reputation and future revenue prospects could suffer. For example, if our software does not function well with a popular mobile device because we have not maintained a relationship with its manufacturer, carriers seeking to provide that device to their respective customers may choose an alternative solution. Even if we succeed in establishing and maintaining these relationships, they may not result in additional customers or revenues.
We rely on our ability and/or customers’ ability to distribute our mobile software applications to their end users through third party mobile software application stores, which we do not control. Changes in the application stores’ policies and/or terms of service and other barriers to our distribution via mobile software application stores may seriously harm our ability to maintain and/or grow the subscriber base for our products and services and could materially and adversely affect our financial condition and results of operations.
Because mobile software applications are key components of our products and services, the success of our business is dependent on our ability and/or our customers’ ability to distribute our mobile software applications through mobile
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software application stores, which are subject to terms and policies that are controlled by and subject to change in the discretion of the third-party operators of the application stores. In addition, each of these application store operators has approval authority over our mobile software applications as a condition to our distribution of our products bymobile software applications through the applicable application store, and any delay or withholding of any such approval can lead to delays in the availability of new releases, which may harm our customerscustomer relationships and adversely affect our business. There is also no guarantee that any approval will not be rescinded in the future. Any changes to third party application stores or their end users.  If any of their effortspolicies, terms or service or approvals, and other barriers that restrict our ability to market and selldistribute our mobile software applications via one or more application stores, including government actions, orders, or restrictions, may seriously harm our ability to maintain and/or grow the subscriber base for our products and services incorporatingand could materially and adversely affect our financial condition and results of operations.
Our products may contain undetected software defects, which could negatively affect our revenues.
Our software products are complex and services are unsuccessfulmay contain undetected defects. If we discover software defects in our products, we may experience delayed or lost revenues during the marketplace,period it takes to correct these problems. Defects, whether actual or perceived, could result in adverse publicity, loss of revenues, product returns, a delay in market acceptance of our products, loss of competitive position or claims against us by customers. Any such problems could be costly to remedy and could cause interruptions, delays, or cessation of our product sales, which could cause us to lose existing or prospective customers and could negatively affect our results of operations.
Risks Related to our Industry and Macroeconomic Conditions
We derive a significant portion of our revenues from wireless carriers, and changes within this vertical market, or failure to penetrate new markets, could adversely impact our revenues and profitability could be adversely affected.

operating results.

We also derive a significant portion of our revenue from a few vertical markets, such as wireless carriers, cable operators, and handset manufacturers.carriers. In order to sustain and grow our business, we must continue to sell our software products in thesethis vertical market, and we must seek to expand into additional markets. Shifts in the dynamics of thesethe vertical markets that we serve, such as new product introductions by our competitors, could materially harm our results of operations, financial condition, and prospects. Increasing our sales outside our core vertical markets and into markets in which we do not have significant experience, for example to large enterprises, requireswould require us to devote time and resources to hire and train sales employees familiar with those industries. Even if we are successful in hiring and training sales teams, customers in other vertical markets may not need or sufficiently value our current products or new product introductions.

If there are delays in

Our results of operations and financial condition may be adversely affected by public health epidemics, including the distributionongoing COVID-19 global health pandemic, and economic and business trends that emerge following such events.
Since early 2020, the COVID-19 pandemic has significantly impacted economic activity and markets around the world. Government regulations and shifting social behaviors have, at times, limited business activities and person-to-person interactions and consumer and business trends that originated during the pandemic continue to persist and may also have long-lasting adverse impact on us and our industry independently of the progress of the pandemic.
During the pandemic, many of our products or if customer negotiations for our new products cannot occur oncustomers and suppliers have temporarily modified their business operations as a timely basis, we may not be able to generate revenues sufficient to meet the needsresult of the business incoronavirus pandemic and related government restrictions. Additionally, rising interest rates may lead consumers to increasingly decrease or delay spending, including on the foreseeable future or at all.

The Company has a history of net losses,products that we supply to our customers, which may incur substantial net losses in the future, and may not achieve profitability.

We have undertaken recent restructurings to reduceharm our expenses to be more in line with our current and projected revenue. However, if our revenues do not increase in the future, we will likely need to undertake further restructurings, operating losses will likely continue, and we may not be able to achieve profitability in the foreseeable future.

Our quarterly revenuesbusiness and operating results are difficult to predict and could fall below analyst or investor expectations, which could cause the price of our common stock to fall.

results. Our quarterly revenues and operating resultscustomers have fluctuated significantly in the pastexperienced and may continue to vary from quarterexperience decreased demand for the value-added products and services that we provide to quarter duethem and may seek to a number of factors, many of which are not withinterminate, suspend, or delay existing or new initiatives involving our control. Ifproducts and services. A decrease in demand for our operating results do not meet the expectations of securities analysts or investors, our stock price may decline. Fluctuations in our operating results may be due to a number of factors, including the following:

the gain or loss of a key customer;

the sizeproducts and timing of orders from and shipments to our major customers;

the size and timing of any product return requests;

our ability to maintain or increase gross margins;

variations in our sales channelsservices or the mixtermination, suspension, or delay of our product sales;

our ability to anticipate market needs and to identify, develop, complete, introduce, market and produceexisting or new products and technologies in a timely manner to address those needs;

the availability and pricing of competing products and technologies and the resulting effect on sales and pricing of our products;

acquisitions;

the effect of new and emerging technologies;

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the timing of acceptance of new mobile services by users of our customers’ services;

deferrals of ordersinitiatives by our customers in anticipation of new products, applications, product enhancements or operating systems; and

general economic and market conditions.

We have difficulty predicting the volume and timing of orders. In any given quarter, our sales may involve large financial commitments from a relatively small number of customers. As a result, the cancellation or deferral of even a small number of orders could materially impact our revenues, which would adversely affect our quarterly financial performance. Also, we have often recorded a large amount of our sales in the last month of the quarter and often in the last week of that month. Accordingly, delays in the closing of sales near the end of a quarter could cause quarterly revenues to fall substantially short of anticipated levels. Significant sales may also occur earlier than expected, which could cause operating results for later quarters to compare unfavorably with operating results from earlier quarters.

Future orders may come from new customers or from existing customers for new products.  The sales cycles may be greater than what we have experienced in the past, increasing the difficulty to predict quarterly revenues.

Because we sell primarily to large carriers, cable/MSOs and OEM customers, we have no direct relationship with most end users of our products.  This indirect relationship delays feedback and blurs signals of change in the quick-to-evolve wireless ecosystem, and is one of the reasons we have difficulty predicting demand.

A large portion of our operating expenses, including rent, depreciation and amortization, is fixed and difficult to reduce or change. Accordingly, if our total revenue does not meet our expectations, we may not be able to adjust our expenses quickly enough to compensate for the shortfall in revenue. In that event, our business, financial condition, and results of operations would be materiallyoperations. To the extent the pandemic adversely affects our business and adversely affected.

Due to allfinancial results, it may also have the effect of the foregoing factors, andheightening many of the other risks discussed in this Report, you shouldset forth herein.

We cannot predict the duration or direction of the pandemic or consumer or business trends or their sustained impact noted above. Ultimately, we will continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate, and attempt to accurately project demand and deploy our workforce and other resources accordingly. If we experience unfavorable market conditions, or if we do not rely on quarter-to-quarter comparisonsmaintain operations at a scope that is commensurate with such conditions, our business and financial results may be harmed.
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Table of our operating results as an indication of future performance.

Contents

Technology and customer needs change rapidly in our market, which could render our products obsolete and negatively affect our business, financial condition, and results of operations.

Our success depends on our ability to anticipate and adapt to changes in technology and industry standards. We will also need to continue to develop and introduce new and enhanced products to meet our target markets’ changing demands and keep up with evolving industry standards, including changes in the Microsoft, Google, and Apple operating systems with which our products are designed to be compatible, and to promote those products successfully.changes in customer demands. The communications and graphics software markets in which we operate are characterized by rapid technological change, changing customer needs, frequent new product introductions, evolving industry standards, and short product life cycles. In addition, some of the technology we market, which has been sold as software in the past, can be integrated at the chipset level by the leading mobile chipset manufacturers.  Any of these factors could render our existing products obsolete and unmarketable. In addition, newNew products and product enhancements can require long development and testing periods as a result of the complexities inherent in today’s computing environmentsmobile technology environment and the performance demanded by customers and called for by evolving wireless networking technologies.customers. If our target markets do not develop as we anticipate, if our products do not gain widespread acceptance in these markets, or if we are unable to develop new versions of our software products that can operate on future wireless networks and PC and mobile device operating systems and interoperate with other popular applications,relevant third-party technology, our business, financial condition and results of operations could be materially and adversely affected.

Competition within our target markets is intense and includes numerous established competitors and new entrants, which could negatively affect our revenues and results of operations.

We operate in markets that are extremely competitive and subject to rapid changes in technology. Because there are low barriers to entry into the software markets in which we participate and may participate in the future, we expect significant competition to continue from both established and emerging software companies, both domestic and international. In fact, our growth opportunities in new product markets could be limited to the extent established

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and emerging software companies enter or have entered those markets. Furthermore,We also may face competition from our existing customers that choose to internally develop and potential OEM customers may acquire or develop products that compete directly with our products.

operate a competing product.

Many of our other current and prospective competitors have significantly greater financial, marketing, service, support, technical, and other resources than we do. As a result, they may be able to adapt more quickly than we can to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products. Announcements of competing products by competitors could result in our carrier customers reducing, delaying, or withholding the cancellationadoption, promotion, or launch of orders by customersour products and services in anticipation of the introduction of such new products. In addition, some of our competitors are currently making complementary products that are sold separately. Such competitors could decide to enhance their competitive position by bundling their products to attract customers seeking integrated, cost-effective software applications. Some competitors have a retail emphasis and offer OEM products with a reduced set of features. The opportunity for retail upgrade sales may induce these and other competitors to make OEM products available at their own cost or even at a loss. We also expect competition to increase as a result of software industry consolidations, which may lead to the creation of additional large and well-financed competitors. Increased competition is likely to result in price reductions, fewer customer orders, reduced margins, and loss of market share.

We have introduced products to support higher speed networking and 4G technologies and services and next generation networks.  If the market for these products does not develop as we have anticipated or if the adoption of and investments in these technologies and services grows more slowly than we have anticipated, our operating results, financial condition, and prospects may be negatively affected.

We have introduced products to support new high-speed networking, 4G technologies, and next generation networks, but the pace of the market adoption of such technologies and the deployment of next generation networks is uncertain. Where some of the products that we have introduced to support high-speed networking and 4G technologies have allowed us to enter new markets, such as mobile marketing and analytics, a viable market for these products may not develop or be sustainable, and we may face intense competition in these markets.  

Future sales and any future profits from these and related products are substantially dependent upon the acceptance and use of these new high-speed networking and 4G technologies, on the continued adoption and use of mobile data services by end users, on our carrier, MSO, and enterprise customers’ ability to successfully introduce new mobile services enabled by our products, and on our ability to broaden our carrier customer base, which we believe will be difficult and time-consuming.  If the adoption of and investments in new networking and 4G technologies does not grow or grows more slowly than anticipated, or if CSPs delay their deployment of next generation networks or fail to deploy such networks successfully, or if we are unable to compete in new markets for our products, we will not obtain the anticipated returns from our planning and development investments.  To the extent we devote substantial resources and incur significant expenses to enable our products to be interoperable with new networks that have failed or have been delayed or not deployed, our operating results, financial condition, and prospects may be negatively affected.

If we are unable to retain key personnel, the loss of their services could materially and adversely affect our

Our business, financial condition and results of operations.

Our future performance depends in significant part upon the continued service of our senior management and other key technical personnel. We do not have employment agreements with our key employees. The loss of the services of our key employees would materially and adversely affect our business, financial condition and results of operations. Our future success also depends on our ability to continue to attract, retain, and motivate qualified personnel, particularly highly skilled engineers involved in the ongoing research and development required to develop and enhance our products. Competition for these employees remains high and employee retention is a common problem in our industry. Our inability to attract and retain the highly trained technical personnel that are essential to our product development, marketing, service, and support teams may limit the rate at which we can generate revenue, develop new products or product enhancements and generally would have an adverse effect on our business, financial condition and results of operations.

We rely directly and indirectly on third-party intellectual property and licenses, which may not be available on commercially reasonable terms or at all.

Many of the Company’s products and services include third-party intellectual property, which requires licenses from those third parties directly to us or to unrelated companies which provide us with sublicenses and/or execution of

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services for the operation of our business. These products and services include our wireless suite of products, as well as our graphics products. The Company has historically been able to obtain such licenses on reasonable terms.  There is, however, no assurance that the necessary licenses could be obtained on acceptable terms, or at all, in the future. If the Company or our third-party service providers are unable to obtain or renew critical licenses on reasonable terms, we may be forced to terminate or curtail our products and services which rely on such intellectual property, and our financial condition and operating results could be adversely affected as a result of legal, business, and economic risks specific to international operations.

In recent years, our revenues derived from sales to customers outside the U.S. have not been material. Our revenues derived from such sales can vary from quarter to quarter and from year to year. In the future, we may expand our international business activities. International operations are subject to many inherent risks, including:
•general political, social and economic instability;
•trade restrictions;
•the imposition of governmental controls;
•exposure to different legal standards, particularly with respect to intellectual property;
•burdens of complying with a variety of foreign laws, including without limitation data privacy laws, such as the General Data Protection Regulation (“GDPR”) in Europe;
•import and export license requirements and restrictions of the United States and any other country in which we operate;
•unexpected changes in regulatory requirements;
•foreign technical standards;
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•changes in tariffs;
•difficulties in staffing and managing international operations;
•difficulties in securing and servicing international customers;
•difficulties in collecting receivables from foreign entities;
•fluctuations in currency exchange rates and any imposition of currency exchange controls; and
•potentially adverse tax consequences.
These conditions may increase our cost of doing business. Moreover, as our customers are adversely affected by these conditions, our business with them may be materially adversely affected.

If we fail to continue to establish and maintain strategic relationships with mobile device manufacturers, wireless carriers, cable MSOs and network infrastructure manufacturers, market acceptance of our products and our profitability may suffer.

Most of our strategic relationships with mobile device manufacturers are not subject to written contract, but rather are in the form of informal working relationships. We believe these relationships are valuable to our success. In particular, these relationships provide us with insights into product development and emerging technologies, which allows us to keep abreast of, or anticipate, market trends, and helps us serve our current and prospective customers. Because these relationships are not typically governed by written agreements, there is no obligation for many of our partners to continue working with us. If we are unable to maintain our existing strategic relationships with mobile device manufacturers or if we fail to enter into additional strategic relationships or the parties with whom we have strategic relationships favor one of our competitors, our ability to provide products that meet our current and prospective customers’ needs could be compromised and our reputation and future revenue prospects could suffer. For example, if our software does not function well with a popular mobile device because we have not maintained a relationship with its manufacturer, carriers seeking to provide that device to their respective customers could choose a competitor’s software over ours or develop their own. Even if we succeed in establishing these relationships, they may not result in additional customers or revenues.

Our growth depends in part on our customers’ ability and willingness to promote our services and attract and retain new end user customers or achieve other goals outside of our control.

We sell our wireless products for use on handheld devices primarily to our carrier, cable/MSO, and enterprise customers, who deploy our products for use by their end user customers. The success of our carrier, cable/MSO and enterprise customers, and their ability and willingness to market services to their end users that are supported by our products, is critical to our future success.  Our ability to generate revenues from sales of our software is also constrained by our carrier customers’ ability to attract and retain customers. We have no input into or influence upon their marketing efforts and sales and customer retention activities. If our large carrier customers fail to maintain or grow demand for their services, revenues or revenue growth from our products designed for use on mobile devices will declinedisrupted and our results of operations will suffer.

Our acquisitionscould be adversely affected.

Legal and Regulatory Risks
The actual or perceived failure by us, our customers, partners, or vendors to comply with stringent and evolving information security, data protection and data privacy laws, regulations, standards, policies, and contractual obligations could harm our reputation and business, may result in increased compliance costs and impediments to the development or performance of companiesour offerings, and may subject us to significant monetary or technologies may disruptother penalties and liability.
In the ordinary course of our business, through the delivery of our solutions and divert management attentionin connection with our routine processing of human resources data, we collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, share and cause our current operationsotherwise process confidential, proprietary, and sensitive information, including personal information, and information that may be considered sensitive personal information in certain jurisdictions. As a result, we are subject to suffer.

We have historically made targeted acquisitionsnumerous data privacy, data protection, and information security obligations, such as various laws, regulations, guidance, industry standards, external and internal privacy and security policies, and contractual requirements, and may become subject to new obligations of smaller companies with important technologythis nature in the future.

The data privacy, data protection, and expectinformation security laws and regulations to which we are and may become subject address and will address a range of issues, including data privacy, cybersecurity and restrictions or technological requirements regarding the collection, use, storage, protection, retention, or transfer of personal information. The regulatory framework and enforcement mechanisms for data privacy and cybersecurity issues worldwide can vary substantially between jurisdictions. New laws continue to do sobe enacted that may require considerable resources to ensure timely and ongoing compliance given the nuances of each jurisdiction’s legal obligations. For example, more U.S. states are enacting laws similar to the California Consumer Privacy Act of 2018 and the substantial amendments to that framework from the California Privacy Rights Act (CPRA), which took effect in January 2023, that provide new data privacy rights to state residents, expand certain protections to personal information of employees in the state, and create special degrees of protection for certain “sensitive” personal information. The CPRA establishes a dedicated California data protection authority, which may increase enforcement actions and penalties for privacy regulation violations, as well as audits of possible violations. Additionally, expanded business-to-business personal information protections may require additional negotiation of new and existing data processing agreements with service providers. Burgeoning legal obligations may require expenditure of considerable resources to establish and maintain the necessary internal infrastructure to comply with monitoring obligations, requests from data subjects, and other requirements, which may limit the use and adoption of our offerings. Other state and federal legislative and regulatory bodies have enacted or may enact similar legislation regarding the handling of personal data.
Further, foreign privacy and data protection laws and regulations can be more restrictive than those in the United States. In the European Union, the GDPR includes operational and governance requirements for companies that collect or process personal data of residents of the European Union and provides for significant penalties for non-compliance. The costs of compliance with, and other burdens imposed by, these laws and regulations may become substantial and may limit the use and adoption of our offerings, require us to change our business practices, impede the performance and development of our solutions.
In addition to data privacy and security laws, we are contractually subject to industry standards adopted by industry groups and may become subject to such obligations in the future. As part of any acquisition, we will be requiredWe are also bound by other contractual obligations related to assimilate the operations, products,privacy, data protection, and personnel of the acquired businessesinformation security, and train, retain, and motivate key personnel from the acquired businesses. Weour efforts to comply with such obligations may not be ablesuccessful. We publish privacy policies, marketing materials, and other statements, such as compliance with certain certifications or self-regulatory principles, regarding privacy, data protection, and information security privacy, data protection, and information security. For the offerings that are distributed by our customers under their respective brands, our customers develop the applicable privacy policies, terms of service and other similar materials and statements. If any of these policies, materials or statements are found to maintain uniform standards, controls, procedures and policies ifbe deficient, lacking in transparency, deceptive, unfair, or misrepresentative
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of our practices, we may be subject to investigation, enforcement actions by regulators, contractual penalties or indemnification obligations, or other adverse consequences.
We may at times fail in these efforts. Similarly, acquisitions may cause disruptions(or be perceived to have failed) in our operations and divert management’s attention from our Company’s day-to-day operations, which could impair our relationshipsefforts to comply with our current employees, customers,privacy, data protection, and strategic partners. Acquisitions may also subject usinformation security obligations. Moreover, despite our efforts, our personnel or third parties on whom we rely, including the third party providers of services we utilize to liabilities and risks that are not known or identifiable at the timedeliver some of the acquisition.

We may also have to incur debt or issue equity securities in order to finance future acquisitions. Our financial condition could be harmed to the extent we incur substantial debt or use significant amountsfunctionality of our cash resources in acquisitions. The issuance of equity securities for any acquisition could be substantially dilutiveofferings, may fail to our existing stockholders. In addition, we expect our profitability could be adversely affected because of acquisition-related accounting costs, write offs, amortization expenses, and charges related to acquired intangible assets. In consummating acquisitions, we are also subject to risks of entering geographic and business markets in which we have had limited or no prior experience. If we are unable to fully integrate acquired businesses, products, or technologies within existing operations, we may not receive the intended benefits ofcomply with such acquisitions.

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Our operating income or loss may continue to change due to shifts in our sales mix and variability in our operating expenses.

Our operating income or loss can change quarter to quarter and year to year due to a change in our sales mix and the timing of our continued investments in research and development and infrastructure. We continue to invest in research and development, which is the lifeline of our technology portfolio.  The timing of these additional expenses can vary significantly quarter to quarter and even from year to year.

Our products may contain undetected software defects,obligations, which could negatively affectimpact our revenues.

Our software products are complex and may contain undetected defects. Inbusiness operations. If we or the past,third parties on which we have discovered software defects in certain of our products and have experienced delayed or lost revenues during the period it took to correct these problems.  Although we and our OEM customers test our products, it is possible that errors may be found or occur in our new or existing products after we have commenced commercial shipment of those products.  Defects, whether actual or perceived, could result in adverse publicity, loss of revenues, product returns, a delay in market acceptance of our products, loss of competitive position, or claims against us by customers. Any such problems could be costly to remedy and could cause interruptions, delays, or cessation of our product sales, which could cause us to lose existing or prospective customers and could negatively affect our results of operations. In addition, some of our software contains open source components that are licensed under the GNU General Public License and other open source licenses. These components may contain undetected defects or incompatibilities, may cause us to lose control over the development of portions of our software code, and may expose us to claims of infringement if these components are, or incorporate, infringing materials, the licenses are not enforceablerely fail, or are modifiedperceived to become incompatiblehave failed, to address or comply with other open source licenses,applicable privacy, data protection, and information security obligations, we could face significant consequences, including but not limited to significant fines, penalties, or exposureliabilities for noncompliance, government enforcement actions, litigation (including class-action claims), additional reporting requirements and/or oversight, bans on processing personal information, and orders to misappropriation claims ifdestroy or not use personal information. Any of these components include unauthorized materials fromevents could have a third party.

material adverse effect on our reputation, business, or financial condition.

Regulations affecting our customers and usour business and future regulations, to which they or we may become subject, to, may harm our business.

Certain of our customers in the communications industry are subject to regulation by the Federal Communications Commission, which could have an indirect effect on our business. In addition, the U.S. telecommunications industry has been subject to continuing deregulation since 1984. We cannot predict when, or upon what terms and conditions, further regulation or deregulation might occur, or the effect regulation or deregulation may have on demand for our products from customers in the communications industry. Demand for our products may be indirectly affected by regulations imposed upon potential users of those products, which may increase our costs and expenses.

We may be unable to adequately protect our intellectual property and other proprietary rights, we may be subject to claims for intellectual property infringement, and our customers may be subject to claims for intellectual property infringement with respect to which we have indemnification obligations, which could negatively impact our revenues.

business and financial results.

Our success is dependent upon our software code base, our programming methodologies and other intellectual properties and proprietary rights. In order to protect our proprietary technology, we rely on a combination of trade secrets, nondisclosure agreements, patents, and copyright and trademark law. We currently own U.S. trademark registrations for certain of our trademarks and U.S. patents for certain of our technologies. However, these measures afford us only limited protection. Furthermore,For our mobile applications that are distributed by our carrier customers to their end users, we rely primarily on “shrink wrap” licenses that are not signed by theour carrier customers to establish binding end user and, therefore, may be unenforceable under the laws of certain jurisdictions. Accordingly, itterms. It is possible that third parties may copy or otherwise obtain our rights without our authorization. It is also possible that third parties may independently develop technologies similar to ours. It may be difficult for us to detect unauthorized use of our intellectual property and proprietary rights.

In addition, we sometimes include open-source software in our products. As a result of our use of open source software in our products, we may license or be required to license or disclose code and/or innovations that turn out to be material to our business and may also be exposed to increased litigation risk. If the protection of our proprietary rights is inadequate to prevent independent development, unauthorized use, or appropriation by third parties, the value of our brands and other intangible assets may be diminished and competitors may be able to more effectively mimic our products, services, and methods of operations. Any of these events could have an adverse effect on our business and financial results.

We may be subject to claims of intellectual property infringement as the number of trademarks, patents, copyrights, and other intellectual property rights asserted by companies in our industry grows and the coverage of these patents and other rights and the conduct of our business, including the functionality of softwareour products, increasingly overlap. From time to time, we have receivedmay receive communications from third parties asserting that our trade name or features, content, or trademarks of certain of our products infringe upon intellectual property rights held by such third parties. We have also received and may in the future receive correspondence from third parties separately asserting that our products may infringe on certain patents held by each of thethose parties. Although we are not aware that any of our products infringe on the proprietary rights of others, third parties may claim infringement by us with respect to our current or future products.
Additionally, subject to certain limitations, our customer agreements require that we indemnify our customers for infringement claims made by third parties involving our intellectual property, including our software code, embedded in their products.products, or otherwise distributed by them. Infringement claims, whether with or without merit, could result in time-consuming and costly litigation, divert the attention of our management, cause product shipment delays, result in our sales being enjoined, or

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require us to enter into royalty or licensing agreements with third parties. If we are required to enter into royalty or licensing agreements, they may not be on terms that are acceptable to us. UnfavorableAn injunction or unfavorable royalty or

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licensing agreements could seriously impair our ability to market our products.

Our business, financial conditionproducts and operating results could be adversely affected as a result of legal, business, and economic risks specific to international operations.

In recent years, our revenues derived from sales to customers outside the U.S. have not been material. Our revenues derived from such sales can vary from quarter to quarter and from year to year. We also frequently ship products to our domestic customers’ international manufacturing divisions and subcontractors. In the future, we may expand these international business activities. International operations are subject to many inherent risks, including:

general political, social and economic instability;

trade restrictions;

the imposition of governmental controls;

exposure to different legal standards, particularly with respect to intellectual property;

burdens of complying with a variety of foreign laws, including without limitation data privacy laws, such as the General Data Privacy Regulation in Europe;

import and export license requirements and restrictions of the United States and any other country in which we operate;

unexpected changes in regulatory requirements;

foreign technical standards;

changes in tariffs;

difficulties in staffing and managing international operations;

difficulties in securing and servicing international customers;

difficulties in collecting receivables from foreign entities;

fluctuations in currency exchange rates and any imposition of currency exchange controls; and

potentially adverse tax consequences.

These conditions may increase our cost of doing business. Moreover, as our customers are adversely affected by these conditions, our business with them may be disrupted and our results of operations could be adversely affected.

Security and privacy breaches may harm our business.

The uninterrupted operation of our hosted solutions and the confidentiality and security of third-party information is critical to our business. Any failures in our security and privacy measures, such as “hacking” of our systems by outsiders, could have a materialan adverse effect on our financial position and results of operations. If we are unable to protect, or our customers perceive that we are unable to protect, the security and privacy of our electronic information, our growth could be materially adversely affected. A security or privacy breach may:

cause our customers to lose confidence in our solutions;

harm our reputation;

expose us to liability; and

increase our expense from potential remediation costs.

While we believe we use proven applications designed for data security and integrity to process electronic transactions, there can be no assurance that our use of these applications will be sufficient to address changing market conditions or the security and privacy concerns of existing and potential customers.  In addition, our customers and end users may use our products and services in a manner which violates security or data privacy laws

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in one or more jurisdictions.  Any significant or high profile data privacy breaches or violations of data privacy laws, whether directly through our hosted solutions or by third parties using our products and services, could result in the loss of business and reputation, litigation against us and regulatory investigations and penalties that could adversely affect our operating results and financial condition.

Interruptions or delays in service from data center hosting facilities could impair the delivery of our service and harm our business.

We currently serve our customers from data center hosting facilities. Any damage to, or failure of, such facilities generally could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their on-demand services, and adversely affect our renewal rates and our ability to attract new customers.

results.

If we fail to meet the requirements for continued listing on the NASDAQ Stock Market, our common stock would likelycould be delisted from trading on NASDAQ, which would likely reduce the liquidity of our common stock and could cause our trading price to decline.

Our common stock is currently listed for quotation on the NASDAQ Stock Market. We are required to meet specified financial requirements in order to maintain our listing on NASDAQ. If we fail to satisfy NASDAQ’s continued listing requirements, our common stock could be delisted from NASDAQ and our common stock would instead trade on the OTC Market. Any potential delisting of our common stock from NASDAQ would likely result in decreased liquidity and increased volatility of our common stock and would likely cause our trading price to decline.

Financial, Investment and Indebtedness Risks
We may raise additional capital through the issuance of equity or convertible debt securities or by entering into new or modifying existing borrowing arrangements in order to meet our capital needs. Additional funds to allow us to meet our capital needs may not be available on terms acceptable to us or at all.
We believe that our cash and the cash we expect to generate from operations will be sufficient to meet our capital needs for the next twelve months. However, it is possible that we may need or choose to obtain additional financing or to modify existing financing arrangements to fund our future activities. We could raise these funds by selling more stock to the public or to selected investors, or by entering into borrowing arrangements; provided that the terms of our existing Notes, Warrants and Additional Warrants permit our ability to access this additional capital (See "Risks Related to Our Convertible Notes"). We may not be able to obtain additional funds on favorable terms, or at all, including if the holders of our Notes, Warrants, or Additional Warrants do not approve such a transaction or if they are unwilling to modify our existing financing arrangements with them. If adequate funds are not available, we may be required to curtail our operations or other business activities significantly or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain technologies or potential markets.
It is possible that our future capital requirements may vary materially from those currently anticipated. The amount of capital that we will need in the future will depend on many factors, including but not limited to:
•the launch and market acceptance of our products;
•the levels of promotion and advertising that will be required to launch our products and achieve and maintain a competitive position in the marketplace;
•our business, product, capital expenditure, and research and development plans and product and technology roadmaps;
•the levels of working capital that we maintain;
•any acquisitions that we would choose to undertake;
•capital improvements to new and existing facilities;
•technological advances;
•our competitors’ response to our products; and
•our relationships with suppliers and customers.
In addition, we may raise additional capital to accommodate planned growth, hiring, and infrastructure needs or to consummate acquisitions of other businesses, products, or technologies.
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The Company has a history of net losses and may incur substantial net losses in the future.
During 2021 and 2022, we have exposure to additional tax liabilities.

Asbeen in a multinational corporation,net loss position, partially driven by the Family Safety Mobile Business acquisition and the elevated level of expenses at which we are subjectcurrently operating as we continue to income taxes as well as sales, use,serve some of our carrier customers from the family safety platform that we acquired, and other non-income based taxes,we continue to incur the expenses associated with operating the acquired platform. Although we plan to continue to migrate all of our continuing wireless carrier customers to a single family safety platform over the next year, we will continue to operate with this elevated level of expenses until such migration has been completed. Additionally, a customer whose contract will be terminating in both2023 will remain on the U.S. and various foreign jurisdictions. Significant judgment is required in determiningacquired platform until their service has ended. Once we have migrated each of our worldwide provision for income taxes, sales and use taxes, and other tax liabilities. Changes in tax laws or tax rulings may havecontinuing carrier customers to a significantly adverse impactconsolidated family safety platform, we will focus our efforts on growing subscribers to the family safety product deployed at each of these carrier customers, which we expect will increase our effective tax rate.

We are also subjectrevenues.

During 2022, we began to non-income based taxes, such as payroll, sales, use, value-added, net worth, property, and goods and services taxes, in both the United States and various foreign jurisdictions. We are regularly under audit by tax authoritiesundertake efforts to align our operating expenses with respectour projected revenue subsequent to these non-income based taxesmigrations, and in February 2023, following receipt of notice of termination of one of our Tier 1 customer contracts, we announced we would accelerate our efforts designed to reduce operating costs and continue advancing our ongoing commitment to profitable growth. We may have exposureencounter challenges in the execution of these efforts, and these challenges could impact our financial results. Moreover, although we believe that these efforts will reduce operating costs and improve operating margins, we cannot guarantee that they will achieve or sustain the targeted benefits, or that the benefits, even if achieved, will be adequate to additional non-income based tax liabilities. An increasing number of states have considered or have adopted laws that attempt to impose obligations on out-of-state retailers to collect salesmeet our long-term profitability and use taxes on their behalf.  A successful assertion by one or more states or foreign countries requiring us to collect sales and use taxes whereoperational expectations. In addition, if we do not do soachieve certain revenue targets subsequent to these efforts, we may need to undertake further cost reduction actions, which may include further restructurings.
The results of cost reduction efforts undertaken by the Company could negatively impact the Company's future operational goals and may negatively impact the Company.
The Company's current and potential future actions to reduce operating costs as a result of the receipt of notice of termination of one of our Tier 1 customer contracts will cause the Company to incur additional charges in substantial tax liabilities, includingthe near term, which may include charges related to employee transition, severance payments, employee benefits, and stock-based compensation. Additional risks associated with the continuing impact of these efforts include employee attrition beyond our intended reduction in force and adverse effects on employee morale, diversion of management attention, adverse effects to our reputation as an employer (which could make it more difficult for past sales, as well as penaltiesus to hire new employees in the future), and interest.

Although we believe that our incomepotential failure or delays to meet operational and non-income based tax estimates are reasonable, there is no assurance that our provisions for taxes are correct, or thatgrowth targets due to the final determinationloss of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals.qualified employees. If we are required to pay substantially more taxes indo not realize the futureexpected benefits of our cost reduction efforts on a timely basis or for prior periods,at all, our operatingbusiness, results of operations and financial condition could be adversely affected.

Evolving

If we are unable to meet our obligations as they become due over the next twelve months, the Company may not be able to continue as a going concern.
We believe that we will be able to meet our financial obligations as they become due over the next twelve months, primarily based on our current working capital levels, our current financial projections, and our belief that we would be able to secure short-term loans and raise capital when necessary. Our ability to obtain a short-term loan or raise additional capital would be subject to our obligations and restrictions under our Notes, Warrants, and Additional Warrants.
Our ability to continue as a going concern is substantially dependent upon multiple factors, which primarily include those factors set forth above. If our actual financial performance is unfavorable in comparison to our internal plans and projections, we may need to consider additional actions to mitigate conditions or events that would raise substantial doubt about our ability to continue as a going concern, including the following:
•Raising additional capital through short-term loans or other borrowing arrangements.
•Implementing additional restructuring and cost reductions.
•Raising additional capital through a private placement or other transactions.
•Disposing of or discontinuing one or more product lines.
•Selling or licensing intellectual property.
Should our going concern assumption not be appropriate, or should we become unable to continue in the normal course of operations, adjustments would be required to the amounts and classifications of assets and liabilities within our consolidated financial statements, and these adjustments could be significant. Our consolidated financial statements do not
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reflect the adjustments or reclassifications of assets and liabilities that would be necessary if we were to become unable to continue as a going concern.
Our operating income or loss may continue to change due to shifts in our sales mix and variability in our operating expenses.
Our operating income or loss can change quarter to quarter and year to year due to a change in our sales mix and the timing of our continued investments in research and development and infrastructure. We continue to invest in research and development, which is vital to maintaining and enhancing our technology portfolio. The timing of these additional expenses can significantly vary quarter to quarter and even from year to year.
Our results of operations may be adversely affected if we fail to realize the full value of our goodwill and intangible assets.
As of December 31, 2022, we had total goodwill and net intangible assets of $71.4 million. We assess goodwill and definite lived assets for impairment annually, and we conduct an interim evaluation of definite lived and indefinite lived assets whenever events or changes in circumstances indicate that these assets may be impaired. Our ability to realize the value of goodwill and net intangible assets will depend on the future cash flows of the businesses to which they relate. If we are not able to realize the value of the goodwill and net intangible assets, this could adversely affect our results of operations and financial condition, and also result in an impairment of those assets. See Note 16 for additional information regarding potential impairment in 2023.
Risks Related to Our Convertible Notes
The terms of our Convertible Notes, and our debt repayment obligations thereunder, may restrict our ability to obtain additional financing, and adversely affect our financial condition and cash flows from operations in the future.
Our indebtedness under the Convertible Notes, and certain restrictions included within the terms of the Convertible Notes, may restrict, and otherwise impair our ability to obtain additional financing in the future for general corporate purposes, including working capital, capital expenditures, potential acquisitions and strategic transactions.Further, a portion of our cash flows from operations may have to be dedicated to repaying the principal and interest of the Convertible Notes during 2023. Our ability to meet our debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors, many of which are outside of our control. Our future operations may not generate sufficient cash to enable us to repay our debt, including the Convertible Notes. If we fail to make a payment on our debt, we could be in default on such debt. If we are at any time unable to pay our indebtedness under the Convertible Notes in cash when due, we may be required to issue additional shares of common stock on unfavorable terms.
Conversion of the Convertible Notes and exercise of the Warrants or Additional Warrants will dilute the ownership interest of our existing stockholders or may otherwise depress the price of our common stock.
The conversion of some or all of the Convertible Notes or exercise of some or all of the Warrants issued along with the Convertible Notes or Additional Warrants will dilute the ownership interests of existing stockholders. Any sales in the public market of our common stock issuable upon such conversion of the Convertible Notes or exercise of the Warrants or Additional Warrants could adversely affect prevailing market prices of our common stock. In addition, the existence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes or exercise of the Warrants or Additional Warrants could be used to satisfy short positions, or anticipated conversion of the Convertible Notes into, or exercise of Warrants or Additional Warrants for, shares of our common stock could depress the price of our common stock.
We may require additional financing to sustain or grow our operations and such additional capital may not be available to us, or may only be available to us on unfavorable terms.
To the extent that revenues generated by our ongoing operations are insufficient to fund future requirements, we may need to raise additional funds through debt or equity financings or curtail our growth. The Convertible Notes contain limitations on our ability to raise money through equity offerings and to incur additional indebtedness.We cannot be sure that we will be able to raise equity or debt financing on terms favorable to us and our stockholders in the amounts that we require, or at all. Our inability in the future to obtain additional equity or debt capital on acceptable terms, or at all, could adversely impact our ability to execute our business strategy, which could adversely affect our growth prospects and future stockholder returns.
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Our obligations to the holders of our Convertible Notes are secured by a security interest in substantially all of our assets, and data privacy lawsif we default on those obligations, the note holders could foreclose on our assets.
Our obligations under the Convertible Notes and regulationsthe transaction documents relating to those notes are secured by a security interest in substantially all of our and our subsidiaries’ assets.As a result, if we default under our obligations under the Convertible Notes or the transaction documents, the holders of the Convertible Notes, acting through their appointed agent, could foreclose on their security interests and liquidate some or all of these assets, which would harm our business, financial condition and results of operations and could require us to curtail or cease operations.
The holders of our Convertible Notes have certain additional rights upon an event of default under the Convertible Notes which could harm our business, financial condition and results of operations and could require us to curtail or cease our operations.
Under our Convertible Notes, the holders have various rights upon an event of default. Such rights include (i) an increase in the interest rate; (ii) the holders having the right to demand redemption of all or a portion of the Convertible Notes and (iii) the holders have the right to convert the Convertible Notes into our common stock at a discount over then current market price of our common stock. At any time after certain notice requirements for an event of default are triggered, a holder of the Convertible Notes may require us to redeem all or any portion by delivering written notice. Each portion of the Convertible Notes subject to redemption would be redeemed by us in cash by wire transfer of immediately available funds at a price equal to the greater of (i) the product of (A) the conversion amount to be redeemed multiplied by (B) the redemption premium (equal to 125%) and (ii) the product of (X) the conversion rate with respect to the conversion amount in effect at such time as the holder delivers an event of default redemption notice multiplied by (Y) the product of (1) the redemption premium (equal to 125%) multiplied by (2) the greatest closing sale price of the common stock on any trading day during the period commencing on the date immediately preceding the event of default and ending on the date we make the entire payment required to be made under the Convertible Notes. We may not have sufficient funds to settle the redemption price and, as described above, this could trigger rights under the security interest granted to the holders and result in the foreclosure of their security interests and liquidation of some or all of our assets.
Other General Risks
Our customers’ launch of our products and services may be subject to the negotiation and completion of new agreements or amendments to existing agreements and/or lengthy design, qualification and go-to-market processes, which may result in increased compliance costs, impedimentslonger sales and launch cycles than we expect, which may impact our financial results and cause our revenues and operating results to be difficult to predict.
A customer’s decision to purchase and launch to the development or performancemarket certain of our offerings,products or solutions, particularly products or versions of products that are new to the market, may involve a lengthy contracting, design, and monetary or other penalties.

Becausequalification processes, with a timing gap between contracting and launch. Further, a lengthy contracting process, together with lengthy testing, qualification and approval processes are often a prerequisite to our solutions process customer datacustomers’ being in a position to launch updated versions of our products. In particular, customers deciding on the implementation of our products may have lengthy and unpredictable procurement and go-to-market processes that may contain personally identifying information,delay or impact expected revenues. This unpredictability may cause our revenues and operating results to vary unexpectedly from quarter-to-quarter, making our future operational results less predictable.

Our acquisitions of companies or technologies may disrupt our business and divert management attention and cause our other operations to suffer.
We have historically made targeted acquisitions of businesses or product lines with technology important to our business strategy and expect to continue to do so in the future. Most recently, we acquired the Family Safety Mobile Business from Avast plc and certain of its affiliates. As part of any acquisition, we are required to assimilate the operations, products, and, where applicable, personnel of the acquired businesses and train, retain, and motivate key personnel needed for the successful integration of the acquired business. We may not be able to maintain uniform standards, controls, procedures, and policies if we fail in these efforts. Additionally, as we integrate any newly acquired business into our existing operations, process changes may result in unanticipated or unintended delays in sales of acquired products or services, which could adversely affect our relationships with customers of the acquired business and result in lower revenues from the acquired business than anticipated. Acquisitions may becomecause disruptions in our operations and divert management’s attention from our Company’s day-to-day operations, which could impair our relationships with our existing employees, customers, and strategic partners. Acquisitions may also subject us to liabilities and risks that are not known or identifiable at the time of the acquisition.
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We may also have to incur debt or issue equity securities to finance future acquisitions. Our financial condition could be harmed to the extent we incur substantial debt or use significant amounts of our cash resources in acquisitions. The issuance of equity securities for any acquisition could be substantially dilutive to our existing stockholders. In addition, we expect our profitability could be adversely affected because of acquisition-related accounting costs, impairments, amortization expenses, and charges related to acquired intangible assets. In consummating acquisitions, we are also subject to federal, staterisks of entering geographic and foreign laws and regulations regardingbusiness markets in which we have had limited or no prior experience. If we are unable to fully integrate acquired businesses, products, or technologies within existing operations, we may not receive the privacy and protectionintended benefits of such data. These lawsacquisitions.
We rely directly and regulations address a rangeindirectly on third-party intellectual property and licenses, which may not be available on commercially reasonable terms or at all.
Many of issues, including data privacy, cybersecuritythe Company’s products and restrictionsservices include third-party intellectual property, which require licenses directly to us or technological requirements regardingto unrelated companies that provide us with sublicenses and/or execution of services for the collection, use, storage, protection, retentionoperation of our business. The Company has historically been able to obtain such licenses or transfer of data. The regulatory framework for data privacy and cybersecurity issues worldwide can vary substantially from jurisdiction to jurisdiction. Foreign privacy and data protection laws and regulations cansublicenses on reasonable terms. There is, however, no assurance that the necessary licenses could be more restrictive than thoseobtained on acceptable terms, or at all, in the United States. Infuture. If the European Union (“EU”),Company or our third-party service providers are unable to obtain or renew critical licenses on reasonable terms, we may be forced to terminate or curtail our products and services which rely on such intellectual property, and our financial condition and operating results may be materially adversely affected.
Our quarterly revenues and operating results are difficult to predict and could fall below analyst or investor expectations, which could cause the General Data Protection Regulation (“GDPR”), isprice of our common stock to fall.
Our quarterly revenues and operating results have fluctuated significantly in the past and may continue to vary from quarter to quarter due to several factors, many of which are not within our control. If our operating results do not meet the expectations of securities analysts or investors, our stock price may decline. Fluctuations in our operating results may be due to several factors, including the following:
•the gain or loss of a key customer;
•the timing of product and services deployments to our major customers and the timing of our customers’ launch of their branded versions of such products and services to their end users;
•the timing and extent of our customers’ efforts to market and promote such products and services to their users;
•the timing of user acceptance of our customers’ branded versions of our products and services and the growth or decline in the subscriber base for such products and services;
•our ability to maintain or increase gross margins;
•variations in our sales channels or the mix of our product sales;
•our ability to anticipate market needs and to identify, develop, complete, introduce, market and produce new products and technologies in a timely manner to address those needs;
•the availability and pricing of competing products and technologies and the resulting effect on sales and pricing of our products;
•acquisitions;
•the effect of new and emerging technologies;
•deferrals of orders by our customers in anticipation of new products, applications, product enhancements or operating systems; and
•general economic and market conditions.
Our revenues are heavily dependent upon the number of subscribers utilizing our products through our wireless carrier customers. Variations in subscribers, including churn of those subscribers across multiple product and wireless carrier bases can drive volatility in our revenues and result in difficulties in predicting our operating results. Significant sales may also occur earlier than expected, which could cause operating results for later quarters to compare unfavorably with operating results from earlier quarters.
19
Table of Contents
Future orders may come into forcefrom new customers or from existing customers for new products. The sales cycles may be greater than what we have experienced in May 2018. The GDPR will replace the current EU Data Protection Directivepast, increasing the difficulty to predict quarterly revenues.
Because we sell primarily to large wireless carriers, we have no direct relationship with most end users of our products. This indirect relationship delays feedback and related country-specific legislation. The GDPR will include operationalblurs signals of change in the quick-to-evolve wireless ecosystem and governance requirements for companies that collect or process personal data of residentsis one of the European Union that differ from or expand upon those currently in place in the EU. The GDPR also provides for significant penalties for non-compliance. The costs of compliance with, and

18

other burdens imposed by, these laws and regulations may become substantial and may limit the use and adoptionreasons we have difficulty predicting demand.

A large portion of our offerings, require usoperating expenses, including rent, depreciation, and amortization, is fixed and difficult to changereduce or change. Accordingly, if our total revenue does not meet our expectations, we may not be able to adjust our expenses quickly enough to compensate for the shortfall in revenue. In that event, our business, practices, impedefinancial condition, and results of operations would be materially and adversely affected.
Due to all of the performanceforegoing factors, and developmentthe other risks discussed in this Report, you should not rely on quarter-to-quarter comparisons of our solutions, or lead to significant fines, penalties or liabilities for noncompliance with such laws or regulations.

operating results as an indication of future performance.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

Our corporate headquarters is located in Aliso Viejo, California,Pittsburgh, Pennsylvania, where we currently lease and occupy approximately 24,68835,621 square feet of space pursuant tounder a lease that expires on MayApril 30, 2026. Prior to January 1, 2022, our leased space in Pittsburgh included an additional 19,965 square feet, which we subleased to a third party under an agreement that commenced on February 1, 2015 and expired on December 31, 2019.2021. We lease an additional 19,100and occupy approximately 8,513 square feet of space in Aliso Viejo, California under a lease that expires Januaryon October 31, 2022, which we have subleased to a third party through January 31, 2022. We lease 15,300 square feet in Watsonville, California under a lease that expires September 30, 2018, which we have subleased to a third party through September 30, 2018.  We lease 55,600 square feet in Pittsburgh, Pennsylvania under a lease that expires December 31, 2021. We sublease 19,965 square feet of our leased space in Pittsburgh under an agreement which commenced on February 1, 2015 and continues for the remainder of our lease term.2024. Internationally, we lease 6,300approximately 12,728 square feet in Belgrade, Serbia under a lease that expires DecemberJuly 31, 2021. We2026, we lease 6,900approximately 1,500 square feet in Stockholm, Sweden under a lease that expires May 31, 2019,September 30, 2023, and we lease approximately 3,200 square feet in Braga, Portugal under a lease that expires July 31, 2018.

2024.

Item 3. LEGAL PROCEEDINGS

The Company may become involved in various legal proceedings arising from its business activities. While management does not currently believe that the ultimate disposition of these matters will have a material adverse impact on the Company’s consolidated results of operations, cash flows, or financial position, litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.

Item 4. MINE SAFETY DISCLOSURES

Not Applicable.

19

20

Table of Contents
PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded on the NASDAQ Stock Market under the symbol “SMSI.” The high and low sale prices for our common stock as reported by NASDAQ are set forth below for the periods indicated.  The prices have been adjusted for our 1:4 reverse stock split that occurred on August 17, 2016.

 

 

High

 

 

Low

 

YEAR ENDED DECEMBER 31, 2017:

 

 

 

 

 

 

 

 

First Quarter

 

$

2.32

 

 

$

0.80

 

Second Quarter

 

 

1.70

 

 

 

0.81

 

Third Quarter

 

 

1.52

 

 

 

0.88

 

Fourth Quarter

 

 

3.41

 

 

 

1.09

 

YEAR ENDED DECEMBER 31, 2016:

 

 

 

 

 

 

 

 

First Quarter

 

$

3.12

 

 

$

1.80

 

Second Quarter

 

 

3.20

 

 

 

2.24

 

Third Quarter

 

 

3.20

 

 

 

2.00

 

Fourth Quarter

 

 

2.34

 

 

 

1.28

 

On March 23, 2018, the closing sale price for our common stock as reported by NASDAQ was $1.68.

For information regarding Securities Authorized for Issuance under Equity Compensation Plans, please refer to Item 12.

12 in Part III of this Annual Report on Form 10-K.

Holders

As of March 23, 2018,15, 2023, there were approximately 13389 holders of record of our common stock based on information provided by our transfer agent.

Dividends

We have never declared or paid any cash dividends on our common stock. We do not expect to pay any cash dividends on our common stock for the foreseeable future. Any determination to pay dividends on our common stock in the future will be at the discretion of our boardBoard of directors,Directors, subject to applicable laws, and will depend on our financial condition, operating results, capital requirements, general business conditions, and other factors that our boardBoard of directorsDirectors considers relevant.  Any declaration and payment of dividends on our common stock will be further subject to the preferential rights of holders of shares of our Series B 10% Convertible Preferred Stock (the “Series B Preferred Stock”), if any such shares remain outstanding.  

The holders of our Series B Preferred Stock are entitled to receive, out of funds legally available therefor, cumulative cash dividends on such shares at a rate per share of ten percent (10%) per annum, payable (i) when and as declared by our board of directors, in quarterly installments on March 1, June 1, September 1 and December 1, (ii) upon conversion of such shares into common stock, and (iii) upon our optional redemption of such shares in accordance with the terms set forth in the Certificate of Designation for our Series B Preferred Stock.

20

Purchases of Equity Securities by the Company

The table set forth below shows all purchases of securities by us during the fourth quarter of fiscal year 2017:

2022:

ISSUER PURCHASES OF EQUITY SECURITIES

ISSUER PURCHASES OF EQUITY SECURITIES

 

ISSUER PURCHASES OF EQUITY SECURITIES

Period

 

Total Number

of Shares

(or Units)

Purchased

 

 

 

Average

Price Paid

per Share

(or Unit)

 

 

Total Number of

Shares (or Units)

Purchased as

Part of Publicly

Announced Plans

or Programs

 

 

Maximum Number

(or Approximate

Dollar Value) of

Shares (or Units)

that May Yet Be

Purchased Under

the Plans or Programs

 

PeriodTotal Number of Shares
(or Units) Purchased		Average Price Paid per Share (or Unit)Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

October 1 - 31, 2017

 

 

5,063

 

 

 

$

1.60

 

 

 

—

 

 

 

—

 

November 1 - 30, 2017

 

 

5,063

 

 

 

$

1.86

 

 

 

—

 

 

 

—

 

December 1 - 31, 2017

 

 

5,062

 

 

 

$

2.74

 

 

 

—

 

 

 

—

 

October 1 - 31, 2022October 1 - 31, 202219,839 $2.25 — — 
November 1 - 30, 2022November 1 - 30, 202219,835 2.26 — — 
December 1 - 31, 2022December 1 - 31, 202219,834 2.12 — — 

Total

 

 

15,188

 

(a)

 

 

 

 

 

 

—

 

 

 

—

 

Total59,508 $2.21 

The above table includes:

(a)

Acquisition of stock by the Company as payment of withholding taxes in connection with the vesting of restricted stock awards, in an aggregate amount of 15,188 shares during the periods set forth in the table. All of the shares were cancelled when they were acquired.

(a)Includes the acquisition of stock by the Company as payment of withholding taxes in connection with the vesting of restricted stock awards in an aggregate amount of 59,508 shares during the periods set forth in the table. All of the shares were canceled when they were acquired.

21

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis

Reserved.
21
Table of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto appearing elsewhere in this Report. The following selected consolidated statements of operations and comprehensive loss data for the years ended December 31, 2017, 2016 and 2015, and the consolidated balance sheet data at December 31, 2017 and 2016, have been derived from audited consolidated financial statements included elsewhere in this Report. The consolidated statements of operations and comprehensive loss data presented below for the years ended December 31, 2014 and 2013, and the consolidated balance sheet data at December 31, 2015, 2014 and 2013 are derived from audited consolidated financial statements that are not included in this Report.

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Consolidated Statement of Operations

   and Comprehensive Loss Data (in

   thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

22,974

 

 

$

28,235

 

 

$

39,507

 

 

$

36,979

 

 

$

42,675

 

Cost of revenues

 

 

5,082

 

 

 

7,564

 

 

 

8,152

 

 

 

9,317

 

 

 

9,707

 

Gross profit

 

 

17,892

 

 

 

20,671

 

 

 

31,355

 

 

 

27,662

 

 

 

32,968

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

 

6,186

 

 

 

9,615

 

 

 

8,902

 

 

 

9,559

 

 

 

15,675

 

Research and development

 

 

8,952

 

 

 

15,906

 

 

 

13,863

 

 

 

14,192

 

 

 

21,305

 

General and administrative

 

 

8,551

 

 

 

10,341

 

 

 

11,128

 

 

 

13,218

 

 

 

18,216

 

Restructuring expenses

 

 

(123

)

 

 

303

 

 

 

—

 

 

 

2,435

 

 

 

5,602

 

Long-lived asset impairment

 

 

—

 

 

 

411

 

 

 

—

 

 

 

—

 

 

 

—

 

Total operating expenses

 

 

23,566

 

 

 

36,576

 

 

 

33,893

 

 

 

39,404

 

 

 

60,798

 

Operating loss

 

 

(5,674

)

 

 

(15,905

)

 

 

(2,538

)

 

 

(11,742

)

 

 

(27,830

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in carrying value of

   contingent liability

 

 

—

 

 

 

668

 

 

 

—

 

 

 

—

 

 

 

—

 

Loss on debt extinguishment

 

 

(405

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Interest income (expense), net

 

 

(1,120

)

 

 

(313

)

 

 

1

 

 

 

(5

)

 

 

28

 

Other income (expense), net

 

 

(8

)

 

 

(22

)

 

 

3

 

 

 

(3

)

 

 

2

 

Loss before provision for income taxes

 

 

(7,207

)

 

 

(15,572

)

 

 

(2,534

)

 

 

(11,750

)

 

 

(27,800

)

Provision for income tax expense

   (benefit)

 

 

(546

)

 

 

(229

)

 

 

68

 

 

 

49

 

 

 

153

 

Net loss

 

 

(6,661

)

 

 

(15,343

)

 

 

(2,602

)

 

 

(11,799

)

 

 

(27,953

)

Other comprehensive income (loss),

   before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on

   available-for-sale securities

 

 

—

 

 

 

2

 

 

 

(1

)

 

 

—

 

 

 

7

 

Other comprehensive income

   (expense), net of tax

 

 

—

 

 

 

2

 

 

 

(1

)

 

 

—

 

 

 

7

 

Comprehensive loss

 

$

(6,661

)

 

$

(15,341

)

 

$

(2,603

)

 

$

(11,799

)

 

$

(27,946

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.49

)

 

$

(1.28

)

 

$

(0.23

)

 

$

(1.16

)

 

$

(3.02

)

Diluted

 

$

(0.49

)

 

$

(1.28

)

 

$

(0.23

)

 

$

(1.16

)

 

$

(3.02

)

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

13,489

 

 

 

11,951

 

 

 

11,486

 

 

 

10,162

 

 

 

9,245

 

Diluted

 

 

13,489

 

 

 

11,951

 

 

 

11,486

 

 

 

10,162

 

 

 

9,245

 

22

 

 

As of December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Consolidated Balance Sheet Data (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

13,877

 

 

$

14,308

 

 

$

24,473

 

 

$

27,390

 

 

$

31,538

 

Total liabilities

 

 

9,310

 

 

 

11,249

 

 

 

10,447

 

 

 

12,488

 

 

 

13,367

 

Accumulated comprehensive deficit

 

 

(232,933

)

 

 

(226,228

)

 

 

(210,887

)

 

 

(208,284

)

 

 

(196,485

)

Total stockholders' equity

 

$

4,567

 

 

$

3,059

 

 

$

14,026

 

 

$

14,902

 

 

$

18,171

 

23

Contents

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OFOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Report. This Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements” and Part I, Item 1A, “Risk Factors.” Readers are also urged to carefully review and consider these, and other disclosures made by us which attempt to advise interested parties of the factors which affect our business.

Introduction and Overview

Smith Micro developsprovides software tosolutions that simplify and enhance the mobile experience providing solutions to some of the leading wireless and cable service providers device manufacturers, and wireless users around the world.globe. From optimizing wireless networks enabling the Digital Family Lifestyle™ to uncovering customer experience insights, and from providing visual accesspowerful voice messaging capabilities, we strive to wireless voicemail to ensuring family safety, our solutions enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones. We also provide a services platform for thesmartphones and consumer IoT that enables comprehensive device management and FOTA updates for various types of connected devices. In addition, Smith Micro’sOur portfolio includes a wide range of products for creating, sharing, and monetizing rich content, such as visual voice messaging, retail content display optimization and 2D/3D graphics applications. With thisperformance analytics on any product set.
We continue to innovate and evolve our business to respond to industry trends and maximize opportunities in emerging markets, such as digital lifestyle services and online safety, “Big Data” analytics, automotive telematics, and the consumer IoT marketplace. The key to our longevity, however, is not simply technological innovation, but our focus on understanding our customers’ needs and delivering value.
In 2022, our revenues declined by 17% to $48.5 million, primarily driven by the $8.9 million decline in revenues in our CommSuite product line during the year as T-Mobile wound down Sprint’s legacy premium visual voicemail service. Principally as a focus, it is Smith Micro’s mission to help our customers thriveresult of this decline in a connected world.

For more than three decades, Smith Micro has developed deep expertise in embedded software for mobile devices, policy-based management platforms, and highly-scalable client and server applications. Tier 1 mobile network operators, cable providers, OEMs/device manufacturers, and enterprise businesses across a wide range of industries use our software to capitalize on the growth of connected consumers, mobile apps, vehicle telematics, and smart cities.

During fiscal year 2017,revenues, we experienceddid experience a decrease in our revenues primarilygross profit to $34.3 million during 2022, a decrease of $11.4 million compared to 2021. Our operating expenses decreased during the year by $11.4 million, due to lower customer demanda non-recurring $12.9 million charge resulting from the earn-out provisions of the Family Safety Mobile Business acquisition incurred during 2021, partially offset by an increase in development costs in 2022 related to the migration of our carrier customers onto our SafePath Family Safety platform. The net loss for our CommSuite product. Several new SafePath® contracts have been signed and launched during the 2017 fiscal year; however, related revenue is increasing at a slower rate than expected. The restructuring actions taken in 2016 and early 2017 were realized throughout the year,2022 was $29.3 million, resulting in a significant decreasenet loss per diluted share of $0.53.

In 2022, we provided white label Family Safety applications to all three Tier 1 wireless carriers in annual operating expenses. The Company reducedthe United States, however one of our Tier 1 customers notified us in February 2023 that it is terminating its rateFamily Safety contract with us, effective as of lossJune 30, 2023. Despite that termination, we continue to believe that we remain strategically positioned to offer our market-leading family safety platform to the majority of U.S. mobile subscribers. Since our acquisitions of Circle Media Labs, Inc.'s ("Circle") operator business in 2020 and used short-term borrowings and various equity transactionsthe Family Safety Mobile Business from Avast in April 2021, we have been focused on migrating those customers from the acquired software platforms to our flagship SafePath platform, with the first such migration being completed during the first quarter of 2022 at one of our U.S. Tier 1 carrier customers. We believe that as a source of cash whilewe complete our development efforts associated with the migration to the SafePath® contracts platform, our development costs should decline. As a result of nearing the finalization of our migration efforts our Research & Development costs have decreased by approximately $1.5 million, or 18%, in the fourth quarter as compared to the second quarter of 2022. In addition, we anticipate that certain costs of sales related to the acquired platforms will be eliminated once the SafePath migrations are complete, which is expected to result in an increase revenue to expected levels.

in our gross margins.


22
Table of Contents
Results of Operations

Revenues to Sprint and their respective affiliates in the Wireless business segment accounted for 61%, 63%, and 65% of the Company’s total revenues for fiscal years 2017, 2016, and 2015, respectively. Revenues to FastSpring in the Graphics business segment accounted for 14%, 14%, and 11% of the Company’s total revenues for fiscal years 2017, 2016, and 2015, respectively. These two customers accounted for 72%, 80%, and 83% of accounts receivable for the years ended December 31, 2017, 2016, and 2015, respectively.

24

The following table sets forth certain consolidated statement of comprehensive lossoperations data as a percentage of total revenues for the periods indicated:

 

Year Ended December 31,

 

 

For the Year Ended December 31,

 

2017

 

 

2016

 

 

2015

 

 

20222021

Revenues

 

 

100.0

 

%

 

100.0

 

%

 

100.0

 

%

Revenues100.0 %100.0 %

Cost of revenues

 

 

22.1

 

 

 

26.8

 

 

 

20.6

 

 

Cost of revenues29.3 21.7 

Gross profit

 

 

77.9

 

 

 

73.2

 

 

 

79.4

 

 

Gross profit70.7 78.3 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating ExpensesOperating Expenses

Selling and marketing

 

 

26.9

 

 

 

34.0

 

 

 

22.5

 

 

Selling and marketing26.6 19.8 

Research and development

 

 

39.0

 

 

 

56.3

 

 

 

35.1

 

 

Research and development61.6 44.8 

General and administrative

 

 

37.2

 

 

 

36.6

 

 

 

28.2

 

 

General and administrative33.3 30.7 

Restructuring expenses

 

 

(0.5

)

 

 

1.1

 

 

 

—

 

 

Long-lived asset impairment

 

 

—

 

 

 

1.5

 

 

 

—

 

 

Change in fair value of contingent considerationChange in fair value of contingent consideration— 22.0 
Amortization of intangible assetsAmortization of intangible assets13.0 13.9 

Total operating expenses

 

 

102.6

 

 

 

129.5

 

 

 

85.8

 

 

Total operating expenses134.5 131.2 

Operating loss

 

 

(24.7

)

 

 

(56.3

)

 

 

(6.4

)

 

Operating loss(63.7)(53.0)

Change in carrying value of contingent

liability

 

 

—

 

 

 

2.4

 

 

 

—

 

 

Loss on debt extinguishment

 

 

(1.8

)

 

 

—

 

 

 

—

 

 

Interest expense

 

 

(4.9

)

 

 

(1.1

)

 

 

—

 

 

Other expense

 

 

—

 

 

 

(0.1

)

 

 

—

 

 

Change in fair value of warrant and derivative liabilitiesChange in fair value of warrant and derivative liabilities9.6 — 
Interest (expense) income, netInterest (expense) income, net(5.5)0.1 
Other (expense) income, netOther (expense) income, net(0.2)0.1 

Loss before provision for income taxes

 

 

(31.4

)

 

 

(55.1

)

 

 

(6.4

)

 

Loss before provision for income taxes(59.9)(52.8)

Provision for income tax expense (benefit)

 

 

(2.4

)

 

 

(0.8

)

 

 

0.2

 

 

Provision for income tax expenseProvision for income tax expense0.5 0.4 

Net loss

 

 

(29.0

)

%

 

(54.3

)

%

 

(6.6

)

%

Net loss(60.4)%(53.1)%

Revenues and Expense Components

The following is a description of the primary components of our revenues and expenses:

Revenues. Revenues are net of sales returns and allowances. Our operations are organized into twoone business segments:

segment, Wireless, which includes all of our NetWise®existing core products, including the Family Safety (including SafePath), CommSuite®, SafePath®,CommSuite, and QuickLink®, familyViewSpot portfolio of products; and

products.

Graphics, which includes our consumer-based products: Poser®, Moho® (formerly Anime Studio®), Clip Studio Paint (formerly Manga Studio®), MotionArtist®, and StuffIt®.

The following table shows the revenues generated by each business segment (in thousands):

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Wireless

 

$

18,342

 

 

$

23,086

 

 

$

33,553

 

Graphics

 

 

4,632

 

 

 

5,149

 

 

 

5,954

 

Total revenues

 

 

22,974

 

 

 

28,235

 

 

 

39,507

 

Cost of revenues

 

 

5,082

 

 

 

7,564

 

 

 

8,152

 

Gross profit

 

$

17,892

 

 

$

20,671

 

 

$

31,355

 

Cost of revenues. Cost of revenues consists of direct product and assembly,hosting, maintenance, data center, royalties, and technical support expenses.

expenses including personnel costs.

Selling and marketing. Selling and marketing expenses consist primarily of personnel costs, advertising costs, including digital marketing expenses, sales commissions, and trade show expenses, and the amortization of certain intangible assets.expenses. These expenses may vary significantly from quarter to quarter based on the timing of trade shows and product introductions.

25

Research and development. Research and development expenses consist primarily of personnel costs, equipment costs, and equipmentexternal contract development costs required to conduct our software development efforts.  It also includes the amortization of certain intangible assets.

General and administrative. General and administrative expenses consist primarily of personnel costs, professional services and fees paid for external service providers, space and occupancy costs, and legal and other public company costs.

Change in carryingfair value of contingent liability. The changeconsideration. Change in fair value of contingent consideration consists of a contract extension becoming probable with a given customer designated in the carryingearn-out provision of an acquisition purchase agreement.
Amortization of intangible assets. Amortization of intangible assets consists of the amortization expense based on the pattern of economic benefit generated from the use of the related assets.
Change in fair value of the Pennsylvania grant liability. See discussion under sub-heading, “Pennsylvania Opportunity Grant Program,” appearingwarrant and derivative liabilities. Change in Note 11fair value of the Noteswarrant and derivative liabilities is from valuation related impacts to Consolidated Financial Statements.

Loss on debt extinguishment. Loss resulting from the extinguishmentwarrant and derivative liabilities which were added in 2022.

23
Table of debt.

Contents

Interest (expense) income, (expense), net. Interest expense is primarily related to interest onassociated with our debt,convertible notes and financing arrangements and the credit-adjusted risk-freeamortization of debt issuance costs and discount. Interest income is primarily related to interest rate used to measure our operating lease termination liabilities in restructuring.

earned on cash equivalents.

Other (expense) income, net.Other income (expense), net. Other income (expense) is primarily related to fixed assets disposals.

asset disposals and other non-operating gains or losses.

Provision for income tax expense. Income tax expense (benefit). The Company accountsis primarily related to the provision for incomefederal, state, and foreign taxes as required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 740, Income Taxesimposed upon our results of operations.
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
Revenues. Revenues were $48.5 million and $58.4 million for the years ended December 31, 2022 and 2021, respectively, representing a decrease of $9.9 million, or 17%. This statement requiresdecrease was driven by declines in CommSuite revenues of approximately $8.9 million and in Family Safety revenues of approximately $1.2 million primarily as a result of the recognitionmigration of deferred tax assetslegacy Sprint customers onto the T-Mobile network. Partially offsetting this decline was an increase in ViewSpot product line of approximately $0.3 million.
Cost of revenues. Cost of revenues were $14.2 million and liabilities$12.7 million for the future consequencesyears ended December 31, 2022 and 2021, respectively. This increase of events that have been recognized$1.5 million was primarily due to higher costs associated with operating the acquired legacy Family Safety Mobile Business.
Gross profit. Gross profit was $34.3 million, or 70.7% of revenues, for the years ended December 31, 2022, compared to $45.7 million, or 78.3% of revenues, for the year ended December 31,2021. The decrease of $11.4 million in gross profit was a result of the year-over-year decline in revenue volume combined with the product mix underlying the revenues.
Selling and marketing. Selling and marketing expenses were $12.9 million and $11.6 million for the years ended December 31, 2022 and 2021, respectively. This increase of $1.3 million was primarily due to charges for severance costs of $0.8 million, including stock based compensation in 2022 combined with increases in personnel related costs.
Research and development. Research and development expenses were $29.9 million and $26.2 million for the years ended December 31, 2022 and 2021, respectively. This increase of $3.7 million was primarily due to an increase in contractor costs associated with supporting SafePath development and personnel related expenses as a result of the acquisition of the Family Safety Mobile Business.
General and administrative. General and administrative expenses were $16.2 million and $17.9 million for the years ended December 31, 2022 and 2021, respectively. This decrease of $1.8 million was primarily due to $1.7 million in transaction and professional service costs associated with our acquisition of the Family Safety Mobile Business in 2021 and costs related to the acquisition of certain non-development intellectual property of $1.0 million incurred in 2021, partially offset by transaction costs related to the Notes and Warrant Offering and Stock Offering in August 2022 and an increase in personnel related costs.
Change in fair value of contingent consideration. The change in fair value of contingent consideration of $12.9 million for the year ended December 31,2021 resulted from a contract extension becoming probable with a given customer designated in the Company’s financial statements or tax returns.  Measurementearn-out provision of the deferred items is based on enacted tax laws.  InPurchase Agreement for the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets and liabilities result in a deferred tax asset, we are required to evaluate the probability of being able to realize the future benefits indicated by such asset.  The deferred tax assets are reduced by a valuation allowance if, based upon all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Establishing, reducing or increasing a valuation allowance in an accounting period generally resultsFamily Safety Mobile Business, resulting in an increase orin the contingent consideration due to Avast.
Amortization of intangible assets. Amortization of intangible assets was $6.3 million and $8.1 million for the years ended December 31, 2022 and 2021, respectively. This decrease of $1.8 million was primarily attributable to the period-over-period decrease in taxamortization expense recognized associated with the intangible assets acquired as part of the Circle acquisition as there was an impairment charge in 2021 of $1.5 million and an acceleration of the statementremaining intangibles.
Change in fair value of operations. We must make significant judgmentswarrant and derivative liabilities. The change in fair value of warrant and derivative liabilities of $4.7 million for the years ended December 31, 2022 resulted from valuation related impacts to determinewarrant and derivative liabilities which were added in 2022.
Interest (expense) income, net. Interest expense was $2.7 million in 2022. Interest income was nominal in 2021. The $2.7 million increase is due to the provisionfinancing transaction from August of 2022 and the related amortization of deferred financing fees and the discount associated with the Convertible Notes.
Provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits, and any valuation allowance to be recorded against deferred tax assets.  expense. Because of our cumulative loss position, the current provision for income tax expense consists of state income tax minimums,taxes, foreign tax withholdings, and foreign income taxes. After consideration of the Company’s continuing cumulative loss position as of December 31, 2017,2022, the Company retained a valuation allowance related to its U.S.-based deferred tax assets of $53.0$62.7 million at December 31, 2017.2022. During fiscal year 2017, the2022, both our valuation allowance on deferred tax assets decreased by $23.7 million.

Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016

Revenues. Revenues of $23.0 million for fiscal year 2017 decreased $5.3 million, or 18.6%, from $28.2 million for fiscal year 2016. Wireless revenues of $18.3 million decreased $4.7 million, or 20.5%, from $23.0 million for fiscal year 2016. The decrease was primarily due to lower customer demand for the CommSuite product, Sprint’s decreased usage of the NetWise product, and the Cable/MSO business which decreased $0.5 million due to slower customer rollouts resulting in lower license purchases.  We expect lost revenues to be replaced in 2018 with the roll out of our SafePath solution with Sprint and other near term opportunities. Graphics sales decreased $0.5 million, or 10.0%, from $5.1 million for fiscal year 2016, primarily due to lower customer demand. Our reseller agreement with Japanese software developer Celsys, which permitted us to market, license and provide support for the English-language version of Clip Studio Paint (formerly Manga Studio), terminated in 2017. As such, Clip Studio Paint was phased out of our product portfolio in 2017.

Cost of revenues. Cost of revenues of $5.1 million for fiscal year 2017 decreased $2.5 million, or 32.8%, from $7.6 million for fiscal year 2016.  This decrease was primarily due to the lower revenues, maintenance costs, and costs related to our restructuring activities in late 2016 and early 2017. Also during 2017, we realized favorable cost reductions from certain vendors and contracts related to delivering revenues.

Gross profit. Gross profit of $17.9 million or 77.9% of revenues for fiscal year 2017 decreased $2.8 million, or 13.4%, from $20.7 million, or 73.2% of revenues for fiscal year 2016. The 4.7 percentage point increase was primarily due to the reduction of costs related to our restructuring activities and lower costs from our vendors.

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Selling and marketing. Selling and marketing expenses of $6.2 million for fiscal year 2017 decreased $3.4 million, or 35.7%, from $9.6 million for fiscal year 2016. This decrease was primarily due to our restructuring activities in late 2016 and early 2017 which included a reduction in force, resulting in a savings of $3.0 million of employee and employee related costs of which $0.3 million was stock-based compensation, and a reduction of $0.5 million of advertising and marketing related expenses.  The amortization of intangible assets was $0.1 million.  

Research and development. Research and development expenses of $9.0 million for fiscal year 2017 decreased $7.0 million, or 43.7%, from $15.9 million for fiscal year 2016. This decrease was primarily due to our restructuring activities in late 2016 and early 2017 which included a reduction in force, resulting in a savings of $3.0 million of employee related costs, of which $0.3 million was stock-based compensation.

General and administrative. General and administrative expenses of $8.6 million for fiscal year 2017 decreased $1.8 million, or 17.3%, from $10.3 million for fiscal year 2016. This decrease was primarily due to lower costs as a result of our restructuring activities, specific initiatives to reducing spending on travel and general information technology support services, and a reduction of certain acquisition related services including legal expenses.

Restructuring expenses.  Restructuring income of $0.1 million for fiscal year 2017 was a result of our restructuring activities in early 2017, which included a one-time reduction in force charges of approximately $0.8 million offset by a change in the estimated restructured lease liability based on the finalization of certain sublease contracts to third parties.  

Long-lived asset impairment.  There were no impairment charges in fiscal year 2017. An intangible asset was impaired that resulted in a charge to the statement of operations of $0.4 million in fiscal year 2016.  

Change in carrying value of contingent liability.  The change in the carrying value of the Pennsylvania grant liability resulted in income of $0.7 million for fiscal year 2016. See discussion under sub-heading, “Pennsylvania Opportunity Grant Program,” appearing in Note 11 of the Notes to Consolidated Financial Statements.

Loss on debt extinguishment. Loss on debt extinguishment of $0.4 million in 2017 was a result of the extinguishment of debt related to the exchange of a related party note for the newly issued Series B Preferred Stock in September 2017.

Interest income (expense), net.  Interest expense was $1.1 million for fiscal year 2017, $0.3 million of which was due to a higher volume of short term debt during the year.

Provision for income tax expense. The Company accounts for income taxes as required by FASB ASC Topic No. 740, Income Taxes.  This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns.  Measurement of the deferred items is based on enacted tax laws.  In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets and liabilities result in a deferred tax asset, we are required to evaluate the probability of being able to realize the future benefits indicated by such asset.  The deferred tax assets are reduced by a valuation allowance if, based upon all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Establishing, reducing or increasing a valuation allowance in an accounting period generally results in an increase or decrease in tax expense in the statement of operations. We must make significant judgments to determine the provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits, and any valuation allowance to be recorded against deferred tax assets.  Because of our loss position, the current provision for income tax expense consists of state income tax minimums, foreign tax withholdings, and foreign income taxes. After consideration of the Company’s continuing cumulative loss position as of December 31, 2017, the Company retained a valuation allowance related to its U.S.-based deferred tax assets of $53.0 million at December 31, 2017. During fiscal year 2017, the valuation allowance on deferred tax assets decreased by $23.7 million.

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Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015

Revenues. Revenues of $28.2 million for fiscal year 2016 decreased $11.3 million, or 28.5%, from $39.5 million for fiscal year 2015. Wireless revenues of $23.1 million decreased $10.5 million, or 31.2%. The decrease was primarily due to Sprint which decreased $8.2 million due to the termination of the NetWise and connection manager business, the Cable/MSO business which decreased $1.1 million due to slower customer rollouts, and the continued decline of our legacy connection manager business which decreased $1.2 million. Graphics sales decreased $0.8 million, or 13.5%, primarily due to lower customer demand for most of our products except Moho, which increased 12% year-over-year.  

Cost of revenues. Cost of revenues of $7.5 million for fiscal year 2016 decreased $0.6 million, or 7.2%, from $8.1 million for fiscal year 2015.  This decrease was primarily due to the lower revenues, lower maintenance costs, and lower spending.

Gross profit. Gross profit of $20.7 million or 73.2% of revenues for fiscal year 2016 decreased $10.7 million, or 34.1%, from $31.4 million, or 79.4% of revenues for fiscal year 2015. The 6.2 percentage point decrease was primarily due to the decreased revenues.

Selling and marketing. Selling and marketing expenses of $9.6 million for fiscal year 2016 increased $0.7 million, or 8.0%, from $8.9 million for fiscal year 2015. This increase was primarily due to the Birdstep acquisition of $0.5 million and increased advertising of $0.1 million.  The amortization of intangible assets resulting from the Birdstep and iMobileMagic acquisitions was $0.2 million.  Stock-based compensation of $0.3 million in 2016 decreased by $0.1 million from 2015.  

Research and development. Research and development expenses of $15.9 million for fiscal year 2016 increased $2.0 million, or 14.7%, from $13.9 million for fiscal year 2015. This increase was primarily due to the Birdstep and iMobileMagic acquisitions of $1.2 million and other headcount additions during the year of $1.2 million.  They were partially offset by reduced spending in other areas of $0.2 million.  Stock-based compensation was $0.5 million in fiscal year 2016, a decrease of $0.2 million from fiscal year 2015.

General and administrative. General and administrative expenses of $10.3 million for fiscal year 2016 decreased $0.8 million, or 6.9%, from $11.1 million for fiscal year 2015. This decrease was primarily due to lower depreciation of $0.7 million and cost reductions of $0.2 million, partially offset by increased travel of $0.3 million, acquisition costs of $0.2 million, and legal fees of $0.1 million.  Stock-based compensation expense decreased from $1.2 million to $0.7 million, or $0.5 million.  

Restructuring expenses.  Restructuring expense was $0.3 million for fiscal year 2016 due to one-time employee terminations of $0.2 million and other expenses of $0.1 million.  There were no restructuring expenses in 2015.  

Long-lived asset impairment.  An intangible asset was impaired that resulted in a charge to the statement of operations of $0.4 million in fiscal year 2016.  There were no impairment charges in 2015.

Change in carrying value of contingent liability.  The change in the carrying value of the Pennsylvania grant liability was income of $0.7 million for fiscal year 2016.

Interest income (expense), net.  Interest expense was $0.3 million for fiscal year 2016 due to the issuance of notes payable on September 6, 2016 and the credit-adjusted risk-free interest rate used to measure our operating lease termination liabilities in restructuring.

Provision for income tax expense. The Company accounts for income taxes as required by FASB ASC Topic No. 740, Income Taxes. This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns.  Measurement of the deferred items is based on enacted tax laws.  In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets and liabilities result in a deferred tax asset, we are required to evaluate the probability of being able to realize the future benefits indicated by such asset.  The deferred tax assets are reduced by a valuation allowance if, based upon all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Establishing, reducing or increasing a valuation allowance in an accounting period generally results in an increase or decrease in tax expense in the statement of

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operations. We must make significant judgments to determine the provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits, and any valuation allowance to be recorded against deferred tax assets.  Because of our loss position, the current provision for income tax expense consists of state income tax minimums, foreign tax withholdings, and foreign income taxes. After consideration of the Company’s continuing cumulative loss position as of December 31, 2016, the Company retained a valuation allowance related to its U.S.-based deferred tax assets of $76.4 million at December 31, 2016.  During fiscal year 2016, the valuation allowance on deferred tax assets increased by $1.5 million and decreased by $0.8 million during fiscal year 2015.

$5.4 million.

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Liquidity and Capital Resources

Going Concern Evaluation

In connection with preparing consolidated

The Company’s principal sources of liquidity are its existing cash and cash equivalents, and cash generated by operations. The Company's primary needs for liquidity relate to working capital requirements for operations and its debt service requirements. As of December 31, 2022, the Company's cash and cash equivalents were approximately $14.0 million. As noted above, we believe that we will be able to meet our financial statementsobligations as they become due over the next twelve months.
Operating activities
Net cash used in operating activities was $19.3 million for the year ended December 31, 2017, management evaluated whether there2022. The primary uses of operating cash were conditionsa net loss of $29.3 million less non-cash expenses totaling $12.4 million, and events, considereda decrease in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.

The Company considered the following:

Operating losses for eleven consecutive quarters.

accounts payable and accrued liabilities of $2.6 million.

Negative cash flow from operating activities for seven consecutive quarters.

Stock price below $1.00/share resulting in non-compliance with NASDAQ listing rules to maintain a stock price of $1.00/share.

Stockholders’ equity less than $2.5 million at March 31, 2017 and June 30, 2017, resulting in non-compliance with NASDAQ listing rules.

Revenue declines for two consecutive years, including a decline of 32% of revenue from the Company’s largest customer, in fiscal year 2016 compared to fiscal year 2015.

Ordinarily, conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern relate to the entity’s ability to meet its obligations as they become due.

The Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial statements are issued by considering the following:

The Company raised $4.0 million of debt financing during the year ended December 31, 2016.

The Company has raised funds from short-term loans from related parties.

As a result of the Company’s restructurings that were implemented during the three months ended December 31, 2016, and again during the three months ended March 31, 2017, the Company’s cost structure is now in line with its future revenue projections.

In May 2017, the Company completed a $2.2 million offering of its common stock.

In September 2017, the Company closed on a $5.5 million preferred stock transaction which converted $2.8 million of long and short term debt, and received $2.7 million of new capital.

On March 6, 2018, the Company issued $5.0 million in a private placement offering of its common stock.  

In addition to the recent capital raised on March 5, 2018, management also believes that the Company will generate enough cash from operations to satisfy its obligations for the next twelve months from the issuance date.  

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The Company will take the following actions if it starts to trend unfavorably to its internal profitability and cash flow projections, in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:

Raise additional capital through short-term loans.

Implement additional restructuring and cost reductions.

Raise additional capital through a private placement.

Secure a commercial bank line of credit.

Dispose of one or more product lines.

Sell or license intellectual property.

At December 31, 2017, we had $2.2 million in cash and cash equivalents and $3.1 million of working capital.

Operating Activities

In 2017, netNet cash used in operating activities was $7.4$12.9 million primarily due to ourfor the year ended December 31, 2021. The net loss adjustedof $31.0 million for the quarter was offset by net non-cash itemsexpenses totaling $28.2 million. The primary source of $4.2 million, decreasesoperating cash was a decrease in accounts receivable of $7.9 million. The primary uses of operating cash were a decrease in accounts payable and accrued liabilities of $2.9 million, and an increase in accounts receivable of $0.4 million.

In 2016, net cash used in operating activities was $11.5 million primarily due to our net loss adjusted for non-cash items of $12.6 million, decreases of accounts payable and accrued liabilities of $2.0$16.3 million, and a decrease of deferred revenue of $0.8 million.  This usage was partially offset by a decrease of accounts receivable of $3.4 million, prepaid assets of $0.3 million, and a decrease of other assets of $0.2 million.

In 2015, net cash used in operating activities was $0.1 million primarily due to decreases in accounts payable and accrued expenses of $1.4 million and decreases in deferred revenue of $1.0$1.4 million. This usage was partially offset by our net loss adjusted for depreciation, amortization, non-cash stock-based compensation, inventory and accounts receivable reserves of $1.5 million, income tax refunds of $0.7 million, and decreases in other prepaid assets of $0.1 million.

Investing Activities

In 2017, cash used in investing activities was less than $0.1 million, related to capital expenditures.

In 2016,

Net cash provided by investing activities was $1.1$0.1 million duefor the year ended December 31, 2022 driven by proceeds received from installment payments for the sale assets of legacy software products, which was completed in 2020.
Net cash used in investing activities for year ended December 31, 2021 of $57.5 million was primarily attributable to the proceeds from the sale of short-term investments of $4.1 million, partially offset by the acquisition of Birdstep of $1.9 million, the acquisition of iMobileMagic of $0.6 million, and capital expenditures of $0.5 million.

In 2015, cash used by investingFamily Safety Mobile Business acquisition.

Financing activities were for the purchase of short-term investments of $1.2 million and capital expenditures of $0.1 million.

Financing Activities

In 2017,

Net cash provided by financing activities was $7.5$17.1 million duefor the year ended December 31, 2022, primarily attributable to net proceeds from commonthe Notes and preferred stock offeringsWarrant Offering of $4.5$15.0 million and proceeds from short-term promissory notesthe Stock Offering of $3.0 million.

In 2016, Partially offsetting the proceeds from the Convertible Notes and Warrants were $1.2 million in transaction fees. Also impacting net cash provided by financing activities were proceeds from insurance premium financing agreements and revolver draws of $1.5 million, offset by repayments on those arrangements of $1.3 million.

Net cash provided by financing activities was $3.8$60.7 million duefor the year ended December 31, 2021, relating primarily to the netMarch 2021 common stock offering, the proceeds fromof which were used, in part, to finance the issuance of debt instruments.

In 2015, cash provided by financing activities was de minimis as a result of cash received from the sale of stock for our employee stock purchase plan and the exercise of stock options.

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Family Safety Mobile Business acquisition.

Contractual Obligations and Commercial Commitments

During our normal course of business, we have made certain indemnities, commitments, and guarantees under which we may be required to make payments in relation to certain transactions. These include: intellectual property indemnities to our customers and licensees in connection with the use, sale and/or license of our products; contractual indemnities to our customers for breach of covenants, representations and warranties with respect to end user data privacy obligations; indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease; indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct; indemnities involving the accuracy of representations and warranties in certain contracts; and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. We may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain customer contracts. The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees may not provide for any limitation of the maximum potential for future payments we could be obligated to make. We have not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.

Real Property Leases

Our corporate headquarters is located in Aliso Viejo, California,Pittsburgh, Pennsylvania, where we currently lease and occupy approximately 24,68835,621 square feet of space pursuant to lease that expires on May 31, 2019. We lease approximately 55,600 square feet in Pittsburgh, Pennsylvania under a lease that expires on April 30, 2026. Prior to January 1, 2022, our leased space in Pittsburgh included an additional 19,965 square feet, which we subleased to a third party under an agreement that commenced on February 1, 2015 and expired on December 31, 2021. We sublease 19,965lease and occupy approximately 8,513 square feet of space in Aliso Viejo, California under a lease that space under an agreement which commenced February 1, 2015 and continues through the expiry date of our lease.expires on October 31, 2024. Internationally, we lease approximately 6,30012,728 square feet in Belgrade, Serbia under a lease that expires DecemberJuly 31, 2021. We2026, we lease approximately 6,9001,500 square feet in Stockholm, Sweden
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under a lease that expires May 31, 2019. WeSeptember 30, 2023, and we lease approximately 3,200 square feet in Braga, Portugal under a lease that expires July 31, 2018.

We lease an additional 19,100 square feet in Aliso Viejo, California under a lease that expires January 31, 2022. In August 2014, we signed an addendum2024.

Recent Accounting Pronouncements
See Note 1 of our Notes to sublease all of this space commencing on September 15, 2014Consolidated Financial Statements for a three-year period, with two renewal options. In October 2017, the sublease agreement was renewed through January 2022. The remaining lease expense, net of sublease income, has been accrued for in our 2013 restructuring liability account.

We lease approximately 15,300 square feet in Watsonville, California under a lease that expires September 30, 2018.  In March 2014, we signed an addendum to sublease all of this space commencing on May 1, 2014.  We continued to pay our current monthly rent through June 30, 2014.  Beginning on July 1, 2014, we are paying the landlord a minimum amount of rent, with annual escalations, through the end of the lease.  This lease expense has been accrued for in our 2013 restructuring liability account.  We now occupy a very small facility in Santa Cruz, California and are paying month-to-month rent.

information regarding recent accounting pronouncements.

Off-Balance Sheet Arrangements

As of December 31, 2017,2022, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our discussion and analysis of results of operations, financial condition, and liquidity are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may materially differ from these estimates under different assumptions or conditions. On an on-going basis, we review our estimates to ensure that they appropriately reflect changes in our business or new information as it becomes available.

We believe the following critical accounting policies affect our more significant estimates and assumptions used in the preparation of our consolidated financial statements:

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Business Combinations

The Company applies

We apply the provisions of FASB ASCFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic No. 805, Business Combinations, in the accounting for itsour acquisitions, which requires recognition of the assets acquired and the liabilities assumed at their acquisition date fair values, separately from goodwill. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the tangible and identifiable intangible assets acquired and liabilities assumed. While the Company uses itswe use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, itsour estimates are inherently uncertain and subject to refinement. As a result, during the measurement period that exists up to twelve months from the acquisition date, the Companywe may record adjustments to the tangible and specifically identifiable intangible assets acquired and liabilities assumed with a corresponding adjustment to goodwill in the reporting period in which the adjusted amounts are determined. Upon the conclusion of the measurement period or final determination of the values of assets acquired and liabilities assumed, whichever comes first, the impact of any subsequent adjustments is included in the consolidated statements of operations.

Costs to exit or restructure certain activities of an acquired company or the Company’sour internal operations are accounted for as a one-time termination and exit cost pursuant to FASB ASC Topic No. 420, Exit or Disposal Cost Obligations, and are accounted for separately from the business combination. A liability for costs associated with an exit or disposal activity is recognized and measured at its fair value in the Company’sour consolidated statement of operations in the period in which the liability is incurred.

Uncertain income tax positions and tax-related valuation allowances that are acquired in connection with a business combination are initially estimated as of the acquisition date. The Company reevaluatesWe reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date, with any adjustments to the preliminary estimates being recorded to goodwill if such adjustments occur within the 12-month measurement period. Subsequent to the end of the measurement period or the Company’sour final determination of the value of the tax allowance or contingency, whichever comes first, changes to these uncertain tax positions and tax-related valuation allowances will affect the provision for income taxes in the consolidated statement of operations and could have a material impact on results of our operations and financial position.

Fair Value of Financial Instruments

The Company measures

We measure and disclosesdisclose fair value measurements as required by FASB ASC Topic No. 820, Fair Value Measurements and Disclosures.

topics.

Fair value is an exit price, representing the amount that would be received upon the sale of an asset or the amount that would be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-basedmarket-
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based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the FASB establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

•Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

•Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.

•Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

As required by FASB ASC Topic No. 820, we

We measure our cash equivalents and short-term investments at fair value. Our cash equivalents and short-term investments are classified within Level 1 by using quoted market prices utilizing market observable inputs.

As required by FASB ASC Topic No. 825, Financial Instruments, an entity can choose to measure at

For derivatives we may utilize fair value many financial instrumentsmeasurements which are categorized within Level 3 of the fair value hierarchy, and certain other items that are not currently required to be measured at fair value. Subsequentsubsequent changes in fair value for designated items are required to be reported in earnings in the current period.

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This Topic also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value.

As required by FASB ASC Topic No. 350, for e.

For goodwill and other intangibles impairment analysis, we may utilize fair value measurements which are categorized within Level 3 of the fair value hierarchy.

We measure acquisition-related contingent consideration at fair value on a recurring basis and may include the use of significant unobservable inputs, and therefore, these instruments represent Level 3 measurements within the fair value hierarchy.
Impairment or Disposal of Long LivedLong-Lived Assets

Long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether or not impairment to such value has occurred as required by FASBper ASC Topic No. 360, Property, Plant, and EquipmentEquipment..

Goodwill

In accordance with FASB ASC and Intangible Assets

Goodwill represents purchase consideration from a business combination that exceeds the value assigned to the net assets of the acquired businesses. As per Topic No. ASC 350, Intangibles-GoodwillIntangibles- Goodwill and Other,, we reviewWe are required to periodically assess the recoverability of the carrying value of our goodwill at least annually during the fourth quarter of the fiscal year or whenever events or circumstances indicate a potential impairment. The Company’s annual impairment testing date is December 31. Recoverability of goodwill is determined by comparing the fair value of the Company’s reporting units toIf the carrying valueamount of the underlying net assets in the reporting units. If the fair value of aour single reporting unit is determined to be less than the carryingexceeds its fair value, of its net assets, goodwill is deemed impaired and an impairment loss is recognizedequal to the extent that theexcess of carrying value of goodwill exceeds the difference between theover fair value of the reporting unit and the fair value of its other assets and liabilities.

Intangible Assets and Amortization

is recorded.

We have no indefinite-lived intangible assets. Amortization expense related to other intangibles acquired inour definite-lived intangible assets resulting from acquisitions is calculated based on a straight line basis over twothe pattern of economic benefit expected to six years.be generated from the use of that asset. Intangible assets are tested for impairment if events or circumstances occur indicating that the respective asset might be impaired.

Going Concern Evaluation

In connectionimpaired in accordance with preparing its consolidated financial statements, management evaluates whether there are conditionsASC Topic No. 350, Intangibles- Goodwill and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued. See management’s going concern evaluation for the year ended December 31, 2017 in the “LiquidityOther and Capital Resources” section above.

ASC 360, Property, Plant and Equipment.

Revenue Recognition

We currently report our net revenues under two operating groups: Wireless and Graphics. Within each of these groups, software revenue is recognized based on the customer and contract type. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectability is probable as required by

In accordance with FASB ASC Topic No. 605-985, 606, Revenue Recognition-Software.  from Contracts with Customers, we recognize the sale of goods and services based on the five-step analysis of transactions as provided in Topic 606, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods and services.
We recognize revenues from salestransfer software licenses to our customers on a royalty free, non-exclusive, non-transferrable, limited use basis during the term of the agreement. In some instances, we perform integration services to ensure the software operates within our customer’s operating platforms as well as the operating platforms of the mobile devices used by their end customers, before transferring the license. Revenue related to these services is recognized at a point in time upon acceptance of the licensed software by the customer. We also earn usage-based revenue on our platforms. Usage based revenue is generated based on licenses used by our customers' active subscribers’ access and usage of our software licenses and cloud-based services on our platforms, the provision of hosting services, and revenue share based on media placements on our platform. We recognize our usage-based revenue when we have completed our performance obligation and have the right to our customers or end users as completed products are shipped and title passes or from royalties generated as authorized customers duplicate our software, ifinvoice the other requirements are met. If the requirements are not met at the date of shipment,customer. This revenue is notgenerally recognized until these elements are knownmonthly or resolved. For Wireless sales, returns fromquarterly. Finally, we ratably recognize revenue over the contract period when customers are limited to defective goods or goods shippedpay in error. Historically, customer returns have not exceeded the very nominal estimates and reserves. advance of our service delivery.
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We also provide some technicalconsulting services to develop customer-specified functionality that are generally not on our software development roadmap. We recognize revenue from our consulting services upon delivery and acceptance by the customer of our software enhancements and upgrades. For certain customers we provide maintenance and technology support toservices for which the customer either pays upfront or as we provide the services. When the customer pays upfront, we record the payments as contract liabilities and recognize revenue ratably over the contract period as this is our customers. Such costs have historically been insignificant.

stand ready performance obligation that is satisfied ratably over the maintenance and technology services period.

We have a limited number of multiple element agreements for which we have contractedreceived upfront payments from customers from services to provide a perpetual license for use of proprietary software, to provide non-recurring engineering,be provided under our ViewSpot contracts. The advance receipts were deferred and in some cases, to provide software maintenance (post contract support). For these software and software-related multiple element arrangements, we must: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essential to the functionality of the delivered products and services; (3) determine the fair value of each undelivered element using vendor-specific objective evidence (“VSOE”); and (4) allocate the total price among

33

the various elements. VSOE of fair value is used to allocate a portion of the price to the undelivered elements and the residual method is used to allocate the remaining portion to the delivered elements. Absent VSOE, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements of the arrangement have been delivered. However, if the only undelivered element is post contract support, the entire arrangement fee issubsequently recognized ratably over the performancecontract period. We determine VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range.  We have established VSOE for our post contract support services and non-recurring engineering.

On occasion, we enter into fixed fee arrangements, typically for trial purposes, in which customer payments are tied to the achievement of specific milestones. Revenue for these contracts is recognized based on customer acceptance of certain milestones as they are achieved.  We also enter hosting arrangements that sometimes include up-front, non-refundable set-up fees.  Revenue is recognized for these fees over the term of the agreement.

For Graphics sales, management reviews available retail channel information and makes a determination of a return provision for sales made to distributors and retailers based on current channel inventory levels and historical return patterns. Certain sales to distributors or retailers are made on a consignment basis.  Revenue for consignment sales are not recognized until sell through to the final customer is established. Certain revenues are booked net of revenue sharing payments. Sales directly to end users are recognized upon shipment. End users have a thirty-day right of return, but such returns are reasonably estimable and have historically been immaterial. We also provide technical supportconsulting services to configure ad hoc targeted promotional content for our customers. Such costs have historically been insignificant.

customers upon request. These requests are driven by our customers’ marketing initiatives and tend to be short term “bursts” of activity. We recognize these revenues upon delivery of the configured promotional content to the cloud platform.

Stock-Based Compensation

The Company accounts

We account for all stock-based payment awards made to employees and directors based on their fair values and recognizes such awards as compensation expense over the vesting period using the straight-line method over the requisite service period for each award as required by FASB ASC Topic No. 718, Compensation-StockCompensation.

Recently Adopted Accounting Pronouncements

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40).  The Update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued.  The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company has adopted this standard and it had no impact on the Company’s consolidated financial statements other than additional required disclosure.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU is effective prospectively for fiscal years beginning after December 31, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company elected to early adopt ASU 2017-04 during 2017 for its annual goodwill impairment test. There was no impact of adoption of ASU 2017-04 on the consolidated financial statements.

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815), which changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU

34

2017-11 is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted, including adoption in an interim period. The Company elected to early adopt ASU 2017-11 during 2017 by applying ASU 2017-11 retrospectively to outstanding financial instruments with a round down feature for each prior reporting period presented, as well as a cumulative-effect adjustment to the Company’s beginning accumulated deficit as of January 1, 2017.

Recently Issued Accounting Standards Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).  The amendments to this Update supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of this Topic is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This Topic defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is evaluating the impact of this guidance on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted.  Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption.  The Company is evaluating the impact of this guidance on our consolidated financial statements.


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements appear in a separate section of this Annual Report on Form 10-K beginning on page F-1.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of December 31, 2017.2022. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer determined that as of December 31, 2017,2022, our disclosure controls and procedures were effective to ensure that the information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

35

Management’s Responsibility for Financial Statements

Our management is responsible for the integrity and objectivity of all information presented in this Report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the consolidated financial statements fairly represent the Company’s financial position and results of operations for the periods and as of the dates stated therein.

The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with our independent registered public accounting firm, SingerLewak LLP, and representatives of management to review
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accounting, financial reporting, internal control, and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent auditors. The independent auditors have free access to the Audit Committee.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended December 31, 20172022 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Report of Management on Internal Control Over Financial Reporting

Our management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

Our management, including the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2017.2022. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework 2013” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on this assessment, management determined that, as of December 31, 2017,2022, we maintained effective internal control over financial reporting.

Item 9B. OTHER INFORMATION

None.

36

Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
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PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is set forth under the headings “Proposal 1: Election of Directors,” “Executive Officers,” “Corporate Governance,” and “Section“Delinquent Section 16(a) Beneficial Ownership Compliance”Reports” in the Company’s definitive Proxy Statement for the 20182023 Annual Meeting of Stockholders (“20182023 Proxy Statement”) and is incorporated herein by reference.

Item 11. EXECUTIVE COMPENSATION

The information required by this Item is set forth under the headings “Executive Compensation” and “Compensation of Directors”“Director Compensation” in the Company’s 20182023 Proxy Statement and is incorporated herein by reference.

reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

A portion of the information required by this Item is set forth under the heading “Security Ownership of Certain Beneficial Owners and Management” in the Company’s 20182023 Proxy Statement and is incorporated herein by reference.  

reference.

Securities Authorized for Issuance Under Anan Equity Compensation Plan

The following table summarizes information as of December 31, 20172022 for the equity compensation plans of the Company pursuant to which grants of options, restricted stock, restricted stock units or other rights to acquire shares may be granted from time to time (in thousands, except option price data):

 

 

Number of

shares to be

issued upon

exercise of

outstanding

options

 

 

Weighted

average

exercise

price of

outstanding

options

 

 

Number of

shares

remaining

available for

future

issuance

 

2015 Omnibus Equity Incentive Plan (1)

 

 

17

 

 

$

2.53

 

 

 

1,680

 

2005 Stock Option / Stock Issuance Plan (2)

 

 

122

 

 

 

6.13

 

 

 

—

 

Total

 

 

139

 

 

$

5.69

 

 

 

1,680

 

(1)

The 2015 Omnibus Equity Incentive Plan (the “2015 OEIP”) was approved by shareholders effective June 18, 2015.

(2)

Upon shareholder approval of the 2015 OEIP, any unissued shares under the 2005 Plan were cancelled and no longer available for future issuance.

Number of
shares to be
issued upon
exercise of
outstanding
options		Weighted
average
exercise
price of
outstanding
options		Number of
shares
remaining
available for
future
issuance
2015 Omnibus Equity Incentive Plan (1)101$3.61 2,425
2005 Stock Option / Stock Issuance Plan (2)293.90 —
Total130$3.67 2,425
(1)The 2015 Omnibus Equity Incentive Plan (the “2015 OEIP”) was approved by shareholders effective June 18, 2015, and was subsequently amended and adopted on June 14, 2018 and June 9, 2020.
(2)Upon shareholder approval of the 2015 OEIP, any unissued shares under the 2005 Plan were canceled and no longer available for future issuance.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is set forth under the heading “Proposal 1: Election of Directors” and under the subheadings “Board Member Independence,” “Audit Committee,” “Compensation Committee,” “Governance and Nominating Committee,” and “Certain Relationships and Related Party Transactions” under the heading “Corporate Governance” in the Company’s 20182023 Proxy Statement and is incorporated herein by reference.

reference.

Item 14. PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES

The information required by this Item is set forth under the heading “Proposal 3: Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s 20182023 Proxy Statement and is incorporated herein by reference.

37

reference.
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PART IV

Item 15. EXHIBITS

(a) (1) Financial Statements

Smith Micro’s financial statements appear in a separate section of this Annual Report on Form 10-K beginning on the pages referenced below:

Page

Page

F-1

F-1

F-2

F-4

F-3

F-5

F-4

F-6

F-5

F-7

F-6

F-8

(3) Exhibits

Exhibit No.

Title

Method of Filing

3.1

2.1

Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on February 19, 2020
2.2Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K/A filed on March 9, 2021
3.1Amended and Restated Certificate of Incorporation

Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement No. 33-95096 (P)

3.1.1

Incorporated by reference to Exhibit 3.1.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2000, filed on August 14, 2000

3.1.2

Incorporated by reference to Exhibit 3.1.2 to the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2005, filed on March 31, 2006

3.1.3

Incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on April 27, 2012

3.1.4

Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on October 16, 2015

3.1.5

Incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on October 16, 2015

3.1.6

3.1.6

Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on August 17, 2016

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3.1.7

Exhibit No.

Title

Method of Filing
3.1.7

Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on October 4, 2017

38

Exhibit No.

Title

Method of Filing

3.2

3.2

Incorporated by reference to Exhibit 3.23.1 to the Registrant's Registration Statement No. 33-95096 (P)

Quarterly Report on Form 10-Q filed on August 12, 2022

3.2.1

4.1

Incorporated by reference to Exhibit 3.34.1 to the Registrant’s CurrentAnnual Report on Form 8-K10-K filed on October 31, 2007

March 13, 2020

4.1

4.2

Specimen certificate representing shares of Common Stock

Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement No. 33-95096 (P)

4.2

4.3

Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on October 16, 2015

4.3

4.4

Form of Common Stock Purchase Warrant, dated May 17, 2017, issued by the Registrant to each of Sutter Securities Incorporated and Chardan Capital Markets, LLC

Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on May 17, 2017

4.4

Form of Registration Rights Agreement dated August 15, 2014

Incorporated by reference to Exhibit 10.2  to the Registrant’s Current Report on Form 8-K filed on August 20, 2014

4.5

Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on September 7, 2016

March 6, 2018

4.6

4.5

Incorporated by reference to Exhibit 10.410.3 to the Registrant’s Current Report on Form 8-K filed on September 7, 2016

May 4, 2018

10.1

4.6

Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on November 7, 2018
4.7Incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K filed on April 19, 2021
4.8Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 11, 2022
4.9Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 11, 2022
10.1Form of Indemnification Agreement

Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement No. 33-95096 (P)

10.2*

Amended and Restated 2005 Stock Option / Stock Issuance Plan

Incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-8 (Reg. No. 333-149222) filed on February 13, 2008

10.3

Incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009

10.4*

10.3*

Amended & Restated Employee Stock Purchase Plan

Incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-8 (No. 333-169671) filed on September 30, 2010

10.5

Form of Common Stock Purchase Agreement dated August 15, 2014

Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 20, 2014

10.6*

Incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on April 30, 2015

10.3.1*Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on June 15, 2018

39

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Exhibit No.

Title

Method of Filing

10.3.2*

Incorporated by reference to Exhibit 10.6.3 to the Registrant’s Annual Report on Form 10-K filed on March 8, 2021

10.6.1*

10.3.3*Filed herewith
10.3.4*Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 12, 2021
10.3.5*

Filed herewith

10.7

Share Purchase Agreement, dated March 8, 2016, by and between Smith Micro Software, Inc. and Birdstep Technology ASA

Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on March 10, 2016

10.8

Share Purchase Agreement, dated July 19, 2016, by and between Smith Micro Software, Inc. and the selling shareholders of iMobileMagic–Mobile Experiences, LDA

Incorporated by reference to Exhibit 2.610.6.1 to the Registrant’s CurrentAnnual Report on Form 8-K10-K filed on July 25, 2016

March 30, 2018

10.9

10.4

Incorporated by reference to Exhibit 2.7 to the Registrant’s Current Report on Form 8-K filed on July 25, 2016

10.10

Note and Warrant Purchase Agreement, dated September 2, 2016, by and among the Company and each of the Investors party thereto

Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 7, 2016

10.11

Form of Senior Subordinated Promissory Note, dated September 6, 2016, issued by the Registrant to each of the Investors party to the Note and Warrant Purchase Agreement dated September 2, 2016

Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 7, 2016

10.12

Secured Promissory Note dated December 6, 2016 issued by the Registrant to William W. Smith, Jr. and Dieva L. Smith

Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 12, 2016

10.13

Amendment to Senior Subordinated Promissory Note, dated December 27, 2016, between the Registrant and Unterberg Koller Capital Fund L.P.

Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 28, 2016

10.14

Amendment to Senior Subordinated Promissory Note and Warrant to Purchase Common Stock, dated December 27, 2016, between the Registrant and William W. Smith, Jr. and Dieva L. Smith

Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on December 28, 2016

10.15

Secured Promissory Note dated February 7, 2017, issued by the Registrant to William W. Smith, Jr. and Dieva L. Smith

Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 8, 2017

10.15.1

Amendment to Secured Promissory Note, dated March 25, 2017, between the Registrant and William W. Smith, Jr. and Dieva L. Smith

Incorporated by reference to Exhibit 10.11.1 to the Registrant’s Current Report on Form 8-K filed on March 28, 2017

15, 2021

10.16

10.5

Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 8, 2017

10.17

Secured Promissory Note dated March 31, 2017, issued by the Registrant to Stephen L. and Monique P. Elfman

Incorporated by reference to Exhibit 10.11.1 to the Registrant’s Current Report on Form 8-K filed on April 3, 2017

19, 2021

40

Exhibit No.

Title

Method of Filing

10.6*

10.18

Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 17, 2017

10.19*

Offer Letter by and between the Registrant and Timothy C. Huffmyer, dated June 19, 2017

Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 20, 2017

10.20

Secured Promissory Note dated June 26, 2017, issued by the Registrant to William W. Smith, Jr. and Dieva L. Smith

Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 7, 2017

10.20.1

Amendment to Secured Promissory Note, dated January 30, 2018, between the Registrant and William W. Smith, Jr. and Dieva L. Smith

Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on January 31, 2018

10.20.2

Second Amendment to Secured Promissory Note, dated March 5, 2018, between the Registrant and William W. Smith, Jr. and Dieva L. Smith

Filed herewith

10.21

Secured Promissory Note dated June 23, 2017, issued by the Registrant to Stephen L. and Monique P. Elfman

Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on July 7, 2017

10.21.1

Amendment to Secured Promissory Note, dated August 18, 2017, between the Registrant and Stephen L. and Monique P. Elfman

Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 25, 2017

12, 2021

10.21.2

10.7*

Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 31, 2018

10.22*

Resignation Severance and Release Agreement, dated as of July 10, 2017, between the Registrant and Steven Yasbek

Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K/A filed on July 11, 2017

10.23

Secured Promissory Note, dated August 18, 2017, issued by the Registrant to William W. Smith, Jr. and Dieva L. Smith

Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on August 25, 2017

10.24

Secured Promissory Note, dated August 24, 2017, issued by the Registrant to Next Generation TC FBO Andrew Arno IRA 1663

Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on August 25, 2017

10.24.1

Amendment to Secured Promissory Note, dated January 30, 2018, between the Registrant and Next Generation TC FBO Andrew Arno IRA 1663

Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on January 31, 2018

10.24.2

Second Amendment to Secured Promissory Note, dated March 5, 2018, between the Registrant and Next Generation TC FBO Andrew Arno IRA 1663

Filed herewith

10.25

Secured Promissory Note, dated August 24, 2017, issued by the Registrant to Andrew Arno

Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on August 25, 2017

10.25.1

Amendment to Secured Promissory Note, dated January 30, 2018, between the Registrant and Andrew Arno

Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on January 31, 2018

41

Exhibit No.

Title

Method of Filing

10.25.2

Second Amendment to Secured Promissory Note, dated March 5, 2018, between the Registrant and Andrew Arno

Filed herewith

10.26

Securities Purchase Agreement, dated as of September 29, 2017, between the Registrant and each of the Purchasers party thereto

Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 4, 2017

6, 2021

10.27

10.8

Incorporated by reference to Exhibit 10.1 to the RegistrantCompany’s Current Report on Form 8-K filed on April 5, 2022
10.9

Incorporated by reference to Exhibit 10.2 to the Registrant’sCompany’s Current Report on Form 8-K filed on October 4, 2017

April 5, 2022

21.1

10.1

Filed herewith

Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 5, 2022

23.1

10.11*

Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed on August 12, 2022
10.12Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 11, 2022
10.13Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 11, 2022
10.14Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on August 11, 2022
10.15Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on August 11, 2022
33
Table of Contents
Exhibit No.TitleMethod of Filing
10.16Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on August 11, 2022
10.17Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on August 11, 2022
10.18Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on August 11, 2022
21.1Filed herewith
23.1

Filed herewith

31.1

Filed herewith

31.2

Filed herewith

32.1

Furnished herewith

101.INS

101.INSInline XBRL Instance Document

- the instance document does not appear in the Interactive Data File because its Inline XBRL tags are embedded within the Inline XBRL document

Filed herewith

101.SCH

Inline XBRL Taxonomy Extension Schema Document

Filed herewith

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

Filed herewith

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

Filed herewith

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

Filed herewith

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

Filed herewith

104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)Filed herewith

(P) Paper Filing Exhibit

*denotes the management contracts and compensatory arrangements in which any director or named executive officer participates

(b)

Exhibits

(b)Exhibits

The exhibits filed as part of this report are listed above in Item 15(a)(3) of this Form 10-K.

Item 16. FORM 10-K SUMMARY

None.

42

34

Table of ContentsSIGNATURES

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

SMITH MICRO SOFTWARE, INC.

Date: March 30, 2018

22, 2023

By: /s/ William W. Smith, Jr.

William W. Smith, Jr.

Chairman of the Board,

President and Chief Executive Officer

(Principal Executive Officer)

Date: March 30, 2018

22, 2023

By: /s/ Timothy C. Huffmyer

James M. Kempton

Timothy C. Huffmyer

James M. Kempton

Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

Signature

Title

Date

/s/ William W. Smith, Jr.

Chairman of the Board,


President and Chief Executive Officer


(Principal Executive Officer)

March 30, 2018

22, 2023

William W. Smith, Jr.

/s/ Timothy C. Huffmyer

James M. Kempton

Vice President and Chief Financial Officer


(Principal Financial and Accounting Officer)

March 30, 2018

22, 2023

Timothy C. Huffmyer

James M. Kempton

/s/ Andrew Arno

Director

March 30, 2018

22, 2023

Andrew Arno

/s/ Thomas G. Campbell

Director

March 30, 2018

22, 2023

Thomas G. Campbell

/s/ Steven L. Elfman

Director

March 30, 2018

22, 2023

Steven L. Elfman

/s/ Samuel Gulko

Director

March 30, 2018

22, 2023

Samuel Gulko

/s/ Gregory J. Szabo

Director

March 30, 2018

22, 2023

Gregory J. Szabo

/s/ Asha KeddyDirectorMarch 22, 2023
Asha Keddy
/s/ Chetan SharmaDirectorMarch 22, 2023
Chetan Sharma

43

35

Table of Contents
REPORT OF INDEPENDENT REGISTEREDREGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors and Stockholders

of Smith Micro Software, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Smith Micro Software, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 20172022 and 2016,2021, the related consolidated statements of operations, and comprehensive loss, stockholders’ equity and cash flows, for each of the three years in the periodthen ended December 31, 2017, and the related notes to the consolidated financial statements (collectively, the “financial statements”"financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172022 and 2016,2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition – Refer to Note 1 and Note 12 of the financial statements
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services. The Company primarily sells software solutions, cloud-based services and consulting services to major wireless network and cable operators.
Significant judgement is exercised by the Company in determining revenue recognition, and includes the following:
•Determination of whether promised services are capable of being distinct and are distinct in the context of the Company’s customer contracts which leads to whether they should be accounted for as individual or combined performance obligations.
•Determination of prices for each distinct performance obligation, including for products and services sold separately.
•Determination of the timing of when revenue is recognized for each distinct performance obligation either over time or at a point in time.
F-1
Table of Contents
We identified revenue recognition as a critical audit matter because of the significant judgements required by management. This required a high degree of auditor judgement and an increased extent of effort when performing audit procedures to evaluate whether revenue was appropriately recognized.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the Company’s revenue recognition included the following, among others:
•We selected a sample of recorded revenue transactions and performed the following procedures:
◦Obtained an understanding of management’s processes and controls related to revenue recognition.
◦Obtained customer source documents and agreed them against the respective contract, related amendments, if any, or Statement of Work, if applicable, for each selection, to test if the contractual terms of the agreement have been appropriately applied to each selection.
◦Evaluated management’s application of each step within the revenue accounting guidance and tested revenue recognition for specific performance obligations, including the allocation of pricing.
◦Tested the mathematical accuracy of management’s calculations of revenue and associated timing of revenue recognized in the financial statements.
Accounting for Issuance of Convertible Debt and Warrants – Refer to Notes 6 and 7 of the financial statements
Critical Audit Matter Description
In August 2022, the Company issued a series of senior secured convertible notes (the “Notes”) with an original principal amount of $15.0 million maturing on December 31, 2023 and warrants (the “Warrants”) to acquire up to an aggregate amount of 2,238,806 additional shares of common stock (together referred to as the “Notes and Warrants Offering”). Concurrently with the Notes and Warrants Offering, the Company issued warrants (“Additional Warrants”) to acquire an aggregate of 1,132,075 additional shares of common stock.

The Notes contain a make-whole feature and a redemption right payable upon a change in control, which both represent embedded features that require bifurcation as a single, compound embedded derivative and to initially and subsequently be measured at each reporting period at fair value. The Company utilized a market approach valuation model to determine the fair value of the derivative liability and warrants. Significant assumptions included current common stock price, risk-free rates, dividend yield, expected terms and volatility, among others.

We identified the accounting and the valuation of the Notes, embedded derivative liability and warrants as a critical audit matter due to the complexity and significant judgement required in assessing the Notes and warrants under the applicable accounting guidance. This included such things as the analysis of the terms of the Notes and warrants to determine the existence of derivatives requiring separate fair value measurement, classification of warrants, allocation of proceeds between the separate financial instruments, and determination of the reasonableness of the valuation models and significant assumptions utilized to value such instruments.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the Company’s Notes and warrant transactions included the following, among others:
•Obtained an understanding of management's process and controls related to the accounting for the Notes and warrant transactions.
•Obtained the underlying agreements and reviewed the key terms.
•Evaluated the appropriateness of management's analysis of the initial and subsequent accounting of the transactions, including determination of balance sheet classification and identification of embedded derivatives.
•Evaluated the reasonableness of the valuation methodology and significant assumptions utilized by management.
•Tested the accuracy of the underlying data and the mathematical accuracy of management's valuation calculation.
•Evaluated the completeness and accuracy of the related disclosures in the financial statements.
F-2
Table of Contents
/s/ SingerLewak LLP

We have served as the Company’s auditor since 2004.

2005.

Los Angeles, California

March 30, 2018

F-1

22, 2023
F-3

Table of Contents
SMITH MICRO SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value data)

 

December 31,

 

December 31,

 

2017

 

 

2016

 

20222021

Assets

 

 

 

 

 

 

 

 

Assets

Current assets:

 

 

 

 

 

 

 

 

Current assets:

Cash and cash equivalents

 

$

2,205

 

 

$

2,229

 

Cash and cash equivalents$14,026 $16,078 

Accounts receivable, net of allowances for doubtful accounts and

other adjustments of $221 and $197 at December 31, 2017

and 2016, respectively

 

 

5,145

 

 

 

4,962

 

Accounts receivable, net of allowance for doubtful accounts of $3 and $2 at December 31, 2022 and 2021, respectivelyAccounts receivable, net of allowance for doubtful accounts of $3 and $2 at December 31, 2022 and 2021, respectively10,501 10,590 

Prepaid expenses and other current assets

 

 

576

 

 

 

726

 

Prepaid expenses and other current assets1,983 1,988 

Total current assets

 

 

7,926

 

 

 

7,917

 

Total current assets26,510 28,656 

Equipment and improvements, net

 

 

1,229

 

 

 

1,811

 

Equipment and improvements, net1,498 2,698 

Deferred tax asset, net

 

 

404

 

 

 

—

 

Right-of-use assetsRight-of-use assets3,722 4,866 

Other assets

 

 

146

 

 

 

149

 

Other assets490 620 

Intangible assets, net

 

 

487

 

 

 

745

 

Intangible assets, net36,320 42,631 

Goodwill

 

 

3,685

 

 

 

3,686

 

Goodwill35,041 35,041 

Total assets

 

$

13,877

 

 

$

14,308

 

Total assets$103,581 $114,512 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

Current liabilities:

 

 

 

 

 

 

 

 

Current liabilities:

Accounts payable

 

$

1,333

 

 

$

1,907

 

Accounts payable$3,236 $3,301 

Accrued payroll and benefits

 

 

1,994

 

 

 

2,391

 

Accrued payroll and benefits3,883 4,055 

Related party notes payable

 

 

1,000

 

 

 

—

 

Other accrued liabilities

 

 

416

 

 

 

1,112

 

Deferred revenue

 

 

73

 

 

 

98

 

Current operating lease liabilitiesCurrent operating lease liabilities1,441 1,400 
Other current liabilitiesOther current liabilities1,589 612 
Current portion of convertible notes payableCurrent portion of convertible notes payable9,007 — 
Derivative liabilitiesDerivative liabilities1,575 — 

Total current liabilities

 

 

4,816

 

 

 

5,508

 

Total current liabilities20,731 9,368 

Non-current liabilities:

 

 

 

 

 

 

 

 

Non-current liabilities:

Related-party notes payable, net of discount & issuance costs of $0

and $619 at December 31, 2017 and 2016, respectively

 

 

1,200

 

 

 

1,295

 

Notes payable, net of discount & issuance costs of $442 and $619,

at December 31, 2017 and 2016, respectively

 

 

1,558

 

 

 

1,295

 

Deferred rent

 

 

970

 

 

 

1,162

 

Other long term liabilities

 

 

766

 

 

 

1,808

 

Deferred tax liability, net

 

 

—

 

 

 

181

 

Warrant liabilitiesWarrant liabilities3,317 — 
Operating lease liabilitiesOperating lease liabilities2,976 4,467 
Deferred tax liabilities, netDeferred tax liabilities, net178 117 

Total non-current liabilities

 

 

4,494

 

 

 

5,741

 

Total non-current liabilities6,471 4,584 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Commitments and contingenciesCommitments and contingencies

Stockholders' equity:

 

 

 

 

 

 

 

 

Stockholders' equity:

Preferred stock, par value $0.001 per share; 5,000,000 shares

authorized; 5,500 shares issued and outstanding at

December 31, 2017

 

 

—

 

 

 

—

 

Common stock, par value $0.001 per share; 100,000,000 shares

authorized; 14,268,765 and 12,297,954 shares issued and

outstanding at December 31, 2017 and 2016, respectively

 

 

14

 

 

 

12

 

Common stock, par value $0.001 per share; 100,000,000 shares authorized; 56,197,910 and 54,259,390 shares issued and outstanding at December 31, 2022 and 2021, respectivelyCommon stock, par value $0.001 per share; 100,000,000 shares authorized; 56,197,910 and 54,259,390 shares issued and outstanding at December 31, 2022 and 2021, respectively56 54 

Additional paid-in capital

 

 

237,486

 

 

 

229,275

 

Additional paid-in capital357,875 352,779 

Accumulated comprehensive deficit

 

 

(232,933

)

 

 

(226,228

)

Accumulated comprehensive deficit(281,552)(252,273)

Total stockholders’ equity

 

 

4,567

 

 

 

3,059

 

Total stockholders’ equity76,379 100,560 

Total liabilities and stockholders' equity

 

$

13,877

 

 

$

14,308

 

Total liabilities and stockholders' equity$103,581 $114,512 

See accompanying notes to the consolidated financial statements.

F-2

F-4

Table of Contents
SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share amount)

amounts)

 

Year Ended December 31,

 

Year Ended December 31,

 

2017

 

 

2016

 

 

2015

 

20222021

Revenues

 

$

22,974

 

 

$

28,235

 

 

$

39,507

 

Revenues$48,513 $58,422 

Cost of revenues

 

 

5,082

 

 

 

7,564

 

 

 

8,152

 

Cost of revenues14,210 12,698 

Gross profit

 

 

17,892

 

 

 

20,671

 

 

 

31,355

 

Gross profit34,303 45,724 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

Selling and marketing

 

 

6,186

 

 

 

9,615

 

 

 

8,902

 

Selling and marketing12,887 11,581 

Research and development

 

 

8,952

 

 

 

15,906

 

 

 

13,863

 

Research and development29,870 26,197 

General and administrative

 

 

8,551

 

 

 

10,341

 

 

 

11,128

 

General and administrative16,161 17,920 

Restructuring expenses

 

 

(123

)

 

 

303

 

 

 

—

 

Long-lived asset impairment

 

 

—

 

 

 

411

 

 

 

—

 

Change in fair value of contingent considerationChange in fair value of contingent consideration— 12,864 
Amortization of intangible assetsAmortization of intangible assets6,312 8,100 

Total operating expenses

 

 

23,566

 

 

 

36,576

 

 

 

33,893

 

Total operating expenses65,230 76,662 

Operating loss

 

 

(5,674

)

 

 

(15,905

)

 

 

(2,538

)

Operating loss(30,927)(30,938)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Change in carrying value of contingent liability

 

 

—

 

 

 

668

 

 

 

—

 

Loss on debt extinguishment

 

 

(405

)

 

 

—

 

 

 

—

 

Interest income (expense), net

 

 

(1,120

)

 

 

(313

)

 

 

1

 

Other income (expense), net

 

 

(8

)

 

 

(22

)

 

 

3

 

Other income (expense):Other income (expense):
Change in fair value of warrant and derivative liabilitiesChange in fair value of warrant and derivative liabilities4,669 — 
Interest (expense) income, netInterest (expense) income, net(2,680)34 
Other (expense) income, netOther (expense) income, net(115)76 

Loss before provision for income taxes

 

 

(7,207

)

 

 

(15,572

)

 

 

(2,534

)

Loss before provision for income taxes(29,053)(30,828)

Provision for income tax expense (benefit)

 

 

(546

)

 

 

(229

)

 

 

68

 

Provision for income tax expenseProvision for income tax expense226 215 

Net loss

 

 

(6,661

)

 

 

(15,343

)

 

 

(2,602

)

Net loss$(29,279)$(31,043)

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on available-for-sale

securities

 

 

—

 

 

 

2

 

 

 

(1

)

Other comprehensive income (expense), net of tax

 

 

—

 

 

 

2

 

 

 

(1

)

Comprehensive loss

 

$

(6,661

)

 

$

(15,341

)

 

$

(2,603

)

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share:Loss per share:

Basic and diluted

 

$

(0.49

)

 

$

(1.28

)

 

$

(0.26

)

Basic and diluted$(0.53)$(0.61)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

Basic and diluted

 

 

13,489

 

 

 

11,951

 

 

 

10,162

 

Basic and diluted55,422 51,232 

See accompanying notes to the consolidated financial statements.

F-3

F-5

Table of Contents
SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

 

Preferred stock

 

 

Common stock

 

 

paid-in

 

 

comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

capital

 

 

deficit

 

 

Total

 

BALANCE, December 31, 2014

 

 

—

 

 

$

—

 

 

 

45,000

 

 

$

45

 

 

$

223,141

 

 

$

(208,284

)

 

$

14,902

 

Exercise of common stock options

 

 

—

 

 

 

—

 

 

 

8

 

 

 

—

 

 

 

10

 

 

 

—

 

 

 

10

 

Non-cash compensation recognized on

   stock options and ESPP

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

186

 

 

 

—

 

 

 

186

 

Restricted stock grants, net of

   cancellations

 

 

—

 

 

 

—

 

 

 

1,091

 

 

 

1

 

 

 

1,966

 

 

 

—

 

 

 

1,967

 

Cancellation of shares for payment of

   withholding tax

 

 

—

 

 

 

—

 

 

 

(394

)

 

 

—

 

 

 

(458

)

 

 

—

 

 

 

(458

)

Tax benefit deficiencies related to

   restricted stock expense

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

5

 

 

 

—

 

 

 

5

 

Employee stock purchase plan

 

 

—

 

 

 

—

 

 

 

24

 

 

 

—

 

 

 

17

 

 

 

—

 

 

 

17

 

Comprehensive loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(2,603

)

 

 

(2,603

)

BALANCE, December 31, 2015

 

 

—

 

 

$

—

 

 

 

45,729

 

 

$

46

 

 

$

224,867

 

 

$

(210,887

)

 

$

14,026

 

Non-cash compensation recognized on

   stock options and ESPP

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

137

 

 

 

—

 

 

 

137

 

Restricted stock grants, net of

   cancellations

 

 

—

 

 

 

—

 

 

 

366

 

 

 

—

 

 

 

1,391

 

 

 

—

 

 

 

1,391

 

Cancellation of shares for payment of

   withholding tax

 

 

—

 

 

 

—

 

 

 

(126

)

 

 

—

 

 

 

(304

)

 

 

—

 

 

 

(304

)

Employee stock purchase plan

 

 

—

 

 

 

—

 

 

 

7

 

 

 

—

 

 

 

13

 

 

 

—

 

 

 

13

 

Shares issued for iMobileMagic

   acquisition

 

 

—

 

 

 

—

 

 

 

611

 

 

 

—

 

 

 

1,737

 

 

 

—

 

 

 

1,737

 

Shares issued for interest on notes

   payable

 

 

—

 

 

 

—

 

 

 

8

 

 

 

 

 

 

 

17

 

 

 

 

 

 

 

17

 

Effects of reverse stock split

 

 

—

 

 

 

—

 

 

 

(34,297

)

 

 

(34

)

 

 

31

 

 

 

—

 

 

 

(3

)

Issuance of warrants

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,386

 

 

 

—

 

 

 

1,386

 

Comprehensive loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(15,341

)

 

 

(15,341

)

BALANCE, December 31, 2016

 

 

—

 

 

$

—

 

 

 

12,298

 

 

$

12

 

 

$

229,275

 

 

$

(226,228

)

 

$

3,059

 

Non-cash compensation recognized on

   stock options and ESPP

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

44

 

 

 

—

 

 

 

44

 

Restricted stock grants, net of

   cancellations

 

 

—

 

 

 

—

 

 

 

(69

)

 

 

—

 

 

 

1,127

 

 

 

—

 

 

 

1,127

 

Cancellation of shares for payment of

   withholding tax

 

 

—

 

 

 

—

 

 

 

(126

)

 

 

—

 

 

 

(171

)

 

 

—

 

 

 

(171

)

Employee stock purchase plan

 

 

—

 

 

 

—

 

 

 

4

 

 

 

—

 

 

 

3

 

 

 

—

 

 

 

3

 

Preferred shares issued in stock offering,

   net of offering costs

 

 

3

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

5,213

 

 

 

—

 

 

 

5,213

 

Common shares issued in stock offering,

   net of offering costs

 

 

—

 

 

 

—

 

 

 

2,162

 

 

 

2

 

 

 

1,990

 

 

 

—

 

 

 

1,992

 

Issuance of warrants in stock offering

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

64

 

 

 

—

 

 

 

64

 

Preferred shares issued with debt

   conversion

 

 

3

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(103

)

 

 

—

 

 

 

(103

)

Warrant repricing

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

44

 

 

 

(44

)

 

 

—

 

Comprehensive loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(6,661

)

 

 

(6,661

)

BALANCE, December 31, 2017

 

 

6

 

 

$

—

 

 

 

14,269

 

 

$

14

 

 

$

237,486

 

 

$

(232,933

)

 

$

4,567

 

Common StockAdditional
Paid-in
Capital		Accumulated
Comprehensive
Deficit		Total
SharesAmount
BALANCE, December 31, 202041,233 $41 $279,905 $(221,230)$58,716 
Non-cash compensation recognized on stock options and ESPP— — 83 — 83 
Restricted stock grants, net of cancellations991 1 4,764 — 4,765 
Cancellation of shares for payment of withholding tax(385)— (2,220)— (2,220)
Employee stock purchase plan10 — 37 — 37 
Common shares issued in stock offering, net of offering costs9,521 10 59,701 — 59,711 
Common shares issued in connection with Avast Family Safety Mobile acquisition, net1,460 1 8,380 8,381 
Exercise of common stock warrants1,408 1 2,064 — 2,065 
Exercise of stock options21 — 65 — 65 
Net loss— — — (31,043)(31,043)
BALANCE, December 31, 202154,259 $54 $352,779 $(252,273)$100,560 
Non-cash compensation recognized on stock options and ESPP— — 86 — 86 
Restricted stock grants, net of cancellations1,187 1 4,861 — 4,862 
Cancellation of shares for payment of withholding tax(406)— (1,218)— (1,218)
Employee stock purchase plan17 — 40 — 40 
Exercise of stock options9 — 19 — 19 
Common shares in stock offering, net of offering costs1,132 1 1,308 — 1,309 
Net loss— — — (29,279)(29,279)
BALANCE, December 31, 202256,198 $56 $357,875 $(281,552)$76,379 

See accompanying notes to the consolidated financial statements.

F-4

F-6

Table of Contents
SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(6,661

)

 

$

(15,343

)

 

$

(2,602

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

922

 

 

 

1,381

 

 

 

1,904

 

Amortization of debt discounts and financing issuance costs

 

 

459

 

 

 

168

 

 

 

—

 

Restructuring reserve adjustment

 

 

(123

)

 

 

—

 

 

 

—

 

Long-lived asset impairment

 

 

—

 

 

 

411

 

 

 

—

 

Change in carrying value of contingent liability

 

 

—

 

 

 

(668

)

 

 

—

 

Loss on debt extinguishment

 

 

405

 

 

 

—

 

 

 

—

 

Provision for adjustments to accounts receivable and doubtful accounts

 

 

182

 

 

 

70

 

 

 

31

 

Provision for excess and obsolete inventory

 

 

—

 

 

 

11

 

 

 

48

 

Loss (gain) on disposal of fixed assets

 

 

(6

)

 

 

27

 

 

 

1

 

Tax benefits from stock-based compensation

 

 

—

 

 

 

—

 

 

 

(5

)

Non-cash compensation related to stock options and restricted stock

 

 

1,171

 

 

 

1,528

 

 

 

2,158

 

Deferred income taxes

 

 

(585

)

 

 

(137

)

 

 

—

 

Change in operating accounts:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(365

)

 

 

3,368

 

 

 

40

 

Prepaid expenses and other assets

 

 

154

 

 

 

475

 

 

 

790

 

Accounts payable and accrued liabilities

 

 

(2,947

)

 

 

(1,966

)

 

 

(1,362

)

Deferred revenue

 

 

(25

)

 

 

(828

)

 

 

(1,058

)

Net cash used in operating activities

 

 

(7,419

)

 

 

(11,503

)

 

 

(55

)

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for acquisitions, net of cash acquired

 

 

—

 

 

 

(2,485

)

 

 

—

 

Capital expenditures

 

 

(77

)

 

 

(500

)

 

 

(124

)

Proceeds from the sale of short-term investments

 

 

—

 

 

 

4,079

 

 

 

—

 

Purchases of short-term investments

 

 

—

 

 

 

—

 

 

 

(1,199

)

Net cash provided by (used in) investing activities

 

 

(77

)

 

 

1,094

 

 

 

(1,323

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Cash received from issuance of common stock and warrants, net of

   offering costs

 

 

2,056

 

 

 

—

 

 

 

—

 

Cash received from issuance of preferred stock, net of offering costs

 

 

2,413

 

 

 

—

 

 

 

—

 

Cash received from short-term secured promissory notes

 

 

1,800

 

 

 

—

 

 

 

—

 

Cash received from related-party notes payable, net of issuance

   costs of $97 (2016)

 

 

1,200

 

 

 

1,903

 

 

 

—

 

Cash received from notes payable, net of issuance costs of $97 (2016)

 

 

—

 

 

 

1,903

 

 

 

—

 

Cash received from stock sale for employee stock purchase plan

 

 

3

 

 

 

13

 

 

 

17

 

Cash received from exercise of stock options

 

 

—

 

 

 

—

 

 

 

10

 

Tax benefits received from stock-based compensation

 

 

—

 

 

 

—

 

 

 

5

 

Net cash provided by financing activities

 

 

7,472

 

 

 

3,819

 

 

 

32

 

Net decrease in cash and cash equivalents

 

 

(24

)

 

 

(6,590

)

 

 

(1,346

)

Cash and cash equivalents, beginning of period

 

 

2,229

 

 

 

8,819

 

 

 

10,165

 

Cash and cash equivalents, end of period

 

$

2,205

 

 

$

2,229

 

 

$

8,819

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

15

 

 

$

27

 

 

$

17

 

Cash paid for interest expense

 

$

662

 

 

$

21

 

 

$

—

 

Change in unrealized gain (loss) on short-term investments

 

$

—

 

 

$

2

 

 

$

(1

)

Issuance of common stock warrants in connection with stock offering

 

$

64

 

 

$

—

 

 

$

—

 

Issuance of preferred stock in settlement of senior subordinated debt

 

$

2,800

 

 

$

—

 

 

$

—

 

Year Ended December 31,
20222021
Operating activities:
Net loss$(29,279)$(31,043)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization7,556 9,338 
Non-cash lease expense1,144 1,160 
Non-cash transaction costs including amortization3,324 — 
Change in fair value(4,669)12,864 
Provision for doubtful accounts— 5 
Provision for excess and obsolete inventory— (97)
Stock based compensation4,948 4,848 
Deferred income taxes61 58 
Gain (loss) on disposal of assets4 (14)
Changes in operating accounts:
Accounts receivable85 7,938 
Prepaid expenses and other assets(25)(268)
Accounts payable and accrued liabilities(2,570)(16,309)
Other liabilities160 (1,396)
Net cash used in operating activities(19,261)(12,916)
Investing activities:
Acquisitions, net— (56,865)
Capital expenditures, net(49)(830)
Other investing activities164 192 
Net cash provided by (used in) investing activities115 (57,503)
Financing activities:
Proceeds from notes and warrants offering15,000 — 
Proceeds from stock and warrants offering3,000 59,711 
Stock, notes, and warrants offering costs(1,227)— 
Payments related to contingent consideration— (1,136)
Proceeds from exercise of common stock warrants— 2,066 
Proceeds from financing arrangements1,541 — 
Repayments of financing arrangements(1,278)— 
Other financing activities58 102 
Net cash provided by financing activities17,094 60,743 
Net decrease in cash and cash equivalents(2,052)(9,676)
Cash and cash equivalents, beginning of year16,078 25,754 
Cash and cash equivalents, end of year$14,026 $16,078 
Supplemental disclosures of cash flow information:
Cash paid for income taxes$253 $84 
Non-cash investing and financing activities:
Issuance of common stock in connection with acquisition$— $8,381 
Derivative and warrants in connection with notes and stock offerings$9,561 $— 

See accompanying notes to the consolidated financial statements.

F-5

F-7

Table of Contents
SMITH MICRO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization, Basis of Presentation and Summary of Significant Accounting Policies

The Company

Smith Micro Software, Inc. (“Smith Micro” or “the Company”) develops software to simplify and enhance the mobile experience, providing solutions to some of the leading wireless and cable service providers device manufacturers, and wireless users around the world. From optimizing wireless networksenabling the family digital lifestyle to uncovering customer experience insights, and from providing visual accesspowerful voice messaging capabilities, the Company strives to wireless voicemail to ensuring family safety, our solutions enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones. We also provide a services platform for thesmartphones and consumer Internet of Things (“IoT”) that enables comprehensive device management and firmware over-the-air (“FOTA”) updates for various types of connected devices. In addition, Smith Micro’s portfolio includes a wide range of products for creating, sharing, and monetizing rich content, such as visual voice messaging, retail content display optimization and 2D/3D graphics applications. With this as a focus, it is performance analytics.
Smith Micro’s missionsolution portfolio is comprised of proven products that enable its customers to help our customers thrive in a connected world.

For more than three decades, Smith Micro has developed deep expertise in embedded software for mobile devices, policy-based management platforms, and highly-scalable client and server applications. Tier 1 mobile network operators, cable providers, OEMs/device manufacturers, and enterprise businesses across a wide range of industries use our software to capitalize on the growth of connected consumers, mobile apps, vehicle telematics, and smart cities.

In general, we help our customers:

provide:

Provide valuable•In-demand digital services that connect today’s digital lifestyle, services, such asincluding family location services, parental controls, and device securityconsumer IoT devices to mobile consumers;

consumers worldwide;

Manage mobile devices over-the-air for maximum performance, efficiency, reliability and cost-effectiveness;

Provide easy•Easy visual access to wirelessly delivered voicemail messages, while also providing easy conversion of voice messages to text messages;

on mobile devices through visual voicemail and voice-to-text transcription functionality; and

Optimize wireless networks, reduce operational costs,•Strategic, consistent, and deliver “best-connected” user experiences;

Efficientlymeasurable digital demonstration experiences that educate retail shoppers, create awareness of products and securely manage connected devices comprising the IoT; and

Design and create 2D and 3D digital illustrations, animation and figure design with easy-to-use, professional-grade graphics software.

We continue to innovate and evolve our business to take advantage of industry trends and opportunities in emerging markets, such as digital lifestyle services, and online safety, “Big Data”drive in-store sales, and optimize retail experiences with actionable analytics automotive telematics, and the industrial IoT. The key to our longevity, however, is not simply technological innovation, but a never-ending focus onderived from in-store customer value.

F-6

behavior.

Basis of Presentation

The accompanying consolidated financial statements reflect the operating results and financial position of Smith Micro and its wholly owned subsidiaries in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany amounts have been eliminated in consolidation.

Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform to the current presentation.
Foreign Currency Transactions

The Company has international operations resulting from current and prior year acquisitions.

The countries in which the Company has a subsidiary or branch office in are Serbia, Sweden, Portugal, the United KingdomCzech Republic, and Canada.Slovakia. The functional currency for all of these foreign entities is the U.S. dollar in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 830-30, Foreign Currency Matters-Translation of Financial Statements.830. Foreign currency transactions that increase or decrease expected functional currency cash flows is a foreign currency transaction gain or loss that are included in determining net income for the period in which the exchange rate changes. Likewise, a transaction gain or loss (measured from the transaction date or the most recent intervening balance sheet date, whichever is later) realized upon settlement of a foreign currency transaction is included in determining net income for the period in which the transaction is settled.

Business Combinations

The Company applies the provisions of FASB ASC Topic No. 805, Business Combinations, in the accounting for its acquisitions, which requires recognition of the assets acquired and the liabilities assumed at their acquisition date fair values, separately from goodwill. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the tangible and identifiable intangible assets acquired and liabilities assumed. While the Company uses its best estimates and assumptions to accurately
F-8
Table of Contents
value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, its estimates are inherently uncertain and subject to refinement. As a result, during the measurement period that exists up to twelve months from the acquisition date, the Company may record adjustments to the tangible and specifically identifiable intangible assets acquired and liabilities assumed with a corresponding adjustment to goodwill in the reporting period in which the adjusted amounts are determined. Upon the conclusion of the measurement period or final determination of the values of assets acquired and liabilities assumed, whichever comes first, the impact of any subsequent adjustments is included in the consolidated statements of operations.

Costs to exit or restructure certain activities of an acquired company or the Company’s internal operations are accounted for as a one-time termination and exit cost pursuant to FASB ASC Topic No. 420, Exit or Disposal Cost Obligations, and are accounted for separately from the business combination. A liability for costs associated with an exit or disposal activity is recognized and measured at its fair value in the Company’s consolidated statement of operations in the period in which the liability is incurred.

Uncertain income tax positions and tax-related valuation allowances that are acquired in connection with a business combination are initially estimated as of the acquisition date. The Company reevaluates these items quarterly based upon facts and circumstances that existed as of the acquisition date, with any adjustments to the preliminary estimates being recorded to goodwill if such adjustments occur within the 12-month measurement period. Subsequent to the end of the measurement period or the Company’s final determination of the value of the tax allowance or contingency, whichever comes first, changes to these uncertain tax positions and tax-related valuation allowances will affect the provision for income taxes in the consolidated statement of operations and could have a material impact on results of operations and financial position.

F-7

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company measures and discloses fair value measurements as required by FASB ASC Topic No. 820, Fair Value Measurements and Disclosures.

Fair value is an exit price, representing the amount that would be received upon the sale of an asset or the amount that would be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the FASB establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

As required by FASB ASC Topic No. 820, we measure our cash equivalents and short-term investments at fair value. Our cash equivalents and short-term investments are classified within Level 1 by using quoted market prices utilizing market observable inputs. 

As required by FASB ASC Topic No. 825, Financial Instruments, an entity can choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. Subsequent changes in fair value for designated items are required to be reported in earnings in the current period. This Topic also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value.

As required by FASB ASC Topic No. 350, for goodwill and other intangibles impairment analysis, we utilize fair value measurements which are categorized within Level 3 of the fair value hierarchy.

At December 31, 2017 and 2016, the carrying value and the aggregate fair value of the Company’s short and long-term debt were as follows (in thousands):

 

 

As of December 31, 2017

 

 

As of December 31, 2016

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term debt - related party

 

$

1,000

 

 

$

1,000

 

 

$

—

 

 

$

—

 

Long-term debt - related party

 

 

1,200

 

 

 

1,200

 

 

 

1,295

 

 

 

1,295

 

Long-term debt

 

 

1,558

 

 

 

1,558

 

 

 

1,295

 

 

 

1,295

 

Total long-term debt

 

$

3,758

 

 

$

3,758

 

 

$

2,590

 

 

$

2,590

 

The carrying value of $3.8 million is net of debt discount of $0.4 million and debt issuance costs of $0.1 million as of December 31, 2017. The carrying value of $2.6 million is net of debt discount of $1.2 million and debt issuance costs of $0.2 million as of December 31, 2016.

F-8

Significant Concentrations

For the year ended December 31, 2017, two customers, each accounting for over 10% of revenues, made up 75% of revenues and 72% of accounts receivable, and one service provider with more than 10% of purchases totaled 11% of accounts payable. For the year ended December 31, 2016, two customers, each accounting for over 10% of revenues, made up 77% of revenues and 80% of accounts receivable, and one service provider with more than 10% of purchases totaled 24% of accounts payable.  For the year ended December 31, 2015, two customers, each accounting for over 10% of revenues, made up 76% of revenues and 83% of accounts receivable, and one service provider with more than 10% of purchases totaled 13% of accounts payable.  

Cash and Cash Equivalents

Cash and cash equivalents generally consist of cash government securities, mutual funds, and money market funds. These securities are primarily held in two financial institutionsThe carrying amount of cash and are uninsured except forcash equivalents approximates fair value due to the minimum Federal Deposit Insurance Corporation coverage, and have original maturity datesshort-term maturities of three months or less.  As of December 31, 2017 and 2016, bank balances totaling approximately $2.0 million and $2.1 million, respectively, were uninsured.

these instruments.

Accounts Receivable and Allowance for Doubtful Accounts

We sell our

Smith Micro sells its products worldwide. We performThe Company performs ongoing credit evaluations of ourits customers and adjustadjusts credit limits based upon payment history, the customer’s current credit worthiness and various other factors, as determined by our review of their current credit information. WeThe Company continuously monitormonitors collections and payments from ourits customers. We estimateThe Company estimates credit losses and maintainmaintains an allowance for doubtful accounts reserve based upon these estimates. While such credit losses have historically been within ourits estimated reserves, wethe Company cannot guarantee that weit will continue to experience the same credit loss rates that we haveit has in the past. If not, this could have an adverse effect on ourSmith Micro’s consolidated financial statements. Allowances for product returns are included in other adjustments to accounts receivable on the accompanying consolidated balance sheets. Product returns are estimated based on historical experience and have also been within management’s estimates.

Equipment and Improvements

Equipment and improvements are stated at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets, generally ranging from three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.

Internal Software Development Costs

Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. The Company considers technological feasibility to be established when all planning, designing, coding, and testing has been completed according to design specifications. After technological feasibility is established, any additional costs are capitalized. Through December 31, 2017,2022, software has been substantially completed concurrently with the establishment of technological feasibility; accordingly, no costs have been capitalized to date.

Impairment or Disposal of Long LivedLong-Lived Assets

Long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. They are tested for recoverability using undiscounted cash flows to determine whether or not impairment to such value has occurred asoccurred.
F-9
Table of Contents
Goodwill and Intangible Assets
Goodwill represents purchase consideration from a business combination that exceeds the value assigned to the net assets of the acquired businesses. Smith Micro is required by FASB ASC Topic No. 360, Property, Plant, and Equipment. The Company determined there was an impairment of its Customer Relationships intangible asset in the amount of $0.4 million as of December 31, 2016. 

F-9

Goodwill

In accordance with FASB ASC Topic No. 350, Intangibles-Goodwill and Other, we reviewto periodically assess the recoverability of the carrying value of its goodwill at least annually during the fourth quarter of the fiscal year or whenever events or circumstances indicate a potential impairment. If the carrying amount of the Company’s single reporting unit exceeds its fair value, an impairment loss equal to the excess of carrying value over fair value is recorded.

The Company’s 2022 fourth quarter annual impairment testing date is December 31. Recoverabilitytest included the assessment of goodwill is determined by comparingqualitative factors to determine whether or not it was more likely than not that the fair value of the Company’sSmith Micro’s single reporting units to theunit was less than its carrying valuevalue. The qualitative assessment considered factors such as macroeconomic conditions, industry and market trends, cost factors, and overall financial performance, among others. In consideration of the underlying net assets in the reporting units. If the fair value of a reporting unit is determined to be less than the carrying value of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the fair valuetotality of the reporting unit andqualitative factors assessed, based on the fair valueweight of its other assets and liabilities.

Intangible Assets and Amortization

the evidence no circumstances existed that would indicate that it was more likely than not that goodwill was impaired. There was no goodwill impairment recognized during the years ended December 31, 2022 or 2021.

The Company has no indefinite-lived intangible assets. Amortization expense related to other intangibles acquired inthe Company’s definite-lived intangible assets resulting from acquisitions is calculated based on a straight line basis over twothe pattern of economic benefit expected to six years.be generated from the use of that asset. Intangible assets are tested for impairment if events or circumstances occur indicating that the respective asset might be impaired.

Derivatives

and Warrants

The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic No. 480, Distinguishing Liabilities Fromfrom Equity and FASB ASC Topic No. 815, Derivatives and HedgingHedginig. Derivative and warrant liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments.

Going Concern Evaluation

In connection with preparing consolidated financial statements for the year ended December 31, 2017, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.

The Company considered the following:

Operating losses for eleven consecutive quarters.

value.

Negative cash flow from operating activities for seven consecutive quarters.

Stock price below $1.00/share resulting in non-compliance with NASDAQ listing rules to maintain a stock price of $1.00/share.

Stockholders’ equity less than $2.5 million at March 31, 2017 and June 30, 2017, resulting in non-compliance with NASDAQ listing rules.

Revenue declines for two consecutive years, including a decline of 32% of revenue from the Company’s largest customer, in fiscal year 2016 compared to fiscal year 2015.

Ordinarily, conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern relate to the entity’s ability to meet its obligations as they become due.

F-10

The Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial statements are issued by considering the following:

The Company raised $4.0 million of debt financing during the year ended December 31, 2016.

The Company has raised funds from short-term loans from related parties.

As a result of the Company’s restructurings that were implemented during the three months ended December 31, 2016, and again during the three months ended March 31, 2017, the Company’s cost structure is now in line with its future revenue projections.

In May 2017, the Company issued $2.2 million in a private placement offering of its common stock.

In September 2017, the Company closed on a $5.5 million preferred stock transaction which converted $2.8 million of long and short-term debt, and received $2.7 million of new capital.

On March 5, 2018, the Company issued $5.0 million in a private placement offering of its common stock.  

In addition to the recent capital raised on March 5, 2018, management also believes that the Company will generate enough cash from operations to satisfy its obligations for the next twelve months from the issuance date.

The Company will take the following actions if it starts to trend unfavorably to its internal profitability and cash flow projections, in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:

Raise additional capital through short-term loans.

Implement additional restructuring and cost reductions.

Raise additional capital through a private placement.

Secure a commercial bank line of credit.

Dispose of one or more product lines.

Sell or license intellectual property.   

Revenue Recognition

We currently report our net revenues under two operating groups: Wireless and Graphics. Within each of these groups, software revenue is recognized based on the customer and contract type. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectability is probable as required by

In accordance with FASB ASC Topic No. 605-985, 606, Revenue Recognition-Software.  Wefrom Contracts with Customers, the Company recognizes the sale of goods and services based on the five-step analysis of transactions as provided in Topic 606, which requires an entity to recognize revenues from salesrevenue to depict the transfer of our software to our customers or end users as completed products are shipped and title passes or from royalties generated as authorized customers duplicate our software, if the other requirements are met. If the requirements are not met at the date of shipment, revenue is not recognized until these elements are known or resolved. For Wireless sales, returns from customers are limited to defectivepromised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods shippedand services.
Smith Micro primarily sell its software solutions, cloud-based services and consulting services to major wireless network and cable operators. For all contracts with customers, the Company first identifies the contract which usually is established when a contract is fully executed by each party and consideration is expected to be received. Next, the Company identifies the performance obligations in error. Historically, customer returns have not exceeded the very nominal estimates and reserves. We also provide some technical supportcontract. A performance obligation is a promise in a contract to our customers. Such costs have historically been insignificant.

We havetransfer a limited number of multiple element agreements for which we have contracted to provide a perpetual license for use of proprietary software, to provide non-recurring engineering, and in some cases, to provide software maintenance (post contract support). For these software and software-related multiple element arrangements, we must: (1) determine whether and when each element has been delivered; (2) determine whether undelivered productsdistinct good or services are essentialservice to the functionalitycustomer. The Company then determines the transaction price in the arrangement and allocates the transaction price, if necessary, to each performance obligation identified in the contract. The allocation of the delivered products and services; (3) determine the fair value of each undelivered element using vendor-specific objective evidence (“VSOE”); and (4) allocate the total price among the various elements. VSOE of fair value is used to

F-11

allocate a portion of thetransaction price to the undelivered elementsperformance obligations are based on the relative standalone selling prices for the goods and services contained in a particular performance obligation. The transaction price is adjusted for the Company’s estimate of variable consideration. The Company evaluates the total amount of variable consideration expected to be earned by using the expected value method, as the Company believes this method represents the most appropriate estimate for this consideration, based on historical service trends, the individual contract considerations, and its best judgment at the time. The Company includes estimates of variable consideration in revenues only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company also generates the majority of its revenue on usage-based fees which are variable and depend entirely on customers’ use of perpetual licenses, transactions processed on the Company’s hosted environment, advertisement placements on the Company’s service platform, and activity on the Company’s cloud-based service platform.

Smith Micro grants certain software licenses to its customers on a royalty free, non-exclusive, non-transferable, limited use basis during the term of the agreement. In some instances, the Company performs integration services to ensure the software operates within its customer’s operating platforms as well as the operating platforms of the mobile devices used by their end customers, before transferring the license. Revenue related to these services is
F-10
Table of Contents
recognized at a point in time upon acceptance of the licensed software by the customer. The Company also earns usage-based revenue on its platforms. The Company’s contracts with the certain customers may include promises to transfer multiple products and services. Smith Micro’s cloud-based service includes a software solution license integrated with cloud-based services. Judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Smith Micro does not allow its customers to take possession of the software solution, and since the utility of the license comes from the cloud-based services that are provided, the Company considers the software license and the residual method is usedcloud-based services to allocate the remaining portion to the delivered elements. Absent VSOE,be a single performance obligation. Usage based revenue is deferred untilgenerated based on licenses used by Smith Micro’s customer’s active subscribers’ access and usage of Smith Micro’s software licenses and cloud-based services on Smith Micro’s platforms, the earlierprovision of hosting services, and revenue share based on media placements on Smith Micro’s platform. Smith Micro recognizes usage-based revenue when the point atCompany has completed its performance obligation and has the right to invoice the customer. This revenue is generally recognized monthly or quarterly. Finally, the Company ratably recognizes usage-based revenue over the contract period when customers pay in advance of service delivery.
Smith Micro also provides consulting services to develop customer-specified functionality that are generally not on its software development roadmap. The Company recognizes revenue from its consulting services upon delivery and acceptance by the customer of its software enhancements and upgrades. For certain customers the Company provides maintenance and technology support services for which VSOE of fair value exists for any undelivered elementthe customer either pays upfront or until all elements ofas the arrangement have been delivered. However, ifCompany provides the only undelivered element is postservices. When the customer pays upfront, the payments are recorded as contract support, the entire arrangement feeliabilities and revenue is recognized ratably over the contract period as this is the Company’s stand ready performance period. We determine VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In determining VSOE, we requireobligation that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range.  We have established VSOE for our post contract support services and non-recurring engineering.

On occasion, we enter into fixed fee arrangements, typically for trial purposes, in which customer payments are tied to the achievement of specific milestones. Revenue for these contracts is recognized based on customer acceptance of certain milestones as they are achieved. We also enter hosting arrangements that sometimes include up-front, non-refundable set-up fees.  Revenue is recognized for these feessatisfied ratably over the maintenance and technology services period.

The Company receives upfront payments from customers from services to be provided under its ViewSpot® contracts. The advance receipts are deferred and subsequently recognized ratably over the contract period. Smith Micro also provides consulting services to configure ad hoc targeted promotional content for its customers upon request. These requests are driven by customers’ marketing initiatives and tend to be short term “bursts” of the agreement.

For Graphics sales, management reviews available retail channel information and makes a determination of a return provision for sales made to distributors and retailers based on current channel inventory levels and historical return patterns. Certain sales to distributors or retailers are made on a consignment basis. Revenue for consignment sales are not recognized until sell through to the final customer is established. Certainactivity. These revenues are booked net of revenue sharing payments. Sales directly to end users are recognized upon shipment. End users have a thirty-day rightdelivery of return, but such returnsthe configured promotional content to the cloud platform.

Smith Micro has made accounting policy elections to exclude all taxes by governmental authorities from the measurement of the transaction price, and since the Company’s standard payment terms are reasonably estimable and have historically been immaterial. We also provide technical support to our customers. Such costs have historically been insignificant.

Sales Incentives

For our Graphics sales, the cost of sales incentivesless than one year, the Company offers without chargehas elected the practical expedient not to customers that can be usedassess whether a contract has a significant financing component.

Principal and Agent Considerations
Smith Micro owns the Intellectual Property and retains ownership when the Company licenses its customized software solutions for use by its customers. The Company is a principal in or that are exercisable bythese transactions and as such revenue is recognized with respect thereto on a customer as a result of, a single exchange transaction is accounted for as a reduction of revenue as required by FASB ASC Topic No. 605-50, Revenue Recognition-Customer Payments and Incentives.  We use historical redemption rates to estimate the cost of customer incentives.  Total sales incentives were $0.3 million, $0.3 million, and $0.2 million for the years ended December 31, 2017, 2016, and 2015, respectively.

gross basis.

Stock-Based Compensation

The Company accounts for all stock-based payment awards made to employees and directors based on their fair values and recognizes such awards as compensation expense over the vesting period using the straight-line method over the requisite service period for each award as required by FASB ASC Topic No. 718, Compensation-StockCompensation.

Recently Adopted Accounting Pronouncements

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40).  The Update provides U.S. GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued.  The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company has adopted this standard and it had no impact on the Company’s consolidated financial statements other than additional required disclosure.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a

F-12

reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU is effective prospectively for fiscal years beginning after December 31, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company elected to early adopt ASU 2017-04 during 2017 for its annual goodwill impairment test. There was no impact of adoption of ASU 2017-04 on the consolidated financial statements.

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815), which changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU 2017-11 is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted, including adoption in an interim period. The Company elected to early adopt ASU 2017-11 during 2017 by applying ASU 2017-11 retrospectively to outstanding financial instruments with a round down feature for each prior reporting period presented, as well as a cumulative-effect adjustment to the Company’s beginning accumulated deficit as of January 1, 2017.

Recently Issued Accounting Standards Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).  The amendments to this Update supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of this Topic is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. This Topic defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is evaluating the impact of this guidance on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted.  Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption.  The Company is evaluating the impact of this guidance on our consolidated financial statements.

F-13

2. Acquisitions

The Company did not engage in any acquisitions during 2017.

The following table summarizes the consideration paid for acquisitions in 2016 (in thousands):

Fair value of assets acquired

 

$

5,843

 

Fair value of liabilities assumed

 

 

1,525

 

Total purchase price

 

$

4,318

 

 

 

 

 

 

Allocation of purchase price:

 

 

 

 

Cash

 

$

2,581

 

Common stock

 

 

1,737

 

Total purchase price

 

$

4,318

 

 

 

 

 

 

Cash consideration paid

 

$

2,581

 

Less: cash acquired

 

 

(96

)

Cash consideration paid, net of cash acquired

 

$

2,485

 

Income Taxes

Birdstep Technology AB

On April 7, 2016, pursuant to the Share Purchase Agreement, dated as of March 8, 2016, by and between the Company and Birdstep Technology ASA (“Birdstep”), the Company completed its acquisition of 100% of the outstanding capital stock of Birdstep’s wholly owned Swedish subsidiary, Birdstep Technology AB. Pursuant to the terms of the Share Purchase Agreement, the Company paid a net purchase price of $2.0 million in cash to Birdstep at the closing. As a result of the acquisition, Birdstep Technology AB became a wholly-owned subsidiary of the Company. Acquisition-related costs of $0.2 million were recorded as expense in the fiscal year 2016 in the general and administrative section of the consolidated statement of operations.

The Company’s allocation of the purchase price is summarized as follows (in thousands):

Assets:

 

 

 

 

Cash and cash equivalents

 

$

73

 

Accounts receivable

 

 

99

 

Income tax receivable

 

 

103

 

Prepaids and other current assets

 

 

311

 

Equipment and improvements

 

 

30

 

Intangible assets

 

 

670

 

Goodwill

 

 

1,991

 

Total assets

 

$

3,277

 

Liabilities:

 

 

 

 

Accounts payable

 

$

223

 

Accrued liabilities

 

 

421

 

Deferred revenue

 

 

486

 

Deferred tax liability

 

 

147

 

Total liabilities

 

$

1,277

 

Total purchase price

 

$

2,000

 

The results of operations of Birdstep Technology AB have been included in the Company’s consolidated financial statements from the date of acquisition.  The pro-forma effect of the acquisition on historical periods is not material and therefore is not included.

F-14

The purpose of the Birdstep acquisition was to re-enter the Asia-Pacific and European wireless markets, and to acquire engineering talent that was already in place and developing essentially the same NetWise-type products that we were.

iMobileMagic – Mobile Experiences, LDA

On July 19, 2016, the Company and iMobileMagic – Mobile Experiences, LDA (“iMM”), a Portuguese limited liability company, entered into a Share Purchase Agreement pursuant to which the Company agreed to acquire 100% of the outstanding share capital of iMM.  Under the terms of the Share Purchase Agreement, the aggregate purchase price of approximately $2.3 million consisted of the following consideration: (i) approximately $0.6 million in cash; (ii) approximately $0.6 million in value of Buyer’s common stock; and (iii) approximately $1.1 million in value of Buyer’s common stock to be held in escrow pursuant to an Escrow Agreement. As a result of the acquisition, iMM has become a wholly-owned subsidiary of the Company.  Approximately 16 employees continued as employees of iMM following the Closing.  Acquisition-related costs of $0.2 million were recorded as expense in fiscal year 2016 in the general and administrative section of the consolidated statement of operations.

The Company’s allocation of the purchase price is summarized as follows (in thousands):

Assets:

 

 

 

 

Cash and cash equivalents

 

$

23

 

Short term investments

 

 

1

 

Accounts receivable

 

 

156

 

Prepaids and other current assets

 

 

8

 

Intangible assets

 

 

683

 

Goodwill

 

 

1,695

 

Total assets

 

$

2,566

 

Liabilities:

 

 

 

 

Accounts payable

 

$

13

 

Accrued liabilities

 

 

64

 

Deferred tax liability

 

 

171

 

Total liabilities

 

$

248

 

Total purchase price

 

$

2,318

 

The results of operations of iMobileMagic have been included in the Company’s consolidated financial statements from the date of acquisition.  The pro-forma effect of the acquisition on historical periods is not material and therefore is not included.

The purpose of the iMobileMagic acquisition was to enter into the fast growing international family services, location-tracking market.

3. Equipment and Improvements

Equipment and improvements consist of the following (in thousands):

 

 

December 31,

 

 

 

2017

 

 

2016

 

Computer hardware, software, and equipment

 

$

14,617

 

 

$

14,617

 

Leasehold improvements

 

 

5,316

 

 

 

5,315

 

Office furniture and fixtures

 

 

962

 

 

 

1,073

 

 

 

 

20,895

 

 

 

21,005

 

Less accumulated depreciation and amortization

 

 

(19,666

)

 

 

(19,194

)

Equipment and improvements, net

 

$

1,229

 

 

$

1,811

 

F-15

Depreciation and amortization expense on equipment and improvements was $0.7 million, $1.2 million, and $1.9 million for the years ended December 31, 2017, 2016, and 2015 respectively.

4. Goodwill and Intangible Assets

The following table sets forth our acquired intangible assets by major asset class as of December 31, 2017 and December 31, 2016 (in thousands except for useful life data):

 

 

 

 

December 31, 2017

 

 

December 31, 2016

 

 

 

Useful life (years)

 

Gross

 

 

Accumulated amortization

 

 

Net book value before impairment

 

 

Impairment charge in 2016

 

 

Net book value

 

 

Gross

 

 

Accumulated amortization

 

 

Net book value before impairment

 

 

Impairment charge

 

 

Net book value

 

Purchased

   technology

 

5-6

 

$

265

 

 

$

(78

)

 

$

187

 

 

$

—

 

 

$

187

 

 

$

265

 

 

$

(32

)

 

$

233

 

 

$

—

 

 

$

233

 

Customer

   relationships

 

3-6

 

 

999

 

 

 

(324

)

 

 

675

 

 

 

(411

)

 

 

264

 

 

 

999

 

 

 

(147

)

 

 

852

 

 

 

(411

)

 

 

441

 

Trademarks/trade

   names

 

2

 

 

38

 

 

 

(28

)

 

 

10

 

 

 

—

 

 

 

10

 

 

 

38

 

 

 

(9

)

 

 

29

 

 

 

—

 

 

 

29

 

Non-compete

 

3

 

 

51

 

 

 

(25

)

 

 

26

 

 

 

—

 

 

 

26

 

 

 

51

 

 

 

(9

)

 

 

42

 

 

 

—

 

 

 

42

 

Total

 

 

 

$

1,353

 

 

$

(455

)

 

$

898

 

 

$

(411

)

 

$

487

 

 

$

1,353

 

 

$

(197

)

 

$

1,156

 

 

$

(411

)

 

$

745

 

Intangible assets amortization expense was $0.3 million and $0.2 million for the years ended December 31, 2017 and 2016, respectively.

Future amortization expense related to intangible assets as of December 31, 2017 are as follows (in thousands):

Year Ending December 31,

 

 

 

 

2018

 

 

249

 

2019

 

 

143

 

2020

 

 

46

 

2021

 

 

40

 

2022

 

 

9

 

Beyond

 

 

—

 

Total

 

$

487

 

Valuation of Goodwill and Intangible Assets

The Company accounts for goodwill and intangible assets as required by FASB ASC Topic No. 350, Intangibles-Goodwill and Other.  This statement requires us to periodically assess the impairment of our goodwill and intangible assets, which requires us to make assumptions and judgments regarding the carrying value of these assets. These assets are considered to be impaired if we determine that their carrying value may not be recoverable based upon our assessment of the following events or changes in circumstances:

a determination that the carrying value of such assets cannot be recovered through undiscounted cash flows;

loss of legal ownership or title to the assets;

significant changes in our strategic business objectives and utilization of the assets; or

the impact of significant negative industry or economic trends.

If the intangible assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the intangible assets exceeds the fair value of the intangible assets. In addition, we base the useful lives and the related amortization expense on our estimate of the useful life of the intangible assets. Due to the numerous variables associated with our judgments and assumptions relating to the carrying value of our

F-16

intangible assets and the effects of changes in circumstances affecting these valuations, both the precision and reliability of the resulting estimates are subject to uncertainty, and as additional information becomes known, we may change our estimate, in which case, the likelihood of a material change in our reported results would increase.  The Company recognized an impairment loss of $0.4 million in the three and twelve months ended December 31, 2016 related to an intangible asset acquired from our Birdstep acquisition.

We review the recoverability of the carrying value of goodwill at least annually or whenever events or circumstances indicate a potential impairment. Our annual impairment testing date is December 31. Recoverability of goodwill is determined by comparing the estimated fair value of our reporting units to the carrying value of the underlying net assets in the reporting units. If the estimated fair value of a reporting unit is determined to be less than the fair value of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the estimated fair value of the reporting unit and the fair value of its other assets and liabilities. We determined that we did not have any impairment of goodwill at December 31, 2017.

5. Debt

Short-term Debt

On February 7, 2017, the Company entered into a short-term secured borrowing arrangement with William W. and Dieva L. Smith (“Smith”) and on February 8, 2017 entered into a short-term secured borrowing arrangement with Steven L. and Monique P. Elfman (“Elfman”) pursuant to which Smith and Elfman each loaned to the Company $1.0 million and the Company issued to each of them a Secured Promissory Note (the “Original Notes”) bearing interest at the rate of 18% per annum.  The Original Notes were due on March 24, 2017 and were secured by the Company’s accounts receivable and certain other assets.  William W. Smith, Jr. is the Company’s Chairman of the Board, President and Chief Executive Officer, and Steven L. Elfman is a director of the Company.  

On March 25, 2017, the Company entered into an Amendment to the Original Note issued to Smith that extended the Maturity Date of the Note to June 26, 2017.  

On March 31, 2017, the Company entered into a new short-term secured borrowing arrangement with Elfman for $1.0 million which matured on June 23, 2017.  

On June 30, 2017, the Company entered into a new short-term secured borrowing arrangement with each of Smith and Elfman to refinance the prior arrangement with each of them, which matured on June 26, 2017 and June 23, 2017, respectively. Under the new borrowing arrangements, the Company issued to each of Smith and Elfman a new Secured Promissory Note (“Replacement Notes”) with a principal balance of $1.0 million, bearing interest at the rate of 12% per annum, and maturing on September 25, 2017. The maturity date of the Replacement Note entered into with Smith may be extended by up to 180 days upon the mutual consent of the Company and Smith.  Each of the Replacement Notes are secured by the Company’s accounts receivable and certain other assets.

On August 22, 2017, the Company entered into Amendments to the Replacement Notes issued to each of Smith and Elfman, which extended the Maturity Date of the Replacement Notes from September 25, 2017 to January 25, 2018. The amendments did not change any other terms of the Replacement Notes.

On August 23, 2017, the Company entered into a borrowing arrangement with Smith, under which the Company borrowed $0.8 million and issued to Smith a Secured Promissory Note, bearing interest at the rate of 12% per annum, and maturing on January 25, 2018.

On August 24, 2017, the Company entered into a new borrowing arrangement with Andrew Arno (“Arno”), under which the Company borrowed $0.3 million and issued to Arno new Secured Promissory Notes with an aggregate principal balance of $0.3 million, bearing interest at the rate of 12% per annum, and maturing on January 31, 2018. Andrew Arno is a director of the Company.    

F-17

On September 29, 2017, the Company exchanged shares of the Company’s newly designated Series B 10% Convertible Preferred Stock (“Series B Preferred Stock”) for outstanding short-term indebtedness with a principal amount of $0.8 million owed to Smith and $0.1 million to Arno for 750 and 50 shares, respectively. See Note 6, Equity Transactions, for further details on the Series B Preferred Stock Offering.

The Company reviewed FASB ASC Topic No. 470-50, Debt Extinguishment, to evaluate the debt extinguishment gain incurred from the debt to equity transaction. Upon completion of the evaluation, it was determined that the gain associated with the short-term related party loan extinguishment to Preferred Stock should be accounted for as a capital contribution and was recorded to Stockholder’s Equity. The principal balance of the note and resulting fair value of the equity interest exchanged was $0.8 million. The fair value was reduced by allocated legal fees and other direct issuance costs of $0.1 million, resulting in a net fair value of $0.8 million. The capital contribution related to the gain was the difference between these two amounts, or $0.1 million.

The Company evaluated the refinancing of the short-term debt instruments under FASB ASU Topic No. 470-60, Troubled Debt Restructurings, to determine whether the modification of the debt instruments would be considered a troubled debt restructuring, using the two-step decision tree. The two steps included an assessment of whether the company is experiencing financial difficulties and if the creditors have provided concessions. Upon completion of this review, the Company concluded that the refinancing did not qualify as a troubled debt restructuring.  

Long-term Debt

On September 2, 2016, we entered into a Note and Warrant Purchase Agreement with Unterberg Koller Capital Fund L.P. and William W. and Dieva L. Smith (collectively, the “Investors”), pursuant to which the Company issued and sold to the Investors in a private placement senior subordinated promissory notes in the aggregate principal amount of $4.0 million (the “Notes”). The Company completed the transactions contemplated by the Note and Warrant Purchase Agreement and issued the Notes on September 6, 2016.  The Notes mature three years following the issuance date, or September 6, 2019, and bear interest at the rate of 10% of the outstanding principal balance of the Notes, payable quarterly in cash or shares of the Company’s common stock.  The Notes are subordinate and junior in right of payment to the prior payment in full of all claims, whether now existing or arising in the future, of holders of senior debt of the Company, as described in the Notes.

On September 29, 2017, the Company exchanged shares of the Company’s newly designated Series B 10% Convertible Preferred Stock for outstanding long-term indebtedness with a principal amount of $2.0 million owed to Smith for 2,000 of the Series B Preferred Stock. See Note 6, Equity Transactions, for further details on the Series B Preferred Stock Offering.

The Company reviewed FASB ASC Topic No. 470-50, Debt Extinguishment, to evaluate the debt extinguishment loss incurred from the transaction. Upon completion of the evaluation, it was determined that the loss associated with the long-term related party loan extinguishment to Preferred Stock should be accounted through the Statement of Operations.  The principal balance of the note and resulting fair value of the equity interest transferred was $2.0 million. The fair value was reduced by legal fees and other direct issuance costs of $0.1 million. The net carrying amount of the long-term note was $1.5 million, which was net of debt issuance costs of $0.1 million and discount of $0.4 million. The extinguishment loss associated with this note was the difference between the net fair value of the equity interest transferred and the net carrying amount of the note being extinguished, which was $0.4 million.

The Company evaluated the conversion of the long-term debt under FASB ASU Topic No. 470-60, Troubled Debt Restructurings, for determining whether the modification of the debt instruments would be considered a troubled debt restructuring, using the two-step decision tree. The two steps included an assessment of whether the company is experiencing financial difficulties and if the creditors have provided concessions. Upon completion of this review, the Company concluded that the refinancing did not qualify as troubled debt restructuring. 

F-18

See also Note 15 for debt transactions that occurred subsequent to December 31, 2017.

6.  Equity Transactions

Preferred Stock Offering

On September 29, 2017, the Company entered into a Securities Purchase Agreement with several investors for the issuance and sale (the “Offering”) of 5,500 shares of the Company’s newly designated Series B 10% Convertible Preferred Stock (the “Series B Preferred Stock”) at a stated value of $1,000 per share, for a total purchase price of $5.5 million.  The Series B Preferred Stock is convertible into the Company’s Common Stock at a conversion price of $1.14 per share, which was the closing bid price of the Common Stock on September 28, 2017, or 4,824,562 shares of Common Stock in the aggregate. The holders of Series B Preferred Stock are entitled to receive cumulative dividends out of funds legally available thereof at a rate of ten percent (10%) per annum, payable (i) when and as declared by the Board of Directors, in quarterly installments on March 1, June 1, September 1 and December 1, (ii) upon conversion into Common Stock with respect the Series B Preferred Stock being converted, and (iii) upon redemption of the Series B Preferred Stock by the Company.

In the event that the trading price of the Company’s Common Stock for 20 consecutive trading days (as determined in the Certificate of Designation) exceeds 400% of the then effective Conversion Price of the Series B Preferred Stock (initially set at $1.14), the Company may force conversion of the Series B Preferred Stock into shares of Common Stock or elect to redeem the Series B Preferred Stock for cash. In addition, upon the occurrence of certain triggering events, each holder of Series B Preferred Stock will have the right to require the Company to redeem such holder’s shares for cash equal to the stated value plus accrued and unpaid dividends and liquidated damages, costs, expenses and other amounts due in respect of the Series B Preferred Stock, and with respect to certain other triggering events, each holder will have the right to increase the dividend rate on such holder’s Series B Preferred Stock to twelve percent (12%) while such triggering event is continuing.

In the Offering, the Company raised gross cash proceeds of $2.7 million, and exchanged outstanding indebtedness with a principal amount of $2.8 million owed to Smith (both long and short-term debt) and $0.1 million owed to Arno.  The Offering raised net cash proceeds of $2.5 million (after deducting the placement agent fee and expenses of the Offering). The Company intends to use the net cash proceeds from the Offering for working capital purposes.   In connection with the Offering, the Company granted customary registration rights to investors with respect to the resale of shares of Common Stock issuable upon conversion of the Series B Convertible Preferred Stock.

Common Stock Offering

On May 16, 2017, the Company entered into subscription agreements with four accredited investors in a private placement pursuant to which the Company issued and sold to such investors an aggregate of 85,000 shares of its unregistered common stock at a price per share of $1.10. 

On May 17, 2017, the Company completed a registered direct offering of 2,077,000 shares of its common stock, which realized gross proceeds of $2.3 million before deducting transaction fees and other expenses. Offering costs related to the transaction totaled $0.2 million, comprised of $0.1 million of transaction fees and $0.1 million of legal and other expenses, resulting in net proceeds of $2.1 million. The Company engaged Sutter Securities Incorporated (“Sutter”) and Chardan Capital Markets, LLC (“Chardan”) as co-placement agents in connection with the offering, and under the terms of the engagement paid the placement agents a cash placement fee and issued to the placement agents warrants to purchase shares of Common Stock equal to 5% of the number of shares sold through each of them, without duplication, at an exercise price per share equal to $1.21 (Sutter) and $1.155 (Chardan). The warrants have a term of five years and will be exercisable beginning on November 18, 2017.

F-19

Warrants

On September 2, 2016, the Company entered into a Note and Warrant Purchase Agreement with the Investors, pursuant to which the Company issued and sold to the Investors in a private placement senior subordinated promissory notes in the aggregate principal amount of $4.0 million and five-year warrants to purchase an aggregate of 1,700,000 shares of the Company’s common stock at an exercise price of $2.74 per share, which expires five years from the date of issuance. The Company completed the transactions contemplated by the Purchase Agreement and issued the Notes and Warrants on September 6, 2016. The terms of the warrants provide that if the Company sells or issues shares of common stock with an exercise price less than $2.74 per share, the exercise price shall be adjusted accordingly to the terms set forth in the Agreement, as discussed in greater detail in the following paragraph. We assessed the warrants and concluded that they should be recorded as equity.

Since the issuance of the warrants to the Investors (the “Smith Warrant” and the “Unterberg Warrant”) on September 6, 2016, there have been five triggering events, causing the warrants to be repriced from the original exercise price of $2.74: Common Stock offerings in May 2017 for $1.10 and $1.05, the issuance of warrants to Sutter and Chardan with exercise prices of $1.21 and $1.155, respectively, all resulting in a charge of $3,000, and the Series B Preferred Stock issuance with a conversion price of $1.14 in September 2017, resulting in a charge of $41,000.  The triggering event charges were recorded to Stockholders’ Equity in the applicable period. Upon application of the triggering events above, the exercise price of the Unterberg Warrant was adjusted to $2.14 and the exercise price of the Smith Warrant was adjusted to $2.38, which is also the agreed upon floor for the Smith Warrants.

The Company issued warrants to purchase shares of Common Stock to the placement agents engaged in connection with a registered direct offering completed on May 17, 2017. See the prior section under the heading “Common Stock Offering” for additional details regarding the warrants issued to the placement agents in connection with that offering.

See also Note 15 for equity transactions that occurred subsequent to December 31, 2017.

7. Income Taxes

Income (loss) before provision for income taxes was generated from the following sources (in thousands):

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Domestic

 

$

(7,132

)

 

$

(15,145

)

 

$

(2,651

)

Foreign

 

 

(75

)

 

 

(427

)

 

 

117

 

Total loss before provision for income taxes

 

$

(7,207

)

 

$

(15,572

)

 

$

(2,534

)

A summary of the income tax expense (benefit) is as follows (in thousands):

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

—

 

 

$

—

 

 

$

—

 

State

 

 

(1

)

 

 

(153

)

 

 

5

 

Foreign

 

 

40

 

 

 

61

 

 

 

63

 

Total current

 

 

39

 

 

 

(92

)

 

 

68

 

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

(530

)

 

 

—

 

 

 

—

 

State

 

 

—

 

 

 

—

 

 

 

—

 

Foreign

 

 

(55

)

 

 

(137

)

 

 

—

 

Total deferred

 

 

(585

)

 

 

(137

)

 

 

—

 

Total provision

 

$

(546

)

 

$

(229

)

 

$

68

 

F-20

A reconciliation of the provision for income taxes to the amount of income tax expense (benefit) that would result from applying the federal statutory rate to the loss before income taxes is as follows:

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Federal statutory rate

 

 

35.0

 

%

 

35.0

 

%

 

35.0

 

State tax, net of federal benefit

 

 

3.9

 

 

 

4.6

 

 

 

(20.4

)

Equity compensation

 

 

(4.5

)

 

 

(0.3

)

 

 

(13.7

)

International tax items

 

 

(0.8

)

 

 

(1.0

)

 

 

(4.6

)

Foreign taxes

 

 

0.2

 

 

 

0.5

 

 

 

(2.5

)

Uncertain tax positions

 

 

0.0

 

 

 

1.1

 

 

 

0.0

 

Other

 

 

0.0

 

 

 

(0.2

)

 

 

(10.6

)

Miscellaneous

 

 

(0.2

)

 

 

(0.5

)

 

 

(1.1

)

Effect of change in rate

 

 

(372.4

)

 

 

0.0

 

 

 

0.0

 

Change in valuation allowance

 

 

346.4

 

 

 

(37.7

)

 

 

15.2

 

 

 

 

7.6

 

%

 

1.5

 

%

 

(2.7

)

The major components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

Deferred income tax assets

 

 

 

 

 

 

 

 

Net operating loss carry forwards

 

$

40,042

 

 

$

54,165

 

Credit carry forwards

 

 

3,557

 

 

 

3,464

 

Fixed assets

 

 

531

 

 

 

985

 

Intangibles

 

 

8,446

 

 

 

15,894

 

Equity-based compensation

 

 

399

 

 

 

688

 

Nondeductible accruals

 

 

465

 

 

 

1,346

 

Various reserves

 

 

81

 

 

 

132

 

Other

 

 

2

 

 

 

22

 

Valuation allowance

 

 

(52,948

)

 

 

(76,648

)

Total deferred income taxes - net

 

 

575

 

 

 

48

 

Deferred income tax liabilities

 

 

 

 

 

 

 

 

Foreign intangibles

 

 

(126

)

 

 

(181

)

Unrealized translation gain/loss

 

 

(23

)

 

 

9

 

Prepaid expenses

 

 

(22

)

 

 

(57

)

Total deferred income liabilities

 

 

(171

)

 

 

(229

)

 

 

 

 

 

 

 

 

 

Net deferred income tax assets (liabilities)

 

$

404

 

 

$

(181

)

F-21

The Company has federal and state net operating loss (“NOL”) carryforwards of approximately $151.0 million and $147.8 million, respectively, at December 31, 2017, to reduce future cash payments for income taxes. These federal NOL carryforwards will expire from 2024 through 2037 and state NOL carryforwards will expire 2017 through 2037. The Company also had $0.5 million of Alternative minimum tax credit carryforwards with an indefinite life, available to offset regular federal income tax requirements.

The Company has federal and state tax credit carryforwards of approximately $2.5 million and $0.7 million, respectively, at December 31, 2017. These tax credits will begin to expire in 2027.

To the extent that an ownership change has occurred under Internal Revenue Code Sections 382 and 383, the Company’s use of its loss carryforwards and credit carryforwards to offset future taxable income may be limited.

At December 31, 2017 and 2016, the Company had unrecognized tax benefits, including interest and penalties, of approximately $0.4 million.

The Company’s gross unrecognized tax benefits as of December 31, 2017 and 2016 and the changes in those balances are as follows (in thousands):

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

Beginning balance

 

$

428

 

 

$

592

 

Increases (decreases) in tax positions for the

   current year

 

 

—

 

 

 

(164

)

Increases (decreases) in tax positions for the

   prior year

 

 

—

 

 

 

—

 

Gross unrecognized tax benefits, ending balance

 

$

428

 

 

$

428

 

We account for income taxes as required by FASB ASC Topic No. 740, Income Taxes. This Topic clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Topic also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Topic requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. In addition, the Topic permits an entity to recognize interest and penalties related to tax uncertainties either as income tax expense or operating

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expenses. The Company has chosen to recognize interest and penalties related to tax uncertainties as income tax expense.

The Company assesses whether a valuation allowance should be recorded against its deferred tax assets based on the consideration of all available evidence, using a “more likely than not” realization standard. The four sources of taxable income that must be considered in determining whether deferred tax assets will be realized are: (1) future reversals of existing taxable temporary differences (i.e., offset of gross deferred tax liabilities against gross deferred tax assets); (2) taxable income in prior carryback years, if carryback is permitted under the applicable tax law; (3) tax planning strategies; and (4) future taxable income exclusive of reversing temporary differences and carryforwards.

F-22

After

Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments, which replaces the “incurred loss” credit losses framework with a reviewnew accounting standard that requires management’s measurement of the four sourcesallowance for credit losses to be based on a broader range of taxablereasonable and supportable information for lifetime credit loss estimates. This guidance is effective for fiscal years beginning after December 15, 2022, and the adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options and Derivatives and Hedging: Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This ASU simplifies accounting for convertible instruments whereby embedded conversion features that are not accounted for as derivatives under Accounting Standards Codification 815 or that do not result in substantial premiums accounted for as paid-in capital are no longer separated from the host contract. Under ASU 2020-06, entities are required to use the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. The if-converted method assumes share settlement of the instrument, which increases the number of potentially dilutive securities used to calculate diluted EPS. This ASU also adds several new disclosure requirements. The Company adopted this ASU in the current year with disclosures included in Note 6. and there was no impact to the prior year.

2. Acquisitions
Avast Family Safety Mobile Business
On April 16, 2021, the Company acquired the Family Safety Mobile Business from Avast pursuant to a Membership Interest and Asset Purchase Agreement (the “Purchase Agreement”).
The following table summarizes the consideration paid for the Family Safety Mobile Business in 2021 (in thousands):
Fair value of assets acquired$74,818 
Fair value of liabilities assumed2,085 
Total purchase price$72,733 
Components of purchase price:
Cash$63,216 
Common stock8,381 
Contingent consideration1,136 
Total purchase price$72,733 
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The Company’s allocation of the purchase price is summarized as follows (in thousands):
Assets:
Cash$6,351 
Accounts receivable6,225 
Prepaid expenses513 
Fixed assets921 
Intangible assets38,033 
Goodwill22,775 
Total assets$74,818 
Liabilities:
Accounts payable$392 
Accrued payroll and benefits1,662 
Accrued expenses31 
Total liabilities$2,085 
Total purchase price$72,733 
The Purchase Agreement included an earn-out provision that provided for additional future payments to Avast aggregating up to $14.0 million. Approximately $1.1 million of the earn-out consideration was included in the original purchase price allocation and valued based upon a percentage of the projected revenue stream from a specified contract utilizing a discounted cash flow method. During the third quarter of 2021, the Company recorded the remaining $12.9 million as a charge to operating expenses due to a contract extension becoming probable with a given customer designated in the earn-out provision, resulting in an increase in the contingent consideration due to Avast. In November 2021, the remainder of the earn-out was paid in full and no further earn-out payments will be due in the future.
The goodwill recognized was attributable primarily to expected synergies and the assembled workforce of the Family Safety Mobile Business. The goodwill is deductible for income tax purposes.
The purpose of the Family Safety Mobile Business acquisition was to acquire a portfolio of mobile family safety services including location features, content filtering and screen time management, cementing Smith Micro as a leader in delivering mobile family safety software solutions to wireless carriers and to further expand Smith Micro’s white-label digital safety solutions, positioning the Company as a leading family safety software-as-a-service provider globally while adding critical headcount in the U.S. and Europe.
3. Equipment and Improvements
Equipment and improvements consist of the following (in thousands):
December 31,
20222021
Computer hardware, software, and equipment$10,347 $10,535 
Leasehold improvements3,381 3,378 
Office furniture and fixtures828 803 
14,556 14,725 
Less accumulated depreciation and amortization(13,058)(12,027)
Equipment and improvements, net$1,498 $2,698 
Depreciation and amortization expense on equipment and improvements was $1.2 million for each of the years ended December 31, 2022 and 2021.
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4. Goodwill and Intangible Assets
The following table sets forth the Company’s acquired intangible assets by major asset class as of December 31, 2022 and 2021, respectively (in thousands, except for useful life data):
December 31, 2022
Weighted Average
Remaining Useful
Life (in Years)		GrossAccumulated
Amortization		Net Book Value
Purchased technology7$13,529 $(5,835)$7,694 
Customer relationships1227,548 (4,490)23,058 
Customer contracts17,000 (5,673)1,327 
Software license75,419 (1,552)3,867 
Non-compete0283 (273)10 
Patents5600 (236)364 
Total$54,379 $(18,059)$36,320 
December 31, 2021
Weighted Average
Remaining Useful
Life (in Years)		GrossAccumulated
Amortization		Net Book Value
Purchased technology8$13,529 $(3,764)$9,765 
Customer relationships1327,549 (2,405)25,144 
Customer contracts27,000 (4,441)2,559 
Software license95,419 (793)4,626 
Non-compete1283 (196)87 
Patents5600 (150)450 
Total$54,380 $(11,749)$42,631 
Intangible assets amortization expense was $6.3 million and $8.1 million for the years ended December 31, 2022 and 2021, respectively.
Future amortization expense related to intangible assets as of December 31, 2022 are as follows (in thousands):
Year Ending December 31,
2023$5,874 
20245,635 
20255,402 
20265,007 
2027 and thereafter14,402 
Total$36,320 
During the first quarter of 2021, the Company received a customer contract termination notice related to a customer contract acquired in the acquisition of Circle’s operator business in February 2020, which was otherwise set to expire in the second quarter of 2024. The contract was terminated effective April 15, 2021; however, in accordance with its terms, Smith Micro continues to deliver wind-down services under the contract. The terms of the contract allow for a wind-down period of up to two years post termination and the Company continued services under this contract throughout 2022. The Company determined the customer contract should be accounted for under the contract modification guidance in Topic 606. As a result, the Company recognized deferred revenue of $0.6 million in 2021 which was being amortized over the customer contract term and amortized the remaining $0.3 million throughout 2022. Additionally, the Company reviewed its customer contract
F-14
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intangible asset associated with this customer contract and determined that the carrying value was in excess of its fair value. Accordingly, the Company recorded a $1.5 million impairment charge within “amortization of intangible assets” in the consolidated statements of operations during the year ended December 31, 2021 and amortized the remaining $0.4 million in 2022 over the estimated remaining service period.
Smith Micro reviews the recoverability of the carrying value of the Company's single reporting unit goodwill at least annually or whenever events or circumstances indicate a potential impairment. The annual impairment testing date is December 31, 2022. Recoverability of goodwill is determined by comparing the estimated fair value of reporting units to the carrying value of the underlying net assets in the reporting units. If the estimated fair value of a reporting unit is determined to be less than the fair value of its net assets, goodwill is deemed impaired, and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the estimated fair value of the reporting unit and the fair value of its other assets and liabilities. Smith Micro determined that there was not any impairment of the Company’s goodwill at December 31, 2022 and 2021.
5. Equity Transactions
2022 Common Stock Offering
In a registered direct offering concurrent with the Notes and Warrants Offering referred to in Note 6, on August 11, 2022, the Company entered into a Securities Purchase Agreement (the “Additional Purchase Agreement” and together with the Securities Purchase Agreement further discussed in Note 6, the “Purchase Agreements”) with certain accredited investors to sell at a purchase price of $2.65 per share, an aggregate of 1,132,075 shares of the Company’s common stock with warrants to purchase up to an aggregate of 1,132,075 shares of the Company’s common stock (the “Additional Warrants”) (the “Stock and Additional Warrants Offering”). Each Additional Warrant is exercisable on the sixth month anniversary of the date of its issuance at an exercise price of $2.65 per share and expires on February 14, 2028. The issuance of the shares of common stock and the Additional Warrants were conducted as a registered direct offering pursuant to the Company’s currently effective Registration Statement on Form S-3, previously filed with and declared effective by the Securities and Exchange Commission, and prospectus supplements thereunder. The Stock and Additional Warrants Offering closed on August 12, 2022, and the Company raised net cash proceeds of $2.8 million.
The Additional Warrants were assessed and concluded to be liability instruments due to certain cash purchase settlement provisions and as a result all changes in the fair value of the Additional Warrants will be recognized in the Company's consolidated statements of operations until they are either exercised or expire. The Additional Warrants for the Company's stock are not traded in an active securities market and, as such, the estimated fair value at inception was $1.6 million determined utilizing a Black-Scholes option pricing model, and is reflected on the balance sheet line "Warrant Liabilities" and as an adjustment to "Additional Paid in Capital."
Given that the Additional Warrants are liability instruments that are measured at fair value, the transaction proceeds were first allocated among the Additional Warrants, with the residual of $1.4 million to equity and transaction issuance costs allocated in the same manner, with $0.1 million relating to the Additional Warrants being expensed immediately within "General and Administrative Expenses," and $0.1 million as an offset to "Additional Paid in Capital."
2021 Common Stock Offering
On March 15, 2021, the Company completed a registered public offering (“Offering”), wherein a total of 9,520,787 shares of the Company’s common stock were issued at a purchase price of $6.85 per share, for a total purchase price of $65.2 million. The Offering raised net cash proceeds of approximately $59.7 million after deducting the underwriting discount and fees and expenses of the Offering. The Company used the net cash proceeds from the Offering to fund, in part, the acquisition of the Family Safety Mobile Business completed on April 16, 2021 (see Note 2 for additional information).
6. Debt and Warrants Transactions
Notes and Warrants Offering
On August 11, 2022, the Company entered into a Securities Purchase Agreement ("SPA") with certain accredited investors, and, pursuant to the SPA, sold a new series of senior secured convertible notes (the "Notes") with an
F-15
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aggregate original principal amount of $15.0 million and an initial conversion price of $3.35 per share, subject to adjustment as described in the Notes, and warrants to acquire up to an aggregate amount of 2,238,806 additional shares of the Company’s common stock (the "Warrants" and together with the Notes, the "Notes and Warrants Offering"). The Warrants are exercisable immediately at an exercise price of $3.35 per share and expire 5 years from the date of issuance on August 11, 2027. There is no established public trading market for the Warrants and the Company does not intend to list the Warrants on any national securities exchange or nationally recognized trading system. The closing of the Notes and Warrants Offering occurred on August 11, 2022.
The Notes accrue compounding interest at the rate of 6.0% per annum, which is payable in cash or shares of the Company's common stock at the Company's option, in arrears quarterly in accordance with the terms of the Notes. Upon the occurrence and during the continuance of an Event of Default (as defined in the Notes), the Notes will accrue interest at the rate of 15.0% per annum. Upon conversion and other designated events, holders of the Notes are also entitled to receive an interest make-whole payment. Upon a redemption due to a Change in Control (as defined in the Notes), holders of the Notes are entitled to cash settlement. The Notes mature on December 31, 2023, with amortization payments being made monthly from April 2023 through December 2023, and the balance at maturity.
The Warrants were assessed and concluded to be liability instruments due to certain cash settlement provisions, and as a result all changes in the fair value of warrants will be recognized in the Company's consolidated statements of operations until they are either exercised or expire. The Warrants are not traded in an active securities market and, as such, the estimated fair value at inception was $3.8 million, determined utilizing a Black-Scholes option pricing model and is reflected on the balance sheet line "Warrant liabilities" and as a discount on the Notes.
The Notes contain a make-whole feature and a redemption right payable in cash upon change in control feature, as well as certain other conversion and redemption features. These features are viewed as a compound embedded derivative that meets the criteria to be bifurcated and carried at fair value. This is classified as in the balance sheet line "Derivative liabilities" and as a discount on the Notes, with subsequent adjustments to fair value each reporting period with a charge to earnings. The derivative was initially recognized at a fair value of $4.2 million and was subsequently adjusted to $1.6 million at December 31, 2022, with the following assumptions being utilized:
Convertibles Notes Derivative
August 11, 2022December 31, 2022
Common stock market price$3.04 $2.10 
Risk-free interest rate3.28 %4.68 %
Expected dividend yield— — 
Expected term (in years)1.39 1.00 
Expected volatility56.32 %61.59 %
Given that the warrants and the derivatives are liability instruments that are measured at fair value, the transaction proceeds were allocated first to the Warrants and derivative, with the residual to the Notes. Transaction issuance costs for the Notes and Warrants Offering were allocated in the same manner, with $0.5 million relating to the Warrants and derivative being expensed immediately within "General and administrative expenses." Deferred financing costs for the Notes and Warrant Offering totaled $0.5 million and are reported net of accumulated amortization as a deduction from the face amount of the debt. Amortization of the deferred financing costs and discount is reported as a component of interest expense and is computed using the effective interest method over the expected term of the debt. In the Notes and Warrant Offering, the Company raised net cash proceeds of $14.0 million.
During the year ended December 31, 2022, the Company recognized interest expense of $2.8 million on the Notes and related instruments utilizing the effective interest rate of 155%, which includes amortization of debt issuance costs of $0.1 million, amortization of discount of $2.3 million, and contractual interest of $0.4 million.
F-16
Table of Contents
The balance of the Notes as of December 31, 20172022 is as follows (unaudited, in thousands):
CurrentLong termTotal
Gross Balance as of December 31, 2022$15,000 $— $15,000 
Unamortized Discount(5,656)— $(5,656)
Unamortized Issuance Costs(337)— $(337)
Net Balance as of December 31, 2022$9,007 $— $9,007 

The Notes contain certain customary affirmative and negative covenants regarding the incurrence of indebtedness, acquisition and investment transactions, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends, distributions or redemptions, and the transfer of assets, among other matters. As of December 31, 2022, the Company was in compliance with all covenants.
Warrant Liabilities
As further discussed above, on August 11, 2022, Warrants to purchase 2,238,806 shares of common stock were issued with an exercise price of $3.35 per share in conjunction with the Notes and Warrants Offering, at an initial fair value of $3.8 million. Additional Warrants (as defined in Note 5 above) to purchase 1,132,075 shares of common stock were issued with an exercise price of $2.65 per share in conjunction with the Stock and Additional Warrants Offering.
All changes in the fair value of these warrant liabilities are recognized in the Company's consolidated statements of operations until they are either exercised or expire. The Warrants are not traded in an active securities market and, as such, the estimated fair value at inception and again at December 31, 2022 was determined by using a Black-Scholes option pricing model that utilizes assumptions noted in the following table. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on the historical volatility over the expected term of the Warrants. The Company has no reason to believe future volatility over the expected remaining life of the Warrants is likely to differ materially from historical volatility. Expected life is based on the contractual term of the Warrants. Below are the specific assumptions utilized:
WarrantsAdditional Warrants
August 11, 2022December 31, 2022August 12, 2022December 31, 2022
Common stock market price$3.04 $2.10 $2.34 $2.10 
Risk-free interest rate3.03 %3.76 %3.03 %3.76 %
Expected dividend yield— — — — 
Expected term (in years)5.00 4.61 5.50 5.12 
Expected volatility66.85 %64.16 %70.55 %65.52 %
Credit Facility
On March 31, 2022, the Company and its wholly-owned subsidiary, Smith Micro Software, LLC, as co-borrowers entered into a credit agreement with Wells Fargo Bank, National Association providing for a $7.0 million secured revolving credit facility (the “Credit Facility”) that was able be utilized to finance the Company’s working capital requirements and other general corporate purposes. In connection with the Notes and Warrants Offering described above),in Note 6 the Credit Facility was terminated on August 11, 2022. There were borrowings and after considerationrepayments of $0.3 million for the year 2022.
7. Fair Value of Financial Instruments
The Company measures and discloses fair value measurements as required by FASB ASC Topic No. 820, Fair Value Measurements and Disclosures.
Fair value is an exit price, representing the amount that would be received upon the sale of an asset or the amount that would be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in
F-17
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pricing an asset or a liability. As a basis for considering such assumptions, the FASB establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
•Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2 – Include other inputs that are directly or indirectly observable in the marketplace.
•Level 3 – Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The following table presents information about the financial liabilities that are measured at fair value on a recurring basis at December 31, 2022 and 2021 (in thousands):
Level 1Level 2Level 3Total
Total at December 31, 2021— — $— $— 
Notes and Warrants Offering Derivative$— $— $1,575 $1,575 
Notes and Warrants Offering Warrants— — 2,052 2,052 
Stock and Additional Warrants Offering Warrants— — 1,265 1,265 
Total at December 31, 2022$— $— $4,892 $4,892 
The following table presents the changes in the fair value of Level 3 instruments for the years ended December 31, 2022 and 2021 (in thousands):
Contingent ConsiderationNotes and Warrants Offering DerivativeNotes and Warrants Offering WarrantsStock and Additional Warrants Offering WarrantsTotal
Measurement at December 31, 2020$— $— $— $— $— 
Additions1,136 — — — 1,136 
Change in fair value12,864 — — — 12,864 
Payments(14,000)— — — (14,000)
Measurement at December 31, 2021$— $— $— $— $— 
Additions— 4,178 3,793 1,590 9,561 
Change in Fair Value— (2,603)(1,741)(325)(4,669)
Measurement at December 31, 2022$— $1,575 $2,052 $1,265 $4,892 
The carrying values for all other financial assets and liabilities approximated fair value for the years ended December 31, 2022 and 2021.
8. Income Taxes
Loss before provision for income taxes was generated from the following sources (in thousands):
Year Ended December 31,
20222021
Domestic$(29,539)$(31,301)
Foreign486 473 
Total loss before provision for income taxes$(29,053)$(30,828)
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Table of Contents
A summary of the income tax expense is as follows (in thousands):
Year Ended December 31,
20222021
Current:
Federal$— $— 
State8 5 
Foreign157 152 
Total current165 157 
Deferred:
Federal24 24 
State37 35 
Foreign— (1)
Total deferred61 58 
Total income tax expense$226 $215 
A reconciliation of the provision for income taxes to the amount of income tax expense that would result from applying the federal statutory rate to the loss before income taxes is as follows:
Year Ended December 31,
20222021
Federal statutory rate21.0 %21.0 %
State tax, net of federal benefit4.1 4.3 
Equity compensation(1.5)0.4 
International tax items(3.9)0.1 
Foreign taxes(0.5)(0.5)
State NOL true-up(1.2)1.2 
Miscellaneous1.8 (0.4)
Effect of change in rate0.7 0.8 
Change in valuation allowance(21.1)(27.6)
(0.8)%(0.7)%
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The major components of the Company’s continuing cumulative loss position as of December 31, 2017, the Company recorded a valuation allowance related to its U.S.-based deferred tax assets and liabilities are as follows (in thousands):
Year Ended December 31,
20222021
Deferred income tax assets
Net operating loss carry forwards$48,317 $47,204 
Research and development expenses5,100 — 
Intangibles4,907 6,259 
Credit carry forwards3,028 3,027 
Nondeductible accruals453 532 
163j Limitation333 — 
Fixed assets289 84 
Equity-based compensation188 208 
Deferred rent15 33 
Other3 7 
Total deferred income taxes - net62,633 57,354 
Deferred income tax liabilities
Prepaid expenses(92)(80)
Unrealized translation gain/loss(21)(45)
Total deferred income liabilities- net(113)(125)
Valuation allowance(62,698)(57,346)
Net deferred income tax liabilities$(178)$(117)
The Company has federal and state net operating loss (“NOL”) carryforwards of $52.9approximately $185.4 million and $150.8 million, respectively, at December 31, 2017.  During 2017,2022, to reduce future cash payments for income taxes. The federal NOL carryforwards generated prior to 2018 will expire from 2031 through 2037 and state NOL carryforwards will expire 2023 through 2041. Federal NOL carryforwards generated in 2018 and thereafter have no expiration date.
The Company has federal and state tax credit carryforwards of approximately $2.5 million and $0.7 million, respectively, at December 31, 2022. These tax credits will begin to expire in 2028.
To the valuation allowance on deferredextent that an ownership change has occurred under Internal Revenue Code Sections 382 and 383, the Company’s use of its loss carryforwards and credit carryforwards to offset future taxable income may be limited.
At December 31, 2022 and 2021, the Company had unrecognized tax assets decreased by $23.7 million, increased $1.7 millionbenefits, including interest and penalties, of approximately $0.4 million.
The Company’s gross unrecognized tax benefits as of December 31, 2022 and 2021 and the changes in 2016, and decreased $0.8 million in 2015.

We recognizedthose balances are as follows (in thousands):

Year Ended December 31,
20222021
Beginning balance$412 $428 
Other— (16)
Gross unrecognized tax benefits, ending balance$412 $412 
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.  During 2017expense, however during 2022 and 2016, we recognized $0 and of2021, the Company did not recognize any interest andor penalties. TheThere were no  cumulative interest and penalties at December 31, 20172022 and 2016 were $0.

Unrecognized tax benefits of $164.0 million were released in October of 2016, which impacted the effective tax rate due to the expiration of the statute of limitations. We do2021. The Company does not anticipate any material changes to unrecognized tax benefits within the next twelve months that will affect the effective tax rate.

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In assessing whether a valuation allowance is required, significant weight is given to evidence that can be objectively verified. A significant factor in the Company’s assessment is that the Company was in a three-year historical cumulative loss as of the end of fiscal 2022. In addition, the Company was also in a loss for fiscal year 2017 and 2018 These facts, combined with uncertain near-term market and economic conditions, reduced the Company’s ability to rely on projections of future taxable income in assessing the realizability of its deferred tax assets.
After a review of the four sources of taxable income as of December 31, 2022 (as described in Note 1), and after consideration of the Company’s continuing cumulative loss position as of December 31, 2022, the Company recorded a valuation allowance related to its U.S.-based deferred tax assets of $62.7 million at December 31, 2022. The valuation allowance on deferred tax assets increased by $5.4 million and $7.9 million in 2022 and 2021, respectively.
The Company is subject to U.S. federal income tax as well as to income tax of multiple state jurisdictions. Currently there are no audits in process or pending from Federal incomeor state tax returns of theauthorities. The Company are subject to IRS examination for the 2013 – 2016 tax years. State income tax returns areis no longer subject to examination for a period of threeU.S. federal income tax returns for years before December 31, 2018 and for state income tax returns, the Company is no longer subject to fourexamination for years after filing.before December 31, 2017. As of December 31, 2017,2022, the Company had no outstanding tax audits. The outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs.

On As of December 22, 2017,31, 2022, a current estimate of the President signedrange of changes that may occur within the Tax Cuts and Jobs Act (“next twelve months cannot be made due to the 2017 Act”) into law. The 2017 Act will have pervasive financial reporting implications for all companies with U.S. operations. We reviewed and incorporateduncertainty regarding the new tax bill implications in the 2017 financial statements. The main change is the remeasurementtiming of deferred taxes at the new corporate tax rate of 21%, which reduced the net deferred tax assets, before valuation allowance, by $26.9 million. Due to full valuation allowance, the change in deferred taxes was fully offset by the change in valuation allowance. The 2017 Act has no significant impact on the 2017 financial statements.

these events.

For financial reporting purposes, income (loss) before provision for income taxes for ourthe Company’s foreign subsidiaries was $(0.1) million, $(0.4) million, and $0.1$0.5 million for theboth years ended December 31, 2017, 20162022 and 2015, respectively. At December 31, 2017, unremitted earnings of foreign subsidiaries were approximately $0.3 million and have been included in our computation of the transition tax associated with the enactment of the Act discussed above. We do2021. Smith Micro does not provide for U.S. taxes on ourits unremitted earnings of foreign subsidiaries that have not been previously taxed since we intendthe Company intends to invest such undistributed earnings indefinitely outside of the U.S.

F-23

The 2017 US Tax Cuts and Jobs Act subjects a U.S. shareholder to current tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The Company's accounting policy is to recognize the tax on GILTI as a period expense in the period the tax is incurred. The current income related to the GILTI inclusion in 2022 is $5.9 million.
F-21

8. Net Loss

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9. Earnings Per Share

The Company calculates earnings per share (“EPS”) as required by FASB ASC Topic No. 260, Earnings Per Share. Basic EPS is calculated by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period, excluding common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period, plus the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For periods with a net loss, the dilutive common stock equivalents are excluded from the diluted EPS calculation. For purposes of this calculation, common stock subject to repurchase by the Company, options, warrants, and optionsconvertible notes are considered to be common stock equivalents, and are only included in the calculation of diluted earnings per share when their effect is dilutive.

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss available to common stockholders

 

$

(6,661

)

 

$

(15,343

)

 

$

(2,602

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

 

13,489

 

 

 

11,951

 

 

 

11,486

 

Potential common shares - options (treasury

   stock method)

 

 

—

 

 

 

—

 

 

 

—

 

Weighted average shares outstanding - diluted

 

 

13,489

 

 

 

11,951

 

 

 

11,486

 

Shares excluded (anti-dilutive)

 

 

—

 

 

 

—

 

 

 

17

 

Shares excluded due to an exercise price greater than

   weighted average stock price for the period

 

 

1,839

 

 

 

2,094

 

 

 

383

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.49

)

 

$

(1.28

)

 

$

(0.23

)

Diluted

 

$

(0.49

)

 

$

(1.28

)

 

$

(0.23

)

The following table sets forth the details of basic and diluted earnings per share (unaudited, in thousands, except per share amounts):

9.

Year Ended December 31,
20222021
(in thousands, except per share amounts)
Numerator:
Net loss$(29,279)$(31,043)
Denominator:
Weighted average shares outstanding – basic55,422 51,232 
Potential common shares – options / warrants (treasury stock method) and convertible notes (as if converted method)— — 
Weighted average shares outstanding – diluted55,422 51,232 
Shares excluded (anti-dilutive)3,662 1,324 
Net loss per common share:
Basic$(0.53)$(0.61)
Diluted$(0.53)$(0.61)
10. Employee Benefit Plans

The Company offers its US employees participation in a 401(k) plan, in which the Company matches the employee contributions at a rate of 20%, subject to a vesting schedule. Total employer contributions amounted to $0.2$0.5 million in each ofand $0.4 million for the years ended December 31, 2017, 2016,2022 and 2015.

10.2021, respectively.

11. Stock-Based Compensation

Stock Plans

On June 18, 2015, our Shareholders approved

During the year ended December 31, 2022, the Company granted 1.4 million shares of restricted stock under the Company’s 2015 Omnibus Equity Incentive Plan, (“as amended ("2015 OEIP”OEIP")., which was approved by Smith Micro’s stockholders on June 18, 2015. Subsequent amendments to the 2015 OEIP to increase the number of shares reserved thereunder were approved by its stockholders on June 14, 2018 and June 9, 2020. The 2015 OEIP which became effective the same date, replaced the 2005 Stock Option / Stock Issuance Plan (“2005 Plan”) which was due to expire on July 28, 2015. All
The outstanding options under the 2005 Plan remain outstanding, but no new grants will be made under the 2005 Plan. The maximum number of shares of the Company’s common stock available for issuance over the term of the 2015 OEIP may not exceed 2,125,0009,625,000 shares.

As of December 31, 2022, there were approximately 2.4 million shares available for future grants under the Company’s 2015 OEIP.

The 2015 PlanOEIP provides for the issuance of full value awards (restricted stock, performance stock, dividend equivalent right or restricted stock units) and partial value awards (stock options or stock appreciation rights) to
F-22
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employees, non-employee members of the board and consultants. Any full value award settled in shares will be debited as 1.2 shares, and partial value awards settled in shares will be debited as 1.0 shares against the share reserve. The exercise price per share for stock option grants is not to be less than the fair market value per share of the Company’s common stock on the date of grant. The Board of Directors has the discretion to determine the vesting schedule. Stock options may be exercisable immediately or in installments, but generally vest over a four-year period from the date of grant. In the event the holder ceases to be employed by the Company, all unvested stock options terminate, and all vested stock options may be exercised within a period of 90 days following termination. In general, stock options expire ten years from the date of grant.

F-24

Restricted stock is valued using the closing stock price on the date of the grant. The total value is expensed over the vesting period of 12 to 48 months.

Stock Compensation Expense
The Company accounts for all stock-based payment awards made to employees and directors based on their fair values and recognized as compensation expense over the vesting period using the straight-line method over the requisite service period for each award as required by FASB ASC Topic No. 718, Compensation-Stock Compensation.
Non-cash stock-based compensation expenses related to stock options, restricted stock grants and the ESPP were recorded in the financial statements as follows (in thousands):
Year Ended December 31,
20222021
Cost of sales$2 $1 
Sales and marketing1,101 901 
Research and development1,082 965 
General and administrative2,764 2,981 
Total non-cash stock compensation expense$4,949 $4,848 
As of December 31, 2022, there was approximately $7.4 million of unrecognized compensation costs related to non-vested stock options and restricted stock granted under the 2015 OEIP and the 2005 Plan. In the second quarter of 2022 there was a modification of a restricted stock award which accelerated the vesting of that award. As such an additional $0.6 million of stock compensation expense was recorded in Sales and Marketing expense in that period.
Valuation of Stock Option Awards
There were no options granted in 2022. The assumptions used to compute the share-based compensation costs for the stock options granted during the year ended December 31, 2021 using the Black-Scholes option pricing model, were as follows:
Year Ended December 31,
2021
Weighted average grant date fair value of
   stock options
$5.94
Assumptions
Risk-free interest rate (weighted average)0.87 %
Expected dividend yield— 
Weighted average expected life (years)6.2
Volatility (weighted average)74.5 %
Forfeiture rate12.0 %
The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The Company assumed no dividend yield because it does not expect to pay dividends for the foreseeable future. The weighted average expected life is the vesting period for those options granted during that period. The average volatility is
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Table of Contents
based on the actual historical volatility of the Company’s common stock. The forfeiture rate was based on modified employee turnover.
Stock Options
A summary of the Company’s stock options outstanding under the 2015 OEIP and 2005 Plan as of December 31, 2022 and 2021 and the activity during the years ended herein are as follows (in thousands except per share amounts):
SharesWeighted Avg. Exercise PriceWtd. Avg. Remaining Contractual Life (Yrs)Aggregate Intrinsic Value
Outstanding as of December 31, 2021194 $4.12 $218 
Exercised(9)$2.11 $12 
Forfeited(2)$4.82 $— 
Expired(44)$5.66 $— 
Outstanding as of December 31, 2022139 $3.75 5.1$6 
Vested and expected to vest at December 31, 2022137 $3.72 5.1$6 
Exercisable as of December 31, 2022117 $3.49 4.6$6 
Employee Stock Purchase Plan

The Company has a shareholder approved employee stock purchase plan (“ESPP”), under which substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market values of the stock as of the beginning and end of six-month offering periods. An employee’s payroll deductions under the ESPP are limited to 10% of the employee’s compensation and employees may not purchase more than the lesser of $25,000 of stock, or 250 shares, for any purchase period. Additionally, no more than 250,000 shares in the aggregate may be purchased under the plan.

Stock Compensation Expense

The Company accounts for all stock-based payment awards made to employees and directors based on their fair values and recognized as compensation expense over the vesting period using the straight-line method over the requisite service period for each award as required by FASB ASC Topic No. 718, Compensation-Stock Compensation.

Valuation of Stock Option and Restricted Stock Awards

The assumptions used to compute the share-based compensation costs for the stock options granted during the years ended December 31, 2017, 2016, and 2015, respectively, using the Black-Scholes option pricing model, were as follows:

ESPP.

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Weighted average grant date fair value of

   stock options

 

 

—

 

 

$

1.40

 

 

$

3.08

 

Assumptions

 

 

—

 

 

 

 

 

 

 

 

 

Risk-free interest rate (weighted average)

 

 

—

 

 

 

1.1

%

 

 

1.1

%

Expected dividend yield

 

 

—

 

 

 

—

 

 

 

—

 

Weighted average expected life (years)

 

 

—

 

 

 

4.8

 

 

 

4.0

 

Volatility (weighted average)

 

 

—

 

 

 

74.3

%

 

 

83.5

%

Forfeiture rate

 

 

—

 

 

 

23.0

%

 

 

23.3

%

There were no stock options granted during 2017.

The risk-free interest rate assumption was based on the United States Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The Company assumed no dividend yield because it does not expect to pay dividends for the foreseeable future. The weighted average expected life is the vesting period for those options granted during that period. The average volatility is based on the actual historical volatility of our common stock. The forfeiture rate was based on modified employee turnover.

Grants of restricted stock are valued using the closing stock price on the date of grant. In the year ended December 31, 2016, a total of 75,000 shares of restricted stock, with a total value of $51,000, were granted to non-employee members of the Board of Directors. This cost will be amortized over a period of 12 months. In addition, 300,000 shares of restricted stock, with a total value of $0.9 million, were granted to key officers and employees of the Company. This cost will be amortized over a period of 48 months.

F-25

Valuation of ESPP

The fair values are estimated at the beginning of each offering period using a Black-Scholes valuation model that uses the assumptions noted in the following table. The risk-free rate is based on the U.S. treasury yield curve in effect at the time of grant. Expected volatility was based on the historical volatility on the day of grant. Following is a schedule of the shares purchased, the fair value per share, and the Black-Scholes model assumptions for each offering period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

March 31,

 

 

September 30,

 

 

March 31,

 

 

September 30,

 

 

March 31,

 

Offering Period Ended

 

2017

 

 

2017

 

 

2016

 

 

2016

 

 

2015

 

 

2015

 

Offering Period EndedSeptember 30,
2022		March 31,
2022		September 30,
2021		March 31,
2021

Shares purchased for offering

period

 

 

2,000

 

 

 

2,002

 

 

 

3,536

 

 

 

3,498

 

 

 

3,113

 

 

 

2,804

 

Shares purchased for offering period10,901 6,019 5,360 4,668 

Fair value per share

 

$

0.35

 

 

$

0.72

 

 

$

0.77

 

 

$

1.24

 

 

$

2.39

 

 

$

1.72

 

Fair value per share as of the beginning of the offering periodFair value per share as of the beginning of the offering period$1.15 $1.61 $1.90 $1.25 

Assumptions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assumptions

Risk-free interest rate (average)

 

 

0.89

%

 

 

0.47

%

 

 

0.47

%

 

 

0.18

%

 

 

0.11

%

 

 

0.40

%

Risk-free interest rate (average)0.86 %0.05 %0.05 %0.12 %

Expected dividend yield

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Expected dividend yield— — — — 

Weighted average expected life

(years)

 

 

0.5

 

 

 

0.5

 

 

 

0.5

 

 

 

0.5

 

 

 

0.5

 

 

 

0.5

 

Weighted average expected life (years)0.50.50.50.5

Volatility (average)

 

 

64.2

%

 

 

52.6

%

 

 

40.4

%

 

 

66.1

%

 

 

103.8

%

 

 

109.1

%

Volatility (average)32.5 %43.1 %44.6 %47.1 %

Compensation Costs

Non-cash stock-based compensation expenses related to stock options, restricted stock grants and the ESPP were recorded in the financial statements as follows (in thousands):

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Cost of revenues

 

$

1

 

 

$

3

 

 

$

12

 

Selling and marketing

 

 

(23

)

 

 

277

 

 

 

335

 

Research and development

 

 

213

 

 

 

495

 

 

 

644

 

General and administrative

 

 

582

 

 

 

753

 

 

 

1,167

 

Restructuring expense

 

 

398

 

 

 

—

 

 

 

—

 

Total non-cash stock compensation expense

 

$

1,171

 

 

$

1,528

 

 

$

2,158

 

F-24

Total share-based compensation for each year includes cash payment

Table of income taxes related to grants of restricted stock in the amounts of $0.0, $0.0, and $0.1 million for the years ended December 31, 2017, 2016, and 2015, respectively.

F-26

Stock Options

A summary of the Company’s stock options outstanding under the 2015 OEIP and 2005 Plan as of December 31, 2017 and the activity during the years ended herein are as follows (in thousands except per share amounts):

Contents

 

 

 

 

 

 

Weighted Ave.

 

 

Aggregate

 

 

 

Shares

 

 

Exercise Price

 

 

Intrinsic Value

 

Outstanding as of December 31, 2014

 

 

534

 

 

$

21.16

 

 

$

—

 

(322 options exercisable at a weighted average

   exercise price of $32.16)

 

 

 

 

 

 

 

 

 

 

 

 

Granted (weighted average fair value of $3.08)

 

 

18

 

 

$

5.08

 

 

 

 

 

Exercised

 

 

(2

)

 

$

4.76

 

 

 

 

 

Cancelled

 

 

(139

)

 

$

16.20

 

 

 

 

 

Outstanding as of December 31, 2015

 

 

411

 

 

$

21.56

 

 

$

—

 

(1,291 options exercisable at a weighted average

   exercise price of $8.04)

 

 

 

 

 

 

 

 

 

 

 

 

Granted (weighted average fair value of $1.40)

 

 

33

 

 

$

2.36

 

 

 

 

 

Exercised

 

 

—

 

 

$

—

 

 

 

 

 

Cancelled

 

 

(71

)

 

$

8.04

 

 

 

 

 

Outstanding as of December 31, 2016

 

 

373

 

 

$

22.51

 

 

$

—

 

(307 options exercisable at a weighted average

   exercise price of $26.48)

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

—

 

 

$

—

 

 

 

 

 

Exercised

 

 

—

 

 

$

—

 

 

 

 

 

Cancelled

 

 

(234

)

 

$

32.54

 

 

 

 

 

Outstanding as of December 31, 2017

 

 

139

 

 

$

5.69

 

 

$

—

 

Exercisable as of December 31, 2017

 

 

116

 

 

$

6.16

 

 

$

—

 

Vested and expected to vest at December 31, 2017

 

 

123

 

 

$

4.48

 

 

$

—

 


During the year ended December 31, 2017, no options were granted or exercised. As of December 31, 2017, there was $1.8 million of unrecognized compensation costs related to non-vested stock options and restricted stock granted under the Plans.  At December 31, 2017, there were 1.7 million and 0 shares available for future grants under the 2015 OEIP and 2005 Plan, respectively.

Restricted Stock Awards

There were 88,000 restricted stock awards granted under the 2015 OEIP and 2005 Stock Plan in 2017.

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A summary of the Company’s restricted stock awards outstanding under the 2015 OEIP and 2005 Plan as of December 31, 2017,2022 and 2021, and the activity during years ended therein, are as follows (in thousands)thousands, except weighted average grant date fair value):

 

 

 

 

 

 

Weighted average

 

 

 

Number

 

 

grant date

 

 

 

of shares

 

 

fair value

 

Unvested at December 31, 2014

 

 

431

 

 

$

7.64

 

Granted

 

 

343

 

 

$

6.00

 

Vested

 

 

(252

)

 

$

7.80

 

Cancelled and forfeited

 

 

(71

)

 

$

6.68

 

Unvested at December 31, 2015

 

 

451

 

 

$

6.44

 

Granted

 

 

375

 

 

$

2.70

 

Vested

 

 

(253

)

 

$

5.83

 

Cancelled and forfeited

 

 

(139

)

 

$

4.16

 

Unvested at December 31, 2016

 

 

434

 

 

$

4.30

 

Granted

 

 

88

 

 

$

1.11

 

Vested

 

 

(329

)

 

$

3.98

 

Cancelled and forfeited

 

 

(26

)

 

$

2.70

 

Unvested at December 31, 2017

 

 

167

 

 

$

3.49

 

Number of sharesWeighted average grant date fair value
Unvested at December 31, 20201,702 $4.07 
Granted1,287 $7.02 
Vested(1,027)$4.47 
Canceled and forfeited(295)$5.60 
Unvested at December 31, 20211,667 $5.83 
Granted1,398 $3.76 
Vested(1,174)$4.87 
Canceled and forfeited(212)$6.06 
Unvested at December 31, 20221,679 $4.75 

11. Commitments and Contingencies

Leases

12. Revenues
Performance Obligations
Family Safety Cloud Based Services
Smith Micro’s Family Safety solutions, which includes the SafePath family of products, are a hybrid Software as a Service (“SaaS”) offering. The Company leasesconsiders the provision of the perpetual license and the cloud-based platform as a single performance obligation. The Company provides the perpetual license on a royalty free basis and earns revenue based either on a fixed fee for usage of its buildings undercloud-based services or on a revenue share arrangement. Smith Micro recognizes the usage-based and revenue share fees when it is entitled to the consideration earned for the distinct service period based on its customer’s usage of its cloud-based services.
ViewSpot Cloud Based Services
Our ViewSpot product is a cloud-based platform that Smith Micro's MNO customers use to display its promotional content on mobile devices on display in their retail outlets. Using this solution, the MNOs have the ability to promote specific mobile devices in targeted geographic retail locations and monitor the efficacy of the promotions and consumer interactions with in-store display devices and the targeted promotional content. Smith Micro sells a royalty free license and cloud-based services to serve the promotional content and capture consumer interaction with the in-store display mobile device. ViewSpot services depend on a significant level of integration, interdependency, and interrelation between the on-premise applications, consulting services and the cloud services, and are accounted for together as a single performance obligation. ViewSpot services are sold on a fixed fee basis to Smith Micro’s customers based on pre-defined purchase orders. Since Smith Micro is obligated to provide the required services over the contract period, the revenue is recognized over time.
From time to time, the Company also provides services to either to configure ad hoc targeted promotional content for Smith Micro’s customers or to set up new devices for optimization on the ViewSpot platform upon request. These requests are driven by the customers’ marketing initiatives and tend to be short term “bursts” of activity. Smith Micro recognizes revenues from these ad hoc services at a point in time which is upon delivery of the configured promotional content to the cloud platform.
CommSuite®Revenue
For the CommSuite product, the Company may provide integration services for a fee to ensure the Company’s software solution can operate on the customer’s operating leasesplatforms and the operating platform of the mobile devices of Smith Micro’s customer’s end users. In addition, since the mobile device OEMs change their operating
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systems regularly, Smith Micro provides maintenance services to ensure utility of the software license is not diminished for the Company’s customers. Smith Micro considers the integration services, the software license, and maintenance services to maintain the utility of the software license for its customers as a single performance obligation. The Company provides the perpetual license on a royalty free basis. Revenue related to integration services, if charged, is recognized at a point in time upon delivery and acceptance of the licensed software by the customer.
To support the CommSuite solution, Smith Micro also provides customers with its hosted environment and Application Service Provider (“ASP”) services for the duration of the license term. The Company considers the provision of these services to be a separate performance obligation. In these transactions, the total consideration expected is variable. The Company does not estimate when the variable consideration will be recognized because the License Usage Based Fees, Hosting Service Fees and ASP Advertising Fees relate specifically to the Company’s efforts to transfer the services for a specified period (month or quarter) which are distinct from the services provided in other specified periods. Smith Micro’s customer’s or the customer’s end customer’s usage occurs within the defined period, and the variability of Smith Micro’s license, hosting and ASP fees is resolved in the specified period, and such fees earned are not subject to adjustment based on the activity in other periods.
Smith Micro earns revenue from these services on a fixed fee per perpetual license usage on its hosted environment and advertising revenue share for advertisements placed by its customers on the Company’s platform. The usage fees are not earned until Smith Micro transfers its software license to its customers. The Company recognizes the usage-based fees when it is entitled to the consideration earned for the distinct service period based on its customer’s usage of its licenses, hosting services, and ASP advertising platform (“hosted environment usage fees”).
Consulting Services and Other
Smith Micro has developed a roadmap for adding new functionality to its wireless products to extend the product lifecycle and expand its customer’s use of the product on their networks. From time to time, the Company enters into consulting services arrangements with its customers to develop incremental functionality not included on the developmental roadmap. The Company earns revenue from these consulting services that expireis recognized at the time of delivery of the software when the services have been completed and control has been transferred to the customers.
The Company also may enter into arrangements with certain customers to provide technology support services beyond the initial warranty period. Technology support services include e-mail and telephone support and unspecified rights to bug fixes available on various dates through 2022. Future minimum annual lease payments undera when-and-if available basis. Smith Micro considers the provision of such leasestechnology support services to be a separate performance obligation which is generally billed in advance for a fixed term and recognized as revenue ratably over the contractual term as the Company performs its services.
Deferred Revenue
Deferred revenue represents amounts billed to customers for which revenue has not been recognized. Deferred revenue primarily consists of the unearned portion of monthly, quarterly, and annually billed service fees and prepayments made by customers for a future period. Smith Micro recognizes revenue upon transfer of control. As of December 31, 20172022 and 2021, the Company’s total deferred revenue balance was $0.3 million and $0.2 million, respectively.
Costs to Obtain a Customer Contract
The Company generally pays sales commissions to its sales force, which are incremental and recoverable costs of acquiring contracts. In most instances, sales commissions are only paid when the Company earns usage-based fees on the contracts. The commission obligation is established each quarter based on the usage-based fees earned. The commission obligation is not adjusted by future usage-based fees earned, meaning each period is discrete from the other. As a result of the structure of the commission plan, Smith Micro records the commission expense when the commission obligation is determined, which is generally quarterly.
Certain provisions of the sales commission plan incentivize and recognize the efforts of eligible participants to earn commissions on future revenue generated on new contracts, sale of a new product to an existing contract, or sale of a product to a different group within an existing customer. The sales commissions are tiered based on the opportunity size. Sales commissions paid under these provisions of the sales commission plan are incremental
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contract acquisition costs, and accordingly are recorded as a deferred contract asset that is amortized on a straight-line basis over the average contract life of the new, renewed, and modified contract.
Costs to Fulfill a Customer Contract
The Company incurs costs to fulfill obligations under a contract which are recognized as the Company fulfills its performance obligation and recognizes revenue. Where the Company provides services and earns revenue over the contract term based on usage of Smith Micro’s platforms, the associated fulfillment costs are recognized as they are incurred and as usage-based revenue is recognized.
Disaggregation of Revenues
Revenues on a disaggregated basis are as follows (in thousands):

Year Ending December 31,

 

 

 

 

2018

 

$

2,435

 

2019

 

 

2,031

 

2020

 

 

1,728

 

2021

 

 

1,731

 

2022

 

 

33

 

Beyond

 

 

—

 

Total

 

$

7,958

 

Year Ended December 31,
20222021
License and service fees$3,807 $3,730 
Hosted environment usage fees4,852 13,770 
Cloud based usage fees38,182 38,415 
Consulting services and other1,672 2,507 
Total revenues$48,513 $58,422 

As of December 31, 2017, $3.2 million of the remaining lease commitments expense has been accrued as part of the 2013 Restructuring Plan, partially offset by future estimated sublease income of $2.6 million.

Total rent expense was $1.1 million, $1.6 million,

13. Commitments and $1.3 million for the years ended December 31, 2017, 2016, and 2015, respectively.

As a condition of our lease in Pittsburgh, the landlord agreed to incentives of $40.00 per square foot, or a total of $2.2 million, for improvements to the space.  These costs have been included in deferred rent in our long-term liabilities and are being amortized over the remaining lease term.

Pennsylvania Opportunity Grant Program

On September 26, 2011, we received $1.0 million from the State of Pennsylvania to help fund our agreement to start-up a new facility.  The grant carried with it an obligation, or commitment, to employ at least 232 people within a three-year time period that ended on December 31, 2013.  We received an extension of time to meet this employment commitment by April 30, 2016.  The grant contained conditions that would require us to return a pro-rata amount of the monies received if we failed to meet these conditions.  As such, the monies had been recorded as a liability in the accrued liabilities line item on the balance sheet until we are irrevocably

F-28

entitled to retain the monies, or until it is determined that we need to return a portion or all of the monies received.  On June 27, 2016, we received a letter from the State of Pennsylvania requesting reimbursement of $0.3 million and said we earned the remaining $0.7 million of the original $1.0 million grant.  On September 19, 2016, we entered into a Settlement and Release Agreement with the Commonwealth of Pennsylvania, acting by and through the Department of Community and Economic Development to repay $0.3 million of the original $1.0 million grant.  Per the agreement, the total amount due of $0.3 million is at 0% interest and is payable in twenty equal quarterly installments commencing on January 31, 2017 and ending on October 31, 2021.

Contingencies

Litigation

The Company may become involved in various legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters will have a material adverse impact on the Company’s consolidated results of operations, cash flows, or financial position, litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows, or financial position in a particular period.

Other Contingent Contractual Obligations

During its normal course of business, the Company has made certain indemnities, commitments, and guarantees under which it may be required to make payments in relation toconnection with certain transactions. These include: intellectual property indemnities to the Company’s customers pursuant to contracts for the Company’s products and licensees in connectionservices, including indemnities with the use, sale and/or license of Company products;respect to intellectual property, confidentiality and data privacy; indemnities to various lessors in connection with facility leases for certain claims arising from use of such facility or under such lease; indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company; indemnities involving the accuracy of representations and warranties in certain contracts; and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. In addition, the Company has made or may make contractual commitments to employees providing for severance payments and/or postretirement benefits upon the occurrence of certain prescribed events. The Company may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain customer contracts. The duration of these indemnities, commitments, and guarantees varies, and in certain cases may be indefinite. The majority of these indemnities, commitments, and guarantees may not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments, and guarantees in the accompanying consolidated balance sheets.

12.

14. Leases
The Company leases office space and equipment, and certain office space was subleased. Management determines if a contract is a lease at the inception of the arrangement and reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised.
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Leases with an initial term of greater than twelve months are recorded on the consolidated balance sheet. Lease expense is recognized on a straight-line basis over the lease term.
The Company’s lease contracts generally do not provide a readily determinable implicit rate. For these contracts, the estimated incremental borrowing rate is based on information available at the inception of the lease.
Operating lease cost consists of the following (in thousands):
Year Ended December 31,
20222021
Lease cost$1,654 $2,297 
Sublease income(18)(603)
Total lease cost$1,636 $1,694 
Operating lease assets and liabilities are summarized as follows (in thousands):
Year Ended December 31,
20222021
Right-of-use assets$3,722 $4,866 
Current lease liabilities$1,441 $1,400 
Long-term lease liabilities2,976 4,467 
Total lease liabilities$4,417 $5,867 
The maturity of operating lease liabilities is presented in the following table (in thousands):
As of December 31, 2022
2023$1,664 
20241,514 
20251,158 
2026476 
Total lease payments4,812 
Less imputed interest395 
Present value of lease liabilities4,417 
15. Segment, Customer Concentration and Geographical Information

Segment Information

Public companies are required to report financial and descriptive information about their reportable operating segments as required by FASB ASC Topic No. 280, Segment Reporting. The Company has twoone primary business unitsunit based on how management internally evaluates separate financial information, business activities and management responsibility.responsibility: Wireless. The Wireless segment includes our NetWise®the Family Safety (which includes SafePath), CommSuite®, SafePath®,CommSuite, and QuickLink® familyViewSpot families of products.  Graphics includes our consumer-based products: Poser®, Moho® (formerly Anime Studio®), Clip Studio® (formerly Manga Studio®), MotionArtist® and StuffIt®.

The Company does not separately allocate operating expenses to these business units,product lines, nor does it allocate specific assets. Therefore, business unitproduct line information reported includes only revenues.

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The following table showspresents the Wireless revenues generated by each business unitproduct line (in thousands):

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Wireless

 

$

18,342

 

 

$

23,086

 

 

$

33,553

 

Graphics

 

 

4,632

 

 

 

5,149

 

 

 

5,954

 

Total revenues

 

 

22,974

 

 

 

28,235

 

 

 

39,507

 

Cost of revenues

 

 

5,082

 

 

 

7,564

 

 

 

8,152

 

Gross profit

 

$

17,892

 

 

$

20,671

 

 

$

31,355

 

Year Ended December 31,
20222021
Family Safety$39,798 $41,019 
CommSuite4,846 13,717 
ViewSpot3,869 3,569 
Other— 117 
Total Wireless revenues$48,513 $58,422 

Customer

Concentration Information

A summary

The Company has certain customers whose revenues individually represented greater than 10% of the Company’s customers that representtotal revenues, or whose accounts receivable balances individually represented greater than 10% or more of the Company’s revenues is as follows:

total accounts receivable.

 

 

Year Ended December 31,

 

 

 

2017

 

 

2016

 

 

2015

 

Wireless:

 

 

 

 

 

 

 

 

 

 

 

 

Sprint (& affiliates)

 

 

61

%

 

 

63

%

 

 

65

%

Graphics:

 

 

 

 

 

 

 

 

 

 

 

 

FastSpring

 

 

14

%

 

 

14

%

 

 

11

%

TheFor the year ended December 31, 2022, two customers listed above comprised 72%made up 40% and 38% of revenues. For the year ended December 31, 2021, two customers made up 56% and 24% of revenues.

As of December 31, 2022 three customers accounted for 40%, 80%26%, and 83%17% of our accounts receivable, and as of December 31, 2017, 2016,2021, four customers accounted for 42%, 27%, 14%, and 2015,12% of accounts receivable.
For the year ended December 31, 2022, one service provider with more than 10% of purchases accounted for 36% of purchases in the year, totaling 19% of accounts payable as of December 31, 2022. For the year ended December 31, 2021, two service providers with more than 10% of purchases accounted for 36% and 13% of purchases in the year, totaling 15% and 0% of accounts payable as of December 31, 2021, respectively.  Our
The Company’s major customers could reduce their orders of ourthe Company’s products in favor of a competitor's product or for any other reason. The loss of any of ourthese major customers or decisions by a significant customer to substantially reduce purchases could have a material adverse effect on ourSmith Micro’s business.

Geographical Information

During the years ended December 31, 2017, 2016,2022 and 2015,2021, the Company operated in threetwo geographic locations: the Americas EMEA (Europe, theand Europe, Middle East and Africa), and Asia Pacific.Africa (EMEA). Revenues attributed to the geographic location of the customer’scustomers’ bill-to address were as follows (in(unaudited, in thousands):

 

Year Ended December 31,

 

Year Ended December 31,

 

2017

 

 

2016

 

 

2015

 

20222021

Americas

 

$

22,579

 

 

$

27,618

 

 

$

39,008

 

Americas$46,621 $55,398 

EMEA

 

 

170

 

 

 

424

 

 

 

239

 

EMEA1,892 3,024 

Asia Pacific

 

 

225

 

 

 

193

 

 

 

260

 

Total revenues

 

$

22,974

 

 

$

28,235

 

 

$

39,507

 

Total revenues$48,513 $58,422 

13. Related Party Transactions

On September 2, 2016, the Company entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with certain investors, including William W. Smith, Jr. and Dieva L. Smith (collectively, “Smith”).  William W. Smith, Jr. is the Company’s Chairman of the Board, President and Chief Executive Officer.  Pursuant to the Purchase Agreement, the Company issued and sold to Smith in a private placement a senior subordinated promissory note in the aggregate principal amount of $2.0 million (the “Debt Notes”) and a five-year warrant (the “Warrant”) to purchase an aggregate of 850,000 shares of the Company’s common stock at an exercise price of $2.74 per share.

The Company completed the transactions contemplated by the Purchase Agreement and issued the Debt Note and Warrantdoes not separately allocate specific assets to Smith on September 6, 2016. Refer to Note 6, Equity Transactions, for additional details.  In September 2017, the Debt Note issued to Smith was exchanged for shares of our Series B Preferred Stock in connection with the Series B Preferred Stock transaction described below, and is no longer outstanding.

F-30

On December 6, 2016, the Company entered into a short-term secured borrowing arrangement with Smith pursuant to which Smith loaned the Company $1.0 million and the Company issued to Smith a Secured Promissory Note bearing interest at the rate of 18% per annum, which was due on December 14, 2016 and was secured by the Company’s accounts receivable and certain other assets.

On February 7, 2017, the Company entered into a new short-term secured borrowing arrangement with Smith, and on February 8, 2017, the Company entered into a short-term secured borrowing arrangement with Steven L. and Monique P. Elfman (“Elfman”) pursuant to which Smith and Elfman each loaned to the Company $1.0 million and the Company issued to each of them a Secured Promissory Note (the “Original Notes”) bearing interest at the rate of 18% per annum.  The Original Notes were due on March 24, 2017 and were secured by the Company’s accounts receivable and certain other assets.  Steven L. Elfman is a director of the Company.  The Original Notes for Elfman and Smith were amended to extend their maturity dates to June 23 and June 26, 2017, respectively.

The Company’s borrowings under the Original Notes with Smith and Elfman were refinanced on June 30, 2017. In connection with such refinancing, the Company issued each of Smith and Elfman a new Secured Promissory Note in the amount of $1.0 million, bearing interest at the rate of 12% per annum and maturing on September 25, 2017 (each, a “Replacement Note”). Each of the Replacement Notes is secured by the Company’s accounts receivable and other assets.  The maturity date under the Smith Replacement Note has been extended to July 25, 2018. The maturity date under the Elfman Replacement Note was extended to February 11, 2018. The Elfman Replacement Note has since been fully paid and is no longer outstanding.

On May 16, 2017, the Company entered into a subscription agreement with Andrew Arno (“Arno”) in a private placement pursuant to which the Company issued and sold 50,000 shares of its common stock at a price per share of $1.10. Andrew Arno is a director of the Company.

On August 23, 2017, the Company entered into a new borrowing arrangement with Smith, under which the Company borrowed $0.8 million and issued to Smith a new Secured Promissory Note, bearing interest at the rate of 12% per annum, and maturing on January 25, 2018. In September 2017, this new Secured Promissory Note was exchanged by Smith for shares of our Series B Preferred Stock in connection with the Series B Preferred Stock transaction described below, and is no longer outstanding.

On August 24, 2017, the Company entered into a new borrowing arrangement with Arno, under which the Company borrowed $0.3 million and issued to Arno Secured Promissory Notes with an aggregate principal balance of $0.3 million, bearing interest at the rate of 12% per annum, and maturing on January 31, 2018. A portion of the debt under the Arno borrowing arrangement was exchanged by Arno for shares of our Series B Preferred Stock in connection with the Series B Preferred Stock transaction described below, and the maturity date for the remaining balance has been extended to July 25, 2018.

On September 29, 2017, the Company exchanged shares of the Company’s newly designated Series B 10% Convertible Preferred Stock for outstanding indebtedness with a principal amount of $2.8 million owed to Smith and Arno for 2,750 and 50 shares, respectively, of Series B Preferred Stock.

See also Note 15 for related party transactions that occurred subsequent to December 31, 2017.

14. Restructuring

In the fourth quarter of fiscal 2016, the Board of Directors approved a plan of restructuring intended to streamline and flatten the Company’s organization, reduce overall headcount by approximately 30%, and reduce its overall cost structure by approximately $2.5 million per quarter. The restructuring plan resulted in special charges totaling $0.3 million recorded during the three month period ended December 31, 2016. These charges were for primarily related to severance costs and were all paid out by December 31, 2016.

In the first quarter of fiscal 2017, the Board of Directors approved an additional restructuring plan intended to further streamline and flatten the Company’s organization, reduce overall headcount by approximately 16%, and reduce its overall cost structure by another $0.9 - $1.0 million per quarter. The restructuring plan will

F-31

result in special charges totaling approximately $0.3 million to be recorded during the three-month period ending March 31, 2017. These charges are primarily related to severance costs and include $0.1 million of non-cash stock-based compensation severance.

Following is the activity in our restructuring liability for the year ended December 31, 2017 (in thousands):

these geographic locations.

 

 

December 31,

2016

 

 

 

 

 

 

 

 

 

 

December 31,

2017

 

 

 

Balance

 

 

Provision, net

 

 

Usage

 

 

Balance

 

Lease/rental terminations

 

$

1,786

 

 

$

(778

)

 

$

(304

)

 

$

704

 

One-time employee termination

   benefits

 

 

65

 

 

 

721

 

 

 

(786

)

 

 

—

 

Datacenter consolidation, other

 

 

109

 

 

 

(88

)

 

 

(21

)

 

 

—

 

Total

 

$

1,960

 

 

$

(145

)

 

$

(1,111

)

 

$

704

 

During the fourth quarter of 2017, the Company renewed and secured sublease contracts through the end of the lease expiration and consequently updated its future sublease assumptions resulting in $0.7 million of restructuring income on the consolidated statement of operations and comprehensive income.

15.

16. Subsequent Events

The Company evaluates and discloses subsequent events as required by ASC Topic No. 855, Subsequent Events. The Topic establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued.

On January 30, 2018,February 21, 2023, the Company entered into amendments to certainreceived written notice of its existing Secured Promissory Notestermination of a U.S. Tier 1 customer agreement for the sole purposeCompany’s family safety solution, effective June 30, 2023. Thereafter, the Company is obligated to deliver service under the agreement for a transition period of extendingup to 180 days at the relevant maturity dates.election of the customer. The Note dated August 18, 2017 issuedagreement accounted for approximately 33% of the revenues of the Company for the year ended December 31, 2022. Prior to Steven L. Elfman and Monique P. Elfman was amended to extend the maturity date of the Notetermination notice, the Company had received no written indication from this customer that they were contemplating terminating this agreement. The Company is currently evaluating its goodwill and intangible assets for impairment in the first quarter of 2023 due to February 11, 2018. The Note dated June 26, 2017 issued to William W. Smith, Jr. and Dieva L. Smith was amended to extendthis event but cannot make a reasonable estimate of any potential impairment as of the maturity date to July 25, 2018. The Notes dated August 24, 2017 issued to Next Generation TC FBO Andrew Arno IRA 1663 and Andrew Arno were amended to extend the maturity date of eachthis Report. In response to July 25, 2018.

this notification, the

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Company has been reviewing its cost structure and has begun taking steps to reduce its expenses. On March 6, 2018,13, 2023, the Company completedbegan making workforce reductions by executing terminations in the United States and Portugal. On March 14, 2023, the Company announced the planned closure of its Slovakian operations, effective June 30, 2023. On March 17, 2023, the Company notified employees in Serbia that certain positions were being eliminated. In the aggregate, these actions will result in a private placement with several investors, wherein a totalreduction of 2,857,144 sharesapproximately 26% of the Company’s common stock was issued at a purchase price of $1.75 per share, with each investor also receiving a warrant to purchase up to a number of shares of Common Stock equal to the number of shares of Common Stock purchased by such investor in the Offering at an exercise price of $2.17 per share, for a total purchase price of $5,000,000 (the “Offering”). It is anticipated that the Offering will raise net cash proceeds of approximately $4,475,000 (after deducting the placement agent fee and expenses of the Offering). The Company intends to use the net cash proceeds from the Offering for working capital purposes, and to fund required dividend payments, payment of principal and interest payments under short-term borrowing obligations, and payment of interest (but not principal) under long-term borrowing obligations.

The Company engaged Chardan Capital Markets, LLC (“Chardan”) as placement agent for the Offering pursuant to an engagement letter agreement. The Company agreed to pay Chardan a cash placement fee equal to 8.0% of the gross proceeds of the offering, and has issued to Chardan a warrant to purchase shares of Common Stock equal to 3.0% of the number of shares sold in the Offering (the “Chardan Warrant”).  The Chardan Warrant will have exercise price of $2.365 per share, a term of 5.5 years from the closing date of the Offering, and otherwise identical terms to the warrants to be issued to the investors in the Offering.

In connection with the Offering, on March 5, 2018, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with investors containing customary representations and warranties. Pursuant to the terms of the Purchase Agreement, the Company agreed to use its best efforts to cause the conversion of all shares of the Company’s Series B 10% Convertible Preferred Stock (the “Series B Preferred Stock”) into shares of Common Stock pursuant to the terms of the Company’s Certificate of Designation (the “Certificate of Designation”) with respect to the Series B Preferred Stock. In connection therewith, the Company has entered into Letter Agreements with each of William W. Smith, Jr. (“Smith”) and Andrew Arno (“Arno”), whereby each of Smith and Arno agree to take certain action to convert the shares of

F-32

Series B Preferred Stock held by them pursuant to terms outlined in the Purchase Agreement, and further agreed that their shares upon conversion shall not be subject to resale registration rights. Pursuant to the terms of the Purchase Agreement, the Company has entered into voting agreements with each of its directors, executive officers and greater than 10% stockholders, by which each such person has agreed to vote all shares of Company capital stock held by them in favor of waiving any applicable beneficial ownership threshold in the Company’s existing Certificate of Designation for the Series B Preferred Stock.  

In addition, as a condition to closing, the following note holders amended their existing Secured Promissory Notes (the “Notes”) for the sole purpose of extending the relevant maturity dates to March 25, 2020: (i) Secured Promissory Note dated June 26, 2017, issued to Smith and Dieva L. Smith, as amended; (ii) Secured Promissory Note dated August 24, 2017, issued to Next Generation TC FBO Andrew Arno IRA 1663, as amended; and (iii) Secured Promissory Note, dated August 24, 2017 issued to Arno, as amended.

16. Quarterly Financial Data (Unaudited)

The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for fiscal 2017 and 2016 are as follows (in thousands, except per share data):

global workforce.

 

 

Year Ended December 31, 2017

 

 

 

1st Quarter

 

 

2nd Quarter

 

 

3rd Quarter

 

 

4th Quarter

 

Selected quarterly financial data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

5,576

 

 

$

5,862

 

 

$

5,804

 

 

$

5,732

 

Gross profit

 

$

4,293

 

 

$

4,577

 

 

$

4,645

 

 

$

4,377

 

Operating loss

 

$

(2,578

)

 

$

(1,619

)

 

$

(942

)

 

$

(535

)

Net loss

 

$

(2,880

)

 

$

(1,952

)

 

$

(1,670

)

 

$

(160

)

Net loss per share - basic (1)

 

$

(0.24

)

 

$

(0.15

)

 

$

(0.12

)

 

$

(0.01

)

Weighted average shares outstanding - basic

 

 

12,163

 

 

 

13,179

 

 

 

14,297

 

 

 

14,281

 

Net loss per share - diluted (1)

 

$

(0.24

)

 

$

(0.15

)

 

$

(0.12

)

 

$

(0.01

)

Weighted average shares outstanding - diluted

 

 

12,163

 

 

 

13,179

 

 

 

14,297

 

 

 

14,281

 


 

 

Year Ended December 31, 2016

 

 

 

1st Quarter

 

 

2nd Quarter

 

 

3rd Quarter

 

 

4th Quarter

 

Selected quarterly financial data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

7,214

 

 

$

7,459

 

 

$

6,478

 

 

$

7,084

 

Gross profit

 

$

5,101

 

 

$

5,547

 

 

$

4,680

 

 

$

5,343

 

Operating loss

 

$

(3,679

)

 

$

(3,907

)

 

$

(4,557

)

 

$

(3,762

)

Net loss

 

$

(3,706

)

 

$

(3,279

)

 

$

(4,314

)

 

$

(3,725

)

Net loss per share - basic (1)

 

$

(0.32

)

 

$

(0.28

)

 

$

(0.35

)

 

$

(0.30

)

Weighted average shares outstanding - basic

 

 

11,524

 

 

 

11,741

 

 

 

12,209

 

 

 

12,323

 

Net loss per share - diluted (1)

 

$

(0.32

)

 

$

(0.28

)

 

$

(0.35

)

 

$

(0.30

)

Weighted average shares outstanding - diluted

 

 

11,524

 

 

 

11,741

 

 

 

12,209

 

 

 

12,323

 

F-30

(1)

Basic and diluted net loss per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share amounts will not necessarily equal the total for the year.

S-33