The table set forth below shows all purchases of securities by us during the fourth quarter of fiscal year
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 and the consolidated balance sheet data as of and for the years ended December 31, 2020 and 2019 have been derived from audited consolidated financial statements included elsewhere in this Report. The consolidated statements of operations and comprehensive loss data and the consolidated balance sheet data presented below as of and for the years ended December 31, 2018, 2017 and 2016 are derived from audited consolidated financial statements that are not included in this Report. | | Year Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
Consolidated Statement of Operations Data (in thousands, except per share data): | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 51,300 | | | $ | 43,346 | | | $ | 26,285 | | | $ | 22,974 | | | $ | 28,235 | |
Cost of revenues | | | 5,190 | | | | 3,927 | | | | 4,333 | | | | 5,082 | | | | 7,564 | |
Gross profit | | | 46,110 | | | | 39,419 | | | | 21,952 | | | | 17,892 | | | | 20,671 | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Selling and marketing | | | 10,698 | | | | 7,517 | | | | 5,784 | | | | 6,186 | | | | 9,615 | |
Research and development | | | 19,071 | | | | 11,682 | | | | 8,602 | | | | 8,952 | | | | 15,906 | |
General and administrative | | | 12,801 | | | | 9,921 | | | | 8,607 | | | | 8,551 | | | | 10,341 | |
Restructuring expenses | | | 19 | | | | 194 | | | | 173 | | | | (123 | ) | | | 303 | |
Long-lived asset impairment | | | — | | | | — | | | | — | | | | — | | | | 411 | |
Total operating expenses | | | 42,589 | | | | 29,314 | | | | 23,166 | | | | 23,566 | | | | 36,576 | |
Operating income (loss) | | | 3,521 | | | | 10,105 | | | | (1,214 | ) | | | (5,674 | ) | | | (15,905 | ) |
Non-operating income (expense): | | | | | | | | | | | | | | | | | | | | |
Change in fair value of warrant liability | | | — | | | | — | | | | (812 | ) | | | — | | | | — | |
Change in carrying value of contingent liability | | | — | | | | — | | | | — | | | | — | | | | 668 | |
Loss on debt extinguishment | | | — | | | | — | | | | (203 | ) | | | (405 | ) | | | — | |
Gain on sale of software products | | | 711 | | | | 483 | | | | — | | | | — | | | | — | |
Interest income (expense), net | | | 96 | | | | 228 | | | | (472 | ) | | | (1,120 | ) | | | (313 | ) |
Other income (expense), net | | | (3 | ) | | | (14 | ) | | | (26 | ) | | | (8 | ) | | | (22 | ) |
Income (loss) before provision for income taxes | | | 4,325 | | | | 10,802 | | | | (2,727 | ) | | | (7,207 | ) | | | (15,572 | ) |
Provision for income tax expense (benefit) | | | 160 | | | | 80 | | | | 13 | | | | (546 | ) | | | (229 | ) |
Net income (loss) | | $ | 4,165 | | | $ | 10,722 | | | $ | (2,740 | ) | | $ | (6,661 | ) | | $ | (15,343 | ) |
Earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.10 | | | $ | 0.31 | | | $ | (0.14 | ) | | $ | (0.49 | ) | | $ | (1.28 | ) |
Diluted | | $ | 0.10 | | | $ | 0.29 | | | $ | (0.14 | ) | | $ | (0.49 | ) | | $ | (1.28 | ) |
Weighted average shares: | | | | | | | | | | | | | | | | | | | | |
Basic | | | 40,808 | | | | 34,513 | | | | 22,322 | | | | 13,489 | | | | 11,951 | |
Diluted | | | 42,764 | | | | 36,991 | | | | 22,322 | | | | 13,489 | | | | 11,951 | |
Contents | | As of December 31, | |
| | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2016 | |
Consolidated Balance Sheet Data (in thousands): | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 72,903 | | | $ | 61,197 | | | $ | 25,203 | | | $ | 13,877 | | | $ | 14,308 | |
Total liabilities | | | 14,187 | | | | 12,513 | | | | 4,640 | | | | 9,310 | | | | 11,249 | |
Accumulated comprehensive deficit | | | (221,230 | ) | | | (225,395 | ) | | | (236,091 | ) | | | (232,933 | ) | | | (226,228 | ) |
Total stockholders' equity | | $ | 58,716 | | | $ | 48,684 | | | $ | 20,563 | | | $ | 4,567 | | | $ | 3,059 | |
20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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
may affect our business.
Introduction and Overview
Providing
Smith Micro provides software solutions that simplify and enhance the mobile experience to some of the leading wireless and cable service providers around the globe is a mission that Smith Micro pursues with passion.globe. From enabling the family digital lifestyle Digital Family Lifestyle™ to providing powerful voice messaging capabilities, we strive to enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones and consumer IoT devices. The Smith MicroOur portfolio includes family safety software solutions to support families in the digital age and a wide range of products for creating, sharing, and monetizing rich content, such as visual voice messaging, retail content display optimization and performance analytics on any product set.During 2020,
We continue to innovate and evolve our business to respond to industry trends and maximize opportunities in growing and evolving 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.
Historically, we experienced an increasehave provided white label Family Safety applications to all three Tier 1 wireless carriers in the United States; however, our Family Safety contract with one of our Tier 1 customers terminated effective June 30, 2023, with post-termination services ending in November 2023. The revenues associated with that customer contract were approximately 36% of our total revenues for 2023. In 2024, we expect no further revenues related to that contract. To address the impact of the contract termination, starting in the first quarter of 2023, we undertook restructuring efforts that resulted in the elimination of approximately 26% of the Company's global workforce. These actions, coupled with other cost reduction measures taken, have resulted in a 26% reduction in operating expenses in 2023 as compared 2022.
In 2023, our revenues declined by 16% to $40.9 million, primarily driven by a $5.3 million decline in revenues in our wirelessFamily Safety product line, coupled with a $2.0million decline in CommSuite revenues. These revenue declines were primarily associated with T-Mobile's efforts to migrate legacy Sprint subscribers to the T-Mobile network, which has impacted our revenues associated with legacy Sprint subscribers for both Family Safety and CommSuite, as well as the impact of the Family Safety contract termination identified above. As a result of this decrease in revenue, gross profit declined to $30.3 million in 2023, a decrease of $4.0 million compared to prior year. Operating expenses decreased in 2023 by approximately $16.9 million, primarily due to enteringa year-over-year reduction in Research and Development expenses of $12.2 million as SafePath migration efforts have now been substantially completed. The net loss for 2023 was $24.4 million, resulting in a net loss of $0.38 per basic and diluted share.
Despite the termination of one of our Family Safety contracts during 2023, we continue to believe that we remain strategically positioned to offer our market-leading family safety platform to most U.S. mobile subscribers. Since our acquisitions of Circle's operator business in 2020 and the 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. Another U.S. Tier 1 carrier customer was successfully launched on the SafePath platform during the third quarter of 2023. We believe that with these transitions to the SafePath platform now complete, we have an opportunity to increase the respective subscriber bases, and in turn, grow the revenues associated with these Tier 1 carriers. Further, we executed a new, multi-year Family Safety agreement with a higher numbermajor Tier 1 carrier in Europe in the fourth quarter of subscribers than the prior year. However, as the year progressed, the continued growth2023, which is anticipated to launch in 2024.
Refer to section titled "Liquidity and Capital Resources" for discussion of SafePath subscriber numbers was negatively impacted by the closuresignificant material changes in cash, and Note 4 of customer retail stores dueour Notes to the COVID-19 pandemic combined withConsolidated Financial Statements for discussion regarding the T-Mobile / Sprint merger. CommSuite revenues were relatively stable during 2020. The Company received additional cash proceedschanges related to the notes payable, derivative liabilities, and warrant liabilities.
Results of Operations
Revenues generated from our sales to T-Mobile (including Sprint, prior to its merger with T-Mobile) and its affiliates accounted for 81% and 84% of the Company’s total revenues and 91% and 92% of accounts receivable for fiscal years 2020 and 2019, respectively.
The following table sets forth certain consolidated statement operations data as a percentage of total revenues for the periods indicated:
| | Year Ended December 31, | | |
| | 2020 | | | 2019 | | |
| For the Year Ended December 31, | |
| 2023 | |
| 2023 | |
| 2023 | |
Revenues | |
Revenues | |
Revenues | | | 100.0 | | % | | 100.0 | | % | 100.0 | | % | % | 100.0 | | % | % |
Cost of revenues | | | 10.1 | | | | 9.1 | | |
Gross profit | | | 89.9 | | | | 90.9 | | |
Gross profit | |
Gross profit | |
Operating expenses: | |
Operating expenses: | |
Operating expenses: | | | | | | | | | |
Selling and marketing | | | 20.9 | | | | 17.3 | | |
Selling and marketing | |
Selling and marketing | |
Research and development | |
Research and development | |
Research and development | | | 37.2 | | | | 27.0 | | |
General and administrative | | | 25.0 | | | | 22.9 | | |
Restructuring expenses | | | — | | | | 0.4 | | |
General and administrative | |
General and administrative | |
Depreciation and amortization | |
Depreciation and amortization | |
Depreciation and amortization | |
Total operating expenses | | | 83.1 | | | | 67.6 | | |
Operating income | | | 6.8 | | | | 23.3 | | |
Gain on sale of software products | | | 1.4 | | | | 1.1 | | |
Interest income | | | 0.2 | | | | 0.5 | | |
Other expense | | | — | | | | — | | |
Income before provision for income taxes | | | 8.4 | | | | 24.9 | | |
Total operating expenses | |
Total operating expenses | |
Operating loss | |
Operating loss | |
Operating loss | |
Change in fair value of warrant and derivative liabilities | |
Change in fair value of warrant and derivative liabilities | |
Change in fair value of warrant and derivative liabilities | |
Loss on derecognition of debt | |
Loss on derecognition of debt | |
Loss on derecognition of debt | |
Interest expense, net | |
Interest expense, net | |
Interest expense, net | |
Other expense, net | |
Other expense, net | |
Other expense, net | |
Loss before provision for income taxes | |
Loss before provision for income taxes | |
Loss before provision for income taxes | |
Provision for income tax expense | | | 0.3 | | | | 0.2 | | |
Net income | | | 8.1 | | % | | 24.7 | | % |
Provision for income tax expense | |
Provision for income tax expense | |
Net loss | |
Net loss | |
Net loss | | (59.7) | | % | (70.1) | | % |
21
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 one business segment:segment, Wireless, which includes all of our existing core products, including SafePath,the Family Safety (including SafePath), CommSuite, and ViewSpot familyportfolio of products. We also generate an immaterial amount of revenue from a few non-core Graphics products. 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. 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.Gain
Depreciation and amortization. Depreciation is the expensing of a fixed asset as it is used to reflect its anticipated deterioration. Amortization of intangible assets consists of the amortization expense based on salethe pattern of software products. Consists of gain resultingeconomic benefit generated from the saleuse of the Poser® 3Drelated assets.
Change in fair value of warrant and Mohoderivative liabilities. Change in fair value of warrant and Motion Artist animation software.derivative liabilities results from valuation related impacts to the warrant and derivative liabilities. Loss on derecognition of debt. Adjustments to fair value at each period end as the result of installment payments extinguishing principal associated with the convertible notes, including derivatives.
Interest (expense) income, (expense), net. Interest expense is primarily related to interest associated with our convertible notes and financing arrangements and the amortization of debt issuance costs and discount. Interest income is primarily related to interest earned on cash equivalents. Other (expense) income, (expense), net. Other (expense) income, (expense)net is primarily related to fixed asset disposals and other non-operating gains or losses. Provision for income tax expense (benefit).expense. The Company accounts for income taxes as required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 judgmentsis primarily related to determine the provision for incomefederal, state, and foreign taxes deferred tax assets and liabilities, unrecognized tax benefits, and any valuation allowance to be recorded against deferred tax assets.imposed upon our results of operations. Year Ended December 31,
20202023 Compared to the Year Ended December 31,
2019Revenues.2022
Revenues. Revenues were $40.9 million and $48.5 million for the years ended December 31, 2023 and 2022, respectively, representing a decrease of $51.3 million in 2020 increased $8.0$7.7 million, or 18%, from $43.3 million16%. This decrease was driven by declines in 2019. WirelessFamily Safety revenues of $50.7approximately $5.3 million increased $8.1 million, or 19%, from $42.6 millionand in 2019. The increaseCommSuite revenues of approximately $2.0 million. This decline in revenues was primarily due to entering 2020 with a higher number of SafePath subscribers than the prior year and additional revenues resulting from the Circle acquisition. The growth in wireless revenues from these products was slightly offset by a reduced strategic focus on the NetWise® products. Sales from our discontinued or non-core products decreased $0.1 million, or 15%, from $0.7 million in 2019, due to lower demand as a result of reduced strategic focusthe migration of legacy Sprint customers onto the T-Mobile network, which has impacted our revenues associated with legacy Sprint subscribers for both Family Safety and marketing effortsCommSuite. There was no legacy Sprint subscriber revenue for these productsCommSuite in the second half of 2023. Also contributing to the decline in Family Safety revenues was the impact of the Family Safety contract termination, as the post-termination transition period concluded at the end of November 2023. The ViewSpot product line's revenues decreased by approximately $0.4 million due to a decrease in device launches in 2023.
.Cost of revenues. Cost of revenues were $10.6 million and $14.2 million for the years ended December 31, 2023 and 2022, respectively. This decrease of $5.2approximately $3.7 million in 2020 increased $1.3 million, or 32%, from $3.9 million in 2019. This increase was primarily due to hosting costs associated withcost reduction efforts in 2023 and the increaseyear-over-year decline in SafePath revenues and revenue.additional costs associated with the new Circle operator business platform acquired in 2020.
22
Gross profit.
Gross profit of $46.1. Gross profit was $30.3 million, or 90%74.2% of revenues, in 2020, increased $6.7for the year ended December 31, 2023, compared to $34.3 million, or 17%, from $39.4 million, or 91%70.7% of revenues, in 2019. This increasefor the year ended December 31, 2022. The decrease of $4.0 million in gross profit was due to higher revenues coupled with stable variable costs during a result of the period.year-over-year decline in revenue volume. Selling and marketing. marketing. Selling and marketing expenses were $11.1 million and $12.9 million for the years ended December 31, 2023 and 2022, respectively. This decrease of $10.7$1.8 million in 2020 increased $3.2 million, or 42%, from $7.5 million in 2019. This increase was primarily due to additional headcount-related expensesdecreases in personnel related costs of $1.2 million coupled with a reduction of $0.8 million of severance and increased intangibles amortizationreorganization related to the Circle acquisition (see Note 2). The amortization of intangible assets within sales and marketing expenses was $1.6 million and $0.4 million in 2020 and 2019, respectively.costs, including stock based compensation. Research and development. development. Research and development expenses of $19.2were $17.1 million in 2020 increased $7.4and $29.4 million or 63%for the years ended December 31, 2023 and 2022, from $11.7respectively. This decrease of approximately $12.2 million in 2019. This increase was primarily due to additional headcount the decline in personnel-related costs of approximately $9.0 million associated with the workforce reduction efforts coupled with reductions in contractor costs of $2.9 million due to the substantial completion of SafePath migration efforts during 2023.
General and administrative. General and administrative expenses were $12.8 million and $15.5 million for the years ended December 31, 2023 and 2022, respectively. This decrease of $2.7 million was primarily related expenses and external contract developmentto declines in personnel-related costs of approximately $1.4 million associated with the workforce reduction efforts undertaken, a reduction of $0.6 million due to support SafePath development, as well as increased intangibles amortizationtransaction fees incurred related to the Circle acquisition. The amortizationNote and Stock Offering in August 2022, a decrease in travel costs of intangible assets within research and development expenses was $1.3approximately $0.2 million and a reduction in consulting and professional fees of approximately $0.4 million.
Depreciation and amortization. Depreciation expense was $0.6 million and $1.2 million for the years ended December 31, 2023 and 2022, respectively. Amortization expense was $6.8 million and $6.3 million for the years ended December 31, 2023 and 2022, respectively. The total decrease in 2020 and 2019, respectively.General and administrative. General and administrative expensesdepreciation expense of $12.8approximately $0.6 million in 2020 increased $2.9 million, or 29%, from $9.9 million in 2019. This increase was primarily due to an increasecertain fixed assets that have now been fully depreciated. Amortization expense is recognized based on the pattern of economic benefit expected to be generated from the use of the intangible asset, and as such it increased approximately $0.5 million.
Change in non-cashfair value of warrant and derivative liabilities. The change in fair value of warrant and derivative liabilities of $4.2 million and $4.7 million for the years ended December 31, 2023 and 2022, respectively, resulted from valuation related impacts to warrant and derivative liabilities including changes in remaining balance, stock compensation, variable compensation expense,price, risk-free interest rate, expected term, and fees associated withexpected volatility.
Loss on derecognition of debt. The loss recognized on derecognition of debt for the Circle acquisition.Restructuring expenses. Restructuring expenseyear ended December 31, 2023 was $4.0 million. This resulted from installment payments made on the convertible notes issued under the Note and Stock offering in August 2022 (the "Notes") in the form of $19 thousand in 2020shares, and $194 thousand in 2019the required derecognition of the net debt position related to restructuring activities initiated during those years.that principal balance, including the derivative, and discounts. There was nothing commensurate in the year ended December 31, 2022 as the Notes did not begin to amortize until 2023.
Gain on sale
The gain on sale of software products of $0.7 million in 2020 resulted from the sale of the Company’s Moho® and Motion Artist® animation software in December 2020. The gain on sale of software product of $0.5 million in 2019 resulted from the sale of the Company’s Poser 3D animation software in June 2019.Interest expense, net. Interest incomeexpense was $96 thousand$6.4 million and $228 thousand$2.7 million for the years ended December 31, 2023 and 2022, respectively. The increase in 2020interest expense of $3.7 million was primarily related to the amortization of the discount and 2019, respectively, resulting fromdebt issuance costs and stated interest earned on cash equivalentsexpense related to the August 2022 Notes and Warrants Offering, with the Notes issued thereunder being outstanding for the full year in 2023 versus less than five months during the year.2022.
Provision for income tax 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 cumulative loss position as of December 31, 2020,2023, the Company retained a full valuation allowance related to its U.S.-based deferred tax assets of $49.4$58.5 million at December 31, 2020. During fiscal year 2020, the valuation allowance on deferred tax assets decreased by $1.0 million.2023. Liquidity and Capital Resources
At December 31, 2020, we had $25.8 million in
Our principal sources of liquidity are our existing cash and cash equivalents, and $30.9cash generated by operations. We have in the past also generated cash from equity and debt financings. Our primary needs for liquidity relate to working capital requirements for operations. Our working capital requirements will depend on many factors, including the ability to obtain sufficient subscribers, and therefore revenue, from our customers to cover the current level of operating expenses to achieve a level of profitability. As of December 31, 2023, our cash and cash equivalents were approximately $7.1 million and we had no outstanding debt. Our cash flow used in operations was $7.0 million for the year ending December 31, 2023.
Our liquidity may be adversely impacted by the anticipated effect of the aforementioned loss during 2023 of our Family Safety contract with a Tier 1 carrier on our results of operations, since we will receive no revenue from that contract during 2024. While we anticipate marketing efforts to accelerate for one of our existing Tier 1 carrier customers in order to drive subscriber growth on our Family Safety product, the timing of that anticipated revenue growth versus the immediate and current impact of the contract loss could cause the cash and cash equivalents on hand and expected to be generated in the next twelve months and beyond the next twelve months to be insufficient to fund operations at the current levels.
This potential adverse impact on liquidity does not trigger a violation of any covenants in our material agreements, particularly as all of our outstanding debt was retired as of December 31, 2023. The availability of sufficient funds will depend to an extent on the timing of subscriber growth and the related cash generation thereof, and/or the ability to obtain the necessary capital to meet our obligations and fund our working capital.capital requirements to maintain normal business operations. However, if we begin to trend unfavorably with respect to our current internal profitability and cash flow projections, the Company may determine to take additional actions, as noted in the our Risk Factor "
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." There can be no assurance that any such potential actions will be available or will be available on satisfactory terms. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry. As a result of these uncertainties, and notwithstanding management's plans and efforts to date, we have been unable to alleviate substantial doubt about our ability to continue as a going concern within one year from the date that the financial statements are issued. Operating
ActivitiesIn 2020, netactivities
Net cash
provided byused in operating activities was
$7.9$7.0 million
primarily due tofor the year ended December 31, 2023. The primary uses of operating cash were a net
incomeloss of
$4.2$24.4 million
and add-backs ofless non-cash expenses totaling
$7.2 million, offset by an increase in accounts receivable of $1.3$17.8 million, and a decrease in accounts payable and accrued liabilities of
$1.9$2.8 million, partially offset by a decrease in accounts receivable of $2.6 million.
In 2019,
Net cash used in operating activities was $19.3 million for the year ended December 31, 2022. The primary uses of operating cash were a net loss of $29.3 million partially offset by net non-cash expenses totaling $10.9 million coupled with a decrease in accounts payable and accrued liabilities of $1.1 million.
Investing activities
Net cash provided by
operating activities was $10.0 million, primarily due to net income of $10.7 million.Investing Activities
In 2020, cash used in investing activities was $14.7$0.1 million due to $13.5for both the years ended December 31, 2023 and 2022.
Financing activities
Net cash used by financing activities of $0.1 million
in payments relatedfor the year ended December 31, 2023 was primarily attributable to the
Circle acquisition in February 2020, $1.3 million in capital expenditures,timing of borrowings and
a $225 thousand equity investment, offset by proceeds of $367 thousandrepayments from
the sale of the Moho and Motion Artist animation software.In 2019, cash used in investing activities was $5.3 million, due to $4.0 million in payments related to the Smart Retail acquisition in January 2019 and $1.7 million in capital expenditures, offset by proceeds of $370 thousand from the sale of the Poser 3D animation software.
23
Financing Activities
In 2020,short-term insurance premium financing arrangements.
Net cash provided by financing activities was
$4.2$17.1 million
for the year ended December 31, 2022, primarily
dueattributable to proceeds from the
exerciseNotes and Warrants Offering of
common stock warrants during$15.0 million and the
year.In 2019,Stock and Additional Warrants Offering of $3.0
million. Partially offsetting the proceeds from the Notes and Warrants Offering were $1.2 million in transaction fees. Also impacting net cash provided by financing activities
was $11.4 million, primarily due to $11.5 million inwere proceeds from
the exerciseinsurance premium financing agreements and revolver draws of
common stock warrants during the second half of the year. This was$1.5 million, offset by
$0.1 million in preferred stock dividend payments during the year.repayments on those arrangements of $1.3 million.
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.
Our corporate headquarters is located in Pittsburgh, Pennsylvania, where we currently lease approximately
55,60035,621 square feet of space under a lease that expires on April 30, 2026.
We sublease 19,965 square feet of our leased space in Pittsburgh under an agreement which commencedIn January 2024, we executed a renewal on
February 1, 2015 and continues through December 31, 2021. Wea lease
andwhere we occupy approximately 8,513 square feet of space in Aliso Viejo, California
under a lease that
now expires on
October 31, 2024.February 29, 2028. Internationally, we lease approximately
8,50012,728 square feet in Belgrade, Serbia under a lease that expires
DecemberJuly 31,
2023, we lease2026, approximately
15001,500 square feet in Stockholm, Sweden under a lease that expires
on September 30,
2023,2026, and
we lease approximately 3,200 square feet in Braga, Portugal under a lease that expires July 31,
2021.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. Each of the above properties is used by our sole reportable operating segment: Wireless.
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.information regarding recent accounting pronouncements.
Off-Balance Sheet Arrangements
As of December 31, 2020,2023, 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:
24
Business Combinations
and Exit or Restructuring Costs
The Company appliesWe 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-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 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 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.
|
•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 warrant liabilities and 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. Subsequent25
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
For goodwill and other intangibles impairment analysis, we
may utilize fair value measurements which are categorized within Level 3 of 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, w, we reviewe 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 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 onethe pattern of economic benefit expected to ten 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.impaired in accordance with ASC Topic No. 350,
Intangibles- Goodwill and Other and ASC 360, Property, Plant and Equipment. Going Concern
In connection with preparing our consolidated financial statements, management evaluates whether there are conditions 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.
Revenue Recognition
The Company adopted
In accordance with FASB ASC Topic No. 606, Revenue from Contracts with Customers as of January 1, 2018, and recognizes, 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.In our Wireless segment, we
We transfer 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
customizationintegration 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
license by the customer. We also earn
usage basedusage-based revenue on our platforms. Usage based revenue is generated based on
active licenses used by our
customer’s end customers,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, and use of our cloud based services.platform. We recognize our usage-based revenue when we have completed our performance obligation and have the right to invoice the customer. This revenue is generally recognized monthly or quarterly.
WeFinally, we ratably recognize
such revenue over the contract period when customers pay in advance of our service delivery.
On February 12, 2020, we acquired certain assets from Circle (as described in Note 2 below), including a source code license to Circle’s parental control software solution and two customer contracts. Pursuant to these contracts, the customer parties thereto license the parental control software solution for distribution to their respective subscribers in designated markets. In each case, the contracts allow the customer to take possession of the software solution and to host it on their platform or with an independent third party hosting service provider without significant cost. We also provide significant services that are required by the customer to ensure they have the utility of the license. As the license to the software solution and the services we provide are highly interrelated, we have concluded that the license
26
and our services are a single performance obligation. The license fee is earned and recognized on a pro-rata basis over the contract term based on our customer’s continued use of the license and our services.
We also provide consulting services
to developin connection with our development of 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
Wireless segment customers we provide maintenance and technology support services 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 stand ready performance obligation that is satisfied ratably over the maintenance and technology services period.
We
receivehave received upfront payments from customers from services to be provided under our ViewSpot contracts. The advance receipts
arewere deferred and subsequently recognized ratably over the contract period. We also provide consulting services to configure
new devices or ad hoc targeted promotional content for our 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.For our Graphics products where we sell off-the-shelf software products with no customizationplatform or post sale technology support services, we recognize revenue at the time we transfer controlupon certification of the product to the customer. This occurs upon shipment of the product or when the customer downloads the software from our website or website of our resellers. We offer a 30 day return option to our customers; a return reserve is established at the time revenue is recorded and the reserve is monitored and adjusted based on actual experience. Historically, returns have been insignificant.
new device.
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 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 Company adopted the FASB ASC Topic No. 842, Leases, and related amendments, as of January 1, 2019, utilizing the modified retrospective approach through a cumulative-effect adjustment to equity. Management elected the package of practical expedients permitted under the transition guidance within the new standard which allowed for the carry forward of the historical lease classification. Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $3.1 million as of January 1, 2019, and an adjustment to retained earnings of $0.1 million. The standard did not materially impact the consolidated net income or earnings per share and had no impact on cash flows. See Note 12 for further details.
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 new accounting standard that requires management’s measurement of the allowance for credit losses to be based on a broader range of reasonable and supportable information for lifetime credit loss estimates. The adoption of this standard is not expected to have a material impact on the Company’s 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.
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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 RulesRule 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of December 31, 2020.2023. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer determined that as of December 31, 2020,2023, 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. 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 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, 20202023 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, 2020.2023. 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, 2020,2023, we maintained effective internal control over financial reporting.
Item 9B. OTHER INFORMATION
Information Required to be Disclosed on Form 8-K for the Fiscal Quarter Ended December 31, 2023, But Not Reported.
Trading Arrangements
During the fiscal quarter ended on December 31, 2023, no director or officer of the Company adopted or terminated any “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.”
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
Our board of directors (the “Board”) is presently comprised of eight directors. Our Amended and Restated Certificate of Incorporation and Bylaws provide for the Board to be divided into three classes. Each class of directors serves for a three-year term, with one class being elected by the Company’s stockholders at each annual meeting.
| | | | | | | | | | | | | | |
Director | | Age | | Position on Board Committee Memberships, and Other Offices |
Andrew Arno | | 64 | | Director; Governance and Nominating, Mergers and Acquisitions |
Thomas G. Campbell | | 73 | | Director; Audit, Compensation, Governance and Nominating |
Steven L. Elfman | | 68 | | Director; Compensation, Governance and Nominating, Mergers and Acquisitions |
Samuel Gulko | | 92 | | Director; Audit, Compensation |
Asha Keddy | | 50 | | Director; Audit |
Chetan Sharma | | 54 | | Director; Mergers and Acquisitions |
William W. Smith, Jr. | | 76 | | Chairman of the Board, President and Chief Executive Officer |
Gregory Szabo | | 76 | | Director; Audit, Mergers and Acquisitions |
Mr. Arno joined our Board of Directors in 2011 and has more than 30 years of experience working with emerging growth companies. Since June 2023, Mr. Arno has served as a managing member of Unterberg Legacy LLC, a family office, which he co-founded. From 2015 until February 2023, he served as Vice Chairman of Special Equities Group, LLC (SEG), a privately held investment banking firm. SEG is affiliated with Dawson James Securities Inc., and was previously affiliated with Bradley Woods & Co. Ltd., and prior thereto Chardan Capital Markets, LLC. From 2013 until 2015 he served as Managing Director of Emerging Growth Equities, an investment bank, and Vice President of Sabr, Inc., a family investment group. He previously served as President of LOMUSA Limited, an investment banking firm. Earlier in his career, Mr. Arno served as Vice Chairman and Chief Marketing Officer of Unterberg Capital, LLC, an investment advisory firm that he co-founded, and he served as Vice Chairman and Head of Equity Capital Markets of Merriman Capital LLC, an investment banking firm, where he also served on the board of its parent company, Merriman Holdings, Inc. Mr. Arno currently serves on the boards of Oncocyte Corporation, a biotechnology company, Independa Inc., a software company, 22nd Century Group, a biotechnology company, and Comhear Inc., an audio technology research and development company. Mr. Arno brings to the Board valuable understanding of public markets, significant experience in investment matters, and a keen understanding of stockholder perspectives as it relates to enhancing value for our stakeholders.
Mr. Campbell became a director in 1995. From 1999 until his retirement in October 2021, he served as the Executive Vice President of King Printing, Inc., a book printing and manufacturing company. Mr. Campbell currently serves in volunteer roles for the gran program of Cummings Foundation, which seeks to support nonprofits in eastern Massachusetts, where he has served since February 2021, and for Rivier University, a private university where he has served since September 2023, From 1996 to 1999, he was the Vice President of Operations of Complete Concepts, Ltd., a manufacturer and distributor of women’s accessories. From 1995 to 1996, Mr. Campbell was an independent management consultant specializing in corporate turnarounds, and prior to that served during 1995 as the Chief Operating Officer of Laser Atlanta Optics, Inc. From 1985 to 1995, he served in several senior management positions at Hayes Microcomputer Products, Inc., including Vice President of Operations and Business Development and as Chief Operating Officer and a member of the Board of Directors of Practical Peripherals, a Hayes subsidiary. Prior to 1985, Mr. Campbell was employed by Digital Equipment Corporation. Mr. Campbell attended Boston University. Mr. Campbell brings to our Board extensive executive management experience in the retail and consumer products industries, along with particular strengths with respect to leadership, management, financial, international business and corporate governance skills.
Mr. Elfman became a director in 2014. He is the former President of Network Operations and Wholesale at Sprint, a telecommunications company and leading wireless carrier prior to its acquisition by T-Mobile in 2020, having had responsibility for product, technology development, network, wholesale operations, value-added services, procurement and real estate, and digital. Mr. Elfman joined the Sprint senior leadership team in 2008 from mobile data technology services company, Infospace, where he was Executive Vice President of Infospace Mobile, then President and Chief Operating Officer of Motricity following the acquisition of Infospace Mobile. He also has held leadership positions at Terabeam, as Executive Vice President of Operations, and at AT&T Wireless, where he was Chief Information Officer. Mr. Elfman was the CIO at GE Capital (Fleet Services Company) as well as head of IT at 3M Company for international operations. Mr.
Elfman graduated from the University of Western Ontario in Canada with a degree in computer science and business. He previously served on the board of directors of Syntonic Limited, a software company and provider of mobile software solutions, where he served as non-executive chairman and as a member of the compensation committee of the board of directors. Mr. Elfman also previously served on the boards of Affirmed Networks, Inc., a mobile network solutions company, CollabIP, Inc., a communications intelligence platform provider, Competitor Carrier Association, Bethany College and Clearwire. Mr. Elfman brings to our Board extensive knowledge of the telecommunications and wireless data and cellular industries, particularly with respect to large wireless providers.
Mr. Gulko became a director in 2004. Since 2002, he has provided tax and consulting services on a part-time basis to a limited number of clients. From 1996 until his retirement in 2002, Mr. Gulko served as the Chief Financial Officer, and as the Vice President of Finance, Secretary and Treasurer of Neotherapeutics, Inc., a publicly traded biotechnology company (now known as Spectrum Pharmaceuticals, Inc.). During this same period, he also served as a member of the board of directors of Neotherapeutics, Inc. Earlier in his career, Mr. Gulko was self-employed as a certified public accountant and business consultant, as well as the part time chief financial officer of several privately-owned companies, and previously served as a partner in the audit practice of Ernst & Young LLP, an accounting and business services firm. Mr. Gulko holds a Bachelor of Science degree in Accounting from the University of Southern California. Mr. Gulko brings to our Board extensive qualifications and experience in finance and public accounting, including his prior service as an audit partner at Ernst & Young LLP and as the CFO of a publicly-traded company.
Ms. Keddy joined the Board in April 2022. She has more than 28 years of industry experience, including senior executive roles, having served for more than 23 years in various roles at Intel Corporation, a Fortune 50 company, most recently serving as Intel’s Corporate Vice President and General Manager, Next Generation Systems and Standards from 2019 until her retirement from the company in March 2023. Ms. Keddy is a business innovation leader, technology futuristand patent-holder. Ms. Keddy has spent her career building enterprise and consumer systems and defining policies to transform working and living environments. Ms. Keddy served as a pivotal force, including serving as Intel’s 5G Executive Sponsor, in leading the creation of 5G and Wi-Fi market opportunities for Intel using incubation efforts, product development, industry forums, standards creation, ecosystem enablement, and policy governance. Ms. Keddy is a highly networked industry thought leader, and a global spokesperson providing insights to government agencies, the media, analysts, academia, and investors. She has served as a representative before Congress and other international government agencies, including testimonies to the U.S. Senate on 5G. Ms. Keddy helped establish Intel as a leader within key wireless, industrial, and edge standards bodies, and multiple industry fora, such as the 3GPP, IEEE, Wi-Fi Alliance, ETSI and Open-RAN. Ms. Keddy brings to the Smith Micro Board extensive industry expertise and in-depth insight into the wireless industry across the entire ecosystem, spanning a near three-decade career of technology, business, and operational leadership experience including in consumer, enterprise, and IOT markets.
Mr. Sharma joined the Board in April 2022. Since 2000, Mr. Sharma has served as the Chief Executive Officer and founder of Chetan Sharma Consulting, a management consulting and strategic advisory firm serving the mobile, media, and technology industries. Prior to founding his firm, Mr. Sharma served as director of the Emerging Solutions and Wireless practices at Luminant Worldwide, a global provider of strategic consulting and professional services, and earlier in his career held roles in systems engineering and product management at Cellular Technical Services, a start-up company focused on preventing fraud in wireless networks. Mr. Sharma holds a Bachelor of Science degree in Electrical Engineering from Indian Institute of Technology and a Master of Science degree in Electrical and Computer Engineering from Kansas State University. Mr. Sharma brings to the Board more than 20 years of experience in providing strategic advisory services to leading companies in the wireless technology industry, and offers the Board valuable insight into strategic and operational issues important to the Company’s success.
Mr. Smith co-founded Smith Micro and has served as our Chairman of the Board, President and Chief Executive Officer since the Company’s inception in 1982. Mr. Smith was employed by Rockwell International Corporation in a variety of technical and management positions from 1975 to 1984. Mr. Smith served with Xerox Data Systems from 1972 to 1975 and RCA Computer Systems Division from 1969 to 1972 in mainframe sales and pre-sale technical roles. Mr. Smith received a Bachelor of Arts degree in Business Administration from Grove City College. As co-founder and the most senior executive of our Company, Mr. Smith provides the Board with valuable insight into the Company’s business operations, opportunities and challenges, as well as his extensive knowledge of the telecommunications and wireless industries, garnered during his 40 years of service with our Company. Mr. Smith also possesses particular strengths with respect to leadership and management skills.
Mr. Szabo re-joined the Board in 2011 after previously serving from 2001 to 2010. Mr. Szabo has over 30 years of wireless communications senior management experience from his career with AirTouch's and Vodafone’s wireless communications operations, which were merged with Verizon Wireless in 2000. As Senior Vice President-Network Services, he directed AirTouch’s engineering and operations for the company's cellular systems in the eastern United States, and later served as Executive Director, Global Technology for AirTouch Vodafone. Mr. Szabo previously held
managerial positions with Motorola and Martin Marietta (now Lockheed Martin). He also co-founded Ertek Inc., which designed manufacturing systems for RFID (Radio Frequency IDentification) tag antennas. Mr. Szabo received both a Bachelor of Science Degree and Master of Science Degree in Electrical Engineering from Ohio University. He brings to our Board substantial market knowledge and in-depth insight into the worldwide telecommunications and wireless data and cellular industries.
Executive Officers and Key Executives
Our executive officers and key executives are appointed and serve at the discretion of the Board. As determined by our Board, our CEO and Chief Financial Officer ("CFO") are the only two officer positions meeting the SEC’s definition of executive officer.
| | | | | | | | | | | | | | |
Name | | Age | | Position |
William W. Smith, Jr. | | 76 | | Chairman of the Board, President and Chief Executive Officer |
David Blakeney | | 63 | | Senior Vice President, Engineering |
Von Cameron | | 61 | | Chief Revenue Officer |
Anup Kaneri | | 45 | | Vice President, Worldwide Products |
James M. Kempton | | 49 | | Vice President, Chief Financial Officer and Treasurer |
Charles B. Messman | | 53 | | Vice President, Marketing |
Jennifer M. Reinke | | 51 | | General Counsel and Secretary |
Kenneth Shebek | | 61 | | Vice President, Chief Information Officer |
David P. Sperling | | 55 | | Vice President, Chief Technology Officer |
Stephen W. Stroud | | 62 | | Vice President, Program Management |
For background information regarding Mr. Smith, see above, under the heading, “Directors.”
Mr. Blakeney joined the Company in 2011 and serves as the executive leader of the Company’s global development engineering team. Prior to this role, he led the development team for several Smith Micro products as well as the wireless products quality engineering team. Prior to joining Smith Micro, he served as Vice President, Research and Development of Tollgrade Communications, Inc., and prior thereto, Mr. Blakeney served as Vice President of Product Development for Marconi’s Broadband Switching Division and Vice President of ATM Engineering at Fore Systems. Previous positions also include engineering management roles at 3Com Corporation and Texas Instruments. Mr. Blakeney holds a Bachelor of Science degree in Electrical Engineering from the University of Illinois.
Mr. Cameron rejoined the Company in April 2022 as Chief Revenue Officer, assuming executive leadership of the Company’s customer acquisition, customer management, and sales and systems engineering teams. From 2013 to April 2022, Mr. Cameron served as President of Practics, Inc., a go-to-market sales consulting firm, where he provided sales leadership consultancy services for technology start-ups. Mr. Cameron previously served as the Company’s Executive Vice President of Sales. Earlier in his career, Mr. Cameron served proudly in the United States Air Force. He holds a Bachelor of Science degree in Math-Operations Research from the United States Air Force Academy and an M.B.A. from Golden Gate University.
Mr. Kaneri joined the Company in July 2019, and leads the Company’s global product management team. His expertise in product innovation and his extensive experience building direct-to-consumer products play a key role in supporting the Company in achieving its goals. Prior to joining the Company, from February 2014 to July 2019 Mr. Kaneri served as Senior Product Manager at UPMC Enterprises, an innovation, commercialization, and venture capital arm of UPMC, a $24 billion health care provider and insurer. Prior to his venture capital work, Mr. Kaneri held roles in product innovation, development, and strategy to bring new technology solutions to the market, and co-founded two successful startups focusing on building disruptive mobile platforms. Mr. Kaneri holds a Bachelor of Science degree in Electronics and Telecommunication Engineering from Pune University, a Postgraduate Diploma in Marketing Management from Symbiosis Institute of Business Management in India, and an M.B.A. from the University of Pittsburgh.
Mr. Kempton joined the Company in November 2021 as Vice President, Chief Financial Officer and Treasurer. Mr. Kempton oversees all finance, accounting and control functions for the Company, as well as the Company’s global human resources operations. Prior to joining the Company, from February 2020 to November 2021, Mr. Kempton served as Controller and principal accounting officer of L.B. Foster Company, a leading provider of products and services for the rail industry and solutions to support critical infrastructure projects. From August 2018 to January 2020, Mr. Kempton
served as Executive Vice President and Chief Financial Officer of Caliburn International, a global provider of professional services and solutions to the federal government. Prior thereto, from October 2013 to August 2018, Mr. Kempton was employed by Michael Baker International, a global provider of engineering and professional services, most recently serving as its Executive Vice President and Chief Financial Officer from July 2016 to August 2018. Prior to his service at Michael Baker International, Mr. Kempton served in successive financial leadership roles at Michael Baker Corporation, and earlier in his career, Mr. Kempton held successive roles at Ernst & Young, LLP. Mr. Kempton holds a Bachelor of Arts degree from Thiel College and is a certified public accountant.
Mr. Messman joined the Company in 2016 as Vice President, Corporate Development and Investor Relations. Mr. Messman assumed the role of Vice President, Marketing in December 2022 and oversees the Company's global marketing, digital monetization, public relations and design teams, while continuing to manage corporate development and investor relations activities. He brings more than 25 years of experience working with a large range of technology companies providing investor relations counsel and advising on strategy, financing alternatives, M&A and marketing activities. Prior to joining Smith Micro, Mr. Messman was the Vice President of Finance & Corporate Development at eGain Corporation, and he co-founded The MKR Group, serving as its President, where he managed investor relations, corporate development, and marketing activities for several technology companies with a wide range of market capitalizations. Mr. Messman holds a Bachelor of Arts degree in Economics from Iowa State University.
Ms. Reinke joined the Company in August 2017 and serves as the Company’s General Counsel and Secretary. Ms. Reinke oversees the Company’s corporate governance, compliance and legal affairs. Prior to joining the Company, Ms. Reinke served as General Counsel and Secretary of Tollgrade Communications, Inc., a technology solutions provider in the telecommunications industry. Prior to her service at Tollgrade Communications, Ms. Reinke was an associate at Reed Smith LLP. Ms. Reinke holds a Bachelor of Science degree in Business Administration from Central Michigan University and a Juris Doctor degree from Wayne State University.
Mr. Shebek joined the Company in 2010 as the Vice President of Operations where he led the enterprise mobility product platform. In his current role as Vice President, Chief Information Officer, which he assumed in 2015, Mr. Shebek is responsible throughout the Company for information technology, quality engineering and customer support and oversees the Company’s Pittsburgh facility. Prior to joining Smith Micro, he was Vice President of Operations for Tollgrade Communications, Inc. He also served as Vice President of Supply & Logistics for Ericsson, Inc. and worked for Marconi as Vice President of Supply Chain and Vice President of North American Operations. He joined Fore Systems in 1994, and previously held management positions with IBM. He holds a Bachelor of Science degree in Mechanical Engineering from Pennsylvania State University.
Mr. Sperling joined the Company in 1989. He assumed the Chief Technology Officer position in 1999. Mr. Sperling began his professional career as a software engineer with the Company and he is currently a named inventor on five of the Company’s patents for various Internet and connectivity technologies. He received a Bachelor of Science degree in Computer Science and an M.B.A. from the University of California, Irvine.
Mr. Stroud joined the Company in August 2022 and serves as the Company's Vice President, Program Management, providing global leadership of the Company’s program management team. Mr. Stroud brings to Smith Micro more than 25 years of experience and expertise leading business and technology solutions. Prior to joining Smith Micro, from 2001 to July 2022, Mr. Stroud served as chief executive officer of Bohemian Group, a technology consulting company. Prior to joining Bohemian Group, he served for ten years as a Business Solutions Manager for Hewlett Packard. Earlier in his career, Mr. Stroud served as a Non-Commissioned Officer in the United States Air Force.
Corporate Governance
Board of Directors and Committees of the Board
Our Board of Directors, elected by the stockholders, is the ultimate decision-making body of the Company, except with respect to those matters reserved to the stockholders. The Board acts as an advisor and counselor to executive management and oversees and monitors its performance.
Our Board of Directors held eight meetings during 2023. Each director attended either in person or via teleconference at least 75% of the aggregate of all Board and applicable committee meetings during fiscal 2023. Although we do not have a formal policy regarding attendance by members of the Board of Directors at our annual meeting of stockholders, directors are encouraged to attend our annual meetings. None of our current directors attended our annual meeting of stockholders in 2023.
Our Board of Directors has established four standing committees: an Audit Committee; a Compensation Committee; a Governance and Nominating Committee; and a Mergers and Acquisitions Committee. Each of these
committees has adopted a written charter, a current copy of which is posted on our website at http://www.smithmicro.com under the Investor Relations section.
Audit Committee. Our Audit Committee is comprised of four members: Mr. Campbell, Mr. Gulko, Ms. Keddy and Mr. Szabo. The Board of Directors has determined that all of the members of the Audit Committee are independent within the meaning of the Nasdaq Stock Market listing standards as well as within the meaning of Rule 10A-3 of the Exchange Act, and that each Audit Committee member is able to read and understand fundamental financial statements. The Audit Committee reviews our financial statements and accounting practices, makes recommendations to the Board of Directors regarding the selection of our independent registered public accounting firm and reviews the results and scope of our annual audit and other services provided by our independent registered public accounting firm. The Audit Committee also reviews and discusses with management the Company’s cybersecurity risk exposures, including the potential impact of those exposures on the Company’s business strategy, operations, results of operations, financial condition, key relationships, and reputation; the steps, programs and/or procedures management have taken to monitor and mitigate such exposures; the Company’s computerized information system and operational infrastructure policies and programs; and major legislative and regulatory developments that could materially impact the Company’s cybersecurity risk exposure. The Audit Committee also oversees, considers, and reviews with management the adequacy of the Company’s disclosure controls and procedures and its internal controls relating to cybersecurity, including materiality assessments. The Audit Committee is responsible for establishing, and has established, procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, and for the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters. In addition, all related party transactions are reviewed and subject to approval by the Audit Committee. Mr. Gulko is the Audit Committee Chairman and the Board has determined that he qualifies as a financial expert, as that term is described in SEC regulations. For more information on Mr. Gulko's relevant experience, please see the section of this Report titled "Directors." The Audit Committee held six meetings during 2023.
Compensation Committee. The Compensation Committee is comprised of three members: Messrs. Campbell, Elfman and Gulko. The Board of Directors has determined that all of the members of the Compensation Committee are independent within the meaning of the Nasdaq Stock Market listing standards and applicable SEC regulations. The Compensation Committee administers our executive compensation programs and makes recommendations to the Board of Directors concerning officer and director compensation. The Compensation Committee also has the authority to administer our 2015 Omnibus Equity Incentive Plan (as amended, the “Plan”), and to make awards under the Plan. The Compensation Committee held three meetings during 2023.
The Compensation Committee’s primary objectives in structuring and administering our executive officer compensation program are to attract, motivate and retain talented and dedicated executive officers, tie annual and long-term cash and stock incentives to achievement of measurable corporate and individual performance objectives, and reinforce business strategies and objectives to enhance stockholder value. To achieve these goals, our Compensation Committee maintains compensation plans that tie a portion of executives’ overall compensation to key strategic goals such as the Company’s financial and operational performance, as measured by metrics such as total revenue and non-GAAP operating expense, and for the current year, additional metrics related to achievement of the Company’s operational performance and revenue growth objectives. Our Compensation Committee evaluates individual executive performance along with our Chief Executive Officer ("CEO") (other than with respect to his own performance) as part of the review process. Our Compensation Committee periodically reviews our executive officers’ compensation to determine whether we provide adequate incentives and motivation to our executive officers and whether we adequately compensate our executive officers relative to comparable officers in other similarly situated companies. The Committee did not engage any compensation consultants during 2023. Management plays a significant role in the compensation-setting process for the CEO and other key executives other than the CEO, by evaluating employee performance, recommending business performance targets and establishing objectives, and recommending salary levels, bonuses and equity-based awards.
Governance and Nominating Committee. The Governance and Nominating Committee is comprised of three members: Messrs. Arno, Campbell and Elfman. The Board of Directors has determined that all of the members of the Governance and Nominating Committee are independent within the meaning of the Nasdaq Stock Market listing standards and applicable SEC regulations. The Governance and Nominating Committee receives proposed nominations to the Board of Directors, reviews the eligibility of each proposed nominee, and recommends candidates for nomination by the Board of Directors to be submitted to the stockholders for election at each annual meeting. The Governance and Nominating Committee held two meetings during 2023.
Our Governance and Nominating Committee also manages the process for evaluating current Board members at the time they are considered for re-nomination. After considering the appropriate skills and characteristics required on and accretive to the Board, the current makeup of the Board, the results of the evaluations, the existence of other potential nominees and the wishes of Board members to be re-nominated, the Governance and Nominating Committee recommends
to the Board of Directors whether those individuals should be re-nominated. The Governance and Nominating Committee also periodically reviews with the Board whether it believes the Board would benefit from adding one or more new directors, and if so, the appropriate skills and characteristics desired in such new director(s). If the Board determines that a new director would be beneficial, the Governance and Nominating Committee solicits and receives recommendations for candidates and manages the process for evaluating candidates. All potential candidates, regardless of their source (including candidates recommended by this Item isstockholders), are reviewed under the same process. Our Governance and Nominating Committee screens the available information about the potential candidates. Based on the results of the initial screening, interviews with viable candidates are scheduled with Governance and Nominating Committee members and with other members of the Board. Upon completion of these interviews and other due diligence, our Governance and Nominating Committee may recommend to the Board the election or nomination of a candidate.
Candidates for independent director may be found through recommendations from current directors, an executive search firm, or other sources. The Governance and Nominating Committee will also consider stockholder nominations for directors submitted in accordance with the procedure set forth in Article II, Section 12 of our Bylaws. The procedure provides that a notice relating to the nomination must be timely given in writing to our corporate Secretary prior to the meeting, setting forth information about the proposed candidate, such as their name, age, business and residence addresses, principal occupation or employment, and their beneficial ownership in Smith Micro stock, and information about the stockholder giving the notice, such as their name and address as they appear on our records, and such stockholder’s beneficial ownership of Smith Micro stock. There are no differences in the manner in which the Governance and Nominating Committee evaluates a candidate that is recommended for nomination for membership on our Board of Directors by a stockholder.
When considering a potential candidate for membership on our Board of Directors, our Governance and Nominating Committee considers relevant business and industry experience and demonstrated character and judgment. Although the Governance and Nominating Committee does not have a formal policy with respect to diversity, the Committee endeavors to seek nominees representing diverse experience in occupational backgrounds in business and technology, and in areas that are relevant to our activities.
Mergers and Acquisitions Committee. The Mergers and Acquisitions Committee (the “M&A Committee”) is comprised of four members: Messrs. Arno, Elfman, Sharma and Szabo. The Board of Directors has determined that all of the members of the M&A Committee are independent within the meaning of the Nasdaq Stock Market listing standards. The M&A Committee evaluates and reviews potential acquisition targets, strategic investments and divestitures, and makes recommendations regarding the same to our Board of Directors. The M&A Committee is also charged with overseeing the due diligence process with respect to proposed acquisitions, strategic investments and divestitures. The M&A Committee held one meeting during 2023.
Board Member Diversity
The table below provides certain highlights of the composition of our board members. Each of the categories listed in the below table has the meaning as it is used in Nasdaq Rule 5605(f).
| | | | | | | | |
Board Diversity Matrix |
Total number of directors | 8 |
| Female | Male |
Part I: Gender Identity |
Directors | 1 | 7 |
Part II: Demographic Background |
Asian | 1 | 1 |
White | 0 | 6 |
Board Member Independence
The Board of Directors has determined that, except for William W. Smith, Jr., all of the members of the Board of Directors are independent as defined in the Nasdaq Stock Market listing standards and applicable SEC regulations. Mr. Smith, who also serves as Chairman of the Board, is employed as the Company’s Chief Executive Officer and President.
Executive Sessions
Independent directors meet in executive session without the presence of our CEO and Chairman or other members of management to review the criteria upon which the performance of the CEO and Chairman is based, to review the performance of the CEO and Chairman against those criteria, to ratify the compensation of the CEO and Chairman as approved by the Compensation Committee, and to discuss any other relevant matters.
Board Leadership Structure
The Board’s current leadership structure is characterized by:
•a combined Chairman of the Board and Chief Executive Officer;
•a robust Committee structure with oversight of various types of risks; and
•an engaged and independent Board.
The Board believes that its current leadership structure provides independent board leadership and engagement while deriving the benefits from having our CEO also serve as Chairman of the Board. As the individual with primary responsibility for managing the Company’s day-to-day operations and in-depth knowledge and understanding of the Company, he is best positioned to chair regular Board meetings as we discuss key business and strategic issues. This combined structure provides independent oversight while avoiding unnecessary confusion regarding the Board’s oversight responsibilities and the day-to-day management of business operations. We do not have a lead independent director.
Risk Oversight
Our Board oversees an enterprise-wide approach to risk management, designed to support the achievement of our strategic and organizational objectives, improve long-term organizational performance and enhance stockholder value. A fundamental part of risk oversight is to understand the risks our Company faces and the steps management is taking to manage those risks and to assess management’s overall appetite for risk. It is management’s responsibility to manage risk and bring material risks facing our Company to the Board’s attention. Our Board receives regular reports from management on matters relating to strategic and operational initiatives, financial performance and legal developments which are each integrated with enterprise-risk exposures. Our Board also approves our CEO’s performance goals for each year. In doing so, the Board has an opportunity to ensure that the CEO’s goals include responsibility for broad risk management. The involvement of the full Board in setting our strategic plan is a key part of its assessment of the risks inherent in our corporate strategy.
The Committees of the Board are also involved in evaluating and overseeing the management of risks particular to their respective areas of oversight. For example, the Audit Committee focuses on financial risk and internal controls, and receives an annual risk assessment report from our external auditors. The Compensation Committee evaluates and sets compensation programs that encourage decision-making predicated upon a level of risk-taking consistent with our business strategy. The Compensation Committee also reviews compensation and benefit plans and the risks associated with them. The Governance and Nominating Committee oversees governance and succession risk, including Board and CEO succession and evaluates director skills and qualifications to appoint particular directors to our standing committees based upon the needs of that committee. Each Committee reports its activities to the full Board of Directors to ensure that the Board is regularly informed about these risks.
Code of Ethics
We have adopted a code of ethics, called our Ethics and Business Conduct Policy (our "Code of Ethics"), that applies to all of our employees, executive officers and directors. We will provide a copy of the Code of Ethics upon request made by email to IR@smithmicro.com or in writing to Smith Micro Software, Inc. at 5800 Corporate Drive, 5th Floor, Pittsburgh, PA 15237, Attention: Investor Relations. The full text of our Code of Ethics is posted on our website at http://www.smithmicro.com under the headings “Proposal 1: ElectionInvestor Relations section. We intend to disclose any amendment to the Code of Directors,” “Executive Officers,” “Corporate Governance,” and “Delinquent Section 16(a) Reports”Ethics or waiver of a provision of the Code of Ethics applicable to our executive officers or directors, including the name of the executive officer or director to whom the amendment applies or for whom the waiver was granted, at the same location on our website identified above. The inclusion of our website address in this Annual Report on Form 10-K does not include or incorporate by reference the Company’s definitive Proxy Statement for the 2021information on our website into this Annual MeetingReport on Form 10-K.
Item 11. EXECUTIVE COMPENSATION
The Summary Compensation Table below summarizes the compensation of the executive officers and the other key executives of the Company named therein (our “named executive officers” or “NEOs”) during 2023 and 2022. Our NEOs for 2023 were as follows:
•William W. Smith. Jr., President and Chief Executive Officer
•James M. Kempton, Vice President and Chief Financial Officer
•Von Cameron, Vice President and Chief Revenue Officer
The principal elements of our executive compensation program are base salary, cash incentive compensation, long-term equity incentives in the form of restricted stock, other benefits and perquisites, including certain reimbursements and matching contributions under our 401(k) savings plan, and in the case of Mr. Cameron, a sales compensation plan. We view these components of compensation as related but distinct. Although our Compensation Committee does review total compensation, we do not believe that significant compensation derived from one component of compensation should negate or offset compensation from other components. Our executive compensation program is designed to attract, motivate, and retain talented and dedicated executives, who are critical to our success. Under this program, a significant portion of our named executive officers and other executives' overall compensation is tied to the achievement of key strategic financial and operational goals, as measured by metrics such as revenue and adjusted operating expense. The following highlights our approach to executive compensation:
Competitive Positioning: We seek to establish the overall compensation of our named executive officers and other executives at levels that we believe are roughly comparable with the average levels of compensation of executives at other growth technology companies of similar size.
Significant Portion of Executive Compensation Tied to Performance: With respect to the four primary components of our compensation program, both cash incentive compensation and equity compensation are tied in whole or in part to the satisfaction of pre-determined performance criteria. Performance-based incentive compensation constitutes a significant portion of potential compensation for our named executive officers and other executives.
Limited other Compensation: Consistent with our “pay-for-performance” philosophy, we restrict all other forms of compensation to our named executive officers and other executives to levels that are consistent with competitive market practices.
Base Salary Compensation
We provide our named executive officers and other executives with base salaries that we believe enable us to hire and retain highly qualified individuals in a competitive environment and to reward individual performance and contributions to our overall business goals, while taking into account the unique circumstances of our Company. We review base salaries for our named executive officers and other executives annually and increases or decreases are generally based on Company and individual performance. We also take into account the base compensation paid by companies that we believe to be our competitors and by other public companies with which we believe we generally compete for executives. Beginning in March 2023, in connection with a review of the Company’s cost structure, we instituted a temporary 10% reduction in executive base salaries that continued throughout 2023.
Discretionary Bonus Compensation
In order to retain and motivate our named executive officers and other executives and in addition to the incentive plans described below, the Compensation Committee approved a discretionary quarterly cash bonus program and the applicable bonus amounts thereunder in which each of our named executive officers and other executives participated during 2023, subject to achievement of key performance milestones. The Committee approved a similar quarterly bonus program and the applicable bonus amounts thereunder for our named executive officers and other executives who were employed by the Company during 2022, subject to the achievement of key performance milestones. Pursuant to the bonus program, eligible participants received a quarterly cash bonus payment provided that they remained employed by the Company as of the date of payment. During 2023, in connection with the Company’s review of its cost structure, the Company suspended its discretionary bonus program for the second quarter, and the Compensation Committee approved a change to the discretionary bonus program such that in lieu of paying the discretionary bonuses for the third and fourth quarters in cash, each of the named executive officers and other executives received a grant of restricted stock in a number of shares equal to such individual’s target discretionary bonus amount for each of the third and fourth quarters of 2023 divided by the closing price of the Company’s common stock the day immediately preceding the grant date. The vesting conditions for the shares of restricted stock granted in lieu of the discretionary cash bonus were the same performance metrics that would otherwise have been used to determine whether and in what amount the discretionary cash bonus would
have been earned for each quarter. These restricted stock awards are described further under the heading, “Equity Compensation,” below. The total of the cash payments to each of our participating NEOs is reflected in the “bonus” column of the Summary Compensation Table.
Performance-based Cash Bonus Awards
As part of our compensation program and in order to maintain appropriate financial incentives, the Company maintains an annual corporate incentive bonus plan in which our named executive officers and other key executives participate. Pursuant to the corporate incentive bonus plan, our NEOs and other executives are eligible for cash bonus compensation. Under the plan, cash bonuses are determined and paid each fiscal year on a quarterly basis based upon the achievement of certain pre-determined performance metrics. Our cash bonus plan is designed to focus our management on achieving key corporate financial objectives, motivate certain desirable behaviors and reward achievement of our key corporate financial objectives and individual goals. Under the terms of the cash bonus plan, performance objectives and annual target cash bonus amounts are established for each named executive officer and other executives participating in the plan. In determining the appropriate level of annual target cash bonus for each named executive officer or other executive the Compensation Committee considers information requiredprovided through independent, third-party surveys and other information collected from public sources for similar positions at peer companies, relative base salary and bonus amounts for each individual and the recommendations of our Chief Executive Officer.
Our bonus plan contains performance objectives with a percentage of the total target bonus amount ascribed to each objective, so that the sum total equals the approved annual target cash bonus for each named executive officer or other executive. For 2022 and 2023, the objectives for NEOs and other executives participating in the plan were related to (1) revenue achievement and (2) operating expense management, which were evenly weighted in terms of target cash bonuses. For each objective, the percentage by this Itemwhich the objective was achieved (which could exceed 100% in the case of quantitative performance objectives) was applied to the dollar value ascribed to each objective. The dollar values for each objective were then combined to determine the actual cash bonuses paid to each such NEO or other executive.
Achievement of the quantitative performance objectives for bonus amounts paid under the corporate incentive bonus plan is determined and paid on a quarterly basis following the completion of each quarter. As a result, the cash paid in a given fiscal year is the result of the attainment achieved for the fourth quarter of the previous year and the first three quarters of the current year. During 2023, the Company suspended the corporate incentive bonus program for the second quarter, and in lieu of paying corporate incentive bonuses for the third and fourth quarters of 2023 in cash, each of the named executive officers and other executives received a grant of restricted stock in a number of shares equal to such individual’s target corporate incentive bonus amount for each of the third and fourth quarters of 2023 divided by the closing price of the Company’s common stock the day immediately preceding the grant date. The vesting conditions for the shares of restricted stock granted in lieu of the corporate incentive cash bonus were the same performance metrics that would otherwise have been used to determine whether and in what amount the cash bonuses would have been earned for each quarter. These restricted stock awards are described further under the heading, “Equity Compensation,” below.
The total of the cash payments under the annual corporate incentive bonus plan is included in the amount of non-equity plan compensation reflected in the Summary Compensation Table.
The table below outlines the quantitative performance objectives that were established for each named executive officer and other executive participating in the plan and the actual results that correspond with their performance bonus payouts during 2023 (except as noted in the table below):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Q4 2022 | | Q1 2023 | | Q2 2023(2) | | Q3 2023(3) | |
Revenue – target | | $ | 20,544 | | | $ | 10,983 | | | – | | $ | 12,584 | | |
Revenue – actual | | $ | 11,405 | | | $ | 10,930 | | | – | | $ | 11,001 | | |
Operating Expenses(1) - target | | $ | 12,848 | | | $ | 11,093 | | | – | | $ | 8,182 | | |
Operating Expenses(1) - actual | | $ | 12,041 | | | $ | 11,261 | | | – | | $ | 7,748 | | |
(1)Excluding stock-based compensation, amortization of intangible assets and personnel severance and reorganization activities, and for Q1 2023 and Q3 2023, also excluding depreciation and amortization of debt issuance costs and discount.
(2)The bonus program was suspended and no bonuses were paid based on second quarter 2023 performance.
(3)As described above, for the third quarter 2023, in lieu of payout of cash bonuses under the Company’s corporate incentive bonus plan, each executive received a grant of restricted stock, and the vesting of such shares of restricted stock was subject to achievement of the same performance metrics that would otherwise have been used
to determine whether and in what amount the cash bonuses were would have been earned for each quarter, as set forth in the table above.
We believe that the performance objectives for our named executive officers and other executives participating in the plan were sufficiently challenging to achieve and that performance at a high level, while devoting full time and attention to their responsibilities, is required for our participating named executive officers and other executives to earn their respective cash bonuses.
Sales Compensation Plan
As the executive leader of our worldwide sales organization, Mr. Cameron participated in a sales compensation plan during 2023 pursuant to which he was eligible to earn cash compensation for achievement of specified revenue targets. A target commission amount was established for each quarter. The amount of compensation actually earned was determined and paid on a quarterly basis following the end of each quarter, and was based on the percentage of target revenue actually achieved. As a result of the timing of calculation and payment of amounts earned, the cash actually paid under the sales compensation plan during 2023 is the amount achieved for the fourth quarter of 2022 and the first three quarters of 2023. The total of these payments is included in the non-equity plan compensation reflected for Mr. Cameron in the Summary Compensation Table.
The table below outlines the revenue objectives that were established under the sales compensation plan for Mr. Cameron and the actual results that correspond with her sales compensation plan payouts during 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Q4 2022 | | Q1 2023 | | Q2 2023 | | Q3 2023 |
Revenue – target | | $ | 20,544 | | | $ | 13,564 | | | $ | 16,453 | | | $ | 16,691 | |
Revenue – actual | | $ | 11,405 | | | $ | 10,930 | | | $ | 10,338 | | | $ | 11,001 | |
We believe that the revenue and associated commission targets under the sales compensation plan were sufficiently challenging to achieve and that performance at a high level, while devoting full time and attention to his responsibilities, is required for Mr. Cameron to earn the commission amounts under the plan.
Equity Compensation
We believe that for growth companies in the software technology sector, such as Smith Micro, equity awards are a significant compensation-related motivator in attracting and retaining executive-level employees. Accordingly, we have provided our named executive officers and other executives with long-term equity incentive awards to attract key executives to join the Company and incentivize those individuals to stay with us for long periods of time, which in turn should provide us with greater stability over such periods than we would experience without such awards.
Each of our named executive officers received a grant of restricted stock during 2023, which vests over a period of four years from the grant date. Half of each total grant vests on a monthly basis and will be earned based on continuous service by the executive over the vesting period. The vesting of the remaining half is subject to the Company’s achievement of certain performance-based criteria for 2023 and the continuous service by the executive over the remaining vesting period. One quarter of each total grant will be eligible to vest if the Company achieves a defined 2023 annual revenue target, and an additional one quarter of each total grant will be eligible to vest if the Company achieves a defined 2023 annual operating expense target (determined on a non-GAAP basis, excluding stock-based compensation, depreciation, amortization of intangible assets, notes and stock offering fees and amortization, and personnel severance and reorganization activities), with a proportionate adjustment to the total performance portion of the grant if the targets are not fully met. Shares earned under the performance conditions cannot exceed the total number of performance shares, even if the sum of the revenue attainment and the expense attainment exceed 100%. Once performance against this criteria is determined, the shares that are eligible to vest will vest 25% on the determination date and then ratably over the next thirty-six months, based on continuous service by the executive.
In addition to these awards, as noted under the headings “Discretionary Bonus Compensation” and “Performance-based Cash Bonus Awards,” each of the Company’s named executive officers and other executives received a grant of restricted stock in lieu of discretionary cash bonuses and corporate incentive plan bonuses for the third and fourth quarters of 2023. The vesting conditions for such awards were identical to the performance metrics that would otherwise have been applied to determine whether and in what amount the cash bonuses would have been earned for the applicable quarter.
Executive Benefits and Perquisites
We provide the opportunity for our named executive officers and other executives to receive certain limited perquisites and general health and welfare benefits. We also offer participation in our defined contribution 401(k) plan to our named executive officers. We provide a 20% match on all eligible employee contributions to our 401(k) plan. We provide these benefits to create additional incentives for our executives and to remain competitive in the general marketplace for executive talent.
Summary Compensation Table – 2023 and 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | Year | | Salary ($) | Bonus ($)(1) | Stock Awards ($)(2) | Non-Equity Plan Compensation ($)(3) | All Other Compensation ($) | | Total ($) |
William W. Smith, Jr. | 2023 | | 460,417 | | 50,000 | | 393,017 | | 90,056 | | 9,500 | | (4) | 1,002,989 | |
Chairman, President and Chief Executive Officer | 2022 | | 506,945 | | 50,000 | | 675,500 | | 182,475 | | 9,074 | | (5) | 1,423,994 | |
James M. Kempton | 2023 | | 253,229 | | 20,000 | | 209,076 | | 45,028 | | 4,500 | | (6) | 531,834 | |
Vice President, CFO and Treasurer | 2022 | | 278,820 | | 20,000 | | 386,000 | | 83,416 | | 4,100 | | (6) | 772,336 | |
Von Cameron | 2023 | | 207,188 | | 20,000 | | 209,076 | | 131,518 | | 4,500 | | (6) | 572,282 | |
Chief Revenue Officer | 2022 | (7) | 148,077 | | 10,000 | | 259,169 | | 95,172 | | 4,100 | | (6) | 516,518 | |
(1)The amounts in this column reflect the cash awards paid pursuant to a quarterly discretionary cash bonus program in 2023 and 2022.
(2)The amounts shown in this column represent the aggregate grant date fair value of Restricted Shares computed in accordance with FASB ASC Topic 718. Generally, the aggregate grant date fair value is the amount that the company expects to expense in its financial statements over the award’s vesting schedule. These amounts reflect the Company’s accounting expense and do not correspond to the actual value that will be realized by the named executive officers. For Restricted Shares, the fair value is calculated using the closing price of our stock on the date of grant. The assumptions we used with respect to the valuation of stock grants are set forth in Note 11 to our consolidated financial statements included in this Annual Report on Form 10-K.
(3)The amounts in this column reflect the cash awards paid during 2023 and 2022 pursuant to our annual corporate incentive bonus plan and, in the case of Mr. Cameron only, our sales compensation plan.
(4)Amount comprised of $5,000 in tax preparation fees paid by the Company and 401(k) matching contributions of $4,500 made by the Company.
(5)Amount comprised of $4,974 in tax preparation fees paid by the Company and 401(k) matching contributions of $4,100 made by the Company.
(6)Amount comprised of 401(k) matching contributions made by the Company.
(7)Mr. Cameron joined the Company in April 2022. All amounts reported for 2022 reflect his service for the partial year.
Outstanding Equity Awards at December 31, 2023
The following table sets forth the number of securities underlying outstanding equity awards for each named executive officer as of December 31, 2023, comprised of outstanding unvested shares of restricted stock as of such date.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Option Awards | Stock Awards |
Named Executive Officer | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) unexercisable | Equity incentive plan awards: number of securities underlying unexercised unearned options (#) | Option exercise price ($) | Option expiration date | Number of Shares or Units of Stock that Have Not Vested (#) | | Market Value of Shares or Units of Stock that Have Not Vested ($) (1) |
William W. Smith, Jr. | 0 | 0 | 0 | — | — | 7,038 | (2) | 5,842 |
| | | | | | 51,500 | (3) | 42,745 |
| | | | | | 92,768 | (4) | 76,997 |
| | | | | | 158,594 | (5) | 131,633 |
| | | | | | 49,670 | (6) | 41,226 |
James M. Kempton | 0 | 0 | 0 | — | — | 53,010 | (4) | 43,998 |
| | | | | | 90,625 | (5) | 75,219 |
| | | | | | 23,180 | (6) | 19,239 |
Von Cameron | 0 | 0 | 0 | — | — | 45,044 | (4) | 37,387 |
| | | | | | 90,625 | (5) | 75,219 |
| | | | | | 23,180 | (6) | 19,239 |
(1)Determined by multiplying the number of shares by $0.83, the closing price for our stock on the Nasdaq Capital Market on December 29, 2023.
(2)Unvested portion of an award granted during 2020, 50% of which was subject to time-based vesting and 50% of which was subject to performance and time-based vesting. Shares are currently vesting in monthly installments. Shares will be fully vested in March 2024.
(3)Unvested portion of an award granted during 2021, 50% of which was subject to time-based vesting and 50% of which was subject to performance and time-based vesting. Shares are currently vesting in monthly installments. Shares will be fully vested in March 2025.
(4)Unvested portion of an award granted during 2022, 50% of which was subject to time-based vesting and 50% of which was subject to performance and time-based vesting. Shares are currently vesting in monthly installments. Shares will be fully vested in March 2026.
(5)Unvested portion of an award granted during 2023, 50% of which was subject to time-based vesting and 50% of which was subject to performance and time-based vesting. Shares are currently vesting in monthly installments. Shares will be fully vested in March 2027.
(6)Unvested portion of an award granted during 2023 in lieu of the payment of cash bonuses for third and fourth quarter 2023 under the Company’s discretionary cash bonus program and corporate incentive bonus program, all of which is subject to performance-based vesting.
Employment Agreements
Agreement with William W. Smith, Jr.
In June 2005, we agreed to make to William W. Smith, Jr., our Chairman of the Board, President and Chief Executive Officer, a lifetime payment of $6,000 annually, subject to annual increases of 5%, to commence at the time of his future retirement or resignation from employment. The agreement provides that we may, at our option, discharge our obligations under the agreement by purchasing a single premium annuity for the benefit of Mr. Smith. We estimate that it would cost approximately $65,000 to purchase such an annuity.
Other than as disclosed above, none of the named executive officers has an employment agreement with us, and the employment of each of the named executive officers may be terminated at any time at the discretion of the Board of Directors.
Potential Payments Upon Termination or Change in Control
The terms of the restricted stock award agreements associated with restricted stock granted under our Plan provide that the shares of restricted stock granted thereunder automatically become fully vested, no longer subject to restrictions and freely transferable upon a “Change of Control” as such term is defined in our Plan. We provide this benefit in order to properly incentivize our executives to support a Change of Control that would be deemed beneficial to our stockholders.
Pay versus Performance - 2023, 2022, and 2021
The following table reports the compensation of our principal executive officer (PEO) and the average compensation of the other named executive officers as reported in the Summary Compensation Table ("SCT") for the past two fiscal years (the"Non-PEO NEOs"), as well as their “compensation actually paid” as calculated pursuant to SEC rules and certain performance measures required by the rules.
| | | | | | | | | | | | | | | | | | | | |
(a) | (b) | (c) | (d) | (e) | (f) | (g) |
Year (1) | Summary Compensation Table Total for PEO ($) | Compensation Actually Paid to PEO ($) (2) | Average Summary Compensation Table Total for Non-PEO NEOs ($) | Average Compensation Actually Paid to Non-PEO NEOs ($) (2) | Value of Initial Fixed $100 Investment Based on Total Shareholder Return ($) | Net Income ($) (In thousands) |
2023 | 1,002,989 | | 557,197 | | 552,058 | | 385,004 | | 37.05 | | (24,396) | |
2022 | 1,423,994 | 378,843 | 771,427 | 381,318 | 43.21 | (29,279) |
2021 | 2,129,543 | 1,616,387 | 753,088 | 356,820 | | 97.43 | (31,043) |
(1)William W. Smith, Jr. was the Company’s PEO during each of 2021, 2022 and 2023. The other Non-PEO NEOs during 2023 were Messrs. Kempton and Cameron, and during 2022 were Mr. Kempton and David P. Sperling, the Company’s Chief Technology Officer. During 2021, the other Non-PEO NEOs were Charles B. Messman, Vice President Marketing; Gail Redmond, our former SVP Worldwide Sales; Timothy Huffmyer, who served as CFO until his resignation in September 2021; Michael Fox, who joined the Company on an interim basis in August 2021 and served as interim CFO from September to November 2021 and continued on in an advisory role through mid-December 2021; and Mr. Kempton, who assumed the role of CFO in November 2021. Average SCT total compensation for Non-PEO NEOs in 2021 is impacted due to the fact that we had three executives who served as CFO during that year, with such persons serving, and only being compensated, for approximately eight, four and two months, respectively.
(2)"Compensation actually paid" is an SEC-derived and required reporting metric, premised on the reported total in the Summary Compensation Table for the PEO and the average Summary Compensation Table totals for the Non-PEO NEOs, subject to the adjustments set forth below to arrive at "compensation actually paid" for our PEO and for our non-PEO NEOs during each of the years set forth in the table above:
Adjustments to Determine Compensation "Actually Paid" for PEO:
| | | | | | | | | | | |
| 2023 | 2022 | 2021 |
Summary Compensation Table Total for PEO (column (b) above) | $ | 1,002,989 | | $ | 1,423,994 | | $ | 2,129,543 | |
Deduction for amounts reported under the “Stock Awards” column the SCT | $ | (393,017) | | $ | (675,500) | | $ | (1,324,750) | |
Increase for fair value at year end of awards granted during year and remain unvested at year end | $ | 202,635 | | $ | 333,047 | | $ | 771,313 | |
Increase for fair value at vesting date of awards granted during year that vested during year | $ | 51,787 | | $ | 41,342 | | $ | 98,891 | |
Change in fair value from prior year end to current year end of awards granted prior to year that were outstanding and unvested at year end | $ | (192,159) | | $ | (427,952) | | $ | (79,340) | |
Change in fair value from prior year end to vesting date of awards granted prior to year that vested during year | $ | (93,870) | | $ | (294,593) | | $ | 53,808 | |
Deduction for fair value from prior year of awards granted prior to year that were forfeited during year | $ | (21,170) | | $ | (21,495) | | $ | (33,078) | |
Compensation Actually Paid to PEO (column (c) above) | $ | 557,197 | | $ | 378,843 | | $ | 1,616,387 | |
Average Adjustments to Determine Average Compensation "Actually Paid" for non-PEO NEOs:
| | | | | | | | | | | |
| 2023 | 2022 | 2021 |
Average Summary Compensation Table Total for Non-PEO NEOs (column (d) above) | $ | 552,058 | | $ | 771,427 | | $ | 753,088 | |
Deduction for the average of amounts reported under the “Stock Awards” column the SCT | $ | (209,076) | | $ | (386,000) | | $ | (478,320) | |
Increase for average of fair value at year end of awards granted during year and remain unvested at year end | $ | 110,990 | | $ | 190,313 | | $ | 176,301 | |
Increase for average of fair value at vesting date of awards granted during year that vested during year | $ | 28,549 | | $ | 23,624 | | $ | 53,575 | |
Change in average of fair value from prior year end to current year end of awards granted prior to year that were outstanding and unvested at year end | $ | (62,264) | | $ | (122,914) | | $ | (19,522) | |
Change in average of fair value from prior year end to vesting date of awards granted prior to year that vested during year | $ | (24,164) | | $ | (88,989) | | $ | 21,468 | |
Deduction for average of fair value from prior year of awards granted prior to year that were forfeited during year | $ | (11,089) | | $ | (6,143) | | $ | (149,771) | |
Average Compensation Actually Paid to Non-PEO NEOs (column (e) above) (1) | $ | 385,004 | | $ | 381,318 | | $ | 356,819 | |
(1) No dividends or other earnings were paid or accrued with respect to the equity contemplated in this table, and no adjustments, amendments or modifications were made with respect to any equity awards.
Compensation Actually Paid Versus Company Performance
In the “Executive Compensation” section of this Report, we provide greater detail on the elements of our executive compensation program and “Director Compensation”our pay-for-performance compensation philosophy. We believe the Company’s executive compensation program and the executive compensation decisions included in the Summary Compensation Table and related disclosures appropriately reward our PEO and the other named executive officers for Company and individual performance, assist the Company in retaining our senior leadership team and support long-term value creation for our stockholders.
Comparison to Total Shareholder Return. The values included in the column for "compensation actually paid" to our PEO and to the Non-PEO NEOs is calculated in accordance with the SEC promulgated disclosure rules in each of the fiscal years reported above and over the three-year cumulative period and shows how the compensation awarded to them changed year-over-year and is generally aligned to the Company’s total shareholder return. This alignment is due to the fact that a significant portion of “compensation actually paid” is comprised of equity awards, which decreased in value during 2022 and 2023. In addition, there was a 10% reduction in base compensation for all of the NEO's which began in March 2023,
no bonuses were paid to the NEOs for the second quarter 2023 performance, and additional equity award grants in 2023 replaced cash bonuses for the third and fourth quarter 2023 performance, a portion of which remained unvested at December 31, 2023, which further aligned average compensation paid to our NEOs to shareholder return throughout 2023.
Comparison to Net Income. We believe the amount of “compensation actually paid” to the PEO and to the Non-PEO NEOs is generally aligned with the Company’s net loss, as the continued net loss is relatively consistent with the non-equity related compensation, which, as indicated above, is comprised of base salary and incentive compensation. Our bonus compensation, which was paid for the first quarter of 2023 and for all of 2022 and 2021, is generally measured based on revenue and operating expenses as compared to an operating plan, which align with the primary drivers of the net loss. There was no bonus paid to the NEOs in the second quarter of 2023 as part of our cost reduction initiatives, and the cash bonus component of the NEOs' compensation was replaced by performance based equity awards for third and fourth quarter 2023 performance. The continued net losses in 2023 and 2022 also contributed to the decrease in share price over that time period, which has resulted in the reductions in value of the equity awards.
Restrictions on Hedging Transactions
Our insider trading policy guidelines acknowledge that buying or selling publicly-traded options, including buying or selling puts or calls or other hedging transactions in the Company’s 2021 Proxy Statement stock may permit a holder to continue to own our common stock obtained through benefit plans or otherwise, but without the full risks and rewards of ownership. When that occurs, our directors, employees, and officers to whom our policy applies, may no longer have the same objectives as our other stockholders. As such, the Company’s directors, officers and employees are prohibited from engaging in such transactions, except as otherwise may be approved in writing by the Company’s CFO or General Counsel, and no such transactions have been approved.
Director Compensation - 2023
The following table sets forth compensation that our directors (other than Mr. Smith, who is incorporated herein by referencea named executive officer and does not separately receive any compensation for his board service) earned during 2023 for services as members of our Board of Directors.
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Name | | Fees earned or paid in cash ($) | | Stock Awards ($) (1), (2) | | Total ($) |
Andrew Arno | | 27,750 | | | 77,500 | | | 105,250 | |
Thomas G. Campbell | | 27,750 | | | 77,500 | | | 105,250 | |
Steven L. Elfman | | 27,750 | | | 77,500 | | | 105,250 | |
Samuel Gulko | | 27,750 | | | 77,500 | | | 105,250 | |
Asha Keddy | | 27,750 | | | 77,500 | | | 105,250 | |
Chetan Sharma | | 27,750 | | | 77,500 | | | 105,250 | |
Gregory J. Szabo | | 27,750 | | | 77,500 | | | 105,250 | |
.
(1)The amounts shown represent the grant date fair value computed in accordance with FASB ASC Topic 718. The assumptions we used with respect to the valuation of stock awards are set forth in Note 11 to our consolidated financial statements included in this Annual Report on Form 10-K.
(2)As of December 31, 2023, each director held 2,084 shares of unvested restricted stock, pursuant to restricted stock awards granted to them in connection with their service as directors.
Summary of Director Compensation
Non-employee members of the Board of Directors receive quarterly fees for Board and committee service, and are reimbursed for their out-of-pocket expenses in connection with service on the Board of Directors. During 2023, the quarterly fee paid to our non-employee directors was set at $7,500, however in March 2023 the Board determined to implement a temporary 10% reduction in Board fees. Non-employee members of the Board of Directors are eligible to receive discretionary awards under our Plan. On January 27, 2023, each non-employee director received a grant of 25,000 shares of restricted stock valued at $3.10 per share, which vested in equal installments over a period of 12 months from the grant date. Our Chairman of the Board, William W. Smith, Jr., is also a named executive officer and does not receive any separate compensation for his service as a director.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to us as of February 6, 2024 except where another date is noted below), with respect to beneficial ownership of our Common Stock by (i) each person (or group of affiliated persons) who is known by us to own beneficially more than five percent (5%) of our outstanding Common Stock, (ii) each director, (iii) each of our named executive officers (NEOs), and (iv) all current directors, executive officers and named executive officers as a group, together with the approximate percentages of outstanding Common Stock owned by each of them. The following table is based upon information supplied by directors, executive officers, other key executives identified as NEOs and principal stockholders. Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. A portionperson has beneficial ownership of shares if the person has the power to vote or dispose of such shares. This power can be exclusive or shared, direct or indirect. In addition, a person is considered by SEC rules to beneficially own shares underlying options and convertible securities that are presently exercisable or convertible or will become exercisable or convertible within 60 days of the information requireddate that beneficial ownership is calculated. Unless otherwise indicated the address of each beneficial owner is c/o Smith Micro Software, Inc., 5800 Corporate Drive, 5th Floor, Pittsburgh, PA 15237. The percentage of beneficial ownership is based on 74,935,907 shares of our Common Stock outstanding as of February 6, 2024.
| | | | | | | | | | | |
| Common Stock |
Name or Group of Beneficial Owners | Number of Shares | | Percent (1) |
Directors and Named Executive Officers: | | | |
William W. Smith, Jr. | 5,365,500 | (2) | 7.16% |
Andrew Arno | 386,355 | (3) | * |
Thomas G. Campbell | 113,700 | (4) | * |
Steven L. Elfman | 188,750 | (5) | * |
Samuel Gulko | 199,500 | (6) | * |
Asha Keddy | 73,082 | (7) | * |
Chetan Sharma | 69,082 | (8) | * |
Gregory J. Szabo | 225,250 | (9) | * |
James M. Kempton | 234,664 | (10) | * |
Von Cameron | 195,700 | (11) | * |
All current NEOs, executive officers and directors as a group (10 persons) | 7,051,583 | (12) | 9.41% |
5% Stockholders |
Iroquois Capital Management L.L.C. | 3,965,186 | | (13) | 5.09 | % |
(1)The percentage beneficial ownership of each of our directors and named executive officers, all executive officers and directors as a group, and each 5% stockholder, if any, is based on a fraction, the numerator of which is the number of shares beneficially held by this Itemsuch holder or group of holders, in the case of all executive officers and directors as a group, and the denominator of which is equal to the sum of the number of shares of our Common Stock outstanding at February 6, 2024 plus the number of shares of our Common Stock issuable upon exercise by such holder or group of holders of warrants or options held by such holder or group of holders which are presently exercisable or will become exercisable within 60 days of such date. An asterisk (*) represents beneficial ownership of less than 1%.
(2)Comprised of 347,559 shares held directly by Mr. Smith (of which 16,879 are unrestricted shares and 330,680 are restricted shares), 5,011,941 shares held in the Smith Living Trust, of which Mr. Smith and his spouse are co-trustees, and 6,000 shares held in the William W. Smith, Jr. IRA.
(3)Comprised of 360,105 unrestricted shares (of which 15,000 shares are held by Mr. Arno’s spouse, and 15,000 shares each are held by MJA Investments and JBA Investments, with respect to which Mr. Arno makes investment decisions but disclaims beneficial ownership), 25,000 restricted shares and 1,250 shares subject to options which are currently exercisable.
(4)Comprised of 88,700 unrestricted shares and 25,000 restricted shares.
(5)Comprised of 163,750 unrestricted shares and 25,000 restricted shares.
(6)Comprised of 173,250 unrestricted shares, 25,000 restricted shares and 1,250 shares subject to options which are currently exercisable.
(7)Comprised of 48,082 unrestricted shares and 25,000 restricted shares.
(8)Comprised of 44,082 unrestricted shares and 25,000 restricted shares.
(9)Comprised of 199,000 unrestricted shares, 25,000 restricted shares and 1,250 shares subject to options which are currently exercisable.
(10)Comprised of 77,475 unrestricted shares and 157,189 restricted shares.
(11)Comprised of 46,151 unrestricted shares and 149,549 restricted shares.
(12)Comprised of shares beneficially owned by our current NEOs and directors, as reported in the above table and described in the foregoing notes 2-11.
(13)Based on information set forth underin Amendment No. 1 to Schedule 13G filed jointly among Iroquois Capital Management L.L.C., Richard Abbe and Kimberly Page (collectively, “Iroquois”) with the heading “Security OwnershipSEC on February 14, 2024 reflecting ownership of Certain Beneficial Ownersour Common Stock as of December 31, 2023. The filing reflects that Iroquois has shared voting and Management” indispositive power over 1,284,183 shares, consisting of 347,828 shares of Common Stock and 936,355 shares of Common Stock issuable upon exercise of Common Stock purchase warrants, and that Mr. Abbe has sole dispositive power over 2,681,003 shares, consisting of 713,984 shares of Common Stock and 1,967,019 shares of Common Stock issuable upon exercise of Common Stock purchase warrants. The terms of the Company’s 2021 Proxy Statement warrants reported by Iroquois and Mr. Abbe provide, however, that the holder may not exercise its warrant to the extent such exercise would cause such holder, together with its affiliates and attribution parties, to beneficially own a number of shares of Common Stock which would exceed 9.99%. Per Schedule 13G filed by Iroquois on June 28, 2023, the address for Iroquois is incorporated herein by reference2 Overhill Road, Scarsdale, New York 10583.. Securities Authorized for Issuance Under an Equity Compensation Plan
The following table summarizes information as of December 31, 20202023 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) | | | 111 | | | $ | 2.92 | | | | 5,052 | |
2005 Stock Option / Stock Issuance Plan (2) | | | 93 | | | | 5.17 | | | | — | |
Total | | | 204 | | | $ | 4.03 | | | | 5,052 | |
(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 canceled and no longer available for future issuance.
|
| | | | | | | | | | | | | | | | | |
| Number of shares to be issued upon exercise of outstanding options or other rights | | Weighted average exercise price of outstanding options or other rights | | Number of shares remaining available for future issuance |
2015 Omnibus Equity Incentive Plan (1) | 57 | | $ | 3.09 | | | 3,287 |
2005 Stock Option / Stock Issuance Plan (2) | 23 | | 3.84 | | | — |
Total | 80 | | $ | 3.31 | | | 3,287 |
(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, June 9, 2020, and June 6, 2023.
(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
Certain Relationships and Related Party Transactions” underTransactions
Since the heading “Corporate Governance”beginning of our last fiscal year, there have not been any transactions, nor are there any currently proposed transactions, in which the Company was or is to be a participant, where the amount involved exceeded $120,000, and in which any related person had or will have a direct or indirect material interest.
Board Member Independence
The Board of Directors has determined that, except for William W. Smith, Jr., all of the members of the Board of Directors are independent as defined in the Nasdaq Stock Market listing standards and applicable SEC regulations. Mr. Smith, who also serves as Chairman of the Board, is employed as the Company’s 2021 Proxy Statement Chief Executive Officer and is incorporated herein by referencePresident.
.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information requiredfollowing is a summary of the fees billed to Smith Micro by this Item is set forthSingerLewak LLP for professional services rendered for the fiscal years ended December 31, 2022 and December 31, 2023:
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Fee Category | Fiscal 2022 Fees | | Fiscal 2023 Fees |
Audit Fees | $ | 360,253 | | | $ | 374,816 | |
Audit-Related Fees | — | | | — | |
Tax Fees | — | | | — | |
All Other Fees | — | | | — | |
Audit Fees: This category consists of fees billed for professional services rendered for the audit of our consolidated annual financial statements, review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by our independent registered public accounting firm in connection with statutory and regulatory filings or engagements.
Audit-Related Fees: This category consists of assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under the heading “Proposal 3: Ratification“Audit Fees.”
Tax Fees: This category consists of Appointmentfees billed for professional services rendered for tax compliance, tax advice and tax planning.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm” inFirm
The Audit Committee pre-approves all audit and permissible non-audit services provided by our independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. The Audit Committee has adopted a policy for the Company’s 2021 Proxy Statement pre-approval of services provided by the independent registered public accounting firm. Under the policy, pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is incorporated herein by referencesubject to a specific budget. In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis. For each proposed service, the independent registered public accounting firm is required to provide detailed back-up documentation at the time of approval. The Audit Committee may delegate pre-approval authority to one or more of its members. Such a member must report any decisions to the Audit Committee at the next scheduled meeting.
PART IV
(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:
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Exhibit No. | | Title | | Title
| Method of Filing |
| | | | |
2.1 | | | | Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on December 18, 2018
|
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2.2
| | Asset Purchase Agreement, dated as of February 12, 2020, between the CompanyRegistrant and Circle Media Labs Inc. | | Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on February 19, 2020 |
2.2 | | | | | Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K/A filed on March 9, 2021 |
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3.1 | | Amended and Restated Certificate of Incorporation | | Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement No. 33-95096 (P) |
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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 |
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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 |
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3.1.3 | | | | Incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on April 27, 2012 |
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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 |
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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 |
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30
Exhibit No.
| | Title
| | Method of Filing
|
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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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 |
| | | | |
3.2 | | | | Incorporated by reference to Exhibit 3.23.1 to the Registrant's Registration Statement No. 33-95096 (P) |
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3.2.1
| | Certificate of Amendment of Amended and Restated Bylaws
| | Incorporated by reference to Exhibit 3.3 to the Registrant’s CurrentQuarterly Report on Form 8-K10-Q filed on October 31, 2007 August 12, 2022 |
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4.1 | | | | Incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K filed on March 13, 2020 |
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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) |
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4.3 | | | | Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on October 16, 2015 |
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4.4 | | | | Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on May 17, 2017
|
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4.5
| | 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
|
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4.6
| | Form of Warrant to Purchase Common Stock, 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 10.3 to the Registrant’s Current Report on Form 8-K filed on September 7, 2016
|
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4.7
| | Form of Registration Rights Agreement, dated September 6, 2016 entered into between the Registrant and each of the Investors party thereto
| | Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on September 7, 2016
|
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4.8
| | Registration Rights Agreement, dated as of September 29, 2017, between the Registrant and each of the Purchasers party thereto
| | Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on October 4, 2017
|
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4.9
| | Registration Rights Agreement, dated as of March 5, 2018, between the Registrant and each of the Purchasers party thereto
| | Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 6, 2018
|
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4.10
| | Form of Warrant to Purchase Common Stock, issued by the Registrant to each of the Purchasers party to the Securities Purchase Agreement dated March SPA (defined below)5, 2018 | | Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on March 6, 2018 |
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31
Exhibit No.
| | Title
| | Method of Filing
|
4.5 | | | | |
4.11
| | Registration Rights Agreement, dated as of May 3, 2018, between the Registrant and each of the Purchasers party thereto
| | Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 4, 2018
|
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4.12
| | Form of Warrant to Purchase Common Stock, issued by the Registrant to each of the Purchasers party to the Securities Purchase Agreement dated May SPA (defined below)3, 2018 | | Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on May 4, 2018 |
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4.13 4.6 | | | | Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 7, 2018
|
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4.14
| | Form of Warrant to Purchase Common Stock, issued by the Registrant to each of the Purchasers party to the Securities Purchase Agreement dated November SPA (defined below)7, 2018 | | Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on November 7, 2018 |
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4.7 | | | | | Incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K filed on April 19, 2021 |
| 10.1
| | | |
4.8 | | | | Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 11, 2022 |
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4.9 | | | | Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 11, 2022 |
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10.1 | | Form of Indemnification Agreement | | Incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement No. 33-95096 (P) |
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10.2* | | | | 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
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| | | | |
10.3
| | Summary of oral agreement dated June 2005 by and between William W. Smith, Jr., and the Registrant | | 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* | | | | 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*
| | 2015 Omnibus Equity Incentive Plan | | 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 |
| 10.6.1*
| | | |
| | | | | | | | | | | | | | |
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 |
| | | | |
10.3.3* | | | | Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 |
| | | | |
10.3.4* | | | | Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 |
| | | | |
10.3.5* | | | | Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 12, 2021 |
| | | | |
10.3.6* | | | | Incorporated by reference to Exhibit 10.6.1 to the Registrant’s Annual Report on Form 10-K filed on March 30, 2018 |
| | | | |
10.6.2* 10.7* | | | | Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on June 15, 2018
|
| | | | |
10.6.3*
| | Amendment to Smith Micro Software, Inc. 2015 Omnibus Equity Incentive Plan, adopted June 9, 2020
| | Filed herewith
|
| | | | |
10.7
| | Note and Warrant Purchase Agreement, dated September 2, 2016, by and amongOffer letter between the Company and each of the Investors party theretoJames M. Kempton
| | Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 7, 2016
|
| | | | |
32
Exhibit No.
| | Title
| | Method of Filing
|
| | | | |
10.8
| | 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
|
| | | | |
10.9
| | 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
|
| | | | |
10.10
| | Form of Subscription Agreement, dated May 16, 2017, between the Registrant 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 May 17, 2017
|
| | | | |
10.11*
| | 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
|
| | | | |
10.12
| | 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
|
| | | | |
10.12.1
| | 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
|
| | | | |
10.12.2
| | Second Amendment to Secured Promissory Note, dated March 5, 2018, between the Registrant and William W. Smith, Jr. and Dieva L. Smith
| | Incorporated by reference to Exhibit 10.20.2 to the Registrant’s Annual Report on Form 10-K filed on March 30, 2018
|
| | | | |
10.13
| | Secured Promissory Note dated June 23, 2017, issued by the Registrant to Steven 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
|
| | | | |
10.13.1
| | Amendment to Secured Promissory Note, dated August 18, 2017, between the Registrant and Steven 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
|
| | | | |
10.13.2
| | Second Amendment to Secured Promissory Note, dated January 30, 2018, between the Registrant and Steven L. and Monique P. Elfman
| | Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 31, 2018
|
| | | | |
10.14
| | 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
|
| | | | |
10.14.1
| | 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
|
| | | | |
10.14.2
| | Second Amendment to Secured Promissory Note, dated March 5, 2018, between the Registrant and Next Generation TC FBO Andrew Arno IRA 1663
| | Incorporated by reference to Exhibit 10.24.2 to the Registrant’s Annual Report on Form 10-K filed on March 30, 2018
|
| | | | |
10.15
| | 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
|
| | | | |
33
Exhibit No.
| | Title
| | Method of Filing
|
| | | | |
10.15.1
| | 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
|
| | | | |
10.15.2
| | Second Amendment to Secured Promissory Note, dated March 5, 2018, between the Registrant and Andrew Arno
| | Incorporated by reference to Exhibit 10.25.2 to the Registrant’s Annual Report on Form 10-K filed on March 30, 2018
|
| | | | |
10.16
| | 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 |
| | | | |
10.17 10.12 | | | | Incorporated by reference to Exhibit 10.1 to the Registrant’sCompany’s Current Report on Form 8-K filed on March 6, 2018 August 11, 2022 |
| | | | |
10.18 10.13 | | | | Incorporated by reference to Exhibit 10.110.2 to the Registrant’sCompany’s Current Report on Form 8-K filed on May 4, 2018 August 11, 2022 |
| | | | |
10.19 10.14 | | | | Incorporated by reference to Exhibit 10.110.3 to the Registrant’sCompany’s Current Report on Form 8-K filed on November 7, 2018 August 11, 2022 |
| | | | |
10.15 | | | | | Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on August 11, 2022 |
| 21.1
| | | |
10.16 | | | |
SubsidiariesIncorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on August 11, 2022 | | Filed herewith
|
| | | | |
21.1 | | | | | Filed herewith |
| | | | |
23.1 | | | | Filed herewith |
| | | | |
31.1 | | | | Filed herewith |
| | | | |
31.2 | | | | Filed herewith |
| | | | |
32.1 | | | | Furnished herewith |
| | | | |
97.1 | | | | Filed herewith |
| | | | |
101.INS | | Inline 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 |
| | | | |
| | | | | | | | | | | | | | |
Exhibit No. | | Title | | | Method of Filing |
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 |
| | | | |
34
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | | Filed herewith |
| | | | |
*denotes the management contracts and compensatory arrangements in which any director or named executive officer participates
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
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 8, 2021 February 26, 2024 | | By: /s/ William W. Smith, Jr. |
| | William W. Smith, Jr. |
| | Chairman of the Board, |
| | President and Chief Executive Officer |
| | (Principal Executive Officer) |
| |
Date: February 26, 2024 | | By: /s/ James M. Kempton |
| Date: March 8, 2021
| By: /s/ Timothy C. Huffmyer James M. Kempton |
| | Timothy C. Huffmyer
|
| | 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 | | Title
| Date |
| | | | |
/s/ William W. Smith, Jr. | | Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
| | March 8, 2021 February 26, 2024 |
William W. Smith, Jr. | | |
| | | | |
/s/ Timothy C. Huffmyer James M. Kempton | | Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
| | March 8, 2021 February 26, 2024 |
Timothy C. Huffmyer James M. Kempton | | |
| | | | |
/s/ Andrew Arno | | Director | | Director
| March 8, 2021 February 26, 2024 |
Andrew Arno | | |
| | | | |
/s/ Thomas G. Campbell | | Director | | Director
| March 8, 2021 February 26, 2024 |
Thomas G. Campbell | | | | |
| | | | |
/s/ Steven L. Elfman | | Director | | Director
| March 8, 2021 February 26, 2024 |
Steven L. Elfman | | | | |
| | | | |
/s/ Samuel Gulko | | Director | | Director
| March 8, 2021 February 26, 2024 |
Samuel Gulko | | | | |
| | | | |
/s/ Gregory J. Szabo | | Director | | Director
| March 8, 2021 February 26, 2024 |
Gregory J. Szabo | | |
| | | | |
/s/ Asha Keddy | | Director | | February 26, 2024 |
Asha Keddy | | |
| | | | |
/s/ Chetan Sharma | | Director | | February 26, 2024 |
Chetan Sharma | | |
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors
of Smith Micro Software, Inc. and its subsidiaries
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,
20202023 and
2019,2022, the related consolidated statements of operations, stockholders’ equity and cash flows, for
each of the years then ended 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,
20202023 and
2019,2022, and the results of its operations and its cash flows for
each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We
Going Concern
The accompanying financial statements have
also audited,been prepared assuming that the Company will continue as a going concern. As discussed in
accordance withNote 2 to the
standardsfinancial statements, the Company has suffered recurring losses from operations and has projected future cash flow requirements to meet continuing operations in excess of
the Public Company Accounting Oversight Board (United States) (“PCAOB”),current available cash. This raises substantial doubt about the Company’s
internal control overability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial
reporting asstatements do not include any adjustments that might result from the outcome of
December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organization on the Treadway Commission in 2013, and our report dated March 13, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.this uncertainty.
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
PCAOBPublic Company Accounting Oversight Board (United States) (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
auditsaudit 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’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.
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.
F-1
Revenue
recognitionRecognition – Refer to
Notes 2Note 1 and
7 toNote 12 of the financial statements
Critical Audit Matter Description
As described in Notes 2 and 7 to the financial statements, the
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,
for the Company’s customers controls, 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 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 stand-alone selling prices for each distinct performance obligation and for products and services that are not 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.• | Determination of the timing of when revenue is recognized for each distinct performance obligation either over time or at a point in time.
|
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
erroreffort when performing audit procedures to evaluate whether revenue was
recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.appropriately recognized.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the Company’s revenue recognition
for the Company’s customer contracts included the following, among others:
| •We selected a sample of recorded revenue transactions and performed the following procedures:• | We selected a sample of recorded revenue transactions and performed the following procedures:
|
| o•Obtained an understanding of management’s processes and controls related to revenue recognition.
| Obtained customer source documents and the contract for each selection, including master agreements and related amendments to evaluate if relevant contractual terms have been appropriately considered by management.
|
| o•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 their accounting policy and tested revenue recognition for specific performance obligations by comparing management’s conclusions to the underlying master agreement and any related amendments.
|
| o•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.
|
| •Tested the mathematical accuracy of management’s calculations of revenue and associated timing of revenue recognized in the financial statements.• | We evaluated management’s significant accounting policies related to revenue recognition for reasonableness. We evaluated management’s estimate of standalone selling prices and the timing of revenue recognition.
|
F-2
Business combination
Goodwill and Definite-Lived Intangible Assets Impairment Analysis – Refer to Note
3 to1 and Note 4 of the financial statements
Critical Audit Matter Description
As discussedof December 31, 2023, the Company’s goodwill and definite-lived intangible assets, net of accumulated amortization, were $35.0 million and $29.5 million, respectively. The Company has a single reporting unit and performs an impairment test of goodwill at least annually during its fourth quarter or whenever events or circumstances indicate the carrying amount may not be recoverable. The Company periodically reviews its definite-lived intangible assets for impairment whenever events or circumstances occur indicating the carrying value of such assets may exceed their fair value. Due to a triggering event in Note 3 to the financial statements,February 2023, the Company completed an acquisition forperformed a quantitative impairment assessment of goodwill and definite-lived intangible assets as a business combination during fiscal 2020: Circle Media Labs Inc. (Circle) for consideration of $13.5 million.Auditing the Company’s accounting for its acquisition of Circle was complex due to the significant estimation required in determiningFebruary 28, 2023 by estimating the fair value of intangible assets, which were valuedthe reporting unit and recorded at $11.3 million.the related asset group, respectively. The Company useddetermined the respective fair values by utilizing a combination of a discounted cash flow model to measureanalysis and market-based valuation methodologies that included significant assumptions such as discount rate, forecasted revenue, gross margin and operating expense projections, and comparable entity industry data. Based on the quantitative assessment performed, the Company concluded that goodwill and definite-lived intangible assets.assets were not impaired as of February 28, 2023. The significant estimation was primarily due to the judgmental natureCompany further performed its annual goodwill impairment test as of December 31, 2023 using a qualitative assessment.
Management considered factors such as macroeconomic conditions, industry and market trends, and performed a sensitivity analysis of the inputs toprior quantitative analysis conducted during the valuation modelfirst quarter of 2023. The Company concluded that goodwill and definite-lived intangible assets were not impaired as of December 31, 2023.
We identified the
sensitivityestimation of the fair
value tovalues of goodwill and definite-lived intangible assets as a critical audit matter because of certain
underlying significant assumptions
in particular,used by management. Auditing management’s assumptions involved a high degree of auditor judgment and increased audit efforts, which included the
projectionsuse of
future revenue.This significant assumption is forward-lookinga valuation professional with specialized skills and could be affected by future economic and market conditions.
knowledge.
How the Critical Audit Matter was Addressed in the Audit
Our
Auditaudit procedures related to the Company’s
estimated fair value of thegoodwill and definite-lived intangible assets
impairment analysis included the following, among others:
| •Obtained an understanding of management's process and controls related to the Company's impairment analysis and determination of the fair value estimates.• | Involvement of our valuation specialists to assist us in the evaluation of the valuation methodology used by the Company and procedures to test the assumptions used in the valuation, including the completeness and accuracy of the underlying data.
|
| •Evaluated the reasonableness of management's significant assumptions and underlying data used in the valuation models such as forecasted revenues, gross margin and operating expense projections by comparing management's forecasts to current and historical results.• | We performed a sensitivity analysis of the discount rate and revenue projections to evaluate the change in fair value resulting from changes in the assumptions.
|
| •Performed a sensitivity analysis on the quantitative amounts utilized by management to assess impairment to evaluate the potential impact on the qualitative impairment assessment performed at year end.• | We also compared the revenue forecast assumptions, including the impact of technology migration curves, to current industry, market and economic trends, to the assumptions used to value similar assets in other acquisitions, to historical results of the acquired business and to other guideline companies within the same industry.
|
•Evaluated management's significant accounting policies related to impairment of goodwill and definite-lived intangible assets for reasonableness, including the determination of a single reporting unit and asset groups.
•Utilized a valuation professional with specialized skills and knowledge to assist in:
▪Evaluating the appropriateness of the selection and application of the income and market-based valuation methods;
▪Testing the mathematical accuracy of the significant calculations in the valuation methods;
▪Determining the reasonableness of the selection of significant assumptions such as discount rates, long-term growth rate range, and multiples using publicly available market data for comparable entities.
We have served as the Company’s auditor since
2004.2005.
Los Angeles, California
March 8, 2021
February 26, 2024
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value data)
| | December 31, | |
| | 2020 | | | 2019 | |
| December 31, | | | December 31, |
| 2023 | | | 2023 | | 2022 |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Current assets: | |
Current assets: | |
Cash and cash equivalents | | $ | 25,754 | | | $ | 28,268 | |
Accounts receivable, net of allowance for doubtful accounts of $10 and $253 at December 31, 2020 and 2019, respectively | | | 12,347 | | | | 10,894 | |
Cash and cash equivalents | |
Cash and cash equivalents | |
Accounts receivable, net of related allowances of $3 and $3 at December 31, 2023 and 2022, respectively | |
Prepaid expenses and other current assets | | | 1,189 | | | | 802 | |
Total current assets | | | 39,290 | | | | 39,964 | |
Equipment and improvements, net | | | 2,170 | | | | 2,109 | |
Right-of-use assets | | | 5,785 | | | | 6,464 | |
Deferred tax asset, net | | | — | | | | 94 | |
Other assets | | | 694 | | | | 234 | |
Intangible assets, net | | | 12,698 | | | | 4,535 | |
Goodwill | | | 12,266 | | | | 7,797 | |
Total assets | | $ | 72,903 | | | $ | 61,197 | |
Liabilities and Stockholders' Equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Current liabilities: | |
Current liabilities: | |
Accounts payable | |
Accounts payable | |
Accounts payable | | $ | 2,282 | | | $ | 2,050 | |
Accrued payroll and benefits | | | 2,867 | | | | 2,107 | |
Current operating lease liabilities | | | 1,433 | | | | 1,221 | |
Other accrued liabilities | | | 216 | | | | 244 | |
Deferred revenue | | | 1,572 | | | | 98 | |
Other current liabilities | |
Current portion of convertible notes payable | |
Derivative liabilities | |
Total current liabilities | | | 8,370 | | | | 5,720 | |
Non-current liabilities: | | | | | | | | |
| Warrant liabilities | |
| Warrant liabilities | |
| Warrant liabilities | |
Operating lease liabilities | | | 4,805 | | | | 5,774 | |
Deferred rent | | | 887 | | | | 885 | |
Deferred tax liability, net | | | 59 | | | | — | |
Other long term liabilities | | | 66 | | | | 134 | |
| Deferred tax liabilities, net | |
Deferred tax liabilities, net | |
Deferred tax liabilities, net | |
Total non-current liabilities | | | 5,817 | | | | 6,793 | |
Commitments and contingencies (Note 12) | | | | | | | | |
Commitments and contingencies | | Commitments and contingencies | | | |
Stockholders' equity: | | | | | | | | |
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 41,232,804 and 38,475,084 shares issued and outstanding at December 31, 2020 and 2019, respectively | | | 41 | | | | 38 | |
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 74,783,834 and 56,197,910 shares issued and outstanding at December 31, 2023 and 2022, respectively | |
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 74,783,834 and 56,197,910 shares issued and outstanding at December 31, 2023 and 2022, respectively | |
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 74,783,834 and 56,197,910 shares issued and outstanding at December 31, 2023 and 2022, respectively | |
Additional paid-in capital | | | 279,905 | | | | 274,041 | |
Accumulated comprehensive deficit | | | (221,230 | ) | | | (225,395 | ) |
Total stockholders’ equity | | | 58,716 | | | | 48,684 | |
Total liabilities and stockholders' equity | | $ | 72,903 | | | $ | 61,197 | |
See accompanying notes to the consolidated financial statements.
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| | Year Ended December 31, | |
| | 2020 | | | 2019 | |
Revenues | | $ | 51,300 | | | $ | 43,346 | |
Cost of revenues | | | 5,190 | | | | 3,927 | |
Gross profit | | | 46,110 | | | | 39,419 | |
Operating expenses: | | | | | | | | |
Selling and marketing | | | 10,698 | | | | 7,517 | |
Research and development | | | 19,071 | | | | 11,682 | |
General and administrative | | | 12,801 | | | | 9,921 | |
Restructuring expenses | | | 19 | | | | 194 | |
Total operating expenses | | | 42,589 | | | | 29,314 | |
Operating income | | | 3,521 | | | | 10,105 | |
Non-operating income (expense): | | | | | | | | |
Gain on sale of software products | | | 711 | | | | 483 | |
Interest income, net | | | 96 | | | | 228 | |
Other expense, net | | | (3 | ) | | | (14 | ) |
Income before provision for income taxes | | | 4,325 | | | | 10,802 | |
Provision for income tax expense | | | 160 | | | | 80 | |
Net income | | $ | 4,165 | | | $ | 10,722 | |
| | | | | | | | |
Net earnings per share: | | | | | | | | |
Basic | | $ | 0.10 | | | $ | 0.31 | |
Diluted | | $ | 0.10 | | | $ | 0.29 | |
Weighted average shares outstanding: | | | | | | | | |
Basic | | | 40,808 | | | | 34,513 | |
Diluted | | | 42,764 | | | | 36,991 | |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
Revenues | $ | 40,862 | | | $ | 48,513 | |
Cost of revenues (including depreciation of $50 and $105 in the years ended December 31, 2023 and 2022, respectively) | 10,559 | | | 14,210 | |
Gross profit | 30,303 | | | 34,303 | |
Operating expenses: | | | |
Selling and marketing | 11,089 | | | 12,883 | |
Research and development | 17,145 | | | 29,388 | |
General and administrative | 12,779 | | | 15,507 | |
Depreciation and amortization | 7,345 | | | 7,452 | |
Total operating expenses | 48,358 | | | 65,230 | |
Operating loss | (18,055) | | | (30,927) | |
Other income (expense): | | | |
Change in fair value of warrant and derivative liabilities | 4,214 | | | 4,669 | |
Loss on derecognition of debt | (3,991) | | | — | |
Interest expense, net | (6,354) | | | (2,680) | |
Other expense, net | (52) | | | (115) | |
Loss before provision for income taxes | (24,238) | | | (29,053) | |
Provision for income tax expense | 158 | | | 226 | |
Net loss | $ | (24,396) | | | $ | (29,279) | |
| | | |
Loss per share: | | | |
Basic and diluted | $ | (0.38) | | | $ | (0.53) | |
| | | |
Weighted average shares outstanding: | | | |
Basic and diluted | 64,916 | | | 55,422 | |
See accompanying notes to the consolidated financial statements.
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | Additional | | | Accumulated | | | | | |
| | Preferred stock | | | Common stock | | | paid-in | | | comprehensive | | | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | capital | | | deficit | | | Total | |
BALANCE, December 31, 2018 | | | 1 | | | $ | — | | | | 28,242 | | | $ | 28 | | | $ | 256,626 | | | $ | (236,091 | ) | | $ | 20,563 | |
Non-cash compensation recognized on stock options and ESPP | | | — | | | | — | | | | — | | | | — | | | | 43 | | | | — | | | | 43 | |
Restricted stock grants, net of cancellations | | | — | | | | — | | | | 1,225 | | | | 1 | | | | 1,450 | | | | — | | | | 1,451 | |
Cancellation of shares for payment of withholding tax | | | — | | | | — | | | | (214 | ) | | | — | | | | (701 | ) | | | — | | | | (701 | ) |
Employee stock purchase plan | | | — | | | | — | | | | 4 | | | | — | | | | 10 | | | | — | | | | 10 | |
Preferred shares converted to common shares | | | (1 | ) | | | — | | | | 1,180 | | | | 1 | | | | (1 | ) | | | — | | | | — | |
Common shares issued in stock offering, net of offering costs | | | — | | | | — | | | | — | | | | — | | | | (14 | ) | | | — | | | | (14 | ) |
Common shares issued in connection with Smart Retail acquisition, net | | | — | | | | — | | | | 2,699 | | | | 3 | | | | 5,126 | | | | — | | | | 5,129 | |
Exercise of common stock warrants | | | — | | | | — | | | | 5,327 | | | | 5 | | | | 11,452 | | | | — | | | | 11,457 | |
Exercise of stock options | | | — | | | | — | | | | 13 | | | | — | | | | 50 | | | | — | | | | 50 | |
Preferred stock dividends | | | — | | | | — | | | | — | | | | — | | | | — | | | | (119 | ) | | | (119 | ) |
Cumulative effect of adoption of ASC 842 | | | — | | | | — | | | | — | | | | — | | | | — | | | | 93 | | | | 93 | |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 10,722 | | | | 10,722 | |
BALANCE, December 31, 2019 | | | — | | | $ | — | | | | 38,476 | | | $ | 38 | | | $ | 274,041 | | | $ | (225,395 | ) | | $ | 48,684 | |
Non-cash compensation recognized on stock options and ESPP | | | — | | | | — | | | | — | | | | — | | | | 65 | | | | — | | | | 65 | |
Restricted stock grants, net of cancellations | | | — | | | | — | | | | 1,000 | | | | 1 | | | | 2,998 | | | | — | | | | 2,999 | |
Cancellation of shares for payment of withholding tax | | | — | | | | — | | | | (309 | ) | | | — | | | | (1,440 | ) | | | — | | | | (1,440 | ) |
Employee stock purchase plan | | | — | | | | — | | | | 6 | | | | — | | | | 19 | | | | — | | | | 19 | |
Exercise of common stock warrants | | | — | | | | — | | | | 2,047 | | | | 2 | | | | 4,194 | | | | — | | | | 4,196 | |
Exercise of stock options | | | — | | | | — | | | | 13 | | | | — | | | | 28 | | | | — | | | | 28 | |
Net income | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,165 | | | | 4,165 | |
BALANCE, December 31, 2020 | | | — | | | $ | — | | | | 41,233 | | | $ | 41 | | | $ | 279,905 | | | $ | (221,230 | ) | | $ | 58,716 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Comprehensive Deficit | | Total |
| Shares | | Amount | | | |
BALANCE, December 31, 2021 | 54,259 | | | $ | 54 | | | $ | 352,779 | | | $ | (252,273) | | | $ | 100,560 | |
Non-cash compensation recognized on stock options and employee stock purchase plan ("ESPP") | — | | | — | | | 86 | | | — | | | 86 | |
Restricted stock grants, net of cancellations | 1,187 | | | 1 | | | 4,861 | | | — | | | 4,862 | |
Cancellation of shares for payment of withholding tax | (406) | | | — | | | (1,218) | | | — | | | (1,218) | |
ESPP shares issued | 17 | | | — | | | 40 | | | — | | | 40 | |
Exercise of stock options | 9 | | | — | | | 19 | | | — | | | 19 | |
Common shares issued in stock offering, net of offering costs | 1,132 | | | 1 | | | 1,308 | | | — | | | 1,309 | |
Net loss | — | | | — | | | — | | | (29,279) | | | (29,279) | |
BALANCE, December 31, 2022 | 56,198 | | | 56 | | | 357,875 | | | (281,552) | | | 76,379 | |
Non-cash compensation recognized on stock options and ESPP | — | | | — | | | 30 | | | — | | | 30 | |
Restricted stock grants, net of cancellations | 1,819 | | | 2 | | | 4,804 | | | — | | | 4,806 | |
ESPP shares issued | 15 | | | — | | | 15 | | | — | | | 15 | |
Cancellation of shares for payment of withholding tax | (374) | | | — | | | (496) | | | — | | | (496) | |
Common shares issued in settlement and prepayment of notes payable | 17,126 | | | 17 | | | 19,035 | | | — | | | 19,052 | |
Net loss | — | | | — | | | — | | | (24,396) | | | (24,396) | |
BALANCE, December 31, 2023 | 74,784 | | | 75 | | | 381,263 | | | (305,948) | | | 75,390 | |
| | | | | | | | | |
See accompanying notes to the consolidated financial statements.
SMITH MICRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | Year Ended December 31, | |
| | 2020 | | | 2019 | |
Operating activities: | | | | | | | | |
Net income | | $ | 4,165 | | | $ | 10,722 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 3,582 | | | | 1,341 | |
Non-cash rent expense | | | 1,110 | | | | 954 | |
Restructuring costs | | | 19 | | | | 194 | |
Gain on sale of software products | | | (711 | ) | | | (483 | ) |
Provision for adjustments to accounts receivable and doubtful accounts | | | (60 | ) | | | 143 | |
Provision for excess and obsolete inventory | | | — | | | | 1 | |
Loss on disposal of fixed assets | | | — | | | | 6 | |
Non-cash compensation related to stock options and restricted stock | | | 3,064 | | | | 1,494 | |
Deferred income taxes | | | 153 | | | | 97 | |
Change in operating accounts: | | | | | | | | |
Accounts receivable | | | (1,269 | ) | | | (3,811 | ) |
Prepaid expenses and other assets | | | (388 | ) | | | (32 | ) |
Accounts payable and accrued liabilities | | | (1,925 | ) | | | (417 | ) |
Deferred revenue | | | 184 | | | | (221 | ) |
Net cash provided by operating activities | | | 7,924 | | | | 9,988 | |
Investing activities: | | | | | | | | |
Acquisitions, net | | | (13,500 | ) | | | (3,974 | ) |
Proceeds from sale of software products | | | 367 | | | | 370 | |
Capital expenditures | | | (1,323 | ) | | | (1,659 | ) |
Purchase of equity instrument | | | (225 | ) | | | — | |
Net cash used in investing activities | | | (14,681 | ) | | | (5,263 | ) |
Financing activities: | | | | | | | | |
Proceeds from exercise of common stock warrants | | | 4,196 | | | | 11,457 | |
Payments related to the issuance of common stock | | | — | | | | (14 | ) |
Proceeds from exercise of stock options | | | 29 | | | | 50 | |
Proceeds from stock sale for employee stock purchase plan | | | 18 | | | | 10 | |
Preferred stock dividends | | | — | | | | (119 | ) |
Net cash provided by financing activities | | | 4,243 | | | | 11,384 | |
Net increase (decrease) in cash and cash equivalents | | | (2,514 | ) | | | 16,109 | |
Cash and cash equivalents, beginning of year | | | 28,268 | | | | 12,159 | |
Cash and cash equivalents, end of year | | $ | 25,754 | | | $ | 28,268 | |
| | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | |
Cash paid (received) for income taxes | | $ | (173 | ) | | $ | 104 | |
| | | | | | | | |
Non-cash investing and financing activities: | | | | | | | | |
Issuance of common stock in connection with acquisition | | $ | — | | | $ | 5,129 | |
Conversion of preferred stock to common stock | | $ | — | | | $ | 1 | |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
Operating activities: | | | |
Net loss | $ | (24,396) | | | $ | (29,279) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation and amortization | 7,395 | | | 7,556 | |
Non-cash lease expense | (191) | | | (306) | |
Non-cash transaction costs including amortization of debt discount and issuance costs | 5,993 | | | 3,324 | |
Change in fair value of warrant and derivative liabilities | (4,214) | | | (4,669) | |
Loss on derecognition of debt | 3,991 | | | — | |
Stock based compensation | 4,835 | | | 4,948 | |
Deferred income taxes | (10) | | | 61 | |
Loss on disposal of assets | 12 | | | 4 | |
Changes in operating accounts: | | | |
Accounts receivable | 2,589 | | | 85 | |
Prepaid expenses and other assets | 12 | | | (25) | |
Accounts payable and accrued liabilities | (2,825) | | | (1,120) | |
Other liabilities | (164) | | | 160 | |
Net cash used in operating activities | (6,973) | | | (19,261) | |
Investing activities: | | | |
Capital expenditures, net | (4) | | | (49) | |
Other investing activities | 136 | | | 164 | |
Net cash provided by investing activities | 132 | | | 115 | |
Financing activities: | | | |
Proceeds from notes and warrants offering | — | | | 15,000 | |
Proceeds from stock and warrants offering | — | | | 3,000 | |
Stock, notes, and warrants offering costs | — | | | (1,227) | |
Proceeds from financing arrangements | 981 | | | 1,541 | |
Repayments of financing arrangements | (1,036) | | | (1,278) | |
Other financing activities | (5) | | | 58 | |
Net cash (used in) provided by financing activities | (60) | | | 17,094 | |
Net decrease in cash and cash equivalents | (6,901) | | | (2,052) | |
Cash and cash equivalents, beginning of period | 14,026 | | | 16,078 | |
Cash and cash equivalents, end of period | $ | 7,125 | | | $ | 14,026 | |
| | | |
Supplemental disclosures of cash flow information: | | | |
Cash paid for income taxes | 187 | | | 253 | |
| | | |
Non-cash investing and financing activities: | | | |
Issuance of common stock in settlement and prepayment of notes payable | $ | 15,000 | | | $ | — | |
Derivative and warrants in connection with notes and stock offerings | $ | — | | | $ | 9,561 | |
See accompanying notes to the consolidated financial statements.
SMITH MICRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Basis of Presentation and Summary of Significant Accounting Policies
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 around the world. From enabling the family digital lifestyle to providing powerful voice messaging capabilities,
we strivethe Company strives to enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones and consumer
IoTInternet of Things (“IoT”) devices.
OurSmith Micro’s portfolio includes
family safety software solutions to support families in the digital age and a wide range of products for creating, sharing, and monetizing rich content, such as visual voice messaging, retail content display optimization and performance
analytics on any product set.Ouranalytics.
Smith Micro’s solution portfolio is comprised of proven products that enable ourits customers to provide:
| • | In-demand digital services that connect today’s digital lifestyle, including family location services, parental controls, and consumer IoT devices to mobile consumers worldwide; |
| •
| Easy visual access to voice messages on mobile devices through visual voicemail and voice-to-text transcription functionality; and
|
| •
| Strategic, consistent and measurable digital demo experiences that educate retail shoppers, create awareness of products and services and drive in-store sales, and optimize retail experiences with actionable analytics derived from in-store customer behavior.
|
We continue to innovate and evolve our business case in response to industry trends in order to capitalize upon growth and maximize opportunities in emerging markets, such as digital lifestyle, including family location services, parental controls, and consumer IoT devices to mobile consumers worldwide;
•Easy visual access to voice messages on mobile devices through visual voicemail and voice-to-text transcription functionality; and
•Strategic, consistent, and measurable digital demonstration experiences that educate retail shoppers, create awareness of products and services, and online family safety, “Big Data”drive in-store sales, and optimize retail experiences with actionable analytics automotive telematics, and the consumer IoT marketplace. The key to our longevity, however, is not simply technological innovation, but our customer-first approach to doing business. never-ending focus on understanding our customers’ needs and delivering value.derived from in-store customer behavior.
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
During 2023 and
prior year acquisitions. The countries in which2022, the Company
hashad a subsidiary or branch office
arein Serbia, Sweden,
Portugal, Czech Republic, and
Portugal.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
and Exit or Restructuring Costs
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
F-8
to accurately 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.
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.
F-9
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.
Significant Concentrations
For the year ended December 31, 2020, 1 customer, accounting for over 10% of revenues, made up 81% of revenues and 91% of accounts receivable, and 1 service provider with more than 10% of purchases totaled 10% of accounts payable. For the year ended December 31, 2019, 1 customer, accounting for over 10% of revenues, made up 84% of revenues and 92% of accounts receivable, and 1 service provider with more than 10% of purchases totaled 10% 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 1 financial institutionThe 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, 2020 and 2019, bank balances totaling approximately $25.5 million and $28.0 million, respectively, were uninsured.these instruments.
Accounts Receivable and Allowance for
Doubtful AccountsWe sell ourCredit Losses
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
F-10
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, 2020,2023, software has been substantially completed concurrently with the establishment of technological feasibility; accordingly, 0no 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 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.
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.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. TheIf 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.
In February 2023, as a result of a triggering event indicating a potential impairment, the Company performed an interim quantitative analysis of goodwill, which did not result in any impairment of goodwill. Subsequently, the Company’s annual impairment testing date is December 31. Recoverabilitytest in the fourth quarter of goodwill is determined by comparing2023 included the assessment of qualitative 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, and a sensitivity analysis of the underlying net assets inprior quantitative analysis by updating assumptions to reflect changes subsequent to that analysis. In consideration of the reporting units. Iftotality of the fair valuequalitative factors assessed, based on the weight of a reporting unit isthe evidence, the Company 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 ofcircumstances did not indicate that it was more likely than not that goodwill exceedswas impaired. There was no goodwill impairment recognized during the difference between the fair value of the reporting unit and the fair value of its other assets and liabilities.Intangible Assets and Amortization
years ended
December 31, 2023 or 2022. 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 onethe pattern of economic benefit expected to
ten years.be generated from the use of that asset and reassessed as determined necessary. Intangible assets are tested for impairment if events or circumstances occur indicating that the respective asset might be impaired.
Revenue Recognition
In the first quarter of 2023, as a result of the triggering event indicated above, the Company performed an interim quantitative analysis of certain customer relationship intangibles assets in which did not result in any impairment. Further, in the fourth quarter of 2023 certain other customer relationship intangible assets were assessed for impairment, and that did not result in any impairment.
Derivatives and Warrants
The Company adoptedanalyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic No. 480, Distinguishing Liabilities from Equity, and FASB ASC Topic No. 815, Derivatives and Hedginig. 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.
Going Concern
In connection with preparing its consolidated financial statements, management evaluated whether there are conditions 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.
Revenue Recognition
In accordance with FASB ASC Topic No. 606, Revenue from Contracts with Customers as of January 1, 2018, and, 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 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.In our Wireless segment, we
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 the contract. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. 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 transaction price to the performance 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
ourits customers on a royalty free, non-exclusive,
non-transferrable,non-transferable, limited use basis during the term of the agreement. In some instances,
we perform customizationthe Company performs integration services to ensure the software operates within
ourits 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
license by the customer.
WeThe Company also
earn usage basedearns usage-based revenue on
ourits 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 cloud-based services to be a single performance obligation. Usage based revenue is generated based on
active licenses used by
ourSmith Micro’s customer’s
end customers,active subscribers’ access and usage of Smith Micro’s software licenses and cloud-based services on Smith Micro’s platforms, the provision of hosting services,
and revenue share based on media placements on
our platform, and use of our cloud based services. We recognize our usage basedSmith Micro’s platform. Smith Micro recognizes usage-based revenue when
we havethe Company has completed
ourits performance obligation and
havehas the right to invoice the customer. This revenue is generally recognized monthly or quarterly. Finally,
in this segment, wethe Company ratably
recognizerecognizes usage-based revenue over the contract period when customers pay in advance of
our service delivery.
On February 12, 2020, we acquired certain assets from Circle (as further described in Note 2 below), including a source code license to Circle’s parental control software solution and 2 customer contracts. Pursuant to these contracts, the customer parties thereto license the parental control software solution for distribution to their respective subscribers in designated markets. In each case, the contracts allow the customer to take possession of the software solution and to host it on their platform or with an independent third party hosting service provider without significant cost. We
Smith Micro also
provide significant services that are required by the customer to ensure they have the utility of the license. As the license to the software solution and the services we provide are highly interrelated, we have concluded that the license and our services are a single performance obligation. The license fee is earned and recognized on a pro-rata basis over the contract term based on our customer’s continued use of the license and our services.F-11
We also provideprovides consulting services to develop customer-specified functionality that are generally not on ourits software development roadmap. We recognizeThe Company recognizes revenue from ourits consulting services upon delivery and acceptance by the customer of ourits software enhancements and upgrades. For certain Wireless segment customers we providethe Company provides maintenance and technology support services for which the customer either pays upfront or as we providethe Company provides the services. When the customer pays upfront, we record the payments are recorded as contract liabilities and recognize revenue is recognized ratably over the contract period as this is ourthe Company’s stand ready performance obligation that is satisfied ratably over the maintenance and technology services period.
We receive
The Company receives upfront payments from customers from services to be provided under
our ViewSpot®its ViewSpot contracts. The advance receipts are deferred and subsequently recognized ratably over the contract period.
WeSmith Micro also
provideprovides consulting services to configure
new devices or ad hoc targeted promotional content for
ourits customers upon request. These requests are driven by
our customers’ marketing initiatives and tend to be short term “bursts” of activity.
We recognize theseThese revenues
are recognized upon delivery of the configured promotional content to the cloud
platform.For our Graphics products where we sell off-the-shelf software products with no customizationplatform or post sale technology support services, we recognize revenue at the time we transfer controlupon certification of the productnew device.
Smith Micro has made accounting policy elections to
exclude all taxes by governmental authorities from the
customer. This occurs upon shipmentmeasurement of the
product or whentransaction price, and since the
customer downloadsCompany’s standard payment terms are less than one year, the
software from our website or website of our resellers. We offerCompany has elected the practical expedient not to assess whether a
30 day return option to our customers;contract has a
return reserve is established at the time revenue is recorded and the reserve is monitored and adjusted based on actual experience. Historically, returns have been insignificant.Product and Services Warranties
Warranty related costs are recorded in our operating expenses as incurred as these costs are immaterial for the products and services we sell.
significant financing component.
Principal and Agent Considerations
We own
Smith Micro owns the Intellectual Property and
retainretains ownership when
we license ourthe Company licenses its customized software solutions for use by
our Wireless segmentits customers.
We areThe Company is a principal in these transactions and as such
we recognize our Wireless segment revenue
is recognized with respect thereto on a gross basis.
We sell our Graphics software products directly to end consumers as well as through our distributors and re-sellers. We are a principal in these transactions as we bear the inventory risk, customers (or customer’s end users) view us as the primary obligor responsible for supporting the software products, and we have full discretion in establishing the prices for our graphics software products. As a principal we record our Graphics revenues on a gross basis.
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 February 2016, the FASB issued ASU No. 2016-02,
Income Taxes
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 Company adopted the FASB ASC Topic No. 842, Leases, and related amendments, as of January 1, 2019, utilizing the modified retrospective approach through a cumulative-effect adjustment to equity. Management elected the package of practical expedients permitted under the transition guidance within the new standard which allowed for the carry forward of the historical lease classification. Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $3.1 million as of January 1, 2019, and an adjustment to retained earnings of $0.1 million. The standard did not materially impact the consolidated net income or earnings per share and had no impact on cash flows. See Note 12 for further details.F-12
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 new accounting standard that requires management’s measurement of the allowance for credit losses to be based on a broader range of reasonable and supportable information for lifetime credit loss estimates. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
Impact of COVID-19
In March 2020, the World Health Organization categorized coronavirus disease 2019 (COVID-19) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. COVID-19 continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects are currently unknown. While the response to the COVID-19 outbreak continues to rapidly evolve, it has led to stay-at-home orders and social distancing guidelines that have seriously disrupted activities in large segments of the economy.
During the second, third and fourth quarters of 2020, we saw a reduction in the number of SafePath® platform subscribers compared to March 2020, which we believe was driven by the COVID-19 related economic slowdown. The Company’s consolidated financial statements presented herein reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company’s customers, all of which are uncertain and cannot be predicted.
As the impact of the COVID-19 pandemic on the economy and the Company’s operations continues to evolve, we will continue to monitor the impact on the Company’s operations and, if needed, postpone non-essential capital expenditures, reduce operating costs, and substantially reduce discretionary spending.
2. Acquisitions
Circle Operator Business
On February 12, 2020, the Company acquired the operator business of Circle Media Labs Inc. (“Circle”) pursuant to a certain Asset Purchase Agreement by and between the Company and Circle.
The following table summarizes the consideration paid for the Circle acquisition in 2020 (unaudited, in thousands):
Fair value of assets acquired | | $ | 14,966 | |
Fair value of liabilities assumed | | | 1,466 | |
Total purchase price | | $ | 13,500 | |
| | | | |
Components of purchase price: | | | | |
Cash | | $ | 13,500 | |
Total purchase price | | $ | 13,500 | |
F-13
The Company’s allocation of the purchase price is summarized as follows (in thousands):
Assets: | | | | |
Inventory, net | | $ | 14 | |
Intangible assets | | | 10,483 | |
Goodwill | | | 4,469 | |
Total assets | | $ | 14,966 | |
Liabilities: | | | | |
Deferred revenue | | $ | 1,290 | |
Amounts due to seller | | | 176 | |
Total liabilities | | $ | 1,466 | |
Total purchase price | | $ | 13,500 | |
All of the goodwill will be deductible for tax purposes.
Pursuant to the transaction, Smith Micro acquired certain assets related to the Circle operator business, including 2 new customer contracts and a source code license to Circle’s then deployed parental control software and related technology.
Unaudited pro forma results of operations for the years ended December 31, 2020 and 2019 are included below as if the Circle acquisition occurred on January 1, 2019. This summary of the unaudited pro forma results of operations is not necessarily indicative of what the Company’s results of operations would have been had Circle been acquired at the beginning of 2019, nor does it purport to represent results of operations for any future periods.
| | Year Ended December 31, | |
| | 2020 | | | 2019 | |
| | (in thousands, except per share amounts) | |
Revenues | | $ | 51,767 | | | $ | 47,252 | |
Net income | | | 4,225 | | | | 10,322 | |
Earnings per share: | | | | | | | | |
Basic | | $ | 0.10 | | | $ | 0.30 | |
Diluted | | $ | 0.10 | | | $ | 0.28 | |
Smart Retail
In December 2018, the Company entered into a definitive agreement to acquire the net assets of ISM Connect, LLC’s Smart Retail product Suite (“Smart Retail”). The transaction closed on January 9, 2019.
The following table summarizes the consideration paid for the Smart Retail acquisition in 2019 (in thousands):
Fair value of assets acquired | | $ | 9,394 | |
Fair value of liabilities assumed | | | 291 | |
Total purchase price | | $ | 9,103 | |
| | | | |
Components of purchase price: | | | | |
Cash | | $ | 3,974 | |
Common stock | | | 5,129 | |
Total purchase price | | $ | 9,103 | |
F-14
The Company’s allocation of the purchase price is summarized as follows (in thousands):
Assets: | | | | |
Costs incurred on projects not complete | | $ | 53 | |
Intangible assets | | | 5,229 | |
Goodwill | | | 4,112 | |
Total assets | | $ | 9,394 | |
Liabilities: | | | | |
Deferred revenue | | $ | 291 | |
Total liabilities | | $ | 291 | |
Total purchase price | | $ | 9,103 | |
All of the goodwill will be deductible for tax purposes.
The purpose of the Smart Retail acquisition was to acquire a new growing and profitable revenue stream while deepening the relationships with our customers. The Smart Retail platform, which the Company now calls ViewSpot, enables wireless carriers and retailers to offer powerful on-screen, interactive device demos that deliver consistent, secure and targeted content that showcase the features of the devices that consumers what to see and learn more about. ViewSpot provides analytics capabilities, which allows customers to gain valuable insights and buying behaviors. The platform was a logical addition to the Company’s existing product line that reaches wireless carriers and provides them with services that can attract and retain customers.
3. Equipment and Improvements
Equipment and improvements consist of the following (in thousands):
| | December 31, | |
| | 2020 | | | 2019 | |
Computer hardware, software, and equipment | | $ | 9,814 | | | $ | 9,079 | |
Leasehold improvements | | | 2,959 | | | | 2,808 | |
Office furniture and fixtures | | | 714 | | | | 1,017 | |
Construction in progress | | | 24 | | | | 494 | |
| | | 13,511 | | | | 13,398 | |
Less accumulated depreciation and amortization | | | (11,341 | ) | | | (11,289 | ) |
Equipment and improvements, net | | $ | 2,170 | | | $ | 2,109 | |
Depreciation and amortization expense on equipment and improvements was $0.7 million and $0.4 million for the years ended December 31, 2020 and 2019, respectively.
F-15
4. Goodwill and Intangible Assets
The following table sets forth our acquired intangible assets by major asset class as of December 31, 2020 and December 31, 2019 (in thousands, except for useful life data):
| | | | December 31, 2020 | |
| | Useful life (years) | | Gross | | | Additions | | | Accumulated amortization | | | Net book value before impairment | | | Impairment charge in 2016 | | | Net book value | |
Purchased technology | | 4-8 | | $ | 2,518 | | | $ | 2,882 | | | $ | (1,612 | ) | | $ | 3,788 | | | $ | — | | | $ | 3,788 | |
Customer relationships | | 3-10 | | | 3,975 | | | | — | | | | (1,158 | ) | | | 2,817 | | | | (411 | ) | | | 2,406 | |
Customer contracts | | 6 | | | — | | | | 7,000 | | | | (1,242 | ) | | | 5,758 | | | | — | | | | 5,758 | |
Trademarks/trade names | | 2 | | | 38 | | | | — | | | | (38 | ) | | | — | | | | — | | | | — | |
Non-compete | | 3 | | | 51 | | | | 232 | | | | (119 | ) | | | 164 | | | | — | | | | 164 | |
Support agreement | | 1 | | | — | | | | 369 | | | | (323 | ) | | | 46 | | | | — | | | | 46 | |
Patents | | 7 | | | — | | | | 600 | | | | (64 | ) | | | 536 | | | | — | | | | 536 | |
Total | | | | $ | 6,582 | | | $ | 11,083 | | | $ | (4,556 | ) | | $ | 13,109 | | | $ | (411 | ) | | $ | 12,698 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2019 | |
| | Useful life (years) | | Gross | | | Additions | | | Accumulated amortization | | | Net book value before impairment | | | Impairment charge in 2016 | | | Net book value | |
Purchased technology | | 4-6 | | $ | 265 | | | $ | 2,253 | | | $ | (687 | ) | | $ | 1,831 | | | $ | — | | | $ | 1,831 | |
Customer relationships | | 3-10 | | | 999 | | | | 2,976 | | | | (860 | ) | | | 3,115 | | | | (411 | ) | | | 2,704 | |
Trademarks/trade names | | 2 | | | 38 | | | | — | | | | (38 | ) | | | — | | | | — | | | | — | |
Non-compete | | 3 | | | 51 | | | | — | | | | (51 | ) | | | — | | | | — | | | | — | |
Total | | | | $ | 1,353 | | | | 5,229 | | | $ | (1,636 | ) | | $ | 4,946 | | | $ | (411 | ) | | $ | 4,535 | |
Intangible assets amortization expense was $2.9 million and $0.9 million for the years ended December 31, 2020 and 2019, respectively.
Future amortization expense related to intangible assets as of December 31, 2020 are as follows (in thousands):
Year Ending December 31, | | | | |
2021 | | $ | 3,180 | |
2022 | | | 3,236 | |
2023 | | | 1,902 | |
2024 | | | 1,389 | |
2025 and thereafter | | | 2,991 | |
Total | | $ | 12,698 | |
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
|
F-16
| •
| 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 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 a previously acquired intangible asset.
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 0t have any impairment of goodwill at December 31, 2020 and 2019.
5. 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 was then 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 were 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) exceeded 400% of the then effective Conversion Price of the Series B Preferred Stock (initially set at $1.14), the Company was able to 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 had 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 had 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.
During the third quarter of 2019, the Company forced conversion of all outstanding Series B Preferred Stock in accordance with its terms.
Warrants
The Company issued warrants to purchase shares of Common Stock in connection with registered direct offerings completed in May 2017, March 2018, May 2018 and November 2018. As of December 31, 2020 and 2019, there were approximately 3.7 million and 5.8 million warrants outstanding, respectively, with exercise prices ranging from $1.16 to $2.38 per share.
F-17
6. Income Taxes
Income before provision for income taxes was generated from the following sources (in thousands):
| | Year Ended December 31, | |
| | 2020 | | | 2019 | |
Domestic | | $ | 4,213 | | | $ | 10,833 | |
Foreign | | | 112 | | | | (31 | ) |
Total income before provision for income taxes | | $ | 4,325 | | | $ | 10,802 | |
A summary of the income tax expense (benefit) is as follows (in thousands):
| | Year Ended December 31, | |
| | 2020 | | | 2019 | |
Current: | | | | | | | | |
Federal | | $ | (133 | ) | | $ | (132 | ) |
State | | | 6 | | | | 7 | |
Foreign | | | 134 | | | | 108 | |
Total current | | | 7 | | | | (17 | ) |
Deferred: | | | | | | | | |
Federal | | | 155 | | | | 144 | |
State | | | 24 | | | | — | |
Foreign | | | (26 | ) | | | (47 | ) |
Total deferred | | | 153 | | | | 97 | |
Total income tax expense | | $ | 160 | | | $ | 80 | |
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, | | |
| | 2020 | | | 2019 | | |
Federal statutory rate | | | 21.0 | | % | | 21.0 | | % |
State tax, net of federal benefit | | | 2.7 | | | | 3.6 | | |
Equity compensation | | | (1.8 | ) | | | 0.1 | | |
International tax items | | | (0.1 | ) | | | 0.2 | | |
Foreign taxes | | | 2.5 | | | | 0.6 | | |
State NOL true-up | | | 2.5 | | | | (6.1 | ) | |
Miscellaneous | | | 1.3 | | | | 0.4 | | |
Effect of change in rate | | | 3.5 | | | | 0.9 | | |
Change in valuation allowance | | | (27.9 | ) | | | (19.8 | ) | |
| | | 3.7 | | % | | 0.7 | | % |
F-18
The major components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
| | Year Ended December 31, | |
| | 2020 | | | 2019 | |
Deferred income tax assets | | | | | | | | |
Net operating loss carry forwards | | $ | 42,127 | | | $ | 41,650 | |
Credit carry forwards | | | 3,027 | | | | 3,159 | |
Fixed assets | | | 116 | | | | 373 | |
Intangibles | | | 3,346 | | | | 4,679 | |
Equity-based compensation | | | 343 | | | | 308 | |
Nondeductible accruals | | | 365 | | | | 319 | |
Various reserves | | | 23 | | | | 209 | |
Other | | | 2 | | | | 2 | |
Valuation allowance | | | (49,405 | ) | | | (50,397 | ) |
Total deferred income taxes - net | | | (56 | ) | | | 302 | |
Deferred income tax liabilities | | | | | | | | |
Foreign intangibles | | | (1 | ) | | | (27 | ) |
Deferred rent | | | 94 | | | | — | |
Unrealized translation gain/loss | | | 3 | | | | (120 | ) |
Prepaid expenses | | | (99 | ) | | | (61 | ) |
Total deferred income liabilities | | | (3 | ) | | | (208 | ) |
| | | | | | | | |
Net deferred income tax assets (liabilities) | | $ | (59 | ) | | $ | 94 | |
The Company has federal and state net operating loss (“NOL”) carryforwards of approximately $160.5 million and $128.2 million, respectively, at December 31, 2020, to reduce future cash payments for income taxes. The federal NOL carryforwards generated prior to 2018 will expire from 2024 through 2037 and state NOL carryforwards will expire 2019 through 2040. 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, 2020. These tax credits will begin to expire in 2028.
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, 2020 and 2019, 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, 2020 and 2019 and the changes in those balances are as follows (in thousands):
| | Year Ended December 31, | |
| | 2020 | | | 2019 | |
Beginning balance | | $ | 428 | | | $ | 428 | |
Increases (decreases) in tax positions for the current year | | | — | | | | — | |
Increases (decreases) in tax positions for the prior year | | | 0 | | | | 0 | |
Gross unrecognized tax benefits, ending balance | | $ | 428 | | | $ | 428 | |
F-19
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 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.
Recently Adopted Accounting Pronouncements
In assessing whetherJune 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 valuationnew accounting standard that requires management’s measurement of the allowance is required, significant weight isfor credit losses to be givenbased on a broader range of reasonable 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 in fiscal 2023 did not 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 evidenceuse 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 2022 with disclosures included in Note 6.
Recently Issued Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which provides for improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This guidance is effective for fiscal years beginning after December 15, 2024, and the adoption of this standard is not anticipated to have a significant impact on the Company's consolidated financial statements other than adding new disclosures, which the Company is currently evaluating.
2. Going Concern
The Company's financial statements have been presented on the basis that can be objectively verified. A significant factorit is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In connection with preparing consolidated financial statements for the year ended December 31, 2023, certain conditions in the Company's evaluation, considered in the aggregate, have 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, which has not been alleviated. The evaluation considered the Company's financial condition, including its liquidity sources, funds necessary to maintain the Company's operations considering the current financial condition, obligations, and other expected cash flows, and negative financial trends of recurring operating losses and negative cash flows.
The Company has no outstanding debt and is continuing operations and generating revenues in the normal course, however the Company is dependent, to an extent, on the timing of subscriber and revenue growth for its products and the related cash generation from that growth and/or the ability to obtain the necessary capital to meet its obligations and fund its working capital requirements to maintain normal business operations. Management believes that the actions presently being taken to implement the Company's business plan to expand subscriber growth, including dynamic marketing campaigns, to acquire new customers and to expand its offerings to existing customers to generate increased revenues, and, if necessary, to raise additional capital will support the Company's operations; as such the financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern. The Company believes that it would be able to raise additional funds as necessary, through public or private equity offerings, including via accessing its currently effective shelf registration, debt financings, or a combination of these funding sources as evidenced by the Company historically being able to complete debt and equity financings, however it may not be able to secure such incremental capital in a timely manner or on favorable terms, if at all. In order to preserve liquidity, the Company may also take one or more of the following additional actions:
•Implement additional restructuring and cost reductions,
•Secure a revolving line of credit,
•Dispose of one or more product lines and/or,
•Sell or license intellectual property.
While management believes that the Company’s assessmentplans for growing revenue and the other potential actions available to it would alleviate the conditions that raise substantial doubt, these strategies are not entirely within the Company’s control and cannot be assessed as being probable of occurring.
3. Equipment and Improvements
Equipment and improvements consist of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
Computer hardware, software, and equipment | $ | 6,653 | | | $ | 10,347 | |
Leasehold improvements | 1,440 | | | 3,381 | |
Office furniture and fixtures | 803 | | | 828 | |
| 8,896 | | | 14,556 | |
Less accumulated depreciation and amortization | (8,013) | | | (13,058) | |
Equipment and improvements, net | $ | 883 | | | $ | 1,498 | |
Depreciation and amortization expense on equipment and improvements was $0.6 million and $1.2 million for each of the years ended December 31, 2023 and 2022, respectively.
4. Goodwill and Intangible Assets
The following table sets forth the Company’s acquired intangible assets by major asset class as of December 31, 2023 and 2022, respectively (in thousands, except for useful life data):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Weighted Average Remaining Useful Life (in Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Purchased technology | 5 | | $ | 13,330 | | | $ | (7,243) | | | $ | 6,087 | |
Customer relationships | 11 | | 27,548 | | | (8,111) | | | 19,437 | |
Customer contracts | 1 | | 7,000 | | | (6,337) | | | 663 | |
Software license | 6 | | 5,419 | | | (2,353) | | | 3,066 | |
| | | | | | | |
Patents | 3 | | 600 | | | (321) | | | 279 | |
Total | | | $ | 53,897 | | | $ | (24,365) | | | $ | 29,532 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Weighted Average Remaining Useful Life (in Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
Purchased technology | 7 | | $ | 13,529 | | | $ | (5,835) | | | $ | 7,694 | |
Customer relationships | 12 | | 27,548 | | | (4,490) | | | 23,058 | |
Customer contracts | 1 | | 7,000 | | | (5,673) | | | 1,327 | |
Software license | 7 | | 5,419 | | | (1,552) | | | 3,867 | |
Non-compete | 0 | | 283 | | | (273) | | | 10 | |
Patents | 4 | | 600 | | | (236) | | | 364 | |
Total | | | $ | 54,379 | | | $ | (18,059) | | | $ | 36,320 | |
Intangible assets amortization expense was $6.8 million and $6.3 million for the years ended December 31, 2023 and 2022, respectively.
Future amortization expense related to intangible assets as of December 31, 2023 are as follows (in thousands):
| | | | | |
Year Ending December 31, | |
2024 | $ | 5,935 | |
2025 | 5,105 | |
2026 | 4,709 | |
2027 | 3,834 | |
2028 and thereafter | 9,949 | |
| |
Total | $ | 29,532 | |
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 of each year. 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.
During the first quarter of 2023, management concluded that the written notice of termination of a U.S. Tier 1 customer agreement for the Company's family safety solution, as disclosed in Note 16 of the 2022 Form 10-K, represented a triggering event indicating possible impairment of goodwill and long-lived assets, including customer relationships intangible assets. The estimated fair value of the Company's reporting unit exceeded the fair value of the other assets and liabilities as of February 2023, and as such there was not any impairment.
Additionally, late in the third quarter of 2023, the Company received notice of a termination of one of its ViewSpot contracts. Subsequently, in the fourth quarter of 2023, the Company was also informed by another ViewSpot customer that they would not enter into a further extension of their existing ViewSpot contract, which was expiring in December 2023. As part of this notice, that customer exercised its right to continued service for a transition period of up to 180 days beyond the expiration of this contract. As a result of these combined customer contract termination and expiration notifications, the Company reviewed its assets, including the customer relationship intangible asset, pertaining to ViewSpot and determined that the carrying amount of the asset group was not in excess of the fair value based upon undiscounted expected future cash flows. The Company then reassessed the lives associated with these assets and is amortizing the remaining customer relationship intangible based on the pattern of economic benefit expected to be generated from the use of that asset, which accelerated $0.9 million of amortization expense in 2023. There was no impairment of any intangible assets at December 31, 2023. Smith Micro also assessed the impact of this event and other factors through December 31, 2023, and determined that there was not any impairment of the Company’s goodwill at December 31, 2023. There also was not any impairment of the Company's goodwill at December 31, 2022.
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 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" in 2022.
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 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 at an exercise price of $3.35 per share and expire five 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 accrued compounding interest at the rate of 6.0% per annum, which was 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 would accrue interest at the rate of 15.0% per annum. Upon conversion and other designated events, holders of the Notes were 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 were entitled to cash settlement. The Notes matured on December 31, 2023, with amortization payments being made monthly from April 2023 through December 2023, and the balance at maturity, with a total of 17.1 million shares transferred valued at a total of $19.1 million as of the dates conveyed. The entire balance of the note was repaid in 2023 and as such all of the debt and related derivative were derecognized as of December 31, 2023.
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 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 was $3.8 million, determined utilizing a Black-Scholes option pricing model and is reflected on the balance sheet line "Warrant liabilities" and were a discount on the Notes.
The Notes contained 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 were viewed as a compound embedded derivative that met the criteria to be bifurcated and carried at fair value. This was classified 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 and was eliminated with the retirement of the notes at December 31, 2023. The following assumptions were utilized:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Convertible Notes Derivative | Common stock market price | | Risk-free interest rate | | Expected dividend yield | | Expected term (in years) | | Expected volatility |
August 11, 2022 at Issuance | $ | 3.04 | | | 3.28 | % | | — | | | 1.39 | | 56.3 | % |
December 31, 2022 | $ | 2.10 | | | 4.68 | % | | — | | | 1.00 | | 61.6 | % |
March 31, 2023 for April 1, 2023 Installment date | $ | 1.16 | | | 4.68 | % | | — | | | 0.75 | | 84.3 | % |
May 1, 2023 for May 1, 2023 Installment date | $ | 1.22 | | | 4.68 | % | | — | | | 0.67 | | 81.6 | % |
May 31, 2023 for June 1, 2023 Installment date | $ | 1.21 | | | 4.91 | % | | — | | | 0.59 | | 86.2 | % |
June 30, 2023 for July 1, 2023 Installment date | $ | 1.11 | | | 5.42 | % | | — | | | 0.50 | | 90.7 | % |
July 31, 2023 for August 1, 2023 Installment date | $ | 1.14 | | | 5.53 | % | | — | | | 0.42 | | 59.9 | % |
August 31, 2023 for September 1, 2023 Installment date | $ | 1.71 | | | 5.54 | % | | — | | | 0.33 | | 69.9 | % |
September 30, 2023 for October 1, 2023 Installment date | $ | 1.21 | | | 5.56 | % | | — | | | 0.25 | | 78.2 | % |
November 1, 2023 for November 1, 2023 Installment date | $ | 1.03 | | | 5.60 | % | | — | | | 0.17 | | 52.4 | % |
December 1, 2023 for December 1, 2023 Installment date | $ | 0.68 | | | 5.53 | % | | — | | | 0.08 | | 147.5 | % |
December 31, 2023 for December 31, 2023 Installment date | $ | 0.83 | | | 5.53 | % | | — | | | 0.00 | | — | % |
Given that the warrants and the derivative 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 in 2022 within "General and administrative expenses." Deferred financing costs for the Notes and Warrants Offering totaled $0.5 million and were reported net of accumulated amortization as a deduction from the face amount of the debt. Amortization of the deferred financing costs and discount was 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 Warrants Offering, the Company raised net cash proceeds of $14.0 million.
During the year ended December 31, 2023, the Company recognized interest expense of $6.6 million on the Notes and related instruments utilizing the effective interest rate of 155%, which includes amortization of debt issuance costs of $0.3 million, amortization of discount of $5.7 million, and contractual interest of $0.6 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.
The balance of the Notes as of December 31, 2023 and 2022 is as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
Gross Current Balance | $ | — | | | $ | 15,000 | |
Unamortized Discount | — | | | (5,656) | |
Unamortized Issuance Costs | — | | | (337) | |
Net Balance | $ | — | | | $ | 9,007 | |
The Notes contained 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. Throughout the duration of the notes the Company was in compliance with all covenants. The notes were retired at maturity in accordance with their terms on December 31, 2023.
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 through December 31, 2023 were determined by using a five-yearBlack-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 cumulative loss asvolatility over the expected term of the endWarrants. 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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Warrants | | Additional Warrants |
| December 31, 2023 | | December 31, 2022 | | December 31, 2023 | | December 31, 2022 |
Common stock market price | 0.83 | | $ | 2.10 | | | $ | 0.83 | | | $ | 2.10 | |
Risk-free interest rate | 4.10 | % | | 3.76 | % | | 4.10 | % | | 3.76 | % |
Expected dividend yield | — | | | — | | | — | | | — | |
Expected term (in years) | 3.61 | | 4.61 | | | 4.12 | | | 5.12 | |
Expected volatility | 66.8 | % | | 64.2 | % | | 68.7 | % | | 65.5 | % |
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 uncertain near-term market and economic conditions, reducedWells Fargo Bank, National Association providing for a $7.0 million secured revolving credit facility (the “Credit Facility”) that was to be utilized to finance the Company’s abilityworking capital requirements and other general corporate purposes. In connection with the Notes and Warrants Offering described in Note 6, the Credit Facility was terminated on August 11, 2022. There were borrowings and repayments 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 relytransfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on projectionsassumptions 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.
The following table presents information about the financial liabilities that are measured at fair value on a recurring basis at December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
Level 3 | | | | | | | December 31, 2023 | | December 31, 2022 |
| | | | | | | | | |
| | | | | | | | | |
Notes and Warrants Offering Derivative | | | | | | | $ | — | | | $ | 1,575 | |
Warrants | | | | | | | 334 | | | 2,052 | |
Additional Warrants | | | | | | | 263 | | | 1,265 | |
Total | | | | | | | $ | 597 | | | $ | 4,892 | |
The following table presents the changes in the fair value of Level 3 instruments for the years ended December 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Notes and Warrants Offering Derivative | | Warrants | | Additional Warrants | | Total |
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 | |
Additions | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Change in fair value | (1,494) | | | (1,718) | | | (1,002) | | | (4,214) | |
Derecognition of debt | (81) | | | — | | | — | | | (81) | |
Measurement at December 31, 2023 | $ | — | | | $ | 334 | | | $ | 263 | | | $ | 597 | |
The carrying values for all other financial assets and liabilities approximated fair value for the years ended December 31, 2023 and 2022.
8. Income Taxes
Loss before provision for income taxes was generated from the following sources (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
Domestic | $ | (24,364) | | | $ | (29,539) | |
Foreign | 126 | | | 486 | |
Total loss before provision for income taxes | $ | (24,238) | | | $ | (29,053) | |
A summary of the income tax expense is as follows (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
Current: | | | |
Federal | $ | — | | | $ | — | |
State | 14 | | | 8 | |
Foreign | 154 | | | 157 | |
Total current | 168 | | | 165 | |
Deferred: | | | |
Federal | 9 | | | 24 | |
State | (19) | | | 37 | |
Foreign | — | | | — | |
Total deferred | (10) | | | 61 | |
Total income tax expense | $ | 158 | | | $ | 226 | |
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, |
| 2023 | | 2022 |
Federal statutory rate | 21.0 | % | | 21.0 | % |
State tax, net of federal benefit | 2.0 | | | 4.1 | |
Equity compensation | (2.3) | | | (1.5) | |
International tax items | (1.6) | | | (3.9) | |
Foreign taxes | (0.6) | | | (0.5) | |
Debt extinguishment loss | (3.5) | | | — | |
State Net Operating Loss true-up | (2.9) | | | (1.2) | |
Miscellaneous | (1.2) | | | 1.8 | |
Effect of change in rate | (2.6) | | | 0.7 | |
Change in valuation allowance | (9.1) | | | (21.1) | |
| (0.7) | % | | (0.8) | % |
The major components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
Deferred income tax assets | | | |
Net operating loss carry forwards | $ | 41,561 | | | $ | 48,317 | |
Research and development expenses | 6,953 | | | 5,100 | |
Intangibles | 4,643 | | | 4,907 | |
Credit carry forwards | 2,479 | | | 3,028 | |
Nondeductible accruals | 405 | | | 453 | |
163j limitation | 87 | | | 333 | |
Fixed assets | 346 | | | 289 | |
Equity-based compensation | 404 | | | 188 | |
Deferred rent | 12 | | | 15 | |
State taxes | 1,515 | | | 3 | |
Total deferred income tax assets - net | 58,405 | | | 62,633 | |
Deferred income tax liabilities | | | |
Prepaid expenses | (82) | | | (92) | |
Unrealized translation gain/loss | (6) | | | (21) | |
Total deferred income tax liabilities - net | (88) | | | (113) | |
Valuation allowance | (58,485) | | | (62,698) | |
Net deferred income tax liabilities | $ | (168) | | | $ | (178) | |
The Company has federal and state net operating loss (“NOL”) carryforwards of approximately $189.5 million and $136.2 million, respectively, at December 31, 2023 and 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, 2023 and 2022. These tax credits will begin to expire in 2028.
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 in assessingmay be limited.
At December 31, 2023 and 2022, the realizabilityCompany had unrecognized tax benefits, including interest and penalties, of its deferredapproximately $0.4 million.
The Company’s gross unrecognized tax assets.After a review of the four sources of taxable incomebenefits as of
December 31, 2020 (as described above),2023 and after consideration of2022 and the Company’s cumulative loss positionchanges in those balances are as of December 31, 2020, thefollows (in thousands): | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
Beginning balance | $ | 412 | | | $ | 412 | |
Other | — | | | — | |
Gross unrecognized tax benefits, ending balance | $ | 412 | | | $ | 412 | |
The Company recorded a valuation allowance related to its U.S.-based deferred tax assets of $49.4 million at December 31, 2020. The valuation allowance on deferred tax assets decreased by $1.0 million and $2.0 million in 2020 and 2019, respectively.We recognizedrecognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. During 2020expense, however during 2023 and 2019, we recognized $0 in2022, the Company did not recognize any interest andor penalties. TheThere were no cumulative interest and penalties at
December 31, 20202023 and 2019 were $0. We do2022. The Company does not anticipate any material changes to unrecognized tax benefits within the next twelve months that will affect the effective tax rate.
In assessing whether a valuation allowance is required, significant weight is given to evidence that can be objectively verified. Realization of deferred tax assets is dependent upon the generation of future taxable income. As required by ASC 740, Smith Micro has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets and determined that it was more likely than not that the Company would not realize the deferred tax assets due to the Company's cumulative losses and uncertain near-term market and economic conditions, which reduce 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, 2023 (as described in Note 1), and after consideration of the Company’s continuing cumulative loss position as of December 31, 2023, the Company recorded a valuation allowance related to its U.S.-based deferred tax assets of $58.5 million at December 31, 2023. The valuation allowance on deferred tax assets decreased by $4.2 million and increased by $5.4 million in 2023 and 2022, 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 or state tax authorities. State income tax returns areThe Company is no longer subject to examination for a period of threeU.S. federal income tax returns for years before December 31, 2019 and for state income tax returns, the Company is no longer subject to fourexamination for years after filing.before December 31, 2018. As of December 31, 2020,2023, the companyCompany had 0no 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. As of December 31, 2020,2023, a current estimate of the range of changes that may occur within the next twelve months cannot be made due to the uncertainty regarding the timing of these events. For financial reporting purposes, income before provision for income taxes for ourthe Company’s foreign subsidiaries was $112 thousand$0.1 million and $(31) thousand$0.5 million for the years ended December 31, 20202023 and 2019,2022, respectively. We doSmith 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. 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
FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make anCompany's accounting policy
election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related toF-20
GILTI in the year the tax is incurred. We have elected 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 20202023 is less than $86 thousand.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset taxable income for years beginning before 2021. The CARES Act also made modifications to IRC Sec. 163(j) to increase the allowable interest from 30%$2.0 million.
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, | |
| | 2020 | | | 2019 | |
| | (in thousands, except per share amounts) | |
Numerator: | | | | | | | | |
Net income | | $ | 4,165 | | | $ | 10,722 | |
Dividends paid to preferred stockholders | | | — | | | | (119 | ) |
Net income available to common stockholders | | $ | 4,165 | | | $ | 10,603 | |
Denominator: | | | | | | | | |
Weighted average shares outstanding - basic | | | 40,808 | | | | 34,513 | |
Potential common shares - options (treasury stock method) | | | 1,956 | | | | 2,478 | |
Weighted average shares outstanding - diluted | | | 42,764 | | | | 36,991 | |
Shares excluded due to an exercise price greater than weighted average stock price for the period | | | 98 | | | | 88 | |
Earnings per common share: | | | | | | | | |
Basic | | $ | 0.10 | | | $ | 0.31 | |
Diluted | | $ | 0.10 | | | $ | 0.29 | |
The following table sets forth the details of basic and diluted earnings per share (in thousands, except per share amounts):8.
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
| (in thousands, except per share amounts) |
Numerator: | | | |
Net loss | $ | (24,396) | | | $ | (29,279) | |
Denominator: | | | |
Weighted average shares outstanding – basic | 64,916 | | | 55,422 | |
Potential common shares – options / warrants (treasury stock method) and convertible notes (as if converted method) | — | | | — | |
Weighted average shares outstanding – diluted | 64,916 | | | 55,422 | |
| | | |
Shares excluded (anti-dilutive) | 7,622 | | | 3,661 | |
| | | |
Net loss per common share: | | | |
Basic | $ | (0.38) | | | $ | (0.53) | |
Diluted | $ | (0.38) | | | $ | (0.53) | |
The following shares were excluded from the computation of diluted net loss per share as the impact of including those shares would be anti-dilutive (in thousands):
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
| |
| | | |
Convertible notes, as if converted | 2,752 | | | 1,754 | |
Outstanding stock options | 102 | | | 101 | |
Outstanding warrants | 4,768 | | | 1,806 | |
Total anti-dilutive shares | 7,622 | | | 3,661 | |
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 and $0.5 million for each of the years ended December 31, 20202023 and 2019.F-21
2022, respectively.
9.
11. Stock-Based Compensation
Stock Plans
On June 18, 2015, our stockholders approved
During the year ended December 31, 2023, the Company granted 1.9 million shares of restricted stock under the Company’s 2015 Omnibus Equity Incentive Plan, (“as amended ("2015 OEIP”OEIP") and subsequent, 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 ourits stockholders on June 14, 2018, June 9, 2020, and June 9, 2020.6, 2023. The 2015 OEIP replaced the 2005 Stock Option / Stock Issuance Plan (“2005 Plan”) which was due to expire on July 28, 2015. All
As of December 31, 2023, there were approximately 3.3 million shares available for future grants under the Company’s 2015 OEIP.
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 9,625,000 shares.
The 2015 OEIP 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 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. Restricted stock is valued using the closing stock price on the date of the grant. The total value is expensed over the vesting period, ofwhich typically ranges from 12 to 48 months. In the third quarter of 2023, there were new grants issued with tranched vesting periods of two to seven 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, |
| 2023 | | 2022 |
Cost of sales | $ | — | | | $ | 2 | |
Sales and marketing | 955 | | | 1,100 | |
Research and development | 1,056 | | | 1,082 | |
General and administrative | 2,824 | | | 2,764 | |
Total non-cash stock compensation expense | $ | 4,835 | | | $ | 4,948 | |
As of December 31, 2023, there was approximately $4.8 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. In the fourth quarter of 2023, vesting of certain restricted stock awards were accelerated in accordance with the terms of the 2015 OEIP. As such, an additional $0.2 million of stock compensation expense was recorded in General and Administrative expense in that period.
Stock Options
There were no stock options awards granted in 2023 or 2022. A summary of the Company’s stock options outstanding under the 2015 OEIP and 2005 Plan as of December 31, 2023 and 2022 and the related activity during 2023 is as follows (in thousands except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares | | Weighted Avg. Exercise Price | | Wtd. Avg. Remaining Contractual Life (Yrs) | | Aggregate Intrinsic Value |
Outstanding as of December 31, 2022 | | 139 | | | $ | 3.75 | | | 5.10 | | $ | 6 | |
Exercised | | — | | | — | | | — | | $ | — | |
Forfeited | | (54) | | | $ | 4.26 | | | — | | $ | 7 | |
Expired | | (5) | | | $ | 5.24 | | | — | | $ | — | |
Outstanding as of December 31, 2023 | | 80 | | | $ | 3.30 | | | 3.85 | | $ | — | |
Vested and expected to vest at December 31, 2023 | | 80 | | | $ | 3.30 | | | 3.83 | | $ | — | |
Exercisable as of December 31, 2023 | | 75 | | | $ | 3.21 | | | 3.64 | | $ | — | |
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, 2020 and 2019, using the Black-Scholes option pricing model, were as follows:
ESPP. | | Year Ended December 31, | |
| | 2020 | | | 2019 | |
Weighted average grant date fair value of stock options | | $ | 2.93 | | | $ | 1.84 | |
Assumptions | | | | | | | | |
Risk-free interest rate (weighted average) | | | 0.44 | % | | | 2.36 | % |
Expected dividend yield | | | — | | | | — | |
Weighted average expected life (years) | | | 6.2 | | | | 6.2 | |
Volatility (weighted average) | | | 80.8 | % | | | 78.7 | % |
Forfeiture rate | | | 12.0 | % | | | 26.0 | % |
F-22
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.
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: