UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________________________

FORM ~~10‑Q~~

10-Q

_____________________________

(Mark One)

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

For the quarterly period ended September 30, ~~2017~~

2023

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

Commission file number ~~001‑35525~~

001-35525

_____________________________

SMITH MICRO SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

_____________________________

~~DELAWARE~~	~~33‑0029027~~
Delaware		33-0029027
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~51 COLUMBIA~~

~~ALISO VIEJO, CA 92656~~

5800 Corporate Drive

Pittsburgh, PA 15237

(Address of principal executive offices, including zip code)

~~(949) 362-5800~~

(412) 837-5300

(Registrant’s telephone number, including area code)

_____________________________

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

Title of each class

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

SMSI

NASDAQ

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

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

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

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☐ ~~(Do not check if a smaller reporting company)~~

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange ~~Act~~. ☐

Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange ~~Act Rule 12b-2)~~Act). Yes ☐o No ☒

As of ~~October 31, 2017,~~November 7, 2023, there were ~~14,283,953~~71,925,856 shares of common stock ~~outstanding~~

outstanding.

Table of Contents

SMITH MICRO SOFTWARE, INC.

QUARTERLY REPORT ON FORM 10-Q

September 30, ~~2017~~

2023

~~TABL~~ETABLE OF CONTENTS


Explanatory Note
PART I.				FINANCIAL INFORMATION
Item 1.				Financial Statements (Unaudited)				2
				Consolidated Balance Sheets as of September 30, ~~2017~~2023 and December 31, ~~2016~~ 2022				2
				Consolidated Statements of Operations ~~and Comprehensive Loss~~ for the ~~three~~Three and ~~nine months ended~~Nine Months Ended September 30, ~~2017~~2023 and ~~2016~~ 2022				3
				Consolidated ~~Statement~~Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022	4
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~ 2023 and 2022					4 6
				~~Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016~~		5
	Notes to the Consolidated Financial Statements			6 7
Item 2.				~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations				20
~~Item 3.~~			~~Quantitative and Qualitative Disclosures About Market Risk~~	29
Item 4.			Controls and Procedures			29 25

PART II.				OTHER INFORMATION
Item 1.				Legal Proceedings				30 27
Item 1A.				Risk Factors				30 27
Item 2.				Unregistered Sales of Equity Securities and Use of Proceeds				30 27
~~Item 6.~~				~~Exhibits~~				31
Item 6.		Exhibits						28

SIGNATURES							32 29

Table of Contents

PART I. ~~FINANCIAL~~FINANCIAL INFORMATION

~~Item 1.~~

Item 1. Financial Statements

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value data)

	September 30,			December 31,
	2017			2016				September 30, 2023		December 31, 2022
	(unaudited)			(audited)				(unaudited)		(audited)
Assets							Assets
Current assets:							Current assets:
Cash and cash equivalents	$	3,939		$	2,229		Cash and cash equivalents	$	7,982	$	14,026
Accounts receivable, net of allowances for doubtful accounts and other adjustments of $60 (2017) and $197 (2016)		5,209			4,962
Income tax receivable		1			1
Inventories, net of reserves for excess and obsolete inventory of $146 (2017) and $148 (2016)		16			12
Accounts receivable, net of allowance for doubtful accounts of $3 and $3 (2023 and 2022, respectively)							Accounts receivable, net of allowance for doubtful accounts of $3 and $3 (2023 and 2022, respectively)	10,290		10,501
Prepaid expenses and other current assets		706			713		Prepaid expenses and other current assets	2,940		1,983
Total current assets		9,871			7,917		Total current assets	21,212		26,510
Equipment and improvements, net		1,381			1,811		Equipment and improvements, net	998		1,498
Right-of-use assets							Right-of-use assets	2,686		3,722

Other assets		146			149		Other assets	475		490
Intangible assets, net		551			745		Intangible assets, net	31,901		36,320
Goodwill		3,685			3,686		Goodwill	35,041		35,041
Total assets	$	15,634		$	14,308		Total assets	$	92,313	$	103,581
Liabilities and Stockholders' Equity							Liabilities and Stockholders' Equity
Current liabilities:							Current liabilities:
Accounts payable	$	1,318		$	1,907		Accounts payable	$	3,027	$	3,236
Accrued liabilities		3,182			3,503
Related-party notes payable, short-term		2,200			—
Deferred revenue		367			98
Accrued payroll and benefits							Accrued payroll and benefits	2,502		3,883
Current operating lease liabilities							Current operating lease liabilities	1,434		1,441
Other current liabilities							Other current liabilities	1,714		1,589
Current portion of convertible notes payable							Current portion of convertible notes payable	3,456		9,007
Derivative liabilities							Derivative liabilities	46		1,575
Total current liabilities		7,067			5,508		Total current liabilities	12,179		20,731
Non-current liabilities:							Non-current liabilities:
Related-party notes payable, net of discount & issuance costs of $0 (2017) and $705 (2016)		—			1,295
Notes payable, net of discount & issuance costs of $508 (2017) and $705 (2016)		1,492			1,295
Deferred rent and other long-term liabilities		2,332			2,970
Deferred tax liability, net		181			181

Warrant liabilities							Warrant liabilities	1,278		3,317
Operating lease liabilities							Operating lease liabilities	1,787		2,976

Deferred tax liabilities, net							Deferred tax liabilities, net	178		178

Total non-current liabilities		4,005			5,741		Total non-current liabilities	3,243		6,471
Commitments and contingencies							Commitments and contingencies
Stockholders' equity:							Stockholders' equity:
Preferred stock, par value $0.001 per share; 5,000,000 shares authorized; 5,500 and 0 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		—			—
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 14,283,953 and 12,297,954 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		14			12
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 70,384,838 and 56,197,910 shares issued and outstanding (2023 and 2022, respectively)							Common stock, par value $0.001 per share; 100,000,000 shares authorized; 70,384,838 and 56,197,910 shares issued and outstanding (2023 and 2022, respectively)	70		56
Additional paid-in capital		237,321			229,275		Additional paid-in capital	376,057		357,875
Accumulated comprehensive deficit		(232,773	)		(226,228	)	Accumulated comprehensive deficit	(299,236)		(281,552)
Total stockholders’ equity		4,562			3,059		Total stockholders’ equity	76,891		76,379
Total liabilities and stockholders' equity	$	15,634		$	14,308		Total liabilities and stockholders' equity	$	92,313	$	103,581

See accompanying notes to the consolidated financial statements.

Table of Contents

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS ~~AND COMPREHENSIVE LOSS~~

(in thousands, except per share data)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,							For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017			2016			2017			2016				2023		2022		2023		2022
	(unaudited)			(unaudited)			(unaudited)			(unaudited)				(unaudited)		(unaudited)		(unaudited)		(unaudited)
Revenues	$	5,804		$	6,478		$	17,242		$	21,151		Revenues	$	11,001	$	11,699	$	32,269	$	37,108
Cost of revenues		1,159			1,798			3,727			5,824
Cost of revenues (including depreciation of $12, $25, $40, and $85 in the three and nine months ended September 30, 2023 and 2022, respectively)													Cost of revenues (including depreciation of $12, $25, $40, and $85 in the three and nine months ended September 30, 2023 and 2022, respectively)	2,528		3,629		8,400		10,882
Gross profit		4,645			4,680			13,515			15,327		Gross profit	8,473		8,070		23,869		26,226
Operating expenses:													Operating expenses:
Selling and marketing		1,413			2,541			4,667			7,389		Selling and marketing	2,449		2,986		8,631		9,687
Research and development		2,100			4,174			6,771			12,204		Research and development	3,704		7,409		13,276		22,756
General and administrative		2,220			2,522			6,648			7,878		General and administrative	2,934		4,208		9,448		11,885
Restructuring (income) expense		(146	)		—			568			—

Depreciation and amortization													Depreciation and amortization	1,567		1,822		4,872		5,665
Total operating expenses		5,587			9,237			18,654			27,471		Total operating expenses	10,654		16,425		36,227		49,993
Operating loss		(942	)		(4,557	)		(5,139	)		(12,144	)	Operating loss	(2,181)		(8,355)		(12,358)		(23,767)
Other expense:
Change in carrying value of contingent liability		—			11			—			668
Loss on related party debt extinguishment		(405	)		—			(405	)		—
Interest (expense) income, net		(315	)		(66	)		(928	)		(68	)
Other expense		(2	)		(9	)		(10	)		(26	)
Other income (expense):													Other income (expense):
Change in fair value of warrant and derivative liabilities													Change in fair value of warrant and derivative liabilities	73		3,457		3,486		3,457

Loss on derecognition of debt													Loss on derecognition of debt	(1,583)		—		(2,985)		—
Interest expense, net													Interest expense, net	(1,443)		(896)		(5,740)		(898)
Other income (expense), net													Other income (expense), net	15		9		(62)		(22)
Loss before provision for income taxes		(1,664	)		(4,621	)		(6,482	)		(11,570	)	Loss before provision for income taxes	(5,119)		(5,785)		(17,659)		(21,230)
Provision for income tax expense		6			11			19			48		Provision for income tax expense	14		27		25		77
Net loss		(1,670	)		(4,632	)		(6,501	)		(11,618	)	Net loss	$	(5,133)	$	(5,812)	$	(17,684)	$	(21,307)
Other comprehensive income, before tax:
Unrealized holding gains on available-for-sale securities		—			—			—			2
Other comprehensive income, net of tax		—			—			—			2
Comprehensive loss		(1,670	)		(4,632	)		(6,501	)		(11,616	)
Net loss per share:

Loss per share:													Loss per share:
Basic and diluted	$	(0.12	)	$	(0.38	)	$	(0.49	)	$	(0.98	)	Basic and diluted	$	(0.08)	$	(0.10)	$	(0.28)	$	(0.39)

Weighted average shares outstanding:													Weighted average shares outstanding:
Basic and diluted		14,297			12,209			13,221			11,826		Basic and diluted	67,354		55,722		62,297		55,140

See accompanying notes to the consolidated financial statements.

Table of Contents

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED ~~STATEMENT~~STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

Additional

Accumulated

Series B preferred stock

Common stock

paid-in

comprehensive

Shares

Amount

Shares

Amount

capital

deficit

Total

BALANCE, December 31, 2016 (audited)

—

$
—

12,298

$
12

$
229,275

$
(226,228
)

$
3,059

Shares issued in Series B preferred stock
   offering, net issuance costs ($287)

3

—

—

—

2,413

—

2,413

Shares issued in Series B preferred stock in
   accordance with debt extinguishment

3

—

—

—

2,697

—

2,697

Shares issued in common stock offering, net

—

—

2,162

2

1,990

—

1,992

Common stock warrants issued in connection
   with stock offering

—

—

—

—

64

—

64

Non-cash compensation recognized on stock
   options and Employee stock purchase plan
   ("ESPP")

—

—

—

—

34

—

34

Restricted stock grants, net of cancellations

—

—

(70
)

—

968

—

968

Cancellation of shares for payment of
   withholding tax

—

—

(111
)

—

(166
)

—

(166
)
Employee stock purchase plan

—

—

4

—

2

—

2

Warrant repricings due to down round triggers

—

—

—

—

44

(44
)

—

Comprehensive loss

—

—

—

—

—

(6,501
)

(6,501
)
BALANCE, September 30, 2017 (unaudited)

6

$
—

14,283

$
14

$
237,321

$
(232,773
)

$
4,562


	Common Stock			Additional Paid-in Capital		Accumulated Comprehensive Deficit		Total
	Shares	Amount
BALANCE, June 30, 2023 (unaudited)	65,202	$	65	$	368,527	$	(294,103)	$	74,489
Non-cash compensation recognized on stock options and employee stock purchase plan ("ESPP")	—	—		6		—		6
Restricted stock grants, net of cancellations	574	—		1,334		—		1,334
ESPP shares issued	7	—		7		—		7
Cancellation of shares for payment of withholding tax	(65)	—		(89)		—		(89)
Common shares issued in settlement and prepayment of notes payable	4,667	5		6,272		—		6,277
Net loss	—	—		—		(5,133)		(5,133)
BALANCE, September 30, 2023 (unaudited)	70,385	$	70	$	376,057	$	(299,236)	$	76,891


	Common Stock			Additional Paid-in Capital		Accumulated Comprehensive Deficit		Total
	Shares	Amount
BALANCE, December 31, 2022 (audited)	56,198	$	56	$	357,875	$	(281,552)	$	76,379
Non-cash compensation recognized on stock options and ESPP	—	—		24		—		24
Restricted stock grants, net of cancellations	1,837	2		3,290		—		3,292
ESPP shares issued	15	—		15		—		15
Cancellation of shares for payment of withholding tax	(245)	—		(381)		—		(381)
Common shares issued in settlement and prepayment of notes payable	12,580	12		15,234		—		15,246
Net loss	—	—		—		(17,684)		(17,684)
BALANCE, September 30, 2023 (unaudited)	70,385	70		376,057		(299,236)		76,891

See accompanying notes to the consolidated financial statements.

Table of Contents

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~

STOCKHOLDERS’ EQUITY

(in thousands)

For the Nine Months Ended

September 30,

2017

2016

(unaudited)

(unaudited)

Operating activities:

Net loss

$
(6,501
)

$
(11,618
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and amortization

694

1,096

Amortization of debt discounts and financing issuance costs

394

36

Restructuring costs

(146
)

—

Change in carrying value of contingent liability

—

(668
)
Loss on related party debt extinguishment

405

—

Provision for doubtful accounts and other adjustments to accounts receivable

78

—

Provision for excess and obsolete inventory

—

8

(Gain) loss on disposal of fixed assets

(6
)

27

Stock based compensation

1,002

1,173

Change in operating accounts:

Accounts receivable

(325
)

3,143

Income tax receivable

—

99

Inventories

(4
)

13

Prepaid expenses and other assets

11

(173
)
Accounts payable and accrued liabilities

(1,564
)

(796
)
Deferred revenue

269

(335
)
Net cash used in operating activities

(5,693
)

(7,995
)
Investing activities:

Acquisition of Birdstep Technology, net of cash received

—

(1,927
)
Acquisition of iMobileMagic, net of cash received

—

(558
)
Capital expenditures

(68
)

(323
)
Proceeds from the sale of short-term investments

—

4,080

Net cash (used in) provided by investing activities

(68
)

1,272

Financing activities:

Cash received from stock sale for employee stock purchase plan

2

13

Cash received from common stock offering, net of expenses

2,056

—

Cash received from preferred stock and warrant offering, net of expenses

2,413

—

Cash received from related-party short-term notes payable

3,000

—

Cash received from related-party long-term notes payable, net of issuance costs ($83)

—

1,917

Cash received from long-term notes payable, net of issuance costs ($83)

—

1,917

Net cash provided by financing activities

7,471

3,847

Net increase (decrease) in cash and cash equivalents

1,710

(2,876
)
Cash and cash equivalents, beginning of period

2,229

8,819

Cash and cash equivalents, end of period

$
3,939

$
5,943

Supplemental disclosures of cash flow information:

Cash paid for income taxes

$
5

$
37

Cash paid for interest expense

552

—

Supplemental schedule of non-cash investing and financing activities:

Issuance of common stock warrants in connection with stock offering

$
64

$
—

Change in unrealized gain on short-term investments

—

2

Issuance of preferred stock for the settlement of sr. subordinated debt

2,697

—

Reclassification of warrant liability upon adoption of ASU 2017-11

1,761

—


	Common Stock			Additional Paid-in Capital		Accumulated Comprehensive Deficit		Total
	Shares	Amount
BALANCE, June 30, 2022 (unaudited)	55,120	$	55	$	354,641	$	(267,768)	$	86,928
Non-cash compensation recognized on stock options and ESPP	—	—		22		—		22
Restricted stock grants, net of cancellations	59	—		1,074		—		1,074
Cancellation of shares for payment of withholding tax	(61)	—		(159)		—		(159)
ESPP	11	—		21		—		32
Common shares issued in stock offering, net of offering costs	1,132	1		1,308		—		1,309


Net loss	—	—		—		(5,812)		(5,812)
BALANCE, September 30, 2022 (unaudited)	56,261	56		356,907		(273,580)		83,383


	Common Stock			Additional Paid-in Capital		Accumulated Comprehensive Deficit		Total
	Shares	Amount
BALANCE, December 31, 2021 (audited)	54,259	$	54	$	352,779	$	(252,273)	$	100,560
Non-cash compensation recognized on stock options and ESPP	—	—		66		—		66
Restricted stock grants, net of cancellations	1,192	1		3,782		—		3,783
Cancellation of shares for payment of withholding tax	(347)	—		(1,084)		—		(1,084)
ESPP	17	—		40		—		40
Common shares issued in stock offering, net of offering costs	1,132	1		1,308		—		1,309


Exercise of stock options	8	—		16		—		16
Net loss	—	—		—		(21,307)		(21,307)
BALANCE, September 30, 2022 (unaudited)	56,261	56		356,907		(273,580)		83,383

See accompanying notes to the consolidated financial statements.

Table of Contents

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	For the Nine Months Ended September 30,
	2023		2022
	(unaudited)		(unaudited)
Operating activities:
Net loss	$	(17,684)	$	(21,307)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	4,912		5,751
Non-cash lease expense	(160)		(374)
Non-cash transaction costs including amortization of debt discount and issuance costs	5,398		1,422
Change in fair value of warrant and derivative liabilities	(3,486)		(3,457)
Loss on derecognition of debt	2,985		—



Stock based compensation	3,316		3,849
Loss on disposal of assets	12		31
Changes in operating accounts:
Accounts receivable	208		1,108
Prepaid expenses and other assets	220		186
Accounts payable and accrued liabilities	(2,224)		(1,526)
Other liabilities	553		(161)
Net cash used in operating activities	(5,950)		(14,478)
Investing activities:

Capital expenditures, net	(5)		(85)
Other investing activities	71		94
Net cash provided by investing activities	66		9
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	(1,156)		(978)
Other financing activities	15		56
Net cash (used in) provided by financing activities	(160)		17,392
Net (decrease) increase in cash and cash equivalents	(6,044)		2,923
Cash and cash equivalents, beginning of period	14,026		16,078
Cash and cash equivalents, end of period	$	7,982	$	19,001

Supplemental disclosures of cash flow information:


Non-cash investing and financing activities:
Issuance of common stock in settlement and prepayment of notes payable	$	12,180	$	—
Derivative and warrants in connection with notes and stock offerings	—		9,578

See accompanying notes to the consolidated financial statements.

Table of Contents

SMITH MICRO SOFTWARE, INC.

Notes to the Consolidated Financial Statements

(Unaudited)

1. The Company

Smith Micro Software, Inc. (“Smith ~~Micro,” “Company,” “we,” “us,” and “our”~~Micro” or “the Company”) develops software to simplify and enhance the mobile experience, providing solutions to some of the leading wireless service providers ~~device manufacturers, and enterprise businesses~~ around the world. From ~~optimizing wireless networks~~enabling the family digital lifestyle to ~~uncovering customer experience insights, and from streamlining Wi-Fi access~~providing powerful voice messaging capabilities, the Company strives to ~~ensuring family safety, our solutions~~ enrich today’s connected lifestyles while creating new opportunities to engage consumers via ~~smartphones. Our~~smartphones and consumer Internet of Things (“IoT”) devices. Smith Micro’s portfolio ~~also~~ includes a wide range of products for creating, sharing, and monetizing rich content, such as visual voice messaging, ~~video streaming,~~retail content display optimization and ~~2D/3D graphics applications. With this as a focus, it is~~ performance analytics on various product sets.

Smith Micro’s ~~mission~~solution portfolio is comprised of proven products that enable its customers to ~~help our customers thrive in a connected world.~~

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 demonstration experiences that educate retail shoppers, create awareness of products and services, drive in-store sales, and optimize retail experiences with actionable analytics derived from in-store customer behavior.

2. Accounting Policies

Basis of Presentation

The accompanying interim consolidated balance sheet ~~and statement of stockholders’ equity~~ as of September 30, ~~2017,~~2023, and the related consolidated statements of operations and ~~comprehensive loss and cash flows~~stockholders’ equity for the three and nine months ended September 30, ~~2017~~2023 and ~~2016,~~2022, and the consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022, are unaudited. The unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted.

In the opinion of management, the accompanying unaudited consolidated financial statements for the periods presented reflect all adjustments which are normal and recurring, and necessary to fairly state the financial position, results of operations, and cash ~~flows.~~flows of the Company. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in ~~our~~the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016~~2022 filed with the ~~SEC.~~

SEC on March 23, 2023 (the "2022 Form 10-K").

Intercompany balances and transactions have been eliminated in consolidation.

Operating results for the three and nine months ended September 30, ~~2017~~2023 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, ~~2017.~~

~~3. Recently Issued~~2023.

New Accounting Pronouncements

In ~~July 2017,~~June 2016, the Financial Accounting Standards Board ~~(“FASB”~~("FASB") issued Accounting Standards Update ~~(“ASU”~~("ASU") ~~No. 2017-11,~~ ~~Earnings Per Share~~2016-13, "Financial Instruments - Credit Losses (Topic ~~260) Distinguishing Liabilities from~~326): Measurement of Credit Losses on Financial Instruments." This updated guidance sets forth a current expected credit loss model based on expected losses. Under this model, an entity recognizes an allowance for expected credit losses based on historical experience, current conditions and forecasted information rather than the current methodology of delaying recognition of credit losses until it is probable a loss has been incurred. This guidance became effective for the Company beginning with interim periods starting in fiscal year 2023. The impact of adopting the new standard did not have a material impact on the Company's consolidated financial statements.

Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the current presentation.

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3. Equity ~~(Topic 480) Derivatives~~Transactions

In a registered direct offering concurrent with the 2022 Notes and ~~Hedging (Topic 815) (“ASU 2017-11”), which changes~~Warrants Offering referred to in Note 4, on August 11, 2022, the ~~classification analysis~~Company entered into a Securities Purchase Agreement (the “Additional Purchase Agreement” and together with the Securities Purchase Agreement further discussed in Note 4, the “Purchase Agreements”) with certain accredited investors to sell at a purchase price of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether$2.65 per share an aggregate of 1,132,075 shares of the ~~instrument is indexed~~Company’s common stock and warrants to purchase up to an ~~entity’s own stock. ASU 2014-11 also clarifies existing disclosure requirements for equity-classified instruments. As~~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 a price of $2.65 per share and expires on February 14, 2028. The issuance of the Shares 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 SEC, 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 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 are not traded in an active securities market and, as such, the estimated fair value at inception was $1.6 million determined utilizing a ~~freestanding equity-linked financial instrument (or embedded~~Black-Scholes option pricing model and is reflected on the balance sheet line "Warrant liabilities" and as an adjustment to Additional Paid-in Capital.

4. Debt and Warrants Transactions

2022 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 ~~option)~~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 a price of $3.35 per share and expire five years from the date of issuance on August 11, 2027. There is no ~~longer would~~established public trading market for the Warrants and the Company does not intend to list the Warrants on any national securities exchange or nationally recognized trading system. The closing of the Notes and Warrants Offering occurred on August 11, 2022.

The Notes accrue compounding interest at the rate of 6.0% per annum, which is payable in cash or shares of the Company's common stock at the Company's option, in arrears in accordance with the terms of the Notes. Upon the occurrence and during the continuance of an Event of Default (as defined in the Notes), the Notes will accrue interest at the rate of 15.0% per annum. Upon conversion and other designated events, holders of the Notes are also entitled to receive an interest make-whole payment. Upon a redemption due to a Change in Control (as defined in the Notes), holders of the Notes are entitled to cash settlement. The Notes mature on December 31, 2023, with amortization payments due monthly by the first business day of the month from April 2023 through December 2023, and the balance at maturity. There were principal installment payments of $10.9 million made during the nine months ended September 30, 2023 as described in Note 3 above, and as such a portion of the debt and related derivative were derecognized.

The Warrants were assessed and concluded to be ~~accounted for~~liability instruments due to cash settlement provisions, and as a result all changes in the fair value of the Warrants will be recognized in the Company's consolidated statements of operations until they are either exercised or expire. The Warrants are not traded in an active securities market and, as such, the estimated fair value at inception was $3.8 million, determined utilizing a Black-Scholes option pricing model and is reflected on the balance sheet line "Warrant liabilities" and as a discount on the Notes.

The Notes contain a make-whole feature and a redemption right payable in cash upon change in control feature, as well as certain other conversion and redemption features. These features are viewed collectively as a compound embedded derivative ~~liability~~that meets the criteria to be bifurcated and carried at fair value. This is classified in the balance sheet line as "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 is subsequently adjusted to fair value quarterly, as required, and immediately prior to any change in underlying debt balance. The change in valuation of the debt instrument as a whole, including the derivative, as a result of installment payments extinguishing an aggregate of $10.9 million in principal under the ~~existence of a down round feature. For freestanding equity classified financial instruments, ASU 2017-11 requires entities that present earnings per share (EPS)~~Notes, is reflected in accordance with ASC Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. ASU 2017-11 is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted, including adoption in an interim period. If an entity early adopts ASU 2017-11 in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period in either of the following ways: (1) Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of ~~financial position as~~operations line "Loss on derecognition of ~~the beginning~~

Table of ~~the first fiscal year and interim period(s) in which ASU 2017-11 is effective or (2) Retrospectively to outstanding financial instruments with a down round feature~~Contents

debt" totaling $1.6 million for ~~each reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10.~~

~~The Company has elected to early adopt ASU 2017-11 during~~ the three months ended September 30, ~~2017 by applying ASU 2017-11 retrospectively to outstanding financial instruments with a down round feature~~2023 and $3.0 million for ~~each prior reporting period presented which includes~~ the ~~quarter ended September 30, 2016 in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. (See Note 19).~~

within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company will be evaluating the impact of this guidance on our consolidated financial statements.

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

~~4. Going Concern Evaluation~~

~~In connection with preparing consolidated financial statements for the three and~~ nine months ended September 30, 2017, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements2023. Below are ~~issued.~~

~~The Company considered the following:~~

~~Operating losses for ten consecutive quarters.~~

specific assumptions utilized:

~~Negative cash flow from operating activities for six consecutive quarters.~~

~~Depressed stock price resulting in being non-compliant with NASDAQ listing rules to maintain a stock price of $1.00/share.~~

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

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

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

~~The Company raised $4 million of debt financing during the year ended December 31, 2016.~~


Convertible Notes Derivative	Common stock market price		Risk-free interest rate		Expected dividend yield	Expected term (in years)	Expected volatility
March 31, 2023 for April 1, 2023 Installment date	$	1.16	4.68	%	—	0.75	84.34	%
May 1, 2023 for May 1, 2023 Installment date	$	1.22	4.68	%	—	0.67	81.57	%
May 31, 2023 for June 1, 2023 Installment date	$	1.21	4.91	%	—	0.59	86.20	%
June 30, 2023 for July 1, 2023 Installment date	$	1.11	5.42	%	—	0.50	90.68	%
July 31, 2023 for August 1, 2023 Installment date	$	1.14	5.53	%	—	0.42	59.89	%
August 31, 2023 for September 1, 2023 Installment date	$	1.71	5.54	%	—	0.33	69.85	%
September 30, 2023 for October 1, 2023 Installment date	$	1.21	5.56	%	—	0.25	78.21	%

~~The Company has raised funds from short-term loans from insiders.~~

~~As a result of the Company’s restructurings that were implemented during~~During the three months ended ~~December 31, 2016,~~September 30, 2023, the Company recognized interest expense of $1.5 million on the Notes and ~~again~~related instruments utilizing the effective interest rate of 155%, which includes amortization of debt issuance costs of $0.1 million, amortization of discount of $1.3 million, and contractual interest of $0.1 million.

During the nine months ended September 30, 2023, the Company recognized interest expense of $5.9 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 $5.1 million, and contractual interest of $0.5 million.

In accordance with the 2022 Notes and Warrants offering, during the ~~six~~nine months ended ~~June~~September 30, ~~2017,~~2023, 11,420,603 shares of the ~~Company’s cost structure is now in line with its future revenue projections. See Footnote 11 below for additional details regarding restructurings.~~

On September 29, 2017, the Company completed a $5.5 million preferred stock transaction, which converted $2.8 million of long term and short-term debt (face value) into equity and raised $2.7 million of new equity capital.

~~Management believes that the Company will generate enough cash from operations to satisfy its obligations~~Company's Common Stock were issued for the ~~next twelve months.~~

April 1, 2023 through the October 1, 2023 principal amortization installment date payments, which in total reduced the convertible Notes principal balance by $10.9 million. The ~~Company will take~~payment for the ~~following actions, if it starts~~October 1, 2023 principal amortization installment date was completed on September 30, 2023. During the three months ended September 30, 2023, 1,159,415 shares of the Company's Common Stock were prefunded to ~~trend unfavorably~~the holders of the Notes for the remaining balance related to ~~its internal profitability~~the November 1, 2023 principal amortization installment date. This prefunded balance of $1.2 million is reflected in the balance sheet line "Prepaid expenses and ~~cash flow projections,~~other current assets" as of September 30, 2023. There were no conversions by the holders of the Notes during the nine months ended September 30, 2023.

The current balance of the Notes as of September 30, 2023 is as follows (unaudited, in ~~order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:~~

~~Raise additional funds through short-term loans.~~

~~Implement additional restructuring and cost reductions.~~

~~Raise additional capital through a private placement.~~

thousands):

	•	~~Secure a commercial bank line~~
			Current
Gross Balance as of ~~credit.~~ September 30, 2023			$	4,051
Unamortized Discount			(562)
Unamortized Issuance Costs			(33)
Net Balance as of September 30, 2023			$	3,456

~~Dispose~~The Notes contain certain customary affirmative and negative covenants regarding the incurrence of ~~one~~indebtedness, acquisition and investment transactions, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends, distributions or ~~more product lines.~~

~~Sell or license intellectual property.~~

~~5. Cash~~redemptions, and ~~Cash Equivalents~~

~~Cash and cash equivalents are primarily held in two financial institutions and are uninsured except for~~ the ~~minimum Federal Deposit Insurance Corporation coverage and have original maturity dates~~transfer of ~~three months or less.~~assets, among other matters. As of September 30, ~~2017~~2023, the Company was in compliance with all covenants.

Warrant Liabilities

As further discussed above, on August 11, 2022, warrants to purchase 2,238,806 shares of common stock were issued with an exercise price of $3.35 per share in conjunction with the Notes and ~~December 31, 2016, bank balances totaling approximately $3.7 million~~Warrants Offering, at an initial fair value of $3.8 million. As further discussed in Note 3, Additional Warrants 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 ~~$2.1 million, respectively, were uninsured.~~

~~6. Accounts Receivable~~

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. Since issuance of the Warrants and Additional Warrants, there have

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been no warrant exercises. The Warrants and Additional Warrants are not traded in an active securities market and, as such, the estimated fair value was determined by using a Black-Scholes option pricing model that utilizes assumptions noted in the following table. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on the historical volatility over the expected term of the warrants. The Company ~~performs ongoing credit evaluations~~has no reason to believe future volatility over the expected remaining life of ~~its customers~~the Warrants and generally does not require collateral. The Company maintains reserves for estimated credit losses and those losses have been within management’s estimates. Allowances for product returns are included in other adjustmentsAdditional Warrants is likely to ~~accounts receivable~~differ materially from historical volatility. Expected life is based on the ~~consolidated balance sheets. Product returns~~contractual term of the applicable warrants. Below are ~~estimated based on historical experience~~the specific assumptions utilized:


Warrants	September 30, 2023
Common stock market price	$	1.21
Risk-free interest rate	4.49		%
Expected dividend yield	—
Expected term (in years)	3.87
Expected volatility	66.05		%


Additional Warrants	September 30, 2023
Common stock market price	$	1.21
Risk-free interest rate	4.49		%
Expected dividend yield	—
Expected term (in years)	4.37
Expected volatility	69.23		%

5. Fair Value of Financial Instruments

The Company measures and ~~management estimations.~~

~~The Company is utilizing the accounts receivable balances to secure the related party short-term notes payable.~~

~~7. Impairment or Disposal of Long Lived Assets~~

~~Long-lived assets to be held are reviewed for events or changes in circumstances, which indicate that their carrying~~discloses fair 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~~measurements as required by FASB ASC Topic No. ~~360,~~ ~~Property, Plant,~~820, Fair Value Measurements and ~~Equipment~~Disclosures. ~~The Company determined there was no impairment as~~

Fair value is an exit price, representing the amount that would be received upon the sale of ~~September 30, 2017 and December 31, 2016.~~

~~8. 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 thean asset or the ~~lease term.~~

9.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.

The following table presents information about the financial liabilities that are measured at fair value on a recurring basis at September 30, 2023 and 2022 (unaudited, in thousands):


Level 3	September 30, 2023		September 30, 2022


Notes and Warrants Offering Derivative	$	46	$	2,173
Warrants	742		2,462
Additional Warrants	536		1,486
Total	$	1,324	$	6,121

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The following table presents the changes in the fair value (unaudited, except for December 31, 2022, in thousands):


	Notes and Warrants Offering Derivative		Warrants		Additional Warrants		Total









Measurement at June 30, 2023	$	217	$	722	$	472	$	1,411
Change in fair value	(157)		20		64		(73)
Derecognition of debt	(14)		—		—		(14)
Measurement at September 30, 2023	$	46	$	742	$	536	$	1,324


	Notes and Warrants Offering Derivative		Warrants		Additional Warrants		Total



Measurement at December 31, 2022	$	1,575	$	2,052	$	1,265	$	4,892
Change in fair value	$	(1,448)	$	(1,310)	$	(729)	$	(3,487)
Derecognition of debt	$	(81)	$	—	$	—	$	(81)
Measurement at September 30, 2023	$	46	$	742	$	536	$	1,324

6. Goodwill

and Intangible Assets

In accordance with FASB ASC Topic No. 350, Intangibles-Goodwill and Other, ~~we review~~Smith Micro reviews the recoverability of the carrying value of goodwill at least annually or whenever events or circumstances indicate a potential impairment. ~~The Company’s~~For purposes of the goodwill impairment test, the Company operates as a single reporting unit. Different judgments relating to the determination of reporting units could significantly affect the testing ~~will be done annually at December 31. Recoverability~~ of goodwill ~~is determined by comparing~~for impairment and the amount of any impairment recognized.

In 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 ~~Company’s reporting units~~other assets and liabilities as of February 2023, and as such there was not any impairment. The Company determined that there were no further goodwill impairment indicators through September 30, 2023 and there were no goodwill impairment indicators at December 31, 2022. If current projections, including revenue growth and operating results, are not achieved or specific valuation factors outside the Company's control, such as discount rates, economic or industry challenges, significantly change, goodwill could be subject to the carrying value of the underlying net assets in the reporting units. If the fair value of a reporting unit is determined to be less than the carrying value of its net assets, goodwill is deemed impaired andfuture impairment.

For intangibles, an impairment loss is recognized ~~to the extent that~~if the carrying ~~value~~amount of ~~goodwill~~an intangible asset is not recoverable and its carrying amount exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the ~~difference between the fair value~~sum of the ~~reporting unit~~undiscounted cash flows expected to result from the use and eventual disposition of the ~~fair value~~asset. As of ~~its other~~February 28, 2023, the Company assessed the assets impacted as a result of the triggering event indicated above and ~~liabilities.~~performed a recoverability test on the Customer relationships intangible asset from the acquisition of the Family Safety Mobile Business from Avast in April 2021, using Level 3 unobservable inputs including estimates of revenue growth, and EBITDA. The ~~Company determined that~~Company's estimated undiscounted future cash flows exceeded the carrying amount of the Customer relationships intangible asset, and therefore there was no ~~goodwill~~ impairment atto the definite-lived intangible assets as a result of the triggering event. There were no further intangible asset impairment indicators through September 30, ~~2017 and December 31, 2016.~~

~~10. Intangible Assets~~

2023.

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The ~~following table sets forth our acquired~~components of the Company’s intangible assets ~~by major asset class~~were as follows for the periods presented:


	September 30, 2023 (unaudited)
	(in thousands, except for useful life data)
	Weighted Average Remaining Useful Life (in Years)	Gross Carrying Amount		Accumulated Amortization		Net Book Value
Purchased technology	6	$	13,330	$	(6,853)	$	6,477
Customer relationships	11	27,548		(6,519)		21,029
Customer contracts	1	7,000		(6,171)		829
Software license	6	5,419		(2,153)		3,266
Patents	4	600		(300)		300
Total		$	53,897	$	(21,996)	$	31,901


	December 31, 2022 (audited)
	(in thousands, except for useful life data)
	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	1	283		(273)		10
Patents	5	600		(236)		364
Total		$	54,379	$	(18,059)	$	36,320

The Company amortizes intangible assets over the pattern of economic benefit expected to be generated from the use of the assets, with a total weighted average amortization period of approximately nine years as of September 30, ~~2017~~2023 and ten years as of December 31, ~~2016 (in thousands except for useful life data):~~

September 30, 2017

December 31, 2016

Useful life

Accumulated

Net

Accumulated

Net book value

Impairment

Net

(years)

Gross

amortization

book value

Gross

amortization

before impairment

charge

book value

Purchased technology

5-6

$
265

$
(66
)

$
199

$
265

$
(32
)

$
233

$
—

$
233

Customer relationships

3-6

528

(220
)

308

999

(147
)

852

(411
)

441

Trademarks/trade
names

2

38

(24
)

14

38

(9
)

29

—

29

Non-compete

3

51

(21
)

30

51

(9
)

42

—

42

Total

$
882

$
(331
)

$
551

$
1,353

$
(197
)

$
1,156

$
(411
)

$
745

~~Intangible assets amortization expense was $0.1 million and $0.2 million for~~2022. During the three ~~and nine~~ months ended September 30, ~~2017, respectively,~~2023 and ~~$0.1 million for the three and nine months ended September 30, 2016. The Company determined there was an impairment of its Customer Relationships~~2022, intangible asset ~~in the amount of $0.4 million as of December 31, 2016.~~

~~Future~~ amortization expense ~~related to intangible assets as of September 30, 2017 are as follows (in thousands):~~

Year Ending December 31,

2017 - 3 months remaining

$
64

2018

249

2019

143

2020

47

2021

40

Beyond

8

Total

$
551

~~11. Restructuring~~

~~The following is the activity in our restructuring liability for~~was $1.5 million and $1.5 million, respectively. During the nine months ended September 30, ~~2017 (in thousands):~~

December 31, 2016

September 30, 2017

Balance

Provision-net

Usage

Balance

Lease/rental terminations

$
1,786

$
(149
)

$
(245
)

$
1,392

One-time employee termination benefits

65

805

(649
)

221

Datacenter consolidation, other

109

(91
)

(18
)

—

Total

$
1,960

$
565

$
(912
)

$
1,613

~~Of the total $1.6~~2023 and 2022, intangible asset amortization expense was $4.4 million ~~balance, $0.2~~and $4.8 million, ~~is reported in accrued liabilities and $1.4 million is reported in deferred rent and other long-term liabilities on the balance sheet.~~

~~12. Debt~~

~~Short-Term Debt~~

Atrespectively.

As of September 30, ~~2017~~2023, estimated amortization expense for the remainder of 2023 and ~~December 31, 2016, the carrying value and the aggregate fair value of the Company’s short-term debt were as follows (in thousands):~~

As of September 30, 2017

As of December 31, 2016

Carrying Amount

Fair Value

Carrying Amount

Fair Value

Current Liabilities:

Related-party notes payable, short-term

$
2,200

$
2,200

$
—

$
—

On February 7, 2017, the Company entered into a short-term secured borrowing arrangement with William W. and Dieva L. Smith (“Smith”) and on February 8, 2017 entered into a short-term secured borrowing arrangement with Steven L. and Monique P. Elfman (“Elfman”) pursuant to which Smith and Elfman each loaned to the Company $1 million and the Company issued to each of them a Secured Promissory Note (the “Original Notes”) bearing interest at the rate of 18% per annum. The Original Notes were due on March 24, 2017 are secured by the Company’s accounts receivable and certain other assets. William W. Smith, Jr. is the Company’s Chairman of the Board, President and Chief Executive Officer, and Steven L. Elfman is a director of the Company.

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

~~On March 31, 2017, the Company entered into a new short-term secured borrowing arrangement with Elfman for $1 million which matured on June 23, 2017.~~

On June 30, 2017, the Company entered into a new short-term secured borrowing arrangement with each of Smith and Elfman to refinance the prior arrangement with each of them, which matured on June 26, 2017 and June 23, 2017, respectively. Under the new

borrowing arrangements, the Company issued to each of Smith and Elfman a new Secured Promissory Note (“Replacement Notes”) with a principal balance of $1 million, bearing interest at the rate of 12% per annum, and maturing on September 25, 2017. The maturity date of the Replacement Note entered into with Smith may be extended by up to 180 days upon the mutual consent of the Company and Smith. Each of the Replacement Notes are secured by the Company’s accounts receivable and certain other assets.

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

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

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

On September 29, 2017, the Company exchanged shares of the Company’s newly designated Series B 10% Convertible Preferred Stock (“Series B Preferred Stock”) for outstanding short-term indebtedness with a principal amount of $0.8 million owed to Smith and $0.1 million to Arno for 750 and 50 shares, respectively. See Note 19, Equity Transactions, for further details on the Series B Preferred Stock Offering.

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

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

~~Long-Term Debt~~

~~At September 30, 2017, the aggregate fair value and the carrying value of the Company’s long-term debt~~thereafter was as follows ~~(in~~(unaudited, in thousands):

As of September 30, 2017

As of December 31, 2016

Carrying Amount

Fair Value

Carrying Amount

Fair Value

Long-term debt - related party

$
—

$
—

$
1,295

$
1,295

Long-term debt

1,492

1,492

1,295

1,295

Total long-term debt

$
1,492

$
1,492

$
2,590

$
2,590


Year Ending December 31,	Amortization Expense
2023	$	1,454
2024	5,635
2025	5,402
2026	5,007
2027	4,131
2028 and thereafter	10,272
Total	$	31,901

~~The carrying value~~

Table of $1.5 million and $2.6 million are net of debt discount of $0.4 million and $1.2 million and debt issuance costs of $0.1 million and $0.2 million as of September 30, 2017 and December 31, 2016, respectively.

On September 2, 2016, we entered into a Note and Warrant Purchase Agreement with Unterberg Koller Capital Fund L.P. and William W. and Dieva L. Smith (collectively, the “Investors”), pursuant to which the Company issued and sold to the Investors in a private placement senior subordinated promissory notes in the aggregate principal amount of $4 million (the “Notes”). The Company completed the transactions contemplated by the Note and Warrant Purchase Agreement and issued the Notes on September 6, 2016. The Notes mature three years following the issuance date, or September 6, 2019, and bear interest at the rate of 10% of the outstanding principal balance of the Notes, payable quarterly in cash or shares of the Company’s common stock. The Notes are subordinate and junior in right of payment to the prior payment in full of all claims, whether now existing or arising in the future, of holders of senior debt of the Company, as described in the Notes.

Contents

On September 29, 2017, the Company exchanged shares of the Company’s newly designated Series B 10% Convertible Preferred Stock for outstanding long-term indebtedness with a principal amount of $2 million owed to Smith for 2,000 of the Series B Preferred Stock. See Note 19, Equity Transactions, for further details on the Series B Preferred Stock Offering.

~~The Company reviewed FASB ASC Topic No. 470-50,~~ ~~Debt Extinguishment~~, to evaluate the debt extinguishment loss incurred from the transaction. Upon completion of the evaluation, it was determined that the loss associated with the long-term related party loan extinguishment to Preferred Stock should be accounted through the Statement of Operations. The principal balance of the note and resulting fair value of the equity interest transferred was $2 million. The fair value was reduced by legal fees and other direct issuance costs of $0.1 million. The net carrying amount of the long-term note was $1.5 million, which was net of debt issuance costs of $0.1 million and discount of $0.4 million. The extinguishment loss associated with this note was the difference between the net fair value of the equity interest transferred and the net carrying amount of the note being extinguished, which was $0.4 million.

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

~~13. Net Loss~~7. Earnings Per Share

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

~~On August 15, 2016,~~

The following table sets forth the ~~Company filed a Certificate~~details of ~~Amendment to its Amended~~basic and ~~Restated Certificate~~diluted earnings per share (unaudited, in thousands, except per share amounts):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022

Numerator:
Net loss	$	(5,133)	$	(5,812)	$	(17,684)	$	(21,307)
Denominator:
Weighted average shares outstanding – basic	67,354		55,722		62,297		55,140
Potential common shares – options / warrants (treasury stock method) and convertible notes (as if converted method)	—		—		—		—
Weighted average shares outstanding – diluted	67,354		55,722		62,297		55,140

Shares excluded (anti-dilutive)	7,163		4,726		8,722		2,182

Net loss per common share:
Basic	$	(0.08)	$	(0.10)	$	(0.28)	$	(0.39)
Diluted	$	(0.08)	$	(0.10)	$	(0.28)	$	(0.39)

The following shares were excluded from the computation of ~~Incorporation with~~diluted net loss per share as the ~~Secretary~~impact of ~~State of Delaware for the purpose of effecting a reverse stock split (the “Reverse Split”) of the outstanding~~including those shares of the Company’s common stock at a ratio of one (1) share for every four (4) shares outstanding, so that every four (4) outstanding shares of common stock before the Reverse Split represents one (1) share of common stock after the Reverse Split. Proportionate adjustments were made to: (i) the aggregate number of shares of Common Stock available for equity-based awards to be granted in the future under our 2015 Omnibus Equity Incentive Plan; (ii) the number of shares that would be ~~owned upon vesting of restricted stock awards and stock options which are outstanding under our 2015 Omnibus Equity Incentive Plan and 2005 Stock Option Plan, and~~anti-dilutive (unaudited, in thousands):


	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2023	2022	2023	2022


Convertible notes, as if converted	2,178	2,460	3,399	823
Outstanding stock options	84	138	84	144
Outstanding warrants	4,901	2,128	5,239	1,215
Total anti-dilutive shares	7,163	4,726	8,722	2,182

During the exercise price of any outstanding stock options, and (iii) the number of shares of Common Stock available for purchase under our Preferred Shares Rights Agreement, dated October 16, 2015, between us and Computershare Trust Company, N.A., as rights agent. We have a total of 100,000,000 authorized shares of common stock, which remained unchanged by the reverse stock split. The Reverse Split was approved by the Company’s stockholders at the special meeting held on August 15, 2016 and was effective on August 17, 2016. The Company adjusted shareholders' equity to reflect the reverse stock split by reclassifying an amount equal to the par value of the additional shares arising from the split from common stock to the Additional Paid-in Capital during the third quarter ~~of fiscal 2016, resulting in no net impact to shareholders' equity on our consolidated balance sheets. Fractional shares~~ended September 30, 2023, there were rounded down to the nearest whole share. Stockholders received cash in lieu of such fractional shares. All information presented herein has been retrospectively adjusted to reflect the reverse stock split as if it took place as of the earliest period presented.

On September 29, 2017, the Company filed with the Secretary of State of the State of Delaware a Certificate of Designation of Preferences, Rights and Limitations of Series B Preferred Stock of the Company (the “Certificate of Designation”), designating a total of 5,500 shares of Series B Preferred Stock. Under the Certificate of Designation, the shares of Series B Preferred Stock have a stated value of $1,000 per share and are optionally convertible, subject to certain limitations set forth in the Certificate of Designation, into shares of the Company’s Common Stock at a conversion price of $1.14 per share, subject to adjustment in the event of a stock split, stock dividend, combination, reclassification or other recapitalization affecting the Common Stock.

~~The holders of Series B Preferred Stock are entitled to receive cumulative dividends~~ ~~out of funds legally available thereof at~~ ~~a rate of ten percent (10%) per annum,~~ payable (i) when and as declared by the Board of Directors, in quarterly installments on March 1, June 1, September 1 and December 1, and (ii) upon conversion into Common Stock with respect the Series B Preferred Stock being converted.

~~In the event~~2.0 million warrants that ~~the~~ trading price of the Company’s Common Stock for 20 consecutive trading days (as determined in the Certificate of Designation) exceeds 400% of the then effective Conversion Price of the Series B Preferred Stock (initially set at $1.14), the Company may force conversion of the Series B Preferred Stock into shares of Common Stock or elect to redeem the Series B Preferred Stock for cash.

Until the date that stockholder approval is obtained, the Certificate of Designation limits the number of shares of Common Stock that are issuable to any holder upon conversion of such holder’s Series B Preferred Stock, such that such issuances would not cause such holder to own in excess of 19.99% of the Company’s issued and outstanding Common Stock. In addition, a holder’s shares of Series B Preferred Stock shall not be converted if, after giving effect to the conversion, such holder and its affiliated persons would own beneficially more than 9.99% of the Company’s Common Stock, subject to adjustment solely at the holder’s discretion upon 61 days’ prior notice to the Company.

expired unexercised.

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2017

2016

2017

2016

(unaudited, in thousands, except per share amounts)

(unaudited, in thousands, except per share amounts)

Numerator:

Net loss available to
   common stockholders

$
(1,670
)

$
(4,632
)

$
(6,501
)

$
(11,618
)
Denominator:

Weighted average shares
   outstanding - basic

14,297

12,209

13,221

11,826

Potential common shares -
  options / warrants
   (treasury stock method)

—

2

1

3

Weighted average shares
   outstanding - diluted

14,297

12,211

13,222

11,829

Shares excluded
   (anti-dilutive)

—

2

1

3

Shares excluded due to an
   exercise price greater than
   weighted average
   stock price for the period

1,973

2,062

1,869

2,062

Net loss per common share:

Basic

$
(0.12
)

$
(0.38
)

$
(0.49
)

$
(0.98
)
Diluted

$
(0.12
)

$
(0.38
)

$
(0.49
)

$
(0.98
)

~~14.~~

8. Stock-Based Compensation

Stock Plans

During the nine months ended September 30, ~~2017,~~2023, the Company granted ~~87,500~~1.9 million shares of restricted stock ~~with a weighted average grant date fair value~~under the Company’s 2015 Omnibus Equity Incentive Plan, as amended ("2015 OEIP"), which was approved by Smith Micro’s stockholders on June 18, 2015 and subsequent amendments to the 2015 OEIP to increase the number of ~~$1.11 per share. These costs will be amortized ratably over a period of 0~~shares reserved thereunder were subsequently approved by its stockholders on June 14, 2018, June 9, 2020, and June 6, 2023. The 2015 OEIP replaced the 2005 Stock Option / Stock Issuance Plan (“2005 Plan”) which was due to ~~48 months.~~

expire on July 28, 2015. As of

Table of Contents

September 30, ~~2017,~~2023, there were ~~1.7~~approximately 3.3 million shares available for future grants under the Company’s 2015 ~~Omnibus Equity Incentive~~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 12,625,000 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 Company's Board of Directors 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 Compensation Committee of the Board of Directors administers the 2015 OEIP and determines the vesting schedule at the time of grant. 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 awards terminate, and all vested stock options may be exercised within a period of 90 days following termination of employment. 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, which typically ranges from 12 to 48 months, however in the quarter ended September 30, 2023, there were new grants with tranched vesting periods of 2 to 7 months.

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 ~~most recent~~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 ~~period ended September 30, 2017~~periods. Payroll deductions under the ESPP are limited to 10% of the employee’s compensation and ~~resulted~~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 2,000 shares being purchased/granted at a fair value of $0.77 per share. The next six-month offering period began on October 1, 2017 and will end on March 31, 2018. These shares will have a fair value of $0.96 per share.

the aggregate may be purchased under the ESPP.

Stock Compensation

Expense

The Company accounts for all stock-based payment awards made to employees and directors based on their fair values ~~which is~~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. ~~Restricted stock is valued using the closing stock price on the date of the grant. Options are valued using a Black-Scholes valuation model.~~

Compensation Costs

~~Stock-based non-cash~~

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017			2016			Three Months Ended September 30,				Nine Months Ended September 30,
	(unaudited)				(unaudited)						2023		2022		2023		2022
Cost of revenues	$	—	$	—	$	—		$	3
Selling and marketing		5		84		(28	)		238

Cost of sales										Cost of sales	—		—		—		2
Sales and marketing										Sales and marketing	300		179		653		915
Research and development		44		128		169			375	Research and development	290		279		754		808
General and administrative		119		196		463			557	General and administrative	751		637		1,909		2,124
Restructuring expense		—		—		398			—
Total non-cash stock compensation expense	$	168	$	408	$	1,002		$	1,173	Total non-cash stock compensation expense	$	1,341	$	1,095	$	3,316	$	3,849

~~15. Fair Value Measurements~~

~~The Company measures~~

As of September 30, 2023, there was approximately $6.7 million in unrecognized compensation costs related to non-vested stock options and ~~discloses~~restricted stock granted under the 2015 OEIP and the 2005 Plan.

Table of Contents

Stock Options

A summary of the Company’s stock options outstanding and related information under the 2015 OEIP and 2005 Plan for the nine months ended September 30, 2023 are as follows (unaudited, in thousands except weighted average exercise price and weighted average remaining contractual life):


	Shares	Weighted Avg. Exercise Price		Wtd. Avg. Remaining Contractual Life (Yrs)	Aggregate Intrinsic Value
Outstanding as of December 31, 2022	139	$	3.75	5.1	$	6


Forfeited	(51)	$	4.25	—	$	7

Outstanding as of September 30, 2023	84	$	3.35	4.0	$	—
Vested and expected to vest at September 30, 2023	83	$	3.34	3.9	$	—
Exercisable as of September 30, 2023	77	$	3.24	3.7	$	—

Restricted Stock Awards

A summary of the Company’s restricted stock awards outstanding under the 2015 OEIP for the nine months ended September 30, 2023 are as follows (unaudited, in thousands, except weighted average grant date fair ~~value measurements as required by~~value):


	Shares	Weighted average grant date fair value
Unvested at December 31, 2022	1,679	4.75
Granted	1,945	1.58
Vested	(770)	4.30
Canceled and forfeited	(109)	3.78
Unvested at September 30, 2023	2,745	2.67

9. Revenues

Revenue Recognition

In accordance with FASB ASC Topic No. ~~820,~~ ~~Fair Value Measurements~~606, Revenue from Contracts with Customers, the Company recognizes the sale of goods and ~~Disclosures~~.

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determinedservices based on ~~assumptions that market participants would use~~the five-step analysis of transactions as provided in ~~pricing an asset or a liability. As a basis for considering such assumptions, the FASB establishes a three-tier value hierarchy,~~Topic 606, 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~~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. 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 which may include certain incentives and discounts, product returns, distributor fees, and storage fees. 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 generates the majority of its revenue on usage-based fees which are variable and depend entirely on customers’ use of ~~observable inputs~~perpetual licenses, transactions processed on the Company’s hosted environment, advertisement placements on the Company’s service platform, and ~~minimize~~activity on the ~~use~~Company’s cloud-based service platform.

The Company’s contracts with mobile network operator (“MNO”) customers include promises to transfer multiple products and services. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Smith Micro’s cloud-based services

Table of ~~unobservable inputs when measuring fair value.~~

~~As required by FASB ASC Topic No. 820, we measure our cash~~Contents

include a software solution license integrated with cloud-based services. Since the Company does not allow its customers to take possession of the cloud-based elements of its software solutions, and ~~cash equivalents at fair value. Our cash equivalents are classified within Level 1 by using quoted market prices utilizing market observable inputs.~~

since the utility of the license comes from the cloud-based services that the Company provides, Smith Micro considers the software license and the cloud services to be a single performance obligation. The Company ~~early adopted ASU 2017-11~~recognizes revenue associated with its MNO customers based upon their active subscribers’ access and ~~changed its method~~usage of Smith Micro’s software licenses and cloud-based services on Smith Micro’s platforms or satisfaction of the performance obligations as indicated in the contracts.

Smith Micro has made accounting ~~for warrants during~~policy elections to exclude all taxes by governmental authorities from the ~~nine months ended September 30, 2017~~measurement of the transaction price, and since the Company’s standard payment terms are less than one year, the Company has elected the practical expedient not to assess whether a contract has a significant financing component.

Disaggregation of Revenues

Revenues on a ~~full retrospective basis. (See Note 19).~~

~~16.~~disaggregated basis are as follows (unaudited, in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022

License and service fees	$	741	$	957	$	2,619	$	2,818
Hosted environment usage fees	749		1,074		2,309		3,937
Cloud based usage fees	9,254		9,388		26,438		28,936
Consulting services and other	257		280		903		1,417
Total revenues	$	11,001	$	11,699	$	32,269	$	37,108

10. Segment, Customer Concentration and Geographical Information

Segment Information

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

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

The following table ~~shows~~presents the Wireless revenues ~~generated~~ by ~~each business unit (in~~product line (unaudited, in thousands):

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2017

2016

2017

2016

(unaudited)

(unaudited)

Wireless

$
4,690

$
5,237

$
13,678

$
17,513

Graphics

1,114

1,241

3,564

3,638

Total revenues

$
5,804

$
6,478

$
17,242

$
21,151


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022

Family Safety	$	9,179	$	9,640	$	27,016	$	30,173
CommSuite	749		1,070		2,310		3,932
ViewSpot	1,073		989		2,943		3,003

Total Wireless revenues	$	11,001	$	11,699	$	32,269	$	37,108

Customer Concentration Information

~~A summary~~

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

total accounts receivable.

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2017

2016

2017

2016

(unaudited)

(unaudited)

Wireless:

Sprint (& affiliates)

58.8
%

64.5
%

60.0
%

64.7
%
Graphics:

FastSpring

12.6
%

13.7
%

14.1
%

12.8
%

~~The~~For the three months ended September 30, 2023, three customers made up 45%, 32% and 10% of revenues. For the three months ended September 30, 2022, two customers ~~listed above comprised 68%~~made up 40% and ~~81%~~37% of ~~our accounts receivable as~~revenues.

For the nine months ended September 30, 2023, three customers made up 41%, 35%, and 10% of revenues. For the nine months ended September 30, 2022, two customers made up 40% and 37% of revenues.

Table of Contents

As of September 30, ~~2017~~2023, three customers accounted for 33%, 32%, and ~~2016, respectively.~~

18% of accounts receivable. As of September 30, 2022, four customers accounted for 36%, 28%, 17%, and 11% of accounts receivable.

Geographical Information

During the three and nine months ended September 30, ~~2017~~2023 and ~~2016,~~2022, the Company operated in ~~three~~two geographic ~~locations;~~locations: the Americas ~~EMEA (Europe, the~~and Europe, Middle East and ~~Africa), and Asia Pacific.~~Africa (EMEA). Revenues attributed to the geographic location of the customers’ bill-to address were as follows ~~(in~~(unaudited, in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,					For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016			2023		2022		2023		2022
	(unaudited)				(unaudited)
Americas	$	5,713	$	6,218	$	16,949	$	20,662	Americas	$	10,787	$	11,247	$	31,380	$	35,654
EMEA		43		203		124		367	EMEA	214		452		889		1,454
Asia Pacific		48		57		169		122
Total revenues	$	5,804	$	6,478	$	17,242	$	21,151	Total revenues	$	11,001	$	11,699	$	32,269	$	37,108

The Company does not separately allocate specific assets to these geographic locations.

~~17. Related-Party Transactions~~

On September 2, 2016, the Company entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with William W. and Dieva L. Smith (collectively, the “Smith”), pursuant to which the Company issued and sold to Smith in a private placement senior subordinated promissory notes in the aggregate principal amount of $2 million (the “Debt Notes”) and five-year warrants (the “Warrants”) to purchase an aggregate of 850,000 shares of the Company’s common stock at an exercise price of $2.74 per share. The Company completed the transactions contemplated by the Purchase Agreement and issued the Debt Notes and Warrants on September 6, 2016. William W. Smith, Jr. is the Company’s Chairman of the Board, President and Chief Executive Officer. Refer to Note 19, Equity Transactions, for additional details.

On February 7, 2017, the Company entered into a short-term secured borrowing arrangement with Smith and on February 8, 2017, the Company entered into a short-term secured borrowing arrangement with Steven L. and Monique P. Elfman (“Elfman”) pursuant to which Smith and Elfman each loaned to the Company $1 million and the Company issued to each of them a Secured Promissory Note (the “Original Notes”) bearing interest at the rate of 18% per annum. The Original Notes were due on March 24, 2017 and were secured by the Company’s accounts receivable and certain other assets. Steven L. Elfman is a director of the Company.

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

~~On March 31, 2017, the Company entered into a new short-term secured borrowing arrangement with Elfman for $1 million which matured on June 23, 2017.~~

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

On June 30, 2017, the Company entered into a new short-term secured borrowing arrangement with each Smith and Elfman to refinance the prior arrangements with each of them which matured on June 26, 2017 and June 23, 2017, respectively. Under the new borrowing arrangement, the Company issued to each of Smith and Elfman a new Secured Promissory Note (“Replacements Notes”) with a principal balance of $1 million, bearing interest at the rate of 12% per annum, and maturing on September 25, 2017. The maturity date of the Replacement Note entered into with Smith may be extended by up to 180 days upon the mutual consent of the Company and Smith. Each of the Replacement Notes are secured by the Company’s accounts receivable and certain other assets.

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

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

~~18.~~

11. Commitments and Contingencies

~~Leases~~

The Company leases its buildings under operating leases that expire on various dates through 2022. Future minimum annual lease payments under such leases as of September 30, 2017 are as follows (in thousands):

Year Ending December 31,

Operating

2017 - 3 months remaining

$
595

2018

2,433

2019

2,029

2020

1,725

2021

1,728

2022

33

Total

$
8,543

Litigation

As of September 30, 2017, $3.4 million of the remaining lease commitments expense has been accrued as part of the 2013 Restructuring Plan, partially offset by future estimated sublease income of $2.1 million.

~~Pennsylvania Opportunity Grant Program~~

On September 19, 2016, we entered into a Settlement and Release Agreement with the Commonwealth of Pennsylvania, acting by and through the Department of Community and Economic Development (“DCED”) to repay $0.3 million of the original $1 million grant previously received by the Company. Per the agreement, the total amount due of $0.3 million is at 0% interest and is payable in twenty equal quarterly installments commencing on January 31, 2017 and ending on October 31, 2021. The balances were $0.3 million as of September 30, 2017 and December 31, 2016 and are reported in Accrued liabilities and Deferred rent and other long-term liabilities on the balance sheet.

~~Litigation~~

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

Other Contingent Contractual Obligations

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

~~19. Equity Transactions~~

~~Preferred Stock Offering~~

~~On September 29, 2017,~~

12. Leases

The Company leases office space and equipment, and certain office space was subleased during 2022. Management determines if a contract is a lease at the ~~Company entered into a Securities Purchase Agreement with several investors for the issuance and sale (the “Offering”) of 5,500 shares~~inception of the ~~Company’s newly designated Series B 10% Convertible Preferred Stock (the “Series B Preferred Stock”)~~arrangement and reviews all options to extend, terminate, or purchase its right-of-use assets at ~~a stated value of $1,000 per share, for a total purchase price of $5.5 million. The Series B Preferred Stock is convertible into~~ the ~~Company’s Common Stock at a conversion price of $1.14 per share, which was the closing bid price~~inception of the ~~Common Stock on September 28, 2017, or approximately 4,824,562 shares~~lease and accounts for these options when they are reasonably certain of ~~Common Stock in the aggregate.~~ ~~The holders of~~ ~~Series B~~ ~~Preferred Stock are entitled to receive cumulative dividends~~ ~~out of funds legally available thereof at~~ ~~a rate of ten percent (10%) per annum,~~ ~~payable (i) when and as declared by the Board of Directors, in quarterly installments on March 1, June 1, September 1 and December 1, and (ii) upon conversion into Common Stock~~being exercised.

Leases with ~~respect the Series B Preferred Stock being converted.~~

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

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

~~Common Stock Offering~~

~~On May 16, 2017, the Company entered into subscription agreements with several investors for the issuance and sale of~~ an aggregate of 2,077,000 shares of its common stock, in a registered direct offering at a purchase price of $1.05 per share. The Shares were offered by the Company pursuant to a shelf registration statement on Form S-3 (File No. 333-215786), which was declared effective on February 10, 2017 by the Securities and Exchange Commission (the “SEC”). Also, on May 16, 2017, the Company entered into subscription agreements with four accredited investors in a private placement pursuant to which the Company issued and sold to the Investors an aggregate of 85,000 shares of its unregistered common stock at a price per share of $1.10.

The Company engaged Sutter Securities Incorporated and Chardan Capital Markets, LLC as co-placement agents in connection with the registered direct offering pursuant to engagement letter agreements with each firm. The Company agreed to pay the placement agents a cash placement fee and issued to the placement agents warrants to purchase shares of Common Stock equal to 5% of the number of shares sold through each of them, without duplication, at an exercise price per share equal to $1.21 (Sutter) and $1.155 (Chardan). The warrants have ainitial term of ~~five years and will be exercisable beginning on November 18, 2017.~~

The transactions closed on May 17, 2017 and the Company realized gross proceeds of $2.3 million before deducting transaction fees and other expenses. Offering costs related to the transaction totaled $0.2 million, comprised of $0.1 million of transaction fees and $0.1 million of legal and other expenses, resulting in net proceeds of $2.1 million.

~~Warrants~~

On September 2, 2016, we entered into a Note and Warrant Purchase Agreement with Unterberg Koller Capital Fund L.P. and William W. and Dieva L. Smith (collectively, the “Investors”), pursuant to which the Company issued five-year warrants (the “Warrants”) to purchase an aggregate of 1,700,000 shares of the Company’s common stock at an Exercise Price of $2.74 per share, which expire five years from the date of issuance. The Company completed the transaction contemplated by the Note and Warrant Purchase Agreement and issued the Warrants on September 6, 2016. The Warrants contain provisions that if the ~~Company sells or issues shares of Common Stock (as defined in Warrants) with an exercise price per share less~~greater than ~~the Exercise Price of $2.74, the Exercise Price shall be adjusted according to the terms set forth within the Warrants (“Triggering Event”).~~

On May 16, 2017, the Company engaged Sutter Securities Incorporated (“Sutter”) and Chardan Capital Markets, LLC (“Chardan”) as co-placement agents in connection with a registered direct offering. The Company agreed to pay the placement agents a cash placement fee and issued to the placement agents warrants to purchase shares of Common Stock equal to 5% of the number of shares sold through each of them, without duplication, at an exercise price per share equal to $1.21 (Sutter) and $1.155 (Chardan). The warrants issued to Sutter and Chardan have a term of five years and will be exercisable beginning on November 18, 2017.

Since the issuance of the Warrants on September 6, 2016, there have been five Triggering Events, which caused the Warrants to be repriced from the original Exercise Price of $2.74: Common Stock offerings in May 2017 for $1.10 and 1.05, the issuance of warrants to Sutter and Chardan with exercise prices of $1.21 and $1.155, respectively, all resulting in a charge of $3,000, and the Series B Preferred Stock issuance with a conversion price of $1.14 in September 2017, resulting in a charge of $41,000. The Triggering Event charges weretwelve months are recorded ~~to Stockholders’ Equity in the applicable period. Upon application of the Triggering Events above, the~~ ~~Unterberg Koller Capital Fund L.P. Adjusted Exercise Price is $2.14 and the Smith Adjusted Exercise Price is $2.38, which is also the agreed upon floor for the Smith Warrants.~~

The Company early adopted ASU 2017-11 and changed its method of accounting for certain warrants that were initially recorded as liabilities during the nine months ended September 30, 2017 on a full retrospective basis. Since the warrants were issued in conjunction with the Related – party notes payable and Notes payable (the “Notes Payable”) issuance, the Company also revalued the amount of debt discount related to the valuation of the warrants, which impacted the net carrying value of Notes Payable. Accordingly, the Company reclassified the Warrant liability to Additional paid in capital of $1.8 million and $1.2 million and the change in valuation of the amount of debt discount from the Notes payable to Additional paid-in capital of $0.7 million and $0.7 million on the consolidated balance ~~sheets for~~sheet. Lease expense is recognized on a straight-line basis over the ~~three months ended September 30, 2016 and~~lease term.

The Company’s lease contracts generally do not provide a readily determinable implicit rate. For these contracts, the ~~year ended December 31, 2016, respectively. In addition, due~~estimated incremental borrowing rate is based on information available at the inception of the lease.

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Operating lease cost consists of the following (unaudited, in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022

Lease cost	$	406	$	400	$	1,224	$	1,219
Sublease income	—		—		—		(18)
Total lease cost	$	406	$	400	$	1,224	$	1,201

The maturity of operating lease liabilities is presented in the following table (unaudited, in thousands):


	As of September 30, 2023

2023	$	406
2024	1,509
2025	1,154
2026	474

Total lease payments	3,543
Less imputed interest	322
Present value of lease liabilities	$	3,221

Additional information relating to the ~~retrospective adoption, for the year ended December 31, 2016, the~~Company’s operating leases follows (unaudited):


	As of September 30, 2023

Weighted average remaining lease term (years)	2.42
Weighted average discount rate	6.3	%

13. Income Taxes

The Company credited the Change in fair value of warrant liability on its consolidated statements of operations by $0.9 million with the same offset to Accumulated deficit on the consolidated balance sheets. The following table provides a reconciliation of Warrant liability, Additional paid-in capital, Accumulated deficit and Change in fair value of warrant liability on the consolidated balance sheets for the three months ended September 30, 2016 and the year ended December 31, 2016 (in thousands):

Consolidated Balance Sheet

Related-party
notes payable

Notes payable

Warrant liability

Additional
paid-in capital

Accumulated
deficit

Balance, September 30, 2016 (Prior to
adoption of ASU 2017-11)

$
883

$
883

$
1,761

$
227,565

$
(222,185
)
Change in valuation of notes payable

359

359

—

(718
)

—

Reclassification of warrant liability

—

—

(1,761
)

1,761

—

Change in fair value of warrant liability

—

—

—

335

(335
)
Change in interest (expense) income, net

—

—

—

(17
)

17

Balance, September 30, 2016 (After adoption
of ASU 2017-11)

$
1,242

$
1,242

$
—

$
228,926

$
(222,503
)

Consolidated Balance Sheet

Related-party
notes payable

Notes payable

Warrant liability

Additional
paid-in capital

Accumulated
deficit

Balance, December 31, 2016 (Prior to
adoption of ASU 2017-11)

$
967

$
967

$
1,210

$
227,889

$
(225,397
)
Change in valuation of notes payable

328

328

—

(656
)

—

Reclassification of warrant liability

—

—

(1,210
)

1,210

—

Change in fair value of warrant liability

—

—

—

910

(910
)
Change in interest (expense) income, net

—

—

—

(79
)

79

Balance, December 31, 2016 (After adoption
of ASU 2017-11)

$
1,295

$
1,295

$
—

$
229,274

$
(226,228
)

The adoption of ASU 2017-11 increased the Loss before provision for income taxes and Net loss by $0.3 million for the three months and nine months ended September 30, 2016, and increased the Net loss per share by $0.03 and $0.02 for the same periods, respectively. During the nine months ended September 30, 2017, there was no impact on the Loss before provision for income taxes, Net loss and Net loss per share due to the adoption of ASU 2017-11.

The Company’s consolidated statement of cash flows for the nine months ended September 30, 2016 was also impacted by the adoption of ASU 2017-11, including the increase in the Net loss by $0.3 million, the reduction of Amortization of debt discounts by a nominal amount and the elimination of the previously reported Change in fair value of warrant liabilities of $0.3 million.

~~20. Income Taxes~~

~~We account~~accounts 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 as either 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.

In assessing whether a valuation allowance is required, significant weight is to be given to evidence that can be objectively verified. A significant factor in the Company’s assessment is that the Company ~~has been~~was in a ~~five-year~~three-year historical cumulative loss as of the end of fiscal ~~year 2016.~~2022. In addition to the three-year historical cumulative loss at the end of fiscal 2022, the Company was also in a loss for fiscal 2017 and 2018. These facts, combined with uncertain near-term market and economic conditions, reduced the Company’s ability to rely on projections of future taxable income in assessing the realizability of its deferred tax assets.

After a review of the four sources of taxable income as of December 31, ~~2016 (as described above),~~2022, and after consideration of the Company’s ~~continuing~~ cumulative loss position as of December 31, ~~2016,~~2022, the Company will continue to reserve its ~~US-based~~U.S.-based deferred tax amounts, which total ~~$76.3~~$62.7 million as of September 30, ~~2017.~~

2023.

The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. ~~Federal income tax returns of the~~The Company ~~are subject to IRS examination for the 2012 – 2016 tax years. State income tax returns are~~is no longer subject to examination for ~~a period~~U.S. federal income tax returns for years before December 31, 2018 and for state income tax returns, the Company is no longer subject to examination for years before December 31, 2017. As of ~~three to four years after filing.~~September 30, 2023, the Company had no outstanding tax audits. The outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. WeSmith Micro may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to ~~our~~the consolidated financial ~~results.~~results of the Company. It is the Company’s policy to classify any interest and/or penalties in the consolidated financial statements as a component of income tax expense.

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14. Subsequent Events

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

Subsequent events have been evaluated as of the date of this filing and no further disclosures ~~were~~are required.

~~Item 2.~~

~~Management’s Discussion and Analysis of~~ ~~Financial Condition and Results of Operations~~

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

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

•our ability to establish and maintain strategic relationships with our customers and mobile device manufacturers, their ability to attract customers, and their willingness to promote our products;

•our ability and/or customers’ ability to distribute our mobile software applications to their end users through third party mobile software application stores, which we ~~may~~do not ~~be able~~control;

•our dependency upon effective operation with operating systems, devices, networks and standards that we do not control and on our continued relationships with mobile operating system providers, device manufacturers and mobile software application stores on commercially reasonable terms or at all;

•our ability to ~~remain~~hire and retain key personnel;

•the possibility of security and privacy breaches in our systems and in the third-party software and/or systems that we use, damaging client relations and inhibiting our ability to grow;

•failure to realize the expected benefits of prior acquisitions;

•interruptions or delays in the services we provide from our data center hosting facilities that could harm our business;

•the existence of undetected software defects in our products and our failure to resolve detected defects in a ~~going concern;~~

timely manner;

•our current client concentration within the vertical wireless carrier market, and the potential impact to our business resulting from changes within this vertical market, or failure to penetrate new markets;

•rapid technological evolution and resulting changes in demand for our products from our key customers and their end users;

•intense competition in our industry and the core vertical markets in which we ~~may not be able~~operate, and our ability to successfully compete;

•the risks inherent with international operations;

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

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

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

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

•our ability to raise additional capital ~~to fund our operations~~ and the risk of such capital ~~may~~ not bebeing available to us at commercially reasonable terms or at all;

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•risks related to the existence and terms of our ~~customer concentration given~~outstanding convertible notes, including that they may restrict our ability to obtain additional financing, and adversely affect our business, financial condition and cash flows from operations in the future, and could require us to curtail or cease our operations;

•the risk that the ~~majority~~conversion of our outstanding convertible notes and exercise of the warrants issued in connection therewith, which will dilute the ownership interest of our existing stockholders, may also depress the price of our common stock;

•the risk that our obligations to the holders of our convertible notes are secured by a security interest in substantially all of our assets, and if we default on those obligations, the note holders could foreclose on our assets;

•our ability to be profitable;

•our ability to remain a going concern;

•changes in our operating results due to shifts in our sales ~~depend~~mix and variability in our operating expenses;

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

•the availability of third-party intellectual property and licenses needed for our operations on ~~a few large client relationships, including Sprint;~~

commercially reasonable terms, or at all;

~~we may not be able to become and remain profitable;~~

•the difficulty of predicting our quarterly revenues and operating results ~~are difficult to predict~~ and ~~could fall~~the chance of such revenues and results falling below analyst or investor expectations, which could cause the price of our common stock to fall;

and

~~changes in demand~~•those additional factors which are listed under Item 1A of Part I of our Annual Report on Form 10-K for ~~our products from our key customers and their end users;~~

the year ended December 31, 2022 filed with the SEC on March 23, 2023 (the "2022 Form 10-K") under the caption “RISK FACTORS.”

~~the intensity of the competition and our ability to successfully compete;~~

~~the pace at which the market for new products develop;~~

~~our ability to hire and retain key personnel;~~

~~the availability of third party intellectual property and licenses which may not be on commercially reasonable terms, or not at all;~~

~~our ability to establish and maintain strategic relationships with our customers;~~

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

~~our ability to protect our intellectual property and our ability to not infringe on the rights of others;~~

~~security and privacy breaches in our systems may damage client relations and inhibit our ability to grow;~~

~~interruptions or delays in the services we provide from our data center hosting facilities could harm our business; and,~~

~~the risk of being delisted from NASDAQ if we fail to meet any of the listing requirements.~~

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

Overview

Smith Micro ~~develops~~provides software tosolutions that simplify and enhance the mobile experience ~~providing solutions~~ to some of the leading wireless service providers ~~device manufacturers, and enterprise businesses~~ around the ~~world.~~globe. From ~~optimizing wireless networks~~enabling the Digital Family Lifestyle™ to ~~uncovering customer experience insights, and from streamlining Wi-Fi access~~providing powerful voice messaging capabilities, we strive to ~~ensuring family safety, our solutions~~ enrich today’s connected lifestyles while creating new opportunities to engage consumers via ~~smartphones.~~smartphones and consumer IoT devices. Our portfolio ~~also~~ includes a wide range of products for creating, sharing, and monetizing rich content, such as visual voice messaging, ~~video streaming,~~retail content display optimization and ~~2D/3D graphics applications. With this~~performance analytics on any product set.

We continue to innovate and evolve our business to respond to industry trends and maximize opportunities in emerging markets, such as digital lifestyle services and online safety, “Big Data” analytics, automotive telematics, and the consumer IoT marketplace. The key to our longevity, however, is not simply technological innovation, but our focus on understanding our customers’ needs and delivering value.

In the third quarter of 2023, our revenues declined by 6% to $11.0 million compared to the third quarter of 2022, primarily driven by a $0.5 million decrease in our Family Safety product line, coupled with a $0.3 million decrease in CommSuite revenues. These revenue declines primarily resulted from decreases 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. There was no legacy Sprint subscriber revenue for CommSuite in the third quarter of 2023. However, as a ~~focus, it is Smith Micro’s mission~~result of the decline in our cost of revenues, we have driven an increase in our gross profit during the third quarter of 2023 to ~~help~~$8.5 million, an increase of $0.4 million as compared to the prior year. Additionally, our ~~customers thrive~~operating expenses have decreased during the third quarter of 2023 compared to the third quarter of 2022 by approximately $5.8 million, primarily due to quarter-over-quarter reductions in Research and Development expenses of $3.7 million as

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SafePath migration efforts have now been substantially completed. The net loss for the third quarter of 2023 was $5.1 million, resulting in a ~~connected world.~~

~~Over the past three decades, Smith Micro has developed deep expertise in embedded software for mobile devices, policy-based management platforms,~~net loss of $0.08 per basic and ~~highly scalable client and server applications.~~diluted share.

While we currently provide white label Family Safety applications to all three Tier 1 wireless carriers in the United States, in accordance with the notice provided by one of our Tier 1 customers in February 2023, our Family Safety contract with that customer terminated effective June 30, 2023, and we will continue providing services to that customer for a post-termination period through November 2023. The revenues associated with that customer contract were approximately 36% of total revenues for the nine-month period ended September 30, 2023. Primarily as a result of that contract nearing the end of the post-termination period, we are anticipating our revenues to decline in the fourth quarter of 2023. In the first quarter of 2024, we expect no further material revenues related to that contract. Despite that termination, we continue to believe that we remain strategically positioned to offer our market-leading family safety platform to the majority of U.S. mobile ~~network operators, cable providers, OEMs/device manufacturers, and enterprise businesses across a wide range~~subscribers. Since our acquisitions of ~~industries use our software to capitalize on the growth of connected consumers~~Circle Media Labs, Inc.'s ("Circle") operator business in 2020 and the ~~Internet~~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 ~~Things (“IoT”).~~

~~A summary~~2022 at one of our U.S. Tier 1 carrier customers. Another U.S. Tier 1 carrier customer successfully migrated to 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.

Additionally, as a result of the ~~Company’s customers~~termination notice referenced above, we announced actions late in the first quarter of 2023 that ~~represent 10% or more~~resulted in the elimination of approximately 26% of the ~~Company’s net revenues is~~Company's global workforce. The severance related costs associated with these actions were recognized in the first quarter of 2023. These actions, coupled with other cost reduction measures taken, have resulted in approximately $6.6 million of quarterly cost savings in the third quarter of 2023 as ~~follows:~~

compared to the third quarter of 2022.

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2017

2016

2017

2016

Wireless:

Sprint (& affiliates)

58.8
%

64.5
%

60.0
%

64.7
%
Graphics:

FastSpring

12.6
%

13.7
%

14.1
%

12.8
%

~~The two customers listed above comprised 68%~~Refer to section titled "Liquidity and ~~81%~~Capital Resources" for discussion of significant material changes in cash, and Note 4 of our ~~accounts receivable as of September 30, 2017~~Notes to the Consolidated Financial Statements for discussion regarding the changes related to the notes payable, derivative liabilities, and ~~2016, respectively.~~

warrant liabilities.

Results of Operations

The table below sets forth certain statements of operations and comprehensive loss data expressed as a percentage of revenues for the three ~~and nine~~ months ended September 30, ~~2017~~2023 and ~~2016.~~2022. Our historical results are not necessarily indicative of the operating results that may be expected in the future.


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,									For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017				2016				2017				2016					2023		2022		2023		2022
Revenues		100.0		%		100.0		%		100.0		%		100.0		%	Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues		20.0				27.8				21.6				27.5			Cost of revenues	23.0		31.0		26.0		29.3
Gross profit		80.0				72.2				78.4				72.5			Gross profit	77.0		69.0		74.0		70.7
Operating expenses:																	Operating expenses:
Selling and marketing		24.3				39.2				27.1				34.9			Selling and marketing	22.3		25.5		26.7		26.1
Research and development		36.2				64.4				39.3				57.7			Research and development	33.7		63.3		41.1		61.3
General and administrative		38.2				38.9				38.5				37.3			General and administrative	26.7		36.0		29.3		32.0
Restructuring expense		(2.5	)			—				3.3				—
Depreciation and amortization																	Depreciation and amortization	14.2		15.6		15.1		15.3
Total operating expenses		96.2				142.5				108.2				129.9			Total operating expenses	96.8		140.4		112.3		134.7
Operating loss		(16.2	)			(70.3	)			(29.8	)			(57.4	)		Operating loss	(19.8)		(71.4)		(38.3)		(64.0)
Change in carrying value of contingent liability		—				0.2				—				3.2
Loss on related party debt extinguishment		(7.0	)			—				(2.3	)			—
Interest income (expense), net		(5.4	)			(1.0	)			(5.4	)			(0.4	)
Other expense		(0.1	)			(0.2	)			(0.1	)			(0.1	)
Change in fair value of warrant and derivative liabilities																	Change in fair value of warrant and derivative liabilities	0.7		29.5		10.8		9.3
Loss on derecognition of debt																	Loss on derecognition of debt	(14.4)		—		(9.3)		—
Interest expense, net																	Interest expense, net	(13.1)		(7.7)		(17.8)		(2.4)
Other income (expense), net																	Other income (expense), net	0.1		0.1		(0.2)		(0.1)
Loss before provision for income taxes		(28.7	)			(71.3	)			(37.6	)			(54.7	)		Loss before provision for income taxes	(46.5)		(49.4)		(54.7)		(57.2)
Provision for income tax expense		0.1				0.2				0.1				0.2			Provision for income tax expense	0.1		0.2		0.1		0.2
Net loss		(28.8	)	%		(71.5	)	%		(37.7	)	%		(54.9	)	%	Net loss	(46.7)	%	(49.7)	%	(54.8)	%	(57.4)	%

~~Revenues and Expense Components~~

~~The following is a description~~

Table of ~~the primary components of our revenues and expenses:~~

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

~~Wireless, which includes our NetWise®, CommSuite®, SafePath®, and QuickLink®, family of products; and,~~

Contents

~~Graphics, which includes our consumer-based products: Poser®, Moho® ClipStudio®, MotionArtist®, and StuffIt®.~~

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

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2017

2016

2017

2016

Wireless

$
4,690

$
5,237

$
13,678

$
17,513

Graphics

1,114

1,241

3,564

3,638

Total revenues

5,804

6,478

17,242

21,151

Cost of revenues

1,159

1,798

3,727

5,824

Gross profit

$
4,645

$
4,680

$
13,515

$
15,327

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

~~Selling and marketing~~. Selling and marketing expenses consist primarily of personnel costs, advertising costs, sales commissions, trade show expenses, and the amortization of certain intangible assets. These expenses 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 and equipment 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.

~~Restructuring expense.~~ ~~Restructuring expenses consist primarily of one-time employee termination benefits, lease and other contract terminations, costs to consolidate facilities, and other related costs.~~

~~Change in fair value of contingent liability. The change in the fair value of the Pennsylvania grant liability.~~

~~Loss on related-party debt extinguishment.~~ ~~The loss recognized on related-party debt extinguished in the conversion to Series B Preferred Stock.~~

~~Interest income (expense), net~~. Interest income (expense), net is primarily related to interest on our debt, and the credit-adjusted risk-free interest rate used to measure our operating lease termination liabilities in restructuring.

~~Other expense. Other expense is primarily related to foreign exchange losses.~~

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

Three Months Ended September 30, ~~2017~~2023 Compared to the Three Months Ended September 30, ~~2016~~

2022

Revenues. Revenues were ~~$5.8~~$11.0 million and ~~$6.5~~$11.7 million for the three months ended September 30, ~~2017~~2023 and ~~2016,~~2022, respectively, representing a decrease of $0.7 million, or ~~10%~~6%. ~~Wireless revenue~~This decrease was primarily related to decreases associated with our Family Safety and CommSuite product lines of ~~$4.7 million decreased~~ $0.5 million ~~or 10%,~~and $0.3 million, respectively. The revenue decline primarily ~~due~~resulted from decreases associated with T-Mobile's efforts to ~~decreased~~migrate legacy Sprint subscribers to the T-Mobile network, which has impacted our revenues ~~from~~associated with legacy Sprint ~~our largest customer. Graphics revenue decreased by $0.1 million or 10% over last year. We continue to invest in new products purchased through the 2016 acquisitions~~subscribers for both Family Safety and ~~pursue related opportunities.~~

CommSuite product lines.

Cost of revenues. Cost of revenues were ~~$1.2~~$2.5 million and ~~$1.8~~$3.6 million for the three months ended September 30, ~~2017~~2023 and ~~2016, respectively, representing a~~2022, respectively. This decrease of ~~$0.6~~approximately $1.1 million ~~or 36%. This decrease~~ was primarily due to ~~lower sales~~cost reduction efforts and ~~cost reductions.~~

the period-over-period decline in revenue.

Gross profit. Gross profit was ~~$4.6~~$8.5 million, or ~~80%~~77% of revenues, for the three months ended September 30, ~~2017, essentially flat from the $4.7~~2023, compared to $8.1 million, or ~~72%~~69.0% of revenues, for the three months ended September 30, ~~2016. Lower revenues were offset~~2022. The increase of $0.4 million in gross profit was driven by the period-over-period decline in cost ~~reductions.~~

of revenues.

Selling and marketing. Selling and marketing expenses were ~~$1.4~~$2.4 million and ~~$2.5~~$3.0 million for the three months ended September 30, ~~2017~~2023 and ~~2016, respectively, representing a~~2022, respectively. This decrease of ~~$1.1~~approximately $0.5 million ~~or 44%. This decrease~~ was primarily due to ~~headcount~~decreases in personnel related costs and ~~other cost reductions due to our recent restructurings. The amortization of intangibles assets was $0.1~~advertising costs.

Research and development. Research and development expenses were $3.7 million and $7.4 million for the three months ended September 30, ~~2017. Stock-based compensation was essentially zero~~2023 and ~~$0.1 million for the three months ended September 30, 2017 and 2016, respectively, representing a~~2022 respectively. This decrease of ~~$0.1 million.~~

~~Research~~$3.7 million was primarily due to the decline in personnel-related costs of approximately $2.6 million associated with the workforce reduction efforts referenced above and ~~development~~reductions in contractor costs of $1.0 million due to the substantial completion of SafePath migration efforts during 2023.

General and administrative. ~~Research~~General and ~~development~~administrative expenses were ~~$2.1~~$2.9 million and $4.2 million for the three months ended September 30, ~~2017~~2023 and ~~2016, respectively, representing a~~2022, respectively. This decrease of ~~$2.1~~approximately $1.3 million ~~or 50%. This decrease~~ was primarily related to a reduction of $0.6 million due to ~~headcount~~transaction fees incurred related to the Note and Stock Offering in August 2022 and declines in personnel related costs of approximately $0.4 million associated with the workforce reduction efforts referenced above, and approximately $0.3 million of other ~~cost reductions due to our recent restructurings. Stock-based compensation~~administrative expense reductions.

Depreciation and amortization. Depreciation expense was ~~essentially zero~~$0.1 million and ~~$0.1~~$0.3 million for the three months ended September 30, ~~2017~~2023 and ~~2016, respectively, representing a decrease of $0.1 million.~~

~~General and administrative. General and administrative expenses were $2.2~~2022, respectively. Amortization expense was $1.5 million and $2.5 million for the three months ended September 30, 2017 and 2016, respectively, representing a decrease of $0.3 million, or 12%. The decrease was primarily due to lower operating costs due to cost reduction initiatives. Stock-based compensation was $0.1 million and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, representing a decrease of $0.1 million.

~~Restructuring expense.~~ Restructuring income was $0.1 million and $0 for the three months ended September 30, 2017 and 2016, respectively. The 2017 income was primarily due to an increase in sublease income due to the signing of a new sublease extension.

~~Change in carrying value of contingent liability.~~ ~~The change in the carrying value of contingent liability was minimal~~ for both of the three months ended September 30, ~~2017~~2023 and ~~2016. This results from a change in the carrying value~~2022. The total decrease of ~~our $1~~approximately $0.3 million ~~Pennsylvania grant received by setting up a new facility in that state.~~

~~Loss on related party debt extinguishment. The loss on related party debt extinguishment of $0.4 million in 2017~~ was primarily due to the ~~extinguishment~~quarter-over-quarter decrease in depreciation expense recognized as certain fixed assets have now been fully depreciated.

Change in fair value of warrant and derivative liabilities.Change in fair value of warrant and derivative liabilities was $0.1 million and $3.5 million for the three months ended September 30, 2023 and 2022, respectively. The total decrease of $3.4 million resulted from valuation related ~~party long-term~~impacts to the warrant and derivative liabilities in the respective periods.

Loss on derecognition of debt. The loss recognized on derecognition of debt ~~exchanged for Series B Preferred Stock.~~

in the third quarter of 2023 was $1.6 million. This resulted from installment payments made on the convertible notes in the form of shares, and the required derecognition of the net debt position related to that principal balance, including the derivative and discounts.

Interest ~~(expense) income, net~~. expense, net. Interest expense was ~~$0.3~~$1.4 million and $0.9 million for the three months ended September 30, ~~2017, which consisted~~2023 and 2022, respectively. The increase in interest expense of ~~interest on notes payable of $0.2~~$0.5 million ~~and~~was primarily related to the amortization of the ~~debt~~ discount and debt issuance costs and stated interest expense related to the financing transaction from August of 2022, which is discussed in further detail in Notes 3 and 4 herein (the "Note and Stock Offering").

Other income (expense), net. Other income (expense) was ~~$0.1 million. Interest~~nominal for both the three months ended September 30, 2023 and 2022.

Provision for income tax expense. Because of our cumulative loss position, the provision for income tax expense ~~on notes payable was $0.1 million~~consists of state income taxes, foreign tax withholdings, and foreign income taxes for the three months ended September 30, ~~2016.~~

2023 and 2022. There were no material changes in the period-to-period comparison.

Nine Months Ended September 30, ~~2017~~2023 Compared to the Nine Months Ended September 30, ~~2016~~

~~Revenues.~~2022

Revenues. Revenues were ~~$17.2~~$32.3 million and ~~$21.2~~$37.1 million for the nine months ended September 30, ~~2017~~2023 and ~~2016,~~2022, respectively, representing a decrease of ~~$3.9~~$4.8 million, or ~~19%~~13%. ~~Wireless~~This decrease was primarily related to declines associated with our Family Safety and CommSuite product lines of $3.2 million and $1.6 million, respectively. The decrease in revenues ~~decreased $3.8 million, or 22%,~~was primarily ~~due~~associated with T-Mobile's efforts to ~~decreased activity from~~migrate legacy Sprint subscribers to the T-Mobile network, which has impacted our ~~largest customer. Graphics~~ revenues ~~were decreased $0.1 million or 2%. We continue to invest in new products purchased through the 2016 acquisitions~~associated with legacy Sprint subscribers for both Family Safety and ~~pursue related opportunities.~~

CommSuite.

Table of Contents

Cost of revenues. Cost of revenues ~~was $3.7~~were $8.4 million and ~~$5.8~~$10.9 million for the nine months ended September 30, ~~2017~~2023 and ~~2016, respectively, representing a~~2022, respectively. This decrease of ~~$2.1~~approximately $2.5 million ~~or 36%. This decrease~~ was primarily due to ~~lower sales and~~the period-over-period decline in revenue coupled with the cost ~~reductions.~~

reduction efforts undertaken in 2023.

Gross ~~profit.~~ profit. Gross profit was ~~$13.5~~$23.9 million, or ~~78%~~74% of revenues, for the nine months ended September 30, ~~2017, a decrease of $1.8~~2023, compared to $26.2 million, or ~~12%, from $15.3 million, or 72%~~70.7% of revenues, for the nine months ended September 30, ~~2016.~~2022. The ~~percentage point increase~~decrease of approximately $2.4 million in gross profit was ~~primarily due to lower cost from recent restructurings~~.

driven by the period-over-period decline in revenue volume.

Selling and ~~marketing.~~ marketing. Selling and marketing expenses were ~~$4.7~~$8.6 million and ~~$7.4 million for~~ ~~the nine months ended September 30, 2017 and 2016~~, respectively, representing a decrease of $2.7 million, or 37%. This decrease was primarily due to headcount reductions due to our recent restructurings. Stock-based compensation was zero and $0.2$9.7 million for the nine months ended September 30, ~~2017~~2023 and ~~2016,~~2022, respectively.

This decrease of $1.1 million was primarily due to decreases in personnel-related costs of $0.7 million coupled with a period-over-period reduction in severance and reorganization related costs of $0.7 million, partially offset by an increase in stock based compensation of $0.3 million.

Research and ~~development.~~ development. Research and development expenses were ~~$6.8~~$13.3 million and ~~$12.2~~$22.8 million for the nine months ended September 30, ~~2017~~2023 and ~~2016, respectively, representing a~~2022 respectively. This decrease of ~~$5.4~~approximately $9.5 million ~~or 45%. This decrease~~ was primarily due to ~~headcount~~the decline in personnel-related costs of approximately $6.9 million associated with the workforce reduction efforts referenced above and reductions in contractor costs of $2.7 million due to the substantial completion of SafePath migration efforts during 2023.

General and ~~a reduction of consulting service costs. Stock-based compensation decreased from $0.4~~administrative. General and administrative expenses were $9.4 million ~~to $0.2 million, or $0.2~~and $11.9 million for the nine months ended September 30, ~~2017~~2023 and ~~2016,~~2022, respectively.

~~General~~ This decrease of approximately $2.4 million was primarily related to declines in in personnel related costs of approximately $1.0 million associated with the workforce reduction efforts referenced above, a reduction of $0.6 million due to transaction fees incurred related to the Note and ~~administrative.~~ ~~General and administrative expenses were $6.6~~Stock Offering in August 2022, a decrease in travel costs of approximately $0.2 million and ~~$7.9 million for the nine months ended September 30, 2017~~a reduction in stock-based compensation expense of approximately $0.2 million.

Depreciation and ~~2016, respectively, representing a decrease of $1.2 million, or 16%~~amortization. ~~This decrease was primarily due to lower travel related costs, professional service fees and cost reduction initiatives. Stock-based compensation~~Depreciation expense was $0.5 million and ~~$0.6 million for the nine months ended September 30, 2017 and 2016, respectively.~~

~~Restructuring expense.~~ Restructuring expense was $0.6 million and $0 for the nine months ended September 30, 2017 and 2016, respectively. The 2017 expense was primarily due to employee terminations and the acceleration of stock awards vesting.

~~Change in carrying value of contingent liability.~~ ~~This consists of the amount earned from our $1 million Pennsylvania grant received by setting up a new facility in that state.~~

~~Loss on related party debt extinguishment. The loss on related party debt extinguishment of $0.4 million in 2017 was due to the extinguishment of related party long-term debt exchanged for Series B Preferred Stock.~~

~~Interest (expense) income, net. Interest expense was~~ $0.9 million for the nine months ended September 30, ~~2017, which consisted~~2023 and 2022, respectively. Amortization expense was $4.4 million and $4.8 million for the nine months ended September 30, 2023 and 2022, respectively. The total decrease of ~~interest~~approximately $0.8 million was primarily due to certain fixed assets and intangible assets that have now been fully depreciated and amortized.

Change in fair value of warrant and derivative liabilities.Change in fair value of warrant and derivative liabilities was $3.5 million for both the nine months ended September 30, 2023 and 2022. The fair value adjustments resulted from valuation related impacts to the warrant and derivative liabilities.

Loss on derecognition of debt. The loss recognized on derecognition of debt for the nine months ended September 30, 2023 was $3.0 million This resulted from installment payments made on the convertible notes ~~payable~~issued under the Note and Stock offering in August 2022 (the "Notes") in the form of ~~$0.4~~shares, and the required derecogition of the net debt position related to that principal balance, including the derivative, and discounts. There was nothing commensurate in the nine months ended September 30, 2022.

Interest expense, net. Interest expense was $5.7 million and $0.9 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in interest expense of $4.8 million was primarily related to the amortization of the ~~debt~~ discount and debt issuance costs and stated interest expense related to the August 2022 Note and Stokc Offering, with the Notes issued thereunder being outstanding for the full year in 2023 versus less than two months during the nine months ended September 30, 2022.

Other income (expense), net. Other expense was ~~$0.5~~$0.1 million and nominal for the nine months ended September 30, 2023 and 2022, respectively. The increase was primarily related to changes in foreign currency rates for the respective periods.

Provision for income tax expense. Because of our cumulative loss position, the provision for income tax expense consists of state income taxes, foreign tax withholdings, and foreign income taxes for the nine months ended September 30, 2023 and 2022. There were no material changes in the period-to-period comparison.

Liquidity and Capital Resources

The Company’s principal sources of liquidity are its existing cash and cash equivalents, and cash generated by operations. The Company's primary needs for liquidity relate to working capital requirements for operations and its debt service requirements. As of September 30, 2023, the Company's cash and cash equivalents were approximately $8.0 million. ~~Interest expense on notes~~We believe that we will be able to meet our financial obligations as they become due over the next twelve months.

Table of Contents

Operating activities

Net cash used in operating activities was $6.0 million for the nine months ended September 30, 2023. The primary uses of operating cash were a net loss of $17.7 million less non-cash expenses totaling $13.0 million, and a decrease in accounts payable and accrued liabilities of $2.2 million, partially offset by an increase in other liabilities of $0.6 million and a decrease in accounts receivable of $0.2 million and a decrease in operating prepaid expenses and other assets of $0.2 million.

Net cash used in operating activities was $14.5 million for the nine months ended September 30, 2022. The primary uses of operating cash were the net loss of $21.3 million, offset by net non-cash expenses totaling $7.2 million coupled with a decrease in accounts payable and accrued liabilities of $1.5 million, partially offset by a decrease in accounts receivable of $1.1 million and a increase in prepaid and other assets of $0.2 million.

Investing activities

Net cash provided by investing activities was $0.1 million for the nine months ended September 30, ~~2016.~~

~~Liquidity and Capital Resources~~

~~Going Concern Evaluation~~

~~In connection with preparing consolidated financial statements~~2023. Net cash used in investing activities for ~~the three~~nine months ended September 30, 2017, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.

~~The Company considered the following:~~

~~Operating losses for ten consecutive quarters.~~

2022 was nominal.

~~Negative cash flow from operating~~Financing activities ~~for six consecutive quarters.~~

~~Depressed stock price resulting in being non-compliant with NASDAQ listing rules to maintain a stock price of $1.00/share.~~

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

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

~~The Company raised $4 million of debt financing during the year ended December 31, 2016.~~

~~The Company has been able to raise funds from short-term loans from insiders.~~

As a result of the Company’s restructurings that were implemented during the three months ended December 31, 2016, and again during the six months ended June 30, 2017, the Company’s cost structure is now in line with its future revenue projections. See Footnote 11 for additional details regarding restructurings.

On September 29, 2017, the Company closed on $5.5 million preferred stock transactions, which extinguished $2.8 million of long term and short-term debt (face value) and raised $2.7 million of new capital.

~~Management believes that the Company will generate enough cash from operations to satisfy its obligations for the next twelve months.~~

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

~~Raise additional funds through short-term loans.~~

~~Implement additional restructuring and cost reductions.~~

~~Raise additional capital through a private placement.~~

~~Secure a commercial bank line of credit.~~

~~Dispose of one or more product lines.~~

~~Sell or license intellectual property.~~

~~NASDAQ Notice for Failure to Satisfy Continued Listing Rules~~

~~Our common stock is currently listed on the NASDAQ Capital Market. In order to maintain that listing, we must satisfy minimum financial and other requirements.~~ ~~On May 8, 2017,~~ we received a written notification from The Nasdaq Stock Market LLC notifying us that we failed to comply with Nasdaq’s Marketplace Rule 5550(b)(1) (the “Rule”) because the Company’s stockholders’ equity as of March 31, 2017 fell below the required minimum of $2.5 million and as of May 8, 2017 the Company did not meet the alternatives of market value of listed securities or net income from continuing operations for continued listing.

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 $1,000 per share, for a total purchase price of $5.5 million. In the Offering, the Company raised gross cash proceeds of $2.7 million and exchanged outstanding indebtedness with a principal amount of $2.8 million. The Offering raised net cash proceeds of $2.4 million (after deducting the placement agent fee and expenses of the Offering) and resulted in an increase in the Company’s stockholders’ equity of approximately $5.1 million.

With the completion of the Offering on September 29, 2017, the Company has regained compliance with the Rule and its stockholders’ equity balance is now greater than $2.5 million as of the quarter ended September 30, 2017 and as of the date of this report.

NASDAQ will continue to monitor the Company’s ongoing compliance with the stockholders’ equity requirement and, if at the time of the Company’s next periodic report the Company does not evidence compliance, it may be subject to delisting from NASDAQ.

~~At September 30, 2017, we had $3.9 million in cash and cash equivalents and $2.8 million of working capital.~~

~~Operating activities~~

Net cash ~~used in operating~~provided by financing activities ~~was $5.7~~of $0.2 million for the nine months ended September 30, ~~2017. The primary uses~~2023 was primarily attributable to the timing of ~~operating cash were to fund our net loss of $6.5 million, adding back non-cash net expenses of $2.4 million,~~borrowings and ~~decreases in accounts payable and accrued expenses of $1.6 million. This usage was offset by increases in deferred revenue of $0.3 million and accounts receivable of $0.3 million.~~

repayments from short-term insurance premium financing arrangements.

Net cash ~~used in operating~~provided by financing activities ~~was $8.0~~of $17.4 million for the nine months ended September 30, ~~2016. The primary uses~~2022, was primarily attributable to proceeds from our convertible notes and warrants offering of operating cash were to fund our net loss of $11.6 million, adding back non-cash net expenses of $1.7 million, decreases in accounts payable and accrued expenses of $0.8 million, deferred revenue of $0.3$15.0 million and ~~increases in prepaid~~our stock and ~~other assets for $0.2~~warrants offering of $3.0 million. ~~This usage was partially offset by a decrease of accounts receivable of $3.1 million and income tax refunds of $0.1 million.~~

~~Investing activities~~

~~Net cash used in investing activities was $68,000 for~~Partially offsetting the ~~nine months ended September 30, 2017 for capital expenditures.~~

Net cash used in investing activities was $1.3 million for the nine months ended September 30, 2016 used to acquire the shares of Birdstep Technology AB for $1.9 million net cash, iMobileMagic for $0.6 million, and capital expenditures of $0.3 million offset by sale of sale of short-term investments of $4.1 million.

~~Financing activities~~

~~Net cash received from financing activities was $7.5 million for the nine months ended September 30, 2017. We received $2.1 million~~proceeds from the ~~sale of our common stock~~convertible notes and warrants were $1.2 million in ~~a private placement, $3.0 million from short-term loans from related-parties and $2.4 million from the sale of our Series B Preferred Stock.~~

~~Net~~transaction fees. Also impacting net cash provided by financing activities ~~was approximately $3.8 million for the nine months ended September 30, 2016, from the net~~were proceeds from ~~the issuance~~insurance premium financing agreements and revolver draws of ~~senior subordinated promissory notes.~~

~~Off-Balance Sheet Arrangements~~

~~We do not have any off-balance sheet arrangements.~~

~~Contractual obligations and commercial commitments~~

~~The following table summarizes our contractual obligations and other commitments as~~$1.5 million, offset by repayments on those arrangements of ~~September 30, 2017 (in thousands):~~

$1.0 million.

Payments due by period

1 year

More than

Contractual obligations:

Total

or less

1-3 years

3-5 years

5 years

Operating lease obligations

$
8,543

$
2,422

$
3,929

$
2,192

$
—

Notes payable

4,200

2,200

2,000

—

—

Purchase obligations

368

368

—

—

—

Pennsylvania state grant note

292

69

206

17

—

Total

$
13,403

$
5,059

$
6,135

$
2,209

$
—

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

Recent Accounting Guidance

See Note 2 of our products; 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 CompanyNotes 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~~Consolidated Financial Statements 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.

~~Recent Accounting Guidance~~

~~In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11,~~ ~~Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815) (“ASU 2017-11”)~~, which changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU 2014-11 also clarifies existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, ASU 2017-11 requires entities that present earnings per share (EPS) in accordance with ASC Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. ASU 2017-11 is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted, including adoption in an interim period. If an entity early adopts ASU 2017-11 in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period in either of the following ways: (1) Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which ASU 2017-11 is effective or (2) Retrospectively to outstanding financial instruments with a down round feature for each reporting period presented in accordance with the guidance oninformation regarding our recent accounting changes in paragraphs 250-10-45-5 through 45-10. The Company has elected to early adopt ASU 2017-11 during the three months ended September 30, 2017 by applying ASU 2017-11 retrospectively to outstanding financial

guidance.

instruments with a round down feature for each prior reporting period presented which includes the quarter ended September 30, 2016 as well as a cumulative-effect adjustment to the Company’s beginning accumulated deficit as of January 1, 2017. (See Note 19).

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

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

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 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~~ See Note 1 of our Notes to the ~~following~~Consolidated Financial Statements in our 2022 Form 10-K for information regarding our critical accounting policies ~~affect our more significant estimates~~ and ~~assumptions used in the preparation of our consolidated financial statements:~~

~~Revenue Recognition~~

We currently report our net revenues under two operating groups: Wireless and Graphics. Within each of these groups, software revenue is recognized based on the customer and contract type. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectability is probable as required by FASB ASC Topic No. 985-605, ~~Software-Revenue Recognition~~. We recognize revenues from sales of our software to our customers or end users as completed products are shipped and title passes or from royalties generated as authorized customers duplicate our software, if the other requirements are met. If the requirements are not met at the date of shipment, revenue is not recognized until these elements are known or resolved. For Wireless sales, returns from customers are limited to defective goods or goods shipped in error. Historically, customer returnsestimates. There have ~~not exceeded the very nominal estimates and reserves. We also provide some technical support to our customers. Such costs have historically~~ been ~~insignificant.~~

We have a few multiple element agreements for which we have contracted to provide a perpetual license for use of proprietary software, to provide non-recurring engineering, and, in some cases, to provide software maintenance (post contract support). For these software and software-related multiple element arrangements, we must: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essentialno material changes to the ~~functionality of~~Company's critical accounting policies and estimates since the ~~delivered products~~2022 Form 10-K.

Item 4. Controls and services; (3) determine the fair value of each undelivered element using vendor-specific objective evidence (“VSOE”); and, (4) allocate the total price among the various elements. VSOE of fair value is used to allocate a portion of the price to the undelivered elements and the residual method is used to allocate the remaining portion to the delivered elements. Absent VSOE, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements of the arrangement have been delivered. However, if the only undelivered element is post contract support, the entire arrangement fee is recognized ratably over the performance period. We determine VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In determining VSOE, we require that a

substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. We have established VSOE for our post contract support services and non-recurring engineering.

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

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

~~Accounts Receivable and Allowance for Doubtful Accounts~~

We sell our products worldwide. We perform ongoing credit evaluations of our customers and adjust 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. We continuously monitor collections and payments from our customers. We estimate credit losses and maintain an allowance for doubtful accounts reserve based upon these estimates. While such credit losses have historically been within our estimated reserves, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. If not, this could have an adverse effect on our consolidated financial statements.

~~Impairment or Disposal of Long 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 FASB ASC Topic No. 360, ~~Property, Plant, and Equipment. The Company determined there was no impairment as of September 30, 2017.~~

~~Goodwill~~

~~In accordance with FASB ASC Topic No. 350,~~ ~~Intangibles-Goodwill and Other~~, we review the recoverability of the carrying value of goodwill at least annually 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 to the carrying value of the underlying net assets in the reporting units. If the fair value of a reporting unit is determined to be less than the carrying value of its net assets, goodwill is deemed impaired and an impairment loss is recognized to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the fair value of its other assets and liabilities.

~~Intangible Assets and Amortization~~

~~Amortization expense related to other intangibles acquired in acquisitions is calculated on a straight-line basis over the useful lives.~~

~~Income Taxes~~

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

Procedures

~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk~~

~~Interest Rate Risk~~

Our financial instruments include cash and cash equivalents. At September 30, 2017, the carrying values of our financial instruments approximated fair values based on current market prices and rates.

~~Foreign Currency Risk~~

While a majority of our business is denominated in U.S. dollars, we do invoice in foreign currencies. For both the three and nine months ended September 30, 2017 and 2016, our revenues denominated in foreign currencies were de minimis. Fluctuations in the rate of exchange between the U.S. dollar and certain other currencies may affect our results of operations and period-to-period comparisons of our operating results. We do not currently engage in hedging or similar transactions to reduce these risks. The operational expenses of our foreign entities reduce the currency exposure we have because our foreign currency revenues are offset in part by expenses payable in foreign currencies. As such, we do not believe we have a material exposure to foreign currency rate fluctuations at this time.

~~Item~~ 4.

~~Controls and Procedures~~

Evaluation of disclosure controls and procedures

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in ~~Rules~~Rule 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of September 30, ~~2017.~~2023. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have determined that as of September 30, ~~2017,~~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 ~~Securities and Exchange Commission’s~~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

Table of Contents

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.~~Report. The consolidated financial statements were prepared in conformity with ~~accounting principles generally accepted in the United States of America~~U.S. GAAP 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 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 Company’s 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~~control over financial reporting during the quarter ended September 30, ~~2017~~2023 that have materially affected, or isare reasonably likely to materially affect, our internal ~~controls~~control over financial reporting.

Table of Contents

PART II. OTHEROTHER INFORMATION

~~Item 1.~~

Item 1. Legal Proceedings

~~Item 1A.~~

Item 1A. Risk Factors

~~You~~

In addition to the other information included in this Report, you should carefully consider ~~and evaluate all of~~ the ~~information~~factors discussed in ~~this Quarterly Report~~Part I, Item 1A. “Risk Factors” in our 2022 Form 10-K, and the ~~risk~~ factors ~~set forth~~identified at the beginning of Part I, Item 2 of this Report, under the heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which could materially affect our business, financial condition, cash flows, or results of operations. The risks described in ~~our Annual Report on~~the 2022 Form 10-K ~~for~~ are not the ~~fiscal year ended December 31, 2016.~~only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently considers immaterial also may materially adversely affect its business, financial condition, and/or operating results. There have been no material changes to the risk factors ~~described under Item 1A of~~included in our ~~Annual Report on~~2022 Form 10-K ~~for the fiscal year ended December 31, 2016, which was filed with the SEC on March 10, 2017.~~

~~Item 2.~~

Item 2. Unregistered Sales of Equity ~~Securities and Use of Proceeds~~

~~On September 29, 2017, the Company entered into a~~ Securities ~~Purchase Agreement with several investors for the issuance~~ and ~~sale (the “Offering”)~~Use of 5,500 shares of the Company’s newly designated Series B 10% Convertible Preferred Stock (the “Series B Preferred Stock”) at $1,000 per share, for a total purchase price of $5.5 million. The Series B Preferred Stock is convertible into the Company’s Common Stock at a conversion price of $1.14 per share, which was the closing bid price of the Common Stock on September 28, 2017, or approximately 4,824,562 shares of Common Stock in the aggregate.

The Offering was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D of the Securities Act and in reliance on similar exemptions under applicable state laws. Each of the purchasers in the Offering represented that it is an accredited investor within the meaning of Rule 501(a) of Regulation D, and was acquiring the securities for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The securities were offered without any general solicitation by the Company or its representatives.

Proceeds

The table set forth below shows all repurchases of securities by us during the three months ended September 30, ~~2017:~~

ISSUER PURCHASES OF EQUITY SECURITIES

Period

Total
Number of
Shares (or
Units)
Purchased

Average
Price Paid
per Share
(or Unit)

Total Number of
Shares (or Units)
Purchased as
Part of Publicly
Announced Plans
or Programs

Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs

July 1 - 31, 2017

—

$
—

—

—

August 1 - 31, 2017

—

—

—

—

September 1 - 30, 2017

15,065

(a)

$
1.17

—

—

Total

15,065

$
1.17

~~The above table includes:~~

~~(a)~~

Repurchases of stock by the Company as payment of withholding taxes in connection with the vesting of restricted stock awards, in an aggregate amount of 15,065 shares during the periods set forth in the table.

2023:


ISSUER PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares (or Units) Purchased	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1 - 31, 2023	22,776	$	1.15	—	—
August 1 - 31, 2023	22,215	1.60		—	—
September 1 - 30, 2023	20,373	1.35		—	—
Total	65,364	$	1.37

(1)Shares of the Company's common stock repurchased by the Company as payment of withholding taxes in connection with the vesting of restricted stock awards during the applicable period. All of the shares were cancelled when they were acquired by the Company.

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Item 6. Exhibits

~~Item 6.~~

E~~xhibits~~

~~Exhibit~~	~~Description~~
Exhibit			Description
~~3.1~~ 10.1			~~Certificate~~For m of ~~Designation of Preferences, Rights and Limitations of Series B Convertible Preferred~~Restricted Stock ~~of Smith Micro Software, Inc., dated September 29, 2017 (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 4, 2017, and incorporated herein by reference).~~Agreement under 2015 Omnibus Equity Incentive Plan
31.1
~~10.1~~	Resignation Severance and Release Agreement, by and between Steven Yasbek and the Company (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K/A filed on July 11, 2017, and incorporated herein by reference).

~~10.2~~	Amendment to Secured Promissory Note, dated August 18, 2017, by and between the Company and Steven L. Elfman and Monique P. Elfman (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 25, 2017, and incorporated herein by reference).

~~10.3~~	Secured Promissory Note, dated August 18, 2017, issued by the Company to William W. Smith, Jr. and Dieva L. Smith (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 25, 2017, and incorporated herein by reference).

~~10.4~~	Secured Promissory Note, dated August 24, 2017, issued by the Company to Next Generation TC FBO Andrew Arno IRA 1663 (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on August 25, 2017, and incorporated herein by reference).

~~10.5~~	Secured Promissory Note, dated August 24, 2017, issued by the Company to Andrew Arno (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on August 25, 2017, and incorporated herein by reference).

~~10.6~~	Securities Purchase Agreement, dated September 29, 2017, between the Company and each purchaser identified on the signature pages thereto (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 4, 2017, and incorporated herein by reference).

~~10.7~~	Registration Rights Agreement, dated September 29, 2017, between the Company and each purchaser identified on the signature pages thereto (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on October 4, 2017, and incorporated herein by reference).

~~31.1~~	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002
31.2
~~31.2~~	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002
32.1
~~32.1~~	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002
101.INS
~~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
101.SCH
~~101.SCH~~	Inline XBRL Taxonomy Extension Schema Document
101.CAL
~~101.CAL~~	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
~~101.DEF~~	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
~~101.LAB~~	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
~~101.PRE~~	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

Table of Contents ~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this ~~report~~Report to be signed on its behalf by the undersigned thereunto duly authorized.


	SMITH MICRO SOFTWARE, INC.

November ~~14, 2017~~ 9, 2023	By /s/	William W. Smith, Jr.
	William W. Smith, Jr.
	Chairman of the Board, President and Chief Executive Officer
	(Principal Executive Officer)

November ~~14, 2017~~ 9, 2023	By /s/	~~Timothy C. Huffmyer~~ James M. Kempton
	~~Timothy C. Huffmyer~~ James M. Kempton
	Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

										Additional			Accumulated
	Series B preferred stock				Common stock					paid-in			comprehensive
	Shares		Amount		Shares			Amount		capital			deficit			Total
BALANCE, December 31, 2016 (audited)		—	$	—		12,298		$	12	$	229,275		$	(226,228	)	$	3,059
Shares issued in Series B preferred stock offering, net issuance costs ($287)		3		—		—			—		2,413			—			2,413
Shares issued in Series B preferred stock in accordance with debt extinguishment		3		—		—			—		2,697			—			2,697
Shares issued in common stock offering, net		—		—		2,162			2		1,990			—			1,992
Common stock warrants issued in connection with stock offering		—		—		—			—		64			—			64
Non-cash compensation recognized on stock options and Employee stock purchase plan ("ESPP")		—		—		—			—		34			—			34
Restricted stock grants, net of cancellations		—		—		(70	)		—		968			—			968
Cancellation of shares for payment of withholding tax		—		—		(111	)		—		(166	)		—			(166	)
Employee stock purchase plan		—		—		4			—		2			—			2
Warrant repricings due to down round triggers		—		—		—			—		44			(44	)		—
Comprehensive loss		—		—		—			—		—			(6,501	)		(6,501	)
BALANCE, September 30, 2017 (unaudited)		6	$	—		14,283		$	14	$	237,321		$	(232,773	)	$	4,562

			September 30, 2017							December 31, 2016
	Useful life				Accumulated			Net				Accumulated			Net book value		Impairment			Net
	(years)		Gross		amortization			book value		Gross		amortization			before impairment		charge			book value
Purchased technology	5-6		$	265	$	(66	)	$	199	$	265	$	(32	)	$	233	$	—		$	233
Customer relationships	3-6			528		(220	)		308		999		(147	)		852		(411	)		441
Trademarks/trade names		2		38		(24	)		14		38		(9	)		29		—			29
Non-compete		3		51		(21	)		30		51		(9	)		42		—			42
Total			$	882	$	(331	)	$	551	$	1,353	$	(197	)	$	1,156	$	(411	)	$	745

Year Ending December 31,
2017 - 3 months remaining	$	64
2018		249
2019		143
2020		47
2021		40
Beyond		8
Total	$	551

	December 31, 2016								September 30, 2017
	Balance		Provision-net			Usage			Balance
Lease/rental terminations	$	1,786	$	(149	)	$	(245	)	$	1,392
One-time employee termination benefits		65		805			(649	)		221
Datacenter consolidation, other		109		(91	)		(18	)		—
Total	$	1,960	$	565		$	(912	)	$	1,613

	As of September 30, 2017				As of December 31, 2016
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Current Liabilities:
Related-party notes payable, short-term	$	2,200	$	2,200	$	—	$	—

Year Ending December 31,	Operating
2017 - 3 months remaining	$	595
2018		2,433
2019		2,029
2020		1,725
2021		1,728
2022		33
Total	$	8,543

	Consolidated Balance Sheet
	Related-party notes payable		Notes payable		Warrant liability			Additional paid-in capital			Accumulated deficit
Balance, September 30, 2016 (Prior to adoption of ASU 2017-11)	$	883	$	883	$	1,761		$	227,565		$	(222,185	)
Change in valuation of notes payable		359		359		—			(718	)		—
Reclassification of warrant liability		—		—		(1,761	)		1,761			—
Change in fair value of warrant liability		—		—		—			335			(335	)
Change in interest (expense) income, net		—		—		—			(17	)		17
Balance, September 30, 2016 (After adoption of ASU 2017-11)	$	1,242	$	1,242	$	—		$	228,926		$	(222,503	)

	Payments due by period
			1 year						More than
Contractual obligations:	Total		or less		1-3 years		3-5 years		5 years
Operating lease obligations	$	8,543	$	2,422	$	3,929	$	2,192	$	—
Notes payable		4,200		2,200		2,000		—		—
Purchase obligations		368		368		—		—		—
Pennsylvania state grant note		292		69		206		17		—
Total	$	13,403	$	5,059	$	6,135	$	2,209	$	—

ISSUER PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares (or Units) Purchased			Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1 - 31, 2017		—		$	—		—		—
August 1 - 31, 2017		—			—		—		—
September 1 - 30, 2017		15,065	(a)	$	1.17		—		—
Total		15,065		$	1.17