SMITH MICRO SOFTWARE INC

Previous wording

In the first quarter of 2024, our revenues declined by 47% to $5.8 million compared to the first quarter of 2023, primarily drivenby a $4.6 million decrease in our Family Safety product line, coupled with a$0.3 million decrease in ViewSpot revenues. These revenue declines primarily resulted fromthe loss of a Family Safety contract with a Tier 1 carrier during 2023 coupled with decreases associated with legacy Sprint Safe & Found revenue declining as subscribers are migrating to the T-Mobile network. As a result of the decline in revenues, our gross profit decreased during the first quarter of 2024 to $3.8 million, representing a decrease of $3.8 million as compared to the first quarter of the prior year. Our operating expenses have increased during the first quarter of 2024 compared to the first quarter of 2023 by approximately $20.7 million, primarily due to a goodwill impairment charge of $24.0 million recorded in the first quarter of 2024, offset primarily by quarter-over-quarter reductions in Research and Development expenses of $1.9 million as SafePath migration efforts have now been completed. The net loss for the first quarter of 2024 was $31.0 million, resulting in a net loss of $3.28 per basic and diluted share.

Current wording

In the second quarter of 2024, our revenues declined by 50% to $5.1 million compared to the second quarter of 2023, primarily drivenby a $4.5 million decrease in our Family Safety product line, coupled with a $0.5 million decrease in ViewSpot revenues. These revenue declines primarily resulted fromthe losses of a Family Safety contract with a Tier 1 carrier and a ViewSpot contract during 2023 coupled with decreases associated with legacy Sprint Safe & Found revenue as subscribers are migrating to the T-Mobile network. As a result of the decline in revenues, our gross profit decreased during the second quarter of 2024 to $3.5 million, representing a decrease of $4.2 million as compared to the second quarter of the prior year. Our operating expenses have decreased during the second quarter of 2024 compared to the second quarter of 2023 by approximately $0.5 million, primarily due to quarter-over-quarter reductions in general and administrative costs. The net loss for the second quarter of 2024 was $6.9 million, resulting in a net lossof $0.66 per basic and diluted share.

Previous wording

We currently provide white label Family Safety applications to two Tier 1 wireless carriers in the United States, and believe that we remain strategically positioned to offer our market-leading family safety platform to the majority of U.S. mobile subscribers. Since our acquisitions of Circle Media Labs, Inc.'s ("Circle") operator business in 2020 and the Family Safety Mobile Business from Avast in April 2021, we have been focused on migrating those customers from the acquired software platforms to our flagship SafePath platform, with the first such migration being completed during the first quarter of 2022 at one of our U.S. Tier 1 carrier customers. Another U.S. Tier 1 carrier customer 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. Further, we executed new, multi-year Family Safety agreements with a Tier 1 carrier in Europe in the fourth quarter of 2023 and a U.S.-based carrier in the first quarter of 2024, which are both anticipated to launch in 2024.

Current wording

We currently provide white label Family Safety applications to two Tier 1 wireless carriers in the United States, and believe that we remain strategically positioned to offer our market-leading family safety platform to the majority of U.S. mobile subscribers. We believe that we have an opportunity to increase the respective subscriber bases, and in turn, grow the revenues associated with these Tier 1 carriers. Further, we executed new, multi-year Family Safety agreements with a Tier 1 carrier in Europe in the fourth quarter of 2023 and a U.S.-based carrier in the first quarter of 2024. The new Family Safety solution with the U.S. based carrier launched on our SafePath Global platform during the second quarter of 2024, and associated marketing activities for that product have begun. Additionally, the Family Safety solution for the Tier 1 European carrier is anticipated to launch in the next few months.

Previous wording

Refer to the section titled "Liquidity and Capital Resources" for discussion of significant material changes in cash, and Note 4 of our Notes to the Consolidated Financial Statements for discussion regarding the changes related to common stock and Note 5 for discussion regarding changes related to the warrant liabilities, and Note 7 for discussion regarding changes to goodwill.

Current wording

Refer to the section titled "Liquidity and Capital Resources" for discussion of material changes in cash, and Note 4 of our Notes to the Consolidated Financial Statements for discussion regarding the changes related to Common Stock and Note 5 for discussion regarding changes related to the warrant liabilities, and Note 7 for discussion regarding changes to goodwill.

Previous wording

The table below sets forth certain statements of operations and comprehensive loss data expressed as a percentage of revenues for the three months ended March 31, 2024 and 2023. Our historical results are not necessarily indicative of the operating results that may be expected in the future.

Current wording

The table below sets forth certain statements of operations and comprehensive loss data expressed as a percentage of revenues for the three and six months ended June 30, 2024 and 2023. Our historical results are not necessarily indicative of the operating results that may be expected in the future.

Previous wording

Revenues. Revenues were $5.8 million and $10.9 million for the three months ended March 31, 2024 and 2023, respectively, representing a decrease of $5.1 million, or 47%. This decrease was primarily related to the loss of a Family Safety contract with a Tier 1 carrier during the fourth quarter of 2023 coupled with legacy Sprint Safe & Found revenue declining as legacy Sprint subscribers are migrating to the T-Mobile network. Also contributing to the decrease was a decline in ViewSpot revenue primarily due to one of our contracts concluding as of the end of September 2023.

Current wording

Revenues. Revenues were $5.1 million and $10.3 million for the three months ended June 30, 2024 and 2023, respectively, representing a decrease of $5.2 million, or 50%. This decrease was primarily related to the loss of revenue from a Family Safety contract with a Tier 1 carrier that concluded during the fourth quarter of 2023 coupled with legacy Sprint Safe & Found revenue declining as legacy Sprint subscribers are migrating to the T-Mobile network. Also contributing to the decrease was a decline in ViewSpot revenue primarily due to one of our contracts concluding as of the end of September 2023.

Previous wording

Cost of revenues. Cost of revenues were $2.0 million and $3.3 million for the three months ended March 31, 2024 and 2023, respectively. This decrease of $1.3 million was primarily due to cost reduction efforts and the period-over-period decline in revenue.

Current wording

Cost of revenues. Cost of revenues were $1.6 million and $2.6 million for the three months ended June 30, 2024 and 2023, respectively. This decrease of $1.0 million was primarily due to cost reduction efforts and the period-over-period decline in revenue.

Previous wording

Gross profit. Gross profit was $3.8 million, or 66% of revenues, for the three months ended March 31, 2024, compared to $7.6 million, or 70.0% of revenues, for the three months ended March 31, 2023. The decrease of $3.8 million in gross profit was primarily driven by the period-over-period decline in revenues.

Current wording

Gross profit. Gross profit was $3.5 million, or 68.7% of revenues, for the three months ended June 30, 2024, compared to $7.7 million, or 75.0% of revenues, for the three months ended June 30, 2023. The decrease of $4.2 million in gross profit was primarily driven by the period-over-period decline in revenues.

Previous wording

Selling and marketing. Selling and marketing expenses were $2.6 million and $3.6 million for the three months ended March 31, 2024 and 2023, respectively. This decrease of approximately $0.9 million was due to decreases in personnel- related costs and marketing costs.

Current wording

Selling and marketing. Selling and marketing expenses were $2.5 million and $2.6 million for the three months ended June 30, 2024 and 2023, respectively. This decrease of approximately $0.1 million was due to decreases in marketing costs partially offset by increases in stock based compensation expense.

Previous wording

General and administrative. General and administrative expenses were $2.8 million and $3.5 million for the three months ended March 31, 2024 and 2023, respectively. This decrease of approximately $0.7 million was primarily related to declines in personnel related costs of approximately $0.5 million associated with the workforce reduction efforts referenced above, and a decrease in occupancy costs of approximately $0.1 million.

Current wording

General and administrative. General and administrative expenses were $2.7 million and $3.0 million for the three months ended June 30, 2024 and 2023, respectively. This decrease of approximately $0.3 million was primarily related to declines in personnel related costs of approximately $0.1 million and a decrease in occupancy costs of approximately $0.1 million.

Previous wording

Change in fair value of warrant and derivative liabilities. Change in fair value of warrant and derivative liabilities was$0.2 million and$3.0 million for thethree months ended March 31, 2024 and 2023, respectively. The total decrease of $2.8 million resulted from valuation related impacts to the warrant and derivative liabilities in the respective periods.

Current wording

Change in fair value of warrant and derivative liabilities. Change in fair value of warrant and derivative liabilities wasnominal and$0.4 million for thethree months ended June 30, 2024 and 2023, respectively. The total decrease of approximately $0.4 million resulted from valuation related impacts to the warrant and derivative liabilities combined with settlements of the Notes during the three months ended June 30, 2023. The Notes were retired at maturity in December 2023, and thus there were no changes in the fair value of the derivative liability in 2024.

Previous wording

Research and development. Research and development expenses were $4.0 million and $5.9 million for the three months ended March 31, 2024 and 2023, respectively. This decrease of $1.9 million was primarily due to the decline in personnel-related costs of approximately $1.7 million associated with the workforce reduction efforts undertaken in response to the loss of one of our Tier 1 Carrier Family Safety contracts during 2023 and reductions in contractor costs of $0.2 million due to the substantial completion of SafePath migration efforts during 2023.

Current wording

Research and development. Research and development expenses were $7.7 million and $9.6 million for the six months ended June 30, 2024 and 2023 respectively. This decrease of approximately $1.9 million was primarily due to a decline in personnel-related costs of approximately $1.3 million and reductions in contractor costs of $0.2 million coupled with a decline in severance related costs of approximately $0.4 million.

Previous wording

Depreciation and amortization. Depreciation expense was $0.1 million and $0.2 million for the three months ended March 31, 2024 and 2023, respectively. Amortization expense was $1.8 million and $1.5 million for the three months ended March 31, 2024 and 2023, respectively. The total decrease in depreciation expense of approximately $0.1 million was primarily due to certain fixed assets that have now been fully depreciated. Amortization expense is recognized based on the pattern of economic benefit expected to be generated from the use of the intangible assets, and as such it increased by approximately$0.3 million period-over-period.

Current wording

Depreciation and amortization. Depreciation expense was $0.2 million and $0.4 million for the six months ended June 30, 2024 and 2023, respectively. Amortization expense was $3.3 million and $3.0 million for the six months ended June 30, 2024 and 2023, respectively. The decrease in depreciation expense of approximately $0.2 million was primarily due to certain fixed assets that have now been fully depreciated. Amortization expense is recognized based on the pattern of economic benefit expected to be generated from the use of the intangible assets, and as such it increased by approximately $0.3 million period-over-period.

Previous wording

Goodwill impairment. The impairment charge for the three months ended March 31, 2024 was triggered by the sustained decrease in our common stock share price and overall market capitalization during the quarter, which led to an analysis whereby we concluded that the carrying value of our single reporting unit exceeded its fair value by $24.0 million. We did not have a similar charge in the prior period.

Current wording

Goodwill impairment. The impairment charge for the six months ended June 30, 2024 was triggered by the sustained decrease in our Common Stock share price and overall market capitalization during the first quarter of 2024, which led to an analysis whereby we concluded that the carrying value of our single reporting unit exceeded its fair value by $24.0 million.

Previous wording

Loss on derecognition of debt. The loss recognized on derecognition of debt was $0.6 million for the three months ended March 31, 2023. The $0.6 million loss recognized for the three months ended March 31, 2023 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.

Current wording

Loss on derecognition of debt. The loss recognized on derecognition of debt was $1.4 million for the six months ended June 30, 2023. The $1.4 million loss recognized for the six months ended June 30, 2023 resulted from installment payments made on the Notes in the form of 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 six months ended June 30, 2024 as the convertible notes were retired at maturity as of December 31, 2023.

Previous wording

Interest income (expense), net. Interest income, net was $0.1 million and interest expense, net was $2.3 million for the three months ended March 31, 2024 and 2023, respectively. The interest expense, net of $2.3 million was primarily related to the amortization of the discount and debt issuance costs and stated interest expense related to the financing transaction from August of 2022 which was fully retired effective December 31, 2023.

Current wording

Interest income (expense), net. Interest income, net was $0.1 million for the six months ended June 30, 2024 and interest expense, net was $4.3 million for the six months ended June 30, 2023. The period-over-period change in interest income (expense), net of $4.4 million was primarily related to the amortization of the discount and debt issuance costs and stated interest expense related to the Notes, which were fully retired effective December 31, 2023.

Previous wording

Other income (expense), net. Other income was $0.2 million for the three months ended March 31, 2024, and other expense was nominal for the three months ended March 31, 2023. The quarter-over-quarter change was primarily related to the licensing of several of our patents in February 2024.

Current wording

Other (expense) income, net. Other income, net was $0.2 million for the six months ended June 30, 2024 and Other expense, net was $0.1 million for the six months ended June 30, 2023. The period-over-period change was primarily related to income derived from the licensing of several of our patents in February 2024.

Previous wording

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. As of March 31, 2024, the Company's cash and cash equivalents were approximately $6.2 million.

Current wording

The Company’s principal sources of liquidity are its existing cash and cash equivalents, and cash generated by operations.

Previous wording

Our liquidity may be adversely impacted by the anticipated effect of the aforementioned loss during 2023 of our Family Safety contract with a Tier 1 carrier on our results of operations, since we are receiving no revenue from that contract during 2024. While we anticipate marketing efforts to accelerate for one of our existing Tier 1 carrier customers in order to drive subscriber growth on our Family Safety product, the timing of that anticipated revenue growth versus the immediate and current impact of the contract loss could cause the cash and cash equivalents on hand and expected to be generated in the next twelve months and beyond to be insufficient to fund operations at the current levels.

Current wording

Our liquidity may be adversely impacted by the anticipated effect of the aforementioned loss during 2023 of our Family Safety contract with a Tier 1 carrier on our results of operations, since we are receiving no revenue from that contract during 2024. While we have adjusted our cost structure and we anticipate marketing efforts to expand for one of our existing Tier 1 carrier customers in order to drive subscriber growth on our Family Safety product, and we expect to generate additional revenues from our recent launch with a carrier customer in the U.S. and our upcoming launch with a Tier 1 carrier in Europe, the timing of that anticipated revenue growth versus the immediate and current impact of the contract loss could cause the cash and cash equivalents on hand and expected to be generated in the next twelve months and beyond to be insufficient to fund operations at the current levels.

Previous wording

This potential adverse impact on liquidity does not trigger a violation of any covenants in our material agreements, particularly as all of our outstanding debt was retired as of December 31, 2023. The availability of sufficient funds will depend to an extent on the timing of subscriber growth and the related cash generation thereof, and/or the ability to obtain the necessary capital to meet our obligations and fund our working capital requirements to maintain normal business operations. However, if we begin to trend unfavorably with respect to our current internal profitability and cash flow projections, the Company may determine to take additional actions, as noted in the Risk Factors in our 2023 Form 10-K, "If we are unable to meet our obligations as they become due over the next twelve months, the Company may not be able to continue as a going concern." There can be no assurance that any such potential actions will be available or will be available on satisfactory terms. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry. As a result of these uncertainties, and notwithstanding management's plans and efforts to date, we have been unable to alleviate substantial doubt about our ability to continue as a going concern within one year from the date that the financial statements are issued.

Current wording

This potential adverse impact on liquidity does not trigger a violation of any covenants in our material agreements, particularly as all of our outstanding debt was retired as of December 31, 2023. The availability of sufficient funds will depend to an extent on the timing of subscriber growth and the related cash generation thereof, and/or the ability to obtain the necessary capital to meet our obligations and fund our working capital requirements to maintain normal business operations. To meet future cash needs, the Company may determine to take additional actions, as noted in the Risk Factor appearing in our 2023 Form 10-K under the heading, "If we are unable to meet our obligations as they become due over the next twelve months, the Company may not be able to continue as a going concern." There can be no assurance that any such potential actions will be available or will be available on satisfactory terms. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry. As a result of these uncertainties, and notwithstanding management's plans and efforts to date, we have been unable to alleviate substantial doubt about our ability to continue as a going concern within one year from the date that thefinancial statements are issued.

Previous wording

Net cash used in operating activities was $1.3 million for the three months ended March 31, 2024. The primary uses of operating cash were a net loss of $31.0 million less non-cash expenses totaling $26.7 million, driven by a goodwill impairment charge, and a decrease in accounts payable and accrued liabilities of $0.5 million, partially offset by a decrease in accounts receivable of $3.6 million.

Current wording

Net cash used in operating activities was $5.6 million for the six months ended June 30, 2024. The primary uses of operating cash were a net loss of $37.9 million less non-cash expenses totaling $29.3 million, primarily driven by a goodwill impairment charge of $24.0 million and stock compensation expense of $2.3 million, a decrease in accounts payable and accrued liabilities of $0.5 million and an increase in prepaid expenses and other assets of $0.2 million partially offset by a decrease in accounts receivable of $4.1 million.

Previous wording

Net cash used in operating activities was $5.3 million for the three months ended March 31, 2023. The primary uses of operating cash were the net loss of $6.9 million less non-cash expenses totaling $2.4 million, an increase in accounts receivable of $0.7 million and a decrease in accounts payable and accrued liabilities of $0.1 million.

Current wording

Net cash used in operating activities was $7.5 million for the six months ended June 30, 2023. The primary uses of operating cash were the net loss of $12.6 million less non-cash expenses totaling $7.3 million, an increase in accounts receivable of $1.4 million and a decrease in accounts payable and accrued and other liabilities of $0.9 million.

Previous wording

Net cash provided by investing activities of $0.2 million for the three months ended March 31, 2024 was attributable to the net proceeds from licensing several of our patents in February 2024. Net cash used in investing activities for three months ended March 31, 2023 was nominal.

Current wording

Net cash provided by investing activities of $0.2 million for the six months ended June 30, 2024 was primarily attributable to the net proceeds from licensing several of our patents in February 2024. Net cash provided by investing activities for six months ended June 30, 2023 was $0.1 million.

Previous wording

Net cash provided by financing activities of $0.2 million for the three months ended March 31, 2024 was primarily attributable to the timing of borrowings and repayments from short-term insurance premium financing arrangements.

Current wording

Net cash provided by financing activities of $3.9 million for the six months ended June 30, 2024 was primarily attributable to the net cash proceeds of $3.4 million from the Registered Direct Offering and Private Placement and borrowings of $1.0 million less repayments of $0.5 million from short-term insurance premium financing arrangements.

Previous wording

Net cash provided by financing activities was nominal for the three months ended March 31, 2023.

Current wording

Net cash used by financing activities was $0.2 million for the six months ended June 30, 2023.

Previous wording

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 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 ongoing basis, we review our estimates to ensure that they appropriately reflect changes in our business or new information as it becomes available. See Note 1 of our Notes to the Consolidated Financial

Current wording

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 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 we believe to be reasonable under the circumstances. Actual results may materially differ from these estimates under different assumptions or conditions. On an ongoing basis, we review our estimates to ensure that they appropriately reflect changes in our business or new information as it becomes available. See Note 1 of our Notes to the Consolidated Financial Statements in our 2023 Form 10-K for information regarding our critical accounting estimates. There have been no material changes to the Company's critical accounting estimates since the 2023 Form 10-K.