SMITH MICRO SOFTWARE INC

Previous wording

Smith Micro provides software solutions that simplify and enhance the mobile experience to some of the leading wireless and cable service providers around the globe. From enabling the Digital Family Lifestyle™to providing powerful voice messaging capabilities, we strive to enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones and consumer IoT devices. Our portfolio includes family safety software solutions to support families in the digital age and a wide range of products for creating, sharing, and monetizing rich content, such as visual voice messaging, retail content display optimization and performance analytics on any product set.

Current wording

Smith Micro provides software solutions that simplify and enhance the mobile experience to some of the leading wireless service providers around the globe. From enabling the Digital Family Lifestyle™to providing powerful voice messaging capabilities, we strive to enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones and consumer IoT devices. Our portfolio includes family safety software solutions to support families in the digital age and a wide range of products for creating, sharing, and monetizing rich content, such as visual voice messaging, retail content display optimization and performance analytics on any product set.

Previous wording

In 2023, our revenues declined by 16% to $40.9 million, primarily driven by a $5.3 million decline in revenues in our Family Safety product line, coupled with a $2.0 million decline in CommSuite revenues. These revenue declines were primarily associated with T-Mobile's efforts to migrate legacy Sprint subscribers to the T-Mobile network, which has impacted our revenues associated with legacy Sprint subscribers for both Family Safety and CommSuite, as well as the impact of the Family Safety contract termination identified above. As a result of this decrease in revenue, gross profit declined to $30.3 million in 2023, a decrease of $4.0 million compared to prior year. Operating expenses decreased in 2023 by approximately $16.9 million, primarily due to a year-over-year reduction in Research and Development expenses of $12.2 million as SafePath migration efforts have now been substantially completed. The net loss for 2023 was $24.4 million, resulting in a net loss of $0.38 per basic and diluted share.

Current wording

In 2024, our revenues declined by 50% to $20.6 million, primarily driven by an $18.1 million decline in revenues in our Family Safety product line, coupled with a $2.3 million decline in ViewSpot revenues. The revenue decline was primarily associated with the impact of the loss of a Tier 1 Family Safety contract, which concluded in November 2023. The revenues associated with that customer accounted for approximately 36% of our total revenues for 2023 and we recognized no revenues related to that contract in 2024. Other factors impacting the decline in revenues were the losses of two ViewSpot contracts, coupled 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. As a result of the decrease in revenue, gross profit declined to $14.4 million in 2024, a decrease of $15.9 million compared to the prior year. To address the impact of that Tier 1 Family Safety contract termination, starting in the first quarter of 2023 and continuing in 2024, we undertook multiple restructuring efforts that have resulted in the elimination of approximately 48% of the Company's global workforce. While operating expenses increased in 2024 by approximately $15.5 million, the increase was primarily due to a non-cash goodwill impairment charge of $24.0 million. We realized year-over-year reductions in Research and Development, Sales and Marketing and General and Administrative expenses of $3.1 million, $2.2 million and $2.2 million, respectively, as a result of the cost reduction efforts undertaken. These decreases resulted in an 18% reduction in operating expenses, excluding goodwill impairment, in 2024 as compared to 2023, which follows a 26% reduction in operating expenses in 2023 as compared to 2022. The net loss for 2024 was $48.7 million, resulting in a net loss of $3.94 per basic and diluted share.

Previous wording

Despite the termination of one of our Family Safety contracts during 2023, we continue to believe that we remain strategically positioned to offer our market-leading family safety platform to most U.S. mobile subscribers. Since our acquisitions of Circle's operator business in 2020 and the Family Safety Mobile Business from Avast in April 2021, we have been focused on migrating those customers from the acquired software platforms to our flagship SafePath platform, with the first such migration being completed during the first quarter of 2022 at one of our U.S. Tier 1 carrier customers. Another U.S. Tier 1 carrier customer was successfully launched on the SafePath platform during the third quarter of 2023. We believe that with these transitions to the SafePath platform now complete, we have an opportunity to increase the respective subscriber bases, and in turn, grow the revenues associated with these Tier 1 carriers. Further, we executed a new, multi-year Family Safety agreement with a major Tier 1 carrier in Europe in the fourth quarter of 2023, which is anticipated to launch in 2024.

Current wording

We believe that we remain strategically positioned to offer our market-leading family safety platform to the majority of U.S. mobile subscribers as we provide white-label Family Safety applications to two Tier 1 wireless carriers operating in the United States. Further, a Tier 1 carrier in Europe launched a new SafePath-based family safety solution in the fourth quarter of 2024 and began conducting robust marketing activities related to that solution during the first quarter of 2025. 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. In addition, with the recent expansion of our SafePath product line, most notably with SafePath Kids and SafePath OS, we believe that we are well-positioned to grow our Family Safety revenues more broadly with these Tier 1 carriers as well as with other operators in our industry.

Previous wording

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

Current wording

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

Previous wording

Interest (expense) income, net. Interest expense is primarily related to interest associated with our convertible notes and financing arrangements and the amortization of debt issuance costs and discount. Interest income is primarily related to interest earned on cash equivalents.

Current wording

Interest income (expense), net. Interest income is primarily related to interest earned on cash equivalents. Interest expense is primarily related to interest associated with our convertible notes and financing arrangements and the amortization of debt issuance costs and discount.

Previous wording

Other (expense) income, net. Other (expense) income, net is primarily related to fixed asset disposals and other non-operating gains or losses.

Current wording

Other income (expense), net. Other income (expense), net is primarily related to fixed asset disposals and other non-operating gains or losses.

Previous wording

Provision for income tax expense. Income tax expense is primarily related to the provision for federal, state, and foreign taxes imposed upon our results of operations.

Current wording

(Benefit) provision for income tax expense. Income tax (benefit) expense is primarily related to the provision for federal, state, and foreign taxes imposed upon our results of operations.

Previous wording

Revenues. Revenues were $40.9 million and $48.5 million for the years ended December 31, 2023 and 2022, respectively, representing a decrease of $7.7 million, or 16%. This decrease was driven by declines in Family Safety revenues of approximately $5.3 million and in CommSuite revenues of approximately $2.0 million. This decline in revenues was primarily as a result of the migration of legacy Sprint customers onto the T-Mobile network, which has impacted our revenues associated with legacy Sprint subscribers for both Family Safety and CommSuite. There was no legacy Sprint subscriber revenue for CommSuite in the second half of 2023. Also contributing to the decline in Family Safety revenues was the impact of the Family Safety contract termination, as the post-termination transition period concluded at the end of November 2023. The ViewSpot product line's revenues decreased by approximately $0.4 million due to a decrease in device launches in 2023.

Current wording

Revenues. Revenues were $20.6 million and $40.9 million for the years ended December 31, 2024 and 2023, respectively, representing a decrease of $20.3 million, or 50%. This decrease was driven by declines in Family Safety and ViewSpot revenues of approximately $18.1 million and $2.3 million, respectively. This decline in revenues was primarily as a result of the losses of a Family Safety contract with a Tier 1 carrier and two ViewSpot contracts, coupled with the migration of legacy Sprint customers onto the T-Mobile network, which has impacted our revenues associated with legacy Sprint subscribers for Family Safety.

Previous wording

Cost of revenues. Cost of revenues were $10.6 million and $14.2 million for the years ended December 31, 2023 and 2022, respectively. This decrease of approximately $3.7 million was primarily due to cost reduction efforts in 2023 and the year-over-year decline in revenue.

Current wording

Cost of revenues. Cost of revenues were $6.1 million and $10.6 million for the years ended December 31, 2024 and 2023, respectively. This decrease of approximately $4.4 million was primarily due to cost reduction efforts in 2024 and the year-over-year decline in revenue.

Previous wording

Gross profit. Gross profit was $30.3 million, or 74.2% of revenues, for the year ended December 31, 2023, compared to $34.3 million, or 70.7% of revenues, for theyear ended December 31, 2022. The decrease of $4.0 million in gross profit was a result ofthe year-over-year decline in revenue volume.

Current wording

Gross profit. Gross profit was $14.4 million, or 70.2% of revenues, for the year ended December 31, 2024, compared to $30.3 million, or 74.2% of revenues, for theyear ended December 31, 2023. The decrease of $15.9 million in gross profit was a result ofthe year-over-year decline in revenue volume.

Previous wording

Selling and marketing. Selling and marketing expenses were $11.1 million and $12.9 million for the years ended December 31, 2023 and 2022, respectively. This decrease of $1.8 million was primarily due to decreases in personnel related costs of $1.2 million coupled with a reduction of $0.8 million of severance and reorganization related costs, including stock based compensation.

Current wording

Selling and marketing. Selling and marketing expenses were $8.9 million and $11.1 million for the years ended December 31, 2024 and 2023, respectively. This decrease of $2.2 million was primarily due to decreases in personnel related costs of $1.7 million coupled with a period-over-period decline in marketing costs of $0.6 million and a decrease in travel costs of $0.1 million, partially offset by an increase in stock-based compensation of approximately $0.3 million.

Previous wording

Research and development. Research and development expenses were $17.1 million and $29.4 million for the years ended December 31, 2023 and 2022, respectively. This decrease of approximately $12.2 millionwas primarily due tothe decline in personnel-related costs of approximately $9.0 million associated with the workforce reduction efforts coupled with reductions in contractor costs of $2.9 million due to the substantial completion of SafePath migration efforts during 2023.

Current wording

Research and development. Research and development expenses were $14.1 million and $17.1 million for the years ended December 31, 2024 and 2023, respectively. This decrease of approximately $3.1 millionwas primarily due tothe decline in personnel-related costs of approximately $2.9 million associated with the workforce reduction efforts coupled with reductions in contractor costs of $0.2 million due to the substantial completion of SafePath migration efforts during 2023.

Previous wording

General and administrative. General and administrative expenses were$12.8 million and $15.5 million for the years ended December 31, 2023 and 2022, respectively. This decrease of$2.7 million was primarily related to declines in personnel-related costs of approximately $1.4 million associated with the workforce reduction efforts undertaken, a reduction of $0.6 million due to transaction fees incurred related to the Note and Stock Offering in August 2022, a decrease in travel costs of approximately $0.2 million and a reduction in consulting and professional fees of approximately $0.4 million.

Current wording

General and administrative. General and administrative expenses were $10.6 million and $12.8 million for the years ended December 31, 2024 and 2023, respectively. This decrease of $2.2 million was primarily related to declines in personnel-related costs of approximately $1.0 million associated with the workforce reduction efforts undertaken, a decrease in professional fees of approximately $0.2 million, a reduction in occupancy costs of approximately $0.4 million, and a decline in stock-based compensation of approximately $0.6 million.

Previous wording

Depreciation and amortization. Depreciation expense was $0.6 million and $1.2 million for the years ended December 31, 2023 and 2022, respectively. Amortization expense was $6.8 million and $6.3 million for the years ended December 31, 2023 and 2022, respectively. The total decrease in depreciation expense of approximately $0.6 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 asset, and as such it increased approximately $0.5 million.

Current wording

Depreciation and amortization. Depreciation expense was $0.4 million and $0.6 million for the years ended December 31, 2024 and 2023, respectively. Amortization expense was $5.9 million and $6.8 million for the years ended December 31, 2024 and 2023, respectively. The total 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 asset, and as such it decreased by approximately $0.9 million.

Previous wording

Change in fair value of warrant and derivative liabilities. The change in fair value of warrant and derivative liabilities of $4.2 million and $4.7 million for the years ended December 31, 2023 and 2022, respectively, resulted from valuation related impacts to warrant and derivative liabilities including changes in remaining balance, stock price, risk-free interest rate, expected term, and expected volatility.

Current wording

Change in fair value of warrant and derivative liabilities. The change in fair value of warrant and derivative liabilities of $0.4 million and $4.2 million for the years ended December 31, 2024 and 2023, respectively, resulted from valuation related impacts to warrant and derivative liabilities including changes in stock price, risk-free interest rate, expected term, and expected volatility.

Previous wording

Loss on derecognition of debt. The loss recognized on derecognition of debt for the year ended December 31, 2023 was $4.0 million. This resulted from installment payments made on the convertible notes issued under the Note and Stock offering in August 2022 (the "Notes") in the form of shares, and the required derecognition of the net debt position related to that principal balance, including the derivative, and discounts. There was nothing commensurate in the year ended December 31, 2022 as the Notes did not begin to amortize until 2023.

Current wording

Loss on derecognition of debt. The loss recognized on derecognition of debt for the year ended December 31, 2023 was $4.0 million. This resulted from installment payments made on the convertible notes issued under the Note and Stock offering in August 2022 (the "Notes") in the form of shares, and the required derecognition of the net debt position related to that principal balance, including the derivative, and discounts. There was no commensurate loss in the year ended December 31, 2024 as the convertible notes were retired at maturity as of December 31, 2023.

Previous wording

Interest expense, net. Interest expense was $6.4 million and $2.7 million for the years ended December 31, 2023 and 2022, respectively. The increase in interest expense of $3.7 million was primarily related to the amortization of the discount and debt issuance costs and stated interest expense related to the August 2022 Notes and Warrants Offering, with the Notes issued thereunder being outstanding for the full year in 2023 versus less than five months during 2022.

Current wording

Interest income (expense), net. Interest income, net was $0.1 million for the year ended December 31, 2024 and interest expense, net was $6.4 million for the year ended December 31, 2023. The period-over-period change in interest income (expense), net of $6.5 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

Provision for income tax expense. Because of our cumulative loss position, the current provision for income tax expense consists of state income taxes, foreign tax withholdings, and foreign income taxes. After consideration of the Company’s cumulative loss position as of December 31, 2023, the Company retained a full valuation allowance related to its U.S.-based deferred tax assets of $58.5 million at December 31, 2023.

Current wording

(Benefit) provision for income tax expense. Because of our cumulative loss position, the current provision for income tax expense consists of state income taxes, foreign tax withholdings, and foreign income taxes. After consideration of the Company’s cumulative loss position as of December 31, 2024, the Company retained a full valuation allowance related to its U.S.-based deferred tax assets of $70.2 million at December 31, 2024.

Previous wording

Our principal sources of liquidity are our existing cash and cash equivalents, and cash generated by operations. We have in the past also generated cash from equity and debt financings. Our primary needs for liquidity relate to working capital requirements for operations. Our working capital requirements will depend on many factors, including the ability to obtain sufficient subscribers, and therefore revenue, from our customers to cover the current level of operating expenses to achieve a level of profitability. As of December 31, 2023, our cash and cash equivalents were approximately $7.1 million and we had no outstanding debt. Our cash flow used in operations was $7.0 million for the year ending December 31, 2023.

Current wording

Our principal sources of liquidity are our existing cash and cash equivalents, and cash generated by operations. We have in the past also generated cash from equity and debt financings. Our primary needs for liquidity relate to working capital requirements for operations. Our working capital requirements will depend on many factors, including the ability to obtain sufficient subscribers, and therefore revenue, from our customers to cover the current level of operating expenses to achieve a level of profitability. As of December 31, 2024, our cash and cash equivalents were approximately $2.8 million and we had no outstanding debt. Our cash flow used in operations was $14.3 million for the year ended December 31, 2024. Our cash balance as of December 31, 2024 was impacted by our transition to a new payment platform with our largest customer, which delayed the receipt of cash from this customer for certain invoices. We were subsequently able to collect $2.5 million of these aged receivables from that customer in January 2025. This delay in cash receipts was the primary driver of the increase in our accounts receivable balance to $5.7 million as of December 31, 2024 compared to $3.4 million as of September 30, 2024.

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 will receive no revenue from that contract during 2024. While we anticipate marketing efforts to accelerate for one of our existing Tier 1 carrier customers in order to drive subscriber growth on our Family Safety product, the timing of that anticipated revenue growth versus the immediate and current impact of the contract loss could cause the cash and cash equivalents on hand and expected to be generated in the next twelve months and beyond the next twelve months to be insufficient to fund operations at the current levels.

Current wording

Our liquidity is being adversely impacted by the effect of the aforementioned loss during 2023 of our Family Safety contract with a Tier 1 carrier on our results of operations, since we recognized no revenue from that contract during 2024. While we have adjusted our cost structure and we expect to generate additional revenues from our recent launch with a Tier 1 carrier in Europe, the timing of that anticipated revenue growth versus the current impact of that 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 our Risk Factor "If we are unable to meet our obligations as they become due over the next twelve months, the Company may not be able to continue as a going concern." There can be no assurance that any such potential actions will be available or will be available on satisfactory terms. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry. As a result of these uncertainties, and notwithstanding management's plans and efforts to date, we have been unable to alleviate substantial doubt about our ability to continue as a going concern within one year from the date that the financial statements are issued.

Current wording

This 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, to meet future cash needs, the Company may determine to take additional actions, as noted in our Risk Factor "If we are unable to meet our obligations as they become due over the next twelve months, the Company may not be able to continue as a going concern." There can be no assurance that any such potential actions will be available or will be available on satisfactory terms. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry. As a result of these uncertainties, and notwithstanding management's plans and efforts to date, we have been unable to alleviate substantial doubt about our ability to continue as a going concern within one year from the date that the financial statements are issued.

Previous wording

Net cash used in operating activities was $19.3 million for the year ended December 31, 2022. The primary uses of operating cash were a net loss of $29.3 million partially offset by net non-cash expenses totaling $10.9 million coupled with a decrease in accounts payable and accrued liabilities of $1.1 million.

Current wording

Net cash used in operating activities was $14.3 million for the year ended December 31, 2024. The primary uses of operating cash were a net loss of $48.7 million less non-cash expenses totaling $33.9 million, including a goodwill impairment charge of $24.0 million, depreciation and amortization of $6.3 million and stock compensation expense of $4.5 million, coupled with a decrease in accounts payable and accrued liabilities of $1.9 million, partially offset by a decrease in accounts receivable of $2.2 million.

Previous wording

Net cash provided by investing activities was $0.1 million for both the years ended December 31, 2023 and 2022.

Current wording

Net cash provided by investing activities of $0.2 million for the year ended December 31, 2024 was primarily attributable to the net proceeds from licensing several of our patents. Net cash used in investing activities was $0.1 million for the year ended December 31, 2023.

Previous wording

Our corporate headquarters is located in Pittsburgh, Pennsylvania, where we currently lease approximately 35,621 square feet of space under a lease that expires on April 30, 2026. In January 2024, we executed a renewal on a lease where we occupy approximately 8,513 square feet of space in Aliso Viejo, California that now expires on February 29, 2028. Internationally, we lease approximately 12,728 square feet in Belgrade, Serbia under a lease that expires July 31, 2026, approximately 1,500 square feet in Stockholm, Sweden under a lease that expires September 30, 2026, and approximately 3,200 square feet in Braga, Portugal under a lease that expires July 31, 2024. Each of the above properties is used by our sole reportable operating segment: Wireless.

Current wording

Our corporate headquarters is located in Pittsburgh, Pennsylvania, where we currently lease approximately 35,621 square feet of space under a lease that expires on April 30, 2026. In January 2024, we executed a renewal on a lease where we occupy approximately 8,513 square feet of space in Aliso Viejo, California that now expires on February 29, 2028. Internationally, we lease approximately 12,728 square feet in Belgrade, Serbia under a lease that expires July 31, 2026, approximately 1,500 square feet in Stockholm, Sweden under a lease that expires September 30, 2026, and approximately 2,659 square feet in Braga, Portugal under a lease that expires May 31, 2027. Each of the above properties is used by our sole reportable operating segment: Wireless.

Previous wording

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

Current wording

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

Previous wording

We transfer software licenses to our customers on a royalty free, non-exclusive, non-transferrable, limited use basis during the term of the agreement. In some instances, we perform integration services to ensure the software operates within our customer’s operating platforms as well as the operating platforms of the mobile devices used by their end customers, before transferring the license. Revenue related to these services is recognized at a point in time upon acceptance of the licensed software by the customer. We also earn usage-based revenue on our platforms. Usage based revenue is generated based on licenses used by our customers' active subscribers’ access and usage of our software licenses and cloud-based services on our platforms, the provision of hosting services, and revenue share based on media placements on our platform. We recognize our usage-based revenue when we have completed our performance obligation and have the right to invoice the customer. This revenue is generally recognized monthly or quarterly. Finally, we ratably recognize revenue over the contract period when customers pay in advance of our service delivery.

Current wording

We transfer software licenses to our customers on a royalty free, non-exclusive, non-transferrable, limited use basis during the term of the agreement. In some instances, we perform integration services to ensure the software operates within our customer’s operating platforms as well as the operating platforms of the mobile devices used by their end customers, before transferring the license. Revenue related to these services is recognized at a point in time upon acceptance of the licensed software by the customer. We also earn usage-based revenue on our platforms. Usage based revenue is generated based on licenses used by our customers' active subscribers’ access and usage of our software licenses and cloud-based services on our platforms, the provision of hosting services, and revenue share based on media placements on our platform. We recognize our usage-based revenue when we have completed our performance obligation and have the right to invoice the customer. This revenue is generally recognized monthly. Finally, we ratably recognize revenue over the contract period when customers pay in advance of our service delivery.