Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________________________ FORM 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, 2023 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-35525 _____________________________ SMITH MICRO SOFTWARE, INC. (Exact name of re ...

Financial Data and Key Metrics Changes - The company reported revenue of $11 million for Q3 2023, a decrease of approximately 6% compared to $11.7 million in Q3 2022, but an increase of 6% from the previous quarter [56][31] - Non-GAAP pretax profit for Q3 2023 was approximately $700,000, compared to a non-GAAP net loss of approximately $4.9 million in Q3 2022 [59][60] - Gross margin improved to 77% in Q3 2023 from 69% in Q3 2022, with gross profit increasing to $8.5 million from $8.1 million year-over-year [58][34] Business Line Data and Key Metrics Changes - Family Safety revenue decreased by approximately $500,000 or 5% year-over-year, primarily due to a reduction in Sprint Safe & Found revenue, but increased by $400,000 sequentially from Q2 2023 [26][31] - CommSuite revenue was $700,000 in Q3 2023, down by approximately $300,000 compared to Q3 2022, attributed to a decline in DISH revenue and legacy Sprint deployment [35] - ViewSpot revenue grew to approximately $1.1 million in Q3 2023, an increase of $100,000 year-over-year and $200,000 sequentially, driven by a new contract with a U.S. mobile virtual network operator [36] Market Data and Key Metrics Changes - Year-to-date revenues through September 30, 2023, were $32.3 million, down from $37.1 million in the same period last year, primarily due to declines in legacy Safe & Found Family Safety revenue [34] - The company expects consolidated revenues to decrease by 18% to 23% in Q4 2023, largely due to the decline in Verizon Family Safety revenues as the contract concludes [57] Company Strategy and Development Direction - The company is focusing on leveraging AI and machine learning to enhance family safety solutions and simplify SafePath deployments to capture broader market segments [32][46] - A new global deployment model, SafePath Global, is being introduced to accelerate penetration among Tier 2 and Tier 3 providers, particularly in high ARPU markets in Europe [67] - The strategic focus remains on family safety, with plans to introduce SafePath Premium in 2024, which will include features to monitor and alert parents about harmful content on social media [81][82] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about future growth, particularly with the AT&T relationship, and indicated that significant marketing initiatives are planned for 2024 [79][78] - The company is observing increased demand for consolidated super apps and anticipates that more than half of the global population will be daily users of such applications in the coming years [80] - Management noted that the macro family safety market is evolving due to rising concerns about safety and security, both online and offline [45][46] Other Important Information - The company reported cash and cash equivalents of $8 million as of September 30, 2023, with cash flows from operations of approximately $1.5 million during the quarter [43] - GAAP operating expenses for Q3 2023 were $10.7 million, a decrease of 35% compared to Q3 2022, reflecting the company's aggressive cost-cutting measures [39] Q&A Session Summary Question: What is the expected revenue trajectory in Q4? - Management expects a decline in revenue due to the end of the Verizon contract, with no revenue anticipated from that contract in December [10][57] Question: Can you provide insights on the ViewSpot contracts? - One ViewSpot contract was terminated immediately, resulting in a loss of several hundred thousand dollars in revenue for Q4, while another contract will continue until the end of the year with a transition period [73] Question: What are the expectations for the AT&T relationship moving into 2024? - Management is very bullish about the AT&T relationship, with several initiatives planned for 2024 that are either approved or in the final approval process [79] Question: How is the company addressing competition in the family safety space? - Management noted an increased awareness in the family safety space rather than direct competition, as carriers are required to enhance their offerings due to regulatory pressures [106]

Financial Performance - Revenues for Q2 2023 were $10.3 million, a decrease of 18% compared to $12.7 million in Q2 2022, primarily due to declines in the Family Safety and CommSuite product lines [94][101]. - The net loss for Q2 2023 was $5.7 million, resulting in a net loss of $0.09 per basic and diluted share [94]. - Revenues for the six months ended June 30, 2023, were $21.3 million, a decrease of $4.1 million or 16% compared to $25.4 million for the same period in 2022 [113]. - Gross profit was $15.4 million, representing 72.4% of revenues for the six months ended June 30, 2023, compared to $18.2 million or 71.5% of revenues for the same period in 2022 [115]. Cost Management - Operating expenses decreased by approximately $6.4 million in Q2 2023 compared to Q2 2022, driven by a $4.4 million reduction in Research & Development expenses [94]. - The company eliminated approximately 26% of its global workforce in response to the termination of the Family Safety contract, resulting in over $4 million of quarterly cost savings in Q2 2023 [96]. - Research and development expenses decreased by approximately $5.8 million to $9.6 million for the six months ended June 30, 2023, primarily due to a decline in personnel-related costs [117]. - Selling and marketing expenses were $6.2 million for the six months ended June 30, 2023, down from $6.7 million in 2022, reflecting a decrease in personnel-related costs [116]. - Cost of revenues decreased to $5.9 million for the six months ended June 30, 2023, from $7.3 million in 2022, due to revenue decline and cost reduction efforts [114]. Liquidity and Cash Flow - Net cash used in operating activities was $7.5 million for the six months ended June 30, 2023, compared to $11.6 million for the same period in 2022 [126][127]. - As of June 30, 2023, the company's cash and cash equivalents were approximately $6.4 million, indicating sufficient liquidity to meet financial obligations [125]. Interest and Debt - Interest expense for Q2 2023 was $2.0 million, primarily due to the amortization of the discount and debt issuance costs related to financing transactions [110]. - Interest expense was $4.3 million for the six months ended June 30, 2023, primarily related to the amortization of the discount and debt issuance costs [122]. - The loss recognized on derecognition of debt in Q2 2023 was $0.8 million, resulting from installment payments made on convertible notes [109]. - The loss recognized on derecognition of debt for the six months ended June 30, 2023, was $1.4 million, resulting from installment payments made on convertible notes [121]. Product and Market Developments - The Family Safety contract with a Tier 1 customer terminated effective June 30, 2023, accounting for approximately 34% of total revenues for the six-month period ended June 30, 2023 [95]. - The company expects to launch the SafePath platform for another U.S. Tier 1 carrier in Q3 2023, which is anticipated to improve gross margins [95]. Valuation Adjustments - The change in fair value of warrant and derivative liabilities was $0.4 million for Q2 2023, reflecting valuation impacts [108]. - Change in fair value of warrant and derivative liabilities was $3.4 million for the six months ended June 30, 2023, reflecting valuation impacts [120].

Smith Micro Software, Inc. (NASDAQ:SMSI) Q2 2023 Earnings Conference Call August 9, 2023 4:30 PM ET Company Participants Bill Smith - Chairman, President, Chief Executive Officer Jim Kempton - Chief Financial Officer Charles Messman - Vice President of Marketing Conference Call Participants Scott Searle - ROTH MKM Josh Nichols - B. Riley FBR Jim McIlree - Dawson James Operator Good day, and welcome to the Smith Micro Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. ...

| --- | --- | |----------------------------------------------------|-------| | | | | | | | Smartphones and other screens offer more | | | communication and entertainment opportunities | | | | | | than ever; but with those opportunities certain | | | threats become more visible. | | | Parents want security and ease. Kids want autonomy | | ® SafePath® Direct Marketing/CRM Store Collateral/Employee Training Education Segment | --- | --- | |-----------------------------------|-------| | | | | | | | … ACHIEVING ...

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20%28Unaudited%29) Presents unaudited consolidated financial statements for Q1 2023 and 2022, including balance sheets, operations, equity, cash flows, and notes [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets%20as%20of%20March%2031%2C%202023%20and%20December%2031%2C%202022) | Metric | March 31, 2023 (in millions) | December 31, 2022 (in millions) | | :-------------------------------- | :----------------------------- | :----------------------------- | | Cash and cash equivalents | $8.724 | $14.026 | | Total current assets | $23.233 | $26.510 | | Total assets | $98.258 | $103.581 | | Total current liabilities | $20.249 | $20.731 | | Total non-current liabilities | $4.125 | $6.471 | | Total stockholders' equity | $73.884 | $76.379 | - Total assets decreased from **$103.581 million** at December 31, 2022, to **$98.258 million** at March 31, 2023[9](index=9&type=chunk) - Cash and cash equivalents decreased by **$5.302 million** from **$14.026 million** to **$8.724 million**[9](index=9&type=chunk) [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations%20for%20the%20Three%20Months%20Ended%20March%2031%2C%202023%20and%202022) | Metric | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Revenues | $10.930 | $12.735 | | Gross profit | $7.648 | $9.098 | | Operating loss | $(6.935) | $(7.038) | | Change in fair value of warrant and derivative liabilities | $2.984 | — | | Interest expense, net | $(2.260) | $(0.004) | | Net loss | $(6.887) | $(7.002) | | Basic and diluted loss per share | $(0.11) | $(0.13) | - Revenues decreased by **14.1%** year-over-year, from **$12.735 million** in Q1 2022 to **$10.930 million** in Q1 2023[11](index=11&type=chunk) - Net loss improved slightly from **$(7.002) million** in Q1 2022 to **$(6.887) million** in Q1 2023, partly due to a **$2.984 million** gain from the change in fair value of warrant and derivative liabilities[11](index=11&type=chunk) [Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity%20for%20the%20Three%20Months%20Ended%20March%2031%2C%202023%20and%202022) | Metric | December 31, 2022 (in millions) | March 31, 2023 (in millions) | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Total Stockholders' Equity | $76.379 | $73.884 | | Additional Paid-in Capital | $357.875 | $362.262 | | Accumulated Comprehensive Deficit | $(281.552) | $(288.439) | | Common shares issued in settlement and prepayment of notes payable | — | $3.649 | - Total stockholders' equity decreased by **$2.495 million** from **$76.379 million** at December 31, 2022, to **$73.884 million** at March 31, 2023[14](index=14&type=chunk) - Common shares issued in settlement and prepayment of notes payable contributed **$3.649 million** to equity in Q1 2023[14](index=14&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20Three%20Months%20Ended%20March%2031%2C%202023%20and%202022) | Cash Flow Activity | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Net cash used in operating activities | $(5.335) | $(6.589) | | Net cash provided by (used in) investing activities | $0.003 | $(0.051) | | Net cash provided by financing activities | $0.030 | $0.393 | | Net decrease in cash and cash equivalents | $(5.302) | $(6.247) | | Cash and cash equivalents, end of period | $8.724 | $9.831 | - Net cash used in operating activities decreased by **$1.254 million**, from **$(6.589) million** in Q1 2022 to **$(5.335) million** in Q1 2023[18](index=18&type=chunk) - Cash and cash equivalents at the end of the period decreased to **$8.724 million** as of March 31, 2023, from **$14.026 million** at the beginning of the period[18](index=18&type=chunk) [Notes to the Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) [Note 1. The Company](index=8&type=section&id=Note%201.%20The%20Company) - Smith Micro Software, Inc. develops software to simplify and enhance the mobile experience for wireless and cable service providers globally[20](index=20&type=chunk) - The company's portfolio includes digital services for family safety (location, parental controls, IoT), visual voice messaging, and retail content display optimization[20](index=20&type=chunk)[25](index=25&type=chunk) [Note 2. Accounting Policies](index=8&type=section&id=Note%202.%20Accounting%20Policies) - The unaudited consolidated financial statements are prepared in accordance with SEC rules and US GAAP, omitting certain disclosures normally included in annual statements[21](index=21&type=chunk) - The adoption of ASU 2016-13, 'Financial Instruments - Credit Losses (Topic 326),' effective in fiscal year 2023, did not have a material impact on the financial statements[24](index=24&type=chunk) [Note 3. Equity Transactions](index=9&type=section&id=Note%203.%20Equity%20Transactions) - In August 2022, the company completed a registered direct offering, selling **1,132,075 shares** of common stock and warrants, raising net cash proceeds of **$2.8 million**[26](index=26&type=chunk) - During Q1 2023, **1,644,738 shares** were issued to settle a **$1.5 million** convertible notes installment, and **1,592,359 shares** were prefunded for a May 2023 installment[28](index=28&type=chunk) [Note 4. Debt and Warrants Transactions](index=9&type=section&id=Note%204.%20Debt%20and%20Warrants%20Transactions) - On August 11, 2022, the company sold **$15.0 million** in senior secured convertible notes and warrants to acquire **2,238,806 shares**[29](index=29&type=chunk) - The notes accrue **6.0%** annual interest (**15.0%** upon default) and mature on December 31, 2023, with monthly amortization payments[30](index=30&type=chunk) - Warrants and embedded derivative features are classified as liability instruments, with fair value changes recognized in the consolidated statements of operations[31](index=31&type=chunk)[32](index=32&type=chunk) | Metric | Amount (in millions) | | :-------------------------- | :-------------------- | | Gross Balance as of March 31, 2023 | $13.500 | | Unamortized Discount | $(3.658) | | Unamortized Issuance Costs | $(0.218) | | Net Balance as of March 31, 2023 | $9.624 | [Note 5. Fair Value of Financial Instruments](index=11&type=section&id=Note%205.%20Fair%20Value%20of%20Financial%20Instruments) | Financial Liability | March 31, 2023 (in millions) | | :-------------------------------- | :----------------------------- | | Notes and Warrants Offering Derivative | $0.532 | | Warrants | $0.830 | | Additional Warrants | $0.524 | | Total at March 31, 2023 | $1.886 | - The change in fair value for these liabilities resulted in a gain of **$2.984 million** for the three months ended March 31, 2023[40](index=40&type=chunk) [Note 6. Goodwill and Intangible Assets](index=11&type=section&id=Note%206.%20Goodwill%20and%20Intangible%20Assets) - A U.S. Tier 1 customer agreement termination in February 2023 triggered an interim quantitative impairment analysis for goodwill and long-lived assets[42](index=42&type=chunk) - The impairment analysis concluded no impairment for goodwill or the Customer Relationships intangible asset as of February 28, 2023[44](index=44&type=chunk)[45](index=45&type=chunk) | Intangible Asset | Net Book Value (March 31, 2023, in millions) | | :-------------------- | :------------------------------------------ | | Purchased technology | $7.257 | | Customer relationships | $22.382 | | Customer contracts | $1.198 | | Software license | $3.667 | | Patents | $0.343 | | Total | $34.847 | - Intangible asset amortization expense was **$1.5 million** for the three months ended March 31, 2023, compared to **$1.6 million** in the prior year period[47](index=47&type=chunk) [Note 7. Earnings Per Share](index=13&type=section&id=Note%207.%20Earnings%20Per%20Share) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net loss (in millions) | $(6.887) | $(7.002) | | Weighted average shares outstanding – basic (in thousands) | 61,646 | 54,501 | | Basic and diluted net loss per common share | $(0.11) | $(0.13) | - **8,032 thousand** anti-dilutive shares (convertible notes, stock options, and warrants) were excluded from the diluted net loss per share calculation for Q1 2023[51](index=51&type=chunk) [Note 8. Stock-Based Compensation](index=14&type=section&id=Note%208.%20Stock-Based%20Compensation) - The company granted **1.4 million shares** of restricted stock under its 2015 Omnibus Equity Incentive Plan during Q1 2023[52](index=52&type=chunk) | Expense Category | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | | Sales and marketing | $0.162 | $0.083 | | Research and development | $0.224 | $0.261 | | General and administrative | $0.559 | $0.721 | | Total non-cash stock compensation expense | $0.945 | $1.065 | - As of March 31, 2023, there was approximately **$8.3 million** in unrecognized compensation costs related to non-vested stock options and restricted stock[57](index=57&type=chunk) - **2,627 thousand** unvested restricted stock awards were outstanding as of March 31, 2023[59](index=59&type=chunk) [Note 9. Revenues](index=16&type=section&id=Note%209.%20Revenues) - The company recognizes revenue based on a five-step analysis, primarily from usage-based fees for perpetual licenses, hosted environment transactions, advertisement placements, and cloud-based services[60](index=60&type=chunk) | Revenue Type | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | | License and service fees | $1.000 | $0.828 | | Hosted environment usage fees | $0.819 | $1.429 | | Cloud based usage fees | $8.677 | $9.878 | | Consulting services and other | $0.434 | $0.600 | | Total revenues | $10.930 | $12.735 | [Note 10. Segment, Customer Concentration and Geographical Information](index=17&type=section&id=Note%2010.%20Segment%2C%20Customer%20Concentration%20and%20Geographical%20Information) - The company operates as a single primary business unit: Wireless, which includes Family Safety (SafePath®), CommSuite®, and ViewSpot® products[64](index=64&type=chunk) | Product Line | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | | Family Safety | $9.089 | $10.366 | | CommSuite | $0.826 | $1.430 | | ViewSpot | $1.015 | $0.939 | | Total Wireless revenues | $10.930 | $12.735 | - Three customers accounted for **37%**, **37%**, and **14%** of total revenues for Q1 2023[66](index=66&type=chunk) - Revenues from the Americas totaled **$10.511 million** in Q1 2023, down from **$12.193 million** in Q1 2022[68](index=68&type=chunk) [Note 11. Commitments and Contingencies](index=18&type=section&id=Note%2011.%20Commitments%20and%20Contingencies) - Management does not believe the ultimate disposition of potential legal proceedings will have a material adverse impact on the company's consolidated results[69](index=69&type=chunk) - The company has various indemnities, commitments, and guarantees, for which no liability has been recorded in the consolidated balance sheets[70](index=70&type=chunk) [Note 12. Leases](index=18&type=section&id=Note%2012.%20Leases) | Metric | Three Months Ended March 31, 2023 (in millions) | Three Months Ended March 31, 2022 (in millions) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | | Lease cost | $0.410 | $0.434 | | Sublease income | — | $(0.018) | | Total lease cost | $0.410 | $0.416 | - The present value of operating lease liabilities was **$4.046 million** as of March 31, 2023[74](index=74&type=chunk) - The weighted average remaining lease term was **2.85 years**, with a weighted average discount rate of **6.2%** as of March 31, 2023[75](index=75&type=chunk) [Note 13. Income Taxes](index=19&type=section&id=Note%2013.%20Income%20Taxes) - The company maintains a valuation allowance against its U.S.-based deferred tax amounts, totaling **$62.7 million** as of March 31, 2023, due to a historical cumulative loss position[78](index=78&type=chunk) - There were no outstanding tax audits from federal or state authorities as of March 31, 2023[79](index=79&type=chunk) [Note 14. Subsequent Events](index=20&type=section&id=Note%2014.%20Subsequent%20Events) - Subsequent events have been evaluated as of the filing date, and no further disclosures are required[81](index=81&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management's discussion and analysis of Q1 2023 financial condition, operations, liquidity, capital resources, and risks [Overview](index=22&type=section&id=Overview) - Q1 2023 revenues declined by **14%** to **$10.9 million**, primarily due to decreases in the Family Safety and CommSuite product lines[90](index=90&type=chunk) - Net loss for Q1 2023 was **$6.9 million**, or **$0.11** per basic and diluted share[90](index=90&type=chunk) - One U.S. Tier 1 customer terminated its Family Safety contract effective June 30, 2023, leading to a workforce reduction of approximately **26%** and anticipated quarterly cost savings of **$4 million** by Q2 2023[91](index=91&type=chunk) - The company expects development costs to decline and gross margins to increase as customer migrations to the SafePath platform are completed[91](index=91&type=chunk) [Results of Operations](index=23&type=section&id=Results%20of%20Operations) | Metric (as % of Revenues) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Revenues | 100.0 % | 100.0 % | | Cost of revenues | 30.0 % | 28.6 % | | Gross profit | 70.0 % | 71.4 % | | Operating loss | (63.4) % | (55.3) % | | Net loss | (63.0) % | (55.0) % | [Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022](index=23&type=section&id=Three%20Months%20Ended%20March%2031%2C%202023%20Compared%20to%20the%20Three%20Months%20Ended%20March%2031%2C%202022) - Revenues decreased by **$1.8 million** (**14%**) to **$10.9 million**, primarily due to declines in Family Safety (**$1.3 million**) and CommSuite (**$0.6 million**) related to T-Mobile's subscriber migration[94](index=94&type=chunk) - Gross profit decreased by **$1.5 million** to **$7.6 million**, driven by lower revenue volume and **$0.2 million** in severance costs[96](index=96&type=chunk) - Research and development expenses decreased by **$1.4 million** to **$5.9 million**, mainly due to lower personnel and contractor costs, partially offset by **$0.5 million** in severance costs[98](index=98&type=chunk) - Interest expense, net, increased significantly by **$2.3 million** to **$2.3 million**, primarily due to amortization of debt discount and issuance costs from the August 2022 financing[103](index=103&type=chunk) - A **$3.0 million** income was recognized from the change in fair value of warrant and derivative liabilities in Q1 2023[101](index=101&type=chunk) [Liquidity and Capital Resources](index=24&type=section&id=Liquidity%20and%20Capital%20Resources) - The company's principal sources of liquidity are existing cash and cash equivalents, and cash generated by operations[105](index=105&type=chunk) - Cash and cash equivalents were approximately **$8.7 million** as of March 31, 2023[105](index=105&type=chunk) - Management believes the company will be able to meet its financial obligations over the next twelve months[105](index=105&type=chunk) [Operating activities](index=24&type=section&id=Operating%20activities) - Net cash used in operating activities was **$5.3 million** for Q1 2023, an improvement from **$6.6 million** used in Q1 2022[106](index=106&type=chunk)[107](index=107&type=chunk) - Primary uses of operating cash in Q1 2023 included a net loss of **$6.9 million**, an increase in accounts receivable of **$0.7 million**, and a decrease in accounts payable and accrued liabilities of **$0.4 million**[106](index=106&type=chunk) [Investing activities](index=25&type=section&id=Investing%20activities) - Net cash provided by investing activities was nominal for Q1 2023, compared to **$0.1 million** used in Q1 2022[109](index=109&type=chunk) [Financing activities](index=25&type=section&id=Financing%20activities) - Net cash provided by financing activities was nominal for Q1 2023, down from **$0.4 million** in Q1 2022, primarily due to the timing of borrowings and repayments from short-term insurance premium financing[110](index=110&type=chunk) [Recent Accounting Guidance](index=25&type=section&id=Recent%20Accounting%20Guidance) - Refer to Note 2 of the Notes to the Consolidated Financial Statements for information regarding recent accounting guidance[111](index=111&type=chunk) [Critical Accounting Policies and Estimates](index=25&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) - The preparation of financial statements requires management to make estimates and judgments that affect reported amounts, based on historical experience and reasonable assumptions[112](index=112&type=chunk) - Detailed information on critical accounting policies and estimates is available in Note 1 of the company's 2022 Form 10-K[112](index=112&type=chunk) [Item 4. Controls and Procedures](index=25&type=section&id=Item%204.%20Controls%20and%20Procedures) Assesses disclosure controls, management's financial statement responsibility, and internal control changes [Evaluation of disclosure controls and procedures](index=25&type=section&id=Evaluation%20of%20disclosure%20controls%20and%20procedures) - Management, including the CEO and CFO, determined that disclosure controls and procedures were effective as of March 31, 2023[113](index=113&type=chunk) [Management's responsibility for financial statements](index=25&type=section&id=Management%27s%20responsibility%20for%20financial%20statements) - Management is responsible for the integrity and objectivity of all information presented in this Report, with consolidated financial statements prepared in conformity with U.S. GAAP[114](index=114&type=chunk) - The Audit Committee of the Board of Directors reviews accounting, financial reporting, internal control, and audit matters[115](index=115&type=chunk) [Changes in internal control over financial reporting](index=26&type=section&id=Changes%20in%20internal%20control%20over%20financial%20reporting) - There have been no material changes in internal controls over financial reporting during the quarter ended March 31, 2023[117](index=117&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=27&type=section&id=Item%201.%20Legal%20Proceedings) Addresses potential legal proceedings, with no material adverse impact on financial position or results anticipated - Management does not believe the ultimate disposition of various legal proceedings will have a material adverse impact on the company's consolidated results of operations, cash flows, or financial position[120](index=120&type=chunk) [Item 1A. Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors) Refers to 2022 Form 10-K risk factors and Item 2, confirming no material changes to previously disclosed risks - Readers should consider risk factors discussed in Part I, Item 1A of the 2022 Form 10-K and factors identified at the beginning of Part I, Item 2 of this Report[121](index=121&type=chunk) - There have been no material changes to the risk factors included in the 2022 Form 10-K for the year ended December 31, 2022[121](index=121&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=27&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Details Q1 2023 equity security repurchases, primarily for withholding taxes on restricted stock awards | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------- | :----------------------------- | :--------------------------- | | January 1 - 31, 2023 | 23,993 | $2.63 | | February 1 - 28, 2023 | 21,931 | $3.20 | | March 1 - 31, 2023 | 65,179 | $1.17 | | Total | 111,103 | $2.33 | - Shares were repurchased for the payment of withholding taxes in connection with the vesting of restricted stock awards[122](index=122&type=chunk) [Item 5. Other Information](index=27&type=section&id=Item%205.%20Other%20Information) Discloses impairment review outcome after customer termination, confirming no goodwill or intangible asset impairment - Following an impairment review triggered by a customer agreement termination, the company determined there was no impairment of goodwill or long-lived intangible assets[123](index=123&type=chunk) [Item 6. Exhibits](index=28&type=section&id=Item%206.%20Exhibits) Lists exhibits filed with Form 10-Q, including certifications and Inline XBRL documents - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer, as well as Inline XBRL instance, schema, calculation, definition, label, and presentation documents[124](index=124&type=chunk) SIGNATURES [SIGNATURES](index=29&type=section&id=SIGNATURES) Contains official signatures of authorized officers, certifying due authorization and filing of the Form 10-Q - The Report was signed on May 12, 2023, by William W. Smith, Jr., Chairman of the Board, President and Chief Executive Officer, and James M. Kempton, Vice President and Chief Financial Officer[128](index=128&type=chunk)

Financial Data and Key Metrics Changes - Revenue for the first quarter of 2023 was $10.9 million, down from $12.7 million in the same quarter of 2022, representing a decrease of approximately 14% [73] - GAAP net loss for the first quarter of 2023 was $6.9 million or $0.11 loss per share, compared to a GAAP net loss of $7 million or $0.13 loss per share in the first quarter of 2022 [8] - Non-GAAP gross margin for the first quarter of 2023 was 71.8%, compared to 71.4% in the first quarter of 2022 [101] Business Line Data and Key Metrics Changes - Family Safety revenue decreased by $1.3 million or 12% compared to the first quarter of the prior year, primarily due to the attrition of legacy Sprint subscribers [30] - CommSuite revenues were approximately $800,000, down from $1.4 million in the first quarter of 2022 [66] - ViewSpot revenue was approximately $1 million for the first quarter of 2023, which increased by $100,000 compared to the first quarter of the prior year [100] Market Data and Key Metrics Changes - The company anticipates consolidated revenue for the second quarter of 2023 to be flat to lower by 4% compared to the first quarter of 2023 [31] - The company expects second quarter 2023 non-GAAP operating expenses to decrease by 25% to 30% from the first quarter of 2023 [32] Company Strategy and Development Direction - The company is focused on completing the migration of the AT&T Secure Family application to the SafePath platform, with a public launch expected in the third quarter [64] - The company aims to achieve $4 million in savings from total non-GAAP expenses reported in the fourth quarter of 2022 [12] - The company is optimistic about expanding its ViewSpot business and anticipates additional customers in both North America and EMEA regions [79] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in returning to profitability by the third quarter, with a focus on cost reduction and operational efficiency [42] - The management noted that the challenges faced are largely within their control and are being addressed proactively [107] - Management highlighted positive feedback from sales prospects in both the U.S. and high ARPU markets across Europe [106] Other Important Information - The company has implemented a global reduction in workforce, eliminating approximately 26% of its global workforce to achieve cost reduction goals [3] - The company reported $8.7 million in cash and cash equivalents as of March 31, 2023 [103] Q&A Session Summary Question: Has the expectation for a return to profitability changed? - Management confirmed that they are still committed to achieving profitability in the third quarter [42] Question: Can you elaborate on margins in the back half of the year? - Management indicated that they expect adjusted gross margins to improve by 150 to 250 basis points as the year progresses [43] Question: What additional growth initiatives are being worked on with AT&T? - Management mentioned ongoing discussions and activities to support AT&T's growth initiatives, but did not provide specific quantifiable opportunities at this time [19]

Financial Performance - In 2022, revenues declined by 17% to $48.5 million, primarily due to an $8.9 million decrease in the CommSuite product line [125]. - Gross profit for 2022 was $34.3 million, representing 70.7% of revenues, down from $45.7 million or 78.3% in 2021 [138]. - The net loss for 2022 was $29.3 million, resulting in a net loss per diluted share of $0.53 [125]. Operating Expenses - Operating expenses increased to 134.5% of revenues in 2022, compared to 131.2% in 2021, with significant increases in selling and marketing expenses [128]. - Research and development expenses rose to $29.9 million in 2022, an increase of $3.7 million from 2021, driven by contractor costs for SafePath development [140]. - Net cash used in operating activities was $19.3 million for 2022, primarily due to a net loss of $29.3 million [148]. Cash Flow and Liquidity - Cash and cash equivalents as of December 31, 2022, were approximately $14.0 million, indicating liquidity to meet financial obligations [147]. - Net cash provided by financing activities was $17.1 million in 2022, mainly from a Notes and Warrant Offering of $15.0 million [151]. Research and Development - Research and development costs decreased by approximately $1.5 million, or 18%, in Q4 2022 compared to Q2 2022 as migration efforts neared completion [126]. - The company anticipates that certain costs of sales related to acquired platforms will be eliminated post-migration, potentially increasing gross margins [126]. Corporate Structure and Locations - The corporate headquarters is located in Pittsburgh, Pennsylvania, leasing approximately 35,621 square feet, with the lease expiring on April 30, 2026 [154]. - The company leases an additional 8,513 square feet in Aliso Viejo, California, expiring on October 31, 2024, and 12,728 square feet in Belgrade, Serbia, expiring on July 31, 2026 [154]. Accounting Policies - As of December 31, 2022, there were no off-balance sheet arrangements reported [157]. - The company applies FASB ASC Topic No. 805 for business combinations, recognizing assets and liabilities at fair value on the acquisition date [159]. - Goodwill is assessed for impairment at least annually, with any excess of carrying value over fair value recorded as an impairment loss [167]. - Revenue is recognized based on FASB ASC Topic No. 606, reflecting the transfer of promised goods or services to customers [169]. - Usage-based revenue is generated based on active subscribers' access and usage of software licenses, recognized upon completion of performance obligations [170]. - Stock-based compensation is recognized as an expense over the vesting period using the straight-line method as per FASB ASC Topic No. 718 [173].

Smith Micro Software, Inc. (NASDAQ:SMSI) Q4 2022 Earnings Conference Call March 9, 2023 4:30 PM ET Company Participants Charles Messman - VP, IR & Corporate Development William Smith - Co-Founder, Chairman, President & CEO James Kempton - VP, CFO & Treasurer Conference Call Participants Scott Searle - ROTH MKM Partners Michael Nichols - B. Riley Securities James McIlree - Dawson James Securities Matthew Harrigan - The Benchmark Company Operator Good day, and welcome to the Smith Micro Fourth Quarter 2022 Ea ...

[Explanatory Note](index=4&type=section&id=Explanatory%20Note) This section details adjustments made to the previously issued earnings release for the three and nine months ended September 30, 2022, resulting in a $1.5 million decrease in the reported net loss - Adjustments were made to the earnings release for the three and nine months ended September 30, 2022, affecting Convertible notes payable, Warrant and derivative liabilities, General and administrative expense, Interest expense, and Change in fair value of warrant and derivative liabilities[8](index=8&type=chunk) - The net impact of these adjustments was a decrease in the reported net loss by **$1.5 million**, which represented a decrease in the net loss per share (basic and diluted) of **$0.03**[8](index=8&type=chunk) [PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) Presents the unaudited consolidated financial statements and management's discussion and analysis for the reporting period [Item 1. Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements) Provides the unaudited consolidated balance sheets, statements of operations, stockholders' equity, and cash flows [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) Presents the company's financial position, including assets, liabilities, and equity, as of September 30, 2022, and December 31, 2021 **Consolidated Balance Sheet Highlights (in thousands):** | Metric | September 30, 2022 (unaudited) | December 31, 2021 (audited) | | :--------------------------------- | :----------------------------- | :-------------------------- | | Total assets | $109,496 | $114,512 | | Total current liabilities | $12,765 | $9,368 | | Total non-current liabilities | $13,348 | $4,584 | | Total liabilities | $26,113 | $13,952 | | Total stockholders' equity | $83,383 | $100,560 | - Current portion of convertible notes payable increased from **$0 in 2021 to $3,435 thousand in 2022**, and long-term portion increased to **$3,873 thousand**[12](index=12&type=chunk) - Warrant and derivative liabilities increased from **$0 in 2021 to $6,121 thousand in 2022**[12](index=12&type=chunk) [Consolidated Statements of Operations](index=6&type=section&id=Consolidated%20Statements%20of%20Operations) Details the company's revenues, gross profit, operating loss, and net loss for the three and nine months ended September 30, 2022 and 2021 **Consolidated Statements of Operations Highlights (in thousands, except per share data):** | Metric | For the Three Months Ended Sep 30, 2022 | For the Three Months Ended Sep 30, 2021 | For the Nine Months Ended Sep 30, 2022 | For the Nine Months Ended Sep 30, 2021 | | :--------------------------------- | :-------------------------------------- | :-------------------------------------- | :------------------------------------- | :------------------------------------- | | Revenues | $11,699 | $16,443 | $37,108 | $43,743 | | Gross profit | $8,070 | $12,751 | $26,226 | $35,148 | | Operating loss | $(8,317) | $(18,461) | $(23,777) | $(26,908) | | Net loss | $(5,812) | $(18,607) | $(21,307) | $(27,035) | | Basic and diluted loss per share | $(0.10) | $(0.34) | $(0.39) | $(0.54) | - Change in fair value of warrant and derivative liabilities was **$3,457 thousand** for both the three and nine months ended September 30, 2022, compared to **$0 in 2021**[14](index=14&type=chunk) - Interest expense, net, was **$(896) thousand** for the three months and **$(898) thousand** for the nine months ended September 30, 2022, compared to **$1 thousand and $25 thousand income in 2021**, respectively[14](index=14&type=chunk) [Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) Outlines changes in common stock, additional paid-in capital, and accumulated comprehensive deficit for the reporting periods **Stockholders' Equity Summary (in thousands):** | Metric | September 30, 2022 (unaudited) | December 31, 2021 (audited) | | :--------------------------------- | :----------------------------- | :-------------------------- | | Common Stock (Shares) | 56,261 | 54,259 | | Common Stock (Amount) | $56 | $54 | | Additional Paid-in Capital | $356,907 | $352,779 | | Accumulated Comprehensive Deficit | $(273,580) | $(252,273) | | Total Stockholders' Equity | $83,383 | $100,560 | - Net loss for the nine months ended September 30, 2022, was **$(21,307) thousand**, contributing to the accumulated comprehensive deficit[17](index=17&type=chunk) - Common shares in stock offering, net of offering costs, added **1,132 thousand shares** and **$1,309 thousand** to total equity for the nine months ended September 30, 2022[17](index=17&type=chunk) [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Summarizes cash flows from operating, investing, and financing activities for the nine months ended September 30, 2022 and 2021 **Consolidated Statements of Cash Flows Highlights (in thousands):** | Activity | For the Nine Months Ended Sep 30, 2022 | For the Nine Months Ended Sep 30, 2021 | | :--------------------------------- | :------------------------------------- | :------------------------------------- | | Net cash (used in) provided by operating activities | $(14,478) | $2,275 | | Net cash provided by (used in) investing activities | $9 | $(57,529) | | Net cash provided by financing activities | $17,392 | $61,872 | | Net increase in cash and cash equivalents | $2,923 | $6,618 | | Cash and cash equivalents, end of period | $19,001 | $32,372 | - Financing activities in 2022 included **$15.0 million** from notes and warrants offering and **$3.0 million** from stock and warrants offering[23](index=23&type=chunk) - Investing activities in 2021 included **$(56,865) thousand** for acquisitions, net[23](index=23&type=chunk) [Notes to the Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20the%20Consolidated%20Financial%20Statements) Provides detailed explanations and disclosures supporting the consolidated financial statements [1. The Company](index=10&type=section&id=Note%201.%20The%20Company) Describes Smith Micro Software, Inc.'s business, products, and services for wireless and cable service providers - Smith Micro Software, Inc. develops software to simplify and enhance the mobile experience for wireless and cable service providers[25](index=25&type=chunk) - The company's solutions include family location services, parental controls, consumer IoT devices, visual voicemail, and retail content display optimization[25](index=25&type=chunk)[30](index=30&type=chunk) [2. Accounting Policies](index=10&type=section&id=Note%202.%20Accounting%20Policies) Outlines the significant accounting principles and recent guidance adopted in preparing the financial statements - Unaudited consolidated financial statements are prepared according to SEC rules and US GAAP[26](index=26&type=chunk) - ASU 2016-13 (Credit Losses) becomes effective for the Company in fiscal year 2023, with **no material impact anticipated**[29](index=29&type=chunk) - ASU 2020-06 (Convertible Instruments) was adopted in the current period with **no impact to the prior period**, simplifying accounting for convertible instruments and affecting diluted EPS calculation[30](index=30&type=chunk)[31](index=31&type=chunk) [3. Debt and Fair Value of Financial Instruments](index=11&type=section&id=Note%203.%20Debt%20and%20Fair%20Value%20of%20Financial%20Instruments) Details the company's debt instruments, including convertible notes and warrants, and their fair value measurements - On August 11, 2022, the Company completed a Notes and Warrants Offering, selling **$15.0 million** in senior secured convertible notes and warrants to acquire **2,238,806 shares** of common stock[33](index=33&type=chunk) - The warrants and embedded derivatives (make-whole feature, change in control redemption right) are classified as liability instruments and measured at fair value, with changes recognized in the consolidated statements of operations[35](index=35&type=chunk)[36](index=36&type=chunk)[41](index=41&type=chunk) **Notes Net Balance as of September 30, 2022 (in thousands):** | Component | Current | Long term | Total | | :------------------------ | :------ | :-------- | :------ | | Gross Balance | $10,500 | $4,500 | $15,000 | | Unamortized Discount | $(6,687) | $(585) | $(7,272) | | Unamortized Issuance Costs | $(378) | $(42) | $(420) | | Net Balance | $3,435 | $3,873 | $7,308 | **Fair Value of Financial Liabilities at September 30, 2022 (in thousands):** | Instrument | Level 3 Fair Value | | :--------------------------------- | :----------------- | | Notes and Warrants Offering Derivatives | $2,173 | | Notes and Warrants Offering Warrants | $2,462 | | Stock and Warrants Offering Warrants | $1,486 | | **Total** | **$6,121** | - The **$7.0 million** secured revolving credit facility with Wells Fargo Bank was terminated on August 11, 2022, in connection with the Notes and Warrants Offering[47](index=47&type=chunk) [4. Equity Transactions](index=13&type=section&id=Note%204.%20Equity%20Transactions) Describes recent equity offerings, including common stock and warrant sales, and their financial impact - On August 11, 2022, the Company completed a registered direct offering (Stock and Additional Warrants Offering), selling **1,132,075 shares** of common stock and warrants to purchase an equal number of shares[48](index=48&type=chunk) - The offering raised net cash proceeds of **$2.8 million**[49](index=49&type=chunk) - The Additional Warrants were assessed as liability instruments with an estimated initial fair value of **$1.6 million**, recognized on the balance sheet as Warrant and Derivative Liabilities[50](index=50&type=chunk) [5. Goodwill and Intangible Assets](index=14&type=section&id=Note%205.%20Goodwill%20and%20Intangible%20Assets) Provides information on goodwill impairment testing and the carrying values and amortization of intangible assets - The Company performs annual goodwill impairment testing on December 31 and determined **no impairment indicators existed** at September 30, 2022, or December 31, 2021[52](index=52&type=chunk) **Intangible Assets, Net (in thousands):** | Asset Type | September 30, 2022 (unaudited) | December 31, 2021 (audited) | | :---------------------- | :----------------------------- | :-------------------------- | | Purchased technology | $8,209 | $9,765 | | Customer relationships | $23,580 | $25,144 | | Customer contracts | $1,604 | $2,559 | | Software license | $4,057 | $4,626 | | Non-compete | $29 | $87 | | Patents | $386 | $450 | | **Total Intangible Assets, Net** | **$37,865** | **$42,631** | **Estimated Amortization Expense (in thousands):** | Year Ending December 31, | Amortization Expense | | :----------------------- | :------------------- | | 2022 (remainder) | $1,545 | | 2023 | $5,874 | | 2024 | $5,635 | | 2025 | $5,402 | | 2026 | $5,007 | | 2027 and thereafter | $14,402 | | **Total** | **$37,865** | [6. Earnings Per Share](index=15&type=section&id=Note%206.%20Earnings%20Per%20Share) Presents the calculation of basic and diluted loss per share, including anti-dilutive common stock equivalents **Basic and Diluted Loss Per Share (in thousands, except per share amounts):** | Metric | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :--------------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Net loss | $(5,812) | $(18,607) | $(21,307) | $(27,035) | | Weighted average shares outstanding – basic and diluted | 55,722 | 53,939 | 55,140 | 50,147 | | Loss per common share (Basic and Diluted) | $(0.10) | $(0.34) | $(0.39) | $(0.54) | **Anti-Dilutive Shares Excluded (in thousands):** | Item | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :-------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Convertible notes, as if converted | 2,460 | — | 823 | — | | Outstanding stock options | 138 | 144 | 143 | 105 | | Outstanding warrants | 5,499 | 1,135 | 1,215 | 1,228 | | **Total anti-dilutive** | **8,097** | **1,279** | **2,182** | **1,333** | - For periods with a net loss, dilutive common stock equivalents are excluded from the diluted EPS calculation as their effect would be anti-dilutive[56](index=56&type=chunk) [7. Stock-Based Compensation](index=16&type=section&id=Note%207.%20Stock-Based%20Compensation) Details stock-based compensation expense, restricted stock grants, and unrecognized compensation costs - The Company granted **1.4 million shares** of restricted stock under the 2015 Omnibus Equity Incentive Plan (2015 OEIP) during the nine months ended September 30, 2022[59](index=59&type=chunk) - Approximately **2.4 million shares** were available for future grants under the 2015 Plan as of September 30, 2022[59](index=59&type=chunk) **Total Non-Cash Stock Compensation Expense (in thousands):** | Expense Category | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :-------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Cost of sales | $— | $— | $2 | $1 | | Sales and marketing | $179 | $238 | $915 | $663 | | Research and development | $279 | $270 | $808 | $705 | | General and administrative | $637 | $818 | $2,124 | $2,254 | | **Total** | **$1,095** | **$1,326** | **$3,849** | **$3,623** | - Unrecognized compensation costs related to non-vested stock options and restricted stock totaled approximately **$8.5 million** as of September 30, 2022[65](index=65&type=chunk) [8. Revenues](index=18&type=section&id=Note%208.%20Revenues) Explains the company's revenue recognition policies and disaggregates revenues by type for the reporting periods - Revenue recognition follows FASB ASC Topic No. 606, based on a five-step analysis of transactions[68](index=68&type=chunk)[69](index=69&type=chunk) - For MNO customers, software license and cloud-based services are considered a single performance obligation[70](index=70&type=chunk) **Disaggregated Revenues (in thousands):** | Revenue Type | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :-------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | License and service fees | $957 | $818 | $2,818 | $3,199 | | Hosted environment usage fees | $1,074 | $3,475 | $3,937 | $11,573 | | Cloud based usage fees | $9,388 | $11,446 | $28,936 | $27,047 | | Consulting services and other | $280 | $704 | $1,417 | $1,924 | | **Total Revenues** | **$11,699** | **$16,443** | **$37,108** | **$43,743** | [9. Segment, Customer Concentration and Geographical Information](index=19&type=section&id=Note%209.%20Segment,%20Customer%20Concentration%20and%20Geographical%20Information) Provides details on the company's operating segment, product line revenues, customer concentration, and geographical revenues - The Company operates in one primary business unit: Wireless, which includes Family Safety (SafePath®), CommSuite®, and ViewSpot® product families[73](index=73&type=chunk) **Wireless Revenues by Product Line (in thousands):** | Product Line | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :---------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Family Safety | $9,625 | $11,969 | $30,153 | $29,355 | | CommSuite | $1,070 | $3,463 | $3,932 | $11,535 | | ViewSpot | $989 | $971 | $3,003 | $2,717 | | Other | $15 | $40 | $20 | $136 | | **Total Wireless Revenues** | **$11,699** | **$16,443** | **$37,108** | **$43,743** | - For the three and nine months ended September 30, 2022, **two customers made up 40% and 37% of total revenues**[75](index=75&type=chunk)[76](index=76&type=chunk) **Geographical Revenues (in thousands):** | Region | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Americas | $11,247 | $15,825 | $35,654 | $41,323 | | EMEA | $452 | $618 | $1,454 | $2,420 | | **Total Revenues** | **$11,699** | **$16,443** | **$37,108** | **$43,743** | [10. Commitments and Contingencies](index=19&type=section&id=Note%2010.%20Commitments%20and%20Contingencies) Discusses potential legal proceedings, indemnities, and other commitments that may impact the company - The Company may become involved in various legal proceedings[78](index=78&type=chunk) - 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[79](index=79&type=chunk) - The Company has made various indemnities, commitments, and guarantees (e.g., intellectual property, confidentiality, facility leases, director/officer indemnities) for which **no liability has been recorded**[80](index=80&type=chunk) [11. Leases](index=20&type=section&id=Note%2011.%20Leases) Presents information on the company's operating lease costs, liabilities, and weighted average lease terms - Leases with initial terms greater than twelve months are recorded on the consolidated balance sheet[82](index=82&type=chunk) **Total Lease Cost (in thousands):** | Period | 3M Ended Sep 30, 2022 | 3M Ended Sep 30, 2021 | 9M Ended Sep 30, 2022 | 9M Ended Sep 30, 2021 | | :-------------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Lease cost | $400 | $609 | $1,219 | $1,724 | | Sublease income | $— | $(151) | $(18) | $(452) | | **Total lease cost** | **$400** | **$458** | **$1,201** | **$1,272** | **Maturity of Operating Lease Liabilities as of September 30, 2022 (in thousands):** | Year | Amount | | :-------------------- | :----- | | 2022 (remainder) | $415 | | 2023 | $1,630 | | 2024 | $1,485 | | 2025 | $1,133 | | 2026 | $459 | | **Total lease payments** | **$5,122** | | Less imputed interest | $(483) | | **Present value of lease liabilities** | **$4,639** | - Weighted average remaining lease term is **3.30 years**, and the weighted average discount rate is **6.3%** as of September 30, 2022[83](index=83&type=chunk) [12. Income Taxes](index=21&type=section&id=Note%2012.%20Income%20Taxes) Details the company's deferred tax assets, valuation allowances, and tax audit status - The Company assesses valuation allowances against deferred tax assets based on a 'more likely than not' realization standard[84](index=84&type=chunk) - A reserve of **$57.3 million** for U.S.-based deferred tax amounts is maintained as of September 30, 2022, due to a three-year historical cumulative loss position[85](index=85&type=chunk)[86](index=86&type=chunk) - No outstanding tax audits from federal or state authorities as of September 30, 2022[87](index=87&type=chunk) [13. Subsequent Events](index=21&type=section&id=Note%2013.%20Subsequent%20Events) Confirms the evaluation of events occurring after the balance sheet date and the absence of required disclosures - Subsequent events have been evaluated as of the filing date, and **no further disclosures are required**[88](index=88&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=22&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Analyzes the company's financial performance, liquidity, and capital resources for the reported periods [Overview](index=23&type=section&id=MD%26A%20Overview) Provides a high-level summary of the company's financial performance, key revenue drivers, and strategic outlook - Revenues declined by **29% to $11.7 million** in Q3 2022 compared to Q3 2021, primarily due to decreases in CommSuite (**$2.4 million**) and Family Safety (**$2.3 million**) revenues[97](index=97&type=chunk) - The decline in CommSuite revenues is attributed to T-Mobile's migration of legacy Sprint subscribers and the expected end-of-life for Sprint's legacy premium visual voicemail services before the end of 2022[97](index=97&type=chunk) - Net loss for Q3 2022 was **$5.8 million**, or **$0.10 per basic and diluted share**[97](index=97&type=chunk) - The Company provides white label family safety applications to all three Tier 1 wireless carriers in the U.S. and expects overall family safety platform revenue to increase[98](index=98&type=chunk) - Development costs are expected to decline, and gross margins are anticipated to increase as migrations to the SafePath platform are completed over the next year[98](index=98&type=chunk) [Results of Operations](index=24&type=section&id=MD%26A%20Results%20of%20Operations) Analyzes the company's revenues, gross profit, and operating expenses for the reported periods [Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021](index=25&type=section&id=Three%20Months%20Ended%20September%2030,%202022%20Compared%20to%202021) Compares the company's financial performance for the three-month periods, highlighting key changes in revenues and expenses - Revenues decreased by **$4.7 million (29%) to $11.7 million**, driven by declines in CommSuite (**$2.4 million**) and Family Safety (**$2.3 million**)[102](index=102&type=chunk) - Gross profit decreased by **$4.7 million to $8.1 million (69.0% of revenues)** from $12.8 million (77.5% of revenues)[104](index=104&type=chunk) - Research and development expenses increased by **$0.4 million to $7.5 million** due to higher contractor costs for SafePath development[106](index=106&type=chunk) - Amortization of intangible assets decreased by **$1.5 million** due to lower amortization from the Family Safety Mobile Business acquisition and fully amortized assets[109](index=109&type=chunk) [Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021](index=25&type=section&id=Nine%20Months%20Ended%20September%2030,%202022%20Compared%20to%202021) Compares the company's financial performance for the nine-month periods, detailing changes in revenues, costs, and profitability - Revenues decreased by **$6.6 million (15%) to $37.1 million**, primarily due to a **$7.6 million decline in CommSuite revenues**, partially offset by increases in Family Safety (**$0.8 million**) and ViewSpot (**$0.3 million**)[110](index=110&type=chunk) - Cost of revenues increased by **$2.3 million to $10.9 million**, driven by increased costs from the acquired Family Safety Mobile Business and maintaining multiple family safety platforms[111](index=111&type=chunk) - Gross profit decreased by **$8.9 million to $26.2 million (70.7% of revenues)** from $35.1 million (80.4% of revenues)[112](index=112&type=chunk) - Research and development expenses increased by **$4.0 million to $23.1 million** due to higher personnel and contractor costs for SafePath development[114](index=114&type=chunk) - Amortization of intangible assets decreased by **$3.2 million** due to fully amortized assets and lower amortization from the Family Safety Mobile Business acquisition[117](index=117&type=chunk) [Liquidity and Capital Resources](index=26&type=section&id=MD%26A%20Liquidity%20and%20Capital%20Resources) Assesses the company's cash position, operating cash flows, and financing activities impacting its liquidity - Cash and cash equivalents were approximately **$19.0 million** as of September 30, 2022[118](index=118&type=chunk) - Net cash used in operating activities was **$14.5 million** for the nine months ended September 30, 2022, compared to **$2.3 million provided** in the prior year[119](index=119&type=chunk)[120](index=120&type=chunk) - Net cash provided by financing activities was **$17.4 million** for the nine months ended September 30, 2022, primarily from the **$15.0 million** convertible notes and warrants offering and **$3.0 million** stock and warrants offering[122](index=122&type=chunk) [Recent Accounting Guidance](index=26&type=section&id=MD%26A%20Recent%20Accounting%20Guidance) Refers to disclosures on new accounting standards and their anticipated impact on the financial statements - Refer to Note 2 of the Notes to the Consolidated Financial Statements for information regarding recent accounting guidance[124](index=124&type=chunk) [Critical Accounting Policies and Estimates](index=26&type=section&id=MD%26A%20Critical%20Accounting%20Policies%20and%20Estimates) Highlights key accounting policies and estimates requiring significant management judgment in financial reporting - The preparation of financial statements requires management to make estimates and judgments that affect reported amounts, based on historical experience and various assumptions[125](index=125&type=chunk)[126](index=126&type=chunk) - Detailed information regarding critical accounting policies and estimates is available in Note 1 of the Company's Annual Report on Form 10-K[126](index=126&type=chunk) [Item 4. Controls and Procedures](index=27&type=section&id=Item%204.%20Controls%20and%20Procedures) Details management's evaluation of disclosure controls and internal control over financial reporting [Evaluation of disclosure controls and procedures](index=27&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Confirms the effectiveness of the company's disclosure controls and procedures as of the reporting period - Management, including the CEO and CFO, determined that disclosure controls and procedures were **effective** as of September 30, 2022[127](index=127&type=chunk) [Management's responsibility for financial statements](index=27&type=section&id=Management's%20Responsibility%20for%20Financial%20Statements) Affirms management's accountability for the integrity and conformity of the financial statements with U.S. GAAP - Management is responsible for the integrity and objectivity of all information presented in this Report, with consolidated financial statements prepared in conformity with U.S. GAAP[128](index=128&type=chunk) [Changes in internal control over financial reporting](index=27&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) States that no material changes occurred in internal controls over financial reporting during the quarter - There have been **no material changes** in internal controls over financial reporting during the quarter ended September 30, 2022[130](index=130&type=chunk) [PART II. OTHER INFORMATION](index=28&type=section&id=PART%20II.%20OTHER%20INFORMATION) Covers legal proceedings, risk factors, equity transactions, and required exhibits [Item 1. Legal Proceedings](index=28&type=section&id=Item%201.%20Legal%20Proceedings) This section states that the Company may be 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, it acknowledges the inherent unpredictability of litigation - The Company may become involved in various legal proceedings[133](index=133&type=chunk) - 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[133](index=133&type=chunk) [Item 1A. Risk Factors](index=28&type=section&id=Item%201A.%20Risk%20Factors) Outlines significant risks, particularly those related to convertible notes and their potential impact on the company [Risks Related to Our Convertible Notes](index=28&type=section&id=Risks%20Related%20to%20Convertible%20Notes) Details the financial and operational risks associated with the company's convertible notes, including dilution and default - The terms of the convertible notes may restrict the Company's ability to obtain additional financing and require a portion of cash flows to be dedicated to debt repayment[135](index=135&type=chunk) - Conversion of the notes and exercise of warrants will **dilute the ownership interest** of existing stockholders and may depress the common stock price[136](index=136&type=chunk) - The Company's obligations under the notes are secured by substantially all of its assets; a default could lead to foreclosure and liquidation of assets[138](index=138&type=chunk)[139](index=139&type=chunk) - Upon an event of default, noteholders have rights including an increased interest rate (**15%**), demand for redemption at a premium (**125%**), or conversion into common stock at a discount[140](index=140&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=29&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section provides a table detailing the Company's repurchases of equity securities during the three months ended September 30, 2022. These repurchases were primarily for the payment of withholding taxes in connection with the vesting of restricted stock awards **Issuer Purchases of Equity Securities (Three Months Ended September 30, 2022):** | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------- | :----------------------------- | :--------------------------- | | July 1 - 31, 2022 | 22,783 | $2.48 | | August 1 - 31, 2022 | 19,723 | $2.69 | | September 1 - 30, 2022 | 19,901 | $2.54 | | **Total** | **62,407** | **$2.57** | - Shares repurchased were for payment of withholding taxes in connection with the vesting of restricted stock awards and were subsequently cancelled[141](index=141&type=chunk) [Item 6. Exhibits](index=30&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including various legal and financial agreements related to the August 2022 Notes and Warrants Offering and Stock and Additional Warrants Offering, as well as certifications from the Chief Executive Officer and Chief Financial Officer - Exhibits include forms of warrants, securities purchase agreements, senior secured convertible notes, registration rights agreements, guaranty and security agreements, lock-up agreements, and voting agreements[143](index=143&type=chunk) - Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 are included[143](index=143&type=chunk) [SIGNATURES](index=31&type=section&id=SIGNATURES) Formal declaration by authorized officers confirming the accuracy and completeness of the report - The Report was signed on **November 14, 2022**, by William W. Smith, Jr., Chairman of the Board, President and Chief Executive Officer, and James M. Kempton, Vice President and Chief Financial Officer[147](index=147&type=chunk)