Smith Micro Software(SMSI) - 2024 Q4 - Annual Report

Part I Business Overview Smith Micro provides software solutions to wireless service providers, focusing on Digital Family Lifestyle, visual voice messaging, and retail display management - The company's core product portfolio includes SafePath® for family safety, ViewSpot® for retail display management, and CommSuite® for premium messaging[26][27][28] - A major U.S. Tier 1 carrier contract, which represented approximately 36% of total revenues for 2023, was terminated effective June 30, 2023, with no revenue generated from this contract in 2024[32] - The company's business is concentrated with a limited number of large MNOs and MSOs, though it plans to expand its reach to smaller operators with SafePath Global™[31] - As of December 31, 2024, the company had 164 employees, with the majority (117) in engineering and operations[41] Risk Factors The company faces substantial risks, primarily from high customer concentration and significant doubt about its ability to continue as a going concern - The company's financial situation raises substantial doubt about its ability to continue as a going concern without securing additional capital[58][59] - Significant customer concentration risk exists, as sales to the three largest customers comprised 58%, 20%, and 14% of revenues for the year ended December 31, 2024[43] - The company has a history of net losses, partially driven by the loss of a U.S. Tier 1 customer in 2023, and may incur substantial net losses in the future[64] - As of March 10, 2025, outstanding warrants to purchase up to 8,382,048 shares of common stock could dilute the ownership interest of existing stockholders upon exercise[68] - The company faces risks from intense competition, rapid technological change, and dependence on third-party technologies and distribution channels like mobile application stores[53][55][71] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[103] Cybersecurity The company manages cybersecurity risk using the NIST Cybersecurity Framework, with Board oversight and no material incidents to date - The company's cybersecurity strategy is guided by the NIST Cybersecurity Framework (NIST CSF)[104] - Governance is handled by the audit committee of the Board of Directors, which oversees management's risk assessment and mitigation processes[109] - To date, there have been no cybersecurity incidents that have materially affected, or are reasonably likely to materially affect, the Company[108] Properties The company leases all its office spaces, with headquarters in Pittsburgh and international locations supporting its Wireless segment - The company's corporate headquarters is a leased space of approximately 35,621 square feet in Pittsburgh, Pennsylvania[111] - International leased properties are located in Belgrade, Serbia; Stockholm, Sweden; and Braga, Portugal[111] Legal Proceedings The company may be involved in various legal proceedings, but management does not expect a material adverse impact - Management does not currently believe that the disposition of any ongoing legal matters will have a material adverse impact on the Company's consolidated financial position[112] Mine Safety Disclosures This item is not applicable to the company's business - Not Applicable[113] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, has approximately 70 holders, and has never paid cash dividends - The company's common stock trades on the Nasdaq Capital Market under the symbol "SMSI"[115] - The company has never declared or paid cash dividends and does not expect to in the foreseeable future[117] Issuer Purchases of Equity Securities | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | October 1 - 31, 2024 | 17,514 | $1.02 | | November 1 - 30, 2024 | 54,315 | $0.90 | | December 1 - 31, 2024 | 2,659 | $0.77 | | Total | 74,488 | $0.92 | Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In 2024, revenues declined 50% to $20.6 million, leading to a $48.7 million net loss and significant restructuring efforts Introduction and Overview In 2024, revenues fell 50% to $20.6 million due to a lost Tier 1 contract, resulting in a $48.7 million net loss and significant workforce reductions Financial Overview | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Revenues | $20.6 million | $40.9 million | | Gross Profit | $14.4 million | $30.3 million | | Net Loss | ($48.7 million) | ($24.4 million) | | Goodwill Impairment | $24.0 million | $0 | - The primary driver of the revenue decline was the loss of a Tier 1 Family Safety contract, which concluded in November 2023 and accounted for 36% of 2023 total revenues[124] - The company undertook multiple restructuring efforts, resulting in the elimination of approximately 48% of its global workforce to reduce operating costs[124] Results of Operations Revenues decreased by $20.3 million (50%) in 2024 due to contract losses, leading to a widened net loss of $48.7 million Operating Performance | Line Item | 2024 (in millions) | 2023 (in millions) | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $20.6 | $40.9 | -50% | | Gross Profit | $14.4 | $30.3 | -52% | | Selling and marketing | $8.9 | $11.1 | -20% | | Research and development | $14.1 | $17.1 | -18% | | General and administrative | $10.6 | $12.8 | -17% | | Goodwill impairment | $24.0 | $0.0 | N/A | | Operating loss | $(49.4) | $(18.1) | -173% | - The decrease in core operating expenses was primarily due to reductions in personnel-related costs resulting from workforce reduction efforts[138][139][140] - A goodwill impairment charge of $24.0 million was recorded in the first quarter of 2024, significantly impacting the operating loss[142] Liquidity and Capital Resources The company's liquidity is severely constrained, raising substantial doubt about its going concern ability, with cash dropping to $2.8 million - The company's financial condition raises substantial doubt about its ability to continue as a going concern within one year[149][271] Cash Flow Summary | Cash Flow Metric (in thousands) | 2024 | 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(14,295) | $(6,973) | | Net cash provided by investing activities | $178 | $132 | | Net cash provided by (used in) financing activities | $9,800 | $(60) | - As of December 31, 2024, cash and cash equivalents were $2.8 million, and the company had no outstanding debt[147] - A delay in cash receipts from the largest customer was a primary driver of the increase in accounts receivable to $5.7 million as of December 31, 2024[147] Critical Accounting Policies and Estimates Management identifies several critical accounting policies requiring significant estimates, including Revenue Recognition, Goodwill Impairment, and Going Concern evaluation - Key critical accounting policies include Revenue Recognition, Goodwill and Intangible Assets, Fair Value of Financial Instruments, Business Combinations, and Going Concern evaluation[161] - Goodwill is tested for impairment at least annually or when triggering events occur, with an impairment loss recorded if the carrying amount of the reporting unit exceeds its fair value[169] - Revenue is recognized based on a five-step analysis under ASC 606, with significant judgment applied to usage-based revenue and contracts with multiple performance obligations[172][173] Financial Statements and Supplementary Data This section refers to the full consolidated financial statements, which begin on page F-1, and the independent auditor's report - The company's consolidated financial statements and related notes begin on page F-1 of the report[177][201] Report of Independent Registered Public Accounting Firm The auditor's report expresses substantial doubt about the company's going concern ability and identifies Revenue Recognition and Goodwill Impairment as Critical Audit Matters - The auditor's report includes a paragraph expressing "substantial doubt about the Company's ability to continue as a going concern" due to recurring losses and future cash needs[215] - Revenue Recognition was identified as a Critical Audit Matter because of significant judgments required by management regarding performance obligations, pricing, and timing[221] - Goodwill Impairment Analysis was identified as a Critical Audit Matter due to significant assumptions used in valuation models, including forecasts for revenue, expenses, and the discount rate[223] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any accounting or financial disclosure matters - None[178] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2024 - Management concluded that disclosure controls and procedures were effective as of December 31, 2024[179] - Management determined that the company maintained effective internal control over financial reporting as of December 31, 2024[184] - No changes in internal controls over financial reporting occurred during the quarter ended December 31, 2024, that have materially affected, or are reasonably likely to materially affect, internal controls[182] Other Information This section discloses the company's insider trading policy and confirms no Rule 10b5-1 trading arrangement changes in Q4 2024 - The company's insider trading policy prohibits directors, officers, and employees from engaging in short sales, hedging transactions, and holding company stock in margin accounts[188] - During the fiscal quarter ended December 31, 2024, no director or officer adopted or terminated a Rule 10b5-1 trading arrangement[190] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[190] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2025 Proxy Statement - Required information is incorporated by reference from the Company's 2025 Proxy Statement[193] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the 2025 Proxy Statement - Required information is incorporated by reference from the Company's 2025 Proxy Statement[194] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2025 Proxy Statement, with 2.606 million shares available for future issuance - Information regarding security ownership is incorporated by reference from the Company's 2025 Proxy Statement[195] Shares Available for Future Issuance | Plan Name | Shares Remaining Available for Future Issuance (in thousands) | | :--- | :--- | | Amended and Restated Omnibus Equity Incentive Plan | 2,606 | Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2025 Proxy Statement - Required information is incorporated by reference from the Company's 2025 Proxy Statement[197] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2025 Proxy Statement - Required information is incorporated by reference from the Company's 2025 Proxy Statement[198] Part IV Exhibits This section lists all exhibits filed with the Annual Report, including financial statements, governance documents, and material contracts - This section provides a comprehensive list of all exhibits filed with the Annual Report, including financial statements, governance documents, material contracts, and required certifications[201][202][203] Form 10-K Summary This item is not applicable, and no summary is provided - None[207]