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Debt and Warrants Transactions
 12 Months Ended
Dec. 31, 2022
Debt Disclosure [Abstract]  
Debt and Warrants Transactions Debt and Warrants Transactions
Notes and Warrants Offering
On August 11, 2022, the Company entered into a Securities Purchase Agreement ("SPA") with certain accredited investors, and, pursuant to the SPA, sold a new series of senior secured convertible notes (the "Notes") with an
aggregate original principal amount of $15.0 million and an initial conversion price of $3.35 per share, subject to adjustment as described in the Notes, and warrants to acquire up to an aggregate amount of 2,238,806 additional shares of the Company’s common stock (the "Warrants" and together with the Notes, the "Notes and Warrants Offering"). The Warrants are exercisable immediately at an exercise price of $3.35 per share and expire 5 years from the date of issuance on August 11, 2027. There is no established public trading market for the Warrants and the Company does not intend to list the Warrants on any national securities exchange or nationally recognized trading system. The closing of the Notes and Warrants Offering occurred on August 11, 2022.
The Notes accrue compounding interest at the rate of 6.0% per annum, which is payable in cash or shares of the Company's common stock at the Company's option, in arrears quarterly in accordance with the terms of the Notes. Upon the occurrence and during the continuance of an Event of Default (as defined in the Notes), the Notes will accrue interest at the rate of 15.0% per annum. Upon conversion and other designated events, holders of the Notes are also entitled to receive an interest make-whole payment. Upon a redemption due to a Change in Control (as defined in the Notes), holders of the Notes are entitled to cash settlement. The Notes mature on December 31, 2023, with amortization payments being made monthly from April 2023 through December 2023, and the balance at maturity.
The Warrants were assessed and concluded to be liability instruments due to certain cash settlement provisions, and as a result all changes in the fair value of warrants will be recognized in the Company's consolidated statements of operations until they are either exercised or expire. The Warrants are not traded in an active securities market and, as such, the estimated fair value at inception was $3.8 million, determined utilizing a Black-Scholes option pricing model and is reflected on the balance sheet line "Warrant liabilities" and as a discount on the Notes.
The Notes contain a make-whole feature and a redemption right payable in cash upon change in control feature, as well as certain other conversion and redemption features. These features are viewed as a compound embedded derivative that meets the criteria to be bifurcated and carried at fair value. This is classified as in the balance sheet line "Derivative liabilities" and as a discount on the Notes, with subsequent adjustments to fair value each reporting period with a charge to earnings. The derivative was initially recognized at a fair value of $4.2 million and was subsequently adjusted to $1.6 million at December 31, 2022, with the following assumptions being utilized:
Convertibles Notes Derivative
August 11, 2022December 31, 2022
Common stock market price$3.04 $2.10 
Risk-free interest rate3.28 %4.68 %
Expected dividend yield— — 
Expected term (in years)1.39 1.00 
Expected volatility56.32 %61.59 %
Given that the warrants and the derivatives are liability instruments that are measured at fair value, the transaction proceeds were allocated first to the Warrants and derivative, with the residual to the Notes. Transaction issuance costs for the Notes and Warrants Offering were allocated in the same manner, with $0.5 million relating to the Warrants and derivative being expensed immediately within "General and administrative expenses." Deferred financing costs for the Notes and Warrant Offering totaled $0.5 million and are reported net of accumulated amortization as a deduction from the face amount of the debt. Amortization of the deferred financing costs and discount is reported as a component of interest expense and is computed using the effective interest method over the expected term of the debt. In the Notes and Warrant Offering, the Company raised net cash proceeds of $14.0 million.
During the year ended December 31, 2022, the Company recognized interest expense of $2.8 million on the Notes and related instruments utilizing the effective interest rate of 155%, which includes amortization of debt issuance costs of $0.1 million, amortization of discount of $2.3 million, and contractual interest of $0.4 million.
The balance of the Notes as of December 31, 2022 is as follows (unaudited, in thousands):
CurrentLong termTotal
Gross Balance as of December 31, 2022$15,000 $— $15,000 
Unamortized Discount(5,656)— $(5,656)
Unamortized Issuance Costs(337)— $(337)
Net Balance as of December 31, 2022$9,007 $— $9,007 

The Notes contain certain customary affirmative and negative covenants regarding the incurrence of indebtedness, acquisition and investment transactions, the existence of liens, the repayment of indebtedness, the payment of cash in respect of dividends, distributions or redemptions, and the transfer of assets, among other matters. As of December 31, 2022, the Company was in compliance with all covenants.
Warrant Liabilities
As further discussed above, on August 11, 2022, Warrants to purchase 2,238,806 shares of common stock were issued with an exercise price of $3.35 per share in conjunction with the Notes and Warrants Offering, at an initial fair value of $3.8 million. Additional Warrants (as defined in Note 5 above) to purchase 1,132,075 shares of common stock were issued with an exercise price of $2.65 per share in conjunction with the Stock and Additional Warrants Offering.
All changes in the fair value of these warrant liabilities are recognized in the Company's consolidated statements of operations until they are either exercised or expire. The Warrants are not traded in an active securities market and, as such, the estimated fair value at inception and again at December 31, 2022 was determined by using a Black-Scholes option pricing model that utilizes assumptions noted in the following table. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatility is based on the historical volatility over the expected term of the Warrants. The Company has no reason to believe future volatility over the expected remaining life of the Warrants is likely to differ materially from historical volatility. Expected life is based on the contractual term of the Warrants. Below are the specific assumptions utilized:
WarrantsAdditional Warrants
August 11, 2022December 31, 2022August 12, 2022December 31, 2022
Common stock market price$3.04 $2.10 $2.34 $2.10 
Risk-free interest rate3.03 %3.76 %3.03 %3.76 %
Expected dividend yield— — — — 
Expected term (in years)5.00 4.61 5.50 5.12 
Expected volatility66.85 %64.16 %70.55 %65.52 %
Credit Facility
On March 31, 2022, the Company and its wholly-owned subsidiary, Smith Micro Software, LLC, as co-borrowers entered into a credit agreement with Wells Fargo Bank, National Association providing for a $7.0 million secured revolving credit facility (the “Credit Facility”) that was able be utilized to finance the Company’s working capital requirements and other general corporate purposes. In connection with the Notes and Warrants Offering described in Note 6 the Credit Facility was terminated on August 11, 2022. There were borrowings and repayments of $0.3 million for the year 2022.