XML 26 R14.htm IDEA: XBRL DOCUMENT v3.24.0.1
Debt and Warrants Transactions
 12 Months Ended
Dec. 31, 2023
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 at an exercise price of $3.35 per share and expire five 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 accrued compounding interest at the rate of 6.0% per annum, which was 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 would accrue interest at the rate of 15.0% per annum. Upon conversion and other designated events, holders of the Notes were 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 were entitled to cash settlement. The Notes matured on December 31, 2023, with amortization payments being made monthly from April 2023 through December 2023, and the balance at maturity, with a total of 17.1 million shares transferred valued at a total of $19.1 million as of the dates conveyed. The entire balance of the note was repaid in 2023 and as such all of the debt and related derivative were derecognized as of December 31, 2023.
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 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 was $3.8 million, determined utilizing a Black-Scholes option pricing model and is reflected on the balance sheet line "Warrant liabilities" and were a discount on the Notes.
The Notes contained 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 were viewed as a compound embedded derivative that met the criteria to be bifurcated and carried at fair value. This was classified 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 and was eliminated with the retirement of the notes at December 31, 2023. The following assumptions were utilized:
Convertible Notes DerivativeCommon stock market priceRisk-free interest rateExpected dividend yieldExpected term (in years)Expected volatility
August 11, 2022 at Issuance
$3.04 3.28 %— 1.3956.3 %
December 31, 2022$2.10 4.68 %— 1.0061.6 %
March 31, 2023 for April 1, 2023 Installment date$1.16 4.68 %— 0.7584.3 %
May 1, 2023 for May 1, 2023 Installment date$1.22 4.68 %— 0.6781.6 %
May 31, 2023 for June 1, 2023 Installment date$1.21 4.91 %— 0.5986.2 %
June 30, 2023 for July 1, 2023 Installment date$1.11 5.42 %— 0.5090.7 %
July 31, 2023 for August 1, 2023 Installment date$1.14 5.53 %— 0.4259.9 %
August 31, 2023 for September 1, 2023 Installment date$1.71 5.54 %— 0.3369.9 %
September 30, 2023 for October 1, 2023 Installment date$1.21 5.56 %— 0.2578.2 %
November 1, 2023 for November 1, 2023 Installment date $1.03 5.60 %— 0.1752.4 %
December 1, 2023 for December 1, 2023 Installment date $0.68 5.53 %— 0.08147.5 %
December 31, 2023 for December 31, 2023 Installment date
$0.83 5.53 %— 0.00— %
Given that the warrants and the derivative 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 in 2022 within "General and administrative expenses." Deferred financing costs for the Notes and Warrants Offering totaled $0.5 million and were reported net of accumulated amortization as a deduction from the face amount of the debt. Amortization of the deferred financing costs and discount was 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 Warrants Offering, the Company raised net cash proceeds of $14.0 million.
During the year ended December 31, 2023, the Company recognized interest expense of $6.6 million on the Notes and related instruments utilizing the effective interest rate of 155%, which includes amortization of debt issuance costs of $0.3 million, amortization of discount of $5.7 million, and contractual interest of $0.6 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, 2023 and 2022 is as follows (in thousands):
December 31, 2023December 31, 2022
Gross Current Balance
$— $15,000 
Unamortized Discount— (5,656)
Unamortized Issuance Costs— (337)
Net Balance
$— $9,007 

The Notes contained 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. Throughout the duration of the notes the Company was in compliance with all covenants. The notes were retired at maturity in accordance with their terms on December 31, 2023.
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 through December 31, 2023 were 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
December 31, 2023December 31, 2022December 31, 2023December 31, 2022
Common stock market price0.83$2.10 $0.83 $2.10 
Risk-free interest rate4.10 %3.76 %4.10 %3.76 %
Expected dividend yield— — — — 
Expected term (in years)3.614.61 4.12 5.12 
Expected volatility66.8 %64.2 %68.7 %65.5 %
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 to 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.