smsi-20230930

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


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 registrant as specified in its charter)

_____________________________


Delaware			33-0029027
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

5800 Corporate Drive

Pittsburgh, PA 15237

(Address of principal executive offices, including zip code)

(412) 837-5300

(Registrant’s telephone number, including area code)

_____________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

SMSI

NASDAQ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 7, 2023, there were 71,925,856 shares of common stock outstanding.

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SMITH MICRO SOFTWARE, INC.

QUARTERLY REPORT ON FORM 10-Q

September 30, 2023

TABLE OF CONTENTS


Explanatory Note
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	2
	Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022	2
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022	3
	Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022	6
	Notes to the Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 4.	Controls and Procedures	25

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27

Item 6.	Exhibits	28

SIGNATURES		29

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SMITH MICRO SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value data)


	September 30, 2023		December 31, 2022
	(unaudited)		(audited)
Assets
Current assets:
Cash and cash equivalents	$	7,982	$	14,026
Accounts receivable, net of allowance for doubtful accounts of $3 and $3 (2023 and 2022, respectively)	10,290		10,501
Prepaid expenses and other current assets	2,940		1,983
Total current assets	21,212		26,510
Equipment and improvements, net	998		1,498
Right-of-use assets	2,686		3,722

Other assets	475		490
Intangible assets, net	31,901		36,320
Goodwill	35,041		35,041
Total assets	$	92,313	$	103,581
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	3,027	$	3,236
Accrued payroll and benefits	2,502		3,883
Current operating lease liabilities	1,434		1,441
Other current liabilities	1,714		1,589
Current portion of convertible notes payable	3,456		9,007
Derivative liabilities	46		1,575
Total current liabilities	12,179		20,731
Non-current liabilities:

Warrant liabilities	1,278		3,317
Operating lease liabilities	1,787		2,976

Deferred tax liabilities, net	178		178

Total non-current liabilities	3,243		6,471
Commitments and contingencies
Stockholders' equity:
Common stock, par value $0.001 per share; 100,000,000 shares authorized; 70,384,838 and 56,197,910 shares issued and outstanding (2023 and 2022, respectively)	70		56
Additional paid-in capital	376,057		357,875
Accumulated comprehensive deficit	(299,236)		(281,552)
Total stockholders’ equity	76,891		76,379
Total liabilities and stockholders' equity	$	92,313	$	103,581

See accompanying notes to the consolidated financial statements.

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SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Revenues	$	11,001	$	11,699	$	32,269	$	37,108
Cost of revenues (including depreciation of $12, $25, $40, and $85 in the three and nine months ended September 30, 2023 and 2022, respectively)	2,528		3,629		8,400		10,882
Gross profit	8,473		8,070		23,869		26,226
Operating expenses:
Selling and marketing	2,449		2,986		8,631		9,687
Research and development	3,704		7,409		13,276		22,756
General and administrative	2,934		4,208		9,448		11,885

Depreciation and amortization	1,567		1,822		4,872		5,665
Total operating expenses	10,654		16,425		36,227		49,993
Operating loss	(2,181)		(8,355)		(12,358)		(23,767)
Other income (expense):
Change in fair value of warrant and derivative liabilities	73		3,457		3,486		3,457

Loss on derecognition of debt	(1,583)		—		(2,985)		—
Interest expense, net	(1,443)		(896)		(5,740)		(898)
Other income (expense), net	15		9		(62)		(22)
Loss before provision for income taxes	(5,119)		(5,785)		(17,659)		(21,230)
Provision for income tax expense	14		27		25		77
Net loss	$	(5,133)	$	(5,812)	$	(17,684)	$	(21,307)

Loss per share:
Basic and diluted	$	(0.08)	$	(0.10)	$	(0.28)	$	(0.39)

Weighted average shares outstanding:
Basic and diluted	67,354		55,722		62,297		55,140

See accompanying notes to the consolidated financial statements.

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SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)


	Common Stock			Additional Paid-in Capital		Accumulated Comprehensive Deficit		Total
	Shares	Amount
BALANCE, June 30, 2023 (unaudited)	65,202	$	65	$	368,527	$	(294,103)	$	74,489
Non-cash compensation recognized on stock options and employee stock purchase plan ("ESPP")	—	—		6		—		6
Restricted stock grants, net of cancellations	574	—		1,334		—		1,334
ESPP shares issued	7	—		7		—		7
Cancellation of shares for payment of withholding tax	(65)	—		(89)		—		(89)
Common shares issued in settlement and prepayment of notes payable	4,667	5		6,272		—		6,277
Net loss	—	—		—		(5,133)		(5,133)
BALANCE, September 30, 2023 (unaudited)	70,385	$	70	$	376,057	$	(299,236)	$	76,891


	Common Stock			Additional Paid-in Capital		Accumulated Comprehensive Deficit		Total
	Shares	Amount
BALANCE, December 31, 2022 (audited)	56,198	$	56	$	357,875	$	(281,552)	$	76,379
Non-cash compensation recognized on stock options and ESPP	—	—		24		—		24
Restricted stock grants, net of cancellations	1,837	2		3,290		—		3,292
ESPP shares issued	15	—		15		—		15
Cancellation of shares for payment of withholding tax	(245)	—		(381)		—		(381)
Common shares issued in settlement and prepayment of notes payable	12,580	12		15,234		—		15,246
Net loss	—	—		—		(17,684)		(17,684)
BALANCE, September 30, 2023 (unaudited)	70,385	70		376,057		(299,236)		76,891

See accompanying notes to the consolidated financial statements.

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SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)


	Common Stock			Additional Paid-in Capital		Accumulated Comprehensive Deficit		Total
	Shares	Amount
BALANCE, June 30, 2022 (unaudited)	55,120	$	55	$	354,641	$	(267,768)	$	86,928
Non-cash compensation recognized on stock options and ESPP	—	—		22		—		22
Restricted stock grants, net of cancellations	59	—		1,074		—		1,074
Cancellation of shares for payment of withholding tax	(61)	—		(159)		—		(159)
ESPP	11	—		21		—		32
Common shares issued in stock offering, net of offering costs	1,132	1		1,308		—		1,309


Net loss	—	—		—		(5,812)		(5,812)
BALANCE, September 30, 2022 (unaudited)	56,261	56		356,907		(273,580)		83,383


	Common Stock			Additional Paid-in Capital		Accumulated Comprehensive Deficit		Total
	Shares	Amount
BALANCE, December 31, 2021 (audited)	54,259	$	54	$	352,779	$	(252,273)	$	100,560
Non-cash compensation recognized on stock options and ESPP	—	—		66		—		66
Restricted stock grants, net of cancellations	1,192	1		3,782		—		3,783
Cancellation of shares for payment of withholding tax	(347)	—		(1,084)		—		(1,084)
ESPP	17	—		40		—		40
Common shares issued in stock offering, net of offering costs	1,132	1		1,308		—		1,309


Exercise of stock options	8	—		16		—		16
Net loss	—	—		—		(21,307)		(21,307)
BALANCE, September 30, 2022 (unaudited)	56,261	56		356,907		(273,580)		83,383

See accompanying notes to the consolidated financial statements.

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SMITH MICRO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	For the Nine Months Ended September 30,
	2023		2022
	(unaudited)		(unaudited)
Operating activities:
Net loss	$	(17,684)	$	(21,307)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	4,912		5,751
Non-cash lease expense	(160)		(374)
Non-cash transaction costs including amortization of debt discount and issuance costs	5,398		1,422
Change in fair value of warrant and derivative liabilities	(3,486)		(3,457)
Loss on derecognition of debt	2,985		—



Stock based compensation	3,316		3,849
Loss on disposal of assets	12		31
Changes in operating accounts:
Accounts receivable	208		1,108
Prepaid expenses and other assets	220		186
Accounts payable and accrued liabilities	(2,224)		(1,526)
Other liabilities	553		(161)
Net cash used in operating activities	(5,950)		(14,478)
Investing activities:

Capital expenditures, net	(5)		(85)
Other investing activities	71		94
Net cash provided by investing activities	66		9
Financing activities:
Proceeds from notes and warrants offering	—		15,000
Proceeds from stock and warrants offering	—		3,000
Stock, notes, and warrants offering costs	—		(1,227)

Proceeds from financing arrangements	981		1,541
Repayments of financing arrangements	(1,156)		(978)
Other financing activities	15		56
Net cash (used in) provided by financing activities	(160)		17,392
Net (decrease) increase in cash and cash equivalents	(6,044)		2,923
Cash and cash equivalents, beginning of period	14,026		16,078
Cash and cash equivalents, end of period	$	7,982	$	19,001

Supplemental disclosures of cash flow information:


Non-cash investing and financing activities:
Issuance of common stock in settlement and prepayment of notes payable	$	12,180	$	—
Derivative and warrants in connection with notes and stock offerings	—		9,578

See accompanying notes to the consolidated financial statements.

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SMITH MICRO SOFTWARE, INC.

Notes to the Consolidated Financial Statements

(Unaudited)

1. The Company

Smith Micro Software, Inc. (“Smith Micro” or “the Company”) develops software to simplify and enhance the mobile experience, providing solutions to some of the leading wireless service providers around the world. From enabling the family digital lifestyle to providing powerful voice messaging capabilities, the Company strives to enrich today’s connected lifestyles while creating new opportunities to engage consumers via smartphones and consumer Internet of Things (“IoT”) devices. Smith Micro’s portfolio includes a wide range of products for creating, sharing, and monetizing rich content, such as visual voice messaging, retail content display optimization and performance analytics on various product sets.

Smith Micro’s solution portfolio is comprised of proven products that enable its customers to provide:

•In-demand digital services that connect today’s digital lifestyle, including family location services, parental controls, and consumer IoT devices to mobile consumers worldwide;

•Easy visual access to voice messages on mobile devices through visual voicemail and voice-to-text transcription functionality; and

•Strategic, consistent, and measurable digital demonstration experiences that educate retail shoppers, create awareness of products and services, drive in-store sales, and optimize retail experiences with actionable analytics derived from in-store customer behavior.

2. Accounting Policies

Basis of Presentation

The accompanying interim consolidated balance sheet as of September 30, 2023, and the related consolidated statements of operations and stockholders’ equity for the three and nine months ended September 30, 2023 and 2022, and the consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022, are unaudited. The unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted.

In the opinion of management, the accompanying unaudited consolidated financial statements for the periods presented reflect all adjustments which are normal and recurring, and necessary to fairly state the financial position, results of operations, and cash flows of the Company. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on March 23, 2023 (the "2022 Form 10-K").

Intercompany balances and transactions have been eliminated in consolidation.

Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2023.

New Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This updated guidance sets forth a current expected credit loss model based on expected losses. Under this model, an entity recognizes an allowance for expected credit losses based on historical experience, current conditions and forecasted information rather than the current methodology of delaying recognition of credit losses until it is probable a loss has been incurred. This guidance became effective for the Company beginning with interim periods starting in fiscal year 2023. The impact of adopting the new standard did not have a material impact on the Company's consolidated financial statements.

Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the current presentation.

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3. Equity Transactions

In a registered direct offering concurrent with the 2022 Notes and Warrants Offering referred to in Note 4, on August 11, 2022, the Company entered into a Securities Purchase Agreement (the “Additional Purchase Agreement” and together with the Securities Purchase Agreement further discussed in Note 4, the “Purchase Agreements”) with certain accredited investors to sell at a purchase price of $2.65 per share an aggregate of 1,132,075 shares of the Company’s common stock and warrants to purchase up to an aggregate of 1,132,075 shares of the Company’s common stock (the “Additional Warrants”) (the “Stock and Additional Warrants Offering”). Each Additional Warrant is exercisable at a price of $2.65 per share and expires on February 14, 2028. The issuance of the Shares and the Additional Warrants were conducted as a registered direct offering pursuant to the Company’s currently effective Registration Statement on Form S-3, previously filed with and declared effective by the SEC, and prospectus supplements thereunder. The Stock and Additional Warrants Offering closed on August 12, 2022, and the Company raised net cash proceeds of $2.8 million.

The Additional Warrants were assessed and concluded to be liability instruments due to cash purchase settlement provisions, and as a result all changes in the fair value of the Additional Warrants will be recognized in the Company's consolidated statements of operations until they are either exercised or expire. The Additional Warrants are not traded in an active securities market and, as such, the estimated fair value at inception was $1.6 million determined utilizing a Black-Scholes option pricing model and is reflected on the balance sheet line "Warrant liabilities" and as an adjustment to Additional Paid-in Capital.

4. Debt and Warrants Transactions

2022 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 a 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 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 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 due monthly by the first business day of the month from April 2023 through December 2023, and the balance at maturity. There were principal installment payments of $10.9 million made during the nine months ended September 30, 2023 as described in Note 3 above, and as such a portion of the debt and related derivative were derecognized.

The Warrants were assessed and concluded to be liability instruments due to cash settlement provisions, and as a result all changes in the fair value of the 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 collectively as a compound embedded derivative that meets the criteria to be bifurcated and carried at fair value. This is classified in the balance sheet line as "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 is subsequently adjusted to fair value quarterly, as required, and immediately prior to any change in underlying debt balance. The change in valuation of the debt instrument as a whole, including the derivative, as a result of installment payments extinguishing an aggregate of $10.9 million in principal under the Notes, is reflected in the statement of operations line "Loss on derecognition of

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debt" totaling $1.6 million for the three months ended September 30, 2023 and $3.0 million for the nine months ended September 30, 2023. Below are specific assumptions utilized:


Convertible Notes Derivative	Common stock market price		Risk-free interest rate		Expected dividend yield	Expected term (in years)	Expected volatility
March 31, 2023 for April 1, 2023 Installment date	$	1.16	4.68	%	—	0.75	84.34	%
May 1, 2023 for May 1, 2023 Installment date	$	1.22	4.68	%	—	0.67	81.57	%
May 31, 2023 for June 1, 2023 Installment date	$	1.21	4.91	%	—	0.59	86.20	%
June 30, 2023 for July 1, 2023 Installment date	$	1.11	5.42	%	—	0.50	90.68	%
July 31, 2023 for August 1, 2023 Installment date	$	1.14	5.53	%	—	0.42	59.89	%
August 31, 2023 for September 1, 2023 Installment date	$	1.71	5.54	%	—	0.33	69.85	%
September 30, 2023 for October 1, 2023 Installment date	$	1.21	5.56	%	—	0.25	78.21	%

During the three months ended September 30, 2023, the Company recognized interest expense of $1.5 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 $1.3 million, and contractual interest of $0.1 million.

During the nine months ended September 30, 2023, the Company recognized interest expense of $5.9 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 $5.1 million, and contractual interest of $0.5 million.

In accordance with the 2022 Notes and Warrants offering, during the nine months ended September 30, 2023, 11,420,603 shares of the Company's Common Stock were issued for the April 1, 2023 through the October 1, 2023 principal amortization installment date payments, which in total reduced the convertible Notes principal balance by $10.9 million. The payment for the October 1, 2023 principal amortization installment date was completed on September 30, 2023. During the three months ended September 30, 2023, 1,159,415 shares of the Company's Common Stock were prefunded to the holders of the Notes for the remaining balance related to the November 1, 2023 principal amortization installment date. This prefunded balance of $1.2 million is reflected in the balance sheet line "Prepaid expenses and other current assets" as of September 30, 2023. There were no conversions by the holders of the Notes during the nine months ended September 30, 2023.

The current balance of the Notes as of September 30, 2023 is as follows (unaudited, in thousands):


	Current
Gross Balance as of September 30, 2023	$	4,051
Unamortized Discount	(562)
Unamortized Issuance Costs	(33)
Net Balance as of September 30, 2023	$	3,456

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 September 30, 2023, 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. As further discussed in Note 3, Additional Warrants 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. Since issuance of the Warrants and Additional Warrants, there have

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been no warrant exercises. The Warrants and Additional Warrants are not traded in an active securities market and, as such, the estimated fair value 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 and Additional Warrants is likely to differ materially from historical volatility. Expected life is based on the contractual term of the applicable warrants. Below are the specific assumptions utilized:


Warrants	September 30, 2023
Common stock market price	$	1.21
Risk-free interest rate	4.49		%
Expected dividend yield	—
Expected term (in years)	3.87
Expected volatility	66.05		%


Additional Warrants	September 30, 2023
Common stock market price	$	1.21
Risk-free interest rate	4.49		%
Expected dividend yield	—
Expected term (in years)	4.37
Expected volatility	69.23		%

5. Fair Value of Financial Instruments

The Company measures and discloses fair value measurements as required by FASB ASC Topic No. 820, Fair Value Measurements and Disclosures.

Fair value is an exit price, representing the amount that would be received upon the sale of an asset or the amount that would be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the FASB establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

•Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

•Level 2 – Include other inputs that are directly or indirectly observable in the marketplace.

•Level 3 – Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following table presents information about the financial liabilities that are measured at fair value on a recurring basis at September 30, 2023 and 2022 (unaudited, in thousands):


Level 3	September 30, 2023		September 30, 2022


Notes and Warrants Offering Derivative	$	46	$	2,173
Warrants	742		2,462
Additional Warrants	536		1,486
Total	$	1,324	$	6,121

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The following table presents the changes in the fair value (unaudited, except for December 31, 2022, in thousands):


	Notes and Warrants Offering Derivative		Warrants		Additional Warrants		Total









Measurement at June 30, 2023	$	217	$	722	$	472	$	1,411
Change in fair value	(157)		20		64		(73)
Derecognition of debt	(14)		—		—		(14)
Measurement at September 30, 2023	$	46	$

SEC Form 10-Q filed by Smith Micro Software Inc.