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Debt and Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2022
Debt Disclosure [Abstract] |
Debt and Fair Value of Financial Instruments | Debt and Fair Value of Financial Instruments 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. 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 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 and derivative 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 which are both embedded derivatives that meet the criteria to be bifurcated and carried at fair value. These are classified as in the balance sheet line Warrant and derivative liabilities and as a discount on the Notes, with subsequent adjustments to fair value each reporting period with a charge to earnings. These derivatives are initially recognized at a fair value of $4.2 million based on the net present value of the expected cash flows and a Black-Scholes option pricing model, respectively, with the following assumptions being utilized:
| Convertibles Notes Derivative
| August 11, 2022 |  | September 30, 2022
Common stock market price | $ | 3.04 |  |  | $ | 2.26 |
Risk-free interest rate | 3.28 | % |  | 3.89 | %
Expected dividend yield | — |  |  | — |
Expected term (in years) | 1.39 |  |  | 1.25 |
Expected volatility | 56.32 | % |  | 57.73 | %
The Notes also contain certain other conversion and redemption features which represent embedded derivatives requiring bifurcation from the debt host instrument and fair value reported at each reporting period; however the key inputs in valuing these instruments include the likelihood that events triggering these provisions will occur during the term of the Notes. The Company has assessed the likelihood of these events occurring as remote at issuance and again at September 30, 2022 such that no value is ascribed to the instruments. 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 derivatives, 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 derivatives 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 three and nine month period ended September 30, 2022, the Company recognized interest expense of $0.9 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 $0.7 million, and contractual interest of $0.1 million. The balance of the Notes as of September 30, 2022 is as follows (unaudited, in thousands):
| Current |  | Long term |  | Total
Gross Balance as of September 30, 2022 | $ | 10,500 |  |  | $ | 4,500 |  |  | $ | 15,000 |
Unamortized Discount | (6,687) |  |  | (585) |  |  | $ | (7,272) |
Unamortized Issuance Costs | (378) |  |  | (42) |  |  | $ | (420) |
Net Balance as of September 30, 2022 | $ | 3,435 |  |  | $ | 3,873 |  |  | $ | 7,308 |
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, 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. As further discussed in Note 4, Additional Warrants (as defined in Note 4 below) 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 (as defined in Note 4 below). 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 September 30, 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:
| Warrants |  | Additional Warrants
| August 11, 2022 |  | September 30, 2022 |  | August 12, 2022 |  | September 30, 2022
Common stock market price | $ | 3.04 |  |  | $ | 2.26 |  |  | $ | 2.34 |  |  | $ | 2.26 |
Risk-free interest rate | 3.03 | % |  | 3.70 | % |  | 3.03 | % |  | 3.70 | %
Expected dividend yield | — |  |  | — |  |  | — |  |  | — |
Expected term (in years) | 5.00 |  |  | 4.87 |  |  | 5.50 |  |  | 5.37 |
Expected volatility | 66.85 | % |  | 66.51 | % |  | 70.55 | % |  | 68.50 | %
Fair Value of Financial Instruments The warrants and derivative instruments are measured as Level 3 instruments in the fair value hierarchy as per FASB ASC Topic No. 820, Fair Value Measurements and Disclosures for fair value measurements of items that are recognized or disclosed at fair value in the financial statements. 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 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 in measuring fair value. As required by FASB Accounting Standards Codification ("ASC") Topic No. 825, Financial Instruments, an entity can choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. Subsequent changes in fair value for designated items are required to be reported in earnings in the current period. This topic also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. The following table presents information about the financial liabilities that are measured at fair value on a recurring basis at September 30, 2022 (in thousands):
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Notes and Warrants Offering Derivatives | — |  |  | — |  |  | $ | 2,173 |  |  | $ | 2,173 |
Notes and Warrants Offering Warrants | — |  |  | — |  |  | 2,462 |  |  | 2,462 |
Stock and Warrants Offering Warrants | — |  |  | — |  |  | 1,486 |  |  | 1,486 |
Total at September 30, 2022 | — |  |  | — |  |  | $ | 6,121 |  |  | $ | 6,121 |
The following table presents the changes in the fair value for the nine months ended September 30, 2022 (in thousands):
| Notes and Warrants Offering Derivatives |  | Notes and Warrants Offering Warrants |  | Stock and Warrants Offering Warrants | Total
Measurement at December 31, 2021 | $ | — |  |  | $ | — |  |  | $ | — |  | $ | — |
Additions | 4,195 |  |  | 3,793 |  |  | 1,590 |  | 9,578 |
Change in Fair Value | (2,022) |  |  | (1,331) |  |  | (104) |  | (3,457) |
Measurement at September 30, 2022 | $ | 2,173 |  |  | $ | 2,462 |  |  | $ | 1,486 |  | $ | 6,121 |
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 further described in this Note 3 and the Stock and Additional Warrants Offering described in Note 4, the Credit Facility was terminated on August 11, 2022. There were borrowings and repayments of $0.3 million for the three and nine months ended September 30, 2022.

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- Definition The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -URI https://asc.fasb.org/topic&trid=2208564 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -SubTopic 20 -Section 50 -Paragraph 1B -Subparagraph (h) -URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495323-112611 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -SubTopic 20 -Section 50 -Paragraph 1C -Subparagraph (c) -URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495334-112611 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -SubTopic 20 -Section 50 -Paragraph 1I -Subparagraph (a) -URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495371-112611 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -SubTopic 20 -Section 50 -Paragraph 1I -Subparagraph (d) -URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495371-112611 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(c)) -URI https://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -SubTopic 20 -Section 50 -Paragraph 1B -Subparagraph (g) -URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495323-112611 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -SubTopic 20 -Section 50 -Paragraph 1C -Subparagraph (b) -URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495334-112611 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -SubTopic 20 -Section 50 -Paragraph 1C -Subparagraph (a) -URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495334-112611 Reference 10: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -SubTopic 20 -Section 50 -Paragraph 1E -Subparagraph (b) -URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495348-112611 Reference 11: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -SubTopic 20 -Section 50 -Paragraph 1B -URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495323-112611 Reference 12: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -SubTopic 20 -Section 50 -Paragraph 1I -Subparagraph (b) -URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495371-112611 Reference 13: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -SubTopic 20 -Section 50 -Paragraph 1B -Subparagraph (i) -URI https://asc.fasb.org/extlink&oid=123466505&loc=SL123495323-112611 + Details
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