Phunware, Inc. - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-37862
PHUNWARE, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 30-1205798 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
1002 West Avenue, Austin, Texas | 78701 | |||||||||||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||||||||||||||
Registrant’s telephone number, including area code: 512-693-4199
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 $0.0001 per share | PHUN | The NASDAQ Capital Market | ||||||||||||
| Warrants to purchase one share of Common Stock | PHUNW | The NASDAQ Capital Market | ||||||||||||
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 ☒ No ☐
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 ☒ No ☐
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 7, 2022, 102,628,317 shares of common stock, par value $0.0001 per share, were issued and outstanding.
TABLE OF CONTENTS
| PAGE | ||||||||
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report (the “Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this Report, including statements regarding our future results of operations and financial position, business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. These risks and others described under “Risk Factors” may not be exhaustive.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Report. In addition, even if our results of operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Report, those results or developments may not be indicative of results or developments in subsequent periods.
ii
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
1
Phunware, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share information)
| September 30, 2022 | December 31, 2021 | ||||||||||
(Unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | 8,538 | $ | 23,137 | |||||||
Accounts receivable, net of allowance for doubtful accounts of $0 and $10 at September 30, 2022 and December 31, 2021, respectively | 1,714 | 967 | |||||||||
| Inventory, net | 3,236 | 2,636 | |||||||||
| Digital assets, net | 12,617 | 32,581 | |||||||||
| Prepaid expenses and other current assets | 809 | 686 | |||||||||
| Total current assets | 26,914 | 60,007 | |||||||||
| Property and equipment, net | 207 | — | |||||||||
| Goodwill | 33,058 | 33,260 | |||||||||
| Intangible assets, net | 2,691 | 3,213 | |||||||||
| Deferred tax asset | 1,278 | 1,278 | |||||||||
| Right-of-use asset | 3,929 | 1,260 | |||||||||
| Other assets | 402 | 276 | |||||||||
| Total assets | $ | 68,479 | $ | 99,294 | |||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 7,514 | $ | 6,589 | |||||||
| Accrued expenses | 5,599 | 9,621 | |||||||||
| Lease liability | 949 | 399 | |||||||||
| Deferred revenue | 1,650 | 3,973 | |||||||||
| PhunCoin deposits | 1,203 | 1,202 | |||||||||
| Current maturities of long-term debt, net | 12,691 | 4,904 | |||||||||
| Warrant liability | 338 | 3,605 | |||||||||
| Total current liabilities | 29,944 | 30,293 | |||||||||
| Deferred tax liability | 1,278 | 1,278 | |||||||||
| Deferred revenue | 1,158 | 1,299 | |||||||||
| Lease liability | 3,316 | 1,147 | |||||||||
| Total liabilities | 35,696 | 34,017 | |||||||||
Commitments and contingencies (Note 8) | |||||||||||
| Stockholders’ equity | |||||||||||
Common stock, $0.0001 par value; 1,000,000,000 shares authorized at September 30, 2022 and December 31, 2021; 101,321,268 and 96,751,610 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively | 10 | 10 | |||||||||
| Additional paid-in capital | 272,657 | 264,944 | |||||||||
| Accumulated other comprehensive loss | (553) | (352) | |||||||||
| Accumulated deficit | (239,331) | (199,325) | |||||||||
| Total stockholders’ equity | 32,783 | 65,277 | |||||||||
| Total liabilities and stockholders’ equity | $ | 68,479 | $ | 99,294 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Phunware, Inc.
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income
(In thousands, except per share information)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net revenues | $ | 4,758 | $ | 2,160 | $ | 17,021 | $ | 5,242 | |||||||||||||||
| Cost of revenues | 3,963 | 1,026 | 12,935 | 2,842 | |||||||||||||||||||
| Gross profit | 795 | 1,134 | 4,086 | 2,400 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Sales and marketing | 1,819 | 715 | 5,232 | 1,910 | |||||||||||||||||||
| General and administrative | 5,189 | 3,296 | 14,745 | 9,075 | |||||||||||||||||||
| Research and development | 1,665 | 1,160 | 4,544 | 3,058 | |||||||||||||||||||
| Total operating expenses | 8,673 | 5,171 | 24,521 | 14,043 | |||||||||||||||||||
| Operating loss | (7,878) | (4,037) | (20,435) | (11,643) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest (expense) income | (991) | 7 | (1,645) | (4,057) | |||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | (7,952) | |||||||||||||||||||
| Impairment of digital assets | — | — | (21,511) | (776) | |||||||||||||||||||
| Fair value adjustment of warrant liability | 797 | 1,501 | 3,267 | (148) | |||||||||||||||||||
| Gain on forgiveness of PPP loan | — | 2,850 | — | 2,850 | |||||||||||||||||||
| Other income, net | 54 | 51 | 318 | 15 | |||||||||||||||||||
| Total other (expense) income | (140) | 4,409 | (19,571) | (10,068) | |||||||||||||||||||
| (Loss) income before taxes | (8,018) | 372 | (40,006) | (21,711) | |||||||||||||||||||
| Income tax expense | — | — | — | — | |||||||||||||||||||
| Net (loss) income | (8,018) | 372 | (40,006) | (21,711) | |||||||||||||||||||
| Other comprehensive (loss) income: | |||||||||||||||||||||||
| Cumulative translation adjustment | (84) | (33) | (201) | (18) | |||||||||||||||||||
| Comprehensive (loss) income | $ | (8,102) | $ | 339 | $ | (40,207) | $ | (21,729) | |||||||||||||||
| Net (loss) income per share, basic | $ | (0.08) | $ | 0.01 | $ | (0.41) | $ | (0.31) | |||||||||||||||
| Net (loss) income per common share, diluted | $ | (0.08) | $ | — | $ | (0.41) | $ | (0.31) | |||||||||||||||
| Weighted-average common shares used to compute net (loss) income per share, basic | 98,822 | 74,347 | 97,803 | 70,185 | |||||||||||||||||||
| Weighted-average common shares used to compute net (loss) income per share, diluted | 98,822 | 74,699 | 97,803 | 70,185 | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Phunware, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(In thousands)
(Unaudited)
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance - June 30, 2022 | 98,137 | $ | 10 | $ | 267,465 | $ | (231,313) | $ | (469) | $ | 35,693 | ||||||||||||||||||||||||
| Release of restricted stock | 527 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Issuance of common stock in connection with acquisition of Lyte Technology, Inc. | 464 | — | 689 | — | — | 689 | |||||||||||||||||||||||||||||
| Sales of common stock, net of issuance costs | 2,193 | — | 3,654 | — | — | 3,654 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 849 | — | — | 849 | |||||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | (84) | (84) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (8,018) | — | (8,018) | |||||||||||||||||||||||||||||
| Balance - September 30, 2022 | 101,321 | $ | 10 | $ | 272,657 | $ | (239,331) | $ | (553) | $ | 32,783 | ||||||||||||||||||||||||
| Balance - December 31, 2021 | 96,752 | $ | 10 | $ | 264,944 | $ | (199,325) | $ | (352) | $ | 65,277 | ||||||||||||||||||||||||
| Exercise of stock options, net of vesting of restricted shares | 23 | — | 16 | — | — | 16 | |||||||||||||||||||||||||||||
| Release of restricted stock | 1,409 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Issuance of common stock under the 2018 employee stock purchase plan | 96 | — | 116 | — | — | 116 | |||||||||||||||||||||||||||||
| Issuance of common stock in connection with acquisition of Lyte Technology, Inc. | 848 | — | 1,814 | — | — | 1,814 | |||||||||||||||||||||||||||||
| Sales of common stock, net of issuance costs | 2,193 | — | 3,654 | 3,654 | |||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 2,113 | — | — | 2,113 | |||||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | (201) | (201) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (40,006) | — | (40,006) | |||||||||||||||||||||||||||||
| Balance - September 30, 2022 | 101,321 | $ | 10 | $ | 272,657 | $ | (239,331) | $ | (553) | $ | 32,783 | ||||||||||||||||||||||||
4
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Other Comprehensive Loss | Total Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance - June 30, 2021 | 72,736 | $ | 7 | $ | 177,254 | $ | (167,886) | $ | (323) | $ | 9,052 | ||||||||||||||||||||||||
| Exercise of stock options, net of vesting of restricted shares | 2 | — | 1 | — | — | 1 | |||||||||||||||||||||||||||||
| Release of restricted stock | 772 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Sales of common stock, net of issuance cost | 2,039 | 1 | 2,170 | — | — | 2,171 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 1,462 | — | — | 1,462 | |||||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | (33) | (33) | |||||||||||||||||||||||||||||
| Net income | — | — | — | 372 | — | 372 | |||||||||||||||||||||||||||||
| Balance - September 30, 2021 | 75,549 | $ | 8 | $ | 180,887 | $ | (167,514) | $ | (356) | $ | 13,025 | ||||||||||||||||||||||||
| Balance - December 31, 2020 | 56,371 | $ | 6 | $ | 144,156 | $ | (145,803) | $ | (338) | $ | (1,979) | ||||||||||||||||||||||||
| Exercise of stock options, net of vesting of restricted shares | 133 | — | 71 | — | — | 71 | |||||||||||||||||||||||||||||
| Release of restricted stock | 1,784 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Issuance of common stock for payment of board of director fees | 99 | — | 66 | — | — | 66 | |||||||||||||||||||||||||||||
| Sales of common stock, net of issuance costs | 17,162 | 2 | 32,706 | — | — | 32,708 | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | 3,888 | — | — | 3,888 | |||||||||||||||||||||||||||||
| Cumulative translation adjustment | — | — | — | — | (18) | (18) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | (21,711) | — | (21,711) | |||||||||||||||||||||||||||||
| Balance - September 30, 2021 | 75,549 | $ | 8 | $ | 180,887 | $ | (167,514) | $ | (356) | $ | 13,025 | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Phunware, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating activities | |||||||||||
| Net loss | $ | (40,006) | $ | (21,711) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Amortization of debt discount and deferred financing costs | 690 | 2,770 | |||||||||
| (Gain) loss on change in fair value of warrant liability | (3,267) | 148 | |||||||||
| Loss on extinguishment of debt | — | 7,952 | |||||||||
| Impairment of digital assets | 21,511 | 776 | |||||||||
| Gain on forgiveness of PPP loan | — | (2,850) | |||||||||
| Stock-based compensation | 2,169 | 3,933 | |||||||||
| Other adjustments | 990 | 297 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (723) | (272) | |||||||||
| Inventory | (731) | — | |||||||||
| Prepaid expenses and other assets | (254) | (345) | |||||||||
| Accounts payable | 925 | (1,236) | |||||||||
| Accrued legal settlement | — | (3,000) | |||||||||
| Lease liability payments | (594) | (662) | |||||||||
| Accrued expenses | (1,118) | (2,891) | |||||||||
| Deferred revenue | (2,464) | (1,998) | |||||||||
| Net cash used in operating activities | (22,872) | (19,089) | |||||||||
| Investing activities | |||||||||||
| Acquisition payment | (1,125) | — | |||||||||
| Purchase of digital assets | (923) | (1,497) | |||||||||
| Capital expenditures | (238) | — | |||||||||
| Net cash used in investing activities | (2,286) | (1,497) | |||||||||
| Financing activities | |||||||||||
| Proceeds from borrowings, net of issuance costs | 11,795 | 9,980 | |||||||||
| Payments on borrowings | (4,698) | (25,116) | |||||||||
| Proceeds from exercise of options to purchase common stock | 16 | 73 | |||||||||
| Proceeds from sales of common stock, net of issuance costs | 3,655 | 32,610 | |||||||||
| Net cash provided by financing activities | 10,768 | 17,547 | |||||||||
| Effect of exchange rate on cash and restricted cash | (209) | (19) | |||||||||
| Net decrease in cash and restricted cash | (14,599) | (3,058) | |||||||||
| Cash and restricted cash at the beginning of the period | 23,137 | 4,031 | |||||||||
| Cash and restricted cash at the end of the period | $ | 8,538 | $ | 973 | |||||||
6
| Supplemental disclosure of cash flow information: | |||||||||||
| Interest paid | $ | 613 | $ | 1,315 | |||||||
| Income taxes paid | $ | — | $ | — | |||||||
| Supplemental disclosures of non-cash activities: | |||||||||||
| Right-of-use assets obtained in exchange for operating lease obligations | $ | 3,053 | $ | — | |||||||
| Non-cash exchange of digital assets | $ | 911 | $ | — | |||||||
| Issuance of common stock in connection with acquisition of Lyte Technology, Inc. | $ | 1,814 | $ | — | |||||||
| Proceeds not received related to sales of common stock | $ | — | $ | 97 | |||||||
| Issuance of common stock for payment of board of director fees | $ | — | $ | 66 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
Phunware, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share information)
(Unaudited)
1. The Company and Basis of Presentation
The Company
Phunware, Inc. and its subsidiaries (the “Company”, "we", "us", or "our") offers a fully integrated software platform that equips companies with the products, solutions and services necessary to engage, manage and monetize their mobile application portfolios globally at scale. Our Multiscreen-as-a-Service ("MaaS") platform provides the entire mobile lifecycle of applications and media in one login through one procurement relationship. Our MaaS technology is available in software development kit ("SDK") form for organizations developing their own application, via customized development services and prepackaged solutions. Through our integrated mobile advertising platform of publishers and advertisers, we provide in-app application transactions for mobile audience building, user acquisition, application discovery, audience engagement and audience monetization. During 2021, we began to sell PhunToken to consumers, developers and brands. PhunToken is an innovative digital asset utilized within our token ecosystem to help drive engagement by unlocking features and capabilities of our MaaS platform. PhunToken is designed to reward consumers for their activity, such as watching branded videos, completing surveys and visiting points of interest. In October 2021, we acquired Lyte Technology, Inc. ("Lyte"), a provider of high-performance computer systems to individual consumers. Founded in 2009, we are a Delaware corporation headquartered in Austin, Texas.
Basis of Presentation
The condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) and include the Company’s accounts and those of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
The balance sheet at December 31, 2021 was derived from our audited consolidated financial statements, but these interim condensed consolidated financial statements do not include all the annual disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2021, which are referenced herein. The accompanying interim condensed consolidated financial statements as of September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021, are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with the audited financial statements, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to fairly state our financial position as of September 30, 2022 and the results of operations for the three and nine months ended September 30, 2022 and 2021, and cash flows for the nine months ended September 30, 2022 and 2021. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any future interim period.
Going Concern, Liquidity and Management’s Plan
Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going Concern ("ASC 205-40") requires management to evaluate whether conditions and/or events raise substantial doubt about our ability to meet future financial obligations as they become due within one year after the date that the financial statements are issued. As required by this standard, management’s evaluation shall initially not take into consideration the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued.
We have a history of losses in each fiscal year since our inception. Total backlog and cash-on-hand for the period then ended did not meet our expectations, as a result of uncertainty of the broader marketplace. For the nine months ended September 30, 2022, we incurred a net loss of $40,006 and used $22,872 in cash for operations.
In July 2022, the Company raised additional cash proceeds in the amount of $11,795 through the issuance of a note, as detailed in Note 6, Debt. In accordance with the note, we can defer one monthly payment in the amount $1,566 up to twelve times. Furthermore, as more fully described in Note 9, Stockholders Equity, in January 2022, we entered into a sales agreement,
8
pursuant to which we may offer and sell shares of our common stock, for aggregate gross proceeds of up to $100,000. We currently anticipate selling common stock through our at-the-market offering, if needed. Sales of shares of our common stock sold under the sales agreement will be made pursuant to an effective shelf registration statement on Form S-3 in the amount of $200,000 filed with the SEC on February 1, 2022. We may also sell additional securities, including common stock, preferred stock, warrants and units through private placement transactions or public offerings. We believe the foregoing plans mitigate the Company’s going concern considerations.
There can be no assurance that we will be able to obtain additional funding on satisfactory terms or at all. In addition, no assurance can be given that any such financing, if obtained, will be adequate to meet our capital needs and support growth. If additional funding cannot be obtained on a timely basis and/or on satisfactory terms, our operations could be materially impacted.
The accompanying condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
2. Summary of Significant Accounting Policies
There have been no changes in significant accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2021, except as set forth below.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Items subject to the use of estimates include, but are not limited to, the standalone selling price for our products and services, our various digital asset transactions, stock-based compensation, useful lives of long-lived assets including intangibles, fair value of intangible assets and the recoverability or impairment of tangible and intangible assets, including goodwill, contingent consideration for our business combination with Lyte and periodic reassessment of fair value, allocating the fair value of purchase consideration to assets acquired and liabilities assumed in our business combination, reserves and certain accrued liabilities, the benefit period of deferred commissions, assumptions used in Black-Scholes valuation method, such as the current trading price of our common stock at time of exercise of our warrant, expected volatility, risk-free interest rate and expected dividend rate and provision for (benefit from) income taxes. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements.
Risks and Uncertainties
Regulation governing blockchain technologies, cryptocurrencies, digital assets, utility tokens, security tokens and offerings of digital assets is uncertain, and new regulations or policies may materially adversely affect the development and the value of our tokens. Regulation of digital assets, like PhunCoin and PhunToken, cryptocurrencies, blockchain technologies and cryptocurrency exchanges, is evolving and likely to continue to evolve. Regulation also varies significantly among international, federal, state and local jurisdictions and is subject to significant uncertainty. Various legislative and executive bodies in the United States and in other countries may in the future adopt laws, regulations, or guidance, or take other actions, which may severely impact the permissibility of tokens generally and the technology behind them or the means of transaction or in transferring them. Any such violations could adversely affect the ability of us to maintain PhunCoin and PhunToken, which could have a material adverse effect on our operations and financial condition. Failure by us to comply with any laws, rules and regulations, some of which may not exist yet or are subject to interpretation and may be subject to change, could also result in a material adverse effect on our operations and financial condition.
Concentrations of Credit Risk
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash, trade accounts receivable and our digital asset holdings.
There is currently no clearing house for our digital assets, including our bitcoin, ethereum or other digital asset holdings, nor is there a central or major depository for the custody of our digital assets. There is a risk that some or all of our digital asset holdings could be lost or stolen. There can be no assurance that the custodians will maintain adequate insurance or that such coverage will cover losses with respect to our digital asset holdings. Further, transactions denominated in digital assets are irrevocable. Stolen or incorrectly transferred digital assets may be irretrievable. As a result, any incorrectly executed
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transactions could adversely our financial condition. The aggregate cost basis of our digital asset holdings was $42,280 and $41,964 at September 30, 2022 and December 31, 2021, respectively.
Although we limit our exposure to credit loss by depositing our cash with established financial institutions that management believes have good credit ratings and represent minimal risk of loss of principal, our deposits, at times, may exceed federally insured limits. Collateral is not required for accounts receivable, and we believe the carrying value approximates fair value.
The following table sets forth our concentration of accounts receivable, net of specific allowances for doubtful accounts.
| September 30, 2022 | December 31, 2021 | ||||||||||
| Customer A | 24 | % | — | % | |||||||
| Customer B | 15 | % | — | % | |||||||
| Customer C | 5 | % | 18 | % | |||||||
| Customer D | — | % | 20 | % | |||||||
Digital Assets
Payments by customers in and purchases by us of digital assets were primarily of bitcoin and ethereum. We currently account for all digital assets held as a result of these transactions as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. We have ownership of and control over our digital assets and we may use third-party custodial services to secure them. The digital assets are initially recorded at cost and are subsequently remeasured, net of any impairment losses incurred since acquisition.
We determine the fair value of our digital assets on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that we have determined is the principal market for bitcoin, ethereum and other digital asset holdings (Level 1 inputs). We perform an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that our digital assets are impaired. In determining if an impairment has occurred, we consider the lowest market price quoted on an active exchange since acquiring the respective digital asset. If the then current carrying value of a digital asset exceeds the fair value, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the fair value.
The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale. In determining the gain or loss to be recognized upon sale, we calculate the difference between the sales price and carrying value of the digital assets sold immediately prior to sale. Impairment losses and gains or losses on sales are recognized within other expense in our consolidated statements of operations and comprehensive (loss) income. Impairment loss was $21,511 and $776 for the nine months ended September 30, 2022 and 2021, respectively.
The following table sets forth our digital asset holdings as of September 30, 2022:
| Asset | Gross Carrying Amount | Accumulated Digital Asset Impairment | Digital Asset Carrying Value | ||||||||||||||
| Bitcoin | $ | 37,882 | $ | (26,295) | $ | 11,587 | |||||||||||
| Ether | 3,175 | (2,471) | 704 | ||||||||||||||
| Other | 1,223 | (897) | 326 | ||||||||||||||
| Total | $ | 42,280 | $ | (29,663) | $ | 12,617 | |||||||||||
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The following table sets forth our digital asset holdings as of December 31, 2021:
| Asset | Gross Carrying Amount | Accumulated Digital Asset Impairment | Digital Asset Carrying Value | ||||||||||||||
| Bitcoin | $ | 36,963 | $ | (8,554) | $ | 28,409 | |||||||||||
| Ethereum | 4,714 | (670) | 4,044 | ||||||||||||||
| Other | 287 | (159) | 128 | ||||||||||||||
| Total | $ | 41,964 | $ | (9,383) | $ | 32,581 | |||||||||||
Accumulated digital asset impairment noted above represents impairment on the remaining cost lots as of the respective dates. Changes in our digital asset holdings for the nine months ended September 30, 2022 were as follows:
| Bitcoin | Ethereum | Other | Total | ||||||||||||||||||||
| Net balance at December 31, 2021 | $ | 28,409 | $ | 4,044 | $ | 128 | $ | 32,581 | |||||||||||||||
| Received from customers, net of expenses | 28 | 376 | 25 | 429 | |||||||||||||||||||
| Purchases of digital assets | 923 | — | — | 923 | |||||||||||||||||||
| Exchanges of digital assets | — | (911) | 911 | — | |||||||||||||||||||
| Other | 26 | 169 | — | 195 | |||||||||||||||||||
| Impairment expense | (17,799) | (2,974) | (738) | (21,511) | |||||||||||||||||||
| Net balance at September 30, 2022 | $ | 11,587 | $ | 704 | $ | 326 | $ | 12,617 | |||||||||||||||
Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Restricted shares subject to repurchase provisions relating to early exercises under our 2009 Equity Incentive Plan were excluded from basic shares outstanding. Diluted net income (loss) per common share is computed by giving effect to all potential shares of common stock adjusted to include the effect of shares issuable pursuant to our convertible note(s), the exercise of in-the-money warrants and options and unvested restricted stock units, to the extent dilutive. Shares are excluded from the calculation of diluted net income (loss) per common share when their inclusion would have been anti-dilutive or out-of-the-money.
The following table sets forth common stock equivalents that have been excluded from the computation of dilutive weighted average shares outstanding as their inclusion would have been anti-dilutive:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Convertible notes | — | 19,324 | — | 19,324 | |||||||||||||||||||
| Warrants | 5,636,801 | 7,676,112 | 5,636,801 | 7,676,112 | |||||||||||||||||||
| Options | 984,729 | 207,257 | 984,729 | 1,117,697 | |||||||||||||||||||
| Restricted stock units | 3,353,776 | 3,807,154 | 3,353,776 | 3,807,154 | |||||||||||||||||||
| Restricted shares | — | 574 | — | 574 | |||||||||||||||||||
| Total | 9,975,306 | 11,710,421 | 9,975,306 | 12,620,861 | |||||||||||||||||||
Fair Value of Financial Instruments
We follow the guidance in ASC 820, Fair Value Measurement, to account for financial assets and liabilities measured on a recurring and non-recurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company uses a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs)
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and an entity's own assumptions (unobservable inputs). The guidance requires fair value measurements be classified and disclosed in one of the following three categories:
| • | Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities. | ||||
| • | Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. | ||||
| • | Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). | ||||
Determining which category an asset or liability falls within the hierarchy requires significant judgment. Our financial instruments measured at fair value as of September 30, 2022 are set forth below:
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Digital assets | $ | 12,617 | $ | — | $ | — | $ | 12,617 | |||||||||||||||
| Total | $ | 12,617 | $ | — | $ | — | $ | 12,617 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Warrant liability | $ | — | $ | 338 | $ | — | $ | 338 | |||||||||||||||
| Total | $ | — | $ | 338 | $ | — | $ | 338 | |||||||||||||||
Our financial instruments measured at fair value as of December 31, 2021 are set forth below:
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Digital assets | $ | 32,581 | $ | — | $ | — | $ | 32,581 | |||||||||||||||
| Total | $ | 32,581 | $ | — | $ | — | $ | 32,581 | |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Warrant liability | $ | — | $ | 3,605 | $ | — | $ | 3,605 | |||||||||||||||
| Total | $ | — | $ | 3,605 | $ | — | $ | 3,605 | |||||||||||||||
The following table sets forth the assumptions used to calculate the fair values of the liability classified warrant issued in connection with our 2020 Convertible Notes as of the dates presented:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Strike price per share | $ | 2.25 | $ | 2.25 | |||||||
| Closing price per share | $ | 1.18 | $ | 2.63 | |||||||
| Term (years) | 0.78 | 1.53 | |||||||||
| Volatility | 99 | % | 186 | % | |||||||
| Risk-free rate | 4.15 | % | 0.56 | % | |||||||
| Dividend Yield | — | — | |||||||||
The carrying value of accounts receivable, inventory, prepaid expenses, other current assets, accounts payable and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of those instruments. All debt is based on current rates at which the Company could borrow funds with similar remaining maturities and approximates fair value.
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Recent Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 introduces a model based on expected losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a smaller reporting company, the standard is currently effective for us for annual reporting periods beginning after December 15, 2022, with early adoption permitted for annual reporting periods beginning after December 15, 2019. We currently intend to adopt this new standard effective January 1, 2023. We currently do not expect the adoption of ASU 2016-13 to have a material impact on our condensed consolidated financial statements and disclosures.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. As the Company does not currently have any debt with conversion features outstanding, we do not expect the adoption of ASU 2020-06 to have a material impact on our condensed consolidated financial statements and disclosures.
3. Business Combination
On October 18, 2021, we closed the acquisition of Lyte with an adjusted purchase price of approximately $11.0 million (subject to an earn-out provision). This acquisition was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged was recorded at estimated fair values on the date of acquisition. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed were based on management’s estimates and assumptions at the time of acquisition. Fair values are subject to refinement for up to one year after the closing date as additional information regarding the closing date fair values becomes available. The fair values of the aggregate assets and liabilities acquired are disclosed in in Note 3, Business Combination, in our Annual Report on Form 10-K filed with the SEC on April 7, 2022. As of September 30, 2022, we have not booked any adjustments to the initial fair values booked at acquisition date.
Pursuant to terms of the stock purchase agreement, the acquisition and earn-out payments consist of the following: (i) $1,125, as adjusted for working capital items, on June 30, 2022, (ii) the issuance of shares of our common stock with an aggregate value of $2,250, in two equal installments valued at up to $1,125, determined on the last business day of each of the quarters ending March 31, 2022 and September 30, 2022 and (iii) up to $1,250 in cash and issuance of shares of our common stock valued at up to $1,250 on the first anniversary of closing, as an earn-out payment based upon Lyte achieving certain annual revenue milestones as provided in the purchase agreement in the year following closing. The revenue milestones were achieved, and accordingly, we made the earn out payment in October 2022. There is $2,449 and $5,531 recorded in accrued expenses in the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively, related to fair value of future acquisition payments and earn out payable due to the seller.
The following table summarizes the unaudited pro forma condensed consolidated financial information of Phunware for the three and nine months ended September 30, 2021, as if the acquisition of Lyte had occurred on January 1, 2021:
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Net revenues | $ | 5,421 | $ | 12,774 | |||||||
| Net income (loss) | $ | 338 | $ | (23,108) | |||||||
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4. Revenue
Our platform revenue consists of SDK license subscriptions and application development services, as well as application transactions, which are comprised of in-app advertising and sales of our digital asset, PhunToken. Hardware revenue relates to the sale of high-performance personal computers. Refer to our revenue recognition policy under the subheading, Revenue Recognition, in Note 2, Summary of Significant Accounting Policies, in our Annual Report on Form 10-K filed with the SEC on April 7, 2022.
Disaggregation of Revenue
The following table sets forth our net revenues by category:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Platform revenue | $ | 1,259 | $ | 2,160 | $ | 5,379 | $ | 5,242 | |||||||||||||||
| Hardware revenue | 3,499 | — | 11,642 | — | |||||||||||||||||||
| Net revenues | $ | 4,758 | $ | 2,160 | $ | 17,021 | $ | 5,242 | |||||||||||||||
We generate revenue in domestic and foreign regions and attribute net revenue to individual countries based on the location of the contracting entity. We derived 99% and 97% of our net revenues from within the United States for the three and nine months ended September 30, 2022, respectively. We derived 99% of our net revenues from within the United States for the three and nine months ended September 30, 2021.
The following table sets forth our concentration of revenue sources as a percentage of total net revenues:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Customer B | 1 | % | 35 | % | 1 | % | 15 | % | |||||||||||||||
| Customer E | — | % | 8 | % | — | % | 14 | % | |||||||||||||||
Deferred Revenue
Our deferred revenue balance consisted of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Current deferred revenue | |||||||||||
| Platform revenue | $ | 1,516 | $ | 1,824 | |||||||
| Hardware revenue | 134 | 2,149 | |||||||||
| Total current deferred revenue | $ | 1,650 | $ | 3,973 | |||||||
| Non-current deferred revenue | |||||||||||
| Platform revenue | $ | 1,158 | $ | 1,299 | |||||||
| Total non-current deferred revenue | $ | 1,158 | $ | 1,299 | |||||||
| Total deferred revenue | $ | 2,808 | $ | 5,272 | |||||||
Deferred revenue consists of customer billings or payments received in advance of the recognition of revenue under the arrangements with customers. We recognize deferred revenue as revenue only when revenue recognition criteria are met. During the nine months ended September 30, 2022, we recognized revenue of $3,624 that was included in our deferred revenue balance as of December 31, 2021.
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Remaining Performance Obligations
Remaining performance obligations were $5,598 as of September 30, 2022, of which we expect to recognize approximately 39% as revenue over the next 12 months and the remainder thereafter.
PhunToken
In May 2021, we announced the commencement of the selling of PhunToken. PhunToken is our innovative digital asset intended to be utilized within our token ecosystem, once developed, to help drive engagement by unlocking features and capabilities of our MaaS platform. During the nine months ended September 30, 2022, we sold 187.0 million PhunToken for an aggregate of $1,535, for which we received both cash and digital assets from customers. Sales of PhunToken are recorded within platform revenue in the table above.
In March 2022, certain members of our senior management team purchased 827.5 million PhunToken pursuant to Restricted Token Purchase Agreements, at an aggregate purchase price of approximately $7. The PhunToken will be transferred to employees over a time-based delivery schedule ranging from to four years. The Company will have the right to repurchase any PhunToken not delivered to the employee as a result of voluntary termination or termination for cause. In October 2022, our Board of Directors terminated the PhunToken Restricted Purchase Agreements, with no further PhunToken to be delivered to the employees after April 1, 2022.
As of September 30, 2022 and December 31, 2021, issued PhunToken were 461.4 million and 131.7 million, respectively. Total supply of PhunToken is capped at 10 billion.
5. Inventory
Our inventory balance on the dates presented consisted of the following:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Raw materials | $ | 3,168 | $ | 2,075 | |||||||
| Work-in-process | — | 207 | |||||||||
| Finished goods | 169 | 138 | |||||||||
| Other | 30 | 216 | |||||||||
| Inventory reserve | (131) | — | |||||||||
| Total inventory | $ | 3,236 | $ | 2,636 | |||||||
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6. Debt
2022 Promissory Note
On July 6, 2022, we entered into a note purchase agreement and completed the sale of an unsecured promissory note (the "2022 Promissory Note") with an original principal amount of $12,809 in a private placement with the same investor of our 2021 Promissory Note, discussed further below. The 2022 Promissory Note was sold with an original issue discount of $492 and we paid at closing issuance costs totaling $522. After deducting all transaction fees paid by us at closing, net cash proceeds to the Company at closing were $11,795. No interest will accrue on the 2022 Promissory Note unless and until the occurrence of an event of default, as defined in the 2022 Promissory Note. Beginning on November 1, 2022 and on the same day of each month thereafter until the 2022 Promissory Note is paid in full, we are required to make a monthly amortization payments in the amount of $1,566 until the maturity date of July 1, 2023, which is subject to adjustment for any payment deferrals we elect. We have the right to defer any monthly payment by one month up to twelve times so long as certain conditions, as defined in the 2022 Promissory Note, are satisfied. In the event we exercise the deferral right for any given month: (i) the outstanding balance will automatically increase by 1.85%; (ii) we will not be obligated to make the monthly payment for such month; and (iii) the maturity date will be extended for one month. We may prepay any or all outstanding balance of the 2022 Promissory Note earlier than it is due with a prepayment premium of 110%. The prepayment premium also applies to the monthly amortization payments.
The 2022 Promissory Note had a principal balance of $12,809 and debt discount of $634 at September 30, 2022.
2021 Promissory Note
In connection with the acquisition of Lyte, we entered into a note purchase agreement and completed the sale of an unsecured promissory note (the "2021 Promissory Note") with an original principal amount of $5,220 in a private placement that closed on October 18, 2021. The 2021 Promissory Note was sold with an original issue discount of $200 and we paid at closing issuance costs totaling $280. After deducting all transaction costs, net cash proceeds to the Company were $4,740. No interest will accrue on the 2021 Promissory Note unless and until the occurrence of an event of default (as defined in the 2021 Promissory Note). Beginning on January 15, 2022 and on the same day of each month thereafter until the 2021 Promissory Note is paid in full, we are required to make a monthly amortization payments in the amount of $574 until the maturity date of October 15, 2022. We may prepay any or all outstanding balance of the 2021 Promissory Note earlier than it is due with a prepayment premium of 110%. The prepayment premium also applies to the monthly amortization payments, which amounts to an effective interest rate of approximately 18%.
The 2021 Promissory Note had a principal balance of $522 and $5,220 and debt discount of $6 and $316 at September 30, 2022 and December 31, 2021, respectively. In October 2022, we paid the final payment amount of $574 on the 2021 Promissory Note.
Interest Expense
The following table sets forth interest expense (income) for our various debt obligations included on the condensed consolidated statements of operations and comprehensive (loss) income:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| 2022 Promissory Note | $ | 463 | $ | — | $ | 463 | $ | — | |||||||||||||||
| 2021 Promissory Note | 49 | — | 349 | — | |||||||||||||||||||
| 2020 Convertible Notes | — | — | — | 1,111 | |||||||||||||||||||
| Accretion of debt discount - issuance costs | 432 | — | 690 | 1,741 | |||||||||||||||||||
| Accretion of debt discount - warrants | — | — | — | 1,029 | |||||||||||||||||||
| All other debt and financing obligations | 47 | (7) | 143 | 176 | |||||||||||||||||||
| Total | $ | 991 | $ | (7) | $ | 1,645 | $ | 4,057 | |||||||||||||||
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Other Debt Obligations
Other than the 2021 and 2022 Promissory Notes referenced above, there have been no material changes to the terms and conditions of our other debt obligations, including the payments in full thereof, since the filing of our Annual Report on Form 10-K. See Note 9, Debt, in our Annual Report on Form 10-K filed with the SEC on April 7, 2022.
7. Leases
On March 15, 2022, we entered into a lease agreement, in which we lease approximately 21,830 square feet in Round Rock, Texas, which we intend to use as manufacturing and warehouse space for our Lyte computer division. The term of the lease is five years and commenced in July 2022. The lease provides for initial base rent payments of approximately $27 per month, subject to escalations. In addition, we are responsible for payments equal to our proportionate share of operating expenses, which is currently estimated to be approximately $7 per month, which is also subject to adjustment to actual costs and expenses according to provisions of the lease. During the third quarter of 2022, we recorded a right-of-use asset and corresponding lease liability of $1,545.
On June 3, 2022, we entered into a lease agreement pursuant to which we lease approximately 7,458 square feet in Austin, Texas, which we intend to use as professional office space for our corporate headquarters. The term of the lease commenced on June 10, 2022 and has a term of sixty-four (64) months. The lease provides for rent abatement until September 30, 2022. Beginning on October 1, 2022, initial base rent payments are approximately $28 per month, subject to escalations contained therein. In addition, we will be responsible for payments equal to our proportionate share of operating expenses, which is currently estimated to be approximately $9 per month, plus electrical and janitorial services, which are to be contracted and paid separately by us. As a result of entering into this lease agreement, we recorded a right-of-use asset and corresponding lease liability of $1,508 on the commencement date noted above.
Further information regarding our other office leases and accounting thereof are located in Note 2, Summary of Significant Accounting Policies, and Note 10, Leases, in our Annual Report on Form 10-K filed with the SEC on April 7, 2022.
The weighted-average remaining lease term for our operating leases as of September 30, 2022 was 4.21 years. We recognize lease expense on a straight-line basis over the lease term with variable lease expense recognized in the period in which the costs are incurred. The components of lease expense are included in general and administrative expense in our condensed consolidated statement of operations and comprehensive (loss) income. Lease expense for the three and nine months ended September 30, 2022 was $338 and $778, respectively. Lease expense for the three and nine months ended September 30, 2021 was $208 and $629, respectively.
Future minimum lease obligations are set forth below:
| Future minimum lease obligations years ending December 31, | Lease Obligations | |||||||
| 2022 (Remainder) | $ | 310 | ||||||
| 2023 | $ | 1,296 | ||||||
| 2024 | $ | 1,305 | ||||||
| 2025 | $ | 929 | ||||||
| 2026 | $ | 744 | ||||||
| Thereafter | $ | 509 | ||||||
| $ | 5,093 | |||||||
| Less: Portion representing interest | $ | (828) | ||||||
| $ | 4,265 | |||||||
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8. Commitments and Contingencies
Litigation
There have been no material changes to the disclosure related to our litigation matters since the filing of our Annual Report on Form 10-K, except as set forth below. See Note 11, "Commitments and Contingencies" in our Annual Report on Form 10-K filed with the SEC on April 7, 2022 for further information.
On February 18, 2022, certain stockholders filed a lawsuit against Phunware and its individual officers and directors. The case, captioned Wild Basin Investments, LLC, et al. v. Phunware, Inc., et al., was filed in the Court of Chancery of the state of Delaware (Cause No. 2022-0168-LWW). Plaintiffs alleged that they invested in various early rounds of financing while the Company was private and that Phunware should not have subjected their shares to a 180-day “lock up” period. Plaintiffs also allege that Phunware’s stock price dropped significantly during the lock up period and seek damages, costs and professional fees. We filed a motion to dismiss the complaint on May 27, 2022 and on July 15, 2022, Plaintiffs filed their answering brief in opposition to the motion to dismiss and a partial motion for summary judgement. All briefing on the motion to dismiss and motion for partial summary judgement is complete. The Court of Chancery has not yet set a date for a hearing on the motions. We intend to vigorously defend against this lawsuit and any appeals. We have not recorded an expense related to this matter because any potential loss is not currently probable or reasonably estimable. Additionally, we cannot presently estimate the range of loss, if any, that may result from the matter. It is possible that the ultimate resolution of the foregoing matter, or other similar matters, if resolved in a manner unfavorable to us, may be materially adverse to our business, financial condition, results of operations or liquidity.
From time to time, we are and may become involved in various legal proceedings in the ordinary course of business. The outcomes of our legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular reporting period. In addition, for the matters disclosed above that do not include an estimate of the amount of loss or range of losses, such an estimate is not possible, and we may be unable to estimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies.
9. Stockholders’ Equity
Common Stock
Total common stock authorized to be issued as of September 30, 2022 was 1,000,000,000 shares, with a par value of $0.0001 per share. At September 30, 2022 and December 31, 2021, there were 101,321,268 and 96,751,610 shares of our common stock outstanding.
On January 31, 2022, we entered into an At Market Issuance Sales Agreement with H.C. Wainwright & Co., LLC (“Wainwright”), pursuant to which we may offer and sell, from time to time, shares of our common stock, par value $0.0001 per share, for aggregate gross proceeds of up to $100,000, through or to Wainwright, as agent or principal. We are not obligated to sell shares of our common stock under the sales agreement with Wainwright. As of September 30, 2022, 2,193,460 shares of our common stock have been sold for aggregate cash proceeds of $3,817, net of transaction costs of $86. We also incurred additional transaction costs paid outside of closing of $163. Sales of shares of our common stock sold under the sales agreement will be made pursuant to an effective shelf registration statement on Form S-3 in the amount of $200,000 filed with the SEC on February 1, 2022.
In January 2021, 2,670,121 shares of our common stock were sold in an at-the-market offering with Ascendiant Capital Markets, LLC ("Ascendiant") for aggregate net cash proceeds of $5,058. Transaction costs were $156. We terminated the Sales Agreement with Ascendiant effective as of March 28, 2021.
In February 2021, we entered into an underwriting agreement with Northland Securities, Inc. and Roth Capital Partners, LLC, relating to an underwritten public offering to which we issued 11,761,111 shares of our common stock at an offering price of $2.25 per share. Aggregate cash proceeds at closing, net of transaction costs of $1,740, totaled $24,722. We incurred additional transaction costs paid outside of closing of $75.
On April 7, 2021, we entered into an At Market Issuance Sales Agreement with B. Riley Securities, Inc. ("B. Riley"), pursuant to which we may offer and sell, from time to time, shares of our common stock through or to B. Riley, for an aggregate offering price of up to $25,000. We paid B. Riley a commission of 3% of the gross proceeds of the sales price per share for sales of our common stock sold through or to B. Riley. As of September 30, 2021, 2,730,654 shares of our common stock had been sold and we had received aggregate net cash proceeds of $3,149, of which $3,052 had been received by us in
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cash as of September 30, 2021. We received the balance subsequent to the end of the quarter, and accordingly, we recorded $97 in prepaid expenses and other current assets as of September 30, 2021. Transaction costs were $97. We also incurred additional transaction costs paid outside of closing of $147. We terminated the sales agreement with B. Riley on February 4, 2022, with an effective date of February 9, 2022.
Warrants
We have various warrants outstanding. A summary of our outstanding warrants is set forth below:
September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| Warrant Type | Cash Exercise Price per share | Number of warrants | Cash Exercise Price per share | Number of warrants | ||||||||||||||||||||||
| 2020 Convertible Note warrant | $ | 2.25 | 1,780,000 | $ | 2.25 | 1,780,000 | ||||||||||||||||||||
| Common stock warrant (Series D-1) | $ | 2.25 | 35,555 | $ | 2.25 | 35,555 | ||||||||||||||||||||
| Common stock warrants (Series F) | $ | 9.22 | 377,402 | $ | 9.22 | 377,402 | ||||||||||||||||||||
| Public warrants (PHUNW) | $ | 11.50 | 1,761,291 | $ | 11.50 | 1,761,291 | ||||||||||||||||||||
| Private placement warrants | $ | 11.50 | 1,658,381 | $ | 11.50 | 1,658,381 | ||||||||||||||||||||
| Unit purchase option warrants | $ | 11.50 | 24,172 | $ | 11.50 | 24,172 | ||||||||||||||||||||
| Total | 5,636,801 | 5,636,801 | ||||||||||||||||||||||||
Except as set forth below, there have been no material changes to the terms of our outstanding warrants. Additional information about our various warrants outstanding is in included under the subheading, "Warrants", in Note 13, Stockholders' Equity, in our Annual Report on Form 10-K filed with the SEC on April 7, 2022.
2020 Convertible Note Warrant
In connection with the issuance of the 2020 Convertible Notes, in 2020, we issued a warrant exercisable for three (3) years for the purchase, initially, of up to an aggregate of 2,160,000 shares of the Company's common stock at an initial exercise price of $4.00 per share. The number of shares and exercise price are each subject to adjustment provided under the warrant. As a result of our underwritten public offering in February 2021, the exercise price of each share decreased to $2.25 per share, and the number of shares for which the warrant is exercisable increased to 3,840,000 shares. If, at the time of exercise of the warrant, there is no effective registration statement registering, or no current prospectus available for, the issuance of the shares, then the warrant may also be exercised, in whole or in part, by means of a “cashless exercise.” The registration statement registering 2,160,000 shares of our common stock issuable pursuant to the terms of the warrant was declared effective by the SEC on October 27, 2020. In April 2022, we filed a registration statement, as amended, registering 250% of the additional warrant shares as result of the adjustment noted above. The registration statement was declared effective by the SEC on May 2, 2022. The warrant may not be exercised if, after giving effect to the exercise, the investor would beneficially own amounts in excess of those permissible under the terms of the warrant.
10. Stock-Based Compensation
There have been no material changes to the terms of our 2018 Equity Incentive Plan (the "2018 Plan"), 2018 Employee Stock Purchase Plan ("2018 ESPP") and 2009 Equity Incentive Plan ("2009 Plan") since the filing of our Annual Report on Form 10-K. Refer to Note 14, Stock-Based Compensation, in our Annual Report on Form 10-K filed with the SEC on April 7, 2022 for more information on our various equity incentive plans.
2018 Equity Incentive Plan
Shares of common stock reserved for issuance under the 2018 Plan also will include any shares of common stock subject to stock options, restricted stock units or similar awards granted under the 2009 Plan, that, on or after the adoption of the 2018 Plan, expire or otherwise terminate without having been exercised in full and shares of common stock issued pursuant to awards granted under the 2009 Plan that are forfeited to or repurchased by us. As of September 30, 2022, the maximum number of shares of common stock that may be added to the 2018 Plan pursuant to the foregoing is 897,229. Not including the maximum number of shares from the 2009 Plan that may be added to the 2018 Plan, the 2018 Plan had 2,272,435 and 762,038 shares of common stock reserved for future issuances as of September 30, 2022 and December 31, 2021, respectively.
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Restricted Stock Units
A summary of our restricted stock unit activity under the 2018 Plan for the nine months ended September 30, 2022 is set forth below:
| Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Outstanding as of December 31, 2021 | 3,576,270 | $ | 1.94 | ||||||||
| Granted | 1,292,000 | 1.58 | |||||||||
| Released | (1,409,494) | 1.76 | |||||||||
| Forfeited | (105,000) | 2.22 | |||||||||
| Outstanding as of September 30, 2022 | 3,353,776 | $ | 1.86 | ||||||||
During the third quarter of 2022, we granted 1,267,000 restricted stock unit awards to team members with an average grant date fair value of $1.57 per share. The awards granted to team members vest over a range of 39 to 49 months with various installment and vesting dates, and are subject to service conditions. We also granted 25,000 restricted stock units to non-employee, each with a grant date fair value of $1.70. The award vest on March 31, 2023 and are subject to service conditions.
Stock Options
A summary of our stock option activity under the 2018 Plan and related information is as follows:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding as of December 31, 2021 | 50,000 | $ | 1.08 | 1.37 | $ | 78 | |||||||||||||||||
| Granted | 50,000 | 1.70 | |||||||||||||||||||||
| Exercised | — | — | |||||||||||||||||||||
| Forfeited | (12,500) | 1.08 | |||||||||||||||||||||
| Outstanding as of September 30, 2022 | 87,500 | $ | 1.43 | 5.9 | $ | 4 | |||||||||||||||||
| Exercisable as of September 30, 2022 | 68,750 | $ | 1.36 | 4.82 | $ | 4 | |||||||||||||||||
During third quarter of 2022, we granted options to purchase 50,000 shares of our common stock to two non-employee consultants with an exercise price of $1.70 per share. The options vest over five months with half on August 30, 2022, then four equal monthly installments until December 30, 2022.
2018 Employee Stock Purchase Plan
We use a Black-Scholes option pricing model to determine the fair value of shares to be purchased under the 2018 ESPP. Stock-based compensation expense related to our 2018 ESPP for the three and nine months ended September 30, 2022 was not significant. There were 911,245 and 189,215 shares of common stock available for sale and reserved for issuance as of September 30, 2022 and December 31, 2021, respectively.
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2009 Equity Incentive Plan
A summary of our stock option activity under the 2009 Plan and related information is as follows:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding as of December 31, 2021 | 925,467 | $ | 0.80 | 5.59 | $ | 1,692 | |||||||||||||||||
| Granted | — | — | |||||||||||||||||||||
| Exercised | (22,757) | 0.68 | |||||||||||||||||||||
| Forfeited | (5,481) | 2.00 | |||||||||||||||||||||
| Outstanding as of September 30, 2022 | 897,229 | $ | 0.80 | 4.96 | $ | 452 | |||||||||||||||||
| Exercisable as of September 30, 2022 | 896,155 | $ | 0.80 | 4.96 | $ | 452 | |||||||||||||||||
For the nine months ended September 30, 2022, the aggregate intrinsic value of options exercised was $42 and the total fair value of options vested was $16.
Stock-Based Compensation
Compensation costs that have been included in our condensed consolidated statements of operations and comprehensive (loss) income for all stock-based compensation arrangements is set forth below:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| Stock-based compensation | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Cost of revenues | $ | 59 | $ | 352 | $ | 154 | $ | 884 | |||||||||||||||
| Sales and marketing | 35 | 140 | 80 | 371 | |||||||||||||||||||
| General and administrative | 760 | 790 | 1,827 | 2,124 | |||||||||||||||||||
| Research and development | 45 | 213 | 108 | 554 | |||||||||||||||||||
| Total stock-based compensation | $ | 899 | $ | 1,495 | $ | 2,169 | $ | 3,933 | |||||||||||||||
As of September 30, 2022, there was approximately $5,702, $224 and $1 of total unrecognized compensation cost related to the 2018 Plan, the 2018 ESPP and the 2009 Plan, respectively. These unrecognized compensation costs are expected to be recognized over an estimated weighted-average period of approximately 2.7 years, 1.1 years and 0.8 years for the 2018 Plan, the 2018 ESPP and 2009 Plan, respectively.
11. Segment and Geographic Information
Our chief operating decision maker is our Chief Executive Officer ("CEO"). Our CEO reviews operating segment information for purposes of allocating resources and evaluating financial performance. We have determined that the Company operates in two reporting segments: Phunware and Lyte. In 2021, but prior to the acquisition of Lyte, our CEO reviewed the financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Selected information for the Company's operating segments and a reconciliation to the condensed consolidated financial statement amounts are as follows:
| Three Months Ended September 30, 2022 | |||||||||||||||||
| Phunware | Lyte | Consolidated | |||||||||||||||
| Net revenues | $ | 1,259 | $ | 3,499 | $ | 4,758 | |||||||||||
| Loss before taxes | $ | (6,858) | $ | (1,160) | $ | (8,018) | |||||||||||
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| Nine Months Ended September 30, 2022 | |||||||||||||||||
| Phunware | Lyte | Consolidated | |||||||||||||||
| Net revenues | $ | 5,379 | $ | 11,642 | $ | 17,021 | |||||||||||
| Loss before taxes | $ | (37,925) | $ | (2,081) | $ | (40,006) | |||||||||||
| September 30, 2022 | |||||||||||||||||
| Phunware | Lyte | Consolidated | |||||||||||||||
| Goodwill | $ | 25,685 | $ | 7,373 | $ | 33,058 | |||||||||||
| Total assets | $ | 64,660 | $ | 3,819 | $ | 68,479 | |||||||||||
| December 31, 2021 | |||||||||||||||||
| Phunware | Lyte | Consolidated | |||||||||||||||
| Goodwill | $ | 25,887 | $ | 7,373 | $ | 33,260 | |||||||||||
| Total assets | $ | 94,621 | $ | 4,673 | $ | 99,294 | |||||||||||
Identifiable long-lived assets attributed to the United States and international geographies are based upon the country in which the asset is located or owned. As of September 30, 2022 and December 31, 2021, all of our identifiable long-lived assets were in the United States.
12. Subsequent Events
We have evaluated subsequent events through the date the financial statements were issued.
Through November 10, 2022, we sold an additional 430,000 shares of our common stock pursuant to the terms of our At Market Issuance Sales Agreement with Wainwright. Aggregate net cash proceeds were $643 and transaction costs were $15.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References in this section to “we,” “us,” "our," or “the Company” refer to Phunware. References to “management” or “management team” refer to Phunware’s officers and directors.
The following discussion and analysis of Phunware’s financial condition and results of operations should be read in conjunction with Phunware’s condensed consolidated financial statements and the related notes to those statements presented in “Part I – Item 1. Financial Statements.” In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Phunware’s actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed in the section titled “Risk Factors” and elsewhere in this Report.
Certain figures, such as interest rates and other percentages, included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our condensed consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.
Overview
Phunware, Inc. offers a fully integrated software platform that equips companies with the products, solutions and services necessary to engage, manage and monetize their mobile application portfolios globally at scale. Our MaaS platform provides the entire mobile lifecycle of applications, media and data in one login through one procurement relationship. Our offerings include:
•Enterprise mobile software development kits (SDKs) including content management, location-based services, marketing automation, business intelligence and analytics, alerts, notifications and messaging, audience engagement and audience monetization; | |||||
•Integration of our SDK licenses into existing applications maintained by our customers, as well as custom application development and support services; | |||||
•Cloud-based vertical solutions, which are off-the-shelf, iOS- and Android-based mobile application portfolios, solutions and services that address: the patient experience for healthcare, the shopper experience for retail, the fan experience for sports, the traveler experience for aviation, the luxury resident experience for real estate, the luxury guest experience for hospitality, the student experience for education and the generic user experience for all other verticals and applications; and | |||||
•Application transactions for mobile audience building, user acquisition, application discovery, audience engagement and monetization, including our engagement-driven digital asset PhunToken. | |||||
We also offer and sell pre-packaged and custom high-end personal computer systems for gaming, streaming and cryptocurrency mining enthusiasts.
We intend to continue investing for long-term growth. We have invested and expect to continue investing in the expansion of our ability to market, sell and provide our current and future products and services to customers globally. We also expect to continue investing in the development and improvement of new and existing products and services to address customers' needs. We currently do not expect to be profitable in the near future.
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Key Business Metrics
Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. We believe that the most important of these measures include backlog and deferred revenue.
Backlog and Deferred Revenue. Backlog represents future amounts to be invoiced under our current agreements. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice. Until such time as these amounts are invoiced, they are not recorded in revenues, deferred revenue, accounts receivable or elsewhere in our condensed consolidated financial statements, and are considered by us to be backlog. We expect backlog to fluctuate up or down from period to period for several reasons, including the timing and duration of customer contracts, varying billing cycles and the timing and duration of customer renewals. We reasonably expect approximately 36% of our backlog as of September 30, 2022 will be invoiced during the subsequent 12-month period, primarily due to the fact that our contracts are typically one to three years in length.
In addition, our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenues as of the end of a reporting period. Together, the sum of deferred revenue and backlog represents the total billed and unbilled contract value yet to be recognized in revenues, and provides visibility into future revenue streams.
The following table sets forth our backlog and deferred revenue:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Backlog | $ | 5,044 | $ | 3,316 | |||||||
| Deferred revenue | 2,808 | 5,272 | |||||||||
| Total backlog and deferred revenue | $ | 7,852 | $ | 8,588 | |||||||
As of September 30, 2022, there was $2.3 million of backlog subject to cancellation per a contract with a particular customer. As of the date of this Report, we expect the customer will proceed with the full contracted amount.
Non-GAAP Financial Measures
Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA
We report our financial results in accordance with accounting principles generally accepted in the United States of America ("GAAP"). We also use certain non-GAAP financial measures that fall within the meaning of Securities and Exchange Commission Regulation G and Regulation S-K Item 10(e), which may provide users of the financial information with additional meaningful comparison to prior period results. Our non-GAAP financial measures include adjusted gross profit, adjusted gross margin and adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") (our "non-GAAP financial measures"). Management uses these measures (i) to compare operating performance on a consistent basis, (ii) to calculate incentive compensation for its employees, (iii) for planning purposes including the preparation of its internal annual operating budget and (iv) to evaluate the performance and effectiveness of operational strategies.
Our non-GAAP financial measures should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue or net income (loss), as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. Our non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations include:
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•Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; | |||||
•Our non-GAAP financial measures do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations, and; | |||||
•Other companies in our industry may calculate our non-GAAP financial measures differently than we do, limiting their usefulness as comparative measures. | |||||
We compensate for these limitations to our non-GAAP financial measures by relying primarily on our GAAP results and using our non-GAAP financial measures only for supplemental purposes. Our non-GAAP financial measures include adjustments for items that may not occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other peer companies over time. For example, it is useful to exclude non-cash, stock-based compensation expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and these expenses can vary significantly across periods due to timing of new stock-based awards. We may also exclude certain discrete, unusual, one-time, or non-cash costs in order to facilitate a more useful period-over-period comparison of its financial performance. Each of the normal recurring adjustments and other adjustments described in this paragraph help management with a measure of our operating performance over time by removing items that are not related to day-to-day operations or are non-cash expenses.
The following table sets forth the non-GAAP financial measures we monitor.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands, except percentages) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Adjusted gross profit (1) | $ | 854 | $ | 1,486 | 4,240 | 3,291 | |||||||||||||||||
Adjusted gross margin (1) | 17.9 | % | 68.8 | % | 24.9 | % | 62.8 | % | |||||||||||||||
Adjusted EBITDA (2) | $ | (6,741) | $ | (2,474) | $ | (17,590) | $ | (7,620) | |||||||||||||||
(1)Adjusted gross profit and adjusted gross margin are non-GAAP financial measures. We believe that adjusted gross profit and adjusted gross margin provide supplemental information with respect to gross profit and gross margin regarding ongoing performance. We define adjusted gross profit as net revenues less cost of revenue, adjusted to exclude one-time revenue adjustments, stock-based compensation and amortization of intangible assets. We define adjusted gross margin as adjusted gross profit as a percentage of net revenues.
(2)Adjusted EBITDA is a non-GAAP financial measure. We believe Adjusted EBITDA provides helpful information with respect to operating performance as viewed by management, including a view of our business that is not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of day-to-day operations. We define adjusted EBITDA as net loss plus (i) interest expense, (ii) income tax expense, (iii) depreciation, (iv) amortization, and further adjusted for (v) non-cash impairment and valuation adjustments and (vi) stock-based compensation expense.
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Reconciliation of Non-GAAP Financial Measures
The following tables set forth a reconciliation of the most directly comparable GAAP financial measure to each of the non-GAAP financial measures discussed above.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands, except percentages) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Gross profit | $ | 795 | $ | 1,134 | $ | 4,086 | $ | 2,400 | |||||||||||||||
| Add back: Amortization of intangibles | — | — | — | 7 | |||||||||||||||||||
| Add back: Stock-based compensation | 59 | 352 | 154 | 884 | |||||||||||||||||||
| Adjusted gross profit | $ | 854 | $ | 1,486 | $ | 4,240 | $ | 3,291 | |||||||||||||||
| Gross margin | 16.7 | % | 52.5 | % | 24.0 | % | 45.8 | % | |||||||||||||||
| Adjusted gross margin | 17.9 | % | 68.8 | % | 24.9 | % | 62.8 | % | |||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net (loss) income | $ | (8,018) | $ | 372 | $ | (40,006) | $ | (21,711) | |||||||||||||||
| Add back: Depreciation and amortization | 185 | 17 | 553 | 75 | |||||||||||||||||||
| Add back (less): Interest expense (income) | 991 | (7) | 1,645 | 4,057 | |||||||||||||||||||
| EBITDA | (6,842) | 382 | (37,808) | (17,579) | |||||||||||||||||||
| Add back: Stock-based compensation | 899 | 1,495 | 2,169 | 3,933 | |||||||||||||||||||
| Add back: Loss on extinguishment of debt | — | — | — | 7,952 | |||||||||||||||||||
| Add back: Impairment of digital assets | — | — | 21,511 | 776 | |||||||||||||||||||
| Less: Gain on forgiveness of PPP loan | — | (2,850) | — | (2,850) | |||||||||||||||||||
| (Less) Add back: Fair value adjustment of warrant liability | (797) | (1,501) | (3,267) | 148 | |||||||||||||||||||
| Less: Gain on sale of digital asset | (1) | — | (195) | — | |||||||||||||||||||
| Adjusted EBITDA | $ | (6,741) | $ | (2,474) | $ | (17,590) | $ | (7,620) | |||||||||||||||
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Components of Results of Operations
Revenue and Gross Profit
There are a number of factors that impact the revenue and margin profile of the product, service and technology offerings we provide, including, but not limited to, solution and technology complexity, technical expertise requiring the combination of products and types of services provided, as well as other elements that may be specific to a particular client solution.
Platform Revenue and Gross Profit
Our platform revenue consists of software subscriptions, application development services and support and application transactions, which are comprised of in-app advertising and PhunToken sales.
Subscription revenue is derived from software license fees, which comprise subscription fees from customers licensing our Software Development Kits (SDKs), that includes accessing the MaaS platform. Subscription revenue from SDK licenses gives the customer the right to access our MaaS platform.
Application development revenue is derived from development services around designing and building new applications or enhancing existing applications. Support revenue is comprised of support and maintenance fees of customer applications, software updates and technical support for application development services for a support term. From time to time, we may also provide professional services by outsourcing employees’ time and materials to customers.
We generate application transaction revenue by charging advertisers to deliver advertisements (ads) to users of mobile connected devices. Depending on the specific terms of each advertising contract, we generally recognize revenue based on the activity of mobile users viewing these ads. Fees from advertisers are commonly based on the number of ads delivered or views, clicks or actions by users on mobile advertisements delivered, and we recognize revenue at the time the user views, clicks or otherwise acts on the ad. We sell ads through several offerings: cost per thousand impressions and cost per click. During 2021, we announced the commencement of PhunToken sales. PhunToken is designed to reward consumers for their activity, such as watching branded videos, completing surveys and visiting points of interest. We recognize revenue related to PhunToken at time of delivery to a customer's ethereum-based wallet.
Platform gross profit is equal to subscriptions and services revenue less the cost of personnel and related costs for our support and professional services employees, external consultants, stock-based compensation and allocated overhead. Costs associated with our development and project management teams are generally recognized as incurred. Costs directly attributable to the development or support of applications relating to subscription customers are included in cost of sales, whereas costs related to the ongoing development and maintenance of Phunware’s MaaS platform are expensed in research and development. Furthermore, gross profit related to application transactions is equal to application transaction revenue less cost of revenue associated with application transactions, which is impacted by the cost of advertising traffic we pay to our suppliers, the amount of traffic which we can purchase from those suppliers and ethereum blockchain fees paid to deliver PhunToken.
As a result, platform gross profit may fluctuate from period to period.
Hardware Revenue and Gross Profit
We acquired Lyte in October 2021. Revenue from Lyte is primarily derived from the sale of high-performance personal computers. Lyte computers are sold with a variety of pre-packaged solutions, as well as customizable solutions selected by our customers. A majority of Lyte's customers pay us via credit card payments, which is managed through a third party processor. We recognize revenue at the time a completed unit ships from our facility.
Hardware gross profit is equal to hardware revenue less the costs associated with the assembly of computers. Hardware gross profit is impacted by the costs that we pay for parts incorporated into a Lyte computer system, as well as labor costs of our employees directly attributable to building computer systems and shipping. Demand may exceed available supply at times, which may hamper our ability to deliver computer systems timely and may increase the costs at which we can obtain inventory needed for computer builds. Customizable solutions we offer our customers may also vary from time to time. As a result, computer hardware revenue and gross profit may fluctuate from period to period. Although we plan to invest in Lyte for future growth, we may experience revenue and gross profit fluctuations as a result of seasonality.
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Gross Margin
Gross margin measures gross profit as a percentage of revenue. Gross margin is generally impacted by the same factors that affect changes in the mix of platform and hardware revenue.
Operating Expenses
Our operating expenses include sales and marketing expenses, general and administrative expenses, research and development expenses, depreciation and amortization of acquired intangible assets. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and, in sales and marketing expense, commissions. Legal settlements pertaining to litigation brought as a result of the Company's operations is also included in operating expenses.
Sales and Marketing Expense. Sales and marketing expense is comprised of compensation, commission expense, variable incentive pay and benefits related to sales personnel, along with travel expenses, other employee related costs, including stock-based compensation and expenses related to marketing programs and promotional activities. We expect our sales and marketing expense will increase in absolute dollars as we increase our sales and marketing organizations as we plan to increase revenue but may fluctuate as a percentage of our total revenue from period to period.
General and Administrative Expense. General and administrative expense is comprised of compensation and benefits of administrative personnel, including variable incentive pay and stock-based compensation, bad debt expenses and other administrative costs such as facilities expenses, professional fees and travel expenses. We expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and listing standards of Nasdaq, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our general and administrative function to support the growth of our business. As a result, we expect that our general and administrative expenses will increase in absolute dollars but may fluctuate as a percentage of our total revenue from period to period.
Research and Development Expense. Research and development expenses consist primarily of employee compensation costs and overhead allocation. We believe that continued investment in our platform is important for our growth. As a result, we expect our research and development expenses will increase in absolute dollars as our business grows but may fluctuate as a percentage of revenue from period to period.
Interest Expense
Interest expense includes interest related to our outstanding debt, including amortization of discounts and deferred issuance costs.
Refer to Note 6 "Debt" in the notes to the condensed consolidated financial statements included Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on our debt offerings.
We also may seek additional debt financings to fund the expansion of our business or to finance strategic acquisitions in the future, which may have an impact on our interest expense.
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Results of Operations
Net Revenues
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| (in thousands, except percentages) | 2022 | 2021 | Amount | % | |||||||||||||||||||
| Net Revenues | |||||||||||||||||||||||
| Platform revenue | $ | 1,259 | $ | 2,160 | $ | (901) | (41.7) | % | |||||||||||||||
| Hardware revenue | 3,499 | — | 3,499 | 100.0 | % | ||||||||||||||||||
| Net revenues | $ | 4,758 | $ | 2,160 | $ | 2,598 | 120.3 | % | |||||||||||||||
| Platform revenue as percentage of total revenue | 26.5 | % | 100.0 | % | |||||||||||||||||||
| Hardware revenue as percentage of total revenue | 73.5 | % | — | % | |||||||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| (in thousands, except percentages) | 2022 | 2021 | Amount | % | |||||||||||||||||||
| Net Revenues | |||||||||||||||||||||||
| Platform revenue | $ | 5,379 | $ | 5,242 | $ | 137 | 2.6 | % | |||||||||||||||
| Hardware revenue | 11,642 | — | 11,642 | 100.0 | % | ||||||||||||||||||
| Net revenues | $ | 17,021 | $ | 5,242 | $ | 11,779 | 224.7 | % | |||||||||||||||
| Platform revenue as percentage of total revenue | 31.6 | % | 100.0 | % | |||||||||||||||||||
| Hardware revenue as percentage of total revenue | 68.4 | % | — | % | |||||||||||||||||||
Net revenues increased $2.6 million, or 120.3%, for the three months ended September 30, 2022 compared to the corresponding period in 2021.
Platform revenue decreased $0.9 million, or (41.7)%, for the three months ended September 30, 2022, compared to the corresponding period in 2021, primarily due to greater platform revenues for development, licensing and support services provided to two customers in 2021, as compared to 2022. These customers are identified as "Customer B" and "Customer E" in Note 4, Revenue, in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this quarterly report on Form 10-Q. These decreases were partially offset by higher advertising revenue of $0.2 million.
Hardware revenue of $3.5 million for the three months ended September 30, 2022, was a result of the acquisition of Lyte in October 2021.
Net revenues increased $11.8 million, or 224.7%, for the nine months ended September 30, 2022 compared to the corresponding period in 2021.
Platform revenue increased $0.1 million, or 2.6%, for the nine months ended September 30, 2022, compared to the corresponding period in 2021, primarily due to $1.7 million from an increase in advertising campaigns and PhunToken sales of $0.6 million. These increases were partially offset by greater platform revenues for development, licensing and support services provided to two customers in 2021, as compared to 2022. These customers are identified as "Customer B" and "Customer E" in Note 4, Revenue, in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this quarterly report on Form 10-Q.
Hardware revenue of $11.6 million for the nine months ended September 30, 2022, was a result of the acquisition of Lyte, in October 2021.
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Cost of Revenues, Gross Profit and Gross Margin
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| (in thousands, except percentages) | 2022 | 2021 | Amount | % | |||||||||||||||||||
| Cost of Revenues | |||||||||||||||||||||||
| Platform revenue | $ | 674 | $ | 1,026 | $ | (352) | (34.3) | % | |||||||||||||||
| Hardware revenue | 3,289 | — | 3,289 | 100.0 | % | ||||||||||||||||||
| Total cost of revenues | $ | 3,963 | $ | 1,026 | $ | 2,937 | 286.3 | % | |||||||||||||||
| Gross Profit | |||||||||||||||||||||||
| Platform revenue | $ | 585 | $ | 1,134 | $ | (549) | (48.4) | % | |||||||||||||||
| Hardware revenue | 210 | — | 210 | 100.0 | % | ||||||||||||||||||
| Total gross profit | $ | 795 | $ | 1,134 | $ | (339) | (29.9) | % | |||||||||||||||
| Gross Margin | |||||||||||||||||||||||
| Platform revenue | 46.5 | % | 52.5 | % | |||||||||||||||||||
| Hardware revenue | 6.0 | % | — | % | |||||||||||||||||||
| Total gross margin | 16.7 | % | 52.5 | % | |||||||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| (in thousands, except percentages) | 2022 | 2021 | Amount | % | |||||||||||||||||||
| Cost of Revenues | |||||||||||||||||||||||
| Platform revenue | $ | 2,313 | $ | 2,842 | $ | (529) | (18.6) | % | |||||||||||||||
| Hardware revenue | 10,622 | — | 10,622 | 100.0 | % | ||||||||||||||||||
| Total cost of revenues | $ | 12,935 | $ | 2,842 | $ | 10,093 | 355.1 | % | |||||||||||||||
| Gross Profit | |||||||||||||||||||||||
| Platform revenue | $ | 3,066 | $ | 2,400 | $ | 666 | 27.8 | % | |||||||||||||||
| Hardware revenue | 1,020 | — | 1,020 | 100.0 | % | ||||||||||||||||||
| Total gross profit | $ | 4,086 | $ | 2,400 | $ | 1,686 | 70.3 | % | |||||||||||||||
| Gross Margin | |||||||||||||||||||||||
| Platform revenue | 57.0 | % | 45.8 | % | |||||||||||||||||||
| Hardware revenue | 8.8 | % | — | % | |||||||||||||||||||
| Total gross margin | 24.0 | % | 45.8 | % | |||||||||||||||||||
Total gross profit decreased $0.3 million, or (29.9)%, for the three months ended September 30, 2022, when compared to the corresponding period of 2021, due to the revenue items described above.
Total gross profit increased $1.7 million, or 70.3%, for the nine months ended September 30, 2022, when compared to the corresponding period of 2021, due to the Lyte gross margin of $1.0 million and a decrease of stock compensation expense of $0.7 million.
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Operating Expenses
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| (in thousands, except percentages) | 2022 | 2021 | Amount | % | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Sales and marketing | $ | 1,819 | $ | 715 | $ | 1,104 | 154.4 | % | |||||||||||||||
| General and administrative | 5,189 | 3,296 | 1,893 | 57.4 | % | ||||||||||||||||||
| Research and development | 1,665 | 1,160 | 505 | 43.5 | % | ||||||||||||||||||
| Total operating expenses | $ | 8,673 | $ | 5,171 | $ | 3,502 | 67.7 | % | |||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| (in thousands, except percentages) | 2022 | 2021 | Amount | % | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Sales and marketing | $ | 5,232 | 0 | $ | 1,910 | $ | 3,322 | 173.9 | % | ||||||||||||||
| General and administrative | 14,745 | 9,075 | 5,670 | 62.5 | % | ||||||||||||||||||
| Research and development | 4,544 | 3,058 | 1,486 | 48.6 | % | ||||||||||||||||||
| Total operating expenses | $ | 24,521 | $ | 14,043 | $ | 10,478 | 74.6 | % | |||||||||||||||
Sales and Marketing
Sales and marketing expense increased $1.1 million, or 154.4% for the three months ended September 30, 2022 compared to the corresponding period of 2021, primarily due to an increase of $0.9 million of marketing related expenditures mostly related to Lyte and PhunToken. Other increases of $0.3 million of employee compensation costs were due to higher headcount.
Sales and marketing expense increased $3.3 million, or 173.9% for the nine months ended September 30, 2022 compared to the corresponding period of 2021, primarily due to an increase of $2.6 million of marketing related expenditures mostly related to Lyte and PhunToken. Other increases of $0.9 million of employee compensation costs were due to higher headcount. These increases were offset by the decrease in stock-based compensation of $0.3 million.
General and Administrative
General and administrative expense increased $1.9 million, or 57.4% for the three months ended September 30, 2022 compared to the corresponding period of 2021, primarily due to an increase of $0.7 million in legal fees, $0.6 million in payroll and other costs mainly related to the employee retention credit received during 2021, $0.3 million mainly related to expenses for new facilities and $0.2 million related to amortization of trade name related to Lyte acquisition.
General and administrative expense increased $5.7 million, or 62.5% for the nine months ended September 30, 2022 compared to the corresponding period of 2021, primarily due to an increase of $1.8 million in payroll costs mainly related to the employee retention credit received during 2021, $1.7 million in legal fees, $0.6 million of facility and travel and entertainment expenses, $0.5 million related to amortization of trade name related to Lyte acquisition, $0.4 million in bad debt recoveries and accounts payable settlements that occurred in 2021, $0.3 million increase in credit card processing fees and $0.7 million in other general and administrative expenses. This increase was offset by a decrease in stock-based compensation of $0.3 million.
Research and Development
Research and development expense increased $0.5 million, or 43.5% and $1.5 million, or 48.6%, for the three and nine months ended September 30, 2022, compared to the corresponding periods in 2021, respectively, primarily resulting from increased headcount dedicated to research and development projects. This increase was minimally offset by in decrease in stock-based compensation.
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Other expense
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| (in thousands, except percentages) | 2022 | 2021 | Amount | % | |||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Interest expense | $ | (991) | $ | 7 | $ | (998) | (14,257.1) | % | |||||||||||||||
| Fair value adjustment of warrant liability | 797 | 1,501 | (704) | (46.9) | % | ||||||||||||||||||
| Gain on forgiveness of PPP loan | — | 2,850 | (2,850) | (100.0) | % | ||||||||||||||||||
| Other income (expense), net | 54 | 51 | 3 | 5.9 | % | ||||||||||||||||||
| Total other expense (income) | $ | (140) | $ | 4,409 | $ | (4,549) | (103.2) | % | |||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| (in thousands, except percentages) | 2022 | 2021 | Amount | % | |||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Interest expense | $ | (1,645) | $ | (4,057) | $ | 2,412 | (59.5) | % | |||||||||||||||
| Loss on extinguishment of debt | — | (7,952) | 7,952 | (100.0) | % | ||||||||||||||||||
| Impairment of digital assets | (21,511) | (776) | (20,735) | 2,672.0 | % | ||||||||||||||||||
| Fair value adjustment of warrant liability | 3,267 | (148) | 3,415 | (2,307.4) | % | ||||||||||||||||||
| Gain on forgiveness of PPP loan | — | 2,850 | (2,850) | (100.0) | % | ||||||||||||||||||
| Other income (expense), net | 318 | 15 | 303 | 2,020.0 | % | ||||||||||||||||||
| Total other expense | $ | (19,571) | $ | (10,068) | $ | (9,503) | 94.4 | % | |||||||||||||||
Other income decreased $4.5 million for the three months ended September 30, 2022, compared to the corresponding period of 2021, mainly as a result of Paycheck Protection Program ("PPP") loan forgiveness in 2021, a smaller gain on the fair value adjustment of our outstanding warrant issued to the holder of our 2020 Convertible Notes and an increase in interest expense, related to our 2021 and 2022 Promissory Notes.
Other expense increased $9.5 million for the nine months ended September 30, 2022, compared to the corresponding period of 2021, primarily due to an impairment of our digital asset holdings and PPP loan forgiveness in 2021. These increases were offset due to losses on extinguishment of debt resulting from payments on our 2020 Convertible Notes in 2021, fair value adjustment of our outstanding warrant issued to the holder of our 2020 Convertible Notes and a decrease in interest expense.
Refer to Note 2, "Summary of Significant Accounting Policies" of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our digital asset holdings. Further, reference is made to Note 6 "Debt" of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion on our debt holdings.
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Financial Condition, Liquidity and Capital Resources
As of September 30, 2022, we held total cash of $8.5 million, all of which was held in the United States. We have a history of operating losses and negative operating cash flows. As we continue to focus on growing our revenues, we expect these trends to continue into the foreseeable future.
We may, if needed, sell our digital asset holdings for cash to fund our ongoing operations. As of September 30, 2022, we held 653 bitcoins and 790 ethereum, of which consist of the majority of the digital assets recorded on our balance sheet. The digital asset market historically has been characterized by significant volatility in its price, limited liquidity and trading volumes compared to sovereign currencies markets, relative anonymity, a developing regulatory landscape, susceptibility to market abuse and manipulation, and various other risks inherent in its entirely electronic, virtual form and decentralized network. During times of instability in the digital asset market, we may not be able to sell our digital asset holdings at reasonable prices, or at all. As a result, our digital assets are less liquid than our existing cash and cash equivalents and may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents.
On October 18, 2021, we closed the acquisition of Lyte with an adjusted purchase price of approximately $11.0 million (subject to an earn-out provision). Pursuant to terms of the stock purchase agreement, we were obligated to make future cash payments of up to $1.25 million on the first anniversary of closing, as an earn-out payment based upon Lyte achieving certain annual revenue milestones. In October 2022, we paid $1.25 million to the seller of Lyte upon achieving the revenue milestones as provided in the purchase agreement.
In connection with the acquisition of Lyte, we entered into a note purchase agreement and completed the sale of an unsecured promissory note with an original principal amount of $5.2 million in a private placement that closed on October 18, 2021. After deducting all transaction cost, net cash proceeds to the Company were $4.7 million. No interest will accrue on the 2021 Promissory Note unless and until the occurrence of an event of default (as defined in the promissory note). We may prepay the outstanding balance of the 2021 Promissory Note earlier than it is due with a prepayment premium of 110%. Beginning on January 15, 2022 and on the same day of each month thereafter until the promissory note is paid in full, we are required to make monthly amortization payments in the amount of $574 thousand which are considered prepayments subject to the prepayment premium. In October 2022, we paid the final payment on the 2021 Promissory Note.
On February 1, 2022, we filed a Form S-3, which was subsequently declared effective by the SEC on February 9, 2022, pursuant to which we may issue up to $200 million in common stock, preferred stock, warrants and units. Contained therein, was a prospectus supplement in which we may sell up to $100 million of our common stock in an “at the market offering” pursuant to an At Market Issuance Sales Agreement we entered into with H.C. Wainwright & Co., LLC on January 31, 2022. As of September 30, 2022, 2,193,460 shares of our common stock have been sold for aggregate net cash proceeds of $3.8 million.
On July 6, 2022, we entered into a note purchase agreement and completed the sale of an unsecured promissory note with an original principal amount of $12.8 million in a private placement with the same investor of the note described above. After deducting all transaction fees paid by us at closing, net cash proceeds to us at closing were $11.8 million. No interest will accrue on the 2022 Promissory Note unless and until the occurrence of an event of default (as defined in the promissory note). Beginning on November 1, 2022 and on the same day of each month thereafter until the promissory note is paid in full, we are required to make a monthly amortization payments in the amount of $1.6 million until the maturity date of July 1, 2022, which is subject to adjustment for any payment deferrals we elect. We may prepay any or all outstanding balance of the 2022 Promissory Note earlier than it is due with a prepayment premium of 110%. The prepayment premium also applies to the monthly amortization payments.
As a result of the financing events described above, while our liquidity risk continues as a result of continued losses and the ongoing and evolving effects of the COVID-19 pandemic, management believes it has sufficient cash on hand for at least one year following the filing date of this Quarterly Report on Form 10-Q.
Our future capital requirements will depend on many factors, including our pace of growth, subscription renewal activity, the timing and extent of spend to support development efforts, the pace at which we can scale Lyte, the expansion of sales and marketing activities and the market acceptance of our products and services. We believe that it is likely we will in the future enter into arrangements to acquire or invest in complementary businesses, technologies and intellectual property rights. We may be required to seek additional equity or debt financings, or issue securities subject to the effective registration statement described above. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired and/or on acceptable terms, our business, operating results and financial condition could be adversely affected.
33
The following table summarizes our cash flows for the periods presented:
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| (in thousands, except percentages) | 2022 | 2021 | Amount | % | |||||||||||||||||||
| Consolidated statement of cash flows | |||||||||||||||||||||||
| Net cash used in operating activities | $ | (22,872) | $ | (19,089) | $ | (3,783) | 19.8 | % | |||||||||||||||
| Net cash used in investing activities | $ | (2,286) | $ | (1,497) | $ | (789) | 52.7 | % | |||||||||||||||
| Net cash provided by financing activities | $ | 10,768 | $ | 17,547 | $ | (6,779) | (38.6) | % | |||||||||||||||
Operating Activities
The primary source of cash from operating activities is receipts from sales of our various product and service offerings to customers. The primary uses of cash from operating activities are payments to employees for compensation and related expenses, publishers and other vendors for the purchase of digital media inventory and related costs, payments to vendors for the costs of inventory related to the assembly and shipping of Lyte computers, sales and marketing expenses and general operating expenses.
We utilized $22.9 million of cash from operating activities during the nine months ended September 30, 2022, primarily as a result of a net loss of $40.0 million. The net loss included non-cash charges of $22.1 million, primarily consisting of impairment of digital assets, ($3.2) million gain on fair value adjustment of our outstanding warrant and $2.2 million of stock-based compensation. In addition, certain changes in our operating assets and liabilities resulted in significant cash (decreases) as follows: a decrease in deferred revenue of ($2.5) million as a result of revenue recognized from existing customer contracts and timing of invoices to customers, ($0.7) million increase in accounts receivable due to the timing of customer invoices and related payments to us, ($0.6) million increase in inventory for computer hardware components as we prepare for the holiday season, ($0.6) million for lease liability payments and $(0.2) million decrease in accounts payable and accrued expenses.
We utilized $19.1 million of cash from operating activities during the nine months ended September 30, 2021, primarily as a result of a net loss of $21.7 million. The net loss included non-cash charges of $13.3 million, primarily consisting of the loss on the extinguishment and amortization of debt issuance costs related to our 2020 Convertible Notes, as well as stock-based compensation. In addition, certain changes in our operating assets and liabilities resulted in significant cash (decreases) as follows: $(7.1) million from a decrease in accounts payable, accrued expenses and an installment payment to Uber related to the settlement of our lawsuit, as well as $(3.3) million from other working capital changes, consisting primarily of a decrease in deferred revenue.
Investing Activities
Investing activities for the nine months ended September 30, 2022 consisted of a $1.1 million cash payment made to the seller of Lyte, $0.9 million for the purchase of digital assets and $0.2 million for capital expenditures.
Investing activities for the nine months ended September 30, 2021 consisted of the purchase of digital currencies.
Financing Activities
Our financing activities during the nine months ended September 30, 2022 consisted of proceeds from equity financings and debt borrowings offset by payments on debt. We acquired $10.8 million of cash from financing activities resulting primarily from $11.8 million in proceeds from our 2022 Promissory Note and $3.7 million in proceeds from the sales of our common stock. We had payments on debt of $4.7 million, of which all were payments on the 2021 Promissory Note. Refer to the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on the Company's financing activities.
Our financing activities during the nine months ended September 30, 2021 consisted of proceeds from equity financings and debt borrowings offset by payments on debt. We acquired $17.5 million of cash from financing activities resulting primarily from $32.6 million in proceeds from the sale of our common stock and $10 million in proceeds from our Series B Convertible Note. These sources of financing were partially offset by $25.1 million of payments on debt, a majority of which were payments on the 2020 Convertible Notes.
34
Contractual Obligations
Information set forth in Note 7, Leases, in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
Indemnification Agreements
In the ordinary course of business, we provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, solutions to be provided by the Company or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with directors and certain current and former officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of, or are related to, their status or service as directors, officers or employees.
Recent Accounting Pronouncements
None.
Summary of Significant Accounting Policies
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Except for the changes described in Note 2, "Summary of Significant Accounting Policies," in the notes to the condensed consolidated financial statements included in Item I, Part I of this Quarterly Report on Form 10-Q, there have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on April 7, 2022.
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers (as defined below), or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (together, the “Certifying Officers”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our Certifying Officers concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under the "Litigation" subheading in Note 8, "Commitments and Contingencies" in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
Item 1A. Risk Factors
Important risk factors that could affect our operations and financial performance, or that could cause results or events to differ from current expectations, are described in Part I, Item 1A, "Risk Factors” of our Annual Report on Form 10-K filed with the SEC on April 7, 2022 for the year ended December 31, 2021, as supplemented by the "Risk Factors" sections in our registration statement on Form S-3 filed with the SEC on February 1, 2022, our registration statement on Form S-3, as amended, filed with the SEC on April 27, 2022 and the information set forth below or contained elsewhere in this Report. The risks and uncertainties described within our Form 10-K for the year ended December 31, 2021 and the registration statements, as amended, are not the only risks we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business or results of operations.
Our business may be negatively impacted by the recently announced transition of our Chief Executive Officer (CEO). While we will continue to depend on the services and performance of our other senior management and key employees, our performance may be impacted if we do not successfully manage the transition process.
In October 2022, our co-founder and CEO, Alan Knitowski, submitted notice of resignation to the Company effective the expiration of his employment contract on December 26, 2022. Our board of directors has formed a leadership transition committee and has engaged a consulting firm to commence a search for new leadership candidates. The engagement of external consultants will result in additional costs to us. If we are unable to execute a timely and orderly transition and successfully integrate a new executive into our leadership team, revenue, operating results and our financial condition may be adversely impacted.
Our future performance also will continue to depend on the services and contributions of our other senior management and key employees to execute on our business plan and to identify and pursue new opportunities as well as service and product innovations. These changes, and any future changes, in our operations and management team could be disruptive to our operations.
Our business is subject to evolving corporate governance and public disclosure regulations and expectations that have increased both our compliance costs and the risk of noncompliance, which could have an adverse effect on our stock price.
We are subject to changing rules and regulations promulgated by a number of governmental and self-regulatory organizations, including the SEC, the Nasdaq Stock Market and the FASB. These rules and regulations continue to evolve in scope and complexity, often making compliance more difficult and uncertain. In addition, increasingly regulators, customers, investors, employees and other stakeholders are focusing on environmental, social and governance (ESG) matters and related disclosures. These changing rules, regulations and stakeholder expectations have resulted in, and are likely to continue to result in, increased general and administrative expenses and increased management time and attention spent complying with or meeting such regulations and expectations. For example, developing and acting on ESG initiatives, and collecting, measuring and reporting ESG information and metrics can be costly, difficult and time consuming and is subject to evolving reporting standards, including the SEC’s recently proposed climate-related reporting requirements. These initiatives and related reporting requirements may present operational, reputational, financial, legal and other risks, which could have a material impact on us.
We are currently operating in a period of significant macro-economic uncertainty, including supply-chain disruptions, COVID-related lockdowns and inflationary pressures. Weakened economic conditions may have an adverse impact on our business and results of operations.
Adverse macroeconomic conditions, including inflation, slower growth or recession, new or increased tariffs, changes to fiscal and monetary policy, tighter credit, higher interest rates, high unemployment and currency fluctuations could materially adversely affect demand for our products and services. Inflationary pressures and supply chain disruptions could impact the price at which we acquire components required in the assembly of Lyte computer systems. Our principal operating expense is compensation related costs. Inflation rates, particularly in the United States, have increased recently to levels not seen in years, and increased inflation may result in decreased demand for our products and services, increases in our operating
37
costs (including our labor costs), reduced liquidity and limits on our ability to access credit or otherwise raise capital. In addition, the effects of inflation on consumers budgets could result in the reduction of our customers’ spending plans. These and other economic factors could materially adversely affect our business, results of operations and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
38
Item 6. Exhibits
Unless otherwise noted, the exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
| Exhibit No. | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 10.5 | ||||||||
| 10.6** | ||||||||
| 10.7** | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
32.1(1) | ||||||||
| 101.INS | XBRL Instance Document* | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema* | |||||||
| 101.CAL | XBRL Taxonomy Calculation Linkbase* | |||||||
| 101.LAB | XBRL Taxonomy Label Linkbase* | |||||||
| 101.PRE | XBRL Definition Linkbase Document* | |||||||
| 101.DEF | XBRL Definition Linkbase Document* | |||||||
| 104 | Cover Page Interactive Data File* | |||||||
| * | Filed herewith | |||||||
| ** | Indicates a management contract or compensatory plan or arrangement | |||||||
| (1) | The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| November 10, 2022 | Phunware, Inc. | ||||||||||
| By: | /s/ Alan S. Knitowski | ||||||||||
| Name: | Alan S. Knitowski | ||||||||||
| Title: | Chief Executive Officer | ||||||||||
| (Principal Executive Officer) | |||||||||||
| By: | /s/ Matt Aune | ||||||||||
| Name: | Matt Aune | ||||||||||
| Title: | Chief Financial Officer | ||||||||||
| (Principal Accounting and Financial Officer) | |||||||||||
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