EDGAR 10-K Filing

Company CIK: 1665300
Filing Year: 2024
Filename: 1665300_10-K_2024_0001628280-24-011484.json

---

ITEM 1. BUSINESS
Item 1. Business.
General
Phunware, Inc. and its subsidiaries (the "Company," "we," "us," or "our") offers a fully integrated cloud platform for mobile that provides companies the products, services and solutions necessary to engage, manage and monetize their mobile application portfolios and audiences at scale. Our mission is to foster an ecosystem where digital interactions enable a more engaged, interactive, and valuable experience for all stakeholders. We are redefining connectivity by ensuring the widespread adoption of our technologies amongst brands, mobile consumers, partners, digital asset holders, and market participants. Founded in 2009, we are a Delaware corporation headquartered in Austin, Texas.
In November 2023, we announced our Phunware 3.0 strategy with three pillars:
•continued sales of our cloud-based platform offerings to hospitality, healthcare, connected workplace, luxury residential and other markets;
•monetization of our patent portfolio in ways other than embedding it in our software; and
•a digital asset strategy that capitalizes on PhunCoin, PhunToken and those assets' ability to return control of their data and use to consumers.
According to eMarketer, adults in the U.S. spend more than four hours daily on mobile internet; 90% of that time in mobile apps (versus mobile web). We believe brands must establish a strong identity on mobile, especially on devices and platforms specific to the Apple iOS and Google Android operating systems and ecosystems. Phunware helps brands define, create, launch, promote, monetize and scale their mobile identities as a means to anchor the consumer journey and improve brand interactions. Our platform allows for the licensing and creation of category-defining mobile experiences for customers and their application users worldwide.
Business Model
Our business model includes a combination of service, subscription and media transaction offerings that enable customers to engage, manage and monetize their mobile application portfolios throughout the mobile application lifecycle, which occurs in four phases:
•Strategize - We help brands define the application experience and determine the operating systems, feature sets and use cases they want their mobile application to support.
•Create - We help brands build their application portfolio.
•Launch - We help brands launch their applications and build their mobile audience.
•Engage, Monetize and Optimize - We help brands activate, monetize and optimize their mobile application portfolios.
Our product and service offerings include cloud-based recurring software license subscriptions, most of which are multi-year, application development and support services and application transaction-based media. Although a majority of our product and service offerings have been sold utilizing an internal sales team, we have also sold our product and service offerings through various sales partners, including value added resellers and systems integrators. We continue to invest in these relationships.
Lyte Technology, Inc.
In October 2021, we acquired Lyte Technology, Inc. (“Lyte”), a provider of high-performance computer systems to individual consumers. On November 1, 2023, we committed to a plan to discontinue and wind down, either by sale or closing, operations of Lyte. We generally completed such plan as of December 31, 2023.
Our Products and Services
Our mobile software subscriptions and services and application transaction solutions offerings include the following:
•Integration of our software development kit (“SDK”) licenses into existing applications maintained by our customers, including:
•Analytics (SDK that provides data related to application use and engagement);
•Content Management (SDK that allows application administrators to create and manage app content in a cloud-based portal);
•Alerts, Notifications & Messaging (SDK that enables brands to send messages to app users through the app);
•Marketing Automation (SDK that enables location-triggered messages and workflow);
•Advertising (SDK that enables in-app audience monetization); and
•Location-Based Services (module that include mapping, navigation, wayfinding, workflow, asset management and policy enforcement);
•Cloud-based vertical solutions, which are off-the-shelf, iOS- and Android-based mobile application solutions 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, including re-occurring and one-time transactional media purchases for application discovery, user acquisition and audience building, audience engagement and audience monetization.
Competitive Strengths
Fully integrated and comprehensive solutions: Our solutions can be used across mobile application experience definition, application portfolio creation, user discovery, user acquisition, user engagement and user monetization. Data from application analytics and our analysis of over one petabyte of user data tied to the anonymous Phunware ID can be used to inform business decisions related to mobile strategy, marketing, operations and more.
Built to be mobile-first, native-first, cloud-based: Phunware was built from the ground up to focus on native mobile development, while other companies in the mobile space have attempted to create shortcuts with “write once, run anywhere” software. The result is over a decade of platform-specific mobile expertise, which we believe to be a major competitive differentiator.
Results-driven culture: Our employees are granted restricted stock units upon and from time to time after commencement of their employment and are encouraged to think of Phunware as a company they own rather than a company for which they work. We also promote from within to reward top performers and encourage leadership development. The result is an employee base singularly focused on solving problems and driving results.
Intellectual property portfolio development and world-class engineering resources: Through our world-class in-house technical and engineering organization, we have focused on developing our patents and other intellectual property, which includes methods of accessing wireless account information, rendering content on a wireless device, indoor and outdoor navigation with a mobile device and more. We are developing creative solutions to solve complex technical problems and create competitive advantages for our customers. We hold eighteen issued patents and six pending patents in various areas including content management, location services and cryptocurrency.
Our Growth Strategy
Key elements of our growth strategy include:
Expansion of mobile products and services. Mobile applications and in-application advertising media are among the fastest-growing and complex technology markets. We have made significant investments in research and development and plan to continue extending the functionality and breadth of our applications in the future.
Deepening of existing customer relationships. We believe that we are well positioned to identify new opportunities or enhance existing services and solutions within and provide additional products and services to our existing customer base. We have historically created and expect to continue to create cross and upsell opportunities as our customers seek to deepen their approach to mobile application lifecycle management.
Development of new relationships to expand our customer base. We intend to continue to grow our customer base by developing our indirect sales and distribution relationships. We also have partnered with technology providers, who serve as a referral source and provide us with quality leads for businesses interested in our products and services and enable us to integrate our products into their offerings. We are able to leverage our mobile expertise and capabilities to compete effectively for new customers both directly and indirectly. Primary indirect channels and distributors include hardware, software, carriers and systems integrators/consultancies.
Continued growth of our customer base through targeted marketing and outreach. We intend to continue to opportunistically expand into and within industry verticals that benefit from our integrated solutions, comprehensive lifecycle approach and ability to engage users in both digital and physical worlds, particularly healthcare and hospitality.
Addition of new capabilities and geographic regions through strategic transactions. We operate in a fragmented market that offers significant consolidation opportunities. We plan to continue to evaluate strategic acquisitions, partnerships and other transactions that enhance our capabilities and expand our geographic footprint, both domestically and internationally.
Expansion of our partnership network with third-party providers of products and services. We are able to leverage our mobile expertise and capabilities to compete effectively for new customers both directly and indirectly. Primary indirect channels include hardware, software, carriers and systems integrators/consultancies. We are focused on building our brand to grow within existing and target end markets where there is strong demand for the products and solutions we provide.
Our Customers
Our target customers for our mobile software subscription and services are companies that are looking to enact digital transformation in their business - whether it is retail, healthcare, hospitality, entertainment, real estate, smart living and workspaces or any other industry. We provide technology and solutions to support these organizations through every stage of the mobile application lifecycle.
We believe the multi-year nature of our software and managed services projects, agreements and related recurring revenues provides revenue visibility. Our subscription and services agreements with our customers consist of terms relating to length of agreement (for subscriptions and application support), payment, performance, cancellation and termination, confidentiality, indemnification obligations and limitation of liability, among other provisions. All of these agreements contain terms of service that are generally consistent across our customers. Our subscription and services agreements generally do not impose obligations of exclusivity or other limiting terms upon us.
Our application transaction agreements, also known as insertion orders, are, for the most part, governed by the standard terms and conditions from the Interactive Advertising Bureau’s (“IAB”) Standard Terms and Conditions for Internet Advertising for Media Buys One Year or Less ("IAB Terms"). The IAB Terms provide that in the event that payments are not paid to the agency, then the media company, or us, agrees to hold the advertiser solely liable. We view the agreements as contracts that ordinarily accompany the business conducted by Phunware and, because of the lack of any commitments to provide a certain amount of business, we are not substantially dependent on the agreements.
Concentration of Major Customers
Due to the nature of our business, we have in the past and may, at times, in the future have a material concentration of our revenue with a small number of customers. For the year ended December 31, 2023, three customers collectively represented 35% of our net revenues.
Sales and Marketing
Our salesforce is focused on direct sales opportunities for our platform subscription and services and application transaction product lines. They are experienced across all verticals in which we serve and can assist small, mid-sized and large organizations. Our indirect sales function works with our partners to identify sales opportunities, as well as identify new sales partner relationships. Our marketing efforts focus on building brand reputation, expanding market awareness, driving customer demand and enabling our sales team.
Our platform subscription and services sales organization is supported by our customer solutions team, which has deep technical expertise. Once contracted, our program management team collaborates with customers to ensure timely deliverables of contracted licenses and services. Post implementation, customers are supported post-sale by our customer success function managed within our program management team. Our sales cycle can range many months for large organizations.
We market our application transaction product line direct to businesses and agencies. We are also hoping to expand our media offerings by attracting new business from local and national advertising agencies. Our contract term for application transactions can be as short as a few days to three months for larger advertising campaigns. Our sales cycle is typically short for direct to business customers, whereby it may be longer when partnering with agencies.
Research and Development
Our ability to compete depends in large part on our continuous commitment to research and development and our ability to rapidly introduce new applications, technologies, features and functionality into our products, services and solutions. Our research and development efforts are focused on improving and enhancing our existing product and service offerings by working closely with our customers, conducting quality assurance testing and improving our core technology as well as developing new proprietary services and solutions. Performance, security, depth and breadth of functionality and usability of our solutions drive our technology decisions and research and development. Our research and development expenses were $4.4 million and $6.1 million for the fiscal years ended December 31, 2023 and 2022, respectively.
PhunCoin and PhunToken
Our research and development team is also working to continue our vision of a future in which consumers own, control and are rewarded for the access to and use of their personal data and information. In 2018, we began offering rights to future issuances of PhunCoin, and in 2019 we expanded to a dual token structure by creating PhunToken. The dual-token ecosystem is designed to both empower consumers and brands to engage with each other and other audiences by creating a blockchain-enabled data and engagement exchange that recognizes the value of data and engagement, which we refer to herein as our "Token Ecosystem." PhunCoin is intended to be the “Value of Data” that empowers consumers to take control of and be compensated for their data and will allow holders to participate in the economics of the Token Ecosystem. PhunToken is intended to be the “Value of Engagement” that empowers consumers to monetize their data and to use PhunToken to engage with brands and others in the Token Ecosystem. In 2021, we commenced the selling of PhunToken to third parties. Upon the sale of PhunToken to customers, we transfer the PhunToken purchased to the customers' ethereum-based wallet address. We sell and will continue to sell PhunToken.
During 2018 and 2019, we sold rights to the future issuances of PhunCoin. To date, we have recorded the rights purchases as a liability in our consolidated balance sheets as of December 31, 2023 and 2022, as we have yet to issue any PhunCoin pursuant to our rights offerings. We may generate additional funding from sales of PhunCoin in the future.
We are planning for future enhancements of the Token Ecosystem in 2024; however, there can be no assurance as to when (or if) we will be able to successfully complete the development of the Token Ecosystem.
Competition
The market for technology and solutions related to mobile application lifecycle management is evolving, highly competitive and significantly fragmented. With the introduction of new technologies and the potential entry of new competitors into the market, we expect competition to increase and intensify in the future, which could harm our ability to increase sales, maintain or increase renewals and maintain our prices.
We compete primarily with companies offering cloud-based software solutions for location-based services, mobile marketing automation, content management, analytics and audience monetization, as well as data and campaign management for audience building and engagement. We also sometimes compete with application development agencies, in-house mobile teams and products developed by software providers that allow customers to build and scale new mobile applications. Our competitors include Airship, Apadmi, Appcelerator, Mutual Mobile, Pointr, Purple and as well as many competitors in the desktop personal computing business.
We believe the principal competitive factors in our market include the following:
•product features and functionality;
•location accuracy and latency;
•technology architecture;
•level of customer satisfaction;
•ease of use and integration of products and services;
•deployment options and hardware flexibility;
•breadth and depth of application functionality;
•professional services and customer support;
•total costs of ownership;
•brand awareness and reputation;
•sophistication of technology platform;
•actionable insights through big data analytics;
•capability for customization, configurability, integration, security, scalability and reliability of applications;
•ability to innovate and respond to customer needs rapidly;
•domain expertise;
•global reach;
•size of customer base and level of user adoption; and
•ability to integrate with legacy enterprise infrastructures and third-party applications.
Some of our current competitors have, and future competitors may have, greater financial, technical, marketing and other resources, greater resources to devote to the development, promotion, sale and support of their products and services, more extensive customer bases and broader customer relationships, and/or longer operating histories and greater name recognition. As a result, these competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. In a few cases, some competitors may also be able to offer competing solutions at little or no additional cost by bundling them with their existing suite of solutions.
Government Regulation
We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business. Many of these laws and regulations are still evolving and being tested in courts, and could be interpreted in ways that could harm our business including, but not limited to, privacy, data protection and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, and other communications, protection of minors, consumer protection, telecommunications, product liability, taxation, economic or other trade prohibitions or sanctions, anti-corruption law compliance and securities law compliance. In particular, we are subject to federal, state and foreign laws regarding privacy and protection of consumer data. Foreign data protection, privacy, content and other laws and regulations can impose different obligations or be more restrictive than those in the United States. U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation and enforcement of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices.
Proposed or new legislation and regulations could also significantly affect our business. For example, the European General Data Protection Regulation (GDPR) took effect in May 2018 and applies to all of our products and services used by people in Europe. The GDPR includes operational requirements for companies that receive or process personal data of residents of the European Union that are different from those previously in place in the European Union, and includes significant penalties for non-compliance. Effective August 2020, the Brazilian General Data Protection Law imposes requirements similar to GDPR on products and services offered to users in Brazil. The California Consumer Privacy Act (CCPA), which took effect in January 2020, also establishes certain transparency rules and creates new data privacy rights for users. Furthermore, voters in California approved Proposition 24, which expanded the CCPA by limiting businesses' use of "sensitive business information," such as precise geolocating. Proposition 24 took effect January 1, 2023 for personal data collected after January 1, 2022.
Following California's lead, Colorado, Connecticut, Utah and Virginia have been or will be enforcing new laws around data privacy and protection. Similarly, there are a number of legislative proposals in the European Union, the United States, at both the federal and state level, as well as other jurisdictions that could impose new obligations or limitations in areas affecting our business, such as digital assets. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services.
New laws enacted by government or regulatory authorities could cause us to incur substantial costs, expose us to unanticipated civil and criminal liability or penalties (including substantial monetary remedies), interrupt or require us to change our business practices in a manner materially adverse to our business, divert resources and the attention of management from our business or subject us to other remedies that adversely affect our business.
Intellectual Property
Our ability to protect our intellectual property, including our technologies, is an important factor in the success and continued growth of our business. We protect our intellectual property through trade secrets law, patents, copyrights, trademarks and contracts. In some cases, we partner with law firms and others to seek enforcement of our rights under the patents we hold and to recover damages for any finding of infringement thereof. We have established business procedures designed to maintain the confidentiality of our proprietary information such as the use of our license agreements with customers and our use of our confidentiality agreements and intellectual property assignment agreements with our employees, consultants, business partners and advisors where appropriate. Some of our technologies rely upon third party licensed intellectual property.
In the United States, we have 18 patents issued and 6 pending non-provisional patent applications. The issued patents expire between the years 2027 and 2037, which are subject to the payment of maintenance fees. We also have one patent in Japan, which expires in 2031, that is subject to the payment of annual fees. In addition, we have registered “Phunware” as a trademark in the United States and Canada. We cannot provide assurance that any of our patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims. Furthermore, even if a patent is issued, we cannot provide assurance that such patent will be adequate to protect our business. We also license software from third parties for integration into our solutions, including open source software and other software available on commercially reasonable terms.
Despite our efforts to protect our technology and proprietary rights through intellectual property rights, licenses and confidentiality agreements, unauthorized parties may still copy or otherwise obtain and use our software and other technology. In addition, if we expand international operations, effective patent, copyright, trademark and trade secret protections may not be available or may be limited in foreign countries.
Our industry is characterized by the existence of a large number of patents and claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in our markets have extensive patent portfolios and are regularly involved in litigation. From time to time, third parties, including certain of these leading companies, may assert patent, copyright, trade secret and other intellectual property rights against us, our channel partners or our customers. Our standard license and other agreements may obligate us to indemnify our indirect sales partners and customers against such claims. Successful claims of infringement by a third party could prevent us from continuing to offer our solution or performing certain services, require us to expend time and money to develop non-infringing solutions or force us to pay substantial damages, including treble damages if we are found to have willfully infringed patents or copyrights, royalties or other fees. Competitors may also be more likely to claim that our solutions infringe their proprietary rights and seek an injunction against us from continuing to offer our platform and/or components thereof. We cannot provide assurance that we do not currently infringe, or that we will not in the future infringe, upon any third-party patents or other proprietary rights.
Employees
We leverage our employees’ long-standing, deep customer relationships and strong technical expertise to deliver complex solutions that meet customer needs and advance mobile technology. As of December 31, 2023, we had 25 full-time employees. None of our employees are currently covered under any collective bargaining agreements. We believe our relations with our employees are good.
Corporate Information
Our principal executive offices are located at 1002 West Avenue, Austin, Texas 78701, and our telephone number is (512) 693-4199. Our website address is https://www.phunware.com. The information on, or that can be accessed through, our
website is not part of this Annual Report on Form 10-K. We have included our website address as an inactive textual reference only.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available free of charge on the investor relations section of our website, located at https://www.phunware.com, which we post as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC also maintains an Internet website that contains reports and other information regarding issuers, such as Phunware, that can be filed electronically with the SEC. The SEC's Internet website is located at http://www.sec.gov.

---

ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
Risk Factors
An investment in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information contained in this Annual Report, including our consolidated financial statements and related notes, before deciding to invest in our securities. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones 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.
Risks Related to Our Business, Operations and Industry
We have a history of losses, we expect to continue to incur losses and we may not achieve or sustain profitability in the future.
We have incurred significant losses in each fiscal year since our inception. We experienced a consolidated net loss for the years ended December 31, 2023 and December 31, 2022. These losses were due to both a decline in platform revenue in 2022 and 2023, as compared to previous years, losses related to our digital asset holdings and the substantial investments we made to build our products and services, grow and maintain our business, acquire customers and service our various debt obligations. You should not consider our historical revenue levels or operating expenses prior to recent periods as indicative of our future performance. Key elements of our growth strategy include acquiring new customers and continuing to innovate and expand our product offerings. As a result, our operating expenses may continue to increase in the future due to expected increased sales and marketing expenses, operating costs, research and development costs and general and administrative costs and, therefore, our operating losses may continue or even potentially increase for the foreseeable future. In addition, as a public company we incur significant legal, accounting and other expenses, including, but not limited to additional costs in resolving our existing legal matters. Furthermore, to the extent that we are successful in increasing our customer base, we may also incur increased expenses because costs associated with generating and supporting customer agreements are generally incurred up front. Revenue recognition may not occur during the same the same period in which we incur costs associated with our agreements. Our efforts to grow our business may be costlier than we expect and we may not be able to increase our revenue enough to offset our higher operating expenses. We may incur significant losses in the future for many reasons, including the other risks described in this Annual Report and unforeseen expenses, difficulties, complications and delays and other unknown events. You should not rely upon future bookings we may announce or revenue growth as indicative of our future performance. We cannot assure you that we will reach profitability in the future or at any specific time in the future or that, if and when we do become profitable, that we will sustain profitability. If we are ultimately unable to generate sufficient revenue to meet our financial targets, become profitable and have sustainable positive cash flows, investors could lose their investment.
Our future performance will depend on the successful transition of our Chief Executive Officer (CEO).
On October 25, 2023, the Company and Russell Buyse, the Company’s CEO, entered into a separation agreement which provided that Mr. Buyse’s employment with the Company terminated. On the same day, our board of directors appointed the Company’s Chief Revenue Officer, Michael Snavely, as CEO. If we are unable to execute a timely and orderly transition and successfully integrate our new CEO 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. Further, if our new CEO formulates different or changed views, the future strategy and plans of our business may differ materially from those of the past.
We are currently operating in a period of significant macro-economic uncertainty, including supply-chain disruptions 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. 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 costs (including our labor costs), reduced liquidity and limits on our ability to access credit or otherwise raise capital. The effects of inflation on customer and consumer 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.
If we are unable to expand or renew sales to existing customers, or attract new customers, our growth could be slower than expected and our business may be harmed.
Our future growth depends upon expanding sales and renewals of sales of our technology, products and services to existing customers. Our customers may not continue to purchase our technology offerings and services, or our customers may reduce their purchase rate of services, if we do not demonstrate the value proposition for their investment and we may not be able to replace existing customers with new customers. In addition, our customers may not renew their contracts with us on the same terms, or at all, because of dissatisfaction with our product or service offerings. If our customers do not renew their contracts, our revenue may grow more slowly than expected, may not grow at all, or may decline.
Additionally, increasing incremental sales to our current customer base may require increasingly sophisticated and costly sales efforts that are targeted at senior management. We plan to continue expanding our sales efforts but we may be unable to hire qualified sales personnel, may be unable to successfully train those sales personnel that we are able to hire and sales personnel may not become fully productive on the timelines that we have projected, or at all. Additionally, although we dedicate significant resources to sales and marketing programs, these sales and marketing programs may not have the desired effect and may not expand sales. We cannot provide assurance that our efforts will increase sales to existing customers or generate additional revenue. If our efforts to upsell to our customers are not successful or we cannot find additional expansion opportunities, our future growth may grow more slowly than expected, may not grow at all, or may decline.
Our ability to achieve significant growth in revenue in the future will also depend upon our ability to attract and sell our technology, products and services to new customers. This may be particularly challenging where an organization has already invested substantial personnel and financial resources to integrate competing technology, products and services. An organization may be reluctant or unwilling to invest in new technology offerings and services. If we fail to attract new customers and maintain and expand those customer relationships, our revenue may grow more slowly than expected, may not grow at all, or may decline and our business may be harmed.
We have incurred a goodwill impairment charge.
We completed our annual goodwill impairment analysis during the fourth quarter of 2023, and we concluded goodwill was impaired. Goodwill impairment charges of $25.8 million were recorded during the year ended December 31, 2023. For additional details, refer to Note 6 "Goodwill" of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion on our goodwill impairment.
Current and future litigation could adversely affect us.
We, along with certain of our former executive officers and certain former board members, are parties to litigation with Wild Basin Investments, LLC as further described on our Current Report on Form 8-K filed with the SEC on January 10, 2020. We, along with our officers and directors, may also become subject to other legal proceedings in our ordinary course of business. We cannot predict with certainty the outcome of this legal proceeding. The outcome of this or future legal proceeding could require us to take, or refrain from taking, actions which could negatively affect our operations. Such legal proceedings involve substantial costs, including the costs associated with investigation, litigation and possible settlement, judgment, penalty, or fine. As a smaller company, the collective costs of litigation proceedings represent a drain on our cash resources, and require an inordinate amount of our management’s time and attention. An adverse ruling with respect to our current or any other litigation could have a material adverse effect on our results of operations and financial condition. Negative publicity surrounding such legal proceedings may also harm our reputation and adversely impact our business and results.
Our results of operations and ability to grow could be negatively affected if we cannot adapt and expand our technology and product and service offerings in response to ongoing market changes.
The collaboration and technology solutions business and markets are characterized by rapid technological change, evolving industry standards, changing customer preferences and new product and service introductions. Our success depends on our ability to continue to develop and implement technology, product and service offerings that anticipate or timely respond to rapid and continuing changes in technology and industry developments and offerings by new technology providers to serve the evolving needs of our customers. Examples of areas of significant change in the industry include cloud, software defined
infrastructure, virtualization, security, mobility, data analytics and IoT, the continued shift from maintenance to managed services and ultimately to cloud based services, as-a-service solutions, security and information technology automation. In addition, enterprises are continuing to shift from on-premise, hardware infrastructure to software centric hosted solutions. Technological developments such as these may materially affect the cost and use of technology and services by our customers and could affect the nature of how our revenue is generated. These technologies and others that may emerge, could reduce and, over time, replace some of our current business. In addition, customers may delay spending under existing contracts and engagements and may delay entering into new contracts while they evaluate new technologies. If we do not sufficiently invest in new technology, industry developments and our personnel, or evolve and expand our business at sufficient speed and scale, or if we do not make the right strategic investments to respond to these developments and successfully drive innovation, our technology, products and services, our results of operations and our ability to develop and maintain a competitive advantage and growth could be negatively affected.
In addition, if we are unable to keep up with changes in technology and new hardware, software and services offerings, for example, by providing the appropriate training to our customer solutions team, sales directors, program management team, channel partners and software development and product engineers to enable them to effectively sell and deliver such new offerings to customers, our business, results of operations, or financial condition could be adversely affected.
Demand for our technology, product and service offerings could be adversely affected by volatile, negative, or uncertain economic conditions and the effects of these conditions on our customers’ businesses.
Our revenue and profitability depend on the demand for our technology, product and service offerings, which could be negatively affected by numerous factors, many of which are beyond our control. Volatile, negative, or uncertain economic conditions affect our customers’ businesses and the markets we serve. Such economic conditions in our markets have undermined and could in the future undermine business confidence in our markets and cause our customers to reduce or defer their spending on new technology offerings and services, or may result in customers reducing, delaying or eliminating spending under existing contracts with us, which would negatively affect our business. Growth in the markets we serve could be at a slow rate, or could stagnate or contract, in each case for an extended period of time. Ongoing economic volatility and uncertainty and changing demand patterns affect our business in a number of other ways, including making it more difficult to accurately forecast customer demand and effectively build our revenue and resource plans.
Economic volatility and uncertainty is particularly challenging because it may take some time for the effects and changes in demand patterns resulting from these and other factors to manifest themselves in our business and results of operations. Changing demand patterns from economic volatility and uncertainty could have a significant negative impact on our business, results of operations, or financial condition.
Global political conditions may adversely affect demand for our products.
Global political conditions may create uncertainties that could adversely affect our business. The United States has been and may continue to be involved in armed conflicts that could have a further impact on our sales. The consequences of armed conflict, political instability or civil or military unrest are unpredictable, and we may not be able to foresee events that could have a material adverse effect on us. Terrorist attacks or other hostile acts may negatively affect our operations, or adversely affect demand for our products, and such attacks or related armed conflicts may impact our physical facilities or those of our suppliers or customers. Furthermore, these attacks or hostile acts may make travel and the transportation of our products more difficult and more expensive, which could materially adversely affect us. Any of these events could cause consumer spending to decrease or result in increased volatility in the United States economy and global financial markets.
The actual market for our products and services could be significantly smaller than estimates of total potential market opportunity and if customer demand for our products and services does not meet expectations, our ability to generate revenue and meet our financial targets could be adversely affected.
While we expect growth in the markets for our products, it is possible that the growth in some or all of these markets may not meet our expectations, or materialize at all. The methodology on which our estimate of our total potential market opportunity is based includes several key assumptions based on our industry knowledge and customer experience. If any of these assumptions proves to be inaccurate, then the actual market for our solutions could be significantly smaller than our estimates of our total potential market opportunity. If the customer demand for our products or services or the adoption rate in our target markets does not meet our expectations, our ability to generate revenue from customers and meet our financial targets could be adversely affected.
Substantial competition could reduce our market share and significantly harm our financial performance.
The markets in which we operate are highly competitive, with relatively low barriers to entry for some software, product or service organizations. Some customers may be hesitant to switch vendors or to adopt cloud-based software such as ours and prefer to maintain their existing relationships. Some of our competitors are larger and have greater name recognition, much longer operating histories, larger marketing budgets and significantly greater resources than we do. We also face competition from custom-built software vendors and from vendors of specific applications, some of which offer cloud-based solutions. We may also face competition from a variety of vendors of software and products that address only a portion of our platform. In addition, other companies that provide cloud-based software in different target markets may develop software or acquire companies that operate in our target markets, and some potential customers may elect to develop their own internal software. With the introduction of new technologies and market entrants, we expect this competition to intensify in the future.
Many of our competitors are able to devote greater resources to the development, promotion and sale of their products and services. Furthermore, our current or potential competitors may be acquired by third parties with greater available resources and the ability to initiate or withstand substantial price competition. In addition, many of our competitors have established marketing relationships, access to larger customer bases and major distribution agreements with consultants, system integrators and resellers. Our competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their product offerings or resources. If our technology, products and services do not become more accepted relative to those of our competitors, or if our competitors are successful in bringing their products or services to market earlier than ours, or if the products or services of our competitors are more technologically capable than ours, then our revenues could be adversely affected. In addition, some of our competitors may offer their products and services at lower prices. If we are unable to achieve our target pricing levels, our operating results may be negatively affected. Pricing pressures and increased competition could result in reduced sales, reduced margins, losses or a failure to maintain or improve our competitive market position, any of which could adversely affect our business.
Our future results will depend on our ability to continue to focus our resources and manage costs effectively.
We are continually focusing on measures intended to further improve cost efficiency. We may be unable to realize all expected cost savings in connection with these efforts within the expected time frame, or at all, and we may incur additional and/or unexpected costs to realize them. Further, we may not be able to sustain any achieved savings in the future. Future results will depend on the success of these efforts.
If we are unable to control costs, our operating margins could decrease and we may incur additional losses. Our future profitability will depend on our ability to manage costs or increase productivity. An inability to effectively manage costs could adversely impact our business, results of operations or financial condition.
Our profitability could suffer if we are not able to manage large and complex projects and complete fixed price, fixed timeframe contracts on budget and on time.
Our profitability and operating results are dependent on the scale of our projects and the prices we are able to charge for our technology, products and services. We perform a significant portion of our work through fixed price contracts, in which we assume full control of the project team and manage all facets of execution. As a significant portion of our projects are on a fixed price model, we may be unable to accurately estimate the appropriate project price and successfully manage such projects. Although we use specified technical processes and our past experience to reduce the risks associated with estimating, planning and performing fixed price and fixed timeframe projects, we face the risk of cost overruns, completion delays and wage inflation in connection with these projects. If we fail to accurately estimate the resources or time required for a project or future rates of wage inflation, or if we fail to perform contractual obligations within the contractual timeframe, our profitability could suffer.
The challenges of managing larger and more complex projects include:
•maintaining high quality control and process execution standards;
•maintaining planned resource utilization rates on a consistent basis;
•maintaining productivity levels and implementing necessary process improvements;
•controlling project costs;
•maintaining close customer contact and high levels of customer satisfaction;
•recruiting and retaining sufficient numbers of skilled engineering, design and program management professionals; and
•maintaining effective customer relationships.
In addition, large and complex projects may involve multiple engagements or stages and there is a risk that a customer may choose not to retain us for additional stages or may cancel or delay additional planned engagements. Such cancellations or delays may make it difficult to plan our project resource requirements and may result in lower profitability levels than we anticipated upon commencing engagements.
Our business strategy is evolving. Investments in new services and technologies may not be successful and may involve pursuing new lines of business or strategic transactions and investments, or dispositions of assets or businesses that may no longer help us meet our objectives. Such efforts may not be successful.
We continue to invest in new services and technologies, including adding additional vertical solutions to our product offerings and blockchain. The complexity of these solutions, our learning curve in developing and supporting them and significant competition in the markets for these solutions could make it difficult for us to market and implement these solutions successfully. Additionally, there is a risk that our customers may not adopt these solutions widely, which could prevent us from realizing expected returns on these investments. Even if these solutions are successful in the market, they may rely on third-party technology, software, services and our ability to meet stringent service levels. If we are unable to deploy these solutions successfully or profitably, it could adversely impact our business, results of operations or financial condition.
Our industry is undergoing significant change and our business strategy is continuing to evolve to meet these changes. In order to profitably grow our business, we may need to expand into new lines of business beyond our current focus of mobile engagement analytics products, mobile application advertising and services, which may involve pursuing strategic transactions, including potential acquisitions of, or investments in, related or unrelated businesses and assets. In addition, we may seek divestitures of existing businesses or assets. There can be no assurance that we will be successful with our efforts to evolve our business strategy and we could suffer significant losses as a result, which could have a material adverse effect on our business, financial condition and results of operations.
If we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the achievement of our strategic objectives. We may also dispose of assets or a business at a price or on terms that are less desirable than we had anticipated. In addition, we may experience greater dis-synergies than expected and the impact of the divestiture on our revenue may be larger than projected.
Future acquisitions could disrupt our business and may divert management’s attention and, if unsuccessful, harm our business.
We may choose to expand by making additional acquisitions that could be material to our business. We have in the past made several acquisitions of complementary businesses, including acquisitions of Odyssey, Simplikate, Digby, Tapit!, GoTV and Lyte.
Acquisitions involve many risks, including the following:
•an acquisition may negatively affect our results of operations and financial condition because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;
•we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel, or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;
•an acquisition may disrupt our ongoing business, divert resources, increase our expenses, or distract our management;
•an acquisition may result in a delay or reduction of customer purchases for both us and the company we acquired due to customer uncertainty about continuity and effectiveness of service from either company;
•we may encounter difficulties in, or may be unable to, successfully sell any acquired technology, products or services;
•an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;
•the challenges inherent in effectively managing an increased number of employees in diverse locations;
•the potential strain on our financial and managerial controls and reporting systems and procedures;
•the potential known and unknown liabilities associated with an acquired company;
•our use of cash to pay for acquisitions would limit other potential uses for our cash;
•if we incur additional debt to fund such acquisitions, such debt may subject us to additional material restrictions on our ability to conduct our business as well as additional financial maintenance covenants;
•the risk of impairment charges related to potential write-downs of acquired assets or goodwill in future acquisitions;
•to the extent that we issue a significant amount of equity or equity linked securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease; and
•managing the varying intellectual property protection strategies and other activities of an acquired company.
We may not succeed in addressing these or other risks or any other problems encountered in connection with the integration of any acquired business. The inability to integrate successfully the business, technologies, products, services, personnel or operations of any acquired business, or any significant delay in achieving integration, could harm our business, results of operations or financial condition.
We may not be able to recognize revenue in the period in which our services are performed, which may cause our margins to fluctuate.
Our services are performed under both fixed-price and time and material contract arrangements. All revenue is recognized pursuant to applicable accounting standards. Our failure to meet all the obligations, or otherwise meet a customer’s
expectations, may result in us having to record the cost related to the performance of services in the period that services were rendered, but delay the timing of revenue recognition to a future period in which all service obligations have been met.
Our financial results may be adversely affected by changes in accounting principles applicable to us.
U.S. generally accepted accounting principles (“GAAP”) are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results for periods prior and subsequent to such change. We may adopt changes in accounting standards retrospectively to prior periods and the adoption may result in an adverse change to previously reported results.
To adopt new standards, we may have to implement new modules in our accounting system, hire consultants and increase our spending on audit fees, thereby increasing our general and administrative expense. Any difficulties in implementing changes in accounting standards or adequately accounting after adoption could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.
We may experience quarterly fluctuations in our operating results due to a number of factors, which makes our future results difficult to predict and could cause our operating results to fall below expectations.
Our quarterly operating results have fluctuated in the past and we expect them to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance and comparing our operating results on a period-to-period basis may not be meaningful. In addition to the other risks described herein, factors that may affect our quarterly operating results include:
•the amount and timing of completion of application development services and other service-related engagements;
•changes in spending on subscriptions, services and application transactions media offerings and services by our current or prospective customers;
•pricing our technology, products, and services effectively so that we are able to attract and retain customers without compromising our operating results;
•one-time, non-recurring revenue events;
•attracting new customers and increasing our existing customers’ use of our technology offerings and services;
•the mix between new contracts and renewals of existing contracts;
•customer renewal rates and the amounts for which agreements are renewed;
•awareness of our brand;
•changes in the competitive dynamics of our market, including consolidation among competitors or customers and the introduction of new technologies and technology enhancements;
•our ability to manage our existing business and future growth;
•unforeseen costs and expenses related to the expansion of our business, operations and infrastructure, including disruptions in our hosting network infrastructure and privacy and data security;
•customer delays in purchasing decisions in anticipation of new products or product enhancements by us or our competitors;
•budgeting cycles of our customers;
•changes in the competitive dynamics of our market, including consolidation among competitors or customers;
•the amount and timing of payment for operating expenses, particularly research and development and sales and marketing expenses (including marketing events and commissions and bonuses associated with performance) and employee benefit expenses;
•changes to the commission plans, quotas and other compensation related metrics for our sales representatives;
•the amount and timing of non-cash expenses, including stock-based compensation, goodwill impairments and other non-cash charges;
•the amount and timing of costs associated with recruiting, training and integrating new employees;
•the amount and timing of cash collections from our customers and the mix of quarterly and annual billings;
•unforeseen costs and expenses related to the expansion of our business, operations and infrastructure;
•changes in the levels of our capital expenditures;
•foreign currency exchange rate fluctuations; and
•general economic and political conditions.
We may not be able to accurately forecast the amount and mix of future technology, products and services, size or duration of contracts, revenue and expenses and, as a result, our operating results may fall below our estimates.
We could be held liable for damages or our reputation could suffer from security breaches or disclosure of confidential information or personal data.
We are also dependent on technology networks and systems to process, transmit and securely store electronic information and to communicate among our locations and with our customers. Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential loss or unauthorized disclosure of confidential information or data, including personal data. In addition, many of our engagements involve projects that are critical to the operations of our customers’ businesses. The theft and/or unauthorized use or publication of our, or our customers’, confidential information or other proprietary business information as a result of such an incident could adversely affect our competitive position and reduce marketplace acceptance of our products and services. Any failure in the networks or computer systems used by us or our customers could result in a claim for substantial damages against us and significant reputational harm, regardless of our responsibility for the failure.
In addition, we often have access to or are required to manage, utilize, collect and store sensitive or confidential customer or employee data, including personal data. As a result, we are subject to numerous U.S. and non-U.S. laws and regulations designed to protect this information, such as the European Union’s GDPR and various U.S. federal and state laws governing the protection of personal data. If any person, including any of our employees, negligently disregards or intentionally breaches controls or procedures with which we are responsible for complying with respect to such data, or otherwise mismanages or misappropriates that data, or if unauthorized access to or disclosure of data in our possession or control occurs, we could be subject to liability and penalties in connection with any violation of applicable privacy laws and/or criminal prosecution, as well as significant liability to our customers or our customers’ clients for breaching contractual confidentiality and security provisions or privacy laws. These risks will increase as we continue to grow our cloud-based product offerings and services and store and process increasingly large amounts of our customers’ confidential information and data and host or manage parts of our customers’ businesses, especially in industries involving particularly sensitive data such as the healthcare industry which we serve. The loss or unauthorized disclosure of sensitive or confidential customer or employee data, including personal data, whether through breach of computer systems, systems failure, employee negligence, fraud or misappropriation, or otherwise, could damage our reputation and cause us to lose customers. Similarly, unauthorized access to or through our information systems and networks or those we develop or manage for our customers, whether by our employees or third parties, could result in negative publicity, legal liability and damage to our reputation, which could in turn harm our business, results of operations, or financial condition.
If we cause disruptions in our customers’ businesses or provide inadequate service, our customers may have claims for substantial damages against us, which could cause us to lose customers, have a negative effect on our corporate reputation and adversely affect our results of operations.
If we make errors in the course of delivering services to our customers or fail to consistently meet our service-level obligations to or other service requirements of our customers, such errors or failures could disrupt our customers' business, which could result in a reduction in our revenue or a claim for substantial damages against us. In addition, a failure or inability by us to meet a contractual requirement could subject us to penalties, cause us to lose customers or damage our brand or corporate reputation and limit our ability to attract new business.
The services we provide are often critical to our customers’ businesses. Certain of our customer contracts require us to comply with security obligations including maintaining network security and backup data, ensuring our network is virus free, maintaining business continuity planning procedures and ensuring our employees conduct their job functions with a high level of integrity. Any failure in a customer’s system, failure of our data center, cloud or other offerings, or breach of security relating to the services we provide to a customer could damage our reputation or result in a claim for substantial damages against us. Any significant failure of our equipment or systems, or any major disruption to basic infrastructure in the locations in which we operate, such as power and telecommunications, could impede our ability to provide services to our customers, have a negative impact on our reputation, cause us to lose customers and adversely affect our results of operations.
Under our customer contracts, our liability for breach of our obligations is in some cases limited pursuant to the terms of the contract. Such limitations may be unenforceable or otherwise may not protect us from liability for damages. In addition, certain liabilities, such as claims of third parties for which we may be required to indemnify our customers, are generally not limited under our contracts. The successful assertion of one or more large claims against us in amounts greater than those covered by our current insurance policies could harm our business, results of operations, or financial condition. Even if such assertions against us are unsuccessful, we may incur reputational harm and substantial legal fees.
Our technology offerings and services could infringe upon the intellectual property rights of others or we might lose our ability to use intellectual property of others.
We cannot be sure that our brand, software solution and products and services do not infringe upon the intellectual property rights of third parties, who could claim that we or our customers are infringing upon their intellectual property rights. These claims could harm our reputation, cause us to incur substantial costs or prevent us from offering some products or services in the future, or require us to rebrand. Any related proceedings could require us to expend significant resources over an extended period of time. In most of our contracts, we agree to indemnify our customers for expenses and liabilities resulting from claimed infringements of the intellectual property rights of third parties. In some instances, the amount of these indemnities could be greater than the revenue we receive from the customer. Any claims or litigation in this area, regardless of merit, could be time-consuming and costly, damage our reputation, and/or require us to incur additional costs to obtain the right to continue to offer a product, service or solution to our customers. If we cannot secure this right at all or on reasonable terms, or, alternatively, substitute a non-infringing technology, our business, results of operations, or financial condition could be harmed. Similarly, if we are unsuccessful in defending a trademark claim, we could be forced to re-brand, which could harm our business, results of operations or financial condition. Additionally, in recent years, individuals and firms have purchased intellectual property assets where their sole or primary purpose is to assert claims of infringement against technology providers and customers that use such technology. Any such action naming us or our customers could be costly to defend or lead to an expensive settlement or judgment against us. Moreover, such an action could result in an injunction being ordered against our customer or our own services or operations, causing further damages.
If we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties, our business could be adversely affected.
Our success depends, in part, upon our ability to protect our proprietary methodologies and other intellectual property. Existing laws offer only limited protection of our intellectual property rights and the protection in some countries in which we operate or may operate in the future may be very limited. We rely upon a combination of confidentiality policies, nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect our intellectual property rights. These laws are subject to change at any time and could further limit our ability to protect our intellectual property. There is uncertainty concerning the scope of available intellectual property protection for software and business methods, which are fields in which we rely on intellectual property laws to protect our rights. The validity and enforceability of any intellectual property rights we obtain may be challenged by others and, to the extent we have enforceable intellectual property rights, those intellectual property rights may not prevent competitors from reverse engineering our proprietary information or independently developing technology, products and services similar to or duplicative of us. Further, the steps we take in this regard might not be adequate to prevent or deter infringement or other misappropriation of our intellectual property by competitors, former employees or other third parties and we might not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights. Enforcing our intellectual property rights might also require considerable time, money and oversight and we may not be successful in enforcing our rights.
If we are unable to collect our receivables from, or bill our unbilled services to, our customers, our business, results of operations or financial condition could be adversely affected.
Our business depends on our ability to successfully obtain payment from our customers of the amounts they owe us for products sold or services performed. We typically evaluate the financial condition of our customers and usually bill and collect on relatively short cycles. We maintain allowances against receivables and unbilled services for which we believe collection is doubtful. Actual losses on customer balances could differ from those that we currently anticipate and, as a result, we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our customers. Macroeconomic conditions could also result in financial difficulties for our customers, including limited access to the credit markets, insolvency, or bankruptcy, and, as a result, could cause customers to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. Timely collection of customer balances also depends on our ability to perform obligations to customers and bill and collect our contracted revenue. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our customer balances and if this occurs, our business, results of operations, or financial condition could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected.
Increased costs of labor and employee health and welfare benefits may adversely impact our results of operations.
Labor related costs represent a significant portion of our expenses and we have experienced increases compensation related expenses. Additional increases in labor costs, for example, as a result of increased competition for skilled labor, or employee benefit costs, such as healthcare costs or otherwise, could further impact our business, results of operations or financial condition.
Our global operations are subject to complex risks, some of which might be beyond our control.
Although international revenue currently represents a small portion of our revenue, our business from outside of the United States may expand in the future as we expand our international presence, including but not limited to our subscription, application transaction, services and digital asset offerings. As a result, we may be subject to risks inherently associated with international operations, including risks associated with foreign currency exchange rate fluctuations, difficulties in enforcing intellectual property and/or contractual rights, the burdens of complying with a wide variety of foreign laws and regulations, potentially adverse tax consequences, tariffs, quotas and other barriers, potential difficulties in collecting accounts receivable, international hostilities, terrorism and natural disasters. Expansion of international operations also increases the likelihood of potential or actual violations of domestic and international anti-corruption laws, such as the Foreign Corrupt Practices Act, or of U.S. and international export control and sanctions regulations. We may also face difficulties integrating any new facilities in different countries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture. If we are unable to manage the risks of our global operations, our business, results of operations, or financial condition could be adversely affected.
Economic uncertainties or downturns in the global economy or the industries in which our customers operate could disproportionately affect the demand for our products and services solutions and negatively impact our operating results.
Global economic conditions could experience a significant downturn causing market volatility widespread uncertainty. As a result, we and our customers could find it extremely difficult to accurately forecast and plan future business activities. In addition, these conditions could cause our customers or prospective customers to reduce their information technology and other budgets, which could decrease corporate and individual spending on our product and service offerings, resulting in delayed and lengthened sales cycles, a decrease in new customer acquisition and/or loss of customers. Furthermore, during challenging economic times, our customers may face issues with their cash flows and with gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to make timely payments to us, impact customer renewal rates and adversely affect our revenue. If such conditions occur, we may be required to increase our reserves, allowances for doubtful accounts and write-offs of accounts receivable and our operating results would be harmed. In addition, a downturn in the technology-related spend by our customers may disproportionately affect us. We cannot predict the timing, strength or duration of any economic slowdown or recovery, whether global, regional or within specific markets. If the conditions of the global economy or markets in which we operate worsen, our business could be harmed. In addition, even if the global economy does not worsen or improves, the market for product and service offerings may not experience growth or we may not experience growth.
If platform subscription renewal rates decrease, or we do not accurately predict subscription renewal rates, our future revenue and operating results may be harmed.
Our customers have no obligation to renew their subscriptions for our solutions after the expiration of their subscription period, which generally ranges from one to three years. In addition, our customers may renew for lower subscription amounts or for shorter contract lengths. We may not accurately predict renewal rates for our customers. Our renewal rates may decline or fluctuate as a result of a number of factors, including customer usage, pricing changes, number of applications used by our customers, customer satisfaction with our service, increased competition, the acquisition of our customers by other companies and deteriorating general economic conditions. If our customers do not renew their subscriptions for our solutions or decrease the amount they spend with us, our revenue will decline and our business will suffer.
If we are unable to attract new customers or sell additional products or services to our existing customers, our revenue growth will be adversely affected.
To increase our revenue, we must add new customers, encourage existing customers to renew their subscriptions on terms favorable to us, increase their usage of our solutions and sell additional products, services and functionality to existing customers. As our industry matures, as interactive channels develop further, or as competitors introduce lower cost and/or differentiated products or services that are perceived to compete with ours, our ability to sell and renew based on pricing, technology and functionality could be impaired. In addition, attracting, retaining and growing our relationship with customers may require us to effectively employ different strategies than we have historically used with current customers and we may face challenges in doing so. As a result, we may be unable to renew our agreements with existing customers or attract new customers or new business from existing customers on terms that would be favorable or comparable to prior periods, which could have an adverse effect on our revenue and growth.
Because we recognize revenue from application development services as deliverables are transferred to customers and platform subscriptions over the term of the relevant contract, downturns or upturns in sales are not immediately reflected in full in our operating results.
We recognize revenue related to application development services upon the transfer of control to the customer of those services. We recognize software subscription revenue over the term of each of our contracts, which, generally ranges from one to three years. As a result, much of the revenue we report each quarter results from contracts entered into during previous quarters. Consequently, a shortfall in demand for our professional services and software solutions or a decline in new, expanded or renewed contracts in any one quarter may not significantly reduce our revenue for that quarter but could negatively affect our revenue in the future. Accordingly, the effect of significant downturns in new or expanded sales or renewals of our professional services or software license solutions will not be reflected in full in our operating results until future periods. Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through additional sales in any period.
If we fail to forecast our revenue accurately, or if we fail to match our expenditures with corresponding revenue, our operating results could be adversely affected.
The lengthy sales cycle for the evaluation and implementation of our platform software and service solutions, which typically extends for several months, may cause us to experience a delay between increasing operating expenses for such sales efforts, and, upon successful sales, the generation of corresponding revenue. Accordingly, we may be unable to prepare accurate internal financial forecasts or replace anticipated revenue that we do not receive as a result of delays arising from these factors. As a result, our operating results in future reporting periods may be significantly below the expectations of the public market, equity research analysts or investors, which could harm the price of our common stock.
The length and unpredictability of the sales cycle for our technology, products and services could delay new sales and cause our revenue and cash flows for any given quarter to fail to meet our projections or market expectations.
The sales cycle between our initial contact with a potential customer and the signing of a contract to provide technology, products and services varies. As a result of the length and unpredictability of the sales cycle, we have a limited ability to forecast the timing of sales. A delay in or failure to complete transactions could harm our business and financial results and could cause our financial results to vary significantly from quarter to quarter. Our sales cycle varies widely, reflecting differences in our potential customers’ decision-making processes, procurement requirements and budget cycles and is subject to significant risks over which we have little or no control, including:
•our customers’ budgetary constraints and priorities;
•the timing of our customers’ budget cycles;
•the impact of the COVID-19 pandemic and related disruptions on our customers; and
•the length and timing of customers’ approval processes.
If we fail to detect advertising fraud or other actions that impact our advertising campaign performance, we could harm our reputation with advertisers or agencies, which could cause our revenue and business to suffer.
Our advertising business relies on our ability to deliver successful and effective advertising campaigns. Some of those campaigns may experience fraudulent and other invalid impressions, clicks or conversions that advertisers may perceive as undesirable, such as non-human traffic generated by machines that are designed to simulate human users and artificially inflate user traffic on websites. These activities could overstate the performance of any given advertising campaign and could harm our reputation. It may be difficult for us to detect advertising-related fraud and other malicious activity because we do not own content and rely in part on our digital media partners to control such activity. These risks become more pronounced as the digital video industry shifts to programmatic buying. Both governmental and industry self-regulatory bodies have increased their scrutiny and awareness of and have taken recent actions to address advertising-related fraud and other malicious activity. While we routinely review the campaign performance, such reviews may not detect or prevent advertising-related fraud or malicious activity. If we fail to detect or prevent fraud or other malicious activity, the affected advertisers may experience or perceive a reduced return on their investment and our reputation may be harmed. High levels of fraud or malicious activity could lead to dissatisfaction with our solutions, refusals to pay, prompt refund or future credit demands or withdrawal of future business. In addition, advertisers increasingly rely on third party vendors to measure campaigns against audience guarantee, viewability and other requirements and to detect fraud. If we are unable to successfully integrate our technology with such vendors, or our measurement and fraud detection differs from their findings, our customers could lose confidence in our solutions, we may not get paid for certain campaigns and our revenues could decrease. If we fail to detect fraud or other
malicious activities that impact the performance of our brand advertising campaigns, we could harm our reputation with our advertisers or agencies and our revenue and business could suffer. Further, if advertisers demand fraud-free inventory, our supply could fall drastically, making it impossible to sustain our current business model.
If we do not maintain and grow a critical mass of advertisers and distribution partners, the value of our services could be adversely affected.
Our success depends, in large part, on the maintenance and growth of a critical mass of advertisers and distribution partners. Advertisers will generally seek the most competitive return on investment from advertising and marketing services. Distribution partners will also seek the most favorable payment terms available in the market. Advertisers and distribution partners may change providers or the volume of business with a provider, unless the product and terms are competitive. In this environment, we must compete to acquire and maintain our network of advertisers and distribution partners. If our business is unable to maintain and grow our base of advertisers, our current distribution partners may be discouraged from continuing to work with us and this may create obstacles for us to enter into agreements with new distribution partners. Our business also depends in part on certain of our large reseller partners and agencies to grow their base of advertisers, as these advertisers become increasingly important to our business and our ability to attract additional distribution partners and opportunities. Similarly, if our distribution network does not grow and does not continue to improve over time, current and prospective advertisers and distribution partners and agencies may reduce or terminate this portion of their business with us. Any decline in the number of advertisers and distribution partners could adversely affect the value of our services.
Any inability to deliver successful mobile advertising campaigns due to technological challenges or an inability to persuasively demonstrate success will prevent us from growing or retaining our current advertiser base.
It is critical that we deliver successful mobile advertising campaigns on behalf of our advertisers. Factors that may adversely affect our ability to deliver successful mobile advertising campaigns include:
•Inability to accurately process data and extract meaningful insights and trends, such as the failure to accurately process data to place ads effectively at digital media properties;
•Faulty or out-of-date algorithms that fail to properly process data or result in inability to capture brand-receptive audiences at scale;
•Technical or infrastructure problems causing digital video not to function, digital video or impressions to not display properly or be placed next to inappropriate context;
•Inability to control video completion rates, maintain user attention or prevent end users from skipping advertisements;
•Inability to detect and prevent advertising fraud and other malicious activity;
•Inability to fulfill audience guarantee or viewability requirements of advertiser customers;
•Inability to integrate with third parties that measure campaigns against audience guarantee or viewability requirements;
•Unavailability of campaign data for advertisers to effectively measure the success of their campaigns; and
•Access to quality inventory at sufficient volumes to meet the needs of advertisers’ campaigns.
Our ability to deliver successful advertising campaigns also depends on the continuing and uninterrupted performance of our own internal and third party managed systems, which we utilize to place ads, monitor the performance of advertising campaigns and manage advertising inventory. Our revenue depends on the technological ability of our solutions to deliver ads and measure them. Sustained or repeated system failures that interrupt our ability to provide advertising campaigns and solutions to customers, including security breaches and other technological failures affecting our ability to deliver ads quickly and accurately and to collect and process data in connection with these ads, could significantly reduce the attractiveness of our solutions to advertisers, negatively impact operations and reduce our revenue. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious human acts and natural disasters. In addition, any steps we take to increase the reliability and redundancy of systems may be expensive and may not be successful in preventing system failures. Also, advertisers may perceive any technical disruption or failure in ad performance on digital media partners’ platforms to be attributable to us and our reputation could similarly suffer, or advertisers may seek to avoid payment or demand future credits for disruptions or failures, any of which could harm our business and results of operations. If
we are unable to deliver successful advertising campaigns, our ability to attract potential advertisers and retain and expand business with existing advertisers could be harmed and our business, financial condition and operating results could be adversely affected.
We may be unable to deliver advertising in a context that is appropriate for mobile advertising campaigns, which could harm our reputation and cause our business to suffer.
It is very important to advertisers that their brand advertisements not be placed in or near content that is unlawful or could be deemed offensive or inappropriate by their customers. Unlike advertising on television, where the context in which an advertiser’s ad will appear is highly predictable and controlled, digital media content is more unpredictable and we cannot guarantee that digital video advertisements will appear in a context that is appropriate for the brand. We rely on continued access to premium ad inventory in high-quality and brand-safe environments, viewable to consumers across multiple screens. If we are not successful in delivering context appropriate advertising campaigns for advertisers, our reputation will suffer and our ability to attract potential advertisers and retain and expand business with existing advertisers could be harmed, or our customers may seek to avoid payment or demand future credits for inappropriately placed advertisements, any of which could harm our business, financial condition and operating results.
Activities of our application transaction customers with which we do business could damage our reputation or give rise to legal claims against us.
We do not monitor or have the ability to control whether our advertising customers’ advertising of their products and solutions complies with federal, state, local and foreign laws. Failure of our advertising customers to comply with federal, state, local or foreign laws or our policies could damage our reputation and expose us to liability under such laws. We may also be liable to third parties for content in the ads we deliver if the content involved violates copyrights, trademarks or other intellectual property rights of third parties or if the content is defamatory, unfair and deceptive or otherwise in violation of applicable laws. A third party or regulatory authority may file a claim against us even if our advertising customer has represented that its ads are lawful and that they have the right to use any copyrights, trademarks or other intellectual property included in an ad. Any of these claims could be costly and time-consuming to defend and could also hurt our reputation within the advertising industry. Further, if we are exposed to legal liability, we could be required to pay substantial fines or penalties, redesign our business methods, discontinue some of our solutions or otherwise expend significant resources. Similarly, we do not monitor or have the ability to control whether digital media property owners with which we do business are in compliance with applicable laws and regulations, or intellectual property rights of others and their failure to do so could expose us to legal liability. Third parties may claim that we should be liable to them for content on digital media properties if the content violates copyrights, trademarks or other intellectual property rights of third parties or if the content is defamatory, unfair and deceptive, or otherwise in violation of applicable laws or other brand protection measures. These risks become more pronounced as the digital video industry shifts to programmatic buying.
Our business depends on our ability to collect and use data to deliver ads and to disclose data relating to the performance of our ads; any limitation on these practices could significantly diminish the value of our solutions and cause us to lose customers and revenue.
When we deliver an ad to an internet-connected device, we are able to collect information about the placement of the ad and the interaction of the device user with the ad, such as whether the user visited a landing page or watched a video. We are also able to collect information about the user’s IP address, device, mobile location and some demographic characteristics. We may also contract with one or more third parties to obtain additional pseudonymous information about the device user who is viewing a particular ad, including information about the user’s interests. As we collect and aggregate this data provided by billions of ad impressions, we analyze it in order to optimize the placement and scheduling of ads across the advertising inventory provided to us by digital media properties.
Although the data we collect does not enable us to determine the actual identity of any individual, our customers or end users might decide not to allow us to collect some or all of the data or might limit our use of it. For example, a digital media partner might not agree to provide us with data generated by interactions with the content on its apps, or device users might not consent to share their information about device usage. Any limitation on our ability to collect data about user behavior and interaction with content could make it more difficult for us to deliver effective advertising programs that meet the demands of our customers. This in turn could harm our revenue and impair our business.
Although our contracts with advertisers generally permit us to aggregate data from advertising campaigns, sometimes an advertiser declines to permit the use of this data, which limits the usefulness of the data that we collect. Furthermore, advertisers may request that we discontinue using data obtained from their campaigns that have already been aggregated with
other advertisers’ campaign data. It would be difficult, if not impossible, to comply with these requests and complying with these kinds of requests could cause us to spend significant amounts of resources. Interruptions, failures or defects in our data collection, mining, analysis and storage systems, as well as privacy concerns and regulatory restrictions regarding the collection, use and processing of data, could also limit our ability to aggregate and analyze the data from our customers’ advertising campaigns. If that happens, we may not be able to optimize the placement of advertising for the benefit of our advertising customers, which could make our solutions less valuable, and, as a result, we may lose customers and our revenue may decline.
Our business practices with respect to data could give rise to liabilities, restrictions on our business or reputational harm as a result of evolving governmental regulation, legal requirements or industry standards relating to consumer privacy and data protection.
In the course of providing our solutions, we collect, transmit and store information related to and seeking to correlate internet-connected devices, user activity and the ads we place. Federal, state and international laws and regulations govern the collection, use, processing, retention, sharing and security of data that we collect across our advertising solutions. We strive to comply with all applicable laws, regulations, policies and legal obligations relating to privacy and data collection, processing use and disclosure. However, the applicability of specific laws may be unclear in some cases and domestic and foreign government regulation and enforcement of data practices and data tracking technologies is expansive, not clearly defined and rapidly evolving. In addition, it is possible that these requirements may be interpreted and applied in a manner that is new or inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any actual or perceived failure by us or our customers or partners to comply with U.S. federal, state or international laws, including laws and regulations regulating privacy, data, security or consumer protection, or disclosure or unauthorized access by third parties to this information, could result in investigations, proceedings or actions against us by governmental entities, competitors, private parties or others. Any investigations, proceedings or actions against us alleging violations of consumer or data protection laws or asserting privacy-related theories could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, adversely affect the demand for our solutions and ultimately result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless our customers from the costs or consequences of litigation resulting from using our solutions or from the unauthorized disclosure of confidential information, which could damage our reputation among our current and potential customers, require significant expenditures of capital and other resources and cause us to lose business and revenue.
The regulatory framework for privacy issues is evolving worldwide. It is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that could affect our business, particularly with regard to collection or use of data to target ads and communication with consumers and the international transfer of data from Europe to the U.S. In particular, the GDPR extends the jurisdictional scope of European data protection law. As a result, we are subject to the GDPR when we provide our targeting services in Europe. The GDPR imposes stricter data protection requirements that may necessitate changes to our services and business practices. Potential penalties for non-compliance with the GDPR include administrative fines of up to 4% of annual worldwide revenue.
While we have not collected data that is traditionally considered identifiable personal data, such as name, email address, physical address, phone numbers or social security numbers, we typically collect and store IP addresses, geolocation information and device or other persistent identifiers that are or may be considered personal data in some jurisdictions or otherwise may be subject to applicable laws or regulations. For example, some jurisdictions in the EU regard IP addresses as personal data and certain regulators have advocated for including IP addresses, GPS-level geolocation data and unique device identifiers as personal data. Moreover, with the effectiveness of the CCPA in California on January 1, 2020, the use of geolocation gathering in California should be approached with care to ensure compliance. Furthermore, the GDPR makes clear that online identifiers (such as IP addresses and other device identifiers) will be treated as “personal data” going forward and therefore subject to stricter data protection rules.
Evolving definitions of personal data within the United States, European Union and elsewhere, especially relating to the classification of IP addresses, machine or device identifiers, geolocation data and other such information, may cause us to change our business practices, diminish the quality of our data and the value of our solution and hamper our ability to expand our offerings.
Complying with any new legal requirements relating to privacy and data protection could force us to incur substantial costs or require us to change our business practices in a manner that could reduce our revenue or compromise our ability to effectively pursue our growth strategy. Our failure to comply with evolving interpretations of applicable laws and regulations relating to privacy and data protection, or to adequately protect personal data, could result in enforcement action against us or reputational harm, which could have a material adverse impact on our business, financial condition and results of operations.
In addition to compliance with applicable laws and regulations, we voluntarily participate in trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct addressing the provision of internet advertising. We could be adversely affected by changes to these guidelines and codes in ways that are inconsistent with our practices or in conflict with the laws and regulations of U.S. or international regulatory authorities. For instance, new guidelines, codes, or interpretations, by self-regulatory organizations or government agencies, may require additional disclosures, or additional consumer consents, such as “opt-in” permissions to share, link or use data, such as health data obtained from third parties, in certain ways. If we fail to abide by, or are perceived as not operating in accordance with, industry best practices or any industry guidelines or codes with regard to privacy, our reputation may suffer and we could lose relationships with advertisers and digital media partners.
Our agreements with partners, employees and others may not adequately prevent disclosure of trade secrets and other proprietary technology and information.
We rely in part on confidentiality agreements and other restrictions with our customers, partners, employees, consultants and others to protect our proprietary technology and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Despite our efforts to protect our proprietary technology, processes and methods, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. Moreover, policing unauthorized use of our trade secrets, technologies, products, intellectual property and proprietary information is difficult, expensive and time-consuming, particularly in foreign countries where applicable laws may be less protective of intellectual property rights than those in the United States and where enforcement mechanisms for intellectual property rights may be weak. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
We could be subject to additional income tax liabilities.
We are generally subject to income taxes in the United States. We use significant judgment in evaluating our worldwide income-tax provision. In the ordinary course of business, we conduct many transactions for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by changes in the valuation of our deferred tax assets and liabilities or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income tax against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income-tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the period or periods for which that determination is made.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value-added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our operating results.
We do not collect sales and use, value-added or similar taxes in all jurisdictions in which we have sales and for all products and services that we sell, based on our belief that such taxes are either not applicable or an exemption from such taxes applies. Sales and use, value-added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future, including as a result of a change in law. Such tax assessments, penalties and interest or future requirements may adversely affect our business, financial condition and results of operations.
Our net operating loss carryforwards may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.
We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. Federal income tax purposes, including any limitations that may be imposed under Section 382 of the Code as a result of our past ownership changes or an ownership change in connection with our reverse merger and recapitalization on December 26, 2018. As of December 31, 2023, we had federal net operating loss carryforwards of approximately $236.7 million, of which $151.0 million will never expire and $85.7 million will expire at various dates beginning in 2030. At December 31, 2023, we had state and local net operating loss carryforwards of approximately $133.1 million, with the majority beginning to expire in 2030 if not utilized.
We periodically assess the likelihood that we will be able to recover net deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible profits. As a result of this analysis of all available evidence, both positive and negative, we concluded that a valuation allowance against our net U.S. deferred tax assets should be applied as of December 31, 2023. To the extent we determine that all or a portion of our valuation allowance is no longer necessary, we will recognize an income tax benefit in the period this determination is made for the reversal of the valuation allowance. Once the valuation allowance is eliminated or reduced, its reversal will no longer be available to offset our current tax provision. These events could have a material impact on our reported results of operations.
Our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions that may have an adverse effect on our business.
Our large customers have substantial purchasing power and leverage in negotiating contractual arrangements with us. These customers may request for us to develop additional features without providing us additional revenue, may require penalties for failure to deliver such features, may seek discounted product or service pricing and may seek more favorable contractual terms. As we sell more products and services to this class of customer, we may be required to agree to such terms and conditions. Such large customers also have substantial leverage in negotiating the resolution of any disagreements or disputes that may arise between us. Any of the foregoing factors could have a material adverse effect on our business, financial condition and results of operations.
If some of our customers experience financial distress or suffer disruptions in their business, their weakened financial position could negatively affect our own financial position and results.
We have a diverse customer base and, at any given time, one or more customers may experience financial distress, file for bankruptcy protection, go out of business, or suffer disruptions in their businesses. If a customer with whom we do a substantial amount of business experiences financial difficulty or suffers disruptions in its business, it could delay or jeopardize the collection of accounts receivable, result in significant reductions in services provided by us and may have a material adverse effect on our business, financial condition and results of operations.
If we are unable to obtain and maintain adequate insurance, our financial condition could be adversely affected in the event of uninsured or inadequately insured loss or damage. Our ability to effectively recruit and retain qualified officers and directors may also be adversely affected if we experience difficulty in maintaining adequate directors’ and officers’ liability insurance.
We may not be able to obtain and maintain insurance policies on terms affordable to us that would adequately insure our business and property against damage, loss or claims by third parties. To the extent our business or property suffers any damages, losses or claims by third parties that are not covered or adequately covered by insurance, our financial condition may be materially adversely affected. We currently have directors’ and officers’ liability insurance. If we are unable to maintain sufficient insurance as a public company to cover liability claims made against our officers and directors, we may not be able to retain or recruit qualified officers and directors to manage our company, which could have a material adverse effect on our business, financial condition and results of operations.
The requirements of being a public company may strain our systems and resources, divert management’s attention and be costly.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations of Nasdaq Capital Market. The requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time consuming and costly and may also place undue strain on our personnel, systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations.
We are required to maintain various other control and business systems related to our equity, finance, treasury, information technology, other recordkeeping systems and other operations. As a result of these maintenance obligations, management’s attention may be diverted from other business concerns, which could adversely affect our business. Furthermore, we supplement our internal team with third party software and system providers to support our reporting obligations to achieve effective internal controls.
To the extent we do not sufficiently manage third party service providers, and they fail to provide us with adequate service, we may not effectively manage our future growth which may result in ineffective internal controls over financial reporting and an increased cost of compliance. The Sarbanes-Oxley Act requires, among other things, that we maintain
effective disclosure controls and procedures and internal control over financial reporting. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be adversely affected.
In addition, compliance with new laws, rules and regulations would make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain appropriate levels of coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors, particularly members to serve on our audit committee.
As a result of disclosure of information in this Annual Report and in other filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation by third parties. If such claims are successful, our business and results of operations could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the time and resources of our management and adversely affect our business and results of operations.
We are a "smaller reporting company" and, because we have opted to use the reduced reporting requirements available to us, our common stock may be less attractive to investors.
We are a "smaller reporting company" as defined by the SEC. For as long as we continue to be a smaller reporting company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not smaller reporting companies, including not being required to comply with auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation and corporate governance in our periodic reports and proxy statements.
We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Our business is subject to the risks of natural disasters, public health crises, political crises and other natural catastrophic events and to interruption by man-made problems such as computer viruses or terrorism.
Our systems and operations are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events. For example, a significant natural disaster, such as a tornado, earthquake, hurricane, mudslides, fire, flood, snow, ice or extreme temperatures could have a material adverse effect on our business, results of operations and financial condition and our insurance coverage may be insufficient to compensate us for losses that may occur. We have an office and at least one data center located in California, a region known for earthquakes and mudslides. A significant amount of our development and ad operations work is also located in California. We also have corporate offices in Texas, which is susceptible to floods, extreme temperatures, heavy winds, ice, snow and tornadoes. In addition, acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, could cause disruptions in our or our advertisers’ businesses or the economy as a whole. Our servers may also be vulnerable to computer viruses, break-ins, denial-of-service attacks and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting California or Texas. As we rely heavily on our data centers, computer and communications systems and the internet to conduct our business and provide high-quality customer service, such disruptions could negatively impact our ability to run our business and either directly or indirectly disrupt our customers’ business, which could have a material adverse effect on our business, results of operations and financial condition.
Risks Related to Capitalization Matters, Corporate Governance and Market Volatility
We have and may sell additional equity or debt securities or enter into other arrangements to fund our operations, which may result in dilution to our stockholders and impose restrictions or limitations on our business. Future sales or issuances of our common stock, or the perception that such sales could occur, could depress the trading price of our common stock.
In February 2022, we filed a shelf registration statement on Form S-3, which was subsequently declared effective by the SEC, pursuant to which we may issue up to $200 million in common stock, preferred stock, warrants and units, and contained therein was a prospectus supplement in which we may sell up to $100 million in sales of our common stock deemed to be an “at the market" offering. During 2023, we issued common stock in various sales of our common stock via at-the-market offerings, purchase commitments and public offerings under our shelf registration statement. We also issued shares of common stock to settle outstanding debt obligations and upon exercise of warrants. Additional capital may be needed in the future to continue our planned operations, and we may seek additional funding through a combination of equity offerings, debt financings, strategic alliances, licensing and collaboration arrangements, or other third-party business arrangements. These financing activities may have an adverse effect on our stockholders’ rights, the market price of our common stock and on our operations and may require us to relinquish rights to some of our technologies, intellectual property or products, issue additional equity or debt securities, or otherwise agree to terms unfavorable to us. Any sale or issuance of securities pursuant to a registration statement or otherwise may result in dilution to our stockholders and may cause the market price of our stock to decline, and new investors could gain rights superior to our existing stockholders.
In addition, any debt financings that we may enter into in the future may impose restrictive covenants or otherwise adversely affect the holdings or the rights of our stockholders, and any additional equity financings will be dilutive to our stockholders. The perception that such sales or issuances may occur could also negatively impact the market price of our common stock. Furthermore, additional equity or debt financing might not be available to us on reasonable terms, if at all.
The failure of financial institutions or transactional counterparties could adversely affect our current and projected business operations and our financial condition and results of operations.
On March 10, 2023, Silicon Valley Bank (SVB) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. A statement by the Department of the Treasury, the Federal Reserve and the FDIC stated that all depositors of SVB would have access to all of their money after only one business day of closure, including funds held in uninsured deposit accounts. However, there is no guarantee that the U.S. Department of Treasury, FDIC and Federal Reserve Board will provide access to uninsured funds in the future in the event of the closure of other banks or financial institutions in a timely fashion or at all.
Although we did not have any funds deposited with SVB or Signature Bank, we regularly maintain cash balances with other financial institutions in excess of the FDIC insurance limit. Access to our cash and cash equivalents in amounts adequate to finance our operations could be significantly impaired by the financial institutions with which we have arrangements directly facing liquidity constraints or failures. In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. Any material decline in available funding or our ability to access our cash and cash equivalents could adversely impact our ability to meet our operating expenses, result in breaches of our contractual obligations or result in violations of federal or state wage and hour laws, any of which could have material adverse impacts on our operations and liquidity.
Furthermore, should our customers have relationships with financial institutions that fail, this may result in a delay of collecting outstanding receivables, if collectible at all, which could have a material adverse affect on our business.
The price of our common stock and warrants has been, and may continue to be, volatile, and you could lose all or part of your investment.
Technology stocks have historically experienced high levels of volatility. The trading price and volume of our common stock have fluctuated, and may continue to fluctuate, substantially due to a variety of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock.
In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock and/or warrants could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the trading price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have an adverse effect on our business, results of operations and financial condition.
Specifically, while we cannot state for certainty what circumstances are causing volatility in our stock price, such volatility may be attributable in part to the following factors:
•price and volume fluctuations in the overall stock market from time to time;
•the announcement of new products, solutions or technologies, investments, commercial relationships, acquisitions or other events by us or our competitors;
•changes in how customers perceive the benefits of our products and future offerings;
•the addition or departure of key personnel, including, but not limited to the successful transition of our Chief Executive Officer;
•the public’s reaction to our press releases, other public announcements and filings with the SEC;
•sales of large blocks of our common stock or warrants;
•developments concerning intellectual property rights;
•changes in legal, regulatory and enforcement frameworks impacting our products;
•variations in our and our competitors’ results of operations;
•whether our results of operations meet the expectations of securities analysts or investors;
•actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry;
•the failure of securities analysts to publish research about us, or shortfalls in our results of operations compared to levels forecast by securities analysts;
•actual or perceived significant data breach involving our products or website;
•litigation involving us, our industry or both;
•governmental or regulatory actions or audits;
•general economic conditions and trends;
•"flash crashes,” “freeze flashes” or other glitches that disrupt trading on the securities exchange on which we are listed; and
•major catastrophic events in our domestic and foreign markets, such as, but not limited to, natural disasters, terrorist attacks, cyber-attacks or disease outbreak, epidemic or pandemic.
Furthermore, the trading price of our Common Stock has recently been volatile during relatively short time periods. For example, on January 12, 2024 our Common Stock traded at an intraday low of $0.08, whereas on January 16, 2024 our Common Stock traded at an intraday high of $0.49. We believe the volatility in the trading price and price range of our Common Stock may be the result of a number of factors, many of which are outside our control. Any increase in the trading price of our Common Stock may not be sustained. In the event of a rapid decrease in the trading price of our Common Stock, investors could lose a significant portion of their investment.
Our failure to meet the continued listing requirements of the Nasdaq Capital Market could adversely affect our business and our ability to maintain the listing of our common stock on the Nasdaq Capital Market.
If we fail to satisfy the continued listing requirements of Nasdaq Capital Market, such as corporate governance requirements or the minimum bid requirement, Nasdaq may take steps to delist our common stock. Such a delisting would likely have a negative effect on the price of our common stock and would impair our stockholders' ability to sell or purchase shares of our common stock when they wish to do so. In the event of a delisting, we can provide no assurance that any action taken by us to restore compliance with listing requirements would allow our common stock to be listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq listing requirements.
On April 13, 2023, we received notice from the Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company was not in compliance with the $1.00 minimum bid requirement for continued listing on Nasdaq. Although we have until April 8, 2024 to regain compliance with the minimum bid requirement, there can be no assurance that we will regain such compliance and Nasdaq could make a determination to delist our common stock.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our common stock adversely, the price and trading volume of our common stock could decline.
The trading market for our common stock may be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. We currently have a limited number of securities and industry analysts who publish research on us. If we are unable to increase our analysts coverage or these current analysts cease to publish research on us, our stock price and trading volume could be negatively impacted. If any of the analysts who cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our common stock could decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared nor paid any cash dividends on our capital stock. We do not expect to declare or pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. As a result, stockholders must rely on sales of their common stock after price appreciation as the only way to realize any future gains on their investment, if any.
Delaware law and our certificate of incorporation and bylaws contain certain provisions, including anti-takeover provisions that limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider favorable.
Our certificate of incorporation, bylaws and the Delaware General Corporation Law ("DGCL") contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors and therefore could depress the trading price of our common stock and warrants. These provisions could also make it difficult for stockholders to take certain actions, including effecting changes in our management. Among other things, our certificate of incorporation and bylaws include provisions regarding:
•a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;
•the ability of our board of directors to issue shares of preferred stock, including “blank check” preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
•the limitation of the liability of, and the indemnification of, our directors and officers;
•the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
•the requirement that directors may only be removed from our board of directors for cause;
•a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of stockholders and could delay the ability of stockholders to force consideration of a stockholder proposal or to take action, including the removal of directors;
•the requirement that a special meeting of stockholders may be called only by our board of directors, the chairperson of our board of directors, chief executive officer or president (in the absence of a chief executive officer), which could delay the ability of stockholders to force consideration of a proposal or to take action, including the removal of directors;
•controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings;
•the requirement for the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend, alter, change or repeal any provision of our certificate of incorporation or bylaws, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in our board of directors and also may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt;
•the ability of our board of directors to amend the bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt; and
•advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in our board of directors and also may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our board of directors or management.
In addition, as a Delaware corporation, we are subject to provisions of Delaware law, including Section 203 of the DGCL, which may generally prohibit certain stockholders holding 15% or more of our outstanding capital stock from engaging in certain business combinations with us for a specified period of time unless certain conditions are met.
Any provision of our certificate of incorporation, bylaws or Delaware law that has the effect of delaying or preventing a change in control could limit the opportunity for stockholders to receive a premium for their shares of our capital stock and could also affect the price that some investors are willing to pay for our common stock.
Our certificate of incorporation designates a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between us and our stockholders, and also provides that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act or Exchange Act, each of which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, or employees.
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee or agent to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or our certificate of incorporation or bylaws, (iv) any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws, or (v) any action asserting a claim against us governed by the internal affairs doctrine, in each such case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act or the Exchange Act.
Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to this provision. These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm its results of operations.
Risks Related to our Digital Asset Holdings
We may acquire additional digital assets in the future, which may expose us to various risks associated with bitcoin and other digital assets.
We are continually examining the risks and rewards of our bitcoin acquisition strategy. This strategy has not been tested over time or under various market conditions. Some investors and other market participants may disagree with this strategy or actions we undertake to implement it. If the price of bitcoin falls or our bitcoin acquisition strategy otherwise proves unsuccessful, it would adversely impact our financial condition, results of operations, and the market price of our common stock.
In connection with owning bitcoin, we may investigate other potential approaches to holding our bitcoin assets. If we change the means by which we have historically held bitcoin assets, the accounting treatment for our bitcoin may correspondingly change. A change in the accounting treatment could have a material impact on our results of operations in future periods and could increase the volatility of our reported results of operations as well as affect the carrying value of our bitcoin on our balance sheet, which in turn could have a material adverse effect on our financial results and the market price of our common stock.
Bitcoin is a highly volatile asset that has traded below $17,000 and above $44,000 per bitcoin during 2023. Bitcoin does not pay interest or other returns and so our ability to generate cash from our bitcoin holdings depends on sales or implementing strategies that we may consider to create income streams or otherwise generate funds using our bitcoin holdings, including financing our bitcoin with loans from third parties. Furthermore, the impact of our bitcoin holdings on our financial results and the market price of our common stock may be impacted by the trading price of bitcoin at any given time.
The prices of digital currencies, including bitcoin and ethereum, may be influenced by regulatory, commercial, and technical factors that are highly uncertain, and fluctuations in the price of bitcoin are likely to influence our financial results and the market price of our common stock.
Fluctuations in the trading prices of digital assets are likely to influence our financial results and the market price of our common stock. Our financial results and the market price of our common stock would be adversely affected and our business and financial condition could be negatively impacted if the price of bitcoin decreased substantially, including as a result of:
•decreased user and investor confidence in digital assets;
•investment and trading activities of highly active retail and institutional users, speculators, miners and investors;
•negative publicity or events relating to digital assets;
•negative or unpredictable media or social media coverage on digital assets;
•public sentiment related to the actual or perceived environmental impact of bitcoin, ethereum and related activities, including environmental concerns raised by private individuals and governmental actors related to the energy resources consumed in the bitcoin mining process;
•changes in consumer preferences and the perceived value of bitcoin or ethereum;
•competition from other crypto assets that are believed to exhibit better speed, security, scalability, or other characteristics, or that are backed by governments, including the U.S. government;
•correlations between the prices of digital assets, including the potential that a crash in one digital asset or widespread defaults on one digital asset exchange or trading venue may cause a crash in the price of bitcoin, or a series of defaults by counterparties on bitcoin asset exchanges or trading venues;
•the identification of Satoshi Nakamoto, the pseudonymous person or persons who purportedly developed bitcoin, or the transfer of Satoshi’s bitcoin;
•interruptions in service or failures of the principal markets for or market participants active in trading involving bitcoin, ethereum or other digital assets;
•further reductions in mining rewards of bitcoin, including block reward halving events, which are events that occur after a specific period of time that reduce the block reward earned by “miners” who validate bitcoin and ethereum transactions;
•transaction congestion and fees associated with processing transactions on the bitcoin or ethereum network;
•changes in the level of interest rates and inflation, monetary policies of governments, trade restrictions, and fiat currency devaluations;
•developments in mathematics or technology, including in digital computing, algebraic geometry and quantum computing, that could result in the cryptography being used by digital assets becoming insecure or ineffective; and
•national and international economic and political conditions.
In addition, bitcoin, ethereum and other digital assets are relatively novel and are subject to various risks and uncertainties that may adversely impact their prices. The application of securities, commodities and other laws and other regulations to such assets is unclear in certain respects, and it is possible that new laws and regulations, or interpretations of existing laws and regulations, in the United States or foreign countries may adversely affect the price of our bitcoin, ethereum and other digital assets. For example, foreign government authorities have recently expanded their efforts to restrict certain activities related to bitcoin and other digital assets. In China, the People’s Bank of China and the National Development and Reform Commission have outlawed cryptocurrency mining and declared all cryptocurrency transactions illegal within the country. In India, based on statements made by government personnel, including the Finance Minister, one can conclude that cryptocurrency is illegal in the country. In July 2022, Russia enacted a law banning payments in cryptocurrency for goods and services. Moreover, the risks of engaging in a bitcoin-focused treasury strategy are relatively novel and have created, and may create further, complications due to the lack of experience that third parties have with companies engaging in such a business, such as the unavailability of director and officer liability insurance on acceptable terms.
The growth of the digital assets industry in general, and the use and acceptance of bitcoin and ethereum in particular, may also impact the price of our digital asset holdings and is subject to a high degree of uncertainty. The pace of worldwide growth in the adoption and use of bitcoin may depend, for instance, on public familiarity with digital assets, ease of buying and accessing bitcoin, institutional demand for bitcoin as an investment asset or store of value, consumer demand for bitcoin as a means of payment or store of value, and the availability and popularity of alternatives to bitcoin. Even if growth in bitcoin adoption occurs in the near or medium-term, there is no assurance that bitcoin usage will continue to grow over the long-term.
Because bitcoin and ethereum have no physical existence beyond the record of transactions on their respective blockchains, a variety of technical factors related to the bitcoin blockchain could also impact the price of bitcoin. For example, malicious attacks by miners, inadequate mining fees to incentivize validating of transactions, hard “forks” of the blockchain into multiple blockchains, and advances in digital computing, algebraic geometry and quantum computing could undercut the integrity of the blockchain and negatively affect the price of our digital asset holdings. The liquidity of bitcoin and ethereum may also be reduced and damage to the public perception of bitcoin and ethereum may occur, if financial institutions were to
deny banking services to businesses that hold digital assets, provide digital asset-related services or accept digital assets as payment, which could also decrease the price of our digital asset holdings.
Due to the unregulated nature and lack of transparency surrounding the operations of many digital asset trading venues, they may experience fraud, security failures or operational problems, which may adversely affect the value of our digital asset holdings. In the event of a bankruptcy filing by a custodian, bitcoin held in custody could be determined to be property of a bankruptcy estate and we could be considered a general unsecured creditor thereof.
Digital asset trading venues are relatively new and, in some cases, unregulated or subject to regulatory uncertainty. Furthermore, many digital asset trading venues do not provide the public with significant information regarding their ownership structure, management teams, corporate practices and regulatory compliance. As a result, the marketplace may lose confidence in these trading venues, including prominent digital asset exchanges that handle a significant volume of trading, in the event one or more trading venues experience fraud, security failures or operational problems.
For example, in the first half of 2022, each of Celsius Network, Voyager Digital Ltd., and Three Arrows Capital declared bankruptcy, resulting in a loss of confidence in participants of the digital asset ecosystem and negative publicity surrounding digital assets more broadly. In November 2022, FTX, the third largest digital asset exchange by volume at the time, halted customer withdrawals and shortly thereafter, FTX and its subsidiaries filed for bankruptcy.
In response to these events, the digital asset markets, including the market for bitcoin specifically, have experienced extreme price volatility and several other entities in the digital asset industry have been, and may continue to be, negatively affected, further undermining confidence in the digital assets markets and in bitcoin. If the liquidity of the digital assets markets continues to be negatively impacted by these events, digital asset prices (including the price of bitcoin) may continue to experience significant volatility and confidence in the digital asset markets may be further undermined. These events are continuing to develop, and it is not possible to predict at this time all of the risks that they may pose to us, our service providers or on the digital asset industry as a whole.
A perceived lack of stability among digital asset exchanges and the closure or temporary shutdown of any significant digital asset exchanges due to business failure, hackers or malware, government-mandated regulation, or fraud, may reduce confidence in digital asset networks and result in greater volatility in digital asset values. To the extent investors view our common stock as linked to the value of our digital asset holdings, particularly bitcoin, these potential consequences of a trading venue’s failure could have a material adverse effect on the market price of our common stock.
Furthermore, the treatment of bitcoins held by custodians that file for bankruptcy protection is uncharted territory in U.S. Bankruptcy law. We cannot say with certainty whether bitcoin held in custody by a bankrupt custodian would be treated as property of a bankruptcy estate and, accordingly, whether the owner of that bitcoin would be treated as a general unsecured creditor.
If we or third-party service providers experience a security breach or cyberattack and unauthorized parties obtain access to our digital asset holdings, we may lose some or all of our digital assets and our financial condition and results of operations could be materially adversely affected.
Security breaches and cyberattacks are of particular concern with respect to digital assets. Bitcoin, ethereum and other digital assets have been, and may in the future be, subject to security breaches, cyberattacks, or other malicious activities. A successful security breach or cyberattack could result in:
•a partial or total loss of our holdings in a manner that may not be covered by insurance;
•harm to our reputation and brand;
•improper disclosure of data and violations of applicable data privacy and other laws; or
•significant regulatory scrutiny, investigations, fines, penalties, and other legal, regulatory, contractual and financial exposure.
Further, any actual or perceived security breach or cybersecurity attack directed at other companies with digital assets or companies that operate digital asset networks or exchanges, whether or not we are directly impacted, could lead to a general loss of confidence in the broader digital asset ecosystem or in the use of networks to conduct financial transactions, which could negatively impact us.
Attacks upon systems across a variety of industries, including industries related to digital assets, are increasing in frequency, persistence and sophistication, and, in many cases, are being conducted by sophisticated, well-funded and organized
groups and individuals, including state actors. The techniques used to obtain unauthorized, improper or illegal access to systems and information (including personal data and digital assets), disable or degrade services, or sabotage systems are constantly evolving, may be difficult to detect quickly, and often are not recognized or detected until after they have been launched against a target. These attacks may occur on our systems or those of our third-party service providers or partners. We may experience breaches of our security measures due to human error, malfeasance, insider threats, system errors or vulnerabilities or other irregularities. In particular, unauthorized parties have attempted, and we expect that they will continue to attempt, to gain access to our systems and facilities, as well as those of our partners and third-party service providers, through various means, such as hacking, social engineering, phishing and fraud. Threats can come from a variety of sources, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage and insiders. In addition, certain types of attacks could harm us even if our systems are left undisturbed. For example, certain threats are designed to remain dormant or undetectable, sometimes for extended periods of time, or until launched against a target and we may not be able to implement adequate preventative measures. Further, there has been an increase in such activities as a result of the COVID-19 pandemic, and there could be additional breaches as a result of the ongoing conflicts involving Ukraine and other countries. Any future security breach of our operations or those of others in the digital asset industry, including third-party services on which we rely, could materially and adversely affect our digital asset holding and financial condition.
The loss or destruction of a private key required to access our digital asset wallets may be irreversible. If we are unable to access our private keys or if we experience a cyberattack or other data loss relating to our digital asset holdings, our financial condition and results of operations could be materially adversely affected.
Our digital assets are controllable only by the possessor of both the unique public keys and private keys relating to the local or online digital wallets in which our digital assets are held. While the blockchain ledger requires a public key relating to a digital wallet to be published when used in a transaction, private keys must be safeguarded and kept private in order to prevent a third party from accessing the assets held in such wallet. To the extent our private key is lost, destroyed, or otherwise compromised and no backup of the private key is accessible, we will be unable to access our digital assets held in the related digital wallet. Furthermore, we cannot provide assurance that our digital wallets will not be compromised as a result of a cyberattack. The blockchain ledger, as well as digital assets and blockchain technologies, have been, and may in the future be, subject to security breaches, cyberattacks or other malicious activities.
A determination that bitcoin or any other digital asset is a "security" could lead to our classification as an “investment company” under the Investment Company Act of 1940 and could adversely affect the market price of our digital asset holdings and the market price of our common stock.
The SEC has stated that certain digital assets may be considered “securities” under the federal securities laws. The test for determining whether a particular digital asset is a “security” is complex and the outcome is difficult to predict. It is possible that the SEC could take a contrary position to the one taken by its senior officials or a federal court could conclude that bitcoin or any other digital assets we hold are securities. Such a determination could lead to our classification as an “investment company” under the Investment Company Act of 1940, as amended (the "Investment Company Act"), which would subject us to significant additional regulatory controls, potential fines and regulatory charges, all of which could have a material adverse effect on our business and operations and also may require us to substantially change the manner in which we conduct our business.
In addition, if bitcoin or any other digital asset we hold are determined to be securities for purposes of the federal securities laws, the additional regulatory restrictions imposed by such a determination could adversely affect the market price of bitcoin or such other digital assets and in turn adversely affect the market price of our common stock.
Risks Related to our Token Ecosystem and Tokens
We have raised capital to fund a Token Generation Event of rights to receive future PhunCoin, and beginning in 2021 we created and sold PhunToken. There can be no assurance that PhunCoin will ever be issued, and any significant difficulties we may experience with the offerings of PhunCoin or sales of PhunToken could result in claims against us. Additionally, the Token Generation Event and the offerings of PhunCoin and sales of PhunToken could subject us to various other business and regulatory uncertainties.
In June 2018, we raised capital by offering investors rights to acquire PhunCoin ("Rights") pursuant to Rule 506(c) of Regulation D as promulgated under the Securities Act. In addition, in 2019, PhunCoin, Inc. commenced an offering of Rights pursuant to Regulation CF, which closed May 1, 2019. As of December 31, 2023, a total of $1.2 million has been raised in both Rights offerings.
During the second quarter of 2019, Phunware announced the launch of a separate token, PhunToken, by our wholly owned subsidiary, Phun Token International, which enables holders to participate in our blockchain-enabled data exchange and mobile loyalty engagement ecosystem. As of December 31, 2023, we sold an aggregate of $2.6 million of PhunToken. Upon sale of PhunToken to customers, we deliver PhunToken to the respective customer's Etherum-based wallet.
We will use commercially reasonable efforts to develop the Token Ecosystem, deliver PhunCoin and PhunToken, respectively, but there is no assurance that such efforts will be successful. If the Token Generation Event, defined as the launch of the Token Ecosystem, is not consummated, our sales of PhunCoin and additional sales of PhunToken may not result in substantial proceeds. If the Token Generation Event is not consummated and/or PhunCoin or PhunToken is not adopted commercially, we may have to reduce our planned expenditures. Also, any significant difficulties we may experience with the Token Generation Event, the delivery of PhunCoin or the continued sales and delivery of PhunToken could result in claims against us which could have a material adverse effect on our financial condition.
The further development and acceptance of blockchain networks, which are part of a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain networks and blockchain assets could have a material adverse effect on our business plans, which may have a material adverse effect on the Company and our stockholders.
The growth of the blockchain industry in general, as well as the networks on which we will rely to consummate the Token Generation Event, is subject to a high degree of uncertainty. The digital asset and digital asset industries as a whole have been characterized by rapid changes and innovations and are constantly evolving. The slowing or stopping of the development, general acceptance and adoption and usage of blockchain networks and digital assets may materially adversely affect our business plans to launch and maintain PhunCoin, sell PhunToken and continue to develop the Token Ecosystem. For example, given the regulatory complexity and uncertainty with respect to digital assets, complying with such laws and regulations, which could change in the future or be subject to new interpretations, could have a material and adverse effect on our ability to develop, launch and continue to operate PhunCoin, PhunToken and the Token Ecosystem. In addition, the tax and accounting consequences to us of the Token Generation Event, PhunCoin, PhunToken and the Token Ecosystem could lead to incorrect reporting, classification or liabilities. If the Token Generation Event occurs and PhunCoin is launched and developed and PhunToken is further developed, the structural foundation of PhunCoin and PhunToken, and the software applications and other interfaces or applications upon which PhunCoin, PhunToken and the Token Ecosystem rely or on which PhunCoin, PhunToken and the Token Ecosystem may rely in the future, are and will be unproven. There can be no assurances that PhunCoin or PhunToken will be fully secure, which may result in impermissible transfers, a complete loss of users’ PhunCoin or PhunToken, or an unwillingness of users to access, adopt and utilize PhunCoin or PhunToken or the Token Ecosystem, whether through system faults or malicious attacks. Any such faults or attacks on PhunCoin or PhunToken may materially and adversely affect our business.
Because our tokens will be digital assets built and transacted initially on top of existing third-party blockchain technology, Phunware is reliant on another blockchain network, and users could be subject to the risk of wallet incompatibility and blockchain protocol risks.
Reliance upon another blockchain technology to create, develop and maintain the Token Ecosystem subjects us and Token Ecosystem users to the risk of digital wallet incompatibility, or additional ecosystem malfunction, unintended function, unexpected functioning of, or attack on, the providers' blockchain protocol, which may cause PhunCoin or PhunToken to malfunction or function in an unexpected manner, including, but not limited to, slowdown or complete cessation in functionality of the Token Ecosystem.
The development and operation of the Token Ecosystem will likely require additional technology and intellectual property rights.
Our ability to develop and operate the Token Ecosystem may depend on technology and intellectual property rights that we may license from unaffiliated third parties. If for any reason we were to fail to comply with our obligations under any applicable license agreement, or were unable to provide or were to fail to provide the technology and intellectual property that the Token Ecosystem requires, it would be unable to operate, which could have a material adverse effect on the Company’s operations and financial condition and its ability to develop, enhance, and maintain the Token Ecosystem.
Some of our Token Ecosystem code and protocols rely on open-source code publicly available. The open-source structure of some of the Token Ecosystem protocols means that the Token Ecosystem may be susceptible to developments by users or contributors that could damage the Token Ecosystem and our reputation and could affect the sale and utilization of PhunCoin, PhunToken and the Token Ecosystem.
The open-source nature of the Token Ecosystem protocol also means that it may be difficult for the Company or contributors maintain or develop the Token Ecosystem and the Company may not have adequate resources to address emerging issues or malicious programs that develop within the Token Ecosystem or expand functionality of the Token Ecosystem adequately or in a timely manner. Third parties not affiliated with us may introduce weaknesses or bugs into the core infrastructure elements of the Token Ecosystem and open-source code which may negatively impact the Token Ecosystem. Such events may result in a loss of trust in the security and operation of the Token Ecosystem and a decline in user activity and could negatively impact the sale and utilization of and development, acceptance and adoption of the Token Ecosystem, PhunCoin and PhunToken.
Open-source software is generally freely accessible, usable and modifiable. Certain open-source licenses may, in certain circumstances, require us to offer the components of our Token Ecosystem that incorporate the open-source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the open-source software and that we license such modifications or derivative works under the terms of the particular open-source license. If an author or other third party that distributes open-source software we use were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, including being enjoined from the offering of the components of our Token Ecosystem that contained the open-source software and being required to comply with the foregoing conditions, which could disrupt our ability to offer the affected software. We could also be subject to suits by parties claiming ownership of what we believe to be open-source software. Litigation could be costly for us to defend, have a negative effect on our operating results and financial condition and require us to devote additional research and development resources to change our products.
The Token Ecosystem is designed to distribute PhunCoin or PhunToken to consumers who provide certain personal information to us. Providing this data exposes us to risks of privacy data breach and cybersecurity attacks.
We utilize a substantial amount of electronic information. This includes transaction information and sensitive personal information of the users of the Token Ecosystem. The service providers used by us, may also use, store, and transmit such information. We intend to implement detailed privacy and cybersecurity policies and procedures and an incident response plan designed to protect such sensitive personal information and prevent data loss and security breaches.
There can be no assurances that PhunCoin, PhunToken or a user’s data will be fully secure, which may result in impermissible transfer, a complete loss of users’ PhunCoin, PhunToken or data on the Token Ecosystem, whether through system faults or malicious attacks, or an unwillingness of users to access, adopt and utilize PhunCoin and PhunToken. Any such faults or attacks on PhunCoin, PhunToken or users’ data may materially and adversely affect PhunCoin, PhunToken and the Token Ecosystem. There are a number of data protection, security, privacy and other government- and industry-specific requirements, including those that require companies to notify individuals of data security incidents involving certain types of personal data. Security compromises could harm the Token Ecosystem’s reputation, erode user confidence in the effectiveness of its security measures, negatively impact its ability to attract new users, or cause existing users to stop using the Token Ecosystem, or purchasing and using or consuming PhunCoin and PhunToken. We may be compelled to disclose personal information about a user or users of the Token Ecosystem to federal or state government regulators or taxation authorities. Accordingly, certain information concerning users may be shared outside Phunware.
The Token Ecosystem may be the target of malicious cyberattacks or may contain exploitable flaws in its underlying code, which may result in security breaches and the loss or theft of PhunCoin or PhunToken. If Token Ecosystem’s security is compromised or if the Token Ecosystem is subjected to attacks that frustrate or thwart our users’ ability to access the Token Ecosystem, their PhunCoin, PhunToken or the Token Ecosystem products and services, users may cease using the Token Ecosystem altogether.
The Token Ecosystem uses and will use new technology. There are no guarantees that such technology will be bug-free or accepted by the marketplace. Thus, even if the Token Ecosystem is operational, our tokens may be subject to the risk of theft, loss, malfunction, or reputational risk, any of which can significantly degrade the potential use of PhunCoin and PhunToken.
The Token Ecosystem structural foundation, the open-source protocols, the software application and other interfaces or applications built upon the Token Ecosystem are still in an early development stage and are unproven, and there can be no assurances that the Token Ecosystem and the creation, transfer or storage of PhunCoin and PhunToken will be uninterrupted or fully secure which may result in a complete loss of users’ PhunCoin or PhunToken or an unwillingness of users to access, adopt and utilize the Token Ecosystem. Further, the Token Ecosystem may also be the target of malicious attacks seeking to identify and exploit weaknesses in the software or the Token Ecosystem which may result in the loss or theft of PhunCoin or PhunToken. For example, if our tokens and the Token Ecosystem are subject to unknown and known security attacks (such as double-spend attacks, 51% attacks, or other malicious attacks), such attacks may materially and adversely affect the Token Ecosystem. In any such event, if the Token Ecosystem is not widely adopted, Purchasers of PhunCoin may lose all of their investment and customers of PhunToken may hold a coin for which there is no market to transact.
The Token Ecosystem is susceptible to mining attacks.
As with other decentralized digital assets, the blockchain used in connection with PhunCoin, PhunToken and the Token Ecosystem may be susceptible to mining attacks, including double-spend attacks, majority mining power attacks, selfish-mining attacks, and race condition attacks. Any successful attacks present a risk to the Token Ecosystem and our tokens. Despite efforts by us, the risk of known or novel mining attacks exists.
Alternative platforms or networks may be established that compete with or are more widely used than the Token Ecosystem. It is possible that alternative platforms or networks could be established that utilize the same or similar protocols underlying the Token Ecosystem or attempt to facilitate services or strategies that are materially similar to the Token Ecosystem’s services or strategies. The introduction of these alternative networks and the potential entry of new competitors into the market could harm our ability to increase sales, which could negatively impact the Token Ecosystem, PhunCoin and PhunToken.
There is no trading market for PhunCoin.
There is no established public market for PhunCoin. Peer-to-peer transfers will not be permitted unless and until rights holders are notified otherwise by us and informed of the requirements and conditions to do so. There can be no assurance that a secondary market will develop or, if a secondary market does develop, that it will provide the holders of the PhunCoin rights with liquidity of investment or that it will continue for the life of PhunCoin. The liquidity of any market will depend on a number of factors, including, but not limited: (i) the number of holders; (ii) the performance of PhunCoin; (iii) the market for similar crypto assets; (iv) the interest of traders in making a market for PhunCoin; (v) regulatory developments in the digital token or cryptocurrency industries and (vi) legal restrictions on transfer. In the event that PhunCoin remains untradeable for a significant period of time or indefinitely, their value could be materially adversely affected.
The delay, or perceived delay, in the full development of our Token Ecosystem may result in declines in PhunToken revenue.
PhunToken is intended to be used or consumed within our Token Ecosystem. We can provide no assurance, as to when, or if, we will be able to successfully complete the development of the Token Ecosystem. If we are unable to fully develop the Token Ecosystem, PhunToken customers or potential PhunToken customers may seek to find alternate methods to use, consume or transact their PhunToken. Secondary markets, some of which we may not be aware of, may develop as a result. The development of an alternative “marketplace” in which consumers can, or believe they can, purchase PhunToken at a price lower than our current sales price, may result in lower sales and harm our financial performance.
The regulatory regime governing blockchain technologies, digital assets, digital asset exchanges and offerings of and transactions in 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, blockchain technologies and digital asset exchanges, is currently expanding and likely to rapidly evolve and increase as government agencies take greater interest in them. Regulation also varies significantly among U.S. federal, state and foreign jurisdictions and is subject to significant uncertainty at this time. 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 digital asset transactions. In addition, any violations of laws and regulations relating to the safeguarding of private information in connection with PhunCoin and PhunToken could subject us to fines, penalties or other regulatory actions, as well as to civil actions by affected parties. Any such violations could adversely affect our ability 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 result in a variety of adverse consequences, including civil penalties and fines.
The sale of PhunToken or the offerings of PhunCoin may subject us to additional regulatory requirements. We will be adversely affected if we are, or any of our subsidiaries is, determined to have been subject to registration as an investment company under the Investment Company Act.
We are currently not deemed an “investment company” subject to regulation under the Investment Company Act. There is no guarantee we will continue to be exempt from registration under the Investment Company Act and were we to be deemed to be an investment company under the Investment Company Act, and thus subject to regulation under the Investment Company Act, the increased reporting and operating requirements could have an adverse impact on our business, operating results and financial condition.
In addition, if the SEC or a court of competent jurisdiction were to find that we are in violation of the Investment Company Act for having failed to register as an investment company thereunder, possible consequences include, but are not limited to, the following: (i) the SEC could apply to a district court to enjoin the violation; (ii) we could be sued by investors in us and in our securities for damages caused by the violation; and (iii) any contract to which we are a party that is made in, or whose performance involves a, violation of the Investment Company Act would be unenforceable by any party to the contract unless a court were to find that under the circumstances enforcement would produce a more equitable result than nonenforcement and would not be inconsistent with the purposes of the Investment Company Act. Should we be subjected to any or all of the foregoing, our business would be materially and adversely affected.
The prices of digital assets are extremely volatile. Fluctuations in the prices of digital assets and/or waning interest of investors in the digital asset markets could materially and adversely affect our business.
The prices of blockchain assets such as bitcoin and ethereum have historically been subject to dramatic fluctuations and are highly volatile. Several factors may influence the interest in digital assets such as PhunCoin and PhunToken, including, but not limited to:
•global digital asset supply;
•businesses’ acceptance of digital assets like cryptocurrencies as payment for goods and services, the security of online digital asset exchanges and digital wallets that hold blockchain assets, the perception that the use and holding of digital assets is safe and secure, and the regulatory restrictions on their use;
•purchasers’ expectations with respect to the rate of inflation;
•changes in the software, software requirements or hardware requirements underlying the Token Ecosystem;
•changes in the rights, obligations, incentives, or rewards for the users of and other participants in the Token Ecosystem;
•interest rates;
•currency exchange rates, including the rates at which digital assets may be exchanged for fiat currencies;
•fiat currency withdrawal and deposit policies of digital asset exchanges on which users may trade digital assets and liquidity on such exchanges;
•interruptions in service from or failures of major digital asset exchanges in which users may trade digital assets;
•investment and trading activities of large investors, including private and registered funds, that may directly or indirectly puchase PhunCoin or other digital assets;
•monetary policies of governments, trade restrictions, currency devaluations and revaluations;
•regulatory measures that may affect the purchase or use of digital assets, including PhunCoin and PhunToken;
•the maintenance and development of the open-source software protocol of certain digital assets;
•global or regional political, economic or financial events and conditions; or
•expectations among the Token Ecosystem or other digital asset market participants that the value and/or utility of certain digital assets will soon change.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

---

ITEM 2. PROPERTIES
Item 2. Properties.
Our corporate headquarters is located in Austin, Texas, where, in June 2022, we entered into a lease agreement for approximately 7,458 square feet of professional office space. We also currently lease professional office facilities in Irvine, California, which we are currently subleasing. We may also further sublease certain of these facilities where space is not fully utilized.
We currently do not anticipate difficulty in either retaining occupancy of any of our facilities through lease renewals prior to expiration or through month-to-month occupancy arrangements or replacing them with equivalent facilities. We believe that our existing facilities are suitable and adequate for our present purposes.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
As previously reported, on March 30, 2021, the Company filed an action against its former counsel Wilson Sonsini Goodrich & Rosati, PC (“WSGR”), which was styled Phunware, Inc., v. Wilson Sonsini Goodrich & Rosati, Professional Corporation, Does 1-25, Case No. 21CV381517 and filed in the Superior Court of the State of California for the County of Santa Clara (the “Uber Litigation”). The Company’s claims asserted in the Uber Litigation were subsequently ordered to arbitration (the “Uber Arbitration”). In the Uber Arbitration, WSGR sought to recover attorney’s fees and costs for services rendered to the Company in connection with a separate litigation matter against Uber Technologies, Inc.
On March 5, 2024, the Company entered into a Settlement Agreement and Release of Claims (the “Settlement Agreement”) with WSGR settling the Uber Litigation. As part of the Settlement Agreement, the Company was required to (i) pay WSGR a total sum of $2,193,852.02 no later than March 8, 2024, (ii) file requests for dismissal of the Uber Litigation, with prejudice, with the Santa Clara Superior Court, and (iii) request that the Uber Arbitration be dismissed and closed with prejudice. In addition, WSGR is required to request that the Uber Arbitration be dismissed and closed with prejudice. The Settlement Agreement also provides that the Company and WSGR release each other from all claims that the Company or WSGR may have against one another with respect to the Uber Litigation or the Uber Arbitration.
The information set forth under the subheading "Litigation" in Note 10, "Commitments and Contingencies" of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K is also incorporated herein by reference.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock, $0.0001 par value, began trading on the Nasdaq Capital Market on December 28, 2018 under the symbol “PHUN”.
Holders
On March 8, 2024, there were approximately 171 holders of record of our common stock. We believe the number of beneficial owners of our common stock is substantially greater than the number of record holders because a large portion of our outstanding common stock is held of record in broker “street name” for the benefit of individual investors.
Dividends
We have not paid any cash dividends on our common stock to date. The payment of any cash dividends will be dependent upon our revenue, earnings and financial condition from time to time. The payment of any dividends is within the discretion of our board of directors. It is presently expected that we will retain all earnings for use in our business operations and, accordingly, it is not expected that our board of directors will declare any dividends in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
The information set forth under the subheading "Securities Authorized for Issuance Under Equity Compensation Plans" included in Part III, Item 12 of this Annual Report on Form 10-K is incorporated herein by reference.
Recent Sales of Unregistered Securities
On July 6, 2022, we issued an unsecured promissory note to Streeterville Capital, LLC ("Streeterville") with an original principal amount of $12.8 million in a private placement (the "2022 Promissory Note"). On August 14, 2023, we entered into an amendment to the 2022 Promissory Note with the noteholder providing for limited conversion rights. On October 4, 2023, Streeterville converted $200,000 of obligations under the 2022 Promissory Note for 24,287 shares of common stock. On October 17, 2023, Streeterville converted $250,000 of obligations under the 2022 Promissory Note for 31,327 shares of common stock. On October 30, 2023, Streeterville converted $150,000 of obligations under the 2022 Promissory Note for 19,158 shares of common stock. On November 13, 2023, Streeterville converted $200,000 of obligations under the 2022 Promissory Note for 30.379 shares of common stock. On November 22, 2023, Streeterville converted $200,000 of obligations under the 2022 Promissory Note for 35,330 shares of common stock. On January 23, 2024, Streeterville converted $2,900,000 of obligations under the 2022 Promissory Note for 224,251 shares of common stock. On February 5, 2024, Streeterville converted $1,604,622 of obligations under the 2022 Promissory Note for 112,224 shares of common stock. The 2022 Promissory Note was paid-in-full in connection with the final conversion on February 5, 2024.
The 2022 Promissory Note and the shares of our common stock issuable upon conversion or in payment thereof under the amendment thereto were offered and sold pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by Section 4(a)(2) thereof, for the sale of securities not involving a public offering.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. 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, Inc. References to “management” or “management team” refer to our officers and directors.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto appearing elsewhere in this Annual Report on Form 10-K. As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our 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, but not limited to, those discussed in the section titled “Risk Factors” and elsewhere in this Annual 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 consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.
Key Events and Recent Developments
In October 2023, the Company entered into separation agreement with Russell Buyse, who was then serving as our Chief Executive Officer. The separation agreement provides that Mr. Buyse's employment with the Company terminated effective October 25, 2023.
On October 25, 2023, we entered into an employment agreement with Michael Snavely to serve as our Chief Executive Officer effective the same date. Our board of directors also appointed Mr. Snavely to serve as a Class III director until the 2024 annual meeting of stockholders.
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 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 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.
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 software subscription and services customer 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 revenue, deferred revenue, accounts receivable or elsewhere in our 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 40% of our backlog as of December 31, 2023 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 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 revenue, and provides visibility into future revenue streams.
The following table sets forth our backlog and deferred revenue:
December 31,
2023 2022
(in thousands)
Backlog $ 2,750 $ 3,824
Deferred revenue 1,909 2,805
Total backlog and deferred revenue $ 4,659 $ 6,629
For further information regarding our deferred revenue balances, refer to Note 4 “Revenue” of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Non-GAAP Financial Measures
Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA
We report our financial results in accordance with GAAP. We also use certain non-GAAP financial measures that fall within the meaning ascribed in SEC 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 our employees, (iii) for planning purposes including the preparation of our 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 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:
•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 our 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.
Year Ended December 31,
2023 2022
(in thousands, except percentages)
Adjusted gross profit (1)
$ 2,133 $ 3,719
Adjusted gross margin (1)
44.1 % 57.0 %
Adjusted EBITDA (2)
$ (15,487) $ (20,761)
(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 (benefit), (iii) depreciation, (iv) amortization, and further adjusted for (v) one-time adjustments and (vi) stock-based compensation expense.
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.
Year Ended December 31,
2023 2022
(in thousands, except percentages)
Gross profit $ 1,686 $ 3,509
Add back: Stock-based compensation 447 210
Adjusted gross profit $ 2,133 $ 3,719
Adjusted gross margin 44.1 % 57.0 %
Year Ended December 31,
2023 2022
(in thousands)
Net loss from continuing operations $ (41,944) $ (45,425)
Add back: Depreciation 84 50
Add back: Interest expense 1,733 2,406
Add back: Income tax expense 29 4
EBITDA (40,098) (42,965)
Add back: Stock-based compensation 4,071 3,009
Add back: Loss on extinguishment of debt 237 -
Add back: Impairment of digital assets 50 22,911
Add back: Impairment of goodwill 25,819 -
Less: Fair value adjustment for warrant liabilities (256) (3,349)
Less: Gain on sale of digital assets (5,310) (367)
Adjusted EBITDA $ (15,487) $ (20,761)
Components of Results of Operations
Revenue and Gross Profit
Our 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 are comprised of subscription fees from customers licensing our Software Development Kits (SDKs), that include access to our platform. Subscription revenue from SDK licenses gives the customer the right to access our location-based software 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 for 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. In 2021, we commenced 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.
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 our software 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, gross profit may fluctuate from period to period.
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 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.
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. Our sales and marketing expense may 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, our general and administrative expenses may 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, our research and development expenses may increase in absolute dollars as our business grows but may fluctuate as a percentage of revenue from period to period.
Impairment of Goodwill. Goodwill impairment consists of non-cash impairment charges related to goodwill. We review goodwill for impairment annually on October 1 and more frequently if events or changes in circumstances indicate an impairment may exist. If the carrying value of the reporting unit continues to exceed its fair value, the fair value of the Company’s goodwill is calculated and an impairment charge equal to the excess is recorded.
Interest Expense
Interest expense includes interest related to our outstanding debt, including amortization of discounts and deferred issuance costs.
Refer to Note 8 "Debt" of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information on 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.
Income Tax Expense
We are subject to U.S. Federal income taxes, state income taxes net of federal income tax effect and nondeductible expenses. Our effective tax rate will vary depending on permanent non-deductible expenses and other factors.
Refer to Note 14 "Income Taxes" of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.
Results of Operations
Comparison of Fiscal Years Ended December 31, 2023 and 2022
Net Revenue, Cost of Revenue, Gross Profit and Gross Margin
Year Ended December 31, Change
(in thousands, except percentages) 2023 2022 Amount %
Net Revenues, Cost of Revenues, Gross Profit & Margin
Net revenues $ 4,832 $ 6,521 $ (1,689) (25.9) %
Cost of revenues 3,146 3,012 134 4.4 %
Gross Profit $ 1,686 $ 3,509 $ (1,823) (52.0) %
Gross Margin 34.9 % 53.8 %
Total revenue decreased $1.7 million, or (25.9)%, in the year ended December 31, 2023 compared to the corresponding period in 2022 due to decreased PhunToken sales of $1.5 million.
Gross profit decreased $1.8 million, or (52.0)%, as a result of decreased PhunToken revenue mentioned above.
Operating Expenses
Year Ended December 31, Change
(in thousands, except percentages) 2023 2022 Amount %
Operating expenses
Sales and marketing $ 3,329 $ 4,114 $ (785) (19.1) %
General and administrative 13,780 17,277 (3,497) (20.2) %
Research and development 4,449 6,149 (1,700) (27.6) %
Impairment of goodwill 25,819 - 25,819 100.0 %
Total operating expenses $ 47,377 $ 27,540 $ 19,837 72.0 %
Sales and Marketing
Sales and marketing expense decreased $0.8 million, or (19.1)% for the year ended December 31, 2023 compared to the corresponding period of 2022, primarily due to a decrease of $0.5 million of marketing related expenditures generally related to PhunToken and a $0.3 million decrease related to lower sales and marketing personnel headcount.
General and Administrative
General and administrative expense decreased $3.5 million, or (20.2)%, for the year ended December 31, 2023 compared to the corresponding period of 2022, as a result of a decrease of $2.6 million in professional fees mainly related to legal expenses attributable to legal matters more fully described under the subheading "Litigation" in Note 10, "Commitments and Contingencies" of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. We also experienced a decrease of $1.0 million in payroll costs, as a result of lower headcount in our general and administrative function and lower bonus expense.
Research and Development
Research and development expense decreased $1.7 million, or (27.6)% for the year ended December 31, 2023, compared to the corresponding period of 2022, primarily resulting from lower headcount dedicated to research and development projects.
Impairment of Goodwill
We recorded an impairment of goodwill of $25.8 million for the year ended December 31, 2023. Refer to Note 6 "Goodwill" of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion on our goodwill impairment.
Other income (expense)
Year Ended December 31,
(in thousands, except percentages) 2023 2022
Other income (expense)
Interest expense $ (1,733) $ (2,406)
Loss on extinguishment of debt (237) -
Impairment of digital assets (50) (22,911)
Fair value adjustment for warrant liabilities 256 3,349
Gain on sale of digital currencies 5,310 367
Other income, net 230 211
Total other income (expense) $ 3,776 $ (21,390)
During 2023, we recorded other income of $3.8 million, as a result of a $5.3 million gain on sale of our digital asset holdings, primarily bitcoin and ethereum. This gain was offset by interest expense recorded related to our 2022 Promissory Note (defined elsewhere herein). Refer to Note 2, "Summary of Significant Accounting Policies" and Note 5, "Digital Assets" of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion regarding our digital asset holdings. Further reference is made to Note 8 "Debt" of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion on the 2022 Promissory Note.
During 2022, we recorded other expense of $21.4 million, which primarily consisted of impairment charges related to our digital asset holdings. We also recorded interest expense related to our various debt instruments and accretion of debt discounts thereunder. These expenses were offset by a gain related to the change in the fair value of our warrants issued in connection with a convertible note we issued in 2020.
Liquidity and Capital Resources
As of December 31, 2023, we held total cash of $3.9 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.
On February 1, 2022, we filed a shelf registration statement 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 pursuant to 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 December 31, 2023, approximately 421,176 shares of our common stock have been sold for aggregate gross cash proceeds of approximately $12.0 million. As of the date of this Report, shares of our common stock with a maximum aggregate offering price of up to $88.0 million may be sold pursuant to the sales agreement.
On July 6, 2022, we entered into a note purchase agreement and completed the sale of an unsecured promissory note (referred to herein as the 2022 Promissory Note) with an original principal amount of $12.8 million in a private placement. After deducting all transaction fees paid by us at closing, net cash proceeds to us at closing were $11.8 million. No interest was to accrue on the 2022 Promissory Note. On August 14, 2023, we entered into an amendment to the 2022 Promissory Note with the noteholder. The amendment extended the maturity date to June 1, 2024 and provided that effective August 1, 2023, we were required to make monthly amortization payments of at least $800 thousand commencing on August 31, 2023 until the 2022 Promissory Note is paid-in-full. We also granted the noteholder certain limited conversion rights, which if elected by the noteholder, would reduce the required monthly payment. The limited conversion rights were subject to advance payment and volume conditions. The amendment also provided that the outstanding balance shall accrue interest at a rate of 8% and payment deferrals are no longer permitted under the 2022 Promissory Note. During 2023, we made payments in the form of both cash and holder-elected conversions. Further, during the first quarter of 2024, the holder elected to convert the remaining balance of the 2022 Promissory Note and the 2022 Promissory Note was paid-in-full in February 2024.
In July 2023, we implemented a plan to decrease our cash burn by reducing employee headcount and other operating expenditures.
On August 22, 2023, we entered into a common stock purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right, but not the obligation, to sell to Lincoln Park up to $30 million in value of shares of our common stock from time to time over the 24-month term of the purchase agreement. On any business day selected by us, we may direct Lincoln Park to purchase up to 5,000 shares of our common stock subject to adjustment as set forth below, on such business day (or the purchase date), which we refer to as a "Regular Purchase," provided, however, that (i) a Regular Purchase may be increased to up to 7,000 shares if the closing sale price of our common stock on the Nasdaq is not below $10.00 on the applicable purchase date; (ii) a Regular Purchase may be increased to up to 9,000 shares if the closing sale price of our common stock on Nasdaq is not below $15.00 on the applicable purchase date; (iii) a Regular Purchase may be increased to up to 11,000 shares if the closing sale price of our common stock on Nasdaq is not below $25.00 on the applicable purchase date; and (iv) a Regular Purchase may be increased to up to 13,000 shares if the closing sale price of our common stock on Nasdaq is not below $37.50 on the applicable purchase date, provided, however, that if such Regular Purchase would not equal or exceed $100 thousand, then the number of shares that may be sold pursuant to such Regular Purchase is the maximum number of shares that would enable us to sell to Lincoln Park a Regular Purchase amount equal to, or as closely approximating without exceeding, $100 thousand. Lincoln Park’s committed obligation under any single Regular Purchase, subject to certain exceptions, cannot exceed $1 million. We may direct Lincoln Park to purchase shares in Regular Purchases as often as every business day, so long as the closing sale price of our common stock on such business day is not less than the floor price of $5.00 per share. Concurrently with entering into the purchase agreement, we also entered into a registration rights agreement with Lincoln Park pursuant to which the Company agreed to register the sale of the shares of the Company’s common stock that have been and may be issued to Lincoln Park under the purchase agreement pursuant to the Company’s existing shelf registration statement on Form S-3. During 2023, we sold 164,106 shares of our common stock, including certain commitment shares issued to Lincoln Park in connection with the transaction, for aggregate gross cash proceeds of $978 thousand. Transaction costs were $97 thousand. As of the date of this Report, $29.0 million in value of shares of our common stock remains issuable pursuant to the purchase agreement with Lincoln Park.
In a series of equity financings, we sold an aggregate of 2,696,000 shares of our common stock and issued pre-funded warrants to purchase up to 974,000 shares of our common stock. The gross proceeds from the offering, before deducting the placement agent's fees and other offering expenses payable by the Company, were approximately $22.6 million. Placement agent transaction costs were approximately $1.8 million. The holders of the pre-funded warrants exercised their rights to purchase 974,000 shares of common stock.
Although we expect to generate operating losses and negative operating cash flows in the future, based on the financing events described above, management believes it has sufficient cash on hand for at least one year following the filing date of this Annual Report on Form 10-K.
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 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 under our 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.
The accompanying consolidated financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the ordinary course of business.
The following table summarizes our cash flows for the periods presented:
Year Ended December 31,
(in thousands, except percentages) 2023 2022
Consolidated statement of cash flows
Net cash used in operating activities $ (18,435) $ (26,856)
Net cash used in investing activities 15,382 (2,258)
Net cash provided by financing activities 4,975 8,055
Operating Activities
Our primary source of cash from operating activities is receipts sales for our various product and service offerings as further described elsewhere in this Annual Report. Our 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, sales and marketing expenses, general operating expenses and employee and material costs for Lyte in discontinued operations.
We utilized $18.4 million of cash from operating activities during 2023 resulting from a net loss from continuing operations of $41.9 million. The net loss included non-cash charges of $26.9 million, primarily consisting from an impairment of goodwill, amortization of debt issuance costs primarily related to our 2022 Promissory Note, and stock-based compensation, offset by a gain in the sale of our digital assets. In addition, certain changes in our operating assets and liabilities resulted in significant cash (decreases) as follows: $(1.6) million from a combined decrease in accounts payable and accrued expenses and lease liability payments, $(1.3) million from the discontinued operation of Lyte, as well as $(0.4) million from other working capital changes, primarily related to a decrease in deferred revenue.
We utilized $26.8 million of cash from operating activities during 2022 resulting from a net loss of $50.9 million. The net loss included non-cash charges of $27.1 million, primarily consisting of the change in fair value of warrants, impairment of digital assets, impairment of goodwill, amortization of debt issuance costs primarily related to our 2022 Promissory Note, as well as stock-based compensation. In addition, certain changes in our operating assets and liabilities resulted in significant cash (decreases) as follows: $(0.1) million from a decrease in accounts payable, accrued expenses and an installment payments to Uber related to the settlement of our lawsuit, as well as $(2.9) million from other working capital changes, primarily related to a decrease in deferred revenue and lease liability payments.
Investing Activities
Our investing activities during 2023 consisted primarily of cash proceeds received for the sales of our digital asset holdings.
Our investing activities during 2022 consisted of the purchase of digital assets and cash payments for the acquisition of Lyte Technologies, Inc., which has been since discontinued. This was partially offset by proceeds from the sale of digital assets.
Financing Activities
Our financing activities during 2023 consisted of proceeds from sales of our common stock through various financing arrangements, offset by payments on our 2022 Promissory Note and the repurchases of our common stock. We raised net proceeds of approximately $10.5 million from various sales of our common stock. This source of financing was offset by $5.0 million of cash payments on our 2022 Promissory Note and $0.5 million of repurchases of shares of our common stock.
Our financing activities during 2022 consisted of proceeds from equity financings and debt borrowings offset by payments on debt. We acquired $8.1 million of cash from financing activities resulting primarily from $11.8 million in proceeds from our 2022 Promissory Note and $4.3 million in proceeds from the sale of our common stock. These sources of financings were partially offset by $8.1 million of payments on debt.
Contractual Obligations
We lease various office facilities, including our corporate headquarters in Austin, Texas, as well as an office in Irvine, California, under non-cancellable operating lease agreements that expire through 2027. The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods. Rent expense under operating leases for our continued operations totaled $0.8 million and $0.9 million for the years ended December 31, 2023 and 2022, respectfully.
The following table sets forth our contractual obligations as of December 31, 2023 (in thousands):
Payments due by period
Contractual obligations Total Less than
1 year
1-3
years
3-5
years
More than
5 years
Operating lease obligations $ 1,868 $ 751 $ 833 $ 284 $ -
Off-Balance Sheet Arrangements
During the years ended December 31, 2023 and 2022, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.
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.
Critical Accounting Policies and Estimates
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.
The critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are set forth below. For further information on all significant accounting policies, refer to Note 2 “Summary of Significant Accounting Policies” of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Revenue
We derive our revenue primarily from our platform subscription fees, application development and support fees. Revenue is recognized when control of these products or services are transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Our revenue recognition policy follows guidance from Accounting Standards Codification ("ASC") No. 606, Revenue from Contracts with Customers (Topic 606).
We determine revenue recognition through the following five-step framework:
•Identification of the contract, or contracts, with a customer;
•Identification of the performance obligations in the contract or contracts;
•Determination of the transaction price;
•Allocation of the transaction price to the performance obligations in the contract; and
•Recognition of revenue when, or as, we satisfy a performance obligation.
Our software subscription and services contracts often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. When a customer contract consists of licensing, application development and support services, we consider these separate performance obligations, which would require an allocation of consideration. For contracts with multiple performance obligations, the contract price is allocated to separate performance obligations on a relative standalone basis for which significant judgment is required. Judgment is required to determine whether a software license is considered distinct and accounted for separately, or not distinct and accounted for together with the software support and services and recognized over time.
Digital Assets
We account for our digital assets 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 or self-custody solutions 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 and ethereum (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 intra-day 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.
Goodwill
We review goodwill for impairment annually during the fourth quarter or more frequently if events or changes in circumstances would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. As of December 31, 2023, we identified an impairment of approximately $25.8 million. Refer to Note 6 "Goodwill" of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion on our goodwill impairment.
Discontinued Operation
On November 1, 2023, we committed to a plan to discontinue and wind down the operations of Lyte, which the Company determined meets the criteria for classification as a discontinued operation in accordance with Accounting Standards Codification ("ASC") Topic 205-20, Discontinued Operations. Prior periods were recast so that the basis of presentation is consistent. For additional information, see Note 3, "Discontinued Operation" of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K..
Recent Accounting Standards
Recent accounting standards applicable to our business are described under the subheading "Recently Adopted Accounting Policies" in Note 2 "Summary of Significant Accounting Policies" of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and as such, we are not required to provide the information required under this Item.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB Firm No. 688)
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Changes Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Phunware, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Phunware, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2018.
Houston, Texas
March 15, 2024
Phunware, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31,
2023 December 31,
Assets
Current assets:
Cash $ 3,934 $ 1,955
Accounts receivable, net of allowance for doubtful accounts of $86 and $10 at December 31, 2023 and 2022, respectively
550 835
Digital assets 75 10,137
Prepaid expenses and other current assets 374 608
Current assets of discontinued operation 28 3,328
Total current assets 4,961 16,863
Property and equipment, net 40 192
Goodwill - 25,766
Right-of-use asset 1,451 2,301
Other assets 276 325
Non-current assets of discontinued operation - 9,388
Total assets $ 6,728 $ 54,835
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 7,836 $ 7,278
Accrued expenses 437 2,741
Lease liability 629 696
Deferred revenue 1,258 1,531
PhunCoin deposits 1,202 1,202
Current maturities of long-term debt, net 4,936 9,667
Warrant liability - 256
Current liabilities of discontinued operation 205 2,206
Total current liabilities 16,503 25,577
Deferred revenue 651 1,274
Lease liability 1,031 1,928
Non-current liabilities of discontinued operation - 1,175
Total liabilities 18,185 29,954
Commitments and contingencies (Note 10)
Stockholders’ (deficit) equity
Common stock, $0.0001 par value; 1,000,000,000 shares authorized at December 31, 2023 and 2022; 3,851,448 and 2,063,074 shares issued and outstanding as of December 31, 2023 and 2022, respectively
- -
Treasury stock at cost; 10,130 and 0 shares at December 31, 2023 and 2022, respectively
(502) -
Additional paid-in capital 292,467 275,572
Accumulated other comprehensive loss (418) (472)
Accumulated deficit (303,004) (250,219)
Total stockholders’ equity (11,457) 24,881
Total liabilities and stockholders’ equity $ 6,728 $ 54,835
The accompanying notes are an integral part of these consolidated financial statements.
Phunware, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share information)
Year Ended December 31,
2023 2022
Net revenues $ 4,832 $ 6,521
Cost of revenues 3,146 3,012
Gross profit 1,686 3,509
Operating expenses:
Sales and marketing 3,329 4,114
General and administrative 13,780 17,277
Research and development 4,449 6,149
Impairment of goodwill 25,819 -
Total operating expenses 47,377 27,540
Operating loss (45,691) (24,031)
Other income (expense):
Interest expense (1,733) (2,406)
Loss on extinguishment of debt (237) -
Impairment of digital assets (50) (22,911)
Fair value adjustment for warrant liabilities 256 3,349
Gain on sale of digital currencies 5,310 367
Other income, net 230 211
Total other income (expense) 3,776 (21,390)
Loss before taxes (41,915) (45,421)
Income tax expense (29) (4)
Net loss from continuing operations (41,944) (45,425)
Net loss from discontinued operation, net of $0 taxes
(10,841) (5,469)
Net loss (52,785) (50,894)
Cumulative translation adjustment 54 (120)
Comprehensive loss $ (52,731) $ (51,014)
Net loss from continuing operations per share, basic and diluted $ (17.62) $ (22.95)
Net loss from discontinued operations per share, basic and diluted $ (4.56) $ (2.76)
Weighted-average common shares used to compute loss per share, basic and diluted 2,379,972 1,979,634
The accompanying notes are an integral part of these consolidated financial statements.
Phunware, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(In thousands, except share information)
Additional
Paid-in
Capital Accumulated Deficit Other
Comprehensive
Loss Total
Stockholders’
Equity (Deficit)
Common Stock Treasury Stock
Shares Amount Shares Amount
Balances as of December 31, 2021 1,935,040 $ - - $ - $ 264,954 $ (199,325) $ (352) $ 65,277
Exercise of stock options, net of vesting of restricted shares 914 - - - 28 - - 28
Release of restricted stock 36,064 - - - - - - -
Issuance of common stock under the 2018 employee stock purchase plan 4,103 - - - 214 - - 214
Issuance of common stock in connection with acquisition of Lyte Technology, Inc. 34,484 - - - 3,064 - - 3,064
Sales of common stock, net of issuance costs 52,469 - - - 4,298 - - 4,298
Stock-based compensation expense - - - - 3,014 - - 3,014
Cumulative translation adjustment - - - - - - (120) (120)
Net loss - - - - - (50,894) - (50,894)
Balances as of December 31, 2022 2,063,074 $ - - $ - $ 275,572 $ (250,219) $ (472) $ 24,881
Exercise of stock options, net of vesting of restricted shares 1,895 - - - 58 - - 58
Release of restricted stock 99,901 - - - - - - -
Issuance of common stock under the 2018 employee stock purchase plan 2,019 - - - 48 - - 48
Issuance of common stock in lieu of cash bonus and consulting fees 20,089 - - - 434 - - 434
Common Stock issued upon conversion of 2022 Promissory Note 208,453 - - - 1,800 - - 1,800
Sales of common stock, net of issuance costs 1,466,147 - - - 10,476 - - 10,476
Stock-based compensation expense - - - - 4,079 - - 4,079
Cumulative translation adjustment - - - - - - 54 54
Treasury stock repurchase - - (10,130) (502) - - - (502)
Net loss - - - - - (52,785) - (52,785)
Balances as of December 31, 2023 3,861,578 $ - (10,130) (502) $ 292,467 $ (303,004) $ (418) $ (11,457)
The accompanying notes are an integral part of these consolidated financial statements.
Phunware, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2023 2022
Operating activities
Net loss from continuing operations $ (41,944) $ (45,425)
Net loss from discontinued operation (10,841) (5,469)
Adjustments to reconcile net loss to net cash provided by operating activities:
Accretion of debt discount and amortization of deferred financing costs 1,136 1,034
Gain on change in fair value of warrant liability (256) (3,349)
Gain on sales of digital currencies (5,310) (367)
Impairment of digital assets 50 22,911
Impairment of goodwill and other long lived assets 25,887 -
Stock-based compensation 4,071 3,009
Other adjustments 1,285 441
Changes in operating assets and liabilities:
Accounts receivable 235 2
Prepaid expenses and other assets 283 26
Accounts payable 558 726
Accrued expenses (1,246) (987)
Lease liability payments (959) (794)
Deferred revenue (896) (318)
Cash flows from operating activities - continuing operations (27,947) (28,560)
Cash flows from operating activities - discontinued operation 9,512 1,704
Net cash used by operating activities (18,435) (26,856)
Investing activities
Proceeds received from sale of digital assets 15,390 1,282
Purchases of digital assets - (923)
Capital expenditures - (242)
Cash flows used in investing activities - continuing operations 15,390 117
Cash flows used in investing activities - discontinued operation (8) (2,375)
Net cash used in investing activities 15,382 (2,258)
Financing activities
Proceeds from borrowings, net of issuance costs - 11,795
Payments on borrowings (5,057) (8,066)
Proceeds from sales of common stock, net of issuance costs 10,476 4,298
Treasury stock repurchases (502) -
Proceeds from exercise of stock options 58 28
Net cash provided by financing activities - continuing operations 4,975 8,055
Effect of exchange rate on cash and restricted cash 57 (123)
Net (decrease) increase in cash and restricted cash 1,979 (21,182)
Cash and restricted cash at the beginning of the period 1,955 23,137
Cash and restricted cash at the end of the period $ 3,934 $ 1,955
The accompanying notes are an integral part of these consolidated financial statements.
Phunware, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2023 2022
Supplemental disclosure of cash flow information
Interest paid $ 1,215 $ 957
Income taxes paid $ - $ -
Supplemental disclosure of non-cash information
Issuance of common stock for payment on 2022 Promissory Note $ 1,800 $ -
Right-of-use assets obtained in exchange for operating lease obligations $ - $ 3,053
Non-cash exchange of digital assets $ 557 $ 906
Issuance of common stock in connection with acquisition of Lyte Technology, Inc. $ - $ 3,064
Issuance of common stock under the 2018 employee stock purchase plan previously accrued $ 48 $ 214
Issuance of common stock for payment of earned bonus and consulting fees $ 434 $ -
The accompanying notes are an integral part of these consolidated financial statements.
Phunware, Inc.
Notes to Consolidated Financial Statements
(In thousands, except share and per share information)
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 anytime, anywhere users worldwide. Our location-based software-as-a-service platform provides the entire mobile lifecycle of applications and media in one login through one procurement relationship. Our 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 platform. PhunToken is designed to reward consumers for their activity, such as watching branded videos, completing surveys and visiting points of interest. On November 1, 2023, we discontinued the operations of Lyte. See Note 3 for further discussion. Founded in 2009, we are a Delaware corporation headquartered in Austin, Texas.
Basis of Presentation
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), and include the Company’s accounts and those of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Discontinued Operation
On November 1, 2023, we committed to a plan to discontinue and wind down the operations of Lyte, which the Company determined meets the criteria for classification as a discontinued operation in accordance with Accounting Standards Codification ("ASC") Topic 205-20, Discontinued Operations. Prior periods were recast so that the basis of presentation is consistent. For additional information, see Note 3, Discontinued Operation.
Reverse Stock Split
On February 26, 2024, the Company effected a reverse stock split of its common stock at a ratio of one-for-fifty (the "Reverse Stock Split"). The number of authorized shares and par values of the common stock were not adjusted as a result of the Reverse Stock Split. The accompanying financial statements and notes thereto give retrospective effect to the reverse stock split for all periods presented. All issued and outstanding common stock, options, restricted stock units and warrants exercisable for common stock and per share amounts have been retrospectively adjusted.
Nasdaq listing
On April 13, 2023, we received a notice from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”) because the bid price of the Company’s common stock on the Nasdaq Capital Market had closed below $1.00 per share for the previous 30 consecutive business days. The notice from Nasdaq stated that, under Nasdaq Listing Rule 5810(c)(3)(A), we had been provided a period of 180 calendar days, or until October 10, 2023, to regain compliance with the Bid Price Requirement. On October 10, 2023, we submitted a request to Nasdaq for an additional 180-day extension to regain compliance with the Bid Price Requirement. On October 12, 2023, the Company received a letter from Nasdaq advising that the Company had been granted a 180-day extension to April 8, 2024, to regain compliance with the Bid Price Requirement, in accordance with Nasdaq Listing Rule 5810(c)(3)(A).
On December 21, 2023, the Company received a letter from Nasdaq notifying the Company that, as of December 20, 2023, the Company's common stock had a closing bid price of $0.10 or less for ten consecutive trading days and that, consistent with Nasdaq Listing Rule 5810(c)(3)(A)(iii), the Nasdaq had determined to delist the Company's common stock from the Nasdaq Capital Market. The notice provided that the Company an opportunity to appeal the Nasdaq's decision to delist the Company's common stock. On December 22, 2023, we submitted a request for a hearing before the Nasdaq Hearings Panel (the "Panel") to appeal the Nasdaq's delisting determination.
As noted above, we have effected a reverse stock split in order to regain compliance with the Bid Price Requirement, and on March 12, 2024, we received a letter from Nasdaq notifying us that we demonstrated compliance with the requirements to remain listed on the Nasdaq Capital Market, as required by the Panel. The letter also informed the Company that pursuant to Listing Rule 5815(d)(4)(B), the Company will be subject to a mandatory Panel monitor for a period of one year from the date of this letter. If, within that one-year monitoring period, the staff finds the Company again out of compliance with the requirement that was the subject of the exception, notwithstanding Rule 5810(c)(2), the Company will not be permitted to provide the Staff with a plan of compliance with respect to that deficiency and the staff will not be permitted to grant additional time for the Company to regain compliance with respect to that deficiency, nor will the Company be afforded an applicable cure or compliance period pursuant to Rule 5810(c)(3). Instead, the Nasdaq will issue a delist determination letter and the Company will have an opportunity to request a new hearing with the initial Panel or a newly convened hearings panel if the initial Panel is unavailable. The Company will have the opportunity to respond/present to the hearings panel as provided by Listing Rule 5815(d)(4)(C).
There can be no assurance the Company will maintain compliance with the above or any other Nasdaq Listing Rules.
Going Concern
Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going Concern, 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 initial evaluation shall 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 since inception. For the year ended, December 31, 2023, we incurred a net loss of $52,785, used $18,435 in cash for operations and had a working capital deficiency. However, subsequent to December 31, 2023, through a series of offerings of our common stock, we raised aggregate net proceeds of approximately $20.8 million. In addition, the holder of our 2022 Promissory Note, as amended, elected to convert the balance of the 2022 Promissory Note and the 2022 Promissory Note is paid in full. See Note 16 for further discussion on financing activities that occurred subsequent to December 31, 2023.
Our assessment included a review of the Company’s cash forecast taking into account the financing activities described above. As a result of the review of our assessment, we believe we have sufficient cash on-hand to fund potential net cash outflows for one year following the filing date of this Annual Report on Form 10-K. Accordingly, we believe there does not exist any indication of substantial doubt about our ability to continue as a going concern for one year following the filing date of this Annual Report on Form 10-K.
We continue to focus on growing our revenues. Accordingly, operating expenditures may exceed the revenue we expect to receive for the foreseeable future. Furthermore, we have a history of operating losses and negative operating cash flows and expect these trends to continue into the foreseeable future.
As of the date of this Annual Report on Form 10-K, while we believe we have adequate capital resources to complete our near-term operations, there is no guarantee that such capital resources will be sufficient until such time we reach profitability. We may access capital markets to fund strategic acquisitions or ongoing operations on terms we believe are favorable. The timing and amount of capital that may be raised is dependent on market conditions and the terms and conditions upon which investors would require to provide such capital. The Company may utilize debt or sell newly issued equity securities through public or private transactions, or through the use of an at-the-market facility. We currently have an effective "shelf" registration statement on Form S-3 we may utilize for additional financing for the issuance of our common stock, preferred stock, warrants or units.
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 our growth. If additional funding cannot be obtained on a timely basis and on satisfactory terms, our operations would be materially negatively impacted; however, we have been successful in accessing capital markets in the past, and we are confident in our ability to access capital markets again, if needed.
The accompanying 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
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. Some of the more significant estimates and assumptions made by management 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, the recoverability or impairment of tangible and intangible assets, including goodwill, reserves and certain accrued liabilities, the benefit period of deferred commissions, the incremental borrowing rate used in accounting for leases 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, digital asset exchanges, 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 and token ecosystem. Regulation of digital assets, like PhunCoin and PhunToken, cryptocurrencies, blockchain technologies and digital asset 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 laws, regulations, guidance or other actions could adversely affect our ability 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 such laws 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.
Revenue Recognition
On January 1, 2019, we adopted ASC 606, Revenue from Contracts with Customers ("ASC 606"). Generally, the provisions of ASC 606 state that revenue is recognized upon transfer of control of promised products or services in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct, distinct within the context of the contract and accounted for as separate performance obligations.
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing for contracts with customers. When the timing of revenue recognition differs from the timing of invoicing, we use judgment to determine whether the contract includes a significant financing component requiring adjustment to the transaction price. Various factors are considered in this determination including the duration of the contract, payment terms and other circumstances. Generally, we determine that contracts do not include a significant financing component. We apply a practical expedient for instances where, at contract inception, the expected timing difference between when promised goods or services are transferred and associated payment will be one year or less. Payment terms vary by contract type; however, contracts typically stipulate a requirement for the customer to pay within 30 days.
The transaction price may be allocated to performance obligations that are unsatisfied or are partially unsatisfied. Amounts relating to remaining performance obligations on non-cancelable contracts include both the deferred revenue balance and amounts that will be invoiced and recognized as revenue in future periods.
Significant Judgments
When selling our platform subscriptions and services, our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For contracts with multiple performance obligations, the contract price is allocated to separate performance obligations on a relative standalone basis for which significant judgment is required. Judgment is required to determine whether a software license is considered
distinct and accounted for separately, or not distinct and accounted for together with the software support and services and recognized over time. Significant judgment is also required relating to the timing of the satisfaction of performance obligations.
Our revenue consists of software subscriptions, application development services and support, application transactions, which are comprised of in-app advertising and PhunToken sales. Excluding PhunToken sales, in which we are paid in advance, typically our platform revenue customers pay us on net-30 day terms.
Subscriptions and Services. We derive subscription revenue from software license fees, which comprise subscription fees from customers licensing our Software Development Kits (SDKs), which include accessing the our platform; application development service revenue from the development of customer applications, or apps, which are built and delivered to customers; and support fees. Our contract terms generally range from one to three years. License fees are typically billed annually in advance.
Subscription revenue from SDK licenses gives the customer the right to access our platform. In accordance with ASC 606, a ‘right to access’ license is recognized over the license period. Support and maintenance revenue is comprised of support fees for customer applications, software updates and technical support for application development services for a support term. Support revenue is recognized ratably over the support term. We typically bill subscriptions and support and maintenance annually in advance.
Application development revenue is derived from development services around designing and building new applications or enhancing existing applications. We recognize application development revenue upon the transfer of control of the completed application or application development services. We typically bill for application development revenue in advance at contract signing, but may at times, bill one-half in advance at contract execution and one-half upon completion.
When a customer contract consists of licensing, application development and support and maintenance, we consider these separate performance obligations, which would require an allocation of consideration, of which significant judgement is required.
From time to time, we may also provide professional services by outsourcing employees to customers on a time and materials basis. Revenues from these arrangements are recognized as the services are performed. We typically bill professional service customers in the month in which the services are performed.
Application Transaction Revenue. We also generate 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, on which advertisers are charged for each ad delivered to 1,000 consumers; cost per click, on which advertisers are billed monthly for each ad clicked or touched on by a user; and cost per action, on which advertisers are charged each time a consumer takes a specified action, such as downloading an app.
In the normal course of business, we may act as an intermediary in executing transactions with third parties. The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether we are acting as the principal or an agent in our transactions with advertisers. Control is a determining factor in assessing principal versus agent relation. The determination of whether we are acting as a principal or an agent in a transaction involves judgment and is based on an evaluation of the terms of each arrangement. ASC 606 provides indicators of when an entity controls specified goods or services and is, therefore, acting as a principal. Based on the indicators of control, we have determined that we are the principal in all advertising arrangements because we are responsible for fulfilling the promise to provide the specified advertisements to advertising agencies or companies; establishing the selling prices of the advertisements sold; and credit risk with its advertising traffic providers. Accordingly, we act as the principal in all advertising arrangements and, therefore, report revenue earned and costs incurred related to these transactions on a gross basis.
PhunToken. During 2021, we announced the commencement of the selling of 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 platform. We follow the guidance of ASC 606 in determination the revenue recognition of our PhunToken sales. PhunToken customers pay us at the time of purchase of PhunToken. We recognize revenue related to PhunToken at the time of delivery of PhunToken to a customer's ethereum-based digital wallet.
Deferred Commissions
We defer commission costs and amortize them in a manner consistent with how we recognize revenue. Key judgments that impact our commission expense include estimating our customer life and the determination of the impairment of commission assets we deem to be unrecoverable. The Company applies a practical expedient and expenses these costs as incurred if the amortization period is one year or less.
Deferred commissions are recorded in prepaid and other current assets in our consolidated balance sheets. Changes in deferred commissions for the years ended December 31, 2023 and 2022 are as follows:
2023 2022
Balance, beginning of the year $ 136 $ 148
Deferral of commissions earned 22 55
Recognition of commission expense (62) (67)
Balance, end of the year $ 96 $ 136
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.
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.
There is currently no clearing house for our digital assets, including our bitcoin 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 transactions could adversely our financial condition.
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.
December 31,
2023 2022
Customer A - % 35 %
Customer B 43 % 4 %
Customer C 16 % 6 %
Customer D 12 % 8 %
Cash, Cash Equivalents, and Restricted Cash
We consider all investments with a maturity of three months or less from the date of acquisition to be cash equivalents. The Company had no cash equivalents or restricted cash at December 31, 2023 or 2022.
Accounts Receivable and Reserves
Accounts receivable are presented net of allowances. We consider receivables past due based on the contractual payment terms. We make judgments as to our ability to collect outstanding receivables and record a bad debt allowance for receivables when collection becomes doubtful. The allowances are based upon historical loss patterns, current and prior trends in our aged receivables, credit memo activity and specific circumstances of individual receivable balances. Accounts receivable consisted of the following:
December 31,
2023 2022
Accounts receivable $ 636 $ 845
Less allowances for doubtful accounts (86) (10)
Accounts receivable, net $ 550 $ 835
Changes in the allowance for doubtful accounts are as follows:
December 31,
2023 2022
Balance, beginning of year $ 10 $ 356
Provision for doubtful accounts, net of recoveries 86 (286)
Write offs (10) (60)
Balance, end of year $ 86 $ 10
Digital Assets
We currently account for all digital assets (primarily bitcoin and ethereum) held 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 use third-party custodial services or self-custody solutions 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 reporting period 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 intra-day 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.
Goodwill
Goodwill arises from purchase business combinations and is measured as the excess of the cost of the business acquired over the sum of the acquisition-date fair values of tangible and identifiable intangible assets acquired, less any liabilities assumed. In accordance with ASC 350, Intangibles - Goodwill and Other, we do not amortize goodwill or intangible assets with indefinite lives but rather assesses their carrying value for indications of impairment annually, or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired.
In testing goodwill for impairment, we have the option to begin with a qualitative assessment, commonly referred to as “Step 0,” to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, such as changes in our management, strategy and primary user base. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative goodwill impairment analysis by comparing the carrying amount to the fair value of the reporting unit. If the carrying amount exceeds the fair value, goodwill will be written down to the fair value and recorded as impairment expense in the consolidated statements of operations. We perform our impairment testing annually and when circumstances change that would more likely than not reduce the fair value
of a reporting unit below its carrying value. The Company performed its annual impairment assessment of goodwill as of October 1, 2023, and updated it during the fourth quarter of 2023, and concluded that goodwill was impaired. Refer to Note 6, Goodwill, for further discussion on our goodwill impairment.
Long-Lived Assets
Long-lived assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate that an asset’s carrying value may not be recoverable. In accordance with authoritative guidance, we evaluate the recoverability of each of our long-lived assets, including property and equipment, by comparing its carrying amount to the undiscounted future cash flows expected to be generated. If the total of undiscounted future cash flows is less than the carrying amount of an asset, an impairment would be recognized for the amount by which the carrying amount of the asset exceeds its fair value. 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 December 31, 2023 and 2022, all of our identifiable long-lived assets were in the United States.
We recorded an impairment loss on long-lived assets in the amount of $68 for the year ended December 31, 2023. We did not recognize any impairment losses relating to our long-lived assets during the year ended December 31, 2022.
Debt Issuance Costs and Discount
Debt discounts and direct costs incurred to issue non-revolving debt instruments are recognized as a reduction to the related debt balance in the accompanying consolidated balance sheets and amortized to interest expense over the contractual term of the related debt using the effective interest method.
Derivative Liabilities
When the Company issues warrants, it evaluates the proper balance sheet classification of the warrant to determine whether the warrant should be classified as equity or as a derivative liability on the consolidated balance sheet. In accordance with ASC 815-40, Derivatives and Hedging - Contracts in the Entity’s Own Equity (“ASC 815-40”), we classify a warrant as equity if it is indexed to our equity and several specific conditions for equity classification are met. A warrant is not considered indexed to our equity, in general, when it contains certain types of exercise contingencies or adjustments to exercise price. If a warrant is not indexed to our equity or it has net cash settlement that results in the warrants to be accounted for under ASC 480, Distinguishing Liabilities from Equity, or ASC 815-40, it is classified as a derivative liability which is carried on the consolidated balance sheet at fair value with any changes in its fair value recognized currently in the statement of operations. As of December 31, 2022, we had a warrant that was classified as a liability and other warrants that were classified as equity.
We used a Black-Scholes option-pricing model to value the warrant classified as a liability at inception and subsequent valuation dates. The initial and subsequent valuations of the warrant require significant judgment.
Leases
We adopted ASU 2016-02, Leases (Topic 842), as of January 1, 2021, in which we recognize a right-of-use asset and lease liability for all operating leases with terms greater than twelve months. The lease liability is measured based on the present value of the lease payments not yet paid. The right-of-use asset is measured based on the initial measurement of the lease liability adjusted for any direct costs incurred upon commencement of the lease.
We have elected certain practical expedients permitted under the guidance. We have elected to apply the short-term lease exception for all leases, which we will not recognize right-of-use assets or lease liabilities for leases that, at the commencement date, have a term of twelve (12) months or less. We have also elected not to separate non-lease components from lease components. Lease components generally include rent, taxes and insurance, while non-lease components generally include common area or other maintenance.
We lease our corporate offices under operating leases and determine if an arrangement is or contains a lease at inception. The initial terms of our real property lease agreements are generally five years and typically allow for renewals in five-year increments. We may, at times, negotiate a shorter lease renewal term. We generally do not account for any renewals at the lease adoption date. We did not enter into any financing leases for the year ended December 31, 2023.
Stock-Based Compensation
Compensation expense related to stock-based transactions, including employee and non-employee director awards, is measured and recognized in the financial statements based on fair value on the grant date of the award. We recognize stock-based compensation expense for awards with only service conditions on a ratable basis over the requisite service period of the related award, generally the vesting period of the award. We have not granted any awards with market or performance conditions. Forfeitures of all stock-based awards are accounted for when they occur.
Research and Development Expense
Research and development expenses consist primarily of personnel costs for our engineering, product, design and quality assurance teams, including stock-based compensation for individuals dedicated to our research and development function. Additionally, research and development expenses include contractor fees and allocated overhead costs. Research and development costs are expensed as incurred.
Retirement Plan
At December 31, 2023, we administered one employee retirement plan that qualified as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the retirement plan, participating employees may contribute a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. No employer matching contributions were made to the retirement plan during the years ended December 31, 2023 or 2022.
Income Taxes
We account for income taxes in accordance with ASC 740, Income Taxes ("ASC 740"). Under ASC 740, deferred tax assets and liabilities reflect the future tax consequences of the differences between the financial reporting and tax bases of assets and liabilities using current enacted tax rates. Valuation allowances are recorded when the realizability of such deferred tax assets does not meet the more-likely-than-not threshold under ASC 740.
Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event of a change in the determination as to the amount of deferred tax assets that can be realized, an adjustment of the valuation allowance with a corresponding impact to the provision for income taxes will be made in the period in which such determination was made.
The guidance on accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criterion for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.
Comprehensive Loss
We apply the guidance in ASC 220, Comprehensive Income, for the reporting and display of comprehensive loss and its components in the consolidated financial statements. Comprehensive loss comprises net loss and cumulative foreign currency translation adjustments. Accumulated comprehensive loss at December 31, 2023 and 2022 was due to foreign currency translation adjustments.
Loss per Common Share
Basic loss per common share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share is computed by giving effect to all potential shares of common stock, including those related to our outstanding warrants and stock equity plans, to the extent dilutive. For all periods presented, these shares were excluded from the calculation of diluted loss per share of common stock because their inclusion would have been anti-dilutive. As a result, diluted loss per common share is the same as basic loss per common share for all periods presented. 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:
December 31,
2023 2022
Warrants - 132,651
Options 17,125 19,236
Restricted stock units 96,808 59,160
Total 113,933 211,047
Fair Value Measurements
We follow the guidance in ASC 820, Fair Value Measurement, to measure certain assets and liabilities on a recurring and nonrecurring 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. We use a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) 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 assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 are set forth below:
Level 1 Level 2 Level 3 Total
Liabilities:
Warrant liability $ - $ - $ - $ -
Total $ - $ - $ - $ -
Our assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 are set forth below:
Level 1 Level 2 Level 3 Total
Liabilities:
Warrant liability $ - $ 256 $ - $ 256
Total $ - $ 256 $ - $ 256
The following table sets forth the assumptions used and calculated aggregated fair values of the liability classified warrant:
December 31, 2023 December 31, 2022
Strike price per share N/A $ 1.42
Closing price per share N/A $ 0.77
Term (years) N/A 0.53
Volatility N/A 102 %
Risk-free rate N/A 4.70 %
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.
Loss Contingencies
We are subject to the possibility of various loss contingencies arising in the ordinary course of business. We accrue for loss contingencies when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. If we determine that a loss is possible and the range of the loss can be reasonably determined, then we disclose the range of the possible loss. We regularly evaluate current information available to us to determine whether an accrual is required, an accrual should be adjusted or a range of possible loss should be disclosed. Legal costs incurred in connection with loss contingencies are expensed as incurred.
From time to time, we are involved in disputes, litigation and other legal actions. However, there are many uncertainties associated with any litigation, and these actions or other third-party claims against us may cause us to incur substantial settlement charges, which are inherently difficult to estimate and could adversely affect our results of operations. The actual liability in any such matters may be materially different from our estimates, which could result in the need to adjust our liability and record additional expenses.
Smaller Reporting Company
We are a "smaller reporting company" as defined by Rule 12b-2 of the Exchange Act, which qualifies the Company for reduced disclosure requirements and, if permitted, additional time to implement new or revised financial accounting standards. Smaller reporting company status is determined on an annual basis.
Segment Reporting
Our chief operating decision maker is our Chief Executive Officer ("CEO"). Our CEO reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As a result of the shutdown of our Lyte operating segment, as of December 31, 2023,we have determined that the Company operates in a single reporting segment.
Recently Adopted Accounting Pronouncements
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. We adopted this new standard effective January 1, 2023. The adoption of ASU 2016-13 did not have a material impact on our condensed consolidated financial statements and disclosures.
Recent Accounting Pronouncements Not Yet Adopted
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. We plan to implement ASU 2020-06 on January 1, 2024.
3. Discontinued Operation
On November 1, 2023, the Company made the strategic decision to wind down and discontinue the operations of its Lyte reporting segment. The assets and liabilities classified as a discontinued operation of Lyte are presented separately in the consolidated balance sheets and consolidated statements of operations and comprehensive loss for the years ended December 31, 2023 and 2022 are presented as a discontinued operation. We generally completed the wind down of the Lyte operations as of December 31, 2023. Therefore, there was no gain or loss on disposal.
Assets and liabilities of the Lyte discontinued operation included the following:
December 31,
2023 December 31,
Accounts receivable, net $ 28 $ 123
Inventory - 2,780
Prepaid expenses and other current assets - 425
Current assets of discontinued operation 28 3,328
Property and equipment, net - 29
Goodwill - 5,347
Intangible assets, net - 2,524
Right-of-use asset - 1,411
Other assets - 77
Non-current assets of discontinued operation - 9,388
Accounts payable 183 421
Accrued expenses 22 154
Deferred revenue - 1,373
Lease liability - 258
Current liabilities of discontinued operation 205 2,206
Lease liability - 1,175
Non-current liability of discontinued operation $ - $ 1,175
A breakdown of the Lyte discontinued operation in the consolidated statements of operations and comprehensive loss are set forth:
Year Ended December 31,
2023 2022
Net revenues $ 7,567 $ 15,273
Cost of revenues 8,470 13,706
Gross profit (903) 1,567
Operating expenses:
Sales and marketing 812 2,700
General and administrative 1,867 2,277
Impairment of goodwill and intangible asset 7,371 2,061
Total operating expenses 10,050 7,038
Operating loss (10,953) (5,471)
Other expense (income) - 2
Total other expense - 2
Net loss from discontinued operation $ (10,953) $ (5,469)
On March 15, 2022, we entered into a lease agreement, in which we lease approximately 21,830 square feet in Round Rock, Texas. The term of the lease was five years and commenced in July 2022. The lease provided for initial base rent payments of approximately $27 per month, subject to escalations. In addition, we were responsible for payments equal to our proportionate share of operating expenses. During the third quarter of 2022, we recorded a right-of-use asset and corresponding lease liability of $1,545. In connection with the wind down of Lyte, we entered into a lease termination agreement in which the landlord agreed to terminate the lease for our Lyte facility effective November 30, 2023. We agreed to forfeit our security deposit of approximately $77 and we paid, on November 9, 2023, a termination fee of approximately $120. For the years ended December 31, 2023 and 2022, we recorded rent expense of $352 and $176, respectively, related to the Lyte warehouse facility, which is included in discontinued operations in the consolidated statement of operations and comprehensive loss.
4. Revenue
Disaggregation of Revenue
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 88% and 93% of our net revenues from within the United States for the years ended December 31, 2023 and 2022, respectively. Revenue by geographic location is as follows:
Year Ended December 31,
2023 2022
Net revenues
United States $ 4,267 $ 6,066
International 565 455
Net revenues $ 4,832 $ 6,521
The following table sets forth our concentration of revenue sources as a percentage of total net revenues:
Year Ended December 31,
2023 2022
Customer A 14 % 1 %
Customer B 11 % 1 %
Customer D 10 % 4 %
Customer E 6 % 11 %
Deferred Revenue
Deferred revenue consists of customer billings or payments received in advance of the recognition of revenue under arrangements with customers. We recognize deferred revenue as revenue only when revenue recognition criteria are met. During the year ended December 31, 2023, we recognized revenue of $2,133 that was included in our deferred revenue balance as of December 31, 2022.
Remaining Performance Obligations
Remaining performance obligations consist of gross deferred revenue and backlog. Remaining performance obligations were $4,688 as of December 31, 2023, of which we expect to recognize 40% 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 platform. For the year ended December 31, 2022, we sold $1,535 of PhunToken for which we received both cash and digital assets from customers. Revenue from PhunToken for the year ended December 31, 2023 was not significant.
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 would have been transferred to employees over a time-based delivery schedule ranging from one to four years. 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 December 31, 2023 and 2022, issued PhunToken were 377.2 million. Total supply of PhunToken is capped at 10 billion.
5. Digital Assets
Changes in our digital asset holdings for the year ended December 31, 2023 were as follows:
Bitcoin Ethereum Other Total
Net balance at December 31, 2022 $ 9,460 $ 350 $ 327 $ 10,137
Digital assets received 3 - 65 68
Purchases of digital assets - - - -
Exchanges of digital assets - 557 (557) -
Disposal proceeds (14,154) (1,236) - (15,390)
Gain on sale of digital assets 4,708 381 221 5,310
Impairment expense - - (50) (50)
Net balance at December 31, 2023 $ 17 $ 52 $ 6 $ 75
Changes in our digital asset holdings for the year ended December 31, 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 37 378 44 459
Purchases of digital assets 923 - - 923
Exchanges of digital assets - (906) 906 -
Disposal proceeds (796) (486) - (1,282)
Gain on sale of digital assets 69 298 - 367
Impairment expense (19,182) (2,978) (751) (22,911)
Net balance at December 31, 2022 $ 9,460 $ 350 $ 327 $ 10,137
6. Goodwill
We test goodwill for impairment annually, as of the beginning of the fourth quarter, or more frequently when events or changes in circumstances indicate that the fair value is below its carrying value. The process of evaluating goodwill for potential impairment is subjective and requires significant estimates, assumptions and judgments particularly related to the estimating the fair value of each reporting unit. Subsequent to the shutdown of Lyte, the Company concluded it operated in one reporting unit.
During the fourth quarter of 2023, sufficient impairment indicators were identified by the Company that it was more-likely-than-not that goodwill was impaired, and a quantitative interim goodwill impairment test was performed. These impairment indicators included a sustained decline in the Company's stock price and volume of shares traded during the fourth quarter of 2023, which hindered fundraising. As a result of our 2023 testing, we concluded goodwill was impaired. We recorded a goodwill impairment charge of $25,820. As a result of this impairment charge, the Company's goodwill balance was completely written off as of December 31, 2023. The impairment was driven by deterioration of cash flows, as well as higher costs.
The goodwill impairment analysis referenced above used the discounted cash flow model (income approach) utilizing Level 3 unobservable inputs. Significant assumptions in this analysis included, but were not limited to, future cash flow projections, the weighted average cost of capital, the terminal growth rate and the tax rate. Estimates of future cash flows are based on current regulatory and economic climates, recent operating results, and planned business strategies. These estimates could be negatively affected by changes in federal, state, or local regulations or economic downturns. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from estimates. We believe the current assumptions and estimates utilized are both reasonable and appropriate.
7. Accrued Expenses
Accrued expenses consisted of the following:
December 31,
2023 2022
Acquisition and earn out payable $ - $ -
Payroll related expenses 15 899
Interest payable - 618
Accounts payable settlement - 231
Taxes 110 431
Other 312 562
Total accrued expenses $ 437 $ 2,741
8. 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. 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 was to accrue on the 2022 Promissory Note. Beginning on November 1, 2022, our monthly amortization payment was approximately $1,566, which includes a 10% premium, until the original maturity date of July 1, 2023. We had 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 the outstanding balance would automatically increase by 1.85%
On March 15, 2023, we elected to defer monthly payment obligations for April, May, June and July 2023, as permitted, at the time, by the 2022 Promissory Note. In connection therewith, we entered into a waiver agreement with the holder waiving the Payment Deferral Conditions, as defined in the 2022 Promissory Note. For agreeing to waive the Payment Deferral Conditions, we agreed to compensate the noteholder an amount equal to 5% of the outstanding balance immediately before entering into the waiver agreement. We evaluated the modification in accordance with the guidance as in ASC 470 - Debt, and we concluded that the modification was not an extinguishment of the original debt; therefore, no gain or loss was recognized upon modification.
On August 14, 2023, we entered into an amendment to the 2022 Promissory Note with the noteholder. The amendment extended the maturity date to May 31, 2024 and provided that effective August 1, 2023, we are required to make monthly amortization payments of at least $800 commencing on August 31, 2023 until the 2022 Promissory Note is paid-in-full. Furthermore, the amendment removed the required payment due on August 1, 2023. We also granted the holder certain limited conversion rights, subject to advance payment and volume conditions. Conversions into shares of our common stock made pursuant to the limited conversion rights will be calculated on a conversion price equal to 90% of the lower of (i) the closing trading price of our common stock on the trading day immediately preceding the date for such conversion or (ii) the average closing trading price of our common stock for the five trading days immediately preceding the date for such conversion. If the holder elects to convert pursuant to the limited conversion option, such conversions will reduce the current month’s monthly amortization payment. Any conversions in any given month in excess of the $800 monthly payment will be applied to reduce the following month's required monthly amortization payment. In connection with the amendment, we agreed to pay an extension fee equal to approximately $708. The amendment also provided that the outstanding balance shall accrue interest at a rate of 8% beginning on August 1, 2023, and payment deferrals are no longer permitted. We evaluated the amendment in accordance with ASC 470 - Debt, and we concluded that the modification was an extinguishment of the original debt. Accordingly, we recorded a loss on extinguishment of debt of $237 for the year ended December 31, 2023. In accounting for the amendment, we reviewed other applicable guidance and determined the amendment met the criteria to be accounted for as share-settled debt pursuant to ASC 480-10-25-14(a) as the settlement amount is based on a fixed monetary amount settled in a variable number of shares.
Effective December 6, 2023, the Company entered into an acknowledgement and agreement with the noteholder to which the parties (a) memorialized the noteholder's waiver of the Company’s obligations to satisfy minimum balance reduction
requirements in cash for each of October 2023 and November 2023 and the minimum balance reduction requirement for December 2023. As consideration for the acknowledgement and agreement, we agreed to pay the noteholder a fee in an aggregate amount equal to 7.5%, or approximately $347, of the outstanding balance of the 2022 Promissory Note. The fee was added to the outstanding balance of the 2022 Promissory Note. We evaluated the modification in accordance with the guidance as in ASC 470 - Debt, and we concluded that the modification was not an extinguishment of the original debt; therefore, no gain or loss was recognized upon modification.
During 2023, we issued 208,453 shares of our common stock to the noteholder pursuant to conversions elected by the noteholder, which amounted to payment of $1,800 of principle and accrued interest thereunder. The 2022 Promissory Note had a balance of $5,011 and debt discount of $75 as of December 31, 2023.
The noteholder subsequently converted the outstanding balance of the 2022 Promissory Note into shares of our common stock. See Note 16 below for further discussion.
Interest Expense
Interest expense amounted to $1,733 and $2,406 for the years ended December 31, 2023 and 2022, respectively.
9. Leases
As of December 31, 2023, we lease two corporate offices located in Austin, Texas and Irvine, California, with the earliest lease agreement currently terminating in March 2025 with the latest terminating in September 2027.
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 lease commenced on June 10, 2022 and has a term of sixty-four (64) months, with an option to renew the lease for an additional five-year term at the conclusion of the initial term. 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.
On October 4, 2023, we entered into a lease termination agreement with the landlord of our office space in San Diego, California, in which the landlord and us agreed to terminate our lease effective October 31, 2023. We agreed to forfeit our security deposit of approximately $14 and pay an early termination fee in the amount of approximately $68 on October 31, 2023. The lease was originally scheduled to conclude on June 30, 2025.
The weighted-average remaining lease term for our operating leases as of December 31, 2023 and 2022 was 3.1 years and 4.0 years, respectively. As our leases generally do not include an implicit rate, we compute our incremental borrowing rate based on information available at the lease commencement date applying a rate to each lease. This approach requires significant judgment. We used incremental borrowing rates that match the duration of the remaining lease terms of our operating leases on a fully collateralized basis at the time we enter into the lease to initially measure our lease liability. The weighted average incremental borrowing rate used to measure our lease liability was 9.63% and 9.80% at December 31, 2023 and 2022, respectively.
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 consolidated statement of operations and comprehensive loss. Rent expense for continuing operations under operating leases totaled $827 and $926 for the years ended December 31, 2023 and 2022, respectively.
Future minimum annual lease payments under the Company’s operating leases are as follows:
Future minimum lease obligations for the years ending December 31, Lease obligations
2024 $ 751
2025 463
2026 370
2027 284
$ 1,868
Less: Portion representing interest $ (208)
$ 1,660
In 2021, we entered into two sublease agreements for our Miami, Florida and Irvine, California office spaces, in which the subtenants will pay us monthly base rent, subject to escalations throughout the term of the sublease. The Miami sublease agreement terminated on June 30, 2023, while the Irvine, California sublease agreement terminates on March 31, 2025. We recognized sublease income of $254 and $300 for the year ended December 31, 2023 and December 31, 2022, respectively.
10. Commitments and Contingencies
Litigation
On March 30, 2021, Phunware filed an action against its former counsel Wilson Sonsini Goodrich & Rosati, PC (“WSGR”). The matter is Phunware, Inc., v. Wilson Sonsini Goodrich & Rosati, Professional Corporation, Does 1-25, Case No. 21CV381517, filed in the Superior Court of the State of California for the County of Santa Clara. On July 30, 2021, we filed a second action against WSGR in the Superior Court of the State of California for the County of Santa Clara. This matter is captioned Phunware, Inc., v. Wilson Sonsini Goodrich & Rosati, Professional Corporation, Does 1-25, Case No. 21CV386411. The two actions are pending in arbitration. The outcome is not certain. The relief sought, as stated in the complaints, are damages according to proof, interest and costs of suit. WSGR filed a crossclaim in arbitration related to services provided to Phunware. WSGR seeks to recover fees related to the services at issue in Phunware’s actions against WSGR, of which $4,321 is recorded in accounts payable in our consolidated balance sheets as of December 31, 2023 and 2022. In March 2023, we partially settled WSGR's claims against us and paid approximately $2.2 million of the outstanding invoice amount owed to them. The claims related to the remaining balance of the payables amount owed continue to be litigated.
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 and oral argument on the motion to dismiss and motion for partial summary judgement is complete. Both parties argued their positions before the Court of Chancery during a hearing on April 4, 2023. On June 16, 2023, the Court ruled on the motions without filing a written opinion. From the bench, Vice Chancellor Cook granted Phunware’s motion to dismiss on the Texas law-based claims and denied both the motion to dismiss and partial motion for summary judgment on the Delaware law claims. The parties engaged in mediation in July 2023, but have been unable to reach a settlement, although discussions continue. We intend to vigorously defend against this lawsuit and any appeals. We have not recorded a liability 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.
11. PhunCoin
In June 2018, we launched an offering pursuant to Rule 506(c) of Regulation D as promulgated under the Securities Act of rights to acquire PhunCoin (the "Rights). In 2019, we commenced an offering of additional Rights to acquire PhunCoin pursuant to Regulation CF promulgated under the Securities Act, which closed May 1, 2019. For both offerings of Rights, we accepted payment in the form of cash and digital assets. The amount of PhunCoin to be issued to the purchaser is equal to the dollar amount paid by the purchaser divided by the price of the PhunCoin at the time of issuance of the PhunCoin during the launch of the Token Ecosystem (as defined below) before taking into consideration any applicable discount rate, which is based on the time of the purchase.
Through December 31, 2023, we received aggregate net cash proceeds from our Rights offerings of $1,202. Proceeds from the Rights are recorded as PhunCoin deposits in the consolidated balance sheet as of December 31, 2023 and 2022. We currently do not plan to raise additional material proceeds through the sales of PhunCoin Rights.
Issuance of PhunCoin
PhunCoin is expected to be issued to Rights holders the earlier of (i) the launch of our blockchain technology enabled rewards marketplace and data exchange (“Token Ecosystem” or "Token Generation Event"), (ii) one (1) year after the issuance of the Rights to the purchaser or (iii) the date we determine that we have the ability to enforce resale restrictions with respect to PhunCoin pursuant to applicable federal securities laws. Proceeds from the Rights offerings are generally not refundable if the Token Generation Event is not consummated.
In 2021, we notified holders of the PhunCoin Rights to request they complete additional information needed for issuance and we currently anticipate that PhunCoin will be transferred to the holders of the Rights in 2024. Holders of the Rights may be transferred PhunCoin even if the Token Ecosystem is not yet fully developed. PhunCoin may not be able to be fully utilized until the Token Ecosystem is fully developed.
There can be no assurance as to when (or if) we will be able to successfully issue PhunCoin or complete the development of the Token Ecosystem. The Company is currently developing multiple aspects of the Token Ecosystem, as well as coordinating with trading platforms to support compliant transfer and trading of PhunCoin. The continued adjustment of dates to complete the development of the Token Ecosystem have been and may be adjusted based on user feedback, additional aspects of the Token Ecosystem currently under development and the ability to meet evolving applicable requirements; therefore, a specific development completion date for the Token Ecosystem is difficult to determine at this time, as it is based on many external factors outside of our control.
Termination of the Token Rights Agreement
Termination of the Token Rights Agreement occurs on the earlier of (i) PhunCoin being issued to the Rights holder pursuant to the provisions noted above, (ii) the payment, or setting aside of payment with respect to a dissolution event (as described below) or (iii) twelve months from the date of the Token Rights Agreement with the Rights holder, which we may extend at our sole discretion for six months if a Token Generation Event has not occurred. Upon termination of the Token Rights Agreement, we have no further obligation to the Rights holder. While the Token Rights Agreement has terminated in accordance with its terms (with respect to all Rights holders), as of the date of this Annual Report, we have determined to continue our obligations under the Token Rights Agreement and transfer of PhunCoin to the holders of Rights.
Dissolution Event
A dissolution event occurs if there has been (i) a voluntary termination of our operations, (ii) a general assignment for the benefit of creditors, (iii) a change of U.S. laws that make the use or issuance of PhunCoin or the Token Generation Event impractical or unfeasible or (iv) any other liquidation, dissolution or winding up of the Company.
In the event a dissolution event occurs prior to the termination of the Token Rights Agreement, if there are any remaining proceeds from the Rights offering that have not been utilized by us in our operations or for the development of the Token Ecosystem, such remaining proceeds would be distributed pro rata to purchasers in the Rights offering following any distributions to holders of our capital stock or debt, if any.
No Voting Rights or Profit Share
Rights holders (and eventual PhunCoin holders) have no voting rights and are not entitled to share in the profits or residual interest of Phunware or any subsidiaries of the Company. However, PhunCoin holders will be provided fractional economic interests in the Token Ecosystem, including monthly PhunCoin or other distributions to PhunCoin holders, based on
their respective ownership percentage of and other elections with respect to PhunCoin, totaling 2.5% or more of certain Token Ecosystem revenues.
PhunCoin Warrants
In 2018, we issued warrants to receive PhunCoin to sixty-eight (68) stockholders. At the time of issuance, we determined there should be no value assigned to the rights to receive PhunCoin under these warrants issued to the stockholders, for the following reasons: (i) the PhunCoin-related rights in these warrants (x) lacked characteristics of financial instruments and derivatives, and (y) did not obligate us to achieve the Token Generation Event or launch and distribute PhunCoin to the warrant holders and (ii) there was not a market for PhunCoin and they did not exist.
Should we complete a Token Generation Event, the warrant holders would receive their requisite amount of PhunCoin.
12. Stockholders’ Equity
Common Stock
Total common stock authorized to be issued as of December 31, 2023 was 1,000,000,000 shares with a par value of $0.0001 per share. At December 31, 2023 and 2022, there were 3,851,448 and 2,063,074 shares outstanding, respectively.
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 million, 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. The Company and Wainwright may each terminate the sales agreement at any time with five days prior written notice. During 2023, we sold 368,707 shares of our common stock under our sales agreement with Wainwright for aggregate gross cash proceeds of $7,393. Transaction costs were $217. During 2022, we sold 52,469 shares of our common stock under our sales agreement with Wainwright for aggregate gross cash proceeds of $4,562. Transaction costs were $101. 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 million filed with the SEC on February 1, 2022.
On August 22, 2023, we entered into a common stock purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right, but not the obligation, to sell to Lincoln Park up to $30 million in value of shares of our common stock from time to time over the 24-month term of the purchase agreement. On any business day selected by us, we may direct Lincoln Park to purchase up to 5,000 shares of our common stock subject to adjustment as set forth below, on such business day (or the purchase date), which we refer to as a "Regular Purchase," provided, however, that (i) a Regular Purchase may be increased to up to 7,000 shares if the closing sale price of our common stock on the Nasdaq is not below $10.00 on the applicable purchase date; (ii) a Regular Purchase may be increased to up to 9,000 shares if the closing sale price of our common stock on Nasdaq is not below $15.00 on the applicable purchase date; (iii) a Regular Purchase may be increased to up to 11,000 shares if the closing sale price of our common stock on Nasdaq is not below $25.00 on the applicable purchase date; and (iv) a Regular Purchase may be increased to up to 13,000 shares if the closing sale price of our common stock on Nasdaq is not below $37.50 on the applicable purchase date, provided, however, that if such Regular Purchase would not equal or exceed $100 thousand, then the number of shares that may be sold pursuant to such Regular Purchase is the maximum number of shares that would enable us to sell to Lincoln Park a Regular Purchase amount equal to, or as closely approximating without exceeding, $100 thousand. Lincoln Park’s committed obligation under any single Regular Purchase, subject to certain exceptions, cannot exceed $1 million. We may direct Lincoln Park to purchase shares in Regular Purchases as often as every business day, so long as the closing sale price of our common stock on such business day is not less than the floor price of $5.00 per share. Concurrently with entering into the purchase agreement, we also entered into a registration rights agreement with Lincoln Park pursuant to which the Company agreed to register the sale of the shares of the Company’s common stock that have been and may be issued to Lincoln Park under the purchase agreement pursuant to the Company’s existing shelf registration statement on Form S-3. During 2023, we sold 164,106 shares of our common stock, including certain commitment shares issued to Lincoln Park in connection with the transaction, for aggregate gross cash proceeds of $978. Transaction costs were $97.
On December 11, 2023, we consummated a registered public offering of an aggregate of 664,307 shares of our common stock and pre-funded warrants to purchase up to 269,027 shares of our common stock pursuant to a securities purchase agreement dated December 7, 2023. The pre-funded warrants issued had an exercise price of $0.05 and were immediately exercisable any time after their original issuance until such pre-funded warrants are exercised in full. The shares were offered at a public offering price of $3.00 per share and the pre-funded warrants were offered at a public offering price of $2.95 per pre-funded warrant. The gross proceeds from the offering, before deducting the placement agent's fees and other offering expenses
payable by the Company, were approximately $2,800. Transaction costs were approximately $389. The holders of pre-funded warrants exercised their rights to purchase 269,027 shares of common stock in December 2023.
Stock Repurchase Plan
On January 5, 2023, our board of directors authorized and approved a stock repurchase program for the repurchase of outstanding shares of our common stock with an aggregate value of up to $5,000. The authorization permits us to repurchase shares of our common stock from time-to-time through open market repurchases at prevailing market prices, in accordance with federal securities laws. The stock repurchase plan is expected to be completed over the next twelve (12) months and may be amended or terminated at any time, in the sole discretion of the board. The exact means, number and timing of stock repurchases depend on market conditions, applicable legal requirements and other factors, and have been funded through the liquidation of our bitcoin holdings. During 2023, we repurchased 10,130 shares of our common stock at an aggregate repurchase price of $502.
Dividends
Dividends are paid on a when-and-if-declared basis. We did not declare any dividends during 2023 or 2022.
Warrants
As of December 31, 2023, we had no warrants outstanding. A summary of our outstanding warrants as of December 31, 2022 is set forth below:
Warrant Type Cash Exercise
Price per
share December 31, 2023
December 31, 2022
2020 Convertible Notes warrant $ 71.23 - 56,226
Common stock warrants (Series F) $ 461.00 - 7,548
Public Warrants (PHUNW) $ 575.00 - 35,226
Private Placement Warrants $ 575.00 - 33,168
Unit Purchase Option Warrants $ 575.00 - 483
Total - 132,651
In connection with the issuance of certain convertible notes, in 2020, we issued a warrant exercisable for three (3) years for the purchase, initially, of up to an aggregate of 43,200 shares of the Company's common stock at an initial exercise price of $200 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 $112.50 per share, and the number of shares for which the warrant is exercisable increased to 76,800 shares. Furthermore, in October 2021, we issued shares to the seller of Lyte as purchase consideration at a price of $71.23 per share, and as a result, the exercise price of the warrant adjusted accordingly and the number of shares exercisable thereunder increased to 56,226. The holder also partially exercised the warrant in 2021. The warrant expired July 15, 2023.
In 2018, but prior to our reverse merger with Stellar, we issued warrants (Series F above) to purchase an aggregate of 21,701 shares of common stock with an exercise price of $461 per share. The term of the warrants is the earlier of (i)
June 5, 2023, (ii) an acquisition, merger, or consolidation of the Company or a sale, lease or other disposition of all or substantially all of the assets of Phunware and its subsidiaries, except (a) any sale of stock for capital raising purposes, (b) purpose of changing the Company’s state of incorporation, and (c) where the stockholders of Phunware immediately before such transaction retain at least a majority of the voting power immediately following such transaction; or (iii) immediately prior to an initial public offering. The reverse merger with Stellar did not trigger an expiration of the warrant pursuant to term (ii) or (iii) above. These warrants are fully vested. As of December 31, 2023, the warrants had expired.
The Company had public warrants trading under the Nasdaq ticker symbol "PHUNW," private placement warrants and unit purchase option warrants. Each of these classes of warrants entitled the holder to purchase one share of common stock at an exercise price of $575 per share. Each of these warrants expired on December 26, 2023.
13. Stock-Based Compensation
A summary of our various equity incentive plans is set forth below:
2023 Inducement Plans
During 2023, our board of directors adopted two inducement plans; the Phunware, Inc. 2023B Inducement Plan and the 2023 Inducement Plan (collectively, the "2023 Inducement Plans"). As permitted by Nasdaq Stock Market rules, our stockholders were not required to approve the 2023 Inducement Plans. The plans provide of up to 24,000 shares of our common stock under awards granted to newly hired employees. An "award" is any right to receive common stock of the Company consisting of nonstatutory stock options, stock appreciation rights, restricted stock awards or restricted stock units.
On June 30, 2023, we made an inducement grant to a newly hired officer of the Company of 12,000 restricted stock units under the 2023 Inducement Plan with a grant date fair value of $27.00 per share. One-third of the restricted stock units will vest on June 3, 2024 and the remainder will vest in equal installments over two annual periods beginning on June 2, 2025 and concluding on June 1, 2026, subject to the employee's continued service on such vesting date. Shares will be delivered electronically to the holder shortly after each vesting date.
On November 10, 2023, we made an inducement grant to a newly hired officer of the Company of 12,000 restricted stock units under the 2023B Inducement Plan with a grant date fair value of $7.30 per share. The restricted stock units vested on February 23, 2024 and were delivered electronically to the holder shortly after the vest date.
2022 Inducement Plan
Our board of directors adopted the Phunware, Inc. 2022 Inducement Plan (the "2022 Inducement Plan") in January 2023. As permitted by Nasdaq Stock Market rules, our stockholders were not required to approve the 2022 Inducement Plan. The plan provides of up to 29,412 shares of our common stock under awards granted to newly hired employees. An "award" is any right to receive common stock of the Company consisting of nonstatutory stock options, stock appreciation rights, restricted stock awards or restricted stock units.
In January 2023, we made an inducement grant to a newly hired officer of the Company of 29,412 restricted stock units under the 2022 Inducement Plan with a grant date fair value of $43.50 per share. One-third, or 9,804, of the restricted stock units was scheduled to vest on December 28, 2023 and the remainder in equal installments over eight quarterly periods beginning on March 31, 2024 with the final vesting date occurring on December 28, 2025. On October 25, 2023, we entered into a separation agreement with the executive, pursuant to which the vesting of this grant was modified such that 10,000 restricted stock units vested on October 25, 2023 and 10,000 restricted stock units will vest on November 30, 2023. The balance, 9,412 unvested restricted stock units, were terminated and returned to the plan to be made available for future grants.
2018 Equity Incentive Plan
In 2018, our board of directors adopted, and our stockholders approved, the 2018 Equity Incentive Plan, as amended (the “2018 Plan”). The purposes of the 2018 Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to employees, directors and consultants who perform services for the Company, and to promote the success of our business. These incentives are provided through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares. Shares will be delivered electronically to the holder shortly after exercise or vest date pursuant to an effective registration statement.
The number of shares of common stock available for issuance under the 2018 Plan will also include an annual increase on the first day of each fiscal year, equal to the lesser of 5% of the outstanding shares of common stock on the last day of the immediately preceding fiscal year or such other amount as our board of directors may determine.
In addition, the 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 Equity Incentive Plan (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 December 31, 2023, the maximum number of shares of common stock that may be added to the 2018 Plan pursuant to the foregoing is 14,625. Not including the maximum number of shares from the 2009 Plan that may be added to the 2018 Plan, the 2018 Plan had 77,426 and 87,653 shares of common stock reserved for future issuances as of December 31, 2023 and December 31, 2022, respectively.
2018 Employee Stock Purchase Plan
Also, in 2018, our board of directors adopted, and our stockholders approved, the 2018 Employee Stock Purchase Plan (the “2018 ESPP”). The purpose of the 2018 ESPP is to provide eligible employees with an opportunity to purchase shares of our common stock at a discount through accumulated contributions generally in the form of payroll deductions of up to 15% of eligible compensation, subject to caps of $25 in any calendar year and 80 shares on any purchase date. The 2018 ESPP provides for 24-month offering periods, generally beginning in June and December of each year, and each offering period consists of four six-month purchase periods. The first purchase under the 2018 ESPP was in December 2021. Participation ends automatically upon termination of employment with the Company.
On each purchase date, participating employees will purchase shares of our common stock at price per share equal to 85% of the lesser of the fair market value of our common stock on (i) the first trading day of the applicable offering period and (ii) the last trading day of each purchase period in the applicable offering period. If the price per share of our common stock on any purchase date in the offering period is lower than the stock price on the enrollment date of that offering period, the offering period will immediately reset after the purchase of shares on such purchase date and automatically roll into a new offering period. Shares will be delivered electronically to the participant shortly after the purchase date pursuant to an effective registration statement.
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 years ended December 31, 2023 and 2022 was not significant.
The number of shares of common stock that may be made available for sale under the 2018 ESPP also includes an annual increase on the first day of each fiscal year beginning for the fiscal year following the fiscal year in which the first enrollment date (if any) occurs equal to the lesser of (i) 16,377 shares of common stock; (ii) 1.5% of the outstanding shares of common stock on the last day of the immediately preceding fiscal year; or such other amount as the administrator may determine.
The 2018 ESPP had 30,415 and 16,058 shares of common stock available for sale and reserved for issuance as of December 31, 2023 and 2022, respectively.
2009 Equity Incentive Plan
In 2009, we adopted the 2009 Plan, which allowed for the granting of incentive and non-statutory stock options, as defined by the Internal Revenue Code, to employees, directors and consultants. The exercise price of the options granted was generally equal to the value of our common stock on the date of grant, as determined by our board of directors. The awards are exercisable and vested, generally over four years, in accordance with each option agreement. The term of each option is no more than ten years from the date of the grant. The 2009 Plan allowed for options to be immediately exercisable, subject to the Company’s right of repurchase for unvested shares at the original exercise price. There were no unvested shares subject to repurchase provisions outstanding as of December 31, 2023 and 2022. Upon exercise, shares will be delivered electronically to the holder pursuant to an effective registration statement. Effective with the adoption of the 2018 Plan, no additional grants will be made under the 2009 Plan.
Restricted Stock Units
A summary of our restricted stock unit activity is set forth below:
Shares Weighted Average Grant Date Fair Value
Outstanding as of December 31, 2022 59,215 $ 77.87
Granted 208,960 $ 25.04
Released (119,995) $ 44.83
Forfeited (51,372) $ 39.40
Outstanding as of December 31, 2023 96,808 $ 25.21
During the third quarter of 2022, we granted 25,340 restricted stock unit awards to team members with an average grant date fair value of $78.50 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 500 restricted stock units to a non-employee consultant with a grant date fair value of $85.00 per share. The award vests on March 31, 2023 and is subject to service conditions.
During the fourth quarter of 2022, we granted 780 restricted stock unit awards to team members with an average grant date fair value of $76.00 per share. The awards granted to team members vest over a range of 48 months with various installment and vesting dates, and are subject to service conditions. We also granted 7,952 restricted stock units to non-employee directors, each with a grant date fair value of $74.00. The awards granted to non-employee directors generally vest quarterly over 12 months, and are subject to service conditions.
During the first quarter of 2023, we granted 38,420 restricted stock unit awards to team members with an average grant date fair value of $46.00 per share. The vesting provisions were generally such that one-third of the awards vested immediately with the remaining vesting at various dates through November 2024. We also granted 7,454 restricted stock unit awards to members of our team in lieu of cash bonus earned during 2022 with a grant date fair value of $46.50. These awards vested immediately.
During the second quarter of 2023, we granted 6,460 restricted stock unit awards to team members with an average grant date fair value of $30.00 per share. The vesting of these awards occurs at various dates through May 2027.
During the third quarter of 2023, we granted 70,660 restricted stock unit awards to team members with an average grant date fair value of $14.00 per share. The vesting of these awards occurs at three equal installments on August 1, 2023, August 1, 2024 and August 1, 2025. We also granted 1,234 restricted stock units to a consultant. Those restricted stock units vested in full at August 31, 2023.
During the fourth quarter of 2023, we granted 18,000 restricted stock units to an executive officer with a grant date fair value of $7.315 per share. The vesting of this award was such that 10,000 restricted stock units vested upon grant, 4,000 restricted stock units vested each of November 30, 2023 and January 12, 2024. We also granted 13,320 restricted stock units to a consultant and board member in lieu of cash payments with an average grant date fair value of $6.85 per share. Those restricted stock units vested immediately.
The restricted stock unit grants were valued based on the fair value of our common stock on the date of grant.
Pursuant to an agreement entered into by us with our former Chief Executive Officer, we modified the remaining vesting schedule related to the unvested portion of the individual's outstanding equity awards as of December 2022. The original equity awards were made at multiple occurrences, each of which contained various vesting share amounts on various dates, with the last vesting period originally scheduled to occur in May 2025. As additional compensation under the agreement, we modified the vesting schedule with respect to the unvested portion of restricted stock units under the individual's awards, such that 789 restricted stock units will vest on each of the last day of each month from January 2023 through December 2023. Incremental costs associated with this modification was not significant for the year ended December 31, 2023.
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, 2022 1,750 $ 71.73 5.60 $ -
Granted 1,500 38.15
Exercised - -
Forfeited (750) 54.00
Outstanding as of December 31, 2023 2,500 $ 56.89 4.19 $ -
Exercisable as of December 31, 2023 2,500 $ 56.89 4.19 $ -
A summary of our stock option activity under the 2009 Plan and related information is set forth below:
Number of Shares Weighted Average Exercise Price Weighted Average Remaining
Contractual Term (years)
Aggregate Intrinsic Value
Outstanding as of December 31, 2022 17,495 $ 40.22 4.22 $ 130
Granted - -
Exercised (1,895) 30.36
Cancelled/Expired (975) 67.56
Outstanding as of December 31, 2023 14,625 $ 39.67 2.94 $ -
Exercisable as of December 31, 2023 14,625 $ 39.67 2.94 $ -
During 2022, we granted options to purchase 1,000 shares of our common stock to two non-employee consultants with an exercise price of $85.00 per share. The options vested in various increments with the final vest date occurring on December 30, 2022.
During 2023, we granted an option to purchase 1,500 shares of our common stock to a non-employee consultant with an exercise price of $38.00 per share. As of December 31, 2023, the option had fully vested. We have historically used the Black-Scholes option pricing model to estimate the fair value of our stock option awards. Stock based compensation related to this grant was not significant.
The weighted average grant date fair value of options granted during 2023 and 2022 was $38.15 and $27.00, respectively. The total fair value for options vested during the years ended December 31, 2023 and 2022 was $6 and $42, respectively.
The aggregate intrinsic value is based on our stock price trading price on the Nasdaq Capital Market. The aggregate intrinsic value of options exercised was $16 and $50 for the years ended December 31, 2023 and 2022, respectively, and is calculated based on the difference between the estimated fair value of our common stock at the date of exercise and the exercise price.
Stock-Based Compensation
Compensation cost that has been included in our consolidated statements of operations and comprehensive loss for all stock-based compensation arrangements is set forth below:
Year Ended December 31,
Stock-based compensation 2023 2022
Cost of revenues $ 447 $ 210
Sales and marketing 135 104
General and administrative 3,294 2,542
Research and development 195 153
Total stock-based compensation $ 4,071 $ 3,009
As of December 31, 2023, there was approximately $2,131 total unrecognized compensation cost related to our stock benefit plans. These unrecognized compensation costs are expected to be recognized over an estimated weighted-average period of approximately 2.0 years.
14. Income Taxes
Deferred income taxes are recognized for the tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the combination of the tax payable for the year and the change during the year in deferred tax assets and liabilities.
For the years ended December 31, 2023 and 2022, we had net losses from continuing operations before income taxes of $41,915 and $45,421, respectively. We had net losses from a discontinued operation of $10,841 and $5,469 for the years ended December 31, 2023 and 2022, respectively.
Net losses relating to U.S. operations for were $51,662 and $52,415, respectively. The difference between income taxes expected at the U.S. federal statutory income tax rate of 21% and the reported income tax expense (benefit) are summarized as follows:
Year Ended December 31,
2023 2022
Income tax (benefit) at statutory rate (continuing operations) $ (8,800) $ (9,537)
Income tax (benefit) at statutory rate (discontinued operation) (2,277) (1,148)
Valuation allowance 6,319 12,894
State income tax (benefit), net of federal benefit (1,289) (2,114)
Business tax credit net of reserves 91 (575)
Non-deductible expenses (continuing operations) 4,840 360
Non-deductible expenses (discontinued operation) 1,123 434
Foreign income taxes at different rate 22 (310)
Income tax expense (benefit) $ 29 $ 4
Effective tax rate (0.05) % (0.01) %
The provision expense (benefit) for income taxes consist of the following:
Year Ended December 31,
2023 2022
Current:
Federal $ - $ -
State 29 4
Foreign - -
Total current 29 4
Deferred:
Federal - -
State - -
Foreign - -
Total deferred - -
Total income tax (benefit) expense $ 29 $ 4
The components of net deferred income taxes consist of the following:
December 31,
2023 2022
Deferred tax assets:
Net operating loss $ 58,913 $ 47,662
Unrealized loss on digital assets 104 6,754
Tax credits 1,940 1,940
Reserves and accruals 62 332
Leases - lease liability 430 1,019
Amortization of acquired intangibles 4,726 2,624
Other deferred tax assets 603 686
Gross deferred tax assets 66,778 61,017
Less valuation allowance (65,375) (59,057)
Total deferred tax assets 1,403 1,960
Deferred tax liabilities:
Amortization of acquired intangibles - -
Leases - right of use asset (376) (931)
Other deferred tax liabilities (1,027) (1,029)
Total deferred tax liabilities (1,403) (1,960)
Net deferred tax liabilities $ - $ -
As of December 31, 2023, we had net operating loss ("NOL") carryforwards of $236,697 and $133,099 for federal and state income tax purposes, respectively. The federal net operating losses of $85,674 which were generated in tax years beginning before January 1, 2018, will begin to expire in 2030 if not utilized. The balance of the net operating losses, $151,023 do not expire. The state net operating losses expire at various times depending on the state with a majority beginning to expire in 2030 if not utilized.
As of December 31, 2023, we had research and development ("R&D") credit carryforwards of approximately $2,286 and $1,622 for federal and state income tax purposes, respectively. The federal and Texas R&D credits will begin to expire in 2034, unless previously utilized. California R&D credits carry forward indefinitely.
Utilization of the NOL and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code (IRC) of 1986, as amended (the "Code"), as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized annually to offset future taxable income. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than fifty (50) percentage points of the outstanding stock of a company by certain stockholders.
As of December 31, 2023, we had not yet completed an analysis of the deferred tax assets for its NOL and tax credits. The future utilization of our net operating loss to offset future taxable income may be subject to an annual limitation under IRC Section 382 as a result of ownership changes that may have occurred previously or that could occur in the future. We have not yet determined whether such an ownership change has occurred. In order to make this determination, we will need to complete an analysis regarding the limitation of the net operating loss.
We have established a full valuation allowance for our deferred tax assets due to uncertainties that preclude us from determining that it is more likely than not that we will be able to generate sufficient taxable income to realize such assets. We monitor positive and negative factors that may arise in the future as we assess the need for a valuation allowance against our deferred tax assets. As of December 31, 2023 and 2022, we have a valuation allowance of $65,375 and $59,057, respectively, against our deferred tax assets.
The technical merits of a tax position derive from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate resolution with a taxing authority.
Uncertain tax positions are evaluated based upon the facts and circumstances that exist at each reporting period. Subsequent changes in judgment based upon new information may lead to changes in recognition, de-recognition, and measurement. Adjustments may result, for example, upon resolution of an issue with the taxing authorities, or expiration of a statute of limitations barring an assessment for an issue.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:
December 31,
2023 2022
Unrecognized tax benefits, beginning of period $ 1,757 $ 1,545
Tax positions taken in prior periods:
Gross increases - -
Gross decreases - -
Tax positions taken in current period:
Gross increases - 212
Settlements - -
Lapse of statute of limitations - -
Unrecognized tax benefits, end of period $ 1,757 $ 1,757
Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We have no accrual for interest and penalties on the consolidated balance sheets and has not recognized interest and/or penalties in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2023 and 2022.
We are subject to taxation in the United States and various state jurisdictions. Our tax years from inception are subject to examination by the United States and state taxing authorities due to the carryforward of unutilized NOLs.
We have ownership interest in controlled foreign corporations. During 2023, we analyzed the potential impact of the Global Intangible Low-Taxed Income and the Base Erosion and Anti-Abuse Tax provisions of the Tax Cuts and Jobs Act signed into law in 2017. Based on the foreign subsidiaries' tax position, we will not incur any impact relating to these two provisions.
The CARES Act was enacted in the United States on March 27, 2020. The CARES Act includes several U.S. income tax provisions related to, among other things, net operating loss carrybacks, alternative minimum tax credits, modifications to the net interest deduction limitations and technical amendments regarding the income tax depreciation of qualified improvement property placed in service after December 31, 2017. The CARES Act did not have a material impact on our financial results for the years ended December 31, 2023 and 2022.
The Consolidated Appropriations Act, 2021 (the "Act") was enacted in the United States on December 27, 2020. The Act enhances and expands certain provisions of the CARES Act. The Act did not have a material impact on our financial results for the year ended December 31, 2023 and 2022.
15. Subsequent Events
The Company has evaluated subsequent events through the date the financial statements were issued.
Additional Equity Financings
In a series of equity financings, we sold an aggregate of 2,696,000 shares of our common stock and issued pre-funded warrants to purchase up to 974,000 shares of our common stock. The gross proceeds from the offering, before deducting the placement agent's fees and other offering expenses payable by the Company, were approximately $22.6 million. Placement agent transaction costs were approximately $1.8 million. The holders of the pre-funded warrants exercised their rights to purchase 974,000 shares of common stock.
2022 Promissory Note
In January and February 2024, we issued 336,550 shares of our common stock to the holder of our 2022 Promissory Note, which amounted to aggregate principal and interest payments in the amount of $4,505. These conversions were made pursuant the terms of the amended 2022 Promissory Note, as well as, the Company granting the noteholder permission for certain additional conversions. In connection with the Company granting the holder additional conversion rights, the noteholder agreed to waive an aggregate of $535. As a result of the conversions, the 2022 Promissory Note is paid-in-full.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. 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 of December 31, 2023. Based on the foregoing, our Certifying Officers concluded that our disclosure controls and procedures were effective as of December 31, 2023.
Management’s Report on Internal Controls Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Under the supervision and with the participation of our management, including our Certifying Officers, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission for newly public companies (COSO). Based on this evaluation and the material weaknesses described below, our management concluded that our internal control over financial reporting was not effective as of December 31, 2023.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Management identified a material weakness in internal control over financial reporting related to the design of information technology general controls ("ITGCs") related to user access, program change and appropriate segregation of duties for certain IT applications. Further, as a result of cost cutting measures and headcount turnover in our accounting function, business process controls across the Company's financial reporting processes were not effectively designed and implemented due to a lack of segregation of duties between preparer and reviewer.
Management will seek to update current processes and/or provide sufficient resources toward the proper mitigation of these material control weaknesses. Management is committed to continuous improvement of our internal control over financial reporting and will continue to diligently review our financial reporting controls and procedures. However, we cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.
Changes in Internal Control over Financial Reporting
Except as set forth above, there were no changes in our internal control over financial reporting identified in conjunction with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitation on the Effectiveness of Controls
Our management, including our Certifying Officers, do not expect that our disclosure controls or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth the current ages and the names and positions of our directors and executive officers as of December 31, 2023:
Name Age Position
Executive Officers
Michael Snavely 55 Chief Executive Officer and Class III Director
Troy Reisner 56 Chief Financial Officer
Chris Olive 54 Chief Legal Officer
Non-Employee Directors
Stephen Chen (1)(2)(3)
41 Class I Director, Chairperson
Rahul Mewawalla (1)(2)(3)
45 Class I Director
(1)
Member of the Audit Committee
(2)
Member of the Compensation Committee
(3)
Member of the Nominating and Corporate Governance Committee
Mr. Elliot Han, age 47, was appointed as a Class II non-employee director on January 21, 2024.
Executive Officers and Significant Employees
Each of our executive officers serves at the discretion of our board of directors (the "Board") and will hold office until his successor is duly appointed and qualified or until his earlier resignation or removal. The following biographical descriptions set forth certain information with respect to our executive officers based on information furnished to us by each such officer.
Michael Snavely joined Phunware as its Chief Revenue officer in September 2023 and was appointed as Chief Executive Officer effective October 25, 2023. Mr. Snavely was also appointed to serve as a Class III director effective October 26, 2023 to fill the vacancy left when Russell Buyse resigned as Chief Executive Officer on October 25, 2023 and Class III director on October 26, 2023. Prior to joining Phunware, Mr. Snavely served as the General Manager of Vidable AI, a unit of Sonic Foundry (Nasdaq: SOFO) of Madison, Wisconsin since 2022. From 2019 until 2022, Mr. Snavely was chief commercial officer at CBANC, which provides a professional network of U.S. banking institutions, the people that work for them and the vendors who serve them. From 2017 to 2018, Mr. Snavely served as president of Springbox, a growth and transformation consulting firm, which was acquired by Prophet in 2019. From 2016 to 2017, he worked for Tile as a global business development leader. Mr. Snavely was previously employed by Phunware from 2014 to 2016, as the executive vice president of global software sales and marketing. Prior to working at Phunware, Mr. Snavely worked at Mutual Mobile (2011 - 2014), Bazaarvoice (2009 - 2011) and The Alliant Group (2007 - 2009), among other roles in his career. Mr. Snavely earned a BA from the College of Wooster in Wooster, Ohio and a J.D. from The Ohio State University. He is licensed (inactive) as an attorney at law in the State of Ohio.
Troy Reisner has served as Phunware's Chief Financial Officer since June 2023. Previously he was the Chief Financial Officer at Keystone Tower Systems, Inc., a manufacturer of wind turbine towers, headquartered in Denver, Colorado. Prior to joining Keystone in December 2019, Mr. Reisner was a partner with the public accounting firm of Deloitte & Touche LLP until his retirement in June 2019. In January 2022, he was appointed to the board of CEA Industries, Inc., (Nasdaq: CEAD), which designs, engineers and sells environmental control and other technologies for the controlled environment agriculture industry, where he also serves as chairman of their audit committee and member of their compensation and strategic investments committee. Mr. Reisner earned a B.S. degree in Accounting from Southern Illinois University at Edwardsville, has practiced as a Certified Public Accountant for over 30 years and is licensed (inactive) as a CPA in the State of Missouri.
Chris Olive joined Phunware in April 2022 as Chief Legal Officer. Prior to his tenure at Phunware, Mr. Olive was a partner at Bracewell LLP in Dallas, Texas, from 2006 to 2022. Mr. Olive brings to Phunware diverse transactional and
regulatory experience, based upon his representation of clients in various capacities in, among other things, complex, bespoke and customized credit facilities, structured financings, swaps and derivatives, insurance finance, corporate acquisitions, financial instrument and commodity purchase and sale and repurchase transactions and related banking, financial and other regulatory matters. He has also served as an associate at Jones Day and served in the United States Army Judge Advocate General’s Corps. Mr. Olive has a BBA in Finance with honors from the University of Miami, a JD from the Southern Methodist University School of Law and an LLM in Banking & Finance Law with distinction from the University of London.
Non-Employee Directors
The following biographical descriptions set forth certain information with respect our non-employee directors based on information furnished to us by each such director.
Stephen Chen, who was elected to serve as a non-employee Class I director in November 2022 and currently serves as Chairperson of our board of directors is a board-tested operational leader and chief financial officer. Since July 2016, Mr. Chen has served as chief financial officer of Kent Moore Capital, an investment and advisory firm focused on specialty finance, where he also currently sits on the board of directors. Also, since 2016, Mr. Chen has served as chief financial officer of BioIntegrate, a regenerative medicine company. Mr. Chen has been involved in blockchain related projects since 2018, and, in 2021, he co-founded IHBit Global, a diversified blockchain holding company with assets including a crypto exchange, token project, electronic sports team and basketball team. From 2012 to 2016, Mr. Chen was a director for Hudson International, a global private investment firm. From 2008 to 2012, he led the emerging markets investment banking team at Oppenheimer Investments North America. Prior to joining Oppenheimer, Mr. Chen was a Vice President at J.P. Morgan. Mr. Chen has a B.S. degree from Brown University.
We believe Mr. Chen is qualified to serve as a member of our Board because of his expertise in financial services and technology, including blockchain.
Rahul Mewawalla was appointed to serve as a non-employee Class I director of Phunware in September 2021. Mr. Mewawalla is a technology, digital, product, and business leader with extensive strategic and operational leadership expertise across technology, internet, software, telecommunications, financial services, media, consumer, enterprise, digital and blockchain companies. He has held several executive leadership roles, and currently serves as Chief Executive Officer and President of Mawson Infrastructure Group Inc., a digital infrastructure company and previously served as Chief Executive Officer and President of Xpanse Inc., a software, technology and fintech company from 2020 to 2021, as Chief Digital Officer and Executive Vice President, Platforms and Technology Businesses at Freedom Mortgage Corporation, a national financial services company from 2020 to 2021, as Chief Executive Officer and President at Zenplace Inc., a software-as-a-service and technology platforms company from 2014 to 2020, as Vice President at Nokia Corporation, a global technology and telecommunications company from 2010 to 2012, as Vice President at General Electric Company’s NBCUniversal, a global media, entertainment and diversified company from 2008 to 2010, and as Senior Director at Yahoo! Inc., a global internet and technology company from 2005 to 2008. Mr. Mewawalla has served as a board director with numerous NASDAQ-listed public companies, including as Chairman of the Board, Board Committee Chairman, Chairman of the Audit Committee, Chairman of the Compensation Committee, Nominating and Governance Committee Member, Special Committee Member, Strategic Transactions Committee Member and Board Director at publicly traded companies, including at Rocky Mountain Chocolate Factory Inc (Nasdaq: RMCF), Lion Group Holding (Nasdaq: LGHL), Aquarius II Acquisition Corporation (Nasdaq: AQUB), Four Leaf Acquisition Corporation (Nasdaq: FORL) and Mawson Infrastructure Group, Inc. (Nasdaq: MIGI). Mr. Mewawalla also served as an independent board director at SOS Children’s Villages USA. He has also served as Senior Advisor to the San Francisco Mayor’s Office on Innovation, as Advisor to Stanford University's Persuasive Technology Lab, and as Committee Chair of the VC TaskForce SIG on Systems and Services. Mr. Mewawalla earned an MBA from the Kellogg School of Management at Northwestern University and a BBS from the University of Delhi.
We believe Mr. Mewawalla’s extensive digital, technology, products, platforms, mobile, strategic and operational expertise, as well as his executive leadership experience, qualify him to serve as a director of the Company.
Elliot Han was appointed to serve as a Class II non-employee director on January 21, 2024. Mr. Han is a Partner at PGP Capital Advisors, a boutique investment/merchant bank where he focuses on mergers & acquisitions and corporate finance both in the domestic and international arena. Mr. Han has extensive knowledge and expertise in corporate finance; corporate development & strategy; corporate law; start-up operations; investments; and digital asset finance (blockchain/cryptocurrencies). Mr. Han has held leadership positions at a variety of organizations, including Cantor Fitzgerald (Head of FinTech/Blockchain, Crypto & Digital Assets Investment Banking & Head of Technology Equity Capital Markets); the New York Stock Exchange (Head of FinTech & Consumer Tech Capital Markets); Jefferies (Head of West Coast Technology Equity Capital Markets); Goldman Sachs (Executive Director, Business Unit Manager and Operating Officer for UK and Emerging
Markets Investment Banking). Mr. Han was also part of the management team at the Argon Group, a leading blockchain/crypto software technology & advisory start-up. He has also spent time as a corporate lawyer at Freshfields Bruckhaus Deringer and began his career at Credit Suisse/CSFB. Mr. Han graduated with a BA from Columbia University, a Master’s degree from Oxford University, and law & MA degrees from Cambridge University. Mr. Han is also a board trustee, limited partner, and investor in various technology companies, funds, and educational institutions.
We believe Mr. Han’s extensive corporate finance, corporate development and strategy, corporate law and digital asset finance expertise qualify him to serve as a director of the Company.
Additional 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. Among others, Alan Knitowski, Randall Crowder, Matt Aune, Kathy Tan Mayor and Eric Manlunas, each of whom served as executive officers and/or directors as of December 17, 2019 have been named as defendants in the lawsuit. Mr. Knitowski, Mr. Aune's and Mr. Crowder's employment terminated with the Company effective December 27, 2022, June 30, 2023 and November 30, 2023, respectively. Mr. Manlunas resigned from our board effective October 1, 2023 and Ms. Mayor resigned from our board effective October 26, 2023.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own more than 10% of the Company’s common stock (collectively, “Reporting Persons”) to file with the SEC reports regarding their ownership and changes in our ownership of our securities. We believe that, during 2023, our directors, executive officers and 10% stockholders complied with all Section 16(a) filing requirements, except for a late Form 4 filing by Troy Reisner on July 7, 2023 to report acquisition of restricted stock units of our common stock, which occurred on June 30, 2023, a late Form 4 filing by Randall Crowder on August 28, 2023 to report a sale of our common stock which occurred on August 21, 2023, a late Form 4 filing by Randall Crowder on November 14, 2023 to report an acquisition of our common stock which occurred on June 1, 2023, a late Form 4 filing by Chris Olive on November 14, 2023 to report an acquisition of our common stock which occurred on June 1, 2023, a late Form 4 filing by Michael Snavely on November 22, 2023 to report an acquisition of our common stock which occurred on November 15, 2023.
CORPORATE GOVERNANCE
Board Composition
Our business affairs are managed under the direction of the Board. The Board currently consists of four members, three of whom qualify as independent within the meaning of the independent director guidelines of the Nasdaq Stock Market ("Nasdaq"). Mr. Snavely, who also serves as our Chief Executive Officer, is not considered independent.
The Board is divided into three staggered classes of directors. At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the same class whose term is then expiring, as follows:
•the Class I directors are currently Stephen Chen, and Rahul Mewawalla, and their terms will expire at the 2025 Annual Meeting of Stockholders;
•the Class II director is currently Elliot Han, and his term will expire at the 2026 Annual Meeting of Stockholders; and
•the Class III director is currently Michael Snavely, and his term will expire at the 2024 Annual Meeting of Stockholders.
Our Certificate of Incorporation and Amended and Restated Bylaws provide that the number of directors shall consist of one or more members and may be increased or decreased from time to time by a resolution of the Board. Each director’s term continues until the election and qualification of his or her successor, or his or her earlier death, resignation or removal. Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors. This classification of the Board may have the effect of delaying or preventing changes in control of our Company.
On January 21, 2024, Elliot Han was appointed as a Class II non-employee director. On January 22, 2024, the Board appointed Chris Olive to serve as a Class II director. Subsequent to Mr. Olive’s appointment, the Board resolved to reduce the size of the Board to a total of four directors, comprised of two Class I directors, one Class II director and one Class III director. In connection with the reduction of the size of the Board, Chris Olive resigned as a director of the Company on January 22, 2024. Mr. Olive’s resignation was not due to any disagreement with the Company, its management, the Board or any committee thereof, or with respect to any matter relating to our operations, policies, or practices.
Corporate Governance Guidelines and Code of Business Conduct and Ethics
Our Board has adopted Corporate Governance Guidelines that address items such as the qualifications and responsibilities of our directors and director candidates and corporate governance policies and standards applicable to us in general. In addition, our Board has adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors, including our Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers. The full text of our Corporate Governance Guidelines and Code of Business Conduct and Ethics is posted on the Governance portion of the investor relations page of our website at https://investors.phunware.com. We will post amendments to our Code of Business Conduct and Ethics or waivers of our Code of Business Conduct and Ethics for directors and executive officers that are required to be disclosed by the rules of the SEC or Nasdaq on the same website.
Audit Committee
We have established a designated standing audit committee. Messrs. Stephen Chen, Elliot Han and Rahul Mewawalla, each of whom is a non-employee member of the Board, comprise our Audit Committee. Mr. Mewawalla is the Chairperson of our Audit Committee. We have determined that each of the members of our Audit Committee satisfies the requirements for independence and financial literacy under the rules of Nasdaq and the SEC. During the fiscal year ended December 31, 2023, the committee met four times. The Audit Committee is responsible for, among other things:
•selecting a qualified firm to serve as the independent registered public accounting firm to audit our financial statements;
•helping to ensure the independence and performance of the independent registered public accounting firm;
•discussing the scope and results of the audit with the independent registered public accounting firm and reviewing, with management and the independent registered public accounting firm, our interim and year-end financial statements;
•developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters;
•reviewing the Company’s policies on and overseeing risk assessment and risk management, including enterprise risk management;
•reviewing the adequacy and effectiveness of our internal control policies and procedures and the Company’s disclosure controls and procedures;
•reviewing related person transactions; and
•approving or, as required, pre-approving, all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm.
The Board has adopted a written charter for the Audit Committee that satisfies the applicable rules and regulations of the SEC and the listing standards of Nasdaq. Our Audit Committee charter can be found on the "Governance Documents" section of our Investor Relations website at https://investors.phunware.com/governance-docs.
Audit Committee Financial Expert
The Board determined Messrs. Stephen Chen and Rahul Mewawalla are both independent directors pursuant to Nasdaq's governance listing standards and each meet the qualifications of an "audit committee financial expert," as defined under the applicable rules and regulations of the SEC. In making this determination, our Board has considered prior experience, business acumen and independence.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
Phunware’s named executive officers (each a "NEO"), which consist of any person who served as principal executive officer ("PEO") during 2023 and the next two most highly compensated executive officers who served as such in for 2023, are:
Michael Snavely, Chief Executive Officer
Russell Buyse, Former Chief Executive Officer
Troy Reisner, Chief Financial Officer
Chris Olive, Chief Legal Officer
Summary Compensation Table
The following table sets forth information regarding the total compensation paid to our named executive officers for the last two fiscal years ended December 31, 2023 and 2022:
Name and Principal Position Fiscal Year Salary ($) (1)
Bonus ($) Stock Awards ($)(2)
All other Compensation ($)(3)
Total ($)
Michael Snavely, Chief Executive Officer(4)
2023 101,073 15,000 219,450 4,438 339,961
Russell Buyse, Former Chief Executive Officer(5)
2023 293,403 - - 57,997 351,400
2022 3,693 40,000 - - 43,693
Troy Reisner, Chief Financial Officer(6)
2023 202,841 - 324,000 8,940 535,781
Chris Olive, Chief Legal Officer(7)
2023 300,000 - 87,640 26,630 414,270
2022 225,000 34,907 925,000 19,270 1,204,177
(1)
Reflects actual earnings, which may differ from approved based salaries due to the effective date of salary increases.
(2)
Amounts represent the aggregate grant date fair value of stock options or restricted stock unit awards, computed in accordance with FASB ASC 718-10-25. The actual value realized by the named executive officer with respect to stock awards will depend on whether the award vests and, if it vests, the market value of our stock on the date such stock is sold.
(3)
Amounts shown in this column include contributions Phunware made on behalf of the named executive officer for inclusion in our medical benefits programs.
(4)
Mr. Snavely joined the Company as its Chief Revenue Officer on September 12, 2023. Mr. Snavely was appointed the Company's Chief Executive Officer effective October 25, 2023. Mr Snavely was paid a sign-on bonus of $5,000 pursuant to the terms of his employment agreement as Chief Revenue Officer and $10,000 pursuant to the terms of his employment agreement as Chief Executive Officer.
(5)
Mr. Buyse served as our CEO from December 28, 2022 until October 25, 2023. Mr. Buyse received additional compensation of $6,000 for service on our Board for the period from November 21, 2022 to December 27, 2022, which is excluded above. Subsequent to the date of his appointment as CEO, Mr. Buyse did not receive additional compensation as a member of our Board during his tenure on the board, which terminated on October 26, 2023. See Director Compensation below. Mr. Buyse was further paid a sign-on bonus of $40,000, pursuant to the terms of his employment agreement.
(6)
Mr. Reisner joined the Company as its Chief Financial Officer on June 2, 2023.
(7)
Mr. Olive joined the Company as its Chief Legal Officer on April 1, 2022.
Executive Employment Agreements
We entered into employment agreements with each of the named executive officers noted above, of which only Michael Snavely, Troy Reisner and Chris Olive remain currently employed by the Company. The employment agreements with our NEOs generally provide for at-will employment and set forth each named executive officer's base salary, bonus target, severance eligibility and eligibility for other standard employee benefit plan participation.
Pursuant to the employment agreements, certain current and future significant employees, including the named executive officers identified above, are eligible for severance benefits under certain circumstances. The actual amounts that would be paid or distributed as a result of a termination of employment occurring in the future may be different than those presented below as many factors will affect the amount of any payments and benefits upon a termination of employment. For example, some of the factors that could affect the amounts payable include base salary and annual bonus target percentage. Although the Company has entered into a written agreement to provide severance payments and benefits in connection with a termination of employment under particular circumstances, the Company, or an acquirer, may mutually agree with an executive officer or significant employee to provide payments and benefits on terms that vary from those currently contemplated. In addition to the amounts presented below, each eligible executive officer or significant employee would also be able to exercise any previously-vested stock options that he or she held, in accordance with the terms of those grants and the respective plans pursuant to which they were granted. Finally, the eligible executive officer or significant employee may also receive any benefits accrued under our broad-based benefit plans, in accordance with those plans and policies.
Mr. Snavely’s Employment Agreement
We entered into an employment agreement, dated as of October 25, 2023, with Michael Snavely, who services as our Chief Executive Officer. Mr. Snavely is employed by the Company on an at-will basis, meaning that either Mr. Snavely or the Company may terminate the employment relationship at any time with or without cause.
The employment agreement provides for an initial base salary of $350,000 per year, a sign-on bonus of $10,000, eligibility in the Company’s bonus programs established by the Board or any committee of the board and eligibility to participate in our employee benefit programs. Under the terms of his employment agreement, the Company provided Mr. Snavely an initial grant of 30,000 restricted stock units (adjusted for reverse stock split) with various vesting dates and a separate grant of $750,000 restricted stock units on or before January 31, 2024 with vesting to commence on March 31, 2024.
If the Company terminates Mr. Snavely’s employment without cause at any time, or if Mr. Snavely resigns for good reason, and in each case, such termination or resignation occurs outside of a Change in Control Period, as defined in the employment agreement, Mr. Snavely is entitled to:
•Executive Accrued Benefits, which include (i) Mr. Snavely’s unpaid base salary, if any, through the date of termination, resignation, or separation, (ii) reimbursement for Mr. Snavely’s documented, reasonable and necessary business expenses incurred but not paid, if any, through the date of termination, and (iii) any other amounts or benefits to which Mr. Snavely is entitled on termination under applicable law, Company policy or plan, or other agreement to which Mr. Snavely is a party with the Company;
•continuing payments of severance pay at a rate equal to their base salary rate, as then in effect, for nine (9) months from the date of termination; and
•partial immediate vesting of Mr. Snavely’s then unvested initial restricted stock unit award.
If the Company terminates Mr. Snavely’s employment without cause at any time, or if Mr. Snavely resigns for good reason, and in each case, such termination or resignation occurs during a Change in Control Period, as defined in the employment agreement, Mr. Snavely is entitled to:
•Executive Accrued Benefits, which include (i) Mr. Snavely’s unpaid base salary, if any, through the date of termination, resignation, or separation, (ii) reimbursement for Mr. Snavely’s documented, reasonable and necessary business expenses incurred but not paid, if any, through the date of termination, and (iii) any other amounts or benefits to which Mr. Snavely is entitled on termination under applicable law, Company policy or plan, or other agreement to which Mr. Snavely is a party with the Company;
•continuing payments of severance pay at a rate equal to their base salary rate, as then in effect, for nine (9) months from the date of termination; and
•immediate vesting as to 100% of Mr. Snavely’s then unvested initial restricted stock unit award.
Mr. Reisner’s Employment Agreement
We entered into an employment agreement, dated as of June 2, 2023, with Troy Reisner, who serves as our Chief Financial Officer. Mr. Reisner is employed by the Company on an at-will basis, meaning that either Mr. Reisner or the Company may terminate the employment relationship at any time with or without cause.
The employment agreement provides for an initial base salary of $350,000 per year, eligibility in the Company’s bonus programs established by the Board or any committee of the Board and eligibility to participate in our employee benefit programs. Under the terms of his employment agreement, the Company provided Mr. Reisner a one-time grant of 12,000 restricted stock units (adjusted for reverse stock split) on June 2, 2023. The restricted stock units granted to Mr. Reisner are subject to a separate award agreement, which outlines the specifics of such grant, including but not limited to, the vesting schedule, forfeiture for cause provisions, the Company’s buyback rights and other restrictions and terms.
If the Company terminates Mr. Reisner’s employment without cause at any time, or if Mr. Reisner resigns for good reason, and in each case, such termination or resignation occurs outside a Change in Control Period, as defined in the employment agreement, Mr. Reisner is entitled to:
•Executive Accrued Benefits, which include (i) Mr. Reisner’s unpaid base salary, if any, through the date of termination, resignation, or separation, (ii) reimbursement for Mr. Reisner’s documented, reasonable and necessary business expenses incurred but not paid, if any, through the date of termination, and (iii) any other amounts or benefits to which Mr. Reisner is entitled on termination under applicable law, Company policy or plan, or other agreement to which Mr. Reisner is a party with the Company;
•continuing payments of severance pay at a rate equal to their base salary rate, as then in effect, for nine (9) months from the date of termination; and
•partial immediate vesting of Mr. Reisner’s then unvested initial restricted stock unit award.
If the Company terminates Mr. Reisner’s employment without cause at any time, or if Mr. Reiner resigns for good reason, and in each case, such termination or resignation occurs during a Change in Control Period, as defined in the employment agreement, Mr. Reisner is entitled to:
•Executive Accrued Benefits, which include (i) Mr. Reisner’s unpaid base salary, if any, through the date of termination, resignation, or separation, (ii) reimbursement for Mr. Reisner’s documented, reasonable and necessary business expenses incurred but not paid, if any, through the date of termination, and (iii) any other amounts or benefits to which Mr. Reisner is entitled on termination under applicable law, Company policy or plan, or other agreement to which Mr. Reisner is a party with the Company;
•continuing payments of severance pay at a rate equal to their base salary rate, as then in effect, for nine (9) months from the date of termination; and
•immediate vesting as to 100% of Mr. Reisner’s then unvested initial restricted stock unit award.
Mr. Olive's Employment Agreement
We entered into an employment agreement, as amended and restated in September 2022, with Chris Olive, who serves as our Chief Legal Officer. The agreement has an initial term of four years from his April 2022 hire date and automatically renews for additional one year terms, unless either party provides ninety (90) day notice. If a change in control, as defined in the agreements, occurs when there are fewer than twelve (12) months remaining during the initial term or an additional term, the term of the employment agreement will extend automatically through the date that is twelve (12) months following the effective date of the change in control.
The employment agreement provides for an initial base salary of $300,000 per year, eligibility in the Company's bonus programs established by the Board or any committee of the Board, and eligibility to participate in our employee benefit programs. Under the terms of his employment agreement, the Company provided Mr. Olive a one-time grant of 10,000 restricted stock units (adjusted for reverse stock split) on September 16, 2022. The restricted stock units granted to Mr. Olive are subject to a separate award agreement, which outlines the specifics of such grant, including but not limited to, the vesting schedule, forfeiture for cause provisions, the Company’s buyback rights and other restrictions and terms.
Mr. Olive is eligible to receive the following payments and benefits in connection with a termination not in connection with a Change in Control, as defined in the agreements:
•continuing payments of severance pay at a rate equal to their base salary rate, as then in effect, for six (6) months from the date of termination;
•coverage under our group health insurance plans or payment of the full amount of health insurance premiums as provided under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) for up to six (6) months after termination; and
•the immediate vesting of all equity awards granted on or after the effective date of the employment agreement.
In the case of a Change in Control, if Mr. Olive is terminated without cause, either during the three months before or in the year after a Change in Control, then he will be entitled to receive the following payments and benefits:
•a lump sum severance payment equal to: (i) the amount of base salary in effect on the date of termination that he would have otherwise received had he remained employed by the Company through the twelve (12) month anniversary of the Change in Control, and (ii) an amount equal to the average annualized bonus earned by him for the two (2) calendar years prior to the calendar year during which the Change in Control occurs, but in no event will the amount be less than his annual target bonus for the year during which the termination occurs, or if greater, his annual target bonus for the year during which the closing of the Change in Control occurs;
•the immediate vesting of all equity awards granted on or after the effective date of the employment agreement; and
•coverage under our group health insurance plans or payment of the full amount of health insurance premiums as provided under COBRA for up to twelve (12) months after termination.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information regarding outstanding stock options and other equity awards held by each of our named executive officers as of December 31, 2023, after giving effect to the reverse stock split of the Company's common stock at a ratio of one-for-fifty:
Options Awards Restricted Stock Unit Awards
Grant Date Number of Securities Underlying Unexercised Options Option Exercise Price Option Expiration Date Number
of shares or
units of stock
that have
not vested
(#) Market value
of shares or
units of stock
that have
not vested
($)
Name Exercisable Unexercisable
Michael Snavely 11/10/2023 - - - - 12,000 (1)
49,200
11/10/2023 - - - - 4,000 (1)
16,400
Russell Buyse 1/4/2023 - - - - - (2)
-
Troy Reisner 6/30/2023 - - - - 12,000 (2)
49,200
Chris Olive 9/16/2022 - - - - 10,000 (3)
41,000
8/31/2023 - - - - 6,260 (3)
25,666
(1)
Mr. Snavely was granted 12,000 restricted stock units on November 10, 2023. The restricted stock units vested on February 23, 2024. Mr. Snavely was also granted 18,000 restricted stock units on November 10, 2023, of which 10,000 restricted stock units vested upon grant and 4,000 restricted stock units vested on each of November 30, 2023 and January 12, 2024.
(2)
Mr. Buyse was granted 29,412 restricted stock units on January 4, 2023. Mr. Buyse terminated from the Company effective October 25, 2023. In connection therewith, the Company and Mr. Buyse entered into a Confidential Transition, Consulting and General Release Agreement, in which the Company modified the vesting schedule for this grant, such that 10,000 restricted stock units vested on October 25, 2023 and 10,000 restricted stock units vested of November 30, 2023. The balance, 9,412 restricted stock units, terminated.
(3)
Mr. Reisner was granted 12,000 restricted stock units on June 30, 2023. One-third of the restricted stock units will vest on June 3, 2024 and one-third will vest annually in equal installments beginning on June 2, 2025 with the final vesting date occurring on June 1, 2026
(3)
Mr. Olive was granted 10,000 restricted stock units on September 16, 2022. The restricted stock units vest at various rates with 2,708 restricted stock units vesting on May 8, 2023, 811 restricted stock units vesting on each of August 8, 2023 and November 8, 2023 and 810 restricted stock units vesting on each of May 8, 2024, August 8, 2024, November 8, 2024, May 8, 2025, August 8, 2025, November 8, 2025 and March 31, 2026, subject to his continued employment with the Company on each such vesting date. Mr. Olive was also granted 6,260 restricted stock units on August 31, 2023. The restricted stock units vest annually commencing on August 1, 2024, with a final vesting date of August 3, 2026.
Director Compensation
We compensate our Board in the form of fees paid in cash. Each outside director is paid an annual cash retainer of $75,000. The chairperson of our Board is paid an additional $45,000 annually. Chairpersons on committees of our Board range from $15,000 to $25,000 of additional annual cash compensation depending on the committee, while a member of our committees is paid $7,500 to $12,500 of additional cash compensation, depending on the committee of service. There are no per-meeting attendance fees for attending our Board or committee meeting.
We also compensate members of our Board in the form of annual grants of restricted stock units of our common stock.
The following table sets forth certain information with respect to the compensation paid to our directors, excluding reasonable travel expenses, for the year ended December 31, 2023.
Name
Fees Earned or
Paid in Cash ($) Stock Awards ($)(1)
Total ($)
Stephen Chen 100,000 - 100,000
Ryan Costello(2)
135,000 - 135,000
Eric Manlunas(3)
76,875 - 76,875
Kathy Tan Mayor(4)
86,458 - 86,458
Rahul Mewawalla
109,167 - 109,167
(1)
This column reflects the aggregate grant date fair value of restricted stock units granted during 2023 computed in accordance with the provisions of ASC 718, Compensation-Stock Compensation. The assumptions that we used to calculate these amounts are discussed in the notes to Phunware’s audited consolidated financial statements for the year ended December 31, 2023. These amounts do not reflect the actual economic value that will be realized by the director upon the vesting of the restricted stock units or the sale of the common stock underlying such restricted stock units.
(2)
Mr. Costello resigned from our Board effective December 31, 2023
(3)
Mr. Manlunas resigned from our Board effective October 1, 2023
(4)
Ms. Mayor resigned from our Board effective October 26, 2023
Outstanding Equity Awards as Fiscal Year-End
There were no equity awards outstanding to our non-employee directors as of December 31, 2023.
Registrant's Action to Recover Erroneously Awarded Compensation
We had no accounting restatements requiring the recovery of erroneously awarded compensation as of December 31, 2023.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth our equity compensation plan information as of December 31, 2023 after giving effect to the reverse stock split of the Company's common stock at a ratio of one-for-fifty:
Number of securities to be issued upon exercise of outstanding options and rights
(a) Weighted-average exercise price of outstanding options and rights
(b) Number of securities remaining available for issuance under equity compensation plans
(c)
Equity compensation plans approved by security holders(1)
17,118 (2)
$42.04 (3)
107,942
Equity compensation plans not approved by security holders(4)
- (5)
$- (3)
9,412
(1)
The following plans have been approved by the Company's stockholders: 2009 Equity Incentive Plan (the "2009 Plan"), 2018 Equity Incentive Plan (the "2018 Plan") and 2018 Employee Stock Purchase Plan (the "2018 ESPP").
(2)
The 2009 Plan terminated on December 26, 2018. The shares reserved for issuance under the 2009 Plan that 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 may be added to the 2018 Plan. The 2009 Plan will continue to govern outstanding awards granted thereunder. As of December 31, 2023, the maximum number of shares of common stock that may be added to the 2018 Plan pursuant to the foregoing is equal to 14,618, which is not included in the column (c) above. In addition the foregoing, excludes unvested restricted stock unit awards granted. As of December 31, 2023, 96,808 restricted stock unit awards were outstanding in the 2018 Plan.
(3)
As there is no exercise price associated with the restricted share awards, such shares are not included in the weighted-average price calculation.
(4)
The following plans were adopted by the Company's Board without requiring stockholder approval pursuant to Nasdaq Listing Rule 5635(c)(4): 2022 Inducement Plan, 2023 Inducement Plan and 2023B Inducement Plan
(5)
Excludes unvested restricted stock unit awards granted. As of December 31, 2023, 24,000 restricted stock unit awards were outstanding in equity compensation plans not approved by security holders.
The number of shares of Common Stock reserved and available for issuance under the 2018 Plan is subject to an automatic annual increase on each January 1st, by an amount equal to five percent (5%) of the number of shares of Common Stock issued and outstanding on the immediately preceding December 31st or such lesser number of shares of Common Stock as approved by the Administrator (as defined in the 2018 Plan). The number of shares of Common Stock reserved and available for issuance under the 2018 ESPP is subject to an automatic annual increase on each January 1st, by the lesser of (i) 16,377 shares of Common Stock, (ii) one and one-half percent (1.5%) of the number of shares of Common Stock issued and outstanding on the immediately preceding December 31st, or (iii) such lesser number of shares of Common Stock as determined by the Administrator (as defined in the 2018 ESPP).
For additional information on the Company's equity compensation plans, refer to Note 13 "Stock-Based Compensation" of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Beneficial Ownership of Principal Shareholders and Management
The following table sets forth information with respect to the beneficial ownership of our common stock as of February 20, 2024, for:
•each stockholder known to us to be beneficial owner of more than 5% of our outstanding shares of common stock;
•each of our directors and director nominees;
•each of our named executive officers; and
•all of our current directors, director nominees and executive officers as a group.
We have determined beneficial ownership in accordance with the rules of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and sole investment power with respect to all shares that they beneficially own, subject to community property laws where applicable.
Effective February 27, 2023, we implemented a reverse stock split of outstanding shares of our common stock at a ratio of one for fifty, Applicable percentage ownership is based on 8,027,082 shares of our common stock outstanding as of February 20, 2024. In computing the number of shares of our common stock beneficially owned by a person and the percentage ownership of that person, we included outstanding shares of our common stock subject to options or restricted stock units held by that person that are currently exercisable or releasable or that will become exercisable or releasable within 60 days of February 20, 2024. We did not include these shares as outstanding, however, for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the address of each beneficial owner listed on the table below is c/o Phunware, Inc., 1002 West Avenue, Austin, Texas 78701.
Name of Beneficial Owner(1)
Shares Percentage
Named Executive Officers, Executive Officers and Directors:
Michael Snavely 11,543 0.1%
Troy Reisner - -%
Chris Olive 3,794 -%
Stephen Chen 2,095 -%
Elliot Han - -%
Rahul Mewawalla 4,576 0.1%
All executive officers and directors as a group (6 persons) 22,008 0.2%
(1)
Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all ordinary shares beneficially owned by them.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Policy for Related Person Transactions
We have adopted a formal written policy providing that our executive officers, directors, nominees for election as directors, beneficial owners of more than 5% of any class of our capital stock, any member of the immediate family of any of the foregoing persons and any firm, corporation or other entity in which any of the foregoing persons is employed or is a general partner or principal or in a similar position or in which such person has a 5% or greater beneficial ownership interest, are not permitted to enter into a related party transaction with us without the approval of our nominating and corporate governance committee, subject to the exceptions described below.
A related person transaction is a transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we and any related person are, were or will be participants in which the amount involves exceeds $120,000. Transactions involving compensation for services provided to the Company as an employee or director are not covered by this policy.
The Board has determined that certain transactions will not require the approval of the nominating and corporate governance committee, including certain employment arrangements of executive officers, director compensation, transactions with another company at which a related party’s only relationship is as a director, non-executive employee or beneficial owner of less than 10% of that company’s outstanding capital stock, transactions where a related party’s interest arises solely from the ownership of our common stock and all holders of our common stock received the same benefit on a pro rata basis and transactions available to all employees generally.
Related Person Transactions
The following is a summary of our related party transactions since January 1, 2023.
Confidential Transition, Consulting and General Release Agreement with Russell Buyse. On October 25, 2023, the Company entered into a Confidential Transition, Consulting and General Release Agreement with Russell Buyse. The transition agreement provided that Mr. Buyse's employment as chief executive officer terminated effective the same date. Furthermore, effective on October 26, 2023, Mr. Buyse freely and voluntarily resigned his position as a director of the Board. The Company and Mr. Buyse agreed that from the period of October 26, 2023 and continuing through November 10, 2023, Mr. Buyse would serve as a consultant to the Company. The Company and Mr. Buyse both agreed to a mutual general release, which excludes certain specified types of claims. Mr. Buyse also agreed to certain restrictive covenants, including confidentiality, non-compete and non-solicitation provisions.
As compensation for his service as a consultant during the period noted above, Mr. Buyse received aggregate gross compensation of $40,000, less applicable withholdings, payable in four (4) bi-monthly installments of $10,000, beginning October 31, 2023 and concluding on December 15, 2023. The Company will also reimburse Mr. Buyse for continuation coverage under the Company's group health plan in accordance with COBRA through March 31, 2024.
During the course of his employment with the Company, Mr. Buyse was awarded a grant of restricted stock units. As of the October 25, 2023, Mr. Buyse had approximately 29,412 unvested restricted stock units (adjusted for reverse stock split) pursuant to the grant with original vesting commencing on December 28, 2023 and concluding on December 28, 2025. As additional compensation under the transition agreement, the Company modified the vesting schedule with respect to the unvested portion of Mr. Buyse's restricted stock unit award, such that 10,000 restricted stock units vested on October 25, 2023 and 10,000 restricted stock units vested of November 30, 2023. The balance, 9,412 restricted stock units terminated.
Confidential Transition, Consulting and General Release Agreement with Matt Aune. On June 2, 2023, the Company entered into a Confidential Transition, Consulting and General Release Agreement with Matt Aune. The separation agreement with Mr. Aune provided that he would cease as the Company’s Chief Financial Officer as of June 2, 2023 and his employment terminated with the Company effective June 30, 2023. The Company and Mr. Aune agreed that from the period of the July 1, 2023 and continuing through December 31, 2023, Mr. Aune would provide certain additional transitional services to the Company.
In exchange for Mr. Aune's performance of obligations to the Company under the terms of the separation agreement, including a general release of claims which excludes certain specified types of claims, Mr. Aune received severance consisting of (i) six months of his continued base salary (in the aggregate amount of $175,000), which commenced on July 1, 2023 and concluded on December 31, 2023, in bi-monthly installments and in accordance with the Company’s general payroll policies,
less applicable taxes and withholdings, (ii) the Company paid continuation coverage under the Company’s group health plan in accordance with COBRA for Mr. Aune, his spouse and his dependents, through December 31, 2023, and (iii) accelerated vesting of 2,647 restricted stock units (adjusted for reverse stock split), which vested on June 30, 2023.
In exchange for Mr. Aune’s continued service as an advisor through December 31, 2023, Mr. Aune received accelerated vesting of any then-remaining unvested restricted stock units on December 31, 2023.
Confidential Separation and General Release Agreement with Matt Lull. On May 30, 2023, the Company entered into a Confidential Separation and General Release Agreement with Matt Lull. The separation agreement provides that Mr. Lull's employment with the Company terminated effective May 29, 2023. The Company and Mr. Lull agreed that from the period of May 29, 2023 and continuing through August 31, 2023, Mr. Lull would serve as a special advisor to the Company. The Company and Mr. Lull both agreed to a mutual general release, which excludes certain specified types of claims. Mr. Lull also agreed to certain restrictive covenants, including confidentiality, non-compete and non-solicitation provisions.
As compensation for his service as a special advisor, Mr. Lull received aggregate gross cash compensation of $105,000, less applicable withholdings, of which $50,000 was paid on June 15, 2023, $12,500 was paid on each of July 15, 2023 and August 15, 2023 and $7,500 was payable in monthly installments beginning on September 15, 2023 and concluding on December 15, 2023. The Company also reimbursed Mr. Lull for continuation coverage under the Company's group health plan in accordance with COBRA through December 31, 2023. As additional compensation under the separation agreement, the Company accelerated the vesting of 4,375 restricted stock units (adjusted for reverse stock split), which vested on June 1, 2023, and 2,917 unvested restricted stock units (adjusted for reverse stock split), terminated in accordance with the Company's 2018 Equity Incentive Plan.
Confidential Transition, Consulting and General Release Agreement with Alan Knitowski. On December 13, 2022, the Company entered into a Confidential Transition, Consulting and General Release Agreement with Alan Knitowski. The transition agreement provides that Mr. Knitowski's employment terminated effective on the December 27, 2022. Furthermore, effective on December 27, 2022, Mr. Knitowski freely and voluntarily resigned his position as a director of the Board. The Company and Mr. Knitowski agreed that from the period of December 27, 2022 and continuing through December 31, 2023, Mr. Knitowski would serve as a special advisor to the Company. The Company and Mr. Knitowski both agreed to a mutual general release, which excludes certain specified types of claims. Mr. Knitowski also agreed to certain restrictive covenants, including confidentiality, non-compete and non-solicitation provisions.
As compensation for his service as a special advisor during the period noted above, Mr. Knitowski received aggregate gross compensation of $225,000, less applicable withholdings, paid in twelve (12) monthly installments of $18,750, beginning January 31, 2023. The monthly installment payments were made in the form of cash and issuance of common stock of the Company. The Company also reimbursed Mr. Knitowski for continuation coverage under the Company's group health plan in accordance with COBRA through December 31, 2023.
During the course of his employment with the Company, Mr. Knitowski was awarded a certain number of grants of restricted stock units. As of the December 27, 2022, Mr. Knitowski had approximately 9,466 unvested restricted stock units (adjusted for reverse stock split), under multiple awards, each of which contained various vesting share amounts on various dates, with the last vesting period scheduled to occur in May 2025. As additional compensation under the transition agreement, the Company modified the vesting schedule with respect to the unvested portion of Mr. Knitowski's restricted stock units, such that 789 restricted stock units vested on each of the last day of each month from January 2023 through December 2023.
Director Independence
Our common stock is listed on Nasdaq. Under the rules of Nasdaq, independent directors must comprise a majority of a listed company’s board of directors. In addition, the rules of Nasdaq require that, subject to specified exceptions, each member of a listed company’s audit, compensation, and nominating and corporate governance committees be independent. Under the rules of Nasdaq, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act. Compensation committee members must also satisfy the independence criteria set forth in Rule 10C-1 under the Exchange Act.
In order to be considered independent for purposes of Rule 10A-3 and Rule 10C-1, a member of an audit committee or compensation committee of a listed company may not, other than in his or her capacity as a member of the committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other
compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.
We have undertaken a review of the independence of each director and considered whether each director has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. As a result of this review, we determined that Messrs. Stephen Chen, Elliott Han and Rahul Mewawalla, representing three of our four directors, are considered “independent directors” as defined under the applicable rules and regulations of the SEC and the listing requirements and rules of Nasdaq.
Board Leadership Structure / Lead Independent Director
We believe that the structure of our Board and Board committees provides strong overall management. The Chair of our Board and our Chief Executive Officer roles are separate. Mr. Snavely serves as our Chief Executive Officer and Stephen Chen serves as Chair of our Board. This structure enables each person to focus on different aspects of company leadership. Our Chief Executive Officer is responsible for setting the strategic direction of our company, the general management and operation of the business and the guidance and oversight of senior management. The Chair of our Board monitors the content, quality and timeliness of information sent to our Board and is available for consultation with our Board regarding the oversight of its business affairs. Our independent directors bring experience, oversight and expertise from outside of Phunware, while Mr. Snavely brings company-specific experience and expertise.
Limitation on Liability and Indemnification Matters
As permitted under Delaware law, our certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers and may indemnify our employees and other agents, to the fullest extent permitted by Delaware law. Delaware law prohibits our certificate of incorporation from limiting the liability of our directors for any of the following:
• any breach of a director’s duty of loyalty to us or to our stockholders;
• acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
• unlawful payment of dividends or unlawful stock repurchases or redemptions; and
• any transaction from which a director derived an improper personal benefit.
If Delaware law is amended to authorize corporate action further eliminating or limiting the personal liability of a director, then the liability of our directors will be eliminated or limited to the fullest extent permitted by Delaware law, as so amended. Our certificate of incorporation will not eliminate a director’s duty of care and, in appropriate circumstances, equitable remedies, such as injunctive or other forms of non-monetary relief, remain available under Delaware law. This provision also will not affect a director’s responsibilities under any other laws, such as the federal securities laws or other state or federal laws. Under our amended and restated bylaws, we will also be empowered to purchase insurance on behalf of any person whom we are required or permitted to indemnify.
In addition to the indemnification required in our certificate of incorporation and amended and restated bylaws, we have entered into an indemnification agreement with each member of our board of directors. These agreements provide for the indemnification of our directors, officers and some employees for certain expenses and liabilities incurred in connection with any action, suit, proceeding or alternative dispute resolution mechanism, or hearing, inquiry or investigation that may lead to the foregoing, to which they are a party, or are threatened to be made a party, by reason of the fact that they are or were a director, officer, employee, agent or fiduciary of our company, or any of our subsidiaries, by reason of any action or inaction by them while serving as a director, officer, employee, agent or fiduciary, or by reason of the fact that they were serving at our request as a director, officer, employee, agent or fiduciary of another entity. In the case of an action or proceeding by or in the right of our company or any of our subsidiaries, no indemnification will be provided for any claim where a court determines that the indemnified party is prohibited from receiving indemnification. We believe that these charter and bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
The limitation of liability and indemnification provisions in our certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. Moreover, a stockholder’s investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. There is no pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services.
Principal Accountant Fees and Services
The following table sets forth aggregate fees billed to the Company for professional services by our independent registered public accounting firm, Marcum LLP for the fiscal years ended December 31, 2023 and 2022:
2023 2022
Audit Fees(1)
$ 321,672 $ 338,815
Audit-related Fees(2)
39,140 102,485
Tax Fees(3)
- -
All Other Fees(4)
- -
Total Fees $ 360,812 $ 441,300
(1)
“Audit Fees” consist of fees for professional services rendered in connection with the audit of our annual consolidated financial statements, including audited financial statements presented in our annual report on Form 10-K, review of our quarterly financial statements presented in our quarterly report on Form 10-Q and services that are normally provided by our independent registered public accounting firm in connection with statutory and regulatory filings or engagements for those fiscal years, including audit services in connection with filing registration statements, and amendments thereto.
(2)
“Audit-related Fees” consist of fees related to audit and assurance procedures not otherwise included in Audit Fees, including fees related to the application of GAAP to proposed transactions and new accounting pronouncements.
(3)
“Tax Fees” consist of tax return preparation, international and domestic tax studies, consulting and planning.
(4)
“All Other Fees” consist of the cost of a subscription to an accounting research tool.
Audit Committee Pre-Approval
Our Audit Committee pre-approves all auditing services and permitted non-audit services to be performed for us by our independent auditor, including the fees and terms thereof. All of the services described above were approved by our Audit Committee.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules.
(a)The following documents are filed as part of this Annual Report:
(1)Consolidated Financial Statements
Our Consolidated Financial Statements are listed in the "Index to the Consolidated Financial Statements" under Part II, Item 8 of this Annual Report on Form 10-K.
(2)Financial Statements Schedule
All financial statement schedules are omitted because they are not applicable or the amounts are immaterial and not required, or the required information is presented in the Consolidated Financial Statements or notes thereto included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
(3)Exhibits
We hereby file as part of this Report the exhibits listed in the attached Exhibit Index. Exhibits which are incorporated herein by reference can be inspected and copied at the public reference facilities maintained by the SEC, 100 F Street, N.E., Room 1580, Washington D.C. 20549. Copies of such material can also be obtained from the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates or on the SEC website at www.sec.gov.
EXHIBIT INDEX
Exhibit No. Description
3.1 Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019). Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
3.2 Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on November 4, 2022).
3.3 Certificate of Designation (Incorporated by reference to Exhibit 3.3 of the Registrant’s Form 8-K (File No. 001-37862) filed with the SEC on January 2, 2019).
3.4 Certificate of Amendment to the Certificate of Incorporation filed February 23, 2024 (Inccorporated by reference to Exhibit 3.1 of the Registrant's Form 8-K (File No. 00-37862) filed with the SEC on February 28, 2024.)
4.1 Specimen common stock certificate of the Registrant (Incorporated by reference to Exhibit 4.3 of Stellar’s Form S-4/A (File No. 333-224227), filed with the SEC on November 6, 2018).
4.2 Description of Securities (Incorporated by reference to Exhibit 4.15 of the Registrant's Form 10-K (File No. 001-37862), filed with the SEC on March 31, 2021).
10.1+ Phunware, Inc. 2018 Equity Incentive Plan, Amended and Restated as of November 11, 2022 (Incorporated by reference to Annex A of the Registrant's Schedule 14A (File No. 001-37862), filed with the SEC on August 31, 2022).
10.2+ Phunware, Inc. 2018 Employee Stock Purchase Plan (Incorporated by reference to Annex E of the Registrant’s Form S-4/A (File No. 333-224227), filed with the SEC on November 13, 2018).
10.3+ Phunware, Inc. 2009 Equity Incentive Plan (Incorporated by reference to Exhibit 10.15 of the Registrant’s Form S-4 (File No. 333-224227), filed with the SEC on April 11, 2018).
10.4 Form of Token Rights Agreement (Incorporated by reference to Exhibit 10.23 of the Registrant’s Form S-4/A (File No. 333-224227), filed with the SEC on October 2, 2018).
10.5 Form of Purchase Agreement (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862) filed with the SEC on June 5, 2019).
10.6 Form of Cryptocurrency Payment Agreement (Incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K (File No. 001-37862) filed with the SEC on June 5, 2019).
10.7 Form of Cryptocurrency Payment Agreement (Incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K (File No. 001-37862) filed with the SEC on November 21, 2019).
10.11 Standard office lease dated July 16, 2019, between the Company and BRE CA Office Owner, LLC (Incorporated by reference to Exhibit 10.3 of the Registrant's Form 10-Q (File No. 001-37862), filed with the SEC on August 13, 2019).
10.12 Office Sublease between the Company and Bangarang Enterprises LLC d/b/a Gander Group dated effective as of March 16, 2021 (Incorporated by Reference to Exhibit 10.1 of the Registrant's Form 8-K filed with the SEC on March 19, 2021).
10.13+ Employment Agreement between the Registrant and Alan Knitowski (Incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
10.14+ Employment Agreement between the Registrant and Matt Aune (Incorporated by reference to Exhibit 10.3 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
10.15+ Employment Agreement between the Registrant and Randall Crowder (Incorporated by reference to Exhibit 10.4 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
10.16+ Employment Agreement between the Registrant and Luan Dang (Incorporated by reference to Exhibit 10.6 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
10.17 At Market Issuance Sales Agreement by and between Phunware, Inc. and HC Wainwright & Co., LLC dated January 31, 2022 (Incorporated by reference to Exhibit 1.2 of the Registrant's Form S-3 (File No. 333-262461) filed with the SEC on February 1, 2022).
10.18 Note Purchase Agreement dated October 15, 2021, between Phunware, Inc. and Streeterville Capital, LLC (incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K filed with the SEC on October 19, 2021).
10.19 Lease Agreement, dated March 15, 2022, between Phunware, Inc. and Jonsson ATX Warehouse, LLC (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862) filed with the SEC on March 18, 2022).
10.20 Lease Termination Agreement, dated November 9, 2023, between Phunware, Inc. and Jonsson ATX Warehouse, LLC (Incorporated by reference to Exhibit 10.5 of the Registrant's Form 10-Q (File No. 001-37862) filed with the SEC on November 13, 2023.)
10.21 Lease Agreement, dated June 3, 2022, between Phunware, Inc. and ATX Acquisitions, LLC (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862) filed with the SEC on June 10, 2020).
10.22 Note Purchase Agreement, dated July 6, 2022, between Phunware, Inc. and Streeterville Capital, LLC (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862) filed with the SEC on June 8, 2022).
10.23 Promissory Note, dated July 6, 2022, between Phunware, Inc. and Streeterville Capital, LLC (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862) filed with the SEC on June 8, 2022).
10.24+ Amendment No. 1 to Employment Agreement by and between Phunware, Inc. and Matt Aune (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No.001-37862) filed with the SEC on September 30, 2022).
10.25+ Amendment No. 1 to Employment Agreement by and between Phunware, Inc. and Randall Crowder (Incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K (File No.001-37862) filed with the SEC on September 30, 2022).
10.26+ Amended and Restated Employment Agreement by and between Phunware, Inc. and Matt Lull (Incorporated by reference to Exhibit 10.44 of the Registrant's Form 10-K (File no. 001-37862), filed with the SEC on March 31, 2023).
10.27+ Amended and Restated Employment Agreement by and between Phunware, Inc. and Chris Olive (Incorporated by reference to Exhibit 10.45 of the Registrants Form 10-K (File No. 001-37862), filed with the SEC on March 31, 2023).
10.28+ Confidential Executive Employment Agreement by and between Phunware, Inc. and Russell Buyse dated November 11, 2022 (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862) filed with the SEC on November 14, 2022).
10.29+ Confidential Transition, Consulting and General Release Agreement by and between Phunware, Inc. and Alan S. Knitowski executed on December 13, 2022 (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862) filed with the SEC on December 16, 2022).
10.30+ Phunware, Inc. 2022 Inducement Plan (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on January 6, 2023).
10.31+ Phunware, Inc. 2023 Inducement Plan (Incorporated by reference to Exhibit 10.6 of the Registrant's Form 10-Q (File No. 001-37862) filed with the SEC on November 13, 2023).
10.32+* Phunware, Inc. 2023B Inducement Plan.
10.33+ Confidential Employment Agreement by and between Phunware, Inc. and Troy Reisner dated June 2, 2023 (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on June 2, 2023).
10.34+ Confidential Separation, Transition, and General Release Agreement by and between Phunware, Inc. and Matt Aune dated June 2, 2023. (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on June 8, 2023).
10.35 Purchase Agreement, dated August 22, 2023, by and between Phunware, Inc. and Lincoln Park Capital Fund, LLC (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on August 23, 2023).
10.36 Registration Rights Agreement, dated as of August 22, 2023, by and between Phunware, Inc. and Lincoln Park Capital Fund, LLC (Incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on August 23, 2023).
10.37+ Confidential Employment Agreement by and between Phunware, Inc. and Mike Snavely dated September 5, 2023 (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on September 8, 2023).
10.38+ Confidential Separation, Consulting and General Release Agreement by and between Phunware, Inc. and Russell Buyse dated October 25, 2023 (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on October 26, 2023).
10.39+ Confidential Employment Agreement by and between Phunware, Inc. and Mike Snavely dated October 25, 2023 (Incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on October 26, 2023).
10.40 Acknowledgement and Agreement effective December 6, 2023 by and between Phunware, Inc. and Streeterville Capital, LLC. (Incorporated by reference to Exhibit 10.4 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on December 6, 2023).
10.41 Form of Securities Purchase Agreement dated as of December 7, 2023 (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on December 11, 2023).
10.42 Placement Agency Agreement dated December 7, 2023, by and between Phunware, Inc. and Roth Capital Partners, LLC (Incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on December 11, 2023).
10.43 Form of Securities Purchase Agreement dated as of January 16, 2024 (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on January 18, 2024).
10.44 Placement Agency Agreement dated January 16, 2024, by and between Phunware, Inc. and Roth Capital Partners, LLC (Incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on January 18, 2024).
10.45 Form of Securities Purchase Agreement dated as of January 18, 2024 (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on January 23, 2024).
10.46 Placement Agency Agreement dated January 16, 2024, by and between Phunware, Inc. and Roth Capital Partners, LLC (Incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on January 23, 2024).
10.47 Form of Securities Purchase Agreement dated as of February 7, 2024 (Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on February 9, 2024).
10.48 Placement Agency Agreement dated February 7, 2024, by and between Phunware, Inc. and Roth Capital Partners, LLC (Incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K (File No. 001-37862), filed with the SEC on February 9, 2024).
14.1 Code of Business Conduct and Ethics as of December 26, 2018 (Incorporated by reference to Exhibit 14.1 of the Registrant's Form 10-K (File No. 001-37862), filed with the SEC on March 20, 2019).
21.1* List of Subsidiaries of the Registrant.
23.1* Consent of Independent Registered Public Accounting Firm.
24.1* Power of Attorney (contained in signature page to this Annual Report on Form 10-K).
31.1* Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
97.1* Executive Incentive Compensation Recoupment Policy
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
** Furnished herewith
+ Indicates a management contract or compensatory plan or arrangement