UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-37862
PHUNWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
7800 Shoal Creek Blvd, Suite 230-S
Austin, TX
(Address of principal executive offices)
26-4413774
(I.R.S. Employer
Identification Number)
78757
(Zip Code)
Registrant’s telephone number: 512-693-4199
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
Common Stock, par value $0.0001 per share
Warrants to purchase one share of Common Stock
Units, each consisting of one share of Common Stock and one
Warrant
Name of Each Exchange on Which Registered:
The NASDAQ Capital Market
The NASDAQ Capital Market
The NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and (emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐
Emerging growth company ☒
Accelerated filer ☐
Smaller reporting company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
EXPLANATORY NOTE
On December 26, 2018, Stellar Acquisition III, Inc., a Republic of the Marshall Islands corporation incorporated in December
2015 (“Stellar”), deregistered as a corporation in the Republic of the Marshall Islands and domesticated as a corporation incorporated under
the laws of the State of Delaware upon the filing with and acceptance by the Secretary of State of Delaware of the certificate of
domestication in accordance with Section 388 of the Delaware General Corporation Law (the “Domestication”). Upon the effectiveness of
the Domestication, Stellar became a Delaware corporation and, upon the consummation of the Business Combination (as defined below),
Stellar changed its corporate name to “Phunware, Inc.” (the “Successor” or the “Company”) and all outstanding securities of Stellar were
deemed to constitute outstanding securities of the Successor. Also on December 26, 2018, STLR Merger Subsidiary Inc., a wholly-owned
subsidiary of Stellar (“Merger Sub”), merged with and into Phunware, Inc. (“Phunware”), a corporation incorporated in Delaware in
February 2009, with Phunware surviving the merger (the “Merger”) and becoming a wholly-owned subsidiary of the Successor (the
“Business Combination”). Upon the consummation of the Business Combination, Phunware changed its corporate name to “Phunware
OpCo, Inc.” As of the open of trading on December 28, 2018, the common stock and warrants of the registrant began trading on the Nasdaq
Capital Market as “PHUN” and “PHUNW,” respectively.
In connection with the consummation of the Business Combination, on December 26, 2018, the board of directors of the
Successor approved a change of its fiscal year end from November 30 to a calendar year ending December 31, effective immediately.
Accordingly, the new fiscal year will begin on January 1 and end on December 31.
As of March 13, 2019, there were 35,201,259 shares of common stock, par value $0.0001 per share, of the registrant issued and
outstanding.
TABLE OF CONTENTS
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Selected Financial Data
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Principal Accounting Fees and Services
PART IV
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report includes forward-looking statements. All statements other than statements of historical facts contained in this Report,
including statements regarding our future results of operations and financial position, business strategy and plans, and our objectives for
future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,”
“may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions that convey
uncertainty of future events or outcomes are intended to identify forward-looking statements, but the absence of these words does not mean
that a statement is not forward-looking.
The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future
developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-
looking statements involve a number of risks, uncertainties (some of which are beyond our control) and other assumptions that may cause
actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks
and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors.” Should one or more of these risks
or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those
projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as
a result of new information, future events or otherwise, except as may be required under applicable securities laws. These risks and others
described under “Risk Factors” may not be exhaustive.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future
performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we
operate may differ materially from those made in or suggested by the forward-looking statements contained in this Report. In addition,
even if our results or operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with
the forward-looking statements contained in this Report, those results or developments may not be indicative of results or developments in
subsequent periods.
ii
Item 1. Business.
Business Combination
PART I
Phunware, Inc. (“Phunware”) was originally incorporated in the state of Delaware in February 2009. Phunware is a mobile
application development platform and its primary internet address can be accessed at https://www.phunware.com.
On February 27, 2018, Phunware entered into an Agreement and Plan of Merger, as amended (collectively, the “Merger
Agreement”) with Stellar Acquisition III, Inc. (“Stellar”). On December 26, 2018, Stellar, a Republic of the Marshall Islands corporation
incorporated in December 2015, deregistered as a corporation in the Republic of the Marshall Islands and domesticated as a corporation
incorporated under the laws of the State of Delaware upon the filing with and acceptance by the Secretary of State of Delaware of the
certificate of domestication in accordance with Section 388 of the Delaware General Corporation Law (the “Domestication”). Upon the
effectiveness of the Domestication, Stellar became a Delaware corporation and, upon the consummation of the Business Combination (as
defined below), Stellar changed its corporate name to “Phunware, Inc.” (the “Successor” or the “Company”) and all outstanding securities
of Stellar were deemed to constitute outstanding securities of the Successor. Also on December 26, 2018, STLR Merger Subsidiary Inc., a
wholly-owned subsidiary of Stellar (“Merger Sub”), merged with and into Phunware, Inc. (“Phunware”), a corporation incorporated in
Delaware in February 2009, with Phunware surviving the merger (the “Merger”) and becoming a wholly-owned subsidiary of the Successor
(the “Business Combination”). Upon the consummation of the Business Combination, Phunware changed its corporate name to “Phunware
OpCo, Inc.” As of the open of trading on December 28, 2018, the common stock and warrants of the registrant began trading on the Nasdaq
Capital Market as “PHUN” and “PHUNW,” respectively.
In connection with the consummation of the Business Combination, holders of 1,813,487 shares of Stellar common stock sold in
its initial public offering (“Public Shares”) exercised their right to redeem their Public Shares for cash at a price of $10.64 per share, for an
aggregate amount of approximately $19.3 million. As a result of these redemptions, the Stellar trust account had approximately $0.4 million
immediately prior to Closing.
In addition, 6,000 shares for aggregate cash proceeds of $6.0 million from the Series A 8% convertible preferred stock financing
(“Series A Financing”) were issued in conjunction with the Business Combination. In connection with the Series A Financing, the
Sponsors transferred an aggregate of 250,000 shares of Stellar common stock and 250,000 warrants to purchase shares of Stellar common
stock to the Series A Financing investor, and 181,391 shares to certain service providers. The Sponsors are Astra Maritime Inc. and
Dominium Investments Inc., affiliated with the Company’s Chairman of the board of directors and Magellan Investments Corp. and Firmus
Investments Inc., affiliated with a member of our board of directors.
Immediately after giving effect to the Business Combination (including the redemptions and the issuance of shares in the Series A
Financing, both described above), there were approximately 27.3 million shares of common stock and warrants to purchase approximately
18.2 million shares of common stock of Phunware issued and outstanding.
In addition, with the consummation of the Business Combination, the Sponsors transferred to the former stockholders of
Phunware 3,985,244 warrants to purchase shares of Successor common stock. As consideration for the warrants transferred to Phunware
shareholders, a promissory note was issued to the Sponsors (the “Transfer Sponsor Warrant Note”). The amount of the note was
approximately $1,993,000, which represented $0.50 per warrant transferred to former stockholders of Phunware. The warrants transferred
have an exercise price of $11.50 per share. The Transfer Sponsor Warrant Note shall mature on December 26, 2019. The Transfer Sponsor
Warrant Note was subsequently waived and forgiven by the noteholders.
Astra Maritime Inc. and Dominium Investments Inc., affiliates of the Company’s Chairman, Mr. Prokopios (Akis) Tsirigakis, and
Magellan Investments Corp. and Firmus Investments Inc., affiliates of Mr. George Syllantavos, a Director of the Company (the
“Sponsors”), also transferred to Stellar 627,864 shares of Stellar common stock, which shall be retained in treasury and available for
issuance from time to time by Phunware.
Furthermore, Stellar issued 2,211,572 Private Placement Warrants to the Sponsors as repayment in full for the unsecured
promissory notes - related parties. The repayment of the related party notes was calculated at $0.50 per warrant.
Upon consummation of the Business Combination, the former stockholders of Phunware owned approximately 94.4% of the
issued and outstanding shares of common stock of the Successor. This percentage excludes the impact of outstanding stock options and
warrants.
The Merger Agreement contains representations and warranties of the parties thereto, certain of which are limited by materiality
and material adverse effect. The parties have also each agreed to certain covenants contained in the Merger Agreement. The
representations, warranties and covenants of the parties contained in the Merger Agreement terminated at the Closing, notwithstanding that
any covenant that, by its terms, provides for performance following the consummation of the Business Combination shall survive until
such covenant is performed.
1
There is no accounting effect or change in the carrying amount of the consolidated assets and liabilities of the Successor as a result
of the domestication. The Business Combination is accounted for as a reverse merger and recapitalization in accordance with Generally
Accepted Accounting Principles in the United States (“GAAP”). Accordingly, Stellar is the legal acquirer and Phunware is the accounting
acquirer and predecessor whereby the Successor’s historical financial statements reflect the financial position, results of operations and
cash flows of Phunware, and the net cash proceeds obtained from Stellar in the Business Combination is reflected as a capital infusion.
Furthermore, the historical capitalization of Phunware immediately before the Business Combination was adjusted based on the exchange
ratio of 0.459 Successor shares for every one share of Phunware capital stock.
Business Overview
Phunware Inc. is the pioneer of Multiscreen-as-a-Service (“MaaS”) platform, a fully integrated enterprise cloud platform for
mobile that provides companies the products, solutions, data and services necessary to engage, manage and monetize their mobile
application portfolios and audiences at scale. According to comScore’s 2017 Mobile App Report, consumers spend 66% of their total
digital time with mobile devices (smartphones and tablets), and 87% of their mobile time in mobile apps (vs. on mobile web). (Source:
comScore 2017 Mobile App Report). Given this reality, 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. We help brands define, create, launch,
promote, monetize and scale their mobile identities as a means to anchor the digital transformation of their customers’ journeys and brand
interactions. Our MaaS platform provides the entire mobile lifecycle of applications, media and data in one login through one procurement
relationship.
Our MaaS platform allows for the licensing and creation of category-defining mobile experiences for brands and their application
users worldwide. We have successfully expanded our addressable market reach into various important and fast-growing markets: mobile
cloud software, media, data science and cryptonetworking. Since our founding in 2009, our goal has been to use our software platform
within the application portfolios of the world’s largest companies and brands to create a massive database of proprietary Phunware IDs.
Phunware IDs are unique identifiers assigned to a mobile device when it becomes first visible across our network of mobile application
portfolios. We measure and accumulate Phunware IDs every month through queries that count unique devices that access our mobile
application portfolio across our network of mobile applications that we have developed and/or support. The data collected from our
Phunware IDs contributes to our data subscription services and application transaction revenue product lines by helping companies and
brands boost campaign performance, target high-value users, maximize conversions and optimize spend.
We offer our platforms as Software-as-a-Service (“SaaS”), Data-as-a-Service (“DaaS”) and application transactions media. Our
business model includes recurring subscriptions, reoccurring transactions and services, often as one-year to five-year software or data
licenses, or transaction-based media insertion orders. We prioritize our sales and marketing efforts first on recurring SaaS and DaaS
subscriptions, second on reoccurring transactions and third on services. In years in which transactional engagements are not expected to be
attractive for gross margins, they are either avoided or pursued opportunistically only. Our target customers are enterprise companies with
large digital, mobile, marketing and information technology budgets and spending that are enacting digital transformation in their
businesses.
Our Industry
We participate in four rapidly evolving markets — mobile cloud software, media, big data and cryptonetworking — each driven
by some combination of technological advancements including cloud, software-defined infrastructure, mobility, data analytics, IoT and
decentralization.
Mobile Cloud Software — The mobile cloud software market includes SaaS-based mobile software for all businesses, brands and
consumers. The mobile application market is enormous, with worldwide smartphone users downloading more than 175 billion apps — and
spending over $86 billion on them — in 2017. (Source: App Annie, 2017 Retrospective). The number of apps available to Android and iOS
users climbed over 6 million in 2017 as well, and the average number of apps on a user’s phone is approximately 80. (Source: App Annie,
2017 Retrospective). In 2018, the app economy was predicted to enter a new era and surpass $110 billion in app store spend (Source: App
Annie, Top Predictions for the App Economy in 2018).
Media Market — The digital media market includes display, native, video and other types of paid media campaigns rendered on a
connected device and used for audience building, audience engagement or audience monetization. According to eMarketer, digital media
spending including mobile will top $225 billion and represent 49.6% of total media investment by 2021 (Source: eMarketer, “Worldwide
Ad Spending eMarketer’s Updated Estimates and forecast for 2016-2021”). According to the Internet Advertising Bureau (IAB), users
spend 66% of their online time on a mobile device and mobile advertising revenue now makes up 54% of all digital ad revenues (Source:
Internet Advertising Bureau (IAB), “Digital Trends: Consumer Usage of Digital and its Influence on Ad Revenue”). In the first half of
2017, mobile advertising revenue was $21.7 billion in the US alone (Source: Internet Advertising Bureau (IAB), “Digital Trends:
Consumer Usage of Digital and its Influence on Ad Revenue”) and Goodway Group predicts it will grow nearly 4% month-over-month
with an expected overall price increase of over 45% by 2019. (Source: Goodway Group, “2018 Programmatic Pricing Guide Projects Big
Price Increase for mobile Ads by 2019”).
2
Big Data Market — The big data market includes businesses engaged in the creation, consumption and/or processing of big data.
IDC forecasts that this market will grow from $130 billion in 2016 to more than $203 billion in 2020 (Source: IDC, “Double-Digit Growth
Forecast for the Worldwide Big Data and Business Analytics Market Through 2020 Led by Banking and Manufacturing Investments,
According to IDC,” October 3, 2015). According to Cisco Systems, global mobile data traffic will grow from 7 exabytes per month in 2016
to 49 exabytes per month in 2021, a compound annual growth rate of 47 percent (Source: Source: Cisco Global Cloud Index: Forecast and
Methodology, 2016-201 White Paper). Users are increasingly willing to share their data and participate in this market: 40% of broadband
households are willing to share data with manufacturers for product monitoring and maintenance (Source: Parks and Associates, “More
than three-fourths of U.S. broadband households use Wi-Fi for in-home connectivity,” May 31, 2017). Across 17 countries studied, 27%
users are willing to share their personal data in exchange for benefits or rewards like lower costs or personalized service (Source: GFK
Insights, “More people firmly agree with sharing personal data, in return for rewards, than firmly disagree,” January 27, 2017).
Cryptonetworking — The cryptonetworking market includes currencies and other tokens that use distributed ledger technology
and cryptography to secure transactions and verify asset transfers. We believe that it grew exponentially over the course of 2017 and 2018
and will continue to grow, and that cryptocurrencies are larger than many national currencies and other major payment networks.
Real-time cryptocurrency market capitalization information is available at the CoinMarketCap website.
PhunCoin™ (“PhunCoin”)
We previously formed a wholly-owned subsidiary, PhunCoin, Inc. that will be the issuer of our PhunCoin. PhunCoin will be
designed for use within the PhunCoin Ecosystem, which is intended to be a rewards marketplace and data exchange whereby users receive
PhunCoin in exchange for their information and PhunCoin can be redeemed by users for goods and services. The PhunCoin Ecosystem is
currently in the development stage and is intended to enhance and augment our current mobile application platform, which enables
businesses to engage, manage and monetize the information collected by end users and our customers from our consumers.
We currently anticipate that our products and technologies will be enhanced through the creation of the PhunCoin Ecosystem, and
that users in the new PhunCoin Ecosystem will fall into three basic categories:
● Manufacturers, consumer product companies, marketing firms, brands and other sellers of goods and services. We generally
refer to this group as our “customers.”
● Individuals that provide personally identifiable information to us and our customers. We generally refer to this group as
“consumers.”
● Application developers that will include the PhunCoin software development kits into their applications and other software
developers and engineers that will help create and maintain the PhunCoin Ecosystem. We generally refer to this group as
“developers.”
We anticipate that, when the PhunCoin Ecosystem becomes operational, our customers will generally continue to pay us cash for
use of our technology and our consumers and developers generally will receive PhunCoin in exchange for providing services and
information to us and our customers.
In accordance with the Merger Agreement, PhunCoin Sub commenced an offering to raise capital to fund the development and
creation of the PhunCoin Ecosystem through the issuance of rights to receive future PhunCoin (the “Rights”). These Rights will only be
issued to accredited investors pursuant to an offering under Rule 506(c) of Regulation D under the Securities Act that complies with know-
your-customer (“KYC”), anti-money-laundering (“AML”) and accredited investor verification requirements.
Our current expectation is that the proceeds from the Rule 506(c) offering of Rights is anticipated to be used solely to fund
development of the PhunCoin Ecosystem, with any additional amounts being used at the discretion of the Phunware or PhunCoin Sub. We
currently estimate that the use of proceeds from the Rule 506(c) offering of Rights are anticipated to be used as follows:
● 35% — Sales & Marketing
● 35% — Research & Development
● 20% — Ecosystem Development
● 10% — General & Administrative
3
PhunCoin will be a digital asset built and transacted on top of an existing blockchain technology. We do not intend to create our
own blockchain technology. As a part of our research and development, we evaluated several blockchain technologies to determine which
of these providers meet the design specifications we require to create the PhunCoin Ecosystem. We are have evaluated the feasibility of
potential solutions and have conducted technical evaluations, performance evaluations, user testing, and other analyses in order to
determine the best technology for the PhunCoin Ecosystem. As a result, we have decided to initially use the Stellar blockchain technology
for the PhunCoin Ecosystem, although we may choose to use a different blockchain technology in the future. We believe that the Stellar
blockchain technology will also enable us to comply with the registration and other requirements of the federal and state securities laws and
other applicable laws and regulations.
As part of the PhunCoin Ecosystem launch (i.e., the “Token Generation Event”), PhunCoin Sub intends to issue PhunCoin
pursuant to an offering either registered or eligible for exemption from registration under the Securities Act. However, there is no assurance
that the PhunCoin Ecosystem will be operational by then (if at all) nor that the offering of PhunCoin will be registered or eligible for an
exemption from registration under the Securities Act. PhunCoin will initially be issued to holders of the Rights and also to holders of
warrantholders of the PhunCoin Right who were also issued warrants that entitle them to receive PhunCoin if the Token Generation Event
occurs. These PhunCoin will have the same terms, other than price, as the PhunCoin being issued to holders of the Rights.
For securities law purposes, PhunCoin is deemed to have already been sold to the holders of the Rights and the warrantholders that
have a Right to future issuance of PhunCoin (“PhunCoin Right”). This means that, if and when issued, such PhunCoin will be restricted as
to transfer and that any resale by such holders must be made pursuant to an exemption from registration or pursuant to an effective resale
registration statement. Phunware does not believe that the PhunCoin issued to holders of the Rights and PhunCoin Right will have any
material impact on the amount of capital PhunCoin Sub (or Phunware) may be able to raise for the purposes of creating and operating the
PhunCoin Ecosystem or other future capital needs. This is because PhunCoin Sub (i) does not currently contemplate using the proposed
PhunCoin offering, as described below, to raise capital (although it could determine to do that as well) but rather, to allow PhunCoin to be
distributed in exchange for data and services and (ii) Phunware and the PhunCoin Sub expect to be able to access other sources of capital,
which may include debt financings and equity financings through additional private placements, or other offerings (including the current
Rule 506(c) private placement which is offering up to $100 million of Rights).
Phunware intends for PhunCoin Sub to be the actual issuer of PhunCoin. Before PhunCoin Sub issues PhunCoin to the holders of
PhunCoin Right, Phunware will obtain the consent of those warrantholders representing the requisite vote necessary to amend the warrant
to provide for the assignment by Phunware to PhunCoin Sub of all of Phunware’s obligations to issue PhunCoin. Pursuant to the
amendment, PhunCoin Sub will fully and unconditionally assume all of Phunware’s obligations to issue PhunCoin that exist under the
warrant. Phunware will notify all warrantholders of any amendment to the warrant and the assignment by Phunware, and the assumption by
PhunCoin, of the obligations to issue PhunCoin and intends to file a Current Report on Form 8-K once the amendment is entered into and
becomes effective.
Once our proposed PhunCoin offering is either registered with the SEC or eligible for an exemption from registration under the
Securities Act, we expect to distribute PhunCoin to developers in exchange for services, i.e. for the inclusion of the PhunCoin software
development kit (i.e. SDK) into the developers’ applications and for the application usage data they provide to the PhunCoin Ecosystem.
We also intend to distribute PhunCoin to consumers in exchange for their agreements to provide certain benefits to us, including, but not be
limited to, enriching their data with additional information and participating in marketing campaigns that will assist us to deliver increased
value to customers.
At this time, we have not taken any action to list PhunCoin on a trading platform. We intend to list and allow trading of PhunCoin
in the future, but only on those platforms that comply with all applicable federal and state securities laws. Currently, no such trading
platforms exist.
PhunCoin is intended to be a digital asset that entitles the holder to access the PhunCoin Ecosystem that we are building and to use
PhunCoin in exchange for goods and services in the PhunCoin Ecosystem. Both PhunCoin and the PhunCoin Ecosystem are currently
under development and, therefore, the specific legal and economic rights have not been finalized. However, we do not expect that PhunCoin
will have any governance, voting, dividend or other rights with respect to either PhunCoin Sub or us, and that we expect that all holders of
PhunCoin will have the same rights.
Our core business is as a mobile application platform enabling our customers to utilize the platform to engage, manage and
monetize their interaction with consumers. Today, this takes the form of software modules such as location-based services, analytics,
content management, marketing automation, and other customer engagement technology designed to create desired business outcomes for
that customer. We expect to integrate PhunCoin into our core business platform as well as create new software and systems to support the
PhunCoin Ecosystem. PhunCoin will complement and supplement our core business by adding new capabilities for our customers to use
“cryptonetworking” to engage consumers, while at the same time creating a new ecosystem that allows those consumers to benefit from the
provision and use of their data. Our core business enables the rapid integration of mobile solutions, but PhunCoin further enhances that
capability by incentivizing customer and consumer engagement with these solutions.
Cryptonetworking is currently not available to Phunware customers. To make cryptonetworking available, Phunware intends to
deploy a combination of standalone technology as well as integration into its MaaS platform such that customers could potentially use
cryptonetworking as a reward for consumers taking action in an application built on the MaaS platform. Phunware is not currently
generating, nor in the past has it generated, revenue from this product or solution offering. To the extent that this type of functionality may
require the PhunCoin Ecosystem to become a registered broker-dealer and register as an alternative trading system with the SEC, PhunCoin
Sub intends to undertake those registrations or revise the functionality in order to remain fully compliant with all applicable laws.
4
Each PhunCoin user account will be created using a technology called self-sovereign identity. This is an identity that is based on
blockchain technology and gives the user full control over this identity without a central authority. Since our approach to this identity starts
with an application and the user’s mobile device, the User who creates this identity will then be paired to the device through a relationship
on that identity system. In addition, this identity will be paired with an account on the blockchain provider, which will then be the
blockchain account at which the PhunCoin can be received via transactions. Key recovery functions and custody of private digital asset
keys will be handled by the identity solution provider and integrated into the software system.
We do not intend to create our own self-sovereign identity system, but to evaluate other existing systems already proven in the
market and to integrate them into the PhunCoin Ecosystem. Such providers include, but are not limited to, Sovrin/Everynm, Veres.One and
uPort. As a part of research and development, we will evaluate an array of self-sovereign technology providers to determine which of these
providers meet the design specifications we require to create the PhunCoin Ecosystem. For each provider, we will conduct technical
evaluations, performance evaluations, user testing, etc. to determine the best technology for the PhunCoin Ecosystem. This will include
evaluation and implementation of the technical architecture needed to validate ownership and approve transfer of PhunCoin in order to
comply with applicable securities laws.
Where possible, we intend to use existing mobile security features, such as, but not limited to, Apple Touch ID to further secure
and at the same time enable easy access to the PhunCoin application using biometric/fingerprint capabilities of those devices.
A multidisciplinary team (design engineering, quality assurance, and product) is actively developing all aspects of the PhunCoin
Ecosystem. iOS and Android PhunCoin wallet and SDK development is also underway and the data exchange capabilities are being
implemented, including segment management and data monetization.
Our Solution
Our business model includes a combination of subscription, transaction and service 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, buy or lease 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 Offerings
Within the four core markets above, our MaaS platform, products and solutions include the following:
● Software, including recurring one- to five-year software licensing for
● MaaS software ingredients that are included inside mobile application portfolios such as Software Development Kits
(“SDKs”), Application Programming Interfaces (“APIs”), scripts, portals, integrations, interfaces and other software tools,
solutions and services that address
● Business Intelligence & Analytics (SDK that provides data related to application use and engagement),
● Content Management (SDK that allows application admins 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);
● Loyalty & Rewards,
● Commerce,
● Location-Based Services (module that include Mapping, Navigation, Way finding, Workflow, Asset Management and
Policy Enforcement), and
● Support & Maintenance of the application;
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● MaaS software application frameworks that pre-integrate all of our MaaS software ingredients for use within mobile
application portfolios, solutions and services; and
● MaaS 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.
● Application transactions, including re-occurring and one-time transactional media purchases, often via insertion orders, for
● application discovery, user acquisition and audience building,
● audience engagement, and
● audience monetization;
● Data, including re-occurring and one-time application transaction media campaigns and recurring one to five year data
licensing for one-to-one, indoor and outdoor, consumer targeting across
● Global Position Systems (GPS),
● high- and low-density WiFi,
● physical and virtual beacons; and
● Cryptonetworking, including a PhunCoin crypto ecosystem that directly connects and rewards mobile application users and
user segments worldwide with the businesses that want to reach them locally, regionally or globally at scale.
Cryptonetworking and PhunCoin is not currently available to our customers, as the Phunware is evaluating blockchain
technologies for its PhunCoin Ecosystem.
Competitive Strengths
Fully integrated and comprehensive solutions: Our comprehensive 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 database of over one petabyte can be used to inform business decisions related to mobile strategy, marketing, operations
and more.
Data reach and scale: Since Phunware’s founding in 2009, our goal has been to use our software platform within the application
portfolios of the world’s largest companies and brands to create a massive database of proprietary Phunware IDs for every device touching
networks globally to then reach everyone, everywhere, indoors and outdoors, in real time, on a 1-to-1 basis.
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
almost a decade of platform-specific mobile expertise, a major competitive differentiator.
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Results-driven culture: Our employees are granted stock options upon hire 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 developing our intellectual property, including methods of accessing wireless account
information, rendering content on a wireless device, indoor navigation with a mobile device and more. We are developing creative solutions
to solve complex technical problems and create competitive advantages for our customers.
Consumer-first mindset: As news stories about improper use and abuse of consumer data by social networks and app developers
continue to surface, we are in a unique position to capitalize on other technology companies’ lack of foresight. The PhunCoin crypto token
will empower users to control and be compensated for the data they contribute to the PhunCoin Ecosystem, and it will prevent traditional
security breach concerns by storing and biometrically protecting data and self-sovereign identity client-side (versus in the cloud).
Our Growth Strategy
Key elements of our growth strategy include:
Expand mobile products and services. Mobile applications, media and data 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.
Deepen existing customer relationships. We believe that we are well positioned to identify new opportunities or enhance existing
services and solutions within our existing customers. We create cross and upsell opportunity between subscription, media and data
customers as each customer seeks to deepen its approach to mobile application lifecycle management.
Develop new relationships to expand our customer base. We intend to continue to grow our customer base by expanding our team
of sales professionals and developing our indirect channel relationships. 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.
Continue to grow our strong domestic footprint and expand internationally. We have a strong and growing presence in the
United States and we believe there are significant opportunities for further domestic expansion. We believe there are multiple attractive
market opportunities, both domestically and internationally, into which we will continue to opportunistically expand. Top expansion targets
include entertainment, healthcare, retail and real estate — all verticals that benefit from our integrated solutions, comprehensive lifecycle
approach and ability to engage users in both digital and physical worlds.
Add new capabilities and geographic regions through strategic acquisition. We operate in a fragmented market that offers
significant consolidation opportunities. We will continue to evaluate strategic acquisitions and partnerships that enhance our capabilities
and expand our geographic footprint, both domestically and internationally.
Expand our partnership network with third-party providers of tools 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 are enterprise companies with consistent IT spending that are looking to enact digital transformation in their
business — whether it is retail, healthcare, entertainment, real estate or any other industry. We provide technology and solutions to support
these companies through every stage of the mobile application lifecycle.
We believe the multi-year contractual nature of our software and managed services provides revenue visibility. Our subscription
agreements with our customers consist of standard services agreements that generally do not contain any minimum commitment terms that
would guarantee business for us and do not impose obligations upon us such as exclusivity or other terms. These agreements provide
standard terms relating to payment, liability, performance, cancellation and termination, confidentiality, and indemnification obligations,
among other provisions. All of these agreements contain terms of service that generally are consistent across Phunware’s customers. These
standard services agreements 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, which provides 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.
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Concentration of Major Customers
During the year ended December 31, 2018, our sales were concentrated with Fox Networks Group (“Fox”) and Fetch Media, Ltd.
(“Fetch”), which accounted for 42% and 21% of our net sales, respectively. During the year ended December 31, 2017, our sales were
concentrated with Fox and Fetch, which accounted for 44% and 11% of our net sales, respectively. As with our other subscriptions and
services customers, our contractual arrangements with Fox are governed by standard terms of service and statements of work. Furthermore,
our contractual arrangements with our application transaction customers, including Fetch, are governed by insertion orders, which in
addition to being governed by our standard terms and conditions are also governed by IAB terms, including but not limited to payment
liability and obligations. The revenue concentration of these customers is simply a function of the Company selling additional services and
expanding the scope of work. Terms are consistent with our standard terms and contain no materially different terms or conditions.
Our agreements, including those with Fox and Fetch, are pursuant to standard services agreements. All of these agreements
contain standard terms of service that generally are consistent across Phunware’s customers.
Our application transaction agreements, also known as insertion orders, are typically governed by the IAB Standard Terms and
Conditions for Internet Adverting for Media Buys One Year or Less (V3.0) (the “IAB Terms”), which can be found on the IAB’s website.
The IAB Terms in Section III.c 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. Phunware views 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, Phunware is not substantially dependent
on the agreements.
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 Adobe, Oracle, Urban
Airship, Chaotic Moon, Adroll and many more.
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;
● 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;
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● 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 numerous U.S. and foreign laws and regulations that are applicable to companies engaged in the business of
advertising on mobile devices. In addition, many areas of law that apply to our business are still evolving and could potentially affect our
business to the extent they restrict our business practices or impose a greater risk of liability.
Given the nascent stage of mobile advertising, industry practices are rapidly evolving. We participate in the Digital Advertising
Alliance and other industry groups that are developing best practices for the mobile advertising industry.
Privacy and Data Protection
Privacy and data protection laws play a significant role in our business. In the United States, at both the state and federal level,
there are laws that govern activities such as the collection and use of data by companies like us and privacy and data protection issues
generally have gained wide media and public attention recently. Online advertising activities in the United States have primarily been
subject to regulation by the FTC, which has regularly relied upon Section 5 of the Federal Trade Commission Act to enforce against unfair
and deceptive trade practices. Section 5 has been the primary regulatory tool used to enforce against alleged violations of online privacy
policies and would apply to privacy practices in the mobile advertising industry. In December 2012, the FTC adopted amendments to rules
under COPPA, which went into effect in July 2013. These amendments broadened the potential applicability of COPPA compliance
obligations to our activities and those of our clients. Further, Europe’s new General Data Protection Regulation (which came into force in
May 2018) extends the jurisdictional scope of European data protection law. As a result, we will be subject to the European Union’s
General Data Protection Regulation (“GDPR”) when we provide our media and data services in Europe. The GDPR imposes stricter data
protection requirements that may necessitate changes to our services and business practices.
The issue of privacy in the mobile advertising industry is still evolving. Federal legislation and rulemaking has been proposed
from time to time that would govern certain advertising practices as they relate to mobile devices, including the use of precise geolocation
data. Although such legislation has not been enacted, it remains a possibility that such federal and state laws may be passed in the future.
There have been numerous civil lawsuits, including class action lawsuits, filed against companies that conduct business in the
mobile device industry, including makers of mobile devices, mobile application providers, mobile operating system providers and mobile
third-party networks. Plaintiffs in these lawsuits have alleged a range of violations of federal, state and common laws, including computer
trespass and violation of privacy laws.
In addition, mobile services are generally not restricted by geographic boundaries and our services reach mobile devices
throughout the world. We transact business with our customers in Europe and Southeast Asia and, as a result, some of our activities may
also be subject to the laws of foreign jurisdictions. In particular, European data protection laws can be more restrictive regarding the
collection and use of data than those in U.S. jurisdictions. As we continue to expand into other foreign countries and jurisdictions, we may
be subject to additional laws and regulations that may affect how we conduct business.
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 solutions. Our research and development efforts are focused on
improving and enhancing our existing 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, functional depth and
breadth, and usability of our solutions drive our technology decisions and product development.
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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. 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 13 patents issued and 6 non-provisional patent applications. The issued patents expire between the
years 2027 and 2036. In addition, we have registered “Phunware” as a trademark in the United States and Canada. We cannot assure you
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 assure you 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, we intend to
expand our international operations, and effective patent, copyright, trademark, and trade secret protection 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 channel 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. We cannot assure you 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, 2018, we had 148 employees, including 104
software developers, engineers, QA engineers and product managers. We employed a sales and marketing force of approximately 20
professionals.
We believe it is as the result of its employee base that we have long-standing customer engagements and strong financial
performance. None of our employees are currently covered under any collective bargaining agreements. We believe our relations with our
employees are good.
Executive Officers
The following table sets forth the names, ages and positions of our executive officers as of the date of this Report:
Name
Executive Officers
Alan S. Knitowski
Luan Dang
Matt Aune
Randall Crowder
EXECUTIVE OFFICERS
Age
49
47
43
38
Position
Chief Executive Officer and Director
Chief Technical Officer
Chief Financial Officer
Chief Operating Officer and Director
Alan Knitowski co-founded Phunware and has served as its Chief Executive Officer and a member of the board of directors since
February 2009. Prior to co-founding Phunware, Mr. Knitowski served as President of Strategic Investments and Managing Director for
Trymetris Capital Management, LLC, or Trymetris, a hedge fund sponsor, from April 2004 to February 2009. Mr. Knitowski holds a B.S.
in Industrial Engineering from The University of Miami, an M.S. in Industrial Engineering from the Georgia Institute of Technology and an
M.B.A from the Haas School of Business at the University of California, Berkeley.
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Luan Dang co-founded our Phunware and has served as its Chief Technology Officer since February 2009. Prior to co-founding
Phunware, he served as President of Alternative Investments for Trymetris from April 2004 to February 2009. Mr. Dang holds a B.S. in
Computer Engineering from the University of California at San Diego and an M.S. in Computer Science from Stanford University.
Matt Aune has served as Phunware’s Chief Financial Officer since August 2013. Mr. Aune previously served as its Director of
Finance and Accounting from August 2011 to August 2013. Prior to joining Phunware, Mr. Aune was employed by Sony Computer
Entertainment America as Senior Business Finance and Operations Analyst from July 2010 to August 2011. From 2003 to 2009, Mr. Aune
served in a variety of roles at Midway Games, a video game developer and publisher, with his final role as the Senior Manager of Financial
Planning and Analysis for Worldwide Product Development. Mr. Aune holds a B.A. in Economics from the University of California, San
Diego and an M.B.A. from San Diego State University.
Randall Crowder has served as Phunware’s Chief Operating Officer since February 2018. In September 2017, he founded and
continues to serve as the Managing Partner at Nove Ventures, a venture capital firm, which focuses on investing in established companies
like Phunware that are looking to leverage blockchain technology to complement their core business model. Since August 2009, Mr.
Crowder has also been a co-founder and Managing Partner at TEXO Ventures, which focuses primarily on tech-enabled health services.
Mr. Crowder holds a B.S. in General Management from the United States Military Academy at West Point and an M.B.A. from the
McCombs School of Business at the University of Texas at Austin.
Item 1A. 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 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
Our revenue has declined, 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 year ended
December 31, 2018 and December 31, 2017. These losses were due to both a reduction in revenue in 2017 and 2018, as compared to
previous years, and the substantial investments we made to build our products and services, grow and maintain our business and acquire
customers. 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 build our brand.
As a result, we expect our operating expenses to increase in the future due to expected increased sales and marketing expenses, operations
costs, research and development costs and general and administrative costs and, therefore, our operating losses will continue or even
potentially increase for the foreseeable future. In addition, as a public company we incur significant legal, accounting and other expenses
that we did not incur as a private company. Furthermore, to the extent that we are successful in increasing our customer base, we will also
incur increased expenses because costs associated with generating and supporting customer agreements are generally incurred up front,
while revenue is generally recognized ratably over the committed term of the agreement. 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 report and unforeseen expenses, difficulties, complications
and delays and other unknown events. You should not rely upon our recent bookings 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, 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.
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Our results of operations and ability to grow could be negatively affected if we cannot adapt and expand our technology offerings
and services 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 offerings and services 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 offerings and services, our results
of operations and our ability to develop and maintain a competitive advantage and to continue to grow 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 out account managers, sales technology specialists, engineers and consultants 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.
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 our technology offerings and services with existing customers. Our
customers may not 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 service. 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 assure you that its efforts will
increase sales to existing customers or additional revenue. If our efforts to upsell to our customers are not successful, our future growth may
be limited.
Our ability to achieve significant growth in revenue in the future will also depend upon our ability to attract new customers. This may be
particularly challenging where an organization has already invested substantial personnel and financial resources to integrate competing
technology offerings and services into our business, as such 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 and our business may be harmed.
Demand for our technology offerings and services 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 offerings and services, 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.
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Substantial competition could reduce our market share and significantly harm our financial performance.
We expect the competitive landscape in which we compete to continue to change as new technologies are developed. While innovation can
help our business as we create new offerings for us to sell and provide complementary services, it can also disrupt our business model and
create new and stronger competitors. For instance, while cloud based solutions present an opportunity for us, cloud based solutions and
technologies that deliver technology solutions as a service could increase the amount of sales directly to customers rather than through
solutions providers like us, or could reduce the amount of hardware we sell, leading to a reduction in our technology offerings revenue
and/or profitability. In addition, some of our hardware and software technology partners sell and could intensify their efforts to sell, their
products directly to our customers. Moreover, traditional OEMs have increased their services capabilities through mergers and acquisitions
with service providers, which could potentially increase competition in the market to provide comprehensive technology solutions to
customers. If any of these trends becomes more prevalent, it could adversely affect our business, results of operations, or financial
condition.
Our future results will depend on our ability to continue to focus our resources and manage costs effectively.
We are continually implementing productivity measures and 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, we may incur losses, which could decrease our operating margins and significantly reduce or eliminate
our profits. 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
offerings 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 IT 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 investments in new services and technologies may not be successful and our business strategy is evolving 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, and such efforts may not be successful.
We continue to invest in new services and technologies, including cloud, virtualization, security, mobility, data analytics 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 would prevent us from realizing expected returns on these investments. Even if
these solutions are successful in the market, they still rely on third-party hardware and software 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.
13
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 providing mobile advertising analytics
products and services, which may involve pursuing strategic transactions, including potential acquisitions of, or investments in, related or
unrelated businesses. 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 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.
If we lose any of our key personnel, or are unable to attract and retain the talent required for our business, our business could be
disrupted and our financial performance could suffer.
Our success is heavily dependent upon our ability to attract, develop, engage and retain key personnel to manage and grow our business,
including our key executive, management, sales, services and technical personnel.
Our future success will depend to a significant extent on the efforts of our executive officers, as well as the continued service and support
of other key employees. Our future success also will depend on our ability to attract and retain highly skilled technology specialists,
engineers and consultants, for whom the market is extremely competitive.
Our inability to attract, develop and retain key personnel could have an adverse effect on our relationships with our technology partners and
customers and adversely affect our ability to expand our offerings of technology offerings and services. Moreover, our inability to train our
sales, services and technical personnel effectively to meet the rapidly changing technology needs of our customers could cause a decrease in
the overall quality and efficiency of such personnel. Such consequences could adversely affect our business, results of operations, or
financial condition.
It may be difficult for us to retain or attract qualified officers and directors, which could adversely affect our business and our
ability to maintain the listing of our common stock on Nasdaq.
We may be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective
management as a result of changes in the rules and regulations which govern publicly-held companies, including, but not limited to,
certifications from executive officers and requirements for financial experts on boards of directors. The perceived increased personal risk
associated with these changes may deter qualified individuals from accepting these roles. Further, applicable rules and regulations of the
SEC and Nasdaq heighten the requirements for board or committee membership, particularly with respect to an individual’s independence
from the corporation and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors
with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, our business and our ability to
maintain the listing of our shares of common stock on Nasdaq could be adversely affected.
Our ability to attract and retain business and personnel may depend on our reputation in the marketplace.
We believe our brand name and our reputation in the marketplace are important corporate assets that help distinguish our technology
offerings and services from those of competitors and contribute to our ability to recruit and retain talented personnel, in particular our
engineers and consulting professionals. However, our corporate reputation is potentially susceptible to material damage by events such as
disputes with customers, cybersecurity breaches, service outages, internal control deficiencies, delivery failures, or compliance violations.
Similarly, our reputation could be damaged by actions or statements of current or former customers, directors, employees, competitors,
vendors, partners, joint ventures or joint venture partners, adversaries in legal proceedings, legislators, or government regulators, as well as
members of the investment community or the media. There is a risk that negative information about us, even if based on rumor or
misunderstanding, could adversely affect our business. Damage to our reputation could be difficult, expensive and time-consuming to
repair, could make potential or existing customers reluctant to select us for new engagements, resulting in a loss of business and could
adversely affect our recruitment and retention efforts. Damage to our reputation could also reduce the value and effectiveness of our brand
name and could reduce investor confidence in us, adversely affecting the Successor’s share price.
14
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 in Odyssey, Simplikate, Digby, Tapit! and GoTV. 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 offerings 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, 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 time and material and fixed price 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 obligations have been met.
15
Our financial results may be adversely affected by changes in accounting principles applicable to us.
U.S. generally accepted accounting principles (“GAAP”) is subject to interpretation by the Financial Accounting Standards Board
(“FASB”), the SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. For example, in May
2014, the FASB issued Accounting Standards Update No. (“ASU”) No. 2014-09 (Topic 606), Revenue from Contracts with Customers,
which supersedes nearly all existing revenue recognition guidance under GAAP. We are required to implement this guidance in the first
quarter of our fiscal year 2019, as we have elected to take advantage of the extended transition period provided in Securities Act Section
7(a)(2)(B) for complying with new or revised accounting standards. The most significant impact relates to our accounting for subscriptions
to our MaaS licenses and application development services, which may potentially make revenue more volatile and difficult to predict. In
addition, accounting for commissions is impacted significantly as we have to capitalize and amortize most commissions under the new
standard instead of expensing commissions as incurred. Due to the complexity of certain of our contracts, the revenue recognition
treatment required under the new standard is dependent on contract-specific terms. Any difficulties in implementing these pronouncements
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. In addition, to adopt the new standard we had to implement a new revenue recognition
module in our accounting system, hire consultants and increase our spending on audit fees, thereby increasing our general and
administrative expense. That increased spending will continue through at least our first fiscal quarter of 2019 and will likely increase our
audit fees on an ongoing basis thereafter.
There has been limited precedence set for financial accounting of digital assets, it is unclear how the Company will be required to
account for digital assets transactions in the future.
There has been limited precedence set for the financial accounting of digital assets, including the accounting around the issuance of our
digital asset, PhunCoin. It is unclear how the Company will be required to account for issuances of its own digital asset, transactions or
digital asset it holds on its balance sheet. Furthermore, a change in regulatory or financial accounting standards could result in the necessity
to restate the Company’s financial statements. Such a restatement could negatively impact the Company’s business, prospects, financial
condition and results of operation. Such circumstances would have a material adverse effect on the ability of the Company to continue as a
going concern or to pursue this segment at all, which would have a material adverse effect on the business, prospects or operations of the
Company and potentially the value of any cryptocurrencies the Company holds or expects to acquire for its own account, including
accounting for PhunCoin, and harm investors.
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:
● changes in spending on subscriptions, services and application transactions media offerings and services by our current or
prospective customers;
● pricing our technology offerings and services effectively so that we are able to attract and retain customers without
compromising our operating results;
● attracting new customers and increasing our existing customers’ use of our technology offerings and services;
● the mix between new contracts and renewals;
● customer renewal rates and the amounts for which agreements are renewed;
● seasonality and its effect on customer demand;
● 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;
● changes to the commission plans, quotas and other compensation related metrics for our sales representatives;
● the amount and timing of payment for operating expenses, particularly sales and marketing expense;
● our ability to manage our existing business and future growth, domestically and internationally;
● 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; and
● general economic and political conditions in our domestic and international markets.
● customer delays in purchasing decisions in anticipation of new products or product enhancements by us or our competitors;
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● 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;
● 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;
● introduction and adoption of our marketing solutions in markets outside of the United States;
● unforeseen costs and expenses related to the expansion of our business, operations and infrastructure;
● awareness of our thought leadership and brand on a global basis;
● changes in the levels of our capital expenditures;
● foreign currency exchange rate fluctuations; and
● general economic and political conditions in our domestic and international markets.
We may not be able to accurately forecast the amount and mix of future technology offerings 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 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 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
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 financial services
industry and the healthcare industry. 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.
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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 or other
service requirements of our customers, these errors or failures could disrupt our customer’s 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 verifying the integrity of employees that work with our customers by conducting background checks.
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 the 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, technology offerings and services, including, for example, the software solutions of others that we offer
to our customers, do not infringe on the intellectual property rights of third parties and these third parties 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 services or solutions 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 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 its 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 right 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 offerings 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 rights might also require considerable time, money and oversight and we may not be successful in
enforcing our rights.
18
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 technology
offerings 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. 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 complete its contractual commitments 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.
Given our number of employees, labor related costs represent a significant portion of our expenses. An increase in labor costs, for example,
as a result of increased competition for skilled labor, or employee benefit costs, such as health care costs or otherwise, could adversely
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.
Our customers have operations across North and South America, Europe, Australia and Asia and other locations. Although international
revenue currently represents a small portion of our business, our revenue from customers outside of the United States may expand in the
future as we expand our international presence. 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 anticorruption 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 general economy or the industries in which our customers operate could
disproportionately affect the demand for our marketing solutions and negatively impact our operating results.
General worldwide economic conditions have experienced a significant downturn and fluctuations in recent years and market volatility and
uncertainty remain widespread. As a result, we and our customers 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 marketing and sales budgets,
which could decrease corporate spending on our marketing solutions, 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 sector may disproportionately affect us because a significant portion of our customers are
technology companies. 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 general economy or markets in which we operate worsen, our business could be harmed.
In addition, even if the overall economy does not worsen or improves, the market for marketing software may not experience growth or we
may not experience growth.
If platform subscriptions 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 is
typically one year, but 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.
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If we are unable to attract new customers or sell additional services and functionality 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 functionality and services 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 enterprise 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 platform subscriptions and services over the term of the relevant contract, downturns or
upturns in sales are not immediately reflected in full in our operating results.
As a subscription-based business, we recognize revenue over the term of each of our contracts, which is typically one year, but 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 solutions and professional services or a decline in new 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 sales or renewals of our marketing 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,
as revenue from new customers must be recognized over the applicable term of the contracts.
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 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 offerings 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 offerings and
services varies. As a result of the variability and length 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; and
● the length and timing of customers’ approval processes.
Privacy concerns and consumers’ acceptance of Internet behavior tracking may limit the applicability, use and adoption of our
marketing solutions.
Privacy concerns may cause consumers to resist providing the personal data necessary to allow our customers to use our service
effectively. We have implemented various features intended to enable our customers to better protect consumer privacy, but these measures
may not alleviate all potential privacy concerns and threats. For example, the ECJ Ruling had the effect of invalidating the Safe Harbor
framework. As a result, the framework no longer provides a valid legal basis for companies to transfer personal data from the European
Union to the United States. Companies, including our customers, must comply with relevant aspects of European Union data protection
laws using alternate mechanisms and our customers may not implement the alternate mechanisms that we offer. Additionally, our
alternative measures may be challenged or deemed insufficient. Even the perception of privacy concerns, whether or not valid, may inhibit
market adoption of our service in certain industries. In addition to government activity privacy advocacy groups and the marketing and
other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. The
costs of compliance with and other burdens imposed by, the foregoing laws, regulations, policies and actions may limit the use and
adoption of our cloud-based marketing solutions and reduce overall demand for it, or lead to significant fines, penalties or liabilities for any
noncompliance or loss of any such action.
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We require significant additional capital funding and such capital may not be available to us.
We expect that our operating expenses will be higher than our net revenue for the foreseeable future, we currently lack sufficient working
capital and, as a standalone entity without giving effect to the Business Combination, we do not currently have financing available to pay all
liabilities as they are scheduled to come due in the next twelve months. We are working on several contingency plans within our control to
conserve existing liquidity through the reduction of discretionary expenses. We are also exploring various alternatives including debt and
equity financing vehicles, alternative offerings (launching an offering for a new token pursuant to Rule 506(c) of Regulation D as
promulgated under the Securities Act) strategic partnerships and the Business Combination.
Our cash requirements relate primarily to our current negative working capital balance plus working capital needed to operate and grow our
business, including funding operating expenses and continued development and expansion of our services. We are currently unable to fund
our operations without additional external financing and therefore cannot sustain future operations, we may be required to delay, reduce
and/or cease our operations and/or seek bankruptcy protection. Although we have successfully raised funds from investors in the past, no
assurances can be made that we will be able to obtain sufficient additional capital to satisfy the current negative working capital balances
and future operations. Furthermore, if adequate additional funds are not available, we will be required to delay, reduce the scope of, or
eliminate material parts of the implementation of our business strategy, including potential additional acquisitions or internally-developed
businesses, which could seriously harm our business and operating results.
Additionally, even if we raise sufficient capital through additional equity or debt financings, warrant exercises, strategic alternatives or
otherwise, there can be no assurance that the revenue or capital infusion will be sufficient to enable us to develop our business to a level
where it will be profitable or generate positive cash flow. If we raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders could be significantly diluted and these newly issued securities may have rights,
preferences or privileges senior to those of existing stockholders. If we incur additional debt, a substantial portion of our operating cash
flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business
activities. The debt holders would have rights senior to common stockholders to make claims on our assets and the terms of any debt
securities issued could also impose significant restrictions on our operations. Because our decision to issue securities in any future offering
will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our
future offerings. Our warrants may and could be exercised on a cashless basis. As a result, our stockholders bear the risk of our future
securities offerings reducing the market price of our common stock and diluting their interest. Broad market and industry factors may
seriously harm the market price of our common stock, regardless of our operating performance and may adversely impact our ability to
raise additional funds. If we raise additional funds through collaborations and/or licensing arrangements, we might be required to relinquish
significant rights to our technologies, or grant licenses on terms that are not favorable to us.
We intend to raise capital through exercises of our warrants by registering the warrants and common shares underlying those
warrants; however, there are no guarantees that that warrant holders will exercise, warrant holders will exercise in cash, the
effectiveness of the registration statement will be timely or occur at all. The Company may further elect to redeem the Public
Warrants.
The Company had 6,900,610 common stock warrants (the “Public Warrants”) outstanding trading under the Nasdaq ticker symbol PHUNW
as of the date of this Report. Under the terms of the warrant agreement, the Company has agreed to use its best efforts to file a new
registration statement under the Securities Act to register the shares of common stock underlying the Public Warrants, following the
completion of the Business Combination. Each Public Warrant entitles the holder to purchase one share of common stock at an exercise
price of $11.50. The Public Warrants became exercisable for cash 30 days after the completion of the Business Combination. However, if
any such registration statement has not been declared effective by the 90th day following the closing of the Business Combination, holders
of the Public Warrants shall have the right, during the period beginning on the 91st day after the closing of the Reverse Merger and
Recapitalization and ending upon such registration statement being declared effective by the Securities and Exchange Commission, and
during any other period when the Company shall fail to have maintained an effective registration statement covering the shares of common
stock issuable upon exercise of the Public Warrants, the holders may exercise their Public Warrants on a cashless basis pursuant to an
available exemption from registration under the Securities Act of 1933, as amended. If an exemption from registration is not available,
holders will not be able to exercise their warrants on a cashless basis. Once the Public Warrants become exercisable, the Company may
redeem the outstanding Public Warrants in whole and not in part at a price of $0.01 per Public Warrant upon a minimum of 30 days’ prior
written notice of redemption, only in the event that the last sale price of the Company’s shares of common stock equals or exceeds $21.00
per share for any 20 trading days within the 30-trading day period ending on the third trading day before the Company sends the notice of
redemption to the Public Warrant holders.
The remainder our warrants are currently exercisable with cash or on a cashless basis.
We intend to raise capital to fund a Token Generation Event, pursuant to a Rule 506(c) of Regulation D offering by our wholly-
owned subsidiary, PhunCoin, Inc. (“PhunCoin Sub”) of rights to receive future PhunCoin. There can be no assurance that the
PhunCoin will ever be issued and, any significant difficulties we and PhunCoin Sub may experience with the offering could result
in claims against us, and the Token Generation Event and PhunCoin will subject us to various other business and regularity
uncertainties.
Pursuant to the agreement and plan of merger, dated as of February 27, 2018 (as amended or supplemented from time to time, the “Merger
Agreement”) among Stellar, Phunware and certain other parties, as amended by the first amendment to the Merger Agreement dated as of
November 1, 2018, we have agreed to use commercially reasonable efforts to raise between $10 million and $100 million through a
PhunCoin offering. In accordance with that obligation, in June 2018, PhunCoin Sub launched an offering to raise capital by offering
investors the right to acquire PhunCoin pursuant to Rule 506(c) of Regulation D as promulgated under the Securities Act. As of the date of
this Annual Report, $990 thousand has been raised in the rights offering. We will use our commercially reasonable efforts to develop and
issue PhunCoin, but there is no assurance that it will do so. If the Token Generation Event, defined as the launch of the PhunCoin
Ecosystem, is not consummated or the rights offering does not result in substantial proceeds, it could have a material adverse effect on our
cash position. If the Token Generation Event is not consummated, we would have to reduce our planned expenditures and/or would require
additional funding from other sources in order to carry out our business plan. Also, any significant difficulties we may experience with the
Token Generation Event or the development of the PhunCoin could result in claims against us and could have a material adverse effect on
the holders of our common stock.
21
The growth of the blockchain industry in general, as well as the networks on which PhunCoin will rely to consummate the Token
Generation Event, is subject to a high degree of uncertainty. The cryptocurrency and cryptosecurities 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 blockchain assets may materially adversely affect our business plans to
launch and maintain PhunCoin. For example, given the regulatory complexity with respect to cryptocurrency and related digital assets,
complying with such 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 and the PhunCoin Ecosystem, which is intended to be a rewards
marketplace and data exchange whereby users receive PhunCoin in exchange for their information and PhunCoin can be redeemed by users
for goods and services. In addition, the tax and accounting consequences to us of the Token Generation Event and PhunCoin are uncertain,
which could lead to incorrect reporting, classification or liabilities. If the Token Generation Event occurs and PhunCoin is developed, its
structural foundation, the software applications and other interfaces or applications upon which it relies or that will be built are unproven.
There can be no assurances that PhunCoin will be fully secure, which may result in impermissible transfers, a complete loss of users’
PhunCoin on the PhunCoin Ecosystem or an unwillingness of users to access, adopt and utilize PhunCoin, whether through system faults or
malicious attacks. Any such faults or attacks on PhunCoin may materially and adversely affect our business.
Because PhunCoin will be a digital asset built and transacted initially on top of Stellar, an existing blockchain technology,
Phunware is reliant on another blockchain network, and users are subject to the risk of wallet incompatibility and blockchain
protocol risks.
We have decided to initially use the Stellar blockchain as the underlying blockchain technology to create the PhunCoin Ecosystem,
although we may choose another blockchain technology in the future. Reliance upon another blockchain technology subjects us and
PhunCoin Ecosystem users to the risk of digital wallet incompatibility, or additional ecosystem malfunction, unintended function,
unexpected functioning of, or attack on, the Stellar blockchain protocol, which may cause PhunCoin to malfunction or function in an
unexpected manner, including, but not limited to, slowdown or complete cessation in functionality of the network.
The PhunCoin Ecosystem is designed to distribute PhunCoin to consumers in exchange for their agreement to 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 PhunCoin Ecosystem. The service providers used by us, may also use, store, and transmit such information. We intend to
implement detailed cybersecurity policies and procedures and an incident response plan designed to protect such information and prevent
data loss and security breaches.
There can be no assurances that PhunCoin or a user’s data will be fully secure, which may result in impermissible transfer, a complete loss
of users’ PhunCoin or data on the PhunCoin Ecosystem or an unwillingness of users to access, adopt and utilize PhunCoin, whether
through system faults or malicious attacks. Any such faults or attacks on PhunCoin and users’ data may materially and adversely affect
PhunCoin and the PhunCoin 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 PhunCoin 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 PhunCoin Ecosystem or
PhunCoin. We may be compelled to disclose personal information about a user or users of the PhunCoin Ecosystem to federal or state
government regulators or taxation authorities. Accordingly, certain information concerning users may be shared outside Phunware.
The regulatory regime governing blockchain technologies, cryptocurrencies, digital assets, utility tokens, and offerings of digital
assets and utility tokens such as PhunCoin is uncertain, and new regulations or policies may materially adversely affect the
development and the value of PhunCoin.
Regulation of digital assets, like PhunCoin, cryptocurrencies, blockchain technologies and cryptocurrency exchanges, is currently
undeveloped and likely to rapidly evolve as government agencies take greater interest in them. 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. In
addition, any violations of laws and regulations relating to the safeguarding of private information in connection with PhunCoin 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 the ability of Phunware to maintain PhunCoin, 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 actual market for our solutions could be significantly smaller than estimates of total potential market opportunity and if
customer demand for our services does not meet expectations, our ability to generate revenue and meet our financial targets could
be adversely affected.
While we expect strong 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 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.
22
We are highly dependent on advertising agencies as intermediaries and this may adversely affect our ability to attract and retain
business.
Nearly all of our application transaction revenue comes from executing brand advertising campaigns for advertising agencies that purchase
our solutions on behalf of their advertiser customers. Advertising agencies are instrumental in assisting brand owners to plan and purchase
advertising and each advertising agency will allocate advertising spend from brands across numerous channels. We do not have exclusive
relationships with advertising agencies and we depend on agencies to work with us as they embark on marketing campaigns for brands.
While in some cases we are invited by advertising agencies to present directly to their advertiser customers or otherwise have developed a
relationship directly with an advertiser, we nevertheless depend on advertising agencies to present to their advertiser customers the merits
of our digital video advertising solutions. Inaccurate descriptions of our digital video advertising solutions by advertising agencies, over
which we have no control, negative recommendations to use our service offerings or failure to mention our solutions at all could hurt our
business. In addition, if an advertising agency is dissatisfied with our solutions on a marketing campaign or in general, we risk losing the
business of the advertiser for whom the campaign was run and of other advertisers represented by that agency. With advertising agencies
acting as intermediaries for multiple brands, our customer base is more concentrated than might be reflected by the number of brand
advertisers for which we conduct marketing campaigns. Since many advertising agencies are affiliated with other agencies in a larger
corporate structure, if we fail to maintain good relations with one agency in such an organization, we may lose business from the affiliated
agencies as well.
Our sales could be adversely impacted by industry changes relating to the use of advertising agencies. For example, if advertisers seek to
bring their marketing campaigns in-house rather than using an advertising agency, we would need to develop direct relationships with the
advertisers, which we might not be able to do and which could increase our sales and marketing expense. Moreover, because of dealing
primarily with advertising agencies, we have a less direct relationship with advertisers than would be the case if advertisers dealt with us
directly. This may drive advertisers to attribute the value we provide to the advertising agency rather than to us, further limiting our ability
to develop long-term relationships directly with advertisers. Advertisers may move from one advertising agency to another, and,
accordingly, even if we have a positive relationship with an advertising agency, we may lose the underlying business when an advertiser
switches to a new agency. The presence of advertising agencies as intermediaries between us and the advertisers thus creates a challenge to
building our own brand awareness and affinity with the advertisers that are the ultimate source of our revenue.
In addition, our advertising agency customers may offer components of our solutions, including selling advertising inventory through their
own sources. As a result, these advertising agencies are, or may become, our competitors. If they further develop their capabilities they
may be more likely to offer their own solutions to advertisers, which could compromise our ability to compete effectively and adversely
affect our business, financial condition and operating results.
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 would cause our revenue and business to suffer.
Our business relies on our ability to deliver successful and effective video 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 video advertising campaign and could harm our reputation. It may be difficult for us to detect
fraudulent or malicious activity because we do not own content and rely in part on our digital media properties to control such activity.
These risks become more pronounced as the digital video industry shifts to programmatic buying. Industry self-regulatory bodies, the
Federal Trade Commission (“FTC”) and certain influential members of Congress have increased their scrutiny and awareness of and have
taken recent actions to address, advertising fraud and other malicious activity. While we routinely review the campaign performance on our
digital media properties’ inventory, such reviews may not detect or prevent fraudulent or malicious activity. If we fail to detect or prevent
fraudulent 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 fraudulent or malicious activity could lead to dissatisfaction with our solutions, refusals to pay,
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. Further, if we are unable to detect
fraudulent or other malicious activities and advertisers demand fraud-free inventory, our supply could fall drastically, making it impossible
to sustain our current business model. If we fail to detect fraudulent 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 would suffer.
23
The mobile advertising market may develop more slowly than expected, which could harm our business.
If the market for mobile marketing and advertising develops more slowly than we expect, our business could suffer. Our future success is
highly dependent on the commitment of advertisers and marketers to mobile communications as an advertising and marketing medium, the
willingness of our potential advertisers to outsource their mobile advertising and marketing needs and our ability to sell our mobile
advertising services to reseller partners and agencies. The mobile advertising and marketing market is rapidly evolving. Businesses,
including current and potential advertisers, may find mobile advertising or marketing to be less effective than traditional advertising media
or marketing methods or other technologies for promoting their products and services. As a result, the future demand and market
acceptance for mobile marketing and advertising is uncertain. Many of our current or potential advertisers may have little or no experience
using mobile communications for advertising or marketing purposes and have allocated only a limited portion of their advertising or
marketing budgets to mobile communications advertising or marketing and there is no certainty that they will allocate more funds in the
future, if any. Funds to these types of campaigns may fluctuate greatly as different agencies and advertisers test and refine their overall
marketing strategies to include mobile advertising and analytics tools. The adoption rate and budget commitments may vary from period to
period as agencies and advertisers determine the appropriate mix of media and lead sources in short term and longer-term campaigns.
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 would 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 digital video
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.
We may experience foreign currency gains and losses and expect to continue to experience those gains and losses; fluctuations in
currency exchange rates can adversely affect our profitability.
We may incur foreign currency transaction gains and losses, primarily related to foreign currency exposures that arise from British Pound
Sterling and Euro denominated transactions that we expect to cash settle in the near term, which are charged against earnings in the period
incurred. We have a program which utilizes foreign currency forward contracts designed to offset the risks associated with certain foreign
currency transaction exposures. We may suspend the program from time to time. As a part of this program, we enter into foreign currency
forward contracts so that increases or decreases in our foreign currency exposures are offset at least in part by gains or losses on the foreign
currency forward contracts in an effort to mitigate the risks and volatility associated with our foreign currency transaction gains or losses.
We expect that we will continue to realize gains or losses with respect to our foreign currency exposures, net of gains or losses from our
foreign currency forward contracts. For example, we will experience foreign currency gains and losses in certain instances if it is not
possible or cost effective to mitigate our foreign currency exposures, if our mitigation efforts are ineffective, or if we suspend our foreign
currency forward contract program. Our ultimate realized loss or gain with respect to currency fluctuations will generally depend on the
size and type of cross-currency exposures that we enter into, the currency exchange rates associated with these exposures and changes in
those rates, whether we have entered into foreign currency forward contracts to offset these exposures and other factors. All of these factors
could materially impact our results of operations, financial position and cash flows.
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 property 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 digital video advertising programs that meet the demands of our customers. This in turn could harm our
revenue and impair our business.
24
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 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 proceedings or actions against us by governmental entities, competitors, private parties or others. Any 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 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 and various government and consumer agencies and public advocacy
groups have called for new regulation and changes in industry practices, including some directed at the digital advertising industry in
particular. 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 would 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. The U.S. government, including the FTC
and the Department of Commerce, has announced that it is reviewing the need for greater regulation of the collection of consumer
information, including regulation aimed at restricting some targeted advertising practices. In Europe, in October 2015 the Court of Justice
of the European Union invalidated the “U.S.-EU Safe Harbor framework,” which created a safe harbor under the European Data Protection
Directive for certain European data transfers to the U.S. We had not self-certified under this regime and therefore were not directly affected
by this decision. In July 2016, the European Commission approved the Privacy Shield, which is a set of principles and related rules that are
intended to replace the U.S.-EU Safe harbor framework. We are in the process of determining whether to join the Privacy Shield program.
Stricter regulation of European data transfers to U.S. in future may impact our ability to serve European customers effectively, or require us
to open and operate datacenters in the European Union which would result in a higher cost of doing business in these jurisdictions.
In particular, the GDPR extends the jurisdictional scope of European data protection law. As a result, we will be 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. Complying with any new regulatory requirements 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.
The FTC has also adopted revisions to the Children’s Online Privacy Protection Act (“COPPA”) that expand liability for the collection of
information by operators of websites and other electronic solutions that are directed to children. Questions exist as to how regulators and
courts may interpret the scope and circumstances for potential liability under COPPA and the FTC continues to provide guidance and
clarification as to its 2013 revisions of COPPA. FTC guidance or enforcement precedent may make it difficult or impractical for us to
provide advertising on certain websites, services or applications. In addition, the FTC recently fined an ad network for certain methods of
collecting and using data from mobile applications, including certain applications directed at children and failing to disclose the data
collection to mobile application developers in their network.
25
While we have not collected data that is traditionally considered personal data, such as name, email address, physical address, phone
numbers or social security numbers, we typically collect and store IP addresses, geo-location information and device or other persistent
identifiers that are or may be considered personal data in some jurisdictions or otherwise may be the subject of legislation or regulation.
For example, some jurisdictions in the EU regard IP addresses as personal data and certain regulators, such as the California Attorney
General’s Office, have advocated for including IP addresses, GPS-level geolocation data and unique device identifiers as personal data
under California law. 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 European Union, the United States and elsewhere, especially relating to the classification
of IP addresses, machine or device identifiers, geo-location 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 into the European
Union or other jurisdictions outside of the United States. Our failure to comply with evolving interpretations of applicable laws and
regulations, 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 government 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 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 properties.
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, 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 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 properties’ 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.
26
Our business is subject to the risks of earthquakes, fires, floods 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, mudslides, fire or flood, 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 located in California. We also have corporate offices in Texas and Florida, both of which are susceptible to floods and
hurricanes. 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, Texas or Florida. 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 advertisers’ businesses, which could have a material adverse effect on our business,
results of operations and financial condition.
Activities of our advertising 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 these 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 agreements with partners, employees and others may not adequately prevent disclosure of trade secrets and other proprietary
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 technologies, products and intellectual
property 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.
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We could be subject to additional income tax liabilities.
We are subject to income taxes in the United States and certain foreign jurisdictions. We use significant judgment in evaluating our
worldwide income-tax provision. During 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 earnings being lower than anticipated in
countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in
currency exchange rates, 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.
Our international operations subject us to potential adverse tax consequences.
We generally conduct our international operations through wholly owned subsidiaries and report our taxable income in various jurisdictions
worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing
regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations
as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position was not
sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective
tax rates, reduced cash flows and lower overall profitability of our operations.
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, 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 the Business Combination. At December 31, 2018, we had federal net operating loss
carryforwards of approximately $98.3 million, of which $12.6 million will never expire and $85.7 million will expire at various dates
beginning in 2030. At December 31, 2018, we had state and local net operating loss carryforwards of approximately $51.0 million, which
will begin to expire in 2030.
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, 2018. 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.
We have a concentration of sales with key customers and any substantial reduction in sales to these customers would have a
material adverse effect on our results of operations and financial condition.
During the year ended December 31, 2018, our sales were concentrated with Fox Networks Group (“Fox”) and Fetch Media, Ltd.
(“Fetch”), which accounted for 42% and 21% of our net sales, respectively. During the year ended December 31, 2017, our sales were
concentrated with Fox and Fetch, which accounted for 44% and 11%, respectively, of our net sales. Fetch and Fox are currently of key
importance to our business, and our results of operations would be materially adversely affected if these relationships ceased or were
reduced in any material respect. We cannot guarantee that the volume of sales will remain consistent going forward. Any substantial change
in traffic or purchasing decisions by these customers, whether due to actions by our competitors, industry factors or otherwise, could have a
material adverse effect on our business, financial condition and results of operations.
If any of our largest customers are acquired, such acquisition may impact its advertising spending or budget with us, arising from factors
such as rebranding, change in advertising agency, or change in media tactics. A significant reduction in advertising spending or budgets by
our largest customers, or the loss of one or more of these customers, if not replaced by new customers or an increase in business from other
existing customers, would have a material adverse effect on our business, financial condition and results of operations.
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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 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 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.
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 report of our independent registered public accounting firm expresses substantial doubt about our ability to continue as a
going concern.
Our auditor, Marcum LLP, has indicated in its report on our financial statements for the fiscal year ended December 31, 2018 that
conditions exist that raise substantial doubt about our ability to continue as a going concern due to our recurring losses from operations and
substantial decline in our working capital. A “going concern” qualification could impair our ability to finance our operations through the
sale of equity, to incur debt, or to pursue other financing alternatives. Our ability to continue as a going concern will depend upon the
availability and terms of future funding, continued growth in services, improved operating margins and our ability to profitably meet our
after-sale service commitments with existing customers. If we are unable to achieve these goals, our business would be jeopardized and
may not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investment.
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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 will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (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. 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 continuing the costly process of implementing and testing our systems to report our results as a public company, to continue to
manage our growth and to implement internal controls. We will be required to implement and 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
this implementation and maintenance, 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 these third parties, 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, we expect these laws, rules and regulations to 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 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 an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging
growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we
continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable
to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic
reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five
years after our Initial Public Offering in 2016, although circumstances could cause us to lose that status earlier, including if the market
value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no
longer be an emerging growth company as of the following December 31. 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.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those
standards apply to private companies. We have irrevocably elected not to avail ourself of this exemption from new or revised accounting
standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging
growth companies.
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Risks Related to Capitalization Matters and Corporate Governance
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 and warrants
has fluctuated, and may continue to fluctuate following this offering, 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. Factors that could cause fluctuations in the trading price of our
common stock and warrants include the following:
● 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;
● fluctuations in the trading volume of our shares or the size of our public float, especially considering that we became a
publicly-listed company through the Business Combination with a special purpose acquisition company, and that the trading
price of our common stock since the consummation of the Business Combination has been very volatile on a relatively low
public float for our trading volume;
● changes in how customers perceive the benefits of our products and future offerings;
● the addition or departure of key personnel;
● 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.
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 and warrants 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.
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From December 28, 2018, the date our common stock began trading on Nasdaq, through March 13, 2019, the closing price of our common
stock has ranged from $10.84 per share to $308.40 per share on an average trading volume of 14,401, and the closing price of our warrants
has ranged from $0.22 per warrant to $0.84 per warrant on an average trading volume of approximately 238,000. From time to time, we
may have volatility in our stock or warrant prices for reasons that are unknown to us.
As of the date of this Report, our executive officers, directors and holders of 5% or more of our common stock collectively
beneficially own over 50% of the outstanding shares of our common stock and continue to have substantial control over us, which
will limit your ability to influence the outcome of important transactions, including a change in control.
As of the date of this Report, our executive officers, directors and each of our stockholders who own 5% or more of our outstanding
common stock and their affiliates, in the aggregate, beneficially own over 50% of the outstanding shares of our common stock. As a result,
these stockholders, if acting together, will be able to influence or control matters requiring approval by our stockholders, including the
election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ
from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership
may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of
our common stock.
If securities or industry analysts do not publish or cease publishing research or reports about the Company, 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 will be influenced by the research and reports that industry or securities analysts may publish
about the Company, our business, our market or our competitors. Securities and industry analysts do not currently, and may never, publish
research on us. If no securities or industry analysts commence coverage of us, our stock price and trading volume would likely be
negatively impacted. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more
favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who may
cover us were to cease coverage of us or fail to regularly publish reports on it, we could lose visibility in the financial markets, which could
cause our stock price or trading volume to decline.
Sales of substantial amounts of our common stock in the public markets, or the perception that such sales could occur, could
reduce the price that our common stock might otherwise attain.
Sales of a substantial number of shares of our common stock and warrants in the public market after this offering, or the perception that
such sales could occur, could adversely affect the market price of our common stock and warrants and may make it more difficult for you
to sell your common stock or warrants at a time and price that you deem appropriate.
At the consummation of the Business Combination, the Sponsors and our officers, directors and stockholders owning more than 1% of our
outstanding equity immediately prior to the effective time of the Business Combination (each, a “Significant Stockholder”) is subject to a
lock-up or such Significant Stockholder is otherwise subject to substantially similar transfer restrictions in favor of Phunware (the “Lock-
Ups”). Pursuant to such Lock-Ups, each such holder agreed not to, during the period commencing from the consummation of the Business
Combination and ending on the earlier of (A) the 180 days of the date of the consummation of the Business Combination and (B) the date
after the consummation of the Business Combination on which we consummate a liquidation, merger, share exchange or other similar
transaction with an unaffiliated third party that results in all of our stockholders having the right to exchange their equity holdings in
Phunware for cash, securities or other property: (x) lend, offer, pledge, hypothecate, encumber, donate, assign, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any restricted securities, (y) enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the restricted securities, or (z) publicly disclose the intention to do any of the
foregoing, whether any such transaction described in clauses (x), (y) or (z) above is to be settled by delivery of restricted securities or other
securities, in cash or otherwise. When the lock-up period in the Lock-Ups expires, the locked-up security holders will be able to sell our
shares in the public market.
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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. However, our Series A Preferred Stock is redeemable at the
holder’s option in an amount equal to 104% of the original purchase price for such shares. We currently intend to retain any future earnings
to finance the operation and expansion of our business, and 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 and bylaws and the 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 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 662⁄3% 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 Phunware.
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.
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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 will designate 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 provide 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 sole and exclusive
forum for (i) any derivative action or proceeding brought on behalf of Phunware, (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.
Our certificate of incorporation will also provide that the federal district courts of the United States of America will be the exclusive forum
for resolving 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 bylaws 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.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters is located in Austin, Texas, where we currently lease approximately 10,600 square feet under the lease
agreement set to expire in 2020. We also lease facilities in Newport Beach, California; San Diego, California; and Miami, Florida. We
believe our current facilities are adequate to meet our ongoing needs and that, to accommodate growth, we will seek additional facilities as
needed to satisfy our growth.
Item 3. Legal Proceedings.
On September 26, 2017, we filed a breach of contract complaint against Uber Technologies, Inc. seeking approximately $3 million
(plus interest) for unpaid invoices for advertising campaign services provided for Uber in the first quarter of 2017. The case,
captioned Phunware, Inc. v. Uber Technologies, Inc., Case No. CGC-17-561546 was filed in the Superior Court of the State of California
County of San Francisco. On November 13, 2017, Uber generally denied the allegations in our complaint and also filed a cross-complaint
against us and Fetch — the advertising agency Uber retained to run its mobile advertising campaign for the period 2014 through the first
quarter of 2017 (the “Fetch Campaign”), asserting numerous fraud and contract-based claims. All the claims stem from Uber’s assertion
that Fetch and/or We (and/or other-as-yet-unidentified ad networks and publishers) are liable for the fraud-infested Fetch Campaign, under
which Uber overpaid Fetch and mobile advertising providers due to fraudulent attribution for installments of the Uber application. Uber
does not allege any specific dollar amount that it is seeking in damages against either of the named cross-defendants (Fetch and Phunware).
We filed a motion to dismiss the cross-complaint, which was heard on February 7, 2018. The motion was granted in part and denied in part
by the Court. On April 16, 2018, the action was designated complex, and the matter has been assigned for all purposes to Judge Wiss of the
Superior Court of California, San Francisco County (Department 305). Uber and Fetch have reached an agreement in principle to settle
Uber’s claims against Fetch on terms that have not been disclosed to Phunware at this time. The Court has set a trial date of August 12,
2019. The parties have exchanged documents in discovery and depositions are underway. We maintain that our claims against Uber are
meritorious and that Uber’s claims against us are not. However, we make no predictions on the likelihood of success of prevailing on our
contract action against Uber or on the likelihood of defeating Uber’s claims against us.
34
On September 8, 2017, the Company and Greater Houston Convention and Visitors Bureau (“GHCVB”) initiated litigation in a
breach of contract dispute. The case is captioned Greater Houston Convention and Visitors Bureau v. Phunware, Inc., Cause No. 2017-
58894, in the District Court of Harris County, Texas. The dispute concerns an October 2016 agreement for us to develop a mobile
application and advertising campaign for GHCVB. In April 2018, the parties mediated this dispute with the assistance of a private mediator.
The mediation was successful and Phunware was awarded $485 thousand, which was paid to us in April 2018. Each side was responsible
for their own attorneys’ fees.
From time to time, the Company is 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.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Following the business combination, common stock and warrants began trading on the NASDAQ Capital Market under the
symbols “PHUN” and “PHUNW”, respectively. The table below sets forth, for the calendar quarter indicated, the high and low bid prices
of our units, common stock and warrants as reported on the Nasdaq for the fiscal year ended December 31, 2018 and 2017.
Year Ended December 31, 2018
January 1, 2018 through March 31, 2018
April 1, 2018 through June 30, 2018
July 1, 2018 through September 30, 2018
October 1, 2018 through December 31, 2018
Year Ended December 31, 2017
January 1, 2017 through March 31, 2017
April 1, 2017 through June 30, 2017
July 1, 2017 through September 30, 2017
October 1, 2017 through December 31, 2017
Common Stock
Warrants
Low
High
Low
High
10.17 $
10.00 $
10.36 $
9.16 $
10.49 $
10.48 $
11.00 $
14.26 $
0.12 $
0.16 $
0.12 $
0.10 $
0.93
0.93
0.40
0.35
Common Stock
Warrants
Low
High
Low
High
10.00 $
9.99 $
10.00 $
10.01 $
10.20 $
10.20 $
10.28 $
10.24 $
0.20 $
0.21 $
0.31 $
0.21 $
0.60
0.40
0.48
0.40
$
$
$
$
$
$
$
$
On March 13, 2019 our common stock had a closing price of $61.50 our warrants had a closing price of $0.7799.
Holders
On March 13, 2019, there were approximately 496 holders of record of our common stock and 136 holders of record of our
warrants. We believe the number of beneficial owners of our common stock and warrants are substantially greater than the number of
record holders because a large portion of our outstanding common stock and warrants are held of record in broker “street names” for the
benefit of individual investors. As of March 13, 2019, there were 35,201,259 common shares outstanding and 9,802,786 warrants
outstanding.
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 will be 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.
35
Securities Authorized for Issuance Under Equity Compensation Plans.
2018 Equity Incentive Plan
In connection with the consummation of the Business Combination, our board of directors adopted, and our stockholders
approved, the 2018 Equity Incentive Plan (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 to the Successor or any parent or subsidiary, 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.
Authorized Shares. A total of 2,729,416 shares of common stock are reserved for issuance pursuant to the 2018 Plan. 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
Business Combination, are assumed in connection with the Business Combination, 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, on or after the Business
Combination, are forfeited to or repurchased by us, with the maximum number of shares of common stock that may be added to the 2018
Plan pursuant to the foregoing equal to 2,372,893. Currently, no awards have been granted under the 2018 Plan.
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 beginning in fiscal 2019, equal to the least of:
● 10% of the post-closing outstanding shares of common stock;
● 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.
If an award expires or becomes unexercisable without having been exercised in full, is surrendered pursuant to an exchange
program, or, with respect to restricted stock, restricted stock units, performance units or performance shares, is forfeited to, or repurchased
by, the Successor due to failure to vest, then the unpurchased shares (or for awards other than stock options or stock appreciation rights, the
forfeited or repurchased shares) will become available for future grant or sale under the 2018 Plan (unless the 2018 Plan has terminated).
With respect to stock appreciation rights, the net shares issued will cease to be available under the 2018 Plan and all remaining shares will
remain available for future grant or sale under the 2018 Plan. Shares used to pay the exercise price of an award or to satisfy the tax
withholding obligations related to an award will become available for future grant or sale under the 2018 Plan. To the extent an award is
paid out in cash rather than shares, such cash payment will not result in a reduction in the number of shares available for issuance under the
2018 Plan.
Adjustments to Shares Subject to the 2018 Plan. In the event of any dividend or other distribution (whether in the form of cash,
shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up,
spin-off, combination, repurchase, or exchange of shares or other securities of the Successor, or other change in the corporate structure
affecting the common stock occurs, the administrator (as defined below), in order to prevent diminution or enlargement of the benefits or
potential benefits intended to be made available under the 2018 Plan, will adjust the number and class of shares that may be delivered under
the 2018 Plan, and/or the number, class and price of shares covered by outstanding awards, and the numerical share limitations in the 2018
Plan.
Administration. Our board of directors or one or more committees appointed by our board of directors administers the 2018 Plan
(referred to as the “administrator”). If the administrator determines it is desirable to qualify transactions under the 2018 Plan as exempt
under Rule 16b-3 of the Exchange Act, such transactions will be structured to satisfy the requirements for exemption under Rule 16b-3.
Subject to the provisions of the 2018 Plan, the administrator has the power to administer the 2018 Plan, including but not limited to, the
power to interpret the terms of the 2018 Plan and awards granted under it, to prescribed, amend and rescind rules relating to the 2018 Plan,
including creating sub-plans, and to determine the terms of the awards, including the exercise price, the number of shares of common stock
subject to each such award, the exercisability of the awards and the form of consideration, if any, payable upon exercise. The administrator
also has the authority to amend existing awards to reduce or increase their exercise prices, to allow participants the opportunity to transfer
outstanding awards to a financial institution or other person or entity selected by the administrator and to institute an exchange program by
which outstanding awards may be surrendered or cancelled in exchange for awards of the same type which may have a higher or lower
exercise price or different terms, awards of a different type and/or cash.
Eligibility. Awards may be granted to employees, directors and consultants of the Company and employees and consultants of any
parent or subsidiary corporation of the Company. Incentive stock options may be granted only to employees who, as of the time of grant,
are employees of the Successor or any parent or subsidiary corporation of the Company.
36
Stock Options. Stock options in the form of non-statutory stock options or incentive stock options may be granted under the 2018
Plan. The administrator determines the number of shares subject to each option. The administrator determines the exercise price of options
granted under the 2018 Plan, provided that the exercise price must at least be equal to the fair market value of the Successor’s common
stock on the date of grant. The term of an incentive stock option may not exceed ten years, except that with respect to any participant who
owns more than 10% of the voting power of all classes of the outstanding stock, the term must not exceed five years and the exercise price
must equal at least 110% of the fair market value on the grant date. The administrator will determine the methods of payment of the
exercise price of an option, which may include cash, shares or other property acceptable to the administrator, as well as other types of
consideration permitted by applicable law. After the termination of service of an employee, director or consultant, he or she may exercise
his or her option for the period of time stated in his or her option agreement. Generally, if termination is due to death or disability, the
option will remain exercisable for 12 months. In all other cases, the option generally will remain exercisable for three months following the
termination of service. An option may not be exercised later than the expiration of its term. Subject to the provisions of the 2018 Plan, the
administrator determines the other terms of options.
Stock Appreciation Rights. Stock appreciation rights may be granted under the 2018 Plan. Stock appreciation rights allow the
recipient to receive the appreciation in the fair market value of common stock between the exercise date and the date of grant. Stock
appreciation rights may not have a term exceeding ten years. After the termination of service of an employee, director or consultant, he or
she may exercise his or her stock appreciation right for the period of time stated in his or her stock appreciation rights agreement. Generally,
the terms and conditions relating to the period of post-termination exercise with respect to options described above also apply to stock
appreciation rights, however, in no event may a stock appreciation right be exercised later than the expiration of its term. Subject to the
provisions of the 2018 Plan, the administrator determines the other terms of stock appreciation rights, including when such rights become
exercisable and whether to pay any increased appreciation in cash or with shares of common stock, or a combination thereof, except that the
per share exercise price for the shares to be issued pursuant to the exercise of a stock appreciation right will be no less than 100% of the fair
market value per share on the date of grant.
Restricted Stock Awards. Restricted stock may be granted under the 2018 Plan. Restricted stock awards are grants of shares of
common stock that vest in accordance with terms and conditions established by the administrator. The administrator will determine the
number of shares of restricted stock granted to any employee, director or consultant and, subject to the provisions of the 2018 Plan, will
determine the terms and conditions of such awards. The administrator may impose whatever conditions to vesting it determines to be
appropriate (for example, the administrator may set restrictions based on the achievement of specific performance goals or continued
service to the Company); provided, however, that the administrator, in its sole discretion, may accelerate the time at which any restrictions
will lapse or be removed. Recipients of restricted stock awards generally will have voting and dividend rights with respect to such shares
upon grant without regard to vesting, unless the administrator provides otherwise. Shares of restricted stock that do not vest are subject to
our right of repurchase or forfeiture.
Restricted Stock Units. Restricted stock units may be granted under the 2018 Plan. Restricted stock units are bookkeeping entries
representing an amount equal to the fair market value of one share of common stock. Subject to the provisions of the 2018 Plan, the
administrator determines the terms and conditions of restricted stock units, including the vesting criteria (which may include accomplishing
specified performance criteria or continued service to the Company) and the form and timing of payment. Notwithstanding the foregoing,
the administrator, in its sole discretion, may reduce or waive any vesting criteria that must be met to receive a payout.
Performance Units and Performance Shares . Performance units and performance shares may be granted under the 2018 Plan.
Performance units and performance shares are awards that will result in a payment to a participant only if performance goals established by
the administrator are achieved or the awards otherwise vest. The administrator will establish organizational or individual performance
goals or other vesting criteria in its discretion, which, depending on the extent to which they are met, will determine the number and/or the
value of performance units and performance shares to be paid out to participants. After the grant of a performance unit or performance
share, the administrator, in its sole discretion, may reduce or waive any performance criteria or other vesting provisions for such
performance units or performance shares. Performance units shall have an initial dollar value established by the administrator on or prior to
the grant date. Performance shares shall have an initial value equal to the fair market value of common stock on the grant date. The
administrator, in its sole discretion, may pay earned performance units or performance shares in the form of cash, in shares of common
stock or in some combination thereof.
Transferability of Awards. Unless the administrator provides otherwise, the 2018 Plan generally does not allow for the transfer of
awards and only the recipient of an award may exercise an award during his or her lifetime.
Dissolution or Liquidation. In the event of a proposed liquidation or dissolution of the Company, the administrator will notify
participants as soon as practicable prior to the effective date of such proposed transaction, and, to the extent not exercised, all awards will
terminate immediately prior to the consummation of such proposed transaction.
Merger or Change in Control. The 2018 Plan provides that in the event of a merger or change in control, as defined under the
2018 Plan, each outstanding award will be treated as the administrator determines, except that if a successor corporation or its parent or
subsidiary does not assume or substitute an equivalent award for any outstanding award, then such award will fully vest, all restrictions on
such award will lapse, all performance goals or other vesting criteria applicable to such award will be deemed achieved at 100% of target
levels. In addition, if an option or stock appreciation right is not assumed or substituted, the administrator will notify the participant in
writing or electronically that the option or stock appreciation right will become fully exercisable, for a specified period prior to the
transaction, and will then terminate upon the expiration of the specified period of time. Upon a change in control, awards granted to an
outside director will vest fully and become immediately exercisable, all restrictions on his or her restricted stock and restricted stock units
will lapse, and with respect to awards with performance-based vesting, all performance goals or other vesting criteria will be deemed
achieved at 100% of target levels, and all other terms and conditions met.
37
Amendment; Termination. The administrator has the authority to amend, alter, suspend, or terminate the 2018 Plan provided such
action does not impair the existing rights of any participant. The 2018 Plan automatically will terminate in 2028, unless it is terminated
sooner.
2018 Employee Stock Purchase Plan
In connection with the consummation of the Business Combination, 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 through accumulated contributions, which generally will be made through
payroll deductions. The 2018 ESPP permits the administrator (as discussed below) to grant purchase rights that qualify for preferential tax
treatment under Code Section 423. In addition, the 2018 ESPP authorizes the grant of purchase rights that do not qualify under Code
Section 423 pursuant to rules, procedures or sub-plans adopted by the administrator that are designed to achieve desired tax or other
objectives.
Authorized Shares. 1,228,237 shares of common stock are available for sale under the 2018 ESPP. 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 least of:
● 3% of the expected post-closing outstanding shares of common stock;
● 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.
2018 ESPP Administration. The 2018 ESPP will be administered by our board of directors or a committee appointed by the board
(the “administrator”). The administrator has full and exclusive discretionary authority to construe, interpret, and apply the terms of the
2018 ESPP, to designate separate offerings under the 2018 ESPP, to adjudicate disputed claims under the 2018 ESPP, and to establish such
procedures that it deems necessary for the administration of the 2018 ESPP. The administrator is specifically authorized to adopt rules and
procedures regarding eligibility to participate, the definition of “compensation,” handling of contributions, and making of contributions to
the 2018 ESPP, among other responsibilities. Every finding, decision and determination made by the administrator will, to the full extent
permitted by law, be final and binding upon all parties.
Eligibility. Any eligible employee on a given enrollment date will be eligible to participate in the 2018 ESPP. Generally, all of our
employees will be eligible to participate if they are employed by the Company, or any participating subsidiary, for at least 20 hours per
week and more than five months in any calendar year. However, an employee may not be granted rights to purchase shares of common
stock under the 2018 ESPP if such employee:
● immediately after the grant would own capital stock and/or hold outstanding options to purchase 5% or more of the total
combined voting power or value of all classes of capital stock; or
● hold rights to purchase shares of common stock under all of our employee stock purchase plans that accrue at a rate that exceeds
$25,000 worth of shares of common stock for each calendar year.
Offering Periods. The offering periods under the 2018 ESPP will begin on such date as determined by the administrator and
expire on the earliest to occur of (a) the completion of the purchase of shares on the last exercise date occurring within 27 months of the
applicable enrollment date of the offering period on which the purchase right was granted, or (b) a shorter period established by the
administrator prior to an enrollment date for all options to be granted on such enrollment date.
An eligible employee may participate in the 2018 ESPP by timely submitting a properly completed subscription agreement or
following an electronic or other enrollment procedure determined by the administrator. On the enrollment date of each offering period,
each participant automatically is granted a right to purchase shares of common stock. This purchase right is exercised on each purchase date
during an offering period to the extent of the contributions made during such offering period, unless the purchase right has expired (upon
termination of a participant’s employment) or the participant has withdrawn from the 2018 ESPP, as described in further detail below.
Once an employee becomes a participant in the 2018 ESPP, the employee automatically will participate in each successive
offering period until the employee withdraws from the 2018 ESPP or the employee’s employment with the Company or one of our
designated subsidiaries terminates.
38
Contributions. The 2018 ESPP permits participants to purchase shares of common stock through contributions (generally in the
form of payroll deductions) of up to an amount of their eligible compensation determined by the administrator. Eligible compensation
includes a participant’s base straight time gross earnings, but exclusive of payments for incentive compensation, bonuses, payments for
overtime and shift premium, equity compensation income and other similar compensation. Unless otherwise determined by the
administrator, a participant may purchase a maximum of 2,000 shares of common stock during a purchase period.
Exercise of Purchase Right. Amounts deducted and accumulated by the participant are used to purchase shares of common stock
on each exercise date. The purchase price of the shares will be determined by the administrator but in no event will be less than 85% of the
lower of the fair market value of common stock on the enrollment date or on the exercise date. Participants may end their participation at
any time during an offering period and will be paid their accrued contributions that have not yet been used to purchase shares of common
stock. Participation ends automatically upon termination of employment with the Company.
Non-Transferability. Neither contributions credited to a participant’s account nor any rights with regard to the exercise of a
purchase right or to receive shares under the 2018 ESPP may be assigned, transferred, pledged or otherwise disposed of in any way, other
than by will, the laws of descent and distribution or as otherwise provided under the 2018 ESPP.
Changes in Capitalization. If there is any dividend or other distribution (whether in the form of cash, common stock, other
securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of common stock or other securities of the Successor, or other change in the corporate structure of
the Company affecting common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the 2018 ESPP, then the administrator will adjust the number and class of common
stock that may be delivered under the 2018 ESPP, the purchase price per share, the number of shares of common stock covered by each
right to purchase shares under the 2018 ESPP that has not yet been exercised, and the numerical limitations set forth in the 2018 ESPP.
Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, any offering period then in
progress will be shortened by setting a new purchase date and any offering periods will end on the new purchase date. The new purchase
date will be prior to the proposed dissolution or liquidation. The administrator will notify each participant in writing or electronically prior
to the new purchase date that the purchase date has been changed to the new purchase date and that the right to purchase shares under the
2018 ESPP will be exercised automatically on the new purchase date, unless the participant has already withdrawn from the offering period
prior to such date.
Change in Control. If there is a merger or “change in control,” as defined in the 2018 ESPP, each right to purchase shares under
the 2018 ESPP will be assumed or an equivalent right to purchase shares will be substituted by the successor corporation or a parent or
subsidiary of such successor corporation. If the successor corporation refuses to assume or substitute for the 2018 ESPP purchase rights, the
offering period covered by such 2018 ESPP purchase right by setting a new purchase date on which such offering period will end. The new
purchase date will be before the proposed merger or change in control. The administrator will notify each participant in writing or
electronically prior to the new purchase date that the purchase date has been changed to the new purchase date and that the right to
purchase shares under the 2018 ESPP will be exercised automatically on the new purchase date, unless the participant has already
withdrawn from the offering period prior to such date.
Amendment; Termination. The administrator, in its sole discretion, may amend, suspend or terminate the 2018 ESPP, subject to
its terms. The 2018 ESPP automatically will terminate in 2038, unless we terminate it sooner.
2009 Equity Incentive Plan
In February 2009, the Phunware board of directors adopted, and the Phunware stockholders approved, the 2009 Plan. The 2009
Plan was most recently amended in December 2017. The 2009 Plan permits the grant of incentive stock options, within the meaning of
Section 422 of the Code, to Phunware employees and any parent and subsidiary corporations’ employees, and for the grant of nonstatutory
stock options, stock appreciation rights, restricted stock, and restricted stock units to Phunware employees, directors and consultants and
Phunware’s parent and subsidiary corporations’ employees and consultants. In addition, the 2009 Plan permits the grant of EMI stock
options, which are options granted under the 2009 Plan to an eligible employee which is a qualifying option as defined in paragraph 1(2) of
Schedule 5 (“Schedule 5”), to the United Kingdom Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”). EMI stock options
(“EMI Options”), may only be granted to Phunware employees and any parent and subsidiary corporations’ employees whose time the
employee is required to spend on Phunware business or that of any subsidiary (including any time which the employee would have been so
required to spend but for permitted absence (as such term is defined in the 2009 Plan)) is not less than twenty-five (25) hours per week, or,
if less, 75% of this working time and who does not have a material interest (as such term is defined in the 2009 Plan) in Phunware or any
subsidiary corporation.
Authorized Shares. The 2009 Plan terminated in connection with the consummation of the Business Combination, and
accordingly, no shares will be available for issuance under the 2009 Plan following the consummation of the Business Combination. The
2009 Plan will continue to govern outstanding awards granted thereunder. As of December 31, 2018, options to purchase 2,364,823 shares
of our common stock remained outstanding under the 2009 Plan.
39
Plan Administration. Phunware’s board of directors or one or more committees appointed by the Phunware board of directors
administers the 2009 Plan (the “administrator”). Subject to the provisions of the 2009 Plan, the administrator has the power to administer
the 2009 Plan, including but not limited to, the power to interpret the terms of the 2009 Plan and awards granted under it, to prescribe,
amend and rescind rules relating to the 2009 Plan, including creating sub-plans, and to determine the terms of the awards, including the
exercise price, the number of shares of Phunware’s common stock subject to each such award, the exercisability of the awards, any
conditions attaching to the shares under an award which makes the shares “restricted securities” or “restricted interest in securities” within
the meaning of ITEPA 2003 (if applicable), and the form of consideration, if any, payable upon exercise. The administrator also has the
authority to amend existing awards, including the power to extend the post-termination exercisability period of awards and to extend the
maximum term of an option and to allow participants to defer the receipt of the payment of cash or the delivery of shares that otherwise
would be due to such participant under an award. The administrator also has the authority to amend existing awards to reduce or increase
their exercise prices, to allow participants the opportunity to transfer outstanding awards to a financial institution or other person or entity
selected by the administrator and to institute an exchange program by which outstanding awards may be surrendered or cancelled in
exchange for awards of the same type which may have a higher or lower exercise price or different terms, awards of a different type and/or
cash and to make all other determinations the administrator deems necessary or advisable for administering the 2009 Plan.
Options (other than EMI Options). Stock options may be granted under the 2009 Plan. The exercise price of options granted
under the 2009 Plan must at least be equal to the fair market value of Phunware’s common stock on the date of grant. The term of an option
may not exceed ten years, except that with respect to incentive stock options, any participant who owns more than 10% of the voting power
of all classes of Phunware’s outstanding stock, the term must not exceed five years and the exercise price must equal at least 110% of the
fair market value on the grant date. The administrator will determine the methods of payment of the exercise price of an option, which may
include cash, shares or other property acceptable to the administrator, as well as other types of consideration permitted by applicable law.
After termination of an employee, director or consultant, he or she may exercise his or her option for the period of time as specified in the
applicable option agreement. If termination is due to death or disability, the option generally will remain exercisable for at least 12 months.
In all other cases, the option will generally remain exercisable for at least three months. However, in no event may an option be exercised
later than the expiration of its term. Subject to the provisions of the 2009 Plan, the administrator determines the other terms of options.
EMI Options. EMI Options may be granted under the 2009 Plan. An option may only be an EMI Option if Phunware was a
qualifying company, within the meaning of Schedule 5, on the date of grant and if the option is granted for commercial reasons in order to
recruit or retain an eligible employee (as such term is defined in the 2009 Plan) and not as part of a scheme or arrangement for the main
purpose (or one of the main purposes) of which is the avoidance of tax. In addition, certain limitations, as described in the 2009 Plan, with
respect to the total value of shares that may be treated as EMI Options apply. If an option does not comply with the requirements of
Schedule 5 and as a result, the option is not an EMI Option, or the extent the limits described in the 2009 Plan are not met, the option will
be a nonstatutory stock option. Except as noted herein, the provisions applicable to nonstatutory stock options described above will also
apply to EMI Options.
Stock Appreciation Rights. Stock appreciation rights may be granted under the 2009 Plan. Stock appreciation rights allow the
recipient to receive the appreciation in the fair market value of Phunware common stock between the exercise date and the date of grant.
Stock appreciation rights may not have a term exceeding ten years. After the termination of service of an employee, director or consultant,
he or she may exercise his or her stock appreciation right for the period of time stated in his or her award agreement. However, in no event
may a stock appreciation right be exercised later than the expiration of its term. Subject to the provisions of the 2009 Plan, the administrator
determines the other terms of stock appreciation rights, including when such rights become exercisable and whether to pay any increased
appreciation in cash or with shares of Phunware common stock, or a combination thereof, except that the per share exercise price for the
shares of Phunware common stock to be issued pursuant to the exercise of a stock appreciation right will be no less than 100% of the fair
market value per share on the date of grant.
Restricted Stock. Restricted stock may be granted under the 2009 Plan. Restricted stock awards are grants of shares of Phunware
common stock that vest in accordance with terms and conditions established by the administrator. The administrator will determine the
number of shares of restricted stock granted to any employee, director or consultant and, subject to the provisions of the 2009 Plan, will
determine the terms and conditions of such awards. The administrator may impose whatever conditions for lapse of the restriction on the
shares it determines to be appropriate (for example, the administrator may set restrictions based on the achievement of specific
performance goals or continued service); provided, however, that the administrator, in its discretion, may accelerate the time at which any
restrictions will lapse or be removed. Recipients of restricted stock awards generally will have voting and dividend rights with respect to
such shares upon grant without regard to the restriction, unless the administrator provides otherwise. Shares of restricted stock as to which
the restrictions have not lapsed are subject to Phunware’s right of repurchase or forfeiture.
Restricted Stock Units. Restricted stock units may be granted under the 2009 Plan. Restricted stock units are bookkeeping entries
representing an amount equal to the fair market value of one share Phunware’s common stock. Subject to the provisions of the 2009, the
administrator will determine the terms and conditions of restricted stock units, including the vesting criteria (which may include
accomplishing specified performance criteria or continued service) and the form and timing of payment. Notwithstanding the foregoing, the
administrator, in its sole discretion, may reduce or waive any vesting criteria that must be met to receive a payout.
40
Non-Transferability of Awards. Unless the administrator provides otherwise (excluding EMI Options), the 2009 Plan generally
does not allow for the transfer of awards and only the recipient of an award may exercise an award during his or her lifetime. An EMI
Option is personal to the participant and may not be transferred and only the recipient of an EMI Option may exercise such award during his
or her lifetime.
Certain Adjustments. In the event of certain changes in Phunware’s capitalization, to prevent diminution or enlargement of the
benefits or potential benefits available under the 2009 Plan, the administrator will adjust the number and class of shares that may be
delivered under the 2009 Plan and/or the number, class and price of shares covered by each outstanding award.
Dissolution or Liquidation. In the event of Phunware’s proposed liquidation or dissolution, the administrator will notify
participants as soon as practicable prior to the date of such proposed action and, to the extent not exercised, all awards will terminate
immediately prior to the consummation of such proposed transaction.
Merger or Change in Control. The 2009 Plan provides that in the event of a merger or change in control, as defined under the
2009 Plan, each outstanding award will be treated as the administrator determines. If a successor corporation or its parent or subsidiary does
not assume or substitute an equivalent award for any outstanding award, then such award will fully vest, all restrictions on the shares
subject to such award will lapse, all performance goals or other vesting criteria applicable to the shares subject to such award will be
deemed achieved at 100% of target levels and all of the shares subject to such award will become fully exercisable, if applicable, for a
specified period prior to the transaction. The award will then terminate upon the expiration of the specified period of time. If an option or
stock appreciation right becomes fully vested and exercisable in connection with a change in control due to the successor corporation’s
refusal to assume the award, the administrator will notify the applicable participant in writing or electronically that the award will be
exercisable for a period of time determined by the administrator, and the option or stock appreciation right will terminate upon the
expiration of such period. The Business Combination was not deemed a change in control as prescribed by the plan, and the Successor
assumed all outstanding awards at the exchange ratio of 0.459.
Amendment; Termination. The Phunware board of directors has the authority to amend, alter, suspend or terminate the 2009 Plan,
provided such action will not impair the existing rights of any participant, unless mutually agreed to in writing between the participant and
the administrator. As noted above, upon the consummation of the Business Combination, the 2009 Plan terminated and no further awards
will be granted thereunder. All outstanding awards will continue to be governed by their existing terms.
Recent Sales of Unregistered Securities
The following list sets forth information as to all Phunware and our securities sold in the last three years which were not registered
under the Securities Act. The descriptions of Phunware issuances are historical and have not been adjusted to give effect to the business
combination.
Stock Issuances
On December 26, 2018, the Registrant issued an aggregate of 6,000 shares of its Series A convertible preferred stock at a purchase
price of $1,000 per share, for an aggregate purchase price of $6 million, to one entity.
Since January 1, 2016, Phunware issued an aggregate of approximately 3,547,000 Series F Preferred Shares at $9.22 per share for
gross aggregate proceeds of approximately $32,702,000. The holders of Phunware’s preferred stock converted their shares into common
stock in the immediately before consummation of the Business Combination.
Plan-Related Issuances
From January 1, 2016 through December 31, 2018, Phunware granted to its officers, directors, employees, consultants and other
service providers options to purchase an aggregate of 2,634,750 Successor shares of its common stock under the Registrant’s 2009 Equity
Incentive Plan at exercise prices ranging from $0.4357 to $2.3094 per share, after giving effect to the exchange ratio of 0.459.
None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering. The
Registrant believes these transactions were exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities
Act (or Regulation D or Regulation S promulgated thereunder), or Rule 701 promulgated under Section 3(b) of the Securities Act as
transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided
under Rule 701. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the
stock certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about
the Registrant.
41
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6. Selected Financial Data.
Not required for smaller reporting companies.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
References in this section to “we,” “us” or “the Company” refer to Phunware. References to “management” or “management
team” refer to Phunware’s officers and directors.
The following discussion and analysis of Phunware’s financial condition and results of operations should be read in conjunction
with Phunware’s consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. In
addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions. Phunware’s actual results and timing of selected events may differ materially from those anticipated in these
forward-looking statements as a result of many factors, including those discussed in the section titled “Risk Factors” and elsewhere in this
Report.
Certain figures, such as interest rates and other percentages, included in this section have been rounded for ease of presentation.
Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such
amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the
same calculations using the figures in our consolidated financial statements or in the associated text. Certain other amounts that appear in
this section may similarly not sum due to rounding.
Overview
Phunware, Inc. offers a fully integrated software platform that equips companies with the products, solutions and services
necessary to engage, manage and monetize their mobile application portfolios globally at scale. Phunware’s Multiscreen as a Service
(MaaS) platform provides the entire mobile lifecycle of applications, media and data in one login through one procurement relationship. Its
offerings include:
● Enterprise mobile software including content management, location-based services, marketing automation, business intelligence
and analytics, alerts, notifications and messaging, audience engagement, audience monetization, vertical solutions and
cryptonetworking, MaaS software application framework that pre-integrates all of our MaaS software ingredients for use within
mobile application portfolios, solutions and services;
● Application transactions for mobile audience building, user acquisition application discovery, audience engagement, audience
monetization; and
● Data for data enrichment expanding connections and attributes of a Phunware ID and building custom audience for use in
mobile media campaigns.
Additionally, we plan to launch PhunCoin, a blockchain-powered token and ecosystem that enables consumers, brands and
application developers to transact directly and create a value-based and voluntary data exchange.
We intend to continue investing for long-term growth. We have invested and expect to continue investing in expanding our ability
to market, sell and provide our current and future products and services to clients globally. We also expect to continue investing in the
development and improvement of new and existing products and services to address client 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 its business against internal goals and
targets. We believe that the most important of these measures include backlog and deferred revenue and dollar-based revenue retention
rate.
42
Backlog and Deferred Revenue. Backlog represents future amounts to be invoiced under our current agreements. We generally
sign multiple-year platform subscriptions and services contracts and invoice an initial annual amount at contract signing followed by
subsequent annual invoices. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice.
Until such time as these amounts are invoiced, they are not recorded in revenues, deferred revenue, accounts receivable or elsewhere in our
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 half of our backlog as of December 31, 2018 and December 31, 2017 will be invoiced
during the subsequent 12-month period, primarily due to the fact that our contracts are typically two to three years in length.
In addition, our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenues as
of the end of a reporting period. The majority of our deferred revenue balance consists of platform subscription revenues that are
recognized ratably over the contractual period. Together, the sum of deferred revenue and backlog represents the total billed and unbilled
contract value yet to be recognized in revenues, and provides visibility into future revenue streams.
The following table sets forth the backlog and deferred revenue:
Backlog
Deferred revenue
Total backlog and deferred revenue
Period Ended
December 31,
2018
2017
$
$
(in thousands)
16,730 $
8,251
24,981 $
20,307
8,209
28,516
Dollar-based Revenue Retention Rate, based on platform subscriptions and services revenue. Phunware calculated dollar-based
revenue retention rate, based on platform subscriptions and services revenue, expressed as a percentage, by dividing (1) total revenue in the
current 12-month period from those customers who were customers during the prior 12-month period by (2) total revenue from the
customers in the prior 12-month period. Phunware believes that our ability to retain our customers and expand their use of our solutions
over time is an indicator of the stability of our revenue base and the long-term value of our customer relationships. Our revenue retention
rate provides insight into the impact on current period revenue of the number of new customers acquired during the prior 12-month period,
the timing of our implementation of those new customers, growth in the usage of our solutions by our existing customers and customer
attrition. If our revenue retention rate for a period exceeds 100%, this means that the revenue retained during the period including
expansion and upsells more than offset the revenue that we lost from customers that did not renew their contracts during the period. Our
revenue retention rate may decline or fluctuate as a result of a number of factors, including customers’ satisfaction or dissatisfaction with
our platform, pricing, economic conditions or overall reductions in our customers’ spending levels.
The following table sets forth the dollar-based revenue retention rates:
Dollar-based revenue retention rate
Non-GAAP Financial Measures
Period Ended
December 31,
2018
2017
94%
141%
Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA
Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA are non-GAAP financial measures. Management uses these
measures (1) to compare operating performance on a consistent basis, (2) to calculate incentive compensation for its employees, (3) for
planning purposes including the preparation of its internal annual operating budget, and (4) to evaluate the performance and effectiveness
of operational strategies. Accordingly, we believe that these measures provide useful information to investors and others in understanding
and evaluating our operating performance in the same manner as management.
43
For more information about Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA and a reconciliation of net
income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, Adjusted Gross Profit,
Adjusted Gross Margin and Adjusted EBITDA, see the section titled “Selected Consolidated Financial and Other Data of Phunware—Use
of Non-GAAP Financial Measures.”
Adjusted gross profit (1)
Adjusted gross margin (1)
Adjusted EBITDA (2)
Year Ended December 31,
2018
2017
(in thousands)
$
$
19,176
$
62.1%
(8,569) $
11,771
44.0%
(24,073)
(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 margin regarding ongoing performance. We define Adjusted
Gross Profit as total revenue less cost of revenue, adjusted to exclude stock-based compensation and amortization of intangible assets.
We define Adjusted Gross Margin as Adjusted Gross Profit as a percentage of total revenue.
(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 income (loss) plus
(1) interest expense, (2) income tax benefit (expense), (3) depreciation, (4) amortization, and further adjusted for (5) stock-based
compensation expense. The reconciliation of net income (loss), the most directly comparable financial measure calculated and presented
in accordance with GAAP, to Adjusted EBITDA for each of the periods presented is as follows. See “—Use of Non-GAAP Financial
Measures” below for additional information.
The following tables present a reconciliation of Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA to gross
profit and net loss, the most directly comparable financial measures calculated in accordance with GAAP:
Gross profit
Add back: Amortization of intangibles
Add back: Stock-based compensation
Adjusted gross profit
Adjusted gross margin
Net loss
Add back: Depreciation and amortization
Add back: Interest expense
Less: Income tax benefit
EBITDA
Add Back: Stock-based compensation
Adjusted EBITDA
Use of Non-GAAP Financial Measures
Year Ended
December 31,
2018
2017
(in thousands)
$
$
19,081
50
45
19,176
11,008
740
23
11,771
62.1%
44.0%
Year Ended December 31,
2018
2017
$
$
(in thousands)
(9,803) $
434
724
(374)
(9,019)
450
(8,569) $
(25,938)
1,438
397
(88)
(24,191)
118
(24,073)
Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA should be considered in addition to, not as a substitute for, or
superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under
GAAP and should not be considered as alternatives to revenue or net income (loss), as applicable, or any other performance measures
derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. Adjusted Gross Profit,
Adjusted Gross Margin and Adjusted EBITDA 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 its ongoing operating performance for a particular period;
44
● Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA 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 Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA differently
than we do, limiting their usefulness as comparative measures.
We compensate for these limitations to Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA by relying primarily
on its GAAP results and using Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA only for supplemental purposes.
Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA 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, including transaction costs and the income tax impact of adjustments in order to facilitate a more
useful period-over-period comparison of its financial performance. Each of the normal recurring adjustments and other adjustments
described in this paragraph help management with a measure of our operating performance over time by removing items that are not related
to day-to-day operations or are non-cash expenses.
Components of Results of Operations
There are a number of factors that impact the revenue and margin profile of the services and technology offerings we provide,
including, but not limited to, solution and technology complexity, technical expertise requiring the combination of products and types of
services provided, as well as other elements that may be specific to a particular client solution.
Revenue and Gross Profit
Platform Subscriptions and Services Revenue. Subscription revenue is derived from software license fees, which comprise
subscription fees from customers licensing our MaaS modules, which includes accessing the MaaS platform and/or MaaS platform data;
application development service revenue from the development of customer applications, or apps, which are built and delivered to
customers; and support fees, which comprise support and maintenance fees of their applications, software updates, and technical support for
software products (post-contract customer support, or PCS) for an initial term. License subscription and app development arrangements are
typically accompanied by support agreements, with terms ranging from 6 to 60 months and are non-cancelable, though customers typically
have the right to terminate their contracts for cause if the Company materially fails to perform.
We typically receive cash payments from customers in advance of when the PCS services are performed under the arrangements
with the customer and records this as deferred revenue. These arrangements obligate us to provide PCS over a fixed term. We are unable to
establish vendor-specific objective evidence (VSOE) of fair value for all undelivered elements in certain arrangements that include
licenses, support, and services, due to the lack of VSOE for support bundled with the software license and application development.
Because VSOE of fair value of the PCS included in the arrangement does not exist, the PCS cannot be accounted for separately from the
software and customization efforts. Once the PCS period commences, we recognize revenue ratably over the remaining PCS period. In
these instances, revenue is recognized ratably over the period that the services are expected to be performed, which is generally the support
period.
From time to time, we also provide professional services by outsourcing employees’ on a time and materials basis to customers.
Such amounts are typically recorded as revenue when the services are delivered.
Platform subscriptions and services 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 PCS of applications relating to platform subscription customers are included in cost of sales. Whereas, costs related to the
ongoing development and maintenance of Phunware’s MaaS platform are expensed in research and development. As a result, platform
subscriptions and services gross profit may fluctuate from period to period.
45
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, cost per click, and cost per action. In addition, we generate
application transaction revenue thru in-app purchases from application on our platform. At that time, services have been provided, the fees
charged are fixed or determinable, persuasive evidence of an arrangement exists, and collectability is reasonably assured.
Application transaction gross profit is equal to application transaction revenue less cost of revenue associated with application
transactions. Application transaction gross profit is impacted by the cost of direct premium, performance and network cost as well as based
on the activity of mobile users viewing ads and marketing engagements through mobile applications. As a result, our application
transaction gross profit may fluctuate from period to period due to variable activity of mobile users.
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 subscriptions and services and application transactions with generally higher gross margins coming from the sale of
platform subscriptions and services.
Operating Expenses
Our operating expenses include sales and marketing expenses, general and administrative expenses, research and development
expenses and amortization of acquired intangible assets.
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 share based
compensation and expenses related to marketing programs and promotional activities. We immediately expense sales commissions related
to acquiring new customers and expansion or upsells from existing customers.
General and Administrative Expense. General and administrative expense is comprised of compensation and benefits of
administrative personnel, including variable incentive pay and share-based compensation, bad debt expenses and other administrative costs
such as facilities expenses, professional fees and travel expenses. We expect to incur additional general and administrative expenses as a
result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and listing
standards of Nasdaq, additional insurance expenses, investor relations activities and other administrative and professional services. We also
expect to increase the size of our general and administrative function to support the growth of our business. As a result, we expect that our
general and administrative expenses will increase in absolute dollars but may fluctuate as a percentage of our total revenue from period to
period.
Research and Development Expense. Research and development expenses consist primarily of employee compensation costs and
overhead allocation. We believe that continued investment in our platform is important for our growth. We expect our research and
development expenses will increase as our business grows.
Interest and Other Expense
Interest expense and other income (expense) include interest expense associated with our outstanding debt and costs associated
with this debt, which may include debt extinguishment cost and a factoring financing arrangement. We also may seek to finance strategic
acquisitions in the future with the proceeds from additional debt incurrences, which may have an impact on its interest expense.
Income Tax Benefit
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.
46
Results of Operations (In thousands, except per share information)
The following tables set forth our consolidated financial data in dollar amounts and as a percentage of total revenue.
Net revenues
Cost of revenues
Gross profit
Operating expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Operating loss
Other expense:
Interest expense
Fair value adjustment for warrant liabilities
Impairment of digital currencies
Other expense
Total other expense
Loss before taxes
Income tax benefit
Net loss
Cumulative translation adjustment
Comprehensive loss
Net loss per share, basic and diluted
Weighted-average shares used to compute net loss per share, basic and diluted
Comparison of Years Ended December 31, 2018 and 2017
Revenue
Year Ended
December 31,
2018
2017
30,883 $
11,802
19,081
5,417
13,562
6,965
25,944
(6,863)
(724)
(54)
(334)
(2,202)
(3,314)
(10,177)
374
(9,803)
(71)
(9,874) $
(0.38) $
25,556
26,722
15,714
11,008
10,721
14,795
11,108
36,624
(25,616)
(397)
—
—
(13)
(410)
(26,026)
88
(25,938)
127
(25,811)
(1.06)
24,519
$
$
$
Year Ended December 31,
Change
2018
2017
Amount
%
(in thousands)
Revenue
Platform subscriptions and services
Application transaction
Total revenue
Platform subscriptions and services as a percentage of total revenue
Application transactions as a percentage of total revenue
$
$
$
19,409
11,474
30,883
$
62.8%
37.2%
$
16,488
10,234
26,722
$
61.7%
38.3%
2,921
1,240
4,161
17.7%
12.1%
15.6%
Total revenue increased $4.2 million, or 15.6%, in the year ended December 31, 2018 compared to the corresponding period in
2017. Platform subscriptions and services revenue increased $2.9 million, or 17.7%, primarily driven by the fulfillment of contracts related
to new customers. Application transaction revenue increased $1.2 million, or 12.1%, due to the Company being released from a revenue
share liability of $6.3 million from an application transaction partner which was recorded as a revenue share liability in 2016 and 2017.
However, the majority of this was offset by the loss of revenue due to decreased or ceased advertising campaigns.
Revenue from Fox Networks Group recorded as platform subscriptions and services revenue was 42% compared to 44% of total
revenue for the years ended December 31, 2018 and 2017 respectively. Revenue from Fetch Media Ltd. recorded as application transaction
revenue was 21% compared to 11% of total revenue for 2018 and 2017 respectively. No other customer was greater than 10% or more of
total revenue in 2018 or 2017.
47
Cost of Revenue, Gross Profit and Gross Margin
Cost of Revenue
Platform subscriptions and services
Application transaction
Total cost of revenue
Gross Profit
Platform subscriptions and services
Application transaction
Total gross profit
Gross Margin
Platform subscriptions and services
Application transaction
Total gross margin
Year Ended December 31,
Change
2018
2017
Amount
%
(in thousands)
$
$
$
$
9,628
2,174
11,802
9,781
9,300
19,081
$
$
$
$
50.4%
81.1%
61.8%
7,757
7,957
15,714
8,731
2,277
11,008
$
$
$
$
53.0%
22.2%
41.2%
1,871
(5,783)
(3,912)
1,050
7,023
8,073
24.1%
(72.7)%
(24.9)%
12.0%
308.4%
73.3%
Total gross profit increased $8.1 million, or 73.3%, in the year ended December 31, 2018 compared to the corresponding period of
2017 primarily attributable to an application transaction partner release of the Company from its liability to them in the amount of $6.3
million. At the beginning of 2018, the Company centralized its media purchasing team which resulted in higher application transaction
margins year over year.
Operating Expenses
Operating expenses
Sales and marketing
General and administrative
Research and development
Total operating expenses
Sales and Marketing
Year Ended December 31,
Change
2018
2017
Amount
%
(in thousands)
$
$
5,417 $
13,562
6,965
25,944 $
10,721 $
14,795
11,108
36,624 $
(5,304)
(1,233)
(4,143)
(10,680)
(49.5)%
(8.3)%
(37.3)%
(29.2)%
Sales and marketing expense decreased $5.3 million, or (49.5%) for the year ended December 31, 2018 compared to the
corresponding period of 2017 primarily due to $2.6 million of reduced employee compensation costs due to lower headcount and $1.6
million reduced commissions expense as a result of lower application transaction revenues excluding the revenue share liability release
discussed above.
General and Administrative
General and administrative expense decreased $1.2 million, or (8.3%), for the year ended December 31, 2018, compared to the
corresponding period of 2017. The decrease is attributable to a $3.2 million bad debt charge in 2017 related to our litigation with Uber
Technologies, Inc. (“Uber”), as described in detail in the section titled “Legal Proceedings,” offset by a $2.3 million increase in
professional fees related to the Business Combination as well as litigation expense related to the dispute with two customers.
Research and Development
Research and development expense decreased $4.1 million, or (37.3%) for the year ended December 31, 2018, compared to the
corresponding period of 2017 as a result of $3.5 million decreased employee and contract headcount as well as $0.6 million decreased
professional fees.
48
Other income (expense)
Other income (expense)
Interest expense
Fair value adjustment for warrant liabilities
Fair value adjustment for digital currencies
Other (expense)
Total other income (expense)
Year Ended December 31,
Change
2018
2017
Amount
%
(in thousands)
$
$
(724) $
(54)
(334)
(2,202)
(3,314) $
(397) $
-
-
(13)
(410) $
(327)
(54)
(334)
(2,189)
(2,904)
82.4%
-%
-%
16,838.5%
708.3%
Interest expense increased $327 thousand for the year ended December 31, 2018, compared to the corresponding period of 2017,
primarily related to the amount of financing used under our factoring financing arrangement.
Total other expense increased $2.9 million for the year ended December 31, 2018, compared to the corresponding period of 2017
primarily related to expenses related to the Business Combination.
Liquidity and Capital Resources
As of December 31, 2016, we adopted the provisions of Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) Topic 205-40, Presentation of Financial Statements - Going Concern (ASC 205-40), which requires management to
assess our ability to continue as a going concern for one year after the date the financial statements are issued. Under ASC 205-40,
management has the responsibility to evaluate whether conditions and/or events raise substantial doubt about our ability to meet our future
financial obligations as they become due within one year after the date that the financial statements are issued. As required by this standard,
management’s evaluation shall initially not take into consideration the potential mitigating effects of management’s plans that have not
been fully implemented as of the date the financial statements are issued.
The Company’s assessment included the preparation of a detailed cash forecast that included all projected cash inflows and
outflows. Although the Company continues to focus on growing its revenues, the Company’s ongoing operating expenditures will
significantly exceed the revenue it expects to receive for the foreseeable future. Additionally, the Company has a history of operating
losses and negative operating cash flows and expects these trends to continue into the foreseeable future.
Our future plans may include utilizing existing with obtaining new credit lines, expanding credit lines, issuing our equity
securities, including the exercise of warrants, and reducing overhead expenses. Despite a history of successfully implementing similar plans
to alleviate the adverse financial conditions, these sources of working capital are not currently assured, and consequently do not sufficiently
mitigate the risks and uncertainties disclosed above. There can be no assurance that the Company 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 the
Company’s capital needs and support its growth. If additional funding cannot be obtained on a timely basis and on satisfactory terms, its
operations would be materially negatively impacted. We have therefore concluded there is substantial doubt about our ability to continue as
a going concern through one year from the issuance of these financial statements.
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. The accompanying consolidated financial statements
do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from uncertainty related to our ability to continue as a going concern.
The following table summarizes our cash flows for the periods presented:
Consolidated statement of cash flows
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Operating Activities
Year Ended December 31,
Change
2018
2017
Amount
%
(in thousands)
$
(6,592) $
377
6,816
(16,989) $
(27)
4,615
10,397
404
2,201
(61.2)%
(1,496.3)%
47.7%
Our primary source of cash from operating activities is receipts from the sale of our platform subscriptions and services and
application transactions to our customers. Our primary uses of cash from operating activities are payments to employee for compensation
and related expenses, publishers and other vendors for the purchase of digital media inventory and related costs, sales and marketing
expenses and general operating expenses.
49
We utilized $6.6 million of cash from operating activities during 2018, primarily resulting from a net loss of $9.8 million, as
adjusted for non-cash charges related to change in fair value of warrants of $1.3 million, stock-based compensation of $0.5 million,
depreciation and amortization of $0.4 million, impairment of digital currencies of $0.3 million and allowance for doubtful receivables of
$0.2 million, offset by decrease of deferred taxes of ($0.4) million. In addition, during 2018 certain changes in our operating assets and
liabilities resulted in significant cash increases (decreases) as follows: ($5.8) million from a decrease in accrued expenses, $4.2 million from
an increase in accounts payable, and $2.4 million from a decrease in accounts receivable.
We utilized $17.0 million of cash from operating activities during 2017, primarily resulting from a net loss of $25.9 million, as
adjusted for non-cash charges related to depreciation and amortization of $0.2 million, stock-based compensation of $0.1 million,
allowance for doubtful receivables of $3.1 million, and amortization of acquired intangibles of $1.3 million. In addition, during 2017
certain changes in our operating assets and liabilities resulted in significant cash increases (decreases) as follows: ($1.2) million from an
decrease in accounts receivable due to the timing of payments received, $3.5 million from an increase in deferred revenue, $3.0 million
from an increase in accrued expenses, and ($0.9) million from a decrease in accounts payable and other accrued liabilities as a result of the
timing of payments to our vendors.
Investing Activities
Our primary investing activities consist of purchases of office and computer equipment. Purchases of property and equipment may
vary from period to period due to the timing of the expansion of our operations and website and internal-use software and development.
Financing Activities
Our financing activities during 2018 consist primarily of the proceeds from common stock subscriptions and our financing
factoring agreement. We acquired $6.8 million of cash from financing activities during 2018, primarily as follows: $5.4 million provided by
common stock subscriptions; $0.6 million provided by net proceeds from our factoring financing agreement; and $0.5 million of proceeds
from the sale of Series A preferred stock shares, net of issuance costs.
Our financing activities during 2017 consist primarily of the issuance of convertible preferred stock and our financing factoring
agreement. We acquired $4.6 million of cash from financing activities during 2017, primarily as follows: $3.2 million provided by
convertible preferred stock subscriptions; $1.0 million provided by net proceeds from our factoring financing agreement; $0.4 million of
proceeds from the sale of convertible preferred stock shares; and ($0.1) million used in payments of capital leases.
Off-Balance Sheet Arrangements
During the years ended December 31, 2018 and 2017, 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 us or from intellectual property infringement claims made by third parties. In addition, we have
entered into indemnification agreements with directors and certain officers and employees that will require us, among other things, to
indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees.
Contractual Obligations
We lease various office facilities, including our corporate headquarters in Texas and offices in California and Florida, under non-
cancellable operating lease agreements that expire through 2023. 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 totaled $0.6
million for each of the years ended December 31, 2018 and 2017.
The following table summarizes our contractual obligations as of December 31, 2018 (in thousands):
Contractual obligations
Operating lease obligations
Payments due by period
1-3
years
Less than
1 year
3-5
years
More than
5 years
Total
$
1,034 $
573 $
402 $
59
—
50
Future minimum lease obligations years ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total
Recent Accounting Pronouncements
Lease
Obligations
573
164
119
119
59
-
1,034
$
$
In May 2014, the FASB and the International Accounting Standards Board jointly issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in ASC 605, Revenue
Recognition. ASU 2014-09 is a comprehensive new revenue recognition standard that will supersede nearly all existing revenue
recognition guidance under U.S. GAAP and International Financial Reporting Standards. The standard’s core principle is that a company
will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the
company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make
more estimates than under current authoritative guidance. These may include identifying performance obligations in the contract,
estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate
performance obligation.
This standard is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years. There is a one-year deferral for non-public companies, but some companies that consider themselves private may have to
follow the public company effective date if they meet certain requirements. Early adoption is not permitted under U.S. GAAP, but non-
public companies may adopt the new standard as of the public entity effective date. This standard will impact those arrangements
historically accounted for under ASC 985-605. VSOE of fair value is not a requirement for separation under the new standard. As a result,
certain amounts required to be deferred under ASC 985-605 may be recognized as revenue sooner. The Company has elected to take
advantage of the extended transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting
standards. The Company will adopt the new standard effective January 1, 2019. The Company is still finalizing its initial assessment, and
its impact to the financials upon the adoption of this ASU.
In 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which
eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and non-current in a classified
balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as non-current. ASU 2015-17 is
effective for consolidated financial statements issued for annual periods beginning after December 15, 2017. The amendments may be
applied prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted this
guidance effective January 1, 2018. Adoption of this guidance did not have a material impact on the Company’s consolidated financial
statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should
recognize the assets and liabilities that arise from leases. For operating leases, a lessee is required to recognize a right-of-use asset and a
lease liability, initially measured at the present value of the lease payments, in the statement of financial position. For leases with a term of
12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and
lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous generally accepted accounting
principles. This ASU is effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. Earlier application is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning
of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the effect that the adoption
of this ASU will have on its financial statements.
In March 2016, the FASB issued ASU 2016-09 Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting (ASU 2016-09). The amendment simplifies several aspects of the accounting for share-based payments,
including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for
equity classification up to the employees’ maximum statutory tax rates, allowing an entity-wide accounting policy election to either
estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the
statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding
purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early
adoption is permitted in any interim or annual period. The Company has chosen to early adopt ASU 2016-09 on a prospective basis. There
was no material impact to the consolidated financial statements upon adoption.
51
In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the
FASB Emerging Issues Task Force). ASU 2016-01 clarifies the presentation of restricted cash on the statement of cash flows. This ASU is
effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For
all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years
beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the
amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim
period. As the Company is an emerging growth company, it has elected to take advantage of a and defer implementation, and has chosen
not to early adopt.
In January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business.
ASU 2017-01 provides a new framework for entities to determine whether a set of assets and activities (together referred to as “a set”) is a
business. The amendments in the ASU will assist entities when they evaluate whether transactions should be accounted for as acquisitions
(or disposals) either of businesses or of assets. This distinction is important since there are significant differences between the accounting
for business combinations and the accounting for acquisitions of assets. Public business entities should apply the amendments in this
Update to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply
the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December
15, 2019. As the Company is an emerging growth company, it has elected to take advantage of a and defer implementation under annual
periods beginning after December 31, 2019. The Company does not there will be a material impact to the consolidated financial statements
upon adoption.
In January 2017, the FASB issued ASU 2017-04 Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. ASU 2017-07 simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment
test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying
amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value. Public business entities that are an SEC filer should adopt the amendments in this ASU for its annual or any interim
goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt
the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020.
All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any
interim goodwill impairment tests in fiscal years beginning after December 15, 2021. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. For testing periods in 2017 and 2018, the Company has not
needed to proceed to Step 2 of the goodwill impairment test.
In May 2017, the FASB issued ASU 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification
Accounting. ASU 2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply
modification accounting in Topic 718. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual
periods, beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018. Adoption of this guidance did
not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13—Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement. ASU 2018-13 improves the effectiveness of disclosures about fair value
measurements required under ASC 820. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of
significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty
should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other
amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance
of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption
of the additional disclosures until their effective date. The Company is currently evaluating the impact this ASU has on its consolidated
financial statements.
In August 2018, the Security Exchange Commission (SEC) adopted the final rule under SEC Release No. 33-10532, “Disclosure
Update and Simplification,” amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or
superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial
statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be
provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of
each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The
Company is evaluating the impact of this guidance on its consolidated financial statements. The Company anticipates its first presentation
of changes in stockholders’ equity will be included in its Form 10-Q for the quarter ended March 31, 2019.
52
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and
assumptions that affect the reported amounts in our consolidated financial statements and accompanying notes. Actual results could differ
from those estimates. Items subject to the use of estimates include revenue recognition for contract completion, useful lives of long-lived
assets including intangibles, valuation of intangible assets acquired in business combinations, reserves and certain accrued liabilities,
determination of the provision for income taxes, and fair value of equity instruments.
Revenue Recognition
Revenue is recognized when all four of the following criteria are met:
● Persuasive evidence of an arrangement exists;
● The service has been completed or services are actively being provided to the customer;
● The amount of fees to be paid by the customer is fixed or determinable; and
● The collection of fees is reasonably assured.
Platform Subscriptions and Services Revenue
We derive subscription revenue from software license fees, which comprise subscription fees from customers licensing our MaaS
modules, which includes accessing the MaaS platform and/or MaaS platform data; application development service revenue from the
development of customer applications, or apps, which are built and delivered to customers; and support fees, which comprise support and
maintenance fees of their applications, software updates, and technical support for software products (post-contract customer support, or
PCS) for an initial term. License subscription and app development arrangements are typically accompanied by support agreements, with
terms ranging from 6 to 60 months and are non-cancelable, though customers typically have the right to terminate their contracts for cause
if we materially fail to perform.
These application development, license and support fee arrangements represent software arrangements that are accounted for
pursuant to the software revenue recognition guidance of ASC 985-605, Software — Revenue Recognition.
We typically receive cash payments from customers in advance of when the PCS services are performed under the arrangements
with the customer and records this as deferred revenue. These arrangements obligate us to provide PCS over a fixed term. We are unable to
establish VSOE of fair value for all undelivered elements in certain arrangements that include licenses, support, and services, due to the
lack of VSOE for support bundled with the software license and application development. Because VSOE of fair value of the PCS included
in the arrangement does not exist, the PCS cannot be accounted for separately from the software and customization efforts. Once the PCS
period commences, we recognize revenue ratably over the remaining PCS period. In these instances, revenue is recognized ratably over the
period that the services are expected to be performed, which is generally the support period.
From time to time, we also provide professional services by outsourcing employees’ time and materials to customers. Such
amounts are typically recorded as the services are delivered.
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 charged 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 addition, we generate application transaction revenue thru in-app
purchases from application on our platform. At that time, services have been provided, the fees charged are fixed or determinable,
persuasive evidence of an arrangement exists, and collectability is reasonably assured.
53
In the normal course of business, we 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. 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. While none of the factors individually are considered
presumptive or determinative in reaching a conclusion on gross versus net revenue recognition, we place the most weight on the analysis of
whether we are the primary obligor in the arrangement. To date, we have determined that we are the primary obligor in all advertising
arrangements because we are responsible for identifying and contracting with third-party advertisers, which include both advertising
agencies or companies; establishing the selling prices of the advertisements sold; performing all billing and collection activities, including
retaining credit risk; and bearing sole responsibility for the suitability and fulfillment of the advertising. Accordingly, we act as the
principal in all advertising arrangements and therefore reports revenue earned and costs incurred related to these transactions on a gross
basis.
We record deferred revenue when it receives cash payments from advertiser clients in advance of when the services are performed
under the arrangements with the customer. We recognize deferred revenue as revenue only when the revenue recognition criteria are met.
Fair Value of Financial Instruments
Authoritative guidance on fair value measurements defines fair value, establishes a consistent framework for measuring fair value,
and expands disclosures for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair
value is an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. 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. As a basis for considering such assumptions, the authoritative guidance
establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 — Observable inputs such as quoted prices in active markets.
Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own
assumptions.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value.
The carrying value of accounts receivable, 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.
Concentrations of Credit Risk
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable.
Although we limit our exposure to credit loss by depositing our cash with established financial institutions that management believes have
good credit ratings and represent minimal risk of loss of principal, our deposits, at times, may exceed federally insured limits. Collateral is
not required for accounts receivable, and we believe the carrying value approximates fair value.
Revenue from Fox Networks Group (“Fox”) was 42% compared to 44% of total revenue for the years ended December 31, 2018
and 2017 respectively. Fox accounted for 66% compared to 24% of accounts receivable as of December 31, 2018 and 2017 respectively.
Revenue from Fetch Media Ltd. was 21% compared to 11% of total revenue for 2018 and 2017 respectively.
Cash
We consider all investments with a maturity of three months or less from the date of acquisition to be cash equivalents. We had no
cash equivalents at December 31, 2018 and 2017.
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 its ability to collect outstanding receivables and records a bad debt allowance for receivables when collection
becomes doubtful. The allowances are based upon historical loss patterns, current and prior trends in its aged receivables, credit memo
activity, and specific circumstances of individual receivable balances.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets, generally ranging from three to seven years. Leasehold
improvements are amortized over the shorter of their useful lives or the remaining terms of the related leases.
54
Goodwill and Intangible Assets
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 assess 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.
The goodwill impairment test required by ASC 350 is a two-step process. The first step of the goodwill impairment test, used to
identify potential impairment, compares the fair value of a reporting unit with its carrying amount, or the net book value of the company or
reporting unit, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired; thus, the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its
fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. We
attribute goodwill to our sole reporting unit for impairment testing.
The enterprise fair value used by us was derived from valuations utilizing a blending of both the income approach, whereby
current and future estimated discounted cash flows were utilized to calculate an operating value of the Company on a controlling interest
basis, and the market approach, whereby comparable company results are used to derive a fair value of the Company. The determination of
whether goodwill has become impaired involves a significant level of judgment in the assumptions underlying the approach used to
determine the value of the reporting unit. Changes in our strategy and/or market conditions could significantly impact these judgments and
require adjustments to recorded amounts of goodwill.
Identifiable intangible assets consist of acquired trade names, customer lists, technology, in-process research and development, and
order backlog associated with the acquired businesses.
ASC 350 requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for
impairment whenever events or changes in circumstances indicate that an asset’s carrying value may not be recoverable in accordance with
ASC 360, Property, Plant, and Equipment.
Amortization of finite-lived intangible assets is calculated using either the straight-line or accelerated amortization model based on
the Company’s best estimate of the distribution of the economic value of the identifiable intangible assets. We did not recognize any
goodwill or intangible impairment losses for the years ended December 31, 2018 or 2017.
Long-Lived Assets
In accordance with authoritative guidance, we periodically re-evaluate the original assumptions and rationale utilized in the
establishment of the carrying value and estimated lives of all of our long-lived assets, including property and equipment. The determinants
used for this evaluation include management’s estimate of the asset’s ability to generate positive income from operations and positive cash
flow in future periods, as well as the strategic significance of the asset to our business objective. We did not recognize any impairment
losses for the years ended December 31, 2018 or 2017.
Leases
Leases are reviewed and classified as capital or operating at their inception. For leases that contain rent escalations or periods
during the lease term where rent is not required, we recognize rent expense based on allocating the total rent payable on a straight-line basis
over the term of the lease excluding lease extension periods. The difference between rent payments and straight-line rent expense is
recorded as deferred rent on the consolidated balance sheets. Deferred rent that will be recognized during the succeeding 12-month period
is recorded as the current portion of deferred rent and the remainder is recorded as long-term deferred rent.
Under certain leases, we also receive incentives for leasehold improvements, which are recognized as deferred rent if we
determine they are owned by us. Leasehold improvement incentives are amortized on a straight-line basis over the shorter of the lease term
or estimated useful life as a reduction to rent expense. The leasehold improvements are included in property and equipment, net and are
amortized to depreciation expense.
Advertising Costs
Advertising costs are expensed as incurred and were included in sales and marketing expenses on the consolidated statements of
operations and comprehensive loss.
55
Retirement Plan
We administered one employee retirement plan that qualified as a deferred salary arrangement under Section 401(k) of the 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 for the years ended December 31, 2018 or
2017.
Income Taxes
We account for income taxes in accordance with FASB ASC 740, Income Taxes. 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.
The accounting guidance on accounting for uncertainty in income taxes prescribes a recognition threshold and measurement
attribute criterion for the 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. We
have not recognized interest or penalties on our consolidated balance sheets or statements of operations and comprehensive loss.
Redeemable Preferred Stock
We issued 6,000 shares for aggregate cash proceeds of $6.0 million from the Series A 8% convertible preferred stock financing
(“Series A Financing”) in conjunction with the Business Combination. In accordance with ASC 480, redemption provisions not solely
within the control of the Company require the security to be classified outside of permanent equity.
Comprehensive Loss
We utilize the guidance in ASC 220, Comprehensive Income, for the reporting and display of comprehensive loss and its components
in our consolidated financial statements. Comprehensive loss comprises net loss and cumulative foreign currency translation adjustments.
The accumulated comprehensive loss at December 31, 2018 and December 31, 2017 was due to foreign currency translation adjustments.
Loss per Common Share
Net 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, plus to the extent dilutive the incremental number of shares of common stock to
settle warrants, as calculated using the treasury stock method. At December 31, 2018 and 2017, the Company had outstanding warrants to
purchase 18,182,627 and 14,885,964 shares of common stock, respectively. 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 the period.
As of December 31, 2018 and 2017, 40,707 and 22,451 shares were restricted relating to early exercises of the Company’s 2009 Stock
Option Plan and are excluded from basic shares outstanding for the years then ended.
Emerging Growth Company
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial
accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do
not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting
standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements
that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected not to opt out of
such extended transition period which means that when a standard is issued or revised and it has different application dates for public or
private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies
adopt the new or revised standard.
56
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our
financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations
in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.
Foreign Currency Risk
The functional currency of our foreign subsidiaries is generally the local currency. Most of our sales are denominated in U.S.
dollars, and therefore our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in
the currencies of the countries in which our operations are located, which are primarily in the U.S., the United Kingdom and India. Our
consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates
and may be adversely affected in the future due to changes in foreign exchange rates. The Company typically has nominal cash balances
held in foreign accounts. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other
derivative financial instruments. During the fiscal years ended December 31, 2018 and 2017, the effect of a hypothetical 10% change in
foreign currency exchange rates applicable to our business would not have had a material impact on our consolidated financial statements.
Interest Rate Sensitivity
We have historically had no cash equivalents balances, only cash balances. In the future we expect our cash and cash equivalents
to be held in cash and short-term money market funds. Due to the short-term nature of these instruments, we believe that we will not have
any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest
rates, however, would reduce future interest income. During the fiscal years ended December 31, 2018 and 2017, the effect of a
hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our interest income. A hypothetical
increase or decrease in overall interest rates is not expected to have a material impact on our interest expense.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary financial information required by this Item 8 are included in our consolidated financial
statements and notes and are set forth in the pages indicated in Part IV, Item 15(a) of this Annual Report on Form 10-K and are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Reference is made to Item 4.01 on the Company’s Current Report on Form 8-K filed with the SEC on January 2, 2019 regarding
changes in accounting firm and is hereby incorporated by reference.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer (together, the “Certifying Officers”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our Certifying
Officers concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.
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, or persons performing similar functions, as appropriate, to allow timely decisions regarding
required disclosure.
Management’s Report on Internal Controls Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the
supervision and with the participation of our management, including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018, 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, our management concluded that our internal control over
financial reporting was effective as of December 31, 2018.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other Information.
None.
57
Item 10. Directors, Executive Officers and Corporate Governance.
Executive Officers and Directors
PART III
A list of our executive officers and biographical information appears in Part I of this report under the heading “Executive
Officers.” The remaining information required by this item is incorporated by reference to the 2019 Proxy Statement to be filed with the
SEC within 120 days after the end of the year ended December 31, 2018.
Code of Conduct
As part of our system of corporate governance, our board of directors has adopted a code of business conduct and ethics. The code
applies to all of our employees, officers (including our principal executive officer, principal financial officer, principal accounting officer
or controller, or persons performing similar functions), agents and representatives, including our independent directors and consultants,
who are not employees of ours, with regard to their Phunware-related activities. Our code of business conduct and ethics is available on our
website at www.phunware.com. We will post on our website any amendment to our code of business conduct and ethics, as well as any
waivers of our code of business conduct and ethics, that are required to be disclosed by the rules of the SEC or the Nasdaq Stock Market.
Item 11. Executive Compensation.
Information required by this item is incorporated by reference to the 2019 Proxy Statement to be filed with the SEC within 120
days after the end of the year ended December 31, 2018.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by this item is incorporated by reference to the 2019 Proxy Statement to be filed with the SEC within 120
days after the end of the year ended December 31, 2018.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by this item is incorporated by reference to the 2019 Proxy Statement to be filed with the SEC within 120
days after the end of the year ended December 31, 2018.
Item 14. Principal Accounting Fees and Services.
Information required by this item is incorporated by reference to the 2019 Proxy Statement to be filed with the SEC within 120
days after the end of the year ended December 31, 2018.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Report:
(1) Consolidated Financial Statements
(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 financial statements and notes thereto in is Item 15 of Part IV below.
(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.
58
EXHIBIT INDEX
Exhibit No. Description
2.1
Agreement and Plan of Merger, dated February 27, 2018, by and among Stellar, STLR Merger Subsidiary Inc. and Phunware,
Inc (Incorporated by reference to Exhibit 2.1 of Stellar’s Form 8-K (File No. 001-37862), filed with the SEC on February 28,
2018, and also included as Annex C to the joint proxy statement/prospectus).
2.2
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
10.1
10.2+
10.3+
10.4+
10.5
10.6
10.7
10.8
10.9
First Amendment to Agreement and Plan of Merger, dated November 1, 2018, by and among Stellar, Phunware, Inc. and the
Holder Representative named therein (Incorporated by reference to Annex C-1 to Stellar’s Form S-4/A (File No. 333-224227),
filed with the SEC on November 13, 2018).
Amended and 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).
Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 of the Registrant’s Form 8-K (File
No. 001-37862), filed with the SEC on January 2, 2019).
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).
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).
Form of Unit Purchase Option between the Company and Maxim Group LLC (Incorporated by reference to Exhibit 4.5 of the
Registrants Form S-1/A (File No. 333-212377) filed with the SEC on August 15, 2016
Warrant Agreement, dated August 18, 2016, between Continental Stock Transfer & Trust Company and Stellar (Incorporated
by reference to Exhibit 4.1 of Stellar’s Form 8-K (File No. 001-37862), filed with the SEC on August 24, 2016).
Second Amended and Restated Sponsor Warrant Purchase Agreement, dated August 12, 2016 among Stellar and certain
security holders (Incorporated by reference to Exhibit 10.9 of Stellar’s Form S-1/A (File No. 333-212377), filed with the SEC
on August 15, 2016).
Registration Rights Agreement, dated August 18, 2016, between Stellar and certain security holders (Incorporated by reference
to Exhibit 10.2 of Stellar’s Form 8-K (File No. 001-37862), filed with the SEC on August 24, 2016).
Form of Securities Subscription Agreement, dated January 29, 2016, among Stellar and certain security holders (Incorporated
by reference to Exhibit 10.7 of Stellar’s Form S-1 (File No. 333-212377), filed with the SEC on June 30, 2016).
Amended and Restated Investors’ Rights Agreement, as amended, between Phunware, Inc. and certain holders of Phunware,
Inc.’s capital stock named therein (Incorporated by Reference to Exhibit 4.7 of the Registrant’s Form S-1 (File No. 333-
229524) filed with the SEC on February 5, 2019.
Form of Warrant to Purchase Shares of Series F Preferred Stock and Phuncoins of Phunware, Inc. (Incorporated by reference to
Exhibit 10.22 of Stellar’s Form S-4/A (File No. 333-224227), filed with the SEC on October 2, 2018)
Securities Purchase Agreement, dated December 26, 2018, between the Stellar and the Purchaser, dated January 29, 2016,
among Stellar and certain security holders (Incorporated by reference to Exhibit 10.9 of the Registrant’s Form 8-K (File No.
001-37862), filed with the SEC on January 2, 2019).
Registration Rights Agreement, dated December 26, 2018, between the Stellar and the Purchaser, dated January 29, 2016,
among Stellar and certain security holders (Incorporated by reference to Exhibit 10.10 of the Registrant’s Form 8-K (File No.
001-37862), filed with the SEC on January 2, 2019).
Form of Indemnification Agreement between the Successor and its directors and officers (Incorporated by reference to Exhibit
10.1 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
Phunware, Inc. 2018 Equity Incentive Plan, including form agreements under the 2018 Equity Incentive Plan (Incorporated by
reference to Annex D to Stellar’s Form S-4/A (File No. 333-224227), filed with the SEC on November 13, 2018).
Phunware, Inc. 2018 Employee Stock Purchase Plan, including form agreements under the 2018 Employee Stock Purchase
Plan (Incorporated by reference to Annex E to Stellar’s Form S-4/A (File No. 333-224227), filed with the SEC on November
13, 2018).
Phunware, Inc. 2009 Equity Incentive Plan, including form agreements under the 2009 Equity Incentive Plan (Incorporated by
reference to Exhibit 10.15 of Stellar’s Form S-4 (File No. 333-224227), filed with the SEC on April 11, 2018).
Property Lease commencing on November 1, 2011 with HUB Properties Trust for premises located at 7800 Shoal Creek Blvd.,
Suite-230S, Austin, TX 78757, as amended by First Amendment to Property Lease dated September 6, 2012, and Second
Amendment to Property Lease dated July 3, 2013 (Incorporated by reference to Exhibit 10.16 of Stellar’s Form S-4 (File No.
333-224227), filed with the SEC on April 11, 2018).
Factoring Agreement with CSNK Working Capital Finance Corp d/b/a Bay View Funding dated June 14, 2016, as amended by
Amendment No. 1 to Factoring Agreement dated June 22, 2016 (Incorporated by reference to Exhibit 10.17 of Stellar’s Form
S-4 (File No. 333-224227), filed with the SEC on April 11, 2018).
Form of Voting Agreement (Incorporated by reference to Exhibit 10.1 of Stellar’s Form 8-K (file No. 001-37862), filed with
the SEC on February 28, 2018).
Form of Sponsor Voting Agreement (Incorporated by reference to Exhibit 10.2 of Stellar’s Form 8-K (file No. 001-37862),
filed with the SEC on February 28, 2018).
Form of Lock-up Agreement (Incorporated by reference to Exhibit 10.3 of Stellar’s Form 8-K (file No. 001-37862), filed with
the SEC on February 28, 2018).
59
10.10
Form of Sponsor Lock-up Agreement (Incorporated by reference to Exhibit 10.4 of Stellar’s Form 8-K (file No. 001-37862),
filed with the SEC on February 28, 2018).
10.11
Form of Token Rights Agreement (Incorporated by reference to Exhibit 10.23 of Stellar’s Form S-4/A (File No. 333-224227),
filed with the SEC on October 2, 2018).
10.12
Letter Agreement, dated August 18, 2016, by and among Stellar, the initial shareholders and the officers and directors of
Stellar (Incorporated by reference to Exhibit 10.3 of Stellar’s Form 8-K (File No. 001-37862), filed with the SEC on August
24, 2016).
10.13
Investment Management Trust Account Agreement, dated August 18, 2016, between Continental Stock Transfer & Trust
Company and Stellar (Incorporated by reference to Exhibit 10.1 of Stellar’s Form 8-K (File No. 001-37862), filed with the
SEC on August 24, 2016).
10.14
Administrative Services Agreement, dated August 18, 2016, between Stellar and Nautilus Energy Management Corp.
(Incorporated by reference to Exhibit 10.4 of Stellar’s Form 8-K (File No. 001-37862), filed with the SEC on August 24,
2016).
10.16
Form of Promissory Note issued by Stellar to the Sponsors (Incorporated by reference to Exhibit 10.1 of the Registrants Form
10-K, filed with the SEC on March 6, 2019).
10.17
Form of Promissory Note issued by Stellar to Phunware (Incorporated by reference to Exhibit 10.11 of the Registrants Form
10-K, filed with the SEC on March 6, 2019).
10.19+
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).
10.20+
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).
10.21+
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).
10.22+
Employment Agreement between the Registrant and Barbary Brunner (Incorporated by reference to Exhibit 10.5 of the
10.23+
10.24+
10.25+
14.1*
16.1
21.1
31.1*
31.2*
32.1*
32.2*
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
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).
Employment Agreement between the Registrant and Matthew Lindenberger (Incorporated by reference to Exhibit 10.7 of the
Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
Employment Agreement between the Registrant and Tushar Patel (Incorporated by reference to Exhibit 10.8 of the Registrant’s
Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
Code of Business Conduct and Ethics as of December 26, 2018
Letter regarding Change in Independent Registered Public Accounting Firm, dated December 26, 2018 (Incorporated by
reference to Exhibit 16.1 of the Registrant’s Form 8-K (File No. 001-37862), filed with the SEC on January 2, 2019).
List of Subsidiaries of the Registrant (Incorporated by reference to Exhibit 21.1 of Stellar’s Form S-4 (File No. 333-224227),
filed with the SEC on April 11, 2018).
Certification of the Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)*
Certification of the Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)*
Certification of the Principal Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350*
Certification of the Principal Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. 1350*
XBRL Instance Document*
XBRL Taxonomy Extension Schema*
XBRL Taxonomy Calculation Linkbase*
XBRL Taxonomy Label Linkbase*
XBRL Definition Linkbase Document*
XBRL Definition Linkbase Document*
*
+
Filed herewith
Indicates a management contract or compensatory plan or arrangement
Item 16. Form 10–K Summary.
None.
60
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
PHUNWARE, INC. AND SUBSIDIARIES
Consolidated Financial Statements as of December 31, 2018 and 2017 and for the Years Ended December 31, 2018 and 2017
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-2
F-3
F-4
F-5
F-6
F-7
F-1
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, 2018 and 2017,
the related consolidated statements of operations and comprehensive loss, changes in convertible preferred stock and stockholders’ equity
and cash flows for each of the two years in the period ended December 31, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period
ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph — Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
more fully described in Note 1, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise
additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
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.
/s/ Marcum llp
Marcum llp
We have served as the Company’s auditor since 2017.
New York, NY
March 19, 2019
F-2
Phunware, Inc.
Consolidated Balance Sheets
(In thousands)
Assets
Current assets:
Cash
Accounts receivable, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Deferred tax asset – long term
Restricted cash
Other assets
Total assets
Liabilities, redeemable convertible preferred stock, and stockholders’ equity
Current liabilities:
Accounts payable
Accrued expenses
Deferred revenue
Factored receivables payable
Short term notes payable – related party
Total current liabilities
Deferred tax liability
Deferred revenue
Deferred rent
Investor deposits
Total liabilities
$
$
$
Commitments and contingencies (see Note 8)
Redeemable convertible preferred stock, $0.0001 par value (see Note 10)
Stockholders’ equity
Common stock, $0.0001 par value (see Note 11)
Additional paid in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity
$
The accompanying notes are an integral part of these financial statements.
F-3
December
31,
2018
December
31,
2017
844 $
3,606
272
4,722
66
25,821
521
64
5,500
187
36,881 $
9,890 $
3,028
2,629
2,434
1,993
19,974
64
5,622
17
-
25,677
-
5,377
3
118,062
(418)
(111,820)
5,827
36,881 $
308
6,206
385
6,899
128
25,886
901
-
-
187
34,001
3,548
8,796
1,044
1,816
-
15,204
387
7,165
98
3,243
26,097
-
-
3
110,265
(347)
(102,017)
7,904
34,001
Phunware, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share information)
Net revenues
Cost of revenues
Gross profit
Operating expenses:
Sales and marketing
General and administrative
Research and development
Total operating expenses
Operating loss
Other expense:
Interest expense
Fair value adjustment for warrant liabilities
Impairment of digital currencies
Other expense
Total other expense
Loss before taxes
Income tax benefit
Net loss
Cumulative translation adjustment
Comprehensive loss
Net loss per share, basic and diluted
Weighted-average shares used to compute net loss per share, basic and diluted
The accompanying notes are an integral part of these financial statements.
F-4
Year Ended
December 31,
2018
2017
30,883 $
11,802
19,081
5,417
13,562
6,965
25,944
(6,863)
(724)
(54)
(334)
(2,202)
(3,314)
(10,177)
374
(9,803)
(71)
(9,874) $
(0.38) $
25,556
26,722
15,714
11,008
10,721
14,795
11,108
36,624
(25,616)
(397)
—
—
(13)
(410)
(26,026)
88
(25,938)
127
(25,811)
(1.06)
24,519
$
$
$
Phunware, Inc.
Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Equity
(In thousands)
Preferred Stock
Common Stock
Shares Amount Shares Amount
Additional
Paid-in Accumulated Comprehensive Stockholders’
Capital
Deficit
Equity
Other
Total
Loss
- $
-
24,490 $
3 $ 109,729 $
(76,079) $
(474) $
33,179
Balances as of
December 31, 2016
Exercise of stock
options, net of
vesting of restricted
shares
Repurchase of Series
Gamma convertible
preferred shares
Issuance of common
stock, net of
issuance costs
Stock-based
compensation
expense
Cumulative translation
adjustment
Net loss
Balances as of
December 31, 2017
Exercise of stock
options, net of
vesting of restricted
shares
Issuance of common
stock, net of
issuance costs
Issuance of Series A
convertible preferred
stock, net of
issuance costs & fair
value of warrants
Recapitalization
related to Business
Combination
Stock-based
compensation
expense
Cumulative translation
adjustment
Net loss
Balances as of
December 31, 2018
-
-
34
-
10
-
-
(12)
-
-
-
-
47
-
408
-
-
-
-
-
-
10
-
-
408
-
118
-
-
-
-
-
-
-
-
-
-
-
-
-
118
-
-
-
(25,938)
127
-
127
(25,938)
-
24,559
3 110,265
(102,017)
(347)
7,904
-
-
276
-
152
-
-
152
1,085
-
9,565
9,565
6
5,377
-
-
-
-
-
1,333
-
(2,370)
-
-
-
-
-
-
(2,370)
-
450
-
-
-
-
-
-
-
-
-
-
-
-
450
-
-
-
(9,803)
(71)
-
(71)
(9,803)
6 $
5,377
27,253 $
3 $ 118,062 $
(111,820) $
(418) $
5,827
The accompanying notes are an integral part of these financial statements.
F-5
Phunware, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Operating activities
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation
Loss on sale of digital currencies
Bad debt expense
Amortization of acquired intangibles
Change in fair value of warrants
Impairment of digital currencies
Stock-based compensation
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Deferred revenue
Net cash used by operating activities
Investing activities
Proceeds received from sale of digital currencies
Payments for note receivable
Capital expenditures
Net cash used for investing activities
Financing activities
Payment on capital lease obligation
Net proceeds from factoring agreement
Proceeds from common stock, net of issuance costs
Proceeds from common stock subscriptions, net of issuance costs
Proceeds from exercise of options to purchase common stock
Proceeds from Series A preferred stock
Proceeds from Business Combination
Net cash provided for financing activities
Effect of exchange rate on cash
Net (decrease) increase in cash
Cash at the beginning of the period
Cash at the end of the period
Supplemental disclosure of cash flow information
Interest paid
Supplemental disclosure of non-cash information
Common stock issuances from subscription payable
Warrants issued in conjunction with Business Combination
The accompanying notes are an integral part of these financial statements.
F-6
Year Ended
December 31,
2018
2017
$
(9,803) $
(25,938)
62
21
167
372
1,329
334
450
(387)
2,439
15
4,156
(5,789)
42
(6,592)
913
(536)
—
377
—
618
—
5,448
152
500
98
6,816
154
—
3,101
1,284
—
—
118
(93)
(1,243)
46
(903)
2,993
3,491
(16,990)
—
—
(27)
(27)
(83)
1,036
410
3,243
10
—
—
4,616
(65)
536
308
844 $
80
(12,321)
12,629
308
712 $
381
3,243 $
1,106 $
—
—
$
$
$
$
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. (the “Company”) is a provider of Multiscreen as a Service (MaaS) solutions, an integrated customer engagement platform
that enables organizations to develop customized, immersive, branded mobile applications. The Company sells its services in vertical
markets, including health care, retail, hospitality, transportation, sports, and entertainment. The Company enables brands to engage,
manage, and monetize their anytime-anywhere mobile users. The Company’s MaaS technology is available in software development kit
form for organizations developing their own application, via customized development services, and prepackaged solutions. Through its
integrated mobile advertising platform of publishers and developers, the Company also maximizes mobile monetization through an
advertising product suite including self-service media buying, real-time bidding, publisher mediation and yield optimization, cross-platform
ad creation, and dynamic ad serving. Founded in 2009, the Company is a Delaware corporation headquartered in Austin, Texas.
Business Combination
On February 27, 2018, Phunware entered into an Agreement and Plan of Merger, as amended (collectively, the “Merger Agreement”) with
Stellar Acquisition III, Inc. (“Stellar”). On December 26, 2018, the Company consummated the transaction contemplated by the Merger
Agreement (the “Reverse Merger and Recapitalization”). In connection with the closing of the Reverse Merger and Recapitalization, the
registrant changed its name from Stellar Acquisition III, Inc. to Phunware, Inc. (“Successor”). Furthermore, the holders of Phunware’s
preferred stock converted all of their issued and outstanding shares of preferred stock into shares of Phunware common stock at a
conversion ratio of one share of common stock for each share of preferred stock (the “Preferred Stock Exchange”). Subject to the terms and
conditions set forth in the Merger Agreement, at the effective time of the Reverse Merger and Recapitalization (the “Effective Time”): (i)
all shares of Phunware common stock and preferred stock (the “Phunware Stock”) issued and outstanding immediately prior to the
Effective Time (after giving effect to the Preferred Stock Exchange) converted into the right to receive the Stockholder Merger
Consideration (as defined below); (ii) each outstanding warrant to acquire shares of Phunware Stock was cancelled, retired and terminated
in exchange for the right to receive from the Successor a new warrant for shares of Successor common stock with its price and number of
shares equitably adjusted based on the conversion of the shares of Phunware Stock into the Stockholder Merger Consideration, but with
terms otherwise the same as the Phunware warrant (each, a “Replacement Warrant”); and (iii) each outstanding option to acquire Phunware
Stock (whether vested or unvested) was assumed by the Successor and automatically converted into an option to acquire shares of
Successor common stock, with its price and number of shares equitably adjusted based on the conversion of the shares of Phunware Stock
into the Stockholder Merger Consideration (each, an “Assumed Option”). The shares of Successor common stock and the Transferred
Sponsor Warrants to be transferred to Phunware stockholders are collectively referred to as “Stockholder Merger Consideration”. The per
share Merger Consideration paid to Phunware Stockholders was 0.459 shares of Successor stock for each share of Phunware Stock.
Unless otherwise noted, the financial statements, footnotes, and basic and dilutive net loss per share presented give retroactive effect of the
Reverse Merger and Recapitalization
Basis of Presentation
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S.
GAAP”), and include the Company’s accounts and those of its wholly owned subsidiaries. All intercompany transactions and balances have
been eliminated in consolidation.
As of December 31, 2016, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going Concern (ASC 205-40), which requires management to
assess the Company’s ability to continue as a going concern for one year after the date the financial statements are issued. Under ASC 205-
40, management has the responsibility to evaluate whether conditions and/or events raise substantial doubt about the Company’s ability to
meet future financial obligations as they become due within one year after the date that the financial statements are issued. As required by
this standard, management’s evaluation shall initially not take into consideration the potential mitigating effects of management’s plans that
have not been fully implemented as of the date the financial statements are issued.
The Company’s assessment included the preparation of a detailed cash forecast that included all projected cash inflows and outflows.
Although the Company continues to focus on growing its revenues, the Company’s ongoing operating expenditures will significantly
exceed the revenue it expects to receive for the foreseeable future. Additionally, the Company has a history of operating losses and
negative operating cash flows and expects these trends to continue into the foreseeable future.
F-7
Future plans may include utilizing existing credit lines and/or obtaining new credit lines, expanding credit lines, issuing additional equity
securities, including the exercise of warrants, and reducing overhead expenses. Despite a history of successfully implementing similar plans
to alleviate the adverse financial conditions, these sources of working capital are not currently assured, and consequently do not sufficiently
mitigate the risks and uncertainties disclosed above. There can be no assurance that the Company 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 the
Company’s capital needs and support its growth. If additional funding cannot be obtained on a timely basis and on satisfactory terms, its
operations would be materially negatively impacted. The Company has therefore concluded there is substantial doubt about its ability to
continue as a going concern through one year from the issuance of these financial statements.
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. The accompanying consolidated financial statements do not
include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.
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. Actual results could differ from those estimates.
Items subject to the use of estimates include revenue recognition for contract completion, useful lives of long-lived assets including
intangibles, valuation of intangible assets acquired in business combinations, reserves and certain accrued liabilities, determination of the
provision for income taxes, and fair value of equity instruments.
Revenue Recognition
Revenue is recognized when all four of the following criteria are met:
● Persuasive evidence of an arrangement exists;
● The service has been completed or services are actively being provided to the customer;
● The amount of fees to be paid by the customer is fixed or determinable; and
● The collection of fees is reasonably assured.
Platform Subscriptions and Services Revenue
The Company derives subscription revenue from software license fees, which comprise subscription fees from customers licensing the
Company’s MaaS modules, which includes accessing the MaaS platform and/or MaaS platform data; application development service
revenue from the development of customer applications, or apps, which are built and delivered to customers; and support fees, which
comprise support and maintenance fees of their applications, software updates, and technical support for software products (post-contract
customer support, or PCS) for an initial term. License subscription and app development arrangements are typically accompanied by
support agreements, with terms ranging from 6 to 60 months and are non-cancelable, though customers typically have the right to terminate
their contracts for cause if the Company materially fails to perform.
These application development, license and support fee arrangements represent software arrangements that are accounted for pursuant to
the software revenue recognition guidance of Accounting Standards Codification Topic (ASC) 985-605, Software — Revenue Recognition.
The Company typically receives cash payments from customers in advance of when the PCS services are performed under the
arrangements with the customer and records this as deferred revenue. These arrangements obligate the Company to provide PCS over a
fixed term. The Company is unable to establish vendor-specific objective evidence (VSOE) of fair value for all undelivered elements in
certain arrangements that include licenses, support, and services, due to the lack of VSOE for support bundled with the software license and
application development. Because VSOE of fair value of the PCS included in the arrangement does not exist, the PCS cannot be accounted
for separately from the software and customization efforts. Once the PCS period commences, the Company recognizes revenue ratably over
the remaining PCS period. In these instances, revenue is recognized ratably over the period that the services are expected to be performed,
which is generally the support period.
From time to time, the Company also provides professional services by outsourcing employees’ time and materials to customers. Such
amounts are typically recorded as the services are delivered.
F-8
Application Transaction Revenue
The Company also generates revenue by charging advertisers to deliver advertisements (ads) to users of mobile connected devices.
Depending on the specific terms of each advertising contract, the Company generally recognizes 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 the Company recognizes revenue at the time the user views, clicks, or otherwise acts on the ad. The
Company sells 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 charged 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 addition, the Company generates
application transaction revenue thru in-app purchases from application on our platform. At that time, services have been provided, the fees
charged are fixed or determinable, persuasive evidence of an arrangement exists, and collectability is reasonably assured.
In the normal course of business, the Company acts 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 the Company is acting as the principal or
an agent in its transactions with advertisers. The determination of whether the Company is acting as a principal or an agent in a transaction
involves judgment and is based on an evaluation of the terms of each arrangement. While none of the factors individually are considered
presumptive or determinative in reaching a conclusion on gross versus net revenue recognition, the Company places the most weight on the
analysis of whether it is the primary obligor in the arrangement. To date, the Company has determined that it is the primary obligor in all
advertising arrangements because it is responsible for identifying and contracting with third-party advertisers, which include both
advertising agencies or companies; establishing the selling prices of the advertisements sold; performing all billing and collection activities,
including retaining credit risk; and bearing sole responsibility for the suitability and fulfillment of the advertising. Accordingly, the
Company acts as the principal in all advertising arrangements and therefore reports revenue earned and costs incurred related to these
transactions on a gross basis.
The Company records deferred revenue when it receives cash payments from advertiser clients in advance of when the services are
performed under the arrangements with the customer. The Company recognizes deferred revenue as revenue only when the revenue
recognition criteria are met.
Fair Value of Financial Instruments
Authoritative guidance on fair value measurements defines fair value, establishes a consistent framework for measuring fair value, and
expands disclosures for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value
is an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. 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. As a basis for considering such assumptions, the authoritative guidance
establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 — Observable inputs such as quoted prices in active markets.
Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value.
The carrying value of accounts receivable, 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.
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and trade accounts
receivable. Although the Company limits its exposure to credit loss by depositing its cash with established financial institutions that
management believes have good credit ratings and represent minimal risk of loss of principal, its deposits, at times, may exceed federally
insured limits. Collateral is not required for accounts receivable, and the Company believes the carrying value approximates fair value.
Revenue from Fox Networks Group was 42% compared to 44% of total revenue for the years ended December 31, 2018 and 2017
respectively. Fox accounted for 66% compared to 24% of accounts receivable as of December 31, 2018 and 2017 respectively. Revenue
from Fetch Media Ltd. was 21% compared to 11% of total revenue for 2018 and 2017 respectively.
F-9
Cash, Cash Equivalents, and Restricted Cash
The Company considers 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 at December 31, 2018 or 2017.
As a result of the Series A Financing (defined and discussed further below), the Company had $5,500 in restricted cash as of December 31,
2018.
Accounts Receivable and Reserves
Accounts receivable are presented net of allowances. The Company considers receivables past due based on the contractual payment terms.
The Company makes judgments as to its ability to collect outstanding receivables and records a bad debt allowance for receivables when
collection becomes doubtful. The allowances are based upon historical loss patterns, current and prior trends in its aged receivables, credit
memo activity, and specific circumstances of individual receivable balances. Accounts receivable consisted of the following:
Accounts receivable
Less allowances for doubtful accounts
Balance
Changes in the allowance for doubtful accounts and sales allowance are as follows as of December 31:
Balance as at beginning of period
Allowances for bad debt
Issuance of credit memos
Balance at end of period
Property and Equipment
December
31,
2018
December
31,
2017
6,882 $
(3,276)
3,606 $
9,295
(3,089)
6,206
2018
2017
3,089 $
167
20
3,276 $
112
3,101
(124)
3,089
$
$
$
$
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-
line method over the estimated useful lives of the related assets, generally ranging from three to seven years. Leasehold improvements are
amortized over the shorter of their useful lives or the remaining terms of the related leases.
Goodwill and Intangible Assets
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, the Company does 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.
The goodwill impairment test required by ASC 350 is a two-step process. The first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of a reporting unit with its carrying amount, or the net book value of the company or
reporting unit, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired; thus, the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its
fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. The
Company attributes goodwill to its sole reporting unit for impairment testing.
The enterprise fair value used by the Company was derived from valuations utilizing a blending of both the income approach, whereby
current and future estimated discounted cash flows were utilized to calculate an operating value of the Company on a controlling interest
basis, and the market approach, whereby comparable company results are used to derive a fair value of the Company. The determination of
whether goodwill has become impaired involves a significant level of judgment in the assumptions underlying the approach used to
determine the value of the reporting unit. Changes in the Company’s strategy and/or market conditions could significantly impact these
judgments and require adjustments to recorded amounts of goodwill.
Identifiable intangible assets consist of acquired trade names, customer lists, technology, in-process research and development, and order
backlog associated with the acquired businesses.
ASC 350 requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment
whenever events or changes in circumstances indicate that an asset’s carrying value may not be recoverable in accordance with ASC 360,
Property, Plant, and Equipment.
F-10
Amortization of finite-lived intangible assets is calculated using either the straight-line or accelerated amortization model based on the
Company’s best estimate of the distribution of the economic value of the identifiable intangible assets.
The Company did not recognize any goodwill or intangible impairment losses in the years ended December 31, 2018 or 2017.
Long-Lived Assets
In accordance with authoritative guidance, the Company periodically re-evaluates the original assumptions and rationale utilized in the
establishment of the carrying value and estimated lives of all of its long-lived assets, including property and equipment. The determinants
used for this evaluation include management’s estimate of the asset’s ability to generate positive income from operations and positive cash
flow in future periods as well as the strategic significance of the asset to the Company’s business objective. The Company did not
recognize any impairment losses during the years ended December 31, 2018 or 2017.
Deferred Revenue
The Company’s deferred revenue balance consisted of the following:
Current deferred revenue
Platform subscriptions and services revenue
Application transaction revenue
PhunCoin deposits
Total current deferred revenue
Non-current deferred revenue
Platform subscriptions and services revenue
Total non-current deferred revenue
Total deferred revenue
Leases
December 31, December 31,
2018
2017
$
$
$
$
$
1,506 $
133
990
2,629 $
5,622 $
5,622 $
8,251 $
910
134
—
1,044
7,165
7,165
8,209
Leases are reviewed and classified as capital or operating at their inception. For leases that contain rent escalations or periods during the
lease term where rent is not required, the Company recognizes rent expense based on allocating the total rent payable on a straight-line
basis over the term of the lease excluding lease extension periods. The difference between rent payments and straight-line rent expense is
recorded as deferred rent on the consolidated balance sheets. Deferred rent that will be recognized during the succeeding 12-month period
is recorded as the current portion of deferred rent and the remainder is recorded as long-term deferred rent.
Under certain leases, the Company also receives incentives for leasehold improvements, which are recognized as deferred rent if the
Company determines they are owned by the Company. Leasehold improvement incentives are amortized on a straight-line basis over the
shorter of the lease term or estimated useful life as a reduction to rent expense. The leasehold improvements are included in property and
equipment, net and are amortized to depreciation expense.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising costs were $225 and $200 for the years ended December 31, 2018 and 2017,
respectively, and were included in sales and marketing expenses on the consolidated statements of operations and comprehensive loss.
Retirement Plan
At December 31, 2018, the Company administered one employee retirement plan that qualified as a deferred salary arrangement under
Section 401(k) of the Internal Revenue Code (the IRC). 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, 2018 or 2017.
F-11
Income Taxes
The Company accounts for income taxes in accordance with Financial Accounting Standards Board (FASB) ASC 740, Income Taxes.
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.
The accounting guidance on accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute
criterion for the 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. The Company
has not recognized interest or penalties on the consolidated balance sheets or statements of operations and comprehensive loss.
Redeemable Preferred Stock
The Company issued 6,000 shares for aggregate cash proceeds of $6.0 million from the Series A 8% convertible preferred stock financing
(“Series A Financing”) in conjunction with the Business Combination. In accordance with ASC 480, redemption provisions not solely
within the control of the Company require the security to be classified outside of permanent equity.
Comprehensive Loss
The Company utilizes 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. The accumulated comprehensive loss at December 31, 2018 and 2017, was due to foreign currency translation adjustments.
Loss per Common Share
Net 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, plus to the extent dilutive the incremental number of shares of common stock to settle
warrants, as calculated using the treasury stock method. At December 31, 2018 and 2017, the Company had outstanding warrants to
purchase 18,182,627 and 14,885,964 shares of common stock, respectively. 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.
As of December 31, 2018 and 2017, 40,707 and 22,451 shares were restricted relating to early exercises of the Company’s 2009 Stock
Option Plan and are excluded from basic shares outstanding for the years then ended.
Emerging Growth Company
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial
accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do
not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting
standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements
that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected not to opt out of
such extended transition period which means that when a standard is issued or revised and it has different application dates for public or
private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies
adopt the new or revised standard.
Recent Accounting Pronouncements
In May 2014, the FASB and the International Accounting Standards Board jointly issued Accounting Standards Update (“ASU”) No. 2014-
09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition.
ASU 2014-09 is a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance
under U.S. GAAP and International Financial Reporting Standards. The standard’s core principle is that a company will recognize revenue
when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be
entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than
under current authoritative guidance. These may include identifying performance obligations in the contract, estimating the amount of
variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation.
This standard is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal
years. There is a one-year deferral for non-public companies, but some companies that consider themselves private may have to follow the
public company effective date if they meet certain requirements. Early adoption is not permitted under U.S. GAAP, but non-public
companies may adopt the new standard as of the public entity effective date. This standard will impact those arrangements historically
accounted for under ASC 985-605. VSOE of fair value is not a requirement for separation under the new standard. As a result, certain
amounts required to be deferred under ASC 985-605 may be recognized as revenue sooner. The Company has elected to take advantage of
the extended transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards. The
Company will adopt the new standard effective January 1, 2019. The Company is still finalizing its initial assessment, and its impact to the
financials upon the adoption of this ASU.
F-12
In 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which eliminates
the current requirement for organizations to present deferred tax liabilities and assets as current and non-current in a classified balance
sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as non-current. ASU 2015-17 is effective for
consolidated financial statements issued for annual periods beginning after December 15, 2017. The amendments may be applied
prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted this guidance
effective January 1, 2018. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should
recognize the assets and liabilities that arise from leases. For operating leases, a lessee is required to recognize a right-of-use asset and a
lease liability, initially measured at the present value of the lease payments, in the statement of financial position. For leases with a term of
12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and
lease liabilities. The accounting applied by a lessor is largely unchanged from that applied under previous generally accepted accounting
principles. This ASU is effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those
fiscal years. Earlier application is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning
of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the effect that the adoption
of this ASU will have on its financial statements.
In March 2016, the FASB issued ASU 2016-09 Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting (ASU 2016-09). The amendment simplifies several aspects of the accounting for share-based payments, including
immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity
classification up to the employees’ maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the
number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash
flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. ASU 2016-09
is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in
any interim or annual period. The Company has chosen to early adopt ASU 2016-09 on a prospective basis. There was no material impact
to the consolidated financial statements upon adoption.
In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB
Emerging Issues Task Force). ASU 2016-01 clarifies the presentation of restricted cash on the statement of cash flows. This ASU is
effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For
all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years
beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the
amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim
period. As the Company is an emerging growth company, it has elected to defer implementation, and has chosen not to early adopt.
In January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-
01 provides a new framework for entities to determine whether a set of assets and activities (together referred to as “a set”) is a business.
The amendments in the ASU will assist entities when they evaluate whether transactions should be accounted for as acquisitions (or
disposals) either of businesses or of assets. This distinction is important since there are significant differences between the accounting for
business combinations and the accounting for acquisitions of assets. Public business entities should apply the amendments in this Update to
annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the
amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15,
2019. As the Company is an emerging growth company, it has elected to defer implementation under annual periods beginning after
December 31, 2019. The Company does not there will be a material impact to the consolidated financial statements upon adoption.
In January 2017, the FASB issued ASU 2017-04 Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. ASU 2017-07 simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment
test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying
amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value. Public business entities that are an SEC filer should adopt the amendments in this ASU for its annual or any interim
goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt
the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020.
All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any
interim goodwill impairment tests in fiscal years beginning after December 15, 2021. Early adoption is permitted for interim or annual
goodwill impairment tests performed on testing dates after January 1, 2017. For testing periods in 2017 and 2018, the Company has not
needed to proceed to Step 2 of the goodwill impairment test.
In May 2017, the FASB issued ASU 2017-09—Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting.
ASU 2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in Topic 718. ASU 2017-09 is effective for all entities for annual periods, and interim periods within those annual periods,
beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018. Adoption of this guidance did not have
a material impact on the Company’s consolidated financial statements.
F-13
In August 2018, the FASB issued ASU 2018-13—Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement. ASU 2018-13 improves the effectiveness of disclosures about fair value
measurements required under ASC 820. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of
significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty
should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other
amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance
of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption
of the additional disclosures until their effective date. The Company is currently evaluating the impact this ASU has on its consolidated
financial statements.
In August 2018, the Security Exchange Commission (SEC) adopted the final rule under SEC Release No. 33-10532, “Disclosure Update
and Simplification,” amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In
addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements.
Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a
note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for
which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company is
evaluating the impact of this guidance on its consolidated financial statements. The Company anticipates its first presentation of changes in
stockholders’ equity will be included in its Form 10-Q for the quarter ended March 31, 2019.
3. Reverse Merger
On February 27, 2018, Phunware entered into an Agreement and Plan of Merger, as amended (collectively, the “Merger Agreement”) with
Stellar Acquisition III, Inc. (“Stellar”). On December 26, 2018, the Company consummated the transaction contemplated by the Merger
Agreement (the “Reverse Merger and Recapitalization”). In connection with the closing of the Reverse Merger and Recapitalization, the
registrant changed its name from Stellar Acquisition III, Inc. to Phunware, Inc. (“Successor”). Furthermore, the holders of Phunware’s
preferred stock converted all of their issued and outstanding shares of preferred stock into shares of Phunware common stock at a
conversion ratio of one share of common stock for each share of preferred stock (the “Preferred Stock Exchange”). Subject to the terms and
conditions set forth in the Merger Agreement, at the effective time of the Reverse Merger and Recapitalization (the “Effective Time”): (i)
all shares of Phunware common stock and preferred stock (the “Phunware Stock”) issued and outstanding immediately prior to the
Effective Time (after giving effect to the Preferred Stock Exchange) converted into the right to receive the Stockholder Merger
Consideration (as defined below); (ii) each outstanding warrant to acquire shares of Phunware Stock was cancelled, retired and terminated
in exchange for the right to receive from the Successor a new warrant for shares of Successor common stock with its price and number of
shares equitably adjusted based on the conversion of the shares of Phunware Stock into the Stockholder Merger Consideration, but with
terms otherwise the same as the Phunware warrant (each, a “Replacement Warrant”); and (iii) each outstanding option to acquire Phunware
Stock (whether vested or unvested) was assumed by the Successor and automatically converted into an option to acquire shares of
Successor common stock, with its price and number of shares equitably adjusted based on the conversion of the shares of Phunware Stock
into the Stockholder Merger Consideration (each, an “Assumed Option”). The shares of Successor common stock and the Transferred
Sponsor Warrants to be transferred to Phunware stockholders are collectively referred to as “Stockholder Merger Consideration”. The
aggregate merger consideration to be paid pursuant to the Merger Agreement to Phunware stockholders amounted to approximately $301
million plus adjustments for cash on-hand as of the date of Closing. The merger consideration to be paid to Phunware stockholders was
paid in the form of number shares of Successor common stock. In addition, each holder of Phunware common and convertible preferred
stock was entitled to elect to receive such holder’s pro rata share of up to an aggregate of 3,985,244 warrants (the “Transfer Sponsor
Warrants”) to purchase shares of Successor common stock that are currently held by certain shareholders of Stellar. The per share Merger
Consideration paid to Phunware Stockholders was 0.459 shares of Successor stock for each share of Phunware Stock.
In connection with the consummation of the Reverse Merger and Recapitalization, certain holders of shares of Stellar common stock sold in
its initial public offering (“Public Shares”) exercised their right to redeem their Public Shares for cash. As a result of these redemptions, the
cash proceeds to the Company as a result of the Reverse Merger and Recapitalization was $0.4 million before transaction costs.
In addition, 6,000 shares for aggregate cash proceeds of $6.0 million from the Series A 8% convertible preferred stock financing (“Series A
Financing”) were issued in conjunction with the Business Combination. In connection with the Series A Financing, certain Stellar
shareholders transferred an aggregate of 250,000 shares of Stellar common stock and 250,000 warrants to purchase shares of Stellar
common stock to the Series A Financing investor, and 181,391 shares to certain service providers. The Sponsors are Astra Maritime Inc.
and Dominium Investments Inc., affiliated with the Company’s Chairman of the board of directors and Magellan Investments Corp. and
Firmus Investments Inc., affiliated with a member of our board of directors. See Note 10 for additional discussion on the Series A
Financing.
F-14
4. Goodwill and Other Intangible Assets
Goodwill
Changes in the Company’s goodwill balance for the years ended December 31, 2018 and 2017, are summarized in the table below.
Balance as at beginning of period
Foreign currency translation
Balance at end of period
Intangible Assets
2018
2017
25,886 $
(65)
25,821 $
25,786
100
25,886
$
$
The Company’s intangible assets, excluding goodwill, consist of intangible assets acquired in business combinations and were recorded at
their estimated fair values on the date of acquisition. The finite-lived intangible assets that are being amortized are summarized in the table
below.
Trade name
Acquired technology
In-process research and
development
Customer relationships
Order backlog
Weighted
Average
Useful Life
(years)
December 31, 2018
December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
4.6 $
5.1
5.0
5.7
1.5
$
648 $
4,828
94
4,576
329
10,475 $
(648) $
(4,763)
(94)
(4,120)
(329)
(9,954) $
- $
65
650 $
4,828
-
456
-
521 $
94
4,626
329
10,527 $
(650) $
(4,714)
(85)
(3,848)
(329)
(9,626) $
-
114
9
778
-
901
Amortization expense for the years ended December 31, 2018 and 2017, was approximately $372 and $1,284 respectively.
Expected future annual amortization expense for finite-lived intangible assets as of December 31, 2018, is as follows:
Year
2019
2020
2021
2022
5. Property and Equipment
Amortization
269
141
90
21
521
$
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-
line method over the estimated useful lives of the related assets, generally ranging from three to seven years. Leasehold improvements are
amortized over the shorter of their useful lives or the remaining terms of the related leases. The estimated useful lives of property and
equipment consist of the following:
Equipment
Furniture and fixtures
Leasehold improvements
Total property and equipment
Accumulated depreciation
Total property and equipment, net
Life (years)
3-5
7
5 or remaining lease
term
December
31,
2018
December
31,
2017
$
$
$
907 $
32
241
1,180 $
(1,114)
66 $
907
32
241
1,180
(1,052)
128
Total depreciation expense was $62 and $154 for the years ended December 31, 2018 and 2017, respectively.
F-15
6. Accrued Expenses
Accrued expenses consist of the following:
Partner revenue share
Payroll related expenses
Taxes
Other
Total accrued expenses
December 31, December 31,
2018
2017
$
$
201 $
2,496
123
208
3,028 $
6,522
1,545
118
611
8,796
During 2018, an application transaction partner agreed to release the Company from its liability to them in the amount of $6,322. This
amount had previously been recorded as a reduction in revenue of $2,907 and $3,415 for the years ended December 31, 2017 and 2016,
respectively. The Company recorded $6,322 related to the release of this liability as net revenues for year ended December 31, 2018 in its
consolidated statement of operations and comprehensive loss.
7. Factoring Agreement
On June 15, 2016 the Company entered into a factoring agreement with CSNK Working Capital Finance Corp. (d/b/a Bay View Funding)
(“Bay View”) whereby it sells select accounts receivable with recourse.
Under the terms of the agreement, Bay View may make advances to the Company of amounts representing up to 80% of the net amount of
eligible accounts receivable. The factor facility was collateralized by a general security agreement over all the Company’s personal
property and interests. Fees paid to Bay View for factored receivables are 1.80% for the first 30 days and is and 0.65% for every ten days
thereafter, to a maximum of 90 days total outstanding. The Company bears the risk of credit loss on the receivables. These receivables are
accounted for as a secured borrowing arrangement and not as a sale of financial assets.
Factor expense of $718 and $391 for the years ended December 31, 2018 and 2017 respectively, is recorded as interest expense in other
expense on the consolidated statements operations and comprehensive loss. The amount of the factored receivables outstanding was $2,434
and $1,816 as of December 31, 2018 and 2017, respectively. There was $566 and $1,184 available for future advances as of December 31,
2018 and 2017 respectively.
8. Commitments and Contingencies
Leases
The Company has operating office space leases in Austin, Texas; Newport Beach, California; San Diego, California; and Miami, Florida.
Rent expense under operating leases totaled $643 and $634 for the years ended December 31, 2018 and 2017, respectively.
Future minimum annual lease payments under the Company’s operating leases are as follows:
Future minimum lease obligations years ended December 31,
2019
2020
2021
2022
2023
Thereafter
Total
Litigation
Lease
Obligations
573
164
119
119
59
-
1,034
$
$
On September 26, 2017, we filed a breach of contract complaint against Uber Technologies, Inc. seeking approximately $3 million (plus
interest) for unpaid invoices for advertising campaign services provided for Uber in the first quarter of 2017. The case,
captioned Phunware, Inc. v. Uber Technologies, Inc., Case No. CGC-17-561546 was filed in the Superior Court of the State of California
County of San Francisco. On November 13, 2017, Uber generally denied the allegations in our complaint and also filed a cross-complaint
against us and Fetch — the advertising agency Uber retained to run its mobile advertising campaign for the period 2014 through the first
quarter of 2017 (the “Fetch Campaign”), asserting numerous fraud and contract-based claims. All the claims stem from Uber’s assertion
that Fetch and/or We (and/or other-as-yet-unidentified ad networks and publishers) are liable for the fraud-infested Fetch Campaign, under
which Uber overpaid Fetch and mobile advertising providers due to fraudulent attribution for installments of the Uber application. Uber
does not allege any specific dollar amount that it is seeking in damages against either of the named cross-defendants (Fetch and Phunware).
We filed a motion to dismiss the cross-complaint, which was heard on February 7, 2018. The motion was granted in part and denied in part
by the Court. On April 16, 2018, the action was designated complex, and the matter has been assigned for all purposes to Judge Wiss of the
Superior Court of California, San Francisco County (Department 305). Uber and Fetch have reached an agreement in principle to settle
Uber’s claims against Fetch on terms that have not been disclosed to Phunware at this time. The Court has set a trial date of August 12,
2019. The parties have exchanged documents in discovery and depositions are underway. We maintain that our claims against Uber are
meritorious and that Uber’s claims against us are not. However, we make no predictions on the likelihood of success of prevailing on our
contract action against Uber or on the likelihood of defeating Uber’s claims against us.
F-16
On September 8, 2017, the Company and Greater Houston Convention and Visitors Bureau (“GHCVB”) initiated litigation in a breach of
contract dispute. The case is captioned Greater Houston Convention and Visitors Bureau v. Phunware, Inc., Cause No. 2017-58894, in the
District Court of Harris County, Texas. The dispute concerns an October 2016 agreement for us to develop a mobile application and
advertising campaign for GHCVB. In April 2018, the parties mediated this dispute with the assistance of a private mediator. The mediation
was successful and Phunware was awarded $485, which was paid to us in April 2018 and recorded as net revenues in the consolidated
statement of operations and comprehensive loss for the year ended December 31, 2018. Each side was responsible for their own attorneys’
fees.
From time to time, the Company is and may become involved in various legal proceedings in the ordinary course of business. The
outcomes of our legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to our operating
results and cash flows for a particular reporting period. In addition, for the matters disclosed above that do not include an estimate of the
amount of loss or range of losses, such an estimate is not possible, and we may be unable to estimate the possible loss or range of losses
that could potentially result from the application of non-monetary remedies.
9. PhunCoin
In June 2018, PhunCoin, Inc., the Company’s wholly-owned subsidiary, launched an offering pursuant to Rule 506(c) of Regulation D as
promulgated under the Securities Act of rights (the “Rights”) to acquire PhunCoin (the “Token”).
PhunCoin, Inc. accepts payment in the form of cash and digital currencies for purchases of the Rights. PhunCoin, Inc. plans to sell between
$10 million and $100 million of the Rights, which will entitle the Rights holders to receive between approximately 8 billion and 30.5 billion
of PhunCoin. 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 Token Generation Event (as defined below) before taking into
consideration an applicable discount rate, which is based on the time of the purchase, (early purchasers will receive a larger discount rate).
Through December 31, 2018, the Company received cash proceeds from its Rights offering of $990, pursuant to which the holders of the
Rights will receive an aggregate of approximately 470.25 million PhunCoin if the Token Generation Event occurs. The Company recorded
proceeds from the Rights sale as current deferred revenue in its consolidated balance sheet.
The rights, privileges, and obligations of Rights holders are set forth as follows:
Issuance of PhunCoin Tokens
The PhunCoin is expected to be issued to Rights holders the earlier of (i) the launch of PhunCoin’s, Inc.’s blockchain technology enabled
rewards marketplace and data exchange (“Token Generation Event”), (ii) one (1) year after the issuance of the Rights to the purchaser, or
(iii) the date PhunCoin, Inc. determines that it has the ability to enforce resale restrictions with respect to PhunCoin pursuant to applicable
federal securities laws. Proceeds from the Rights offering are generally not refundable if the Token Generation Event is not consummated;
however, the Company believes PhunCoin, Inc. has a contractual obligation to use good faith efforts to issue a Token to Rights holders
under the Token Rights Agreement.
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 PhunCoin, Inc. may extend at its sole discretion if a
Token Generation Event has not occurred. Upon termination of the Token Rights Agreement, PhunCoin, Inc. has no further obligation to
the Rights holder.
Dissolution Event
A dissolution event occurs if there has been (i) a voluntary termination of PhunCoin, Inc.’s operations, (ii) a general assignment for the
benefit of PhunCoin, Inc.’s 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 PhunCoin, Inc.
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 PhunCoin, Inc.in its operations or for the development of the PhunCoin Ecosystem, such
remaining proceeds would be distributed pro rata to purchasers in the Rights offering following any distributions to holders of PhunCoin,
Inc.’s 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, PhunCoin, Inc. or any subsidiaries of the Company.
F-17
10. Series A Convertible Preferred Stock
In connection to the consummation of the Reverse Merger and Recapitalization, Phunware issued 6,000 shares to a single investor for
aggregate cash proceeds of $6.0 million from the Series A 8% convertible preferred stock financing (“Series A Financing”) with stated
value of $1,000 per share. The Company deposited $5.5 million of the $6 million proceeds into a restricted escrow account in accordance
with the securities purchase agreement entered into with the investor. All 6,000 shares were outstanding at December 31, 2018.
The shares are mandatorily redeemable in cash at the following schedule; (i) 104% of the aggregate value of three thousand (3,000) shares
on the 30 day anniversary of the issuance; (ii) 104% of the aggregate value of two thousand five hundred (2,500) shares on the 60th
anniversary of the original issue; and (iii) 104% of the aggregate value of five hundred (500) shares of the 90th anniversary of the original
issue.
The Preferred Stock is also convertible into shares of the Company’s common stock at the option of the holder at a price of $11.50 per
share, subject to adjustments for stock dividends, stock splits and other recapitalization type events and antidilutive events which would
include subsequent issuances of equity or equity linked securities at prices more favorable than the conversion price of these preferred
shares. Generally, the Preferred Stock does not have voting rights. Should the holder wish to convert, not later than two days, the Company
shall deliver to the holder the number of conversion shares being acquired upon the conversion of the Preferred Stock. Should the holder
elect to convert, the Company must deliver shares free of restrictive legends and trading restrictions by June 26, 2019. The Company is
currently undertaking the process to register all shares related to the Series A Financing that could be converted.
In the event of liquidation, dissolution or winding up of the Company the Preferred Stock would be entitled to receive assets ahead of the
Company’s common stockholders.
In accordance with ASC 480, redemption provisions not solely within the control of the Company require the security to be classified
outside of permanent equity.
Total preferred stock authorized to be issued as of December 31, 2018 was 100,000,000, with a par value of $0.0001 per share.
11. Stockholders’ Equity
Common Stock
Total common stock authorized to be issued as of December 31, 2018 was 1,000,000,000, with a par value of $0.0001 per share. At
December 31, 2018 and 2017, there were 27,253,457 and 24,559,771 shares outstanding, respectively.
In 2018 and 2017, the Company completed several closings of stock financing. During 2018 and 2017, the Company issued 1,085,096 and
47,364 shares for cash proceeds of $9,565 and $408, net of issuance costs, respectively.
As a result of the Reverse Merger and Recapitalization, on December 26, 2018, Stellar shareholders held 1,519,937 shares. Shareholders of
Phunware forfeited 187,188 shares to receive 3,985,244 Transfer Sponsor Warrants.
Dividends
Dividends are paid on a when-and-if-declared basis. The Company did not declare any dividends during 2018 or 2017.
Warrants
In 2012, the Company issued a warrant to purchase an aggregate of 14,866 shares of the Company’s common stock with an exercise price
of $5.54 per share to a banking institution with which the Company had a revolving line of credit. These warrants are fully vested. As of
December 31, 2018, and December 31, 2017, the holder have warrants to purchase 14,866 shares remain outstanding. At December 31,
2018, the Company has 14,866 shares of common stock reserved to permit exercise of the outstanding warrant.
During 2018, but prior to the Reverse Merger and Recapitalization, the Company issued warrants to purchase an aggregate 1,085,059
shares of the Company’s common stock with an exercise price of $9.22 per share. The term of the warrants is the earlier of (i) the fifth
anniversary of the date of issuance, (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 shareholders 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. These
warrants are fully vested.
F-18
At the time off issuance, the warrants were issued in conjunction with a preferred stock offering from the predecessor entity. The fair value
of the warrants was determined using the probability-weighted expected return method at the time of each Series F convertible preferred
stock close date. The probability-weighted expected return method is based on an estimate of expected fair value as analyzed through
various liquidity scenarios. Fair value is determined for a given scenario at the time of the future liquidity event and discounted back to the
valuation date using a risk-adjusted discount rate. To determine fair value, the present values, under each scenario are weighted based on
the expected probability of each scenario occurring. The fair value of the warrants at time of issuance, determined using the probability-
weighted expected return method, was $396, which was recorded as a reduction to the Series F convertible preferred stock. In addition, the
Company continues to assess the fair value of the Series F convertible preferred stock warrants on a periodic basis. Changes to the fair
value are recorded in other income (expense) in the consolidated statements of operations and comprehensive loss. The Company recorded
$1,329 as a change in fair value of these warrants for year ended December 31, 2018. As a result of the Reverse Merger and
Recapitalization, the warrant liability was reclassified into additional paid-in-capital. As of December 31, 2018, warrants for an aggregate
of 1,085,059 common shares remain outstanding, for which the Company has reserved this number of shares to permit the exercise of the
warrants.
At December 31, 2018 and 2017, the Company had 6,900,610 common stock warrants (the “Public Warrants”) outstanding trading under
the Nasdaq ticker symbol PHUNW. Under the terms of the warrant agreement, the Company has agreed to use its best efforts to file a new
registration statement under the Securities Act to register the shares of common stock underlying the Public Warrants, following the
completion of the Reverse Merger and Recapitalization. Each Public Warrant entitles the holder to purchase one share of common stock at
an exercise price of $11.50. No fractional shares will be issued upon exercise of the Public Warrants. As of December 31, 2018 and 2017,
the Public Warrants were not exercisable; however, they Public Warrants will become exercisable 30 days after the completion of the
Reverse Merger and Recapitalization and will expire five years after the completion of the Reverse Merger and Recapitalization or earlier
upon redemption or liquidation. If the Company is unable to deliver registered shares of common stock to the holder upon exercise of
Public Warrants during the exercise period, there will be no net cash settlement of these Public Warrants and the Public Warrants will
expire worthless. Notwithstanding anything to the foregoing, if any such registration statement has not been declared effective by the 90th
day following the closing of the Reverse Merger and Recapitalization, holders of the Public Warrants shall have the right, during the
period beginning on the 91st day after the closing of the Reverse Merger and Recapitalization and ending upon such registration statement
being declared effective by the Securities and Exchange Commission, and during any other period when the Company shall fail to have
maintained an effective registration statement covering the shares of common stock issuable upon exercise of the Public Warrants, the
holders may exercise their Public Warrants on a cashless basis pursuant to an available exemption from registration under the Securities Act
of 1933, as amended. If an exemption from registration is not available, holders will not be able to exercise their warrants on a cashless
basis. Once the Public Warrants become exercisable, the Company may redeem the outstanding Public Warrants in whole and not in part at
a price of $0.01 per Public Warrant upon a minimum of 30 days’ prior written notice of redemption, only in the event that the last sale price
of the Company’s shares of common stock equals or exceeds $21.00 per share for any 20 trading days within the 30-trading day period
ending on the third trading day before the Company sends the notice of redemption to the Public Warrant holders.
The Company also has 10,182,060 and 7,970,488 Private Placement Warrants outstanding at December 31, 2018 and 2017, respectively
(the “Private Placement Warrants”). Each Private Placement Warrant entitles the holder to purchase one share of common stock at $11.50
per share. The Private Placement Warrants (including the common stock issuable upon exercise of the Private Placement Warrants) will not
be transferable, assignable or salable until 30 days after the completion of the Reverse Merger and Recapitalization. The Private Placement
Warrants will be exercisable for cash (even if a registration statement covering the common stock issuable upon exercise of such warrants
is not effective) or on a cashless basis, at the holder’s option and will not be redeemable in each case so long as they are still held by the
initial purchasers or their affiliates. Of the Public Placement Warrants above, 3,985,244 were issued to Phunware shareholders and
transferred from certain warrant holders of Stellar in the Reverse Merger and Recapitalization. The Company issued 2,211,572 Private
Placement Warrants to the Sponsors as repayment in full for the promissory notes at the closing of the Reverse Merger and
Recapitalization. These are also Private Placement Warrants.
Unit Purchase Option
The Company sold to the underwriters for initial public offering in 2016 an option to purchase up to a total of 130,000 units, at an exercise
price of $11.50 per unit. The units are comprised of one share of common stock and one warrant to purchase common stock. The unit
purchase option may be exercised for cash or on a cashless basis, at the holder’s option, at any time during the period commencing on the
closing of the Reverse Merger and Recapitalization and terminating on the fifth anniversary of the Reverse Merger and Recapitalization.
The units issuable upon exercise of this option are identical to those offered in the Company’s initial public offering in 2016. The unit
purchase option may be exercised for cash or on a “cashless” basis, at the holder’s option, such that the holder may use the appreciated
value of the unit purchase option (the difference between the exercise prices of the unit purchase option and the underlying Warrants and
the market price of the Units and underlying ordinary shares) to exercise the unit purchase option without the payment of cash.
As of December 31, 2018, and 2017, there were 130,000 unit purchase options outstanding.
PhunCoin Warrant
In 2018, the Company issued warrants to receive an aggregate of approximately 27.4 billion PhunCoins to sixty-eight (68) stockholders.
Should the Company complete a Token Generation Event, the stockholders would receive their requisite amount of PhunCoin. The
Company believes there is no traditional “exercise period” or ‘term” as with other typical embedded features, and the PhunCoin warrants
were originally issued in conjunction with the Company’s Series F Preferred Stock financing. The PhunCoin warrants lack characteristics
of financial instruments and derivatives. In addition, the PhunCoin warrants do not obligate the Company to achieve the Token Generation
Event or launch and distribute the PhunCoins to the warrantholders. Currently, there is no market for PhunCoin, and they do not exist.
Accordingly, at the time of the issuance, the Company has determined there is no value assigned to the warrants of PhunCoin issued to the
stockholders.
F-19
12. Stock-Based Compensation
2018 Equity Incentive Plan
In connection with the consummation of the Reverse Merger and Recapitalization, our board of directors adopted, and our stockholders
approved, the 2018 Equity Incentive Plan (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 to the Successor or any parent or subsidiary, 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.
A total of 2,729,416 shares of common stock are reserved for issuance pursuant to the 2018 Plan. 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 Reverse Merger and Recapitalization,
are assumed in connection with the Reverse Merger and Recapitalization, 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, on or after the Reverse Merger and
Recapitalization, are forfeited to or repurchased by us, with the maximum number of shares of common stock that may be added to the
2018 Plan pursuant to the foregoing equal to 2,372,893. Currently, no awards have been granted under the 2018 Plan.
2009 Equity Incentive Plan
In 2009, the Company adopted its 2009 Equity Incentive Plan (the “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
is generally equal to the value of the Company’s common stock on the date of grant, as determined by the Company’s Board of Directors.
The awards are exercisable and vest, 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 Plan allows for options to be immediately exercisable, subject to the Company’s right of
repurchase for unvested shares at the original exercise price. The total amount received in exchange for these shares has been included in
accrued expenses on the accompanying consolidated balance sheets and is reclassified to equity as the shares vest. As of December 31,
2018 and 2017, 40,707 and 22,451 shares were unvested amounting to $34 and $12 in accrued expenses, respectively. Effective with the
Reverse Merger and Recapitalization, no additional grants will be made under the Plan. The Plan had 0 and 1,932,300 shares of common
stock reserved for issuance as of December 31, 2018 and 2017, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation under provisions which require that share-based payment transactions with
employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting
period. The amount of expense recognized during the period is affected by subjective assumptions, including estimates of the Company’s
future volatility, the expected term for its stock options, the number of options expected to ultimately vest, and the timing of vesting for the
Company’s share-based awards.
The Company uses a Black-Scholes option-pricing model to estimate the fair value of its stock option awards. The calculation of the fair
value of the awards using the Black-Scholes option-pricing model is affected by the Company’s stock price on the date of grant as well as
assumptions regarding the following:
● Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the
expected life of the award. The Company’s estimated volatility through December 31, 2018, was based on a weighted average of the
historical stock volatilities of similar peer companies whose stock prices were publicly available. The calculation of estimated
volatility is based in part on historical stock prices of these peer entities over a period equal to the expected life of the awards. The
Company may continue to use the historical volatility of peer entities when it does not have a sufficient trading history for its
common stock. As more historical data for its common stock becomes available, the Company will begin to use historical stock
price volatility to determine expected stock price volatility.
● The expected term represents the period of time that awards granted are expected to be outstanding. Through December 31, 2018,
the Company calculated the expected term using the simplified method as the Company did not have enough historical data to
allow for a weighted average term based on historical exercise patterns.
● The risk-free interest rate is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the stock option award is
granted with a maturity equal to the expected term of the stock option award.
● The assumed dividend yield is based on the Company’s expectation that it will not pay dividends in the foreseeable future.
The Company uses historical data to estimate the number of future stock option forfeitures. Stock-based compensation recorded on the
Company’s consolidated statements of operations and comprehensive loss is based on awards expected to ultimately vest and has been
reduced for estimated forfeitures. The Company’s estimated forfeiture rates may differ from its actual forfeitures, which would affect the
amount of expense recognized during the period.
F-20
Valuation of Stock Options
The assumptions used to compute stock-based compensation costs for the stock options granted during the years ended December 31 are as
follows:
Weighted average risk-free rate
Expected dividend yield
Weighted average expected life (years)
Weighted average volatility
A summary of the Company’s stock option activity under the Plan and related information is as follows:
Year Ended
December 31,
2018
December 31,
2017
2.51%
—
6.08
56.87%
2.00%
—
6.84
67.70%
12/31/2016 Ending Outstanding
Granted
Exercised
Cancelled/Expired
12/31/2017 Beginning Outstanding
Granted
Exercised
Cancelled/Expired
12/31/2018 Ending Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic
Value
0.54
0.52
0.45
0.53
0.54
1.11
0.58
0.78
0.90
7.62 $
24
7.18 $
53
8.12 $
71,332
Number of
Shares
1,226,739 $
432,148
(53,251)
(188,263)
1,417,373 $
1,770,225
(293,778)
(528,997)
2,364,823 $
Options vested and exercisable
1,161,287 $
0.57
5.75 $
35,411
The weighted average grant-date fair value of stock options granted during the years ended December 31, 2018 and 2017, was $0.15 and
$0.28, respectively. The total fair value for options vested during the years ended December 31, 2018 and 2017, was $343 and $113,
respectively. The intrinsic value is the difference between the estimated fair value of the Company’s common stock at the date of exercise
and the exercise price for in-the-money options. The aggregate intrinsic value of options at December 31, 2018 is based on the Company’s
stock price trading price on Nasdaq capital markets. The aggregate intrinsic value of options at December 31, 2017, is based on the
Company’s estimated stock price on that date of $0.24 per share. As of December 31, 2018 and 2017, there was $640 and $181 of
unrecognized compensation expense, respectively, for stock options and awards that is expected to be recognized on a straight-line basis
over a weighted average period of approximately 2.7 years. There were 293,778 and 53,251 options exercised in 2018 and 2017,
respectively, with an aggregate intrinsic value of $483 and $4, respectively.
Compensation Cost
Compensation cost that has been included on the Company’s consolidated statements of operations for all stock-based compensation
arrangements for the years ended December 31 is detailed as follows:
Stock-based compensation
Cost of revenues
Sales and marketing
General and administrative
Research and development
Total stock-based compensation
13. Income Taxes
Year Ended
December 31, December 31,
2018
2017
$
$
45 $
42
313
50
450 $
23
25
42
28
118
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.
The Company has filed a change in accounting method relating to deferred revenue to adopt Internal Revenue Service Revenue Procedure
2004-34 with its 2017 tax returns. This change will revise the recognition of deferred revenue from a cash basis to an approach required
under the Revenue Procedure. The net effect of this change is reflected in both the calculation of the current tax liability and taxes payable
as well as the deferred tax balances.
F-21
For the years ended December 31, 2018 and 2017, the Company had net losses before income taxes of $10.2 million and $26.0 million,
respectively. Net losses relating to U.S. operations for were $9.9 million and $25.8 million, respectively.
The difference between income taxes expected at the U.S. federal statutory income tax rate of 21% and the reported income tax (benefit)
expense are summarized as follows:
Income Tax at Statutory Rate
Valuation allowance
State income tax, net of federal benefit
Business tax credit net of reserves
Non-deductible expenses
Foreign income taxes at different rate
Income tax benefit
Effective tax rate
The provision expense (benefit) for income taxes consists of the following:
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Foreign
Total deferred
Total
The components of net deferred income taxes consist of the following:
Deferred tax assets:
Net operating loss
Reserves and accruals
Tax credits
Gross deferred tax assets
Less valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Amortization of acquired intangibles
Total deferred tax liabilities
Net deferred tax liabilities
December 31,
2018
2017
(2,138) $
2,266
(521)
(325)
341
3
(374) $
3.67%
(8,856)
9,376
(518)
(224)
88
46
(88)
0.34%
$
$
Year Ended December 31,
2018
2017
$
$
$
$
— $
13
—
13
(346)
(41)
—
(387)
(374) $
—
5
—
5
(102)
9
—
(93)
(88)
December 31,
2018
2017
24,280 $
2,836
1,349
28,465
19,060
5,405
763
25,228
(28,401)
64
(25,148)
80
(64)
(64)
0 $
(467)
(467)
(387)
As of December 31, 2018, the Company had net operating loss carryforwards of $98.3 million and $51.0 million for federal and state
income tax purposes, respectively. The federal net operating losses of $85.7 million 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, $12.6 million 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, 2018, the Company had R&D credit carryforwards of approximately $948 and $500 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.
F-22
Utilization of the net operating losses (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 50 percentage points of the outstanding stock of a company by certain stockholders.
As of December 31, 2018, the Company had not yet completed its analysis of the deferred tax assets for its NOL and tax credits. The future
utilization of the Company’s 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. The Company has not yet
determined whether such an ownership change has occurred. In order to make this determination, the Company will need to complete an
analysis regarding the limitation of the net operating loss.
The Company has established a full valuation allowance for its deferred tax assets due to uncertainties that preclude it from determining
that it is more likely than not that the Company will be able to generate sufficient taxable income to realize such assets. The Company
monitors positive and negative factors that may arise in the future as it assesses the need for a valuation allowance against its deferred tax
assets. As of December 31, 2018 and 2017, the Company has a valuation allowance of $28,401 and $25,148 respectively, against its
deferred tax assets.
The Company accounts for the provisions under the Income Taxes topic of the ASC which addresses accounting for the uncertainty in
income taxes. The evaluation of a tax position in accordance with this topic is a two-step process. The first step involves recognition. The
Company determines whether it is more likely than not that a tax position will be sustained upon tax examination, including resolution of
any related appeals or litigation, based on only the technical merits of the position.
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,
2018
2017
$
889 $
594
166
—
461
—
—
—
—
295
—
—
889
Unrecognized tax benefits, beginning of period
Tax positions taken in prior periods:
Gross increases
Gross decreases
Tax positions taken in current period:
Gross increases
Settlements
Lapse of statute of limitations
Unrecognized tax benefits, end of period
$
1,516 $
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had 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, 2018 and 2017.
The Company is subject to taxation in the United States and various state jurisdictions. The Company’s tax years from inception are subject
to examination by the United States and state taxing authorities due to the carryforward of unutilized NOLs.
On December 22, 2017, the United States enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An
Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax
Act”) (previously known as “The Tax Cuts and Jobs Act”). The Tax Act significantly revised the U.S. corporate income tax regime by,
among other things, lowering the corporate tax rate from 35% to 21%. The Tax Act reduced the U.S. corporate income tax rate from 35%
to 21%, effective January 1, 2018. The Company re-measured its deferred tax assets and liabilities as of December 31, 2017, applying the
reduced corporate income tax rate and recorded a provisional decrease to the deferred tax assets and liabilities of $12.7 million, with a
corresponding adjustment to the valuation allowance.
F-23
Effective January 1, 2018, the Company is subject to several provisions of the Tax Act, including new taxes on certain foreign-sourced
earnings, and related party payments, also referred to as the Global Intangible Low-Taxed Income (“GILTI”) and Foreign Derived
Intangible Income (“FDII”) and the Base Erosion and Anti-Abuse Tax (“BEAT”). The Company does not meet the revenue threshold for
BEAT. For the GILTI and FDII computations, because the foreign subsidiaries of the Company have a cumulative net deficit position and
current year losses, there is no impact of GILTI and FDII for December 31, 2018. The Company has elected to account for potential taxes
due on future U.S. inclusions in taxable income related to GILTI using a period cost method. The Company will continue to monitor the
forth coming regulations and additional guidance of the GILTI, FDII, and BEAT provision under the Tax Act, which are complex and
subject to continuing regulatory interpretation by the IRS.
As required by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Act, we have finalized our accounting
analysis based on the guidance and regulations available as of December 31, 2018. We determined that the impact of the Tax Act is a
decrease to the deferred tax assets and liabilities of $12.7 million with a corresponding offset to the valuation allowance resulting in no
change to the Company’s effective tax rate.
14. Domestic and Foreign Operations
The Company generates revenue in domestic and foreign regions. Net revenues attributed to the United States and international
geographies are based upon the country in which the customer is located. The United Kingdom accounted for 21% and 14% of total
revenue for the years ended December 31, 2018 and 2017, respectively. Information about these operations is presented below:
Net revenues
United States
Europe
Other international revenue
Total net revenue
December 31,
2018
2017
$
$
24,477 $
6,358
48
30,883 $
21,343
3,708
1,671
26,722
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, 2018 and 2017, all of the Company’s identifiable long-lived assets were in the United States.
15. Related-Party Transactions
World Wrestling Entertainment (WWE) and Cisco Systems (Cisco) are investors in the Company’s Series E Preferred Stock. WWE and
Cisco are also customers of the Company. The following table sets forth the net revenues generated for the year ended December 31, 2018
and 2017, as well as the accounts receivable balances as of December 31, 2018 and 2017 for WWE and Cisco:
World Wrestling Entertainment
Cisco Systems
Net Revenues
Year Ended
Accounts Receivable
as of
December 31, December 31, December 31, December 31,
2018
2017
2018
2017
$
$
— $
1,724 $
1,201 $
10 $
— $
— $
—
—
As consideration for the Transfer Sponsor Warrants transferred to Phunware shareholders, a promissory note was issued to the Sponsors
(the “Transfer Sponsor Warrant Note”). The amount of the note was approximately $1,993, which represented $0.50 per warrant
transferred to former stockholders of Phunware. The Transfer Sponsor Warrant Note bears no interest. The Transfer Sponsor Warrants have
an exercise price of $11.50 per share. The Transfer Sponsor Warrant Note shall mature on December 26, 2019. The Transfer Sponsor
Warrant Note was subsequently waived and forgiven by the noteholders.
With the Reverse Merger and Recapitalization, the Company assumed $255 in payables from Stellar for Nautilus Energy Management
Corporation, an affiliate of two members of the Company’s board of directors.
16. Subsequent Events
The Company has evaluated subsequent events through March 19, 2019.
On January 15, 2019, Phunware and the holders of the Transfer Sponsor Warrant Notes agreed to amend, waive and forgive the Transfer
Sponsor Warrant Notes in their entireties, effective as of December 26, 2018. The waiver of the Transferred Sponsor Warrant Note had no
effect on the holder of outstanding shares of Phunware stock (as determined immediately prior to the Merger) right to receive, should they
have elected, the Transfer Sponsor Warrants as consideration in the Reverse Merger and Recapitalization.
On January 18, 2019, PhunCoin, Inc. commenced an offering of up to $1,070 of Rights pursuant to Regulation CF. Through the date noted
above the Company has commitments of approximately $134, before intermediary fees, for an aggregate of approximately 67.1 million
PhunCoin.
On January 25, 2019 the holder of the Series A convertible preferred stock redeemed 3,000 shares. The Company paid the holder $3,120 as
a result of this redemption in accordance with terms of the Series A Financing. Furthermore, on February 24, 2019, the holder redeemed
2,500 shares of Series A convertible preferred stock in accordance with the Terms of the Series A financing. The Company paid $2,600 to
the holder. Of the proceeds paid to the holder for both redemptions, $5.5 million was from the restricted cash account, and $220 from the
Company’s operating account.
Through the date noted above, the Company received cash exercises of warrants for the purchase of 585,396 shares of common stock for
aggregate gross proceeds of approximately $5,820, of which $5,728 was received in cash, $92 was received in digital currencies.
Furthermore, 8,272,023 warrants were exercised via cashless provisions that resulted in the issuance of 7,517,334 shares of common stock.
The Company further received cashless exercises of 113,750 units that resulted in the issuance of 103,837 shares and 103,837 warrants.
The warrants issued have the same terms as the Public Warrants.
F-24
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 19, 2019
Phunware, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
By:
/s/ Alan S. Knitowski
Name: Alan S. Knitowski
Title: Chief Executive Officer
Signature
/s/ Alan S. Knitowski
Alan S. Knitowski
/s/ Matt Aune
Matt Aune
/s/ Keith Cowan
Keith Cowan
/s/ Prokopios Tsirigakis
Prokopios Tsirigakis
/s/ Randall Crowder
Randall Crowder
/s/ Lori Tauber Marcus
Lori Tauber Marcus
/s/ Kathy Tan Mayor
Kathy Tan Mayor
/s/ George Syllantavos
George Syllantavos
Title
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Accounting and Financial Officer)
Director
Date
March 19, 2019
March 19, 2019
March 19, 2019
Chair of the Board of Directors
March 19, 2019
Chief Operating Officer and Director
March 19, 2019
Director
Director
Director
61
March 19, 2019
March 19, 2019
March 19, 2019
Exhibit 14.1
PHUNWARE, INC.
CODE OF BUSINESS CONDUCT AND ETHICS
(Effective as of December 26, 2018)
TABLE OF CONTENTS
INTRODUCTION
YOUR RESPONSIBILITIES
GENERAL STANDARDS OF CONDUCT
Overview
Compliance with law
Environmental compliance
No discrimination or harassment
Health and safety
AVOIDING CONFLICTS OF INTERESTS
Overview
Outside employment and directorships
Financial interests in other companies
Transactions with the Company
Corporate opportunities
Loans by the Company
Improper benefits
Election or appointment to public office
Guidance and approvals
PUBLIC COMMUNICATIONS
Public communications and filings
Communication procedures
FINANCIAL REPORTING
Overview
Compliance with rules, controls and procedures
Accuracy of records and reports
Intentional misconduct
Dealing with auditors
Obligation to investigate and report potential violations
Keeping the Audit Committee informed
SAFEGUARDING COMPANY ASSETS
Overview
Misuse of company computer equipment
Protecting the Company’s information
Prohibition on insider trading
Maintaining and managing records
-i-
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TABLE OF CONTENTS
(continued)
RESPONSIBILITIES TO OUR CUSTOMERS, SUPPLIERS AND COMPETITORS
Overview
Improper payments
Gifts and entertainment
Selecting suppliers
Handling the nonpublic information of others
Improperly obtaining or using assets or information
Free and fair competition
WORKING WITH GOVERNMENTS
Overview
Government contracts
Requests by regulatory authorities
Improper payments to government officials
Political contributions
Lobbying
Immigration laws
Trade restrictions
PROCEDURAL MATTERS
Distribution
Acknowledgment
Approvals and waivers
Reporting violations
Investigations
Disciplinary action
ADDITIONAL INFORMATION
-ii-
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This Code of Business Conduct and Ethics (this “Code”) is designed to deter wrongdoing and to promote:
INTRODUCTION
● honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and
professional relationships;
● full, fair, accurate, timely and understandable disclosure in reports and documents we file with or submit to the U.S. Securities
and Exchange Commission and in our other public communications;
● compliance with applicable laws, rules and regulations;
● the prompt internal reporting of violations of this Code; and
● accountability for adherence to this Code.
This Code applies to all directors, officers and employees of Phunware, Inc. (“Phunware” or the “Company”) and its subsidiaries,
who, unless otherwise specified, will be referred to jointly as employees. Agents and contractors of the Company are also expected to read,
understand and abide by this Code.
This Code should help guide your conduct in the course of our business. However, many of the principles described in this Code are
general in nature, and the Code does not cover every situation that may arise. Use common sense and good judgment in applying this Code.
If you have any questions about applying the Code, it is your responsibility to seek guidance.
This Code is not the exclusive source of guidance and information regarding the conduct of our business. You should consult
applicable policies and procedures in specific areas as they apply. The Code is intended to supplement, not replace, the employee handbook
and the other policies and procedures of the Company.
We are committed to continuously reviewing and updating our policies and procedures. The Company therefore reserves the right to
amend, alter or terminate this Code at any time and for any reason, subject to applicable law.
-1-
● You are expected to read and understand this Code.
YOUR RESPONSIBILITIES
● You must uphold these standards in day-to-day activities and comply with all applicable policies and procedures in the Code.
● Part of your job and ethical responsibility is to help enforce this Code. You should be alert to possible violations and promptly report
violations or suspected violations of this Code. Please refer to “Procedural Matters—Reporting Violations” for more information.
● You must cooperate with investigations into possible Code violations and be truthful and forthcoming in the course of these
investigations.
● Reprisals, threats, retribution or retaliation against any person who has in good faith reported a violation or a suspected violation of
law, this Code or other company policies, or against any person who is assisting in good faith in any investigation or process with
respect to such a violation, is prohibited.
● In trying to determine whether any given action is appropriate, keep these steps in mind:
o Obtain all relevant facts.
o Assess the responsibilities and roles of those involved.
o Using your judgment and common sense, evaluate whether the action seems unethical or improper.
o
Seek guidance.
● If you are unsure about any situation or any provision of the Code or any other related policy, discuss the matter with your
manager or responsible employees in the Human Resources Department or, if applicable, the Legal Department.
-2-
Overview
GENERAL STANDARDS OF CONDUCT
Honest and ethical conduct is critical to our business. All employees, agents and contractors have a duty to comply with applicable law
and to act in an honest and ethical manner.
Compliance with law
You are responsible for complying with all laws, rules, regulations and regulatory orders applicable to the conduct of our business. If
you are located or engaging in business outside of the United States, you must comply with laws, rules, regulations and regulatory orders of
the United States, including the Foreign Corrupt Practices Act and U.S. export rules and regulations, in addition to the applicable laws of
other jurisdictions. If compliance with the Code should ever conflict with law, you must comply with the law.
You should undertake to acquire knowledge of the legal requirements relating to your duties sufficient to enable you to recognize
potential dangers and to know when to seek advice from managers or other appropriate personnel.
The Company’s employees are expected to comply with the applicable laws in all countries to which they travel, in which they operate
and where the Company otherwise does business, including laws prohibiting bribery, corruption, or the conduct of business with specified
individuals, companies, or countries. The fact that in some countries certain laws are not enforced or that violation of those laws is not
subject to public criticism will not be accepted as an excuse for noncompliance. In addition, you are expected to comply with U.S. laws,
rules, and regulations governing the conduct of business by its citizens and corporations outside the United States.
These U.S. laws, rules, and regulations, which extend to all company activities outside the United States, include but are not limited to:
(i) the Foreign Corrupt Practices Act, which prohibits directly or indirectly giving anything of value to a government official
to obtain or retain business or favorable treatment, and requires the maintenance of accurate books of account, with all company
transactions being properly recorded;
(ii) U.S. embargoes, which restrict or, in some cases, prohibit companies, their subsidiaries and their employees from doing
business with certain other countries identified on a list that changes periodically or specific companies or individuals;
(iii) export controls, which restrict travel to designated countries or prohibit or restrict the export of goods, services and
technology to designated countries, denied persons, or denied entities from the United States, or the re-export of U.S. origin goods from the
country of original destination to such designated countries, denied companies, or denied entities; and
(iv) antiboycott compliance, which prohibits U.S. companies from taking any action that has the effect of furthering or
supporting a restrictive trade practice or boycott that is fostered or imposed by a foreign country against a country friendly to the United
States or against any U.S. person.
-3-
If you have a question as to whether an activity is restricted or prohibited, seek assistance before taking any action, including giving
any verbal assurances that might be regulated by international laws.
Violations of laws, rules, regulations and orders may subject you to individual criminal or civil liability, in addition to discipline by the
Company. Violations may also subject the Company to civil or criminal liability or the loss of business.
Please also review the Company’s Global Anti-Corruption Policy for additional information regarding your compliance with the
Foreign Corrupt Practices Act and similar anti-bribery statutes.
Environmental compliance
Federal law imposes criminal liability on any person or company that contaminates the environment with any hazardous substance that
could cause injury to the community or environment. Violation of environmental laws can be a criminal offense and can involve monetary
fines and imprisonment. The Company expects employees to comply with all applicable environmental laws.
No discrimination or harassment
The Company is committed to providing a work environment that is free of discrimination and harassment. The Company is an equal
opportunity employer and makes employment decisions on the basis of merit and business needs. In addition, the Company strictly
prohibits harassment of any kind, including harassment on the basis of race, color, veteran status, religion, gender, sex, sexual orientation,
age, mental or physical disability, medical condition, national origin, marital status or any other characteristics protected under federal or
state law or local ordinance.
Health and safety
You are responsible for using good judgment to help ensure a safe and healthy workplace for all employees. This includes following
safety and health rules and practices and reporting accidents, injuries, and unsafe equipment, practices or conditions.
Violence and threatening behavior are not permitted. Employees should report to work in condition to perform their duties, free from
the influence of illegal drugs, marijuana, or alcohol. The use of illegal drugs or marijuana in the workplace will not be tolerated.
-4-
Overview
AVOIDING CONFLICTS OF INTERESTS
Your decisions and actions in the course of your employment with the Company should be based on the best interests of the Company,
and not based on personal relationships or benefits. You should seek to avoid situations where your personal activities and relationships
conflict, or appear to conflict, with the interests of the Company. This includes situations where you may have or appear to have an indirect
conflict through, for example, a significant other or a relative or other persons or entities with which you have a business, social, familial,
personal or other relationship. A conflict may also arise when you take actions or have interests that make it difficult for you to perform
your work for the Company objectively and effectively. You must disclose to your manager any interest that you have that may, or may
appear to, conflict with the interests of the Company.
If you have any questions about a potential conflict or if you become aware of an actual or potential conflict and you are not an officer
or director of the Company, you should discuss the matter with the Chief Financial Officer or, if applicable, the Legal Department (as
further described in “Procedural Matters” below). Supervisors may not authorize conflict of interest matters without first seeking the
approval of the Chief Financial Officer or, if applicable, the Legal Department. If the supervisor is involved in the potential or actual
conflict, you should discuss the matter directly with the Chief Financial Officer or, if applicable, the Legal Department. Executive officers
and directors may seek authorization from the Audit Committee of the Board of Directors, or if the Chief Financial Officer or, if applicable,
the Legal Department determines that it is not practicable or desirable for the Company to wait until the next Audit Committee meeting,
the conflict of interest matter shall be submitted to the Chairperson of the Audit Committee provided that the Chairperson of the Audit
Committee shall report to the Audit Committee at its next meeting any approval or ratification under this delegated authority. Factors that
may be considered in evaluating a potential conflict of interest are, among others:
(i) whether it may interfere with the employee’s job performance, responsibilities or morale;
(ii) whether the employee has access to confidential information;
(iii) whether it may interfere with the job performance, responsibilities or morale of others within the organization;
(iv) any potential adverse or beneficial impact on the Company’s business;
(v) any potential adverse or beneficial impact on the Company’s relationships with its customers or suppliers or other service
providers;
(vi) whether it would enhance or support a competitor’s position;
(vii) the extent to which it would result in financial or other benefit (direct or indirect) to the employee;
(viii) the extent to which it would result in financial or other benefit (direct or indirect) to one of the Company’s customers,
suppliers, or other service providers; and
(ix) the extent to which it would appear improper to an outside observer.
-5-
There are a variety of situations in which a conflict of interest may arise. While it would be impractical to attempt to list all possible
situations, some common types of conflicts are discussed below.
Outside employment, directorships and advisory roles
Unless you are a non-employee director of the Company, you may not perform services as a director, advisor, employee, agent or
contractor for a customer, a supplier or any other entity that has a business relationship with the Company or is a competitor, or may be
deemed a competitor, without approval from the Company. Non-employee directors of the Company must promptly inform the Company
of any such service.
Financial interests in other companies
You should not have a financial interest—including an indirect interest through, for example, a relative or significant other—in any
organization if that interest would give you or would appear to give you a conflict of interest with the Company. You should be particularly
sensitive to financial interests in competitors, suppliers, customers, distributors and strategic partners.
Transactions with the Company
If you have a significant financial interest in a transaction involving the Company—including an indirect interest through, for example,
a relative or significant other or a business entity—you must disclose that interest, and that interest must be approved by the Company in a
manner specified by company policy. We encourage you to seek guidance if you have any questions as to whether an interest in a
transaction is significant. If it is determined that the transaction is required to be reported under SEC rules, the transaction will be subject to
review and approval by the Audit Committee of the Board of Directors. Any dealings with a related party must be conducted in such a way
that no preferential treatment is given to that business.
Corporate opportunities
You may not directly or indirectly exploit for personal gain any opportunities that are discovered through the use of corporate property,
information or position unless the opportunity is disclosed fully in writing to the Board of Directors or its designated committee and the
Board of Directors or its designated committee declines to pursue the opportunity. Even opportunities that are acquired privately by you
may be questionable if they are related to the Company’s existing or proposed lines of business. You cannot use your position with the
Company or corporate property or information for improper personal gain, nor can you compete with the Company in any way.
Any outside association, interest, relationship or participation in a transaction that is fully disclosed to and approved by the Company
shall not be a prohibited conflict of interest. Officers and directors of the Company must fully disclose the circumstances of any actual or
foreseeable conflict of interest to the Chief Executive Officer or Chief Financial Officer of the Company or to the Chairperson of the Audit
Committee. All other individuals subject to this Code may disclose the circumstances of any actual or foreseeable conflict of interest to
their supervisor or the Compliance Officer.
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Loans by the Company
Loans from the Company to directors and executive officers are prohibited. Loans from the Company to other officers and employees
must be approved in advance by the Board of Directors or its designed committee.
Improper benefits
You may not receive any improper benefit as a result of your position with the Company.
Election or appointment to public office
You may serve in an elected or appointed public office provided that the position does not create or appear to create a conflict of
interest.
Guidance and approvals
Evaluating whether a conflict of interest exists, or may appear to exist, requires the consideration of many factors. We encourage you
to seek guidance and approval in any case where you have any questions or doubts. The Company may at any time rescind prior approvals
to avoid a conflict of interest, or the appearance of a conflict of interest, for any reason deemed to be in the best interest of the Company.
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Public communications and filings
PUBLIC COMMUNICATIONS
The Company files reports and other documents with regulatory authorities, including the U.S. Securities and Exchange Commission
and The NASDAQ Stock Market. In addition, from time to time the Company makes other public communications, such as issuing press
releases.
Depending upon your position with the Company, you may be called upon to provide information to help assure that the Company’s
public reports and communications are complete, fair, accurate and understandable. You are expected to use all reasonable efforts to
provide complete, accurate, objective, relevant, timely and understandable answers to inquiries related to the Company’s public
disclosures.
Individuals involved in the preparation of public reports and communications must use all reasonable efforts to comply with our
disclosure controls and procedures, which are designed to ensure full, fair, accurate, timely and understandable disclosure in our public
reports and communications.
If you believe that any disclosure is materially misleading or if you become aware of any material information that you believe should
be disclosed to the public, it is your responsibility to bring this information to the attention of the Chief Financial Officer or, if applicable,
the Legal Department. If you believe that questionable accounting or auditing conduct or practices have occurred or are occurring, you
should notify the Audit Committee of the Board of Directors.
Communication procedures
You may not communicate externally on behalf of the Company unless you are authorized to do so. The Company has established
specific policies regarding who may communicate information to the public, the press, market professionals (such as securities analysts,
institutional investors, investment advisors, brokers and dealers) and security holders on behalf of the Company, which is set out in more
detail in our External Communications Policy. In summary:
● Our Chief Executive Officer, Chief Financial Officer and investor relations personnel, and their authorized designees, are our
official spokespeople for financial matters.
● Our Chief Executive Officer, Chief Financial Officer and investor relations personnel, and their authorized designees, are our
official spokespeople for public comment, press, marketing, technical and other such information.
You should refer all calls or other inquiries from the press, market professionals or security holders to the Chief Financial Officer,
which will see that the inquiry is directed to the appropriate persons within the Company.
All communications made to public audiences on behalf of the Company, including formal communications and presentations made to
investors, customers or the press, require prior approval of the Chief Financial Officer.
-8-
Overview
FINANCIAL REPORTING
As a public company, we are required to follow strict accounting principles and standards, to report financial information accurately
and completely in accordance with these principles and standards, and to have appropriate internal controls and procedures to ensure that
our accounting and financial reporting complies with law. The integrity of our financial transactions and records is critical to the operation
of our business and is a key factor in maintaining the confidence and trust of our employees, security holders and other stakeholders.
Compliance with rules, controls and procedures
It is important that all transactions are properly recorded, classified and summarized in our financial statements, books and records in
accordance with our policies, controls and procedures, as well as all generally accepted accounting principles, standards, laws, rules and
regulations for accounting and financial reporting. If you have responsibility for or any involvement in financial reporting or accounting,
you should have an appropriate understanding of, and you should seek in good faith to adhere to, relevant accounting and financial
reporting principles, standards, laws, rules and regulations and the Company’s financial and accounting policies, controls and procedures. If
you are a senior officer, you should seek to ensure that the internal controls and procedures in your business area are in place, understood
and followed.
Accuracy of records and reports
It is important that those who rely on records and reports—managers and other decision makers, creditors, customers and auditors—
have complete, accurate and timely information. False, misleading or incomplete information undermines the Company’s ability to make
good decisions about resources, employees and programs and may, in some cases, result in violations of law. Anyone involved in preparing
financial or accounting records or reports, including financial statements and schedules, must be diligent in assuring that those records and
reports are complete, accurate and timely. Anyone representing or certifying as to the accuracy of such records and reports should make an
inquiry or review adequate to establish a good faith belief in their accuracy.
Even if you are not directly involved in financial reporting or accounting, you are likely involved with financial records or reports of
some kind—a voucher, time sheet, invoice or expense report. In addition, most employees have involvement with product, marketing or
administrative activities, or performance evaluations, which can affect our reported financial condition or results. Therefore, the Company
expects you, regardless of whether you are otherwise required to be familiar with finance or accounting matters, to use all reasonable efforts
to ensure that every business record or report with which you deal is accurate, complete and reliable.
Intentional misconduct
You may not intentionally misrepresent the Company’s financial performance or otherwise intentionally compromise the integrity of
the Company’s reports, records, policies and procedures.
-9-
Dealing with auditors
Our auditors have a duty to review our records in a fair and accurate manner. You are expected to cooperate with independent and
internal auditors in good faith and in accordance with law. In addition, you must not fraudulently induce or influence, coerce, manipulate or
mislead our independent or internal auditors regarding financial records, processes, controls or procedures or other matters relevant to their
engagement. You may not engage, directly or indirectly, any outside auditors to perform any audit, audit-related, tax or other services,
including consulting, without written approval from the Chief Financial Officer and the Audit Committee of the Board of Directors.
Obligation to investigate and report potential violations
You should make appropriate inquiries in the event you may see, for example:
● financial results that seem inconsistent with underlying business performance;
● inaccurate financial records, including travel and expense reports, time sheets or invoices;
● the circumventing of mandated review and approval procedures;
● transactions that appear inconsistent with good business economics;
● the absence or weakness of processes or controls; or
● persons within the Company seeking to improperly influence the work of our financial or accounting personnel, or our external
or internal auditors.
Dishonest or inaccurate reporting can lead to civil or even criminal liability for you and the Company and can lead to a loss of public
faith in the Company. You are required to promptly report any case of suspected financial or operational misrepresentation or impropriety.
Keeping the Audit Committee informed
The Audit Committee plays an important role in ensuring the integrity of our public reports. If you believe that questionable
accounting or auditing conduct or practices have occurred or are occurring, you should notify the Audit Committee of the Board of
Directors. In particular, the Chief Executive Officer and senior financial officers such as the Chief Financial Officer should promptly bring
to the attention of the Audit Committee any information of which he or she may become aware concerning, for example:
● the accuracy of material disclosures made by the Company in its public filings;
● material violations of the securities laws or other laws, rules or regulations applicable to the Company;
● material weaknesses or significant deficiencies in internal control over financial reporting;
● any evidence of fraud that involves an employee who has a significant role in the Company’s financial reporting, disclosures or
internal controls or procedures; or
● any evidence of a material violation of the policies in this Code regarding financial reporting.
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Overview
SAFEGUARDING COMPANY ASSETS
All employees, agents and contractors are responsible for the proper use of company assets. This responsibility applies to all of the
Company’s assets, including your time, work and work product; cash and accounts; physical assets such as inventory, equipment, vehicles,
computers, systems, facilities and supplies; intellectual property, such as patents, copyrights, trademarks, inventions, technology and trade
secrets; and other proprietary or nonpublic information.
● You should use all reasonable efforts to safeguard company assets against loss, damage, misuse or theft.
● You should be alert to situations that could lead to loss, damage, misuse or theft of company assets, and should report any loss,
damage, misuse or theft as soon as it comes to your attention.
● You should not use, transfer, misappropriate, loan, sell or donate company assets without appropriate authorization.
● You must take reasonable steps to ensure that the Company receives good value for company funds spent.
● You may not use company assets in a manner that would result in or facilitate the violation of law.
● You should use and safeguard assets entrusted to the Company’s custody by customers, suppliers and others in the same
manner as company assets.
Misuse of company computer equipment
You may not, while acting on behalf of the Company or while using its computing or communications equipment or facilities, either:
● access the internal computer system (also known as “hacking”) or other resource of another entity without express written
authorization from the entity responsible for operating that resource; or
● commit any unlawful or illegal act, including harassment, libel, fraud, sending of unsolicited bulk email (also known as
“spam”) in violation of applicable law, trafficking in contraband of any kind or espionage.
If you receive authorization to access another entity’s internal computer system or other resource, you must make a permanent record
of that authorization so that it may be retrieved for future reference, and you may not exceed the scope of that authorization.
Unsolicited bulk email is regulated by law in a number of jurisdictions. If you intend to send unsolicited bulk email to persons outside
of the Company, either while acting on the Company’s behalf or using its computing or communications equipment or facilities, you should
contact the Chief Financial Officer or, if applicable, the Legal Department for approval.
-11-
All data residing on or transmitted through the Company’s computing and communications facilities, including email and word
processing documents, is the property of the Company and subject to inspection, retention and review by the Company in accordance with
applicable law.
Protecting the Company’s information
In the course of your involvement with the Company, you may come into possession of information that has not been disclosed or
made available to the general public. This nonpublic information may include, among other things:
● financial data and projections, including, but not limited to, sales bookings and pipelines;
● proprietary and technical information, such as trade secrets, patents, inventions, product plans and customer lists;
● information regarding corporate developments, such as business strategies, plans for partnerships and collaborations, plans for
acquisitions or other business combinations, divestitures, major contracts, expansion plans, financing transactions and
management changes;
● other legal or regulatory developments, whether actual or threatened;
● personal information about employees; and
● nonpublic information of customers, suppliers and others.
If you have any questions as to what constitutes nonpublic information, please consult with the Chief Financial Officer or, if
applicable, the Legal Department.
All nonpublic information must only be used for company business purposes. You have an obligation to use all reasonable efforts to
safeguard the Company’s nonpublic information. You may not disclose nonpublic information to anyone outside of the Company, except
when disclosure is required by law or when disclosure is required for business purposes and appropriate steps have been taken to prevent
misuse of that information. This responsibility includes not disclosing nonpublic information on social media or in Internet discussion
groups, chat rooms, bulletin boards or other electronic media. In cases where disclosing nonpublic information is required or necessary,
you should coordinate with the Chief Financial Officer. The misuse of nonpublic information is contrary to company policy and may also
be a violation of law.
Each employee is required to sign an At Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement
that addresses the use and disclosure of confidential information of the Company.
Prohibition on insider trading
You may not directly or indirectly—through, for example, significant others, family members or controlled entities—buy or sell stocks
or other securities of the Company or any other company based on nonpublic information obtained from your work at the Company. In
addition, you may not “tip” others by providing them nonpublic information under circumstances that suggest that you were trying to help
them make an investment decision. These obligations are in addition to your obligations with respect to nonpublic information generally, as
discussed above.
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Under U.S. securities laws, it is unlawful for any person who has “material” nonpublic information about a company to trade in the
stock or other securities of that company or to disclose such information to others who may trade. Material nonpublic information is
information about a company that is not known to the general public and that a typical investor would consider important in making a
decision to buy, sell or hold securities. Violations of U.S. securities laws may result in civil and criminal penalties, including disgorgement
of profits, civil judgments, fines and jail sentences.
You should be aware that stock market surveillance techniques are becoming increasingly sophisticated, and the probability that U.S.
federal or other regulatory authorities will detect and prosecute even small-level trading is significant. Insider trading rules are strictly
enforced, even in instances when the financial transactions seem small.
You may not make an unauthorized disclosure of any nonpublic information acquired in the course of your service with the Company
or misuse material nonpublic information in securities trading. Any such actions will be deemed violations of the Company’s Insider
Trading Policy. All employees should be familiar with the Company’s policy regarding Insider Trading. If you have any questions at all
regarding trading in the Company’s securities, contact the Chief Financial Officer for guidance.
Maintaining and managing records
The Company is required by local, state, federal, foreign and other applicable laws, rules and regulations to retain certain records and to
follow specific guidelines in managing its records. Records include paper documents, email, compact discs, computer hard drives and all
other recorded information, regardless of medium or characteristics. Civil and criminal penalties for failure to comply with such guidelines
can be severe for employees, agents, contractors and the Company.
You should consult with the Chief Financial Officer or, if applicable, the Legal Department regarding the retention of records in the
case of actual or threatened litigation or government investigation. The Chief Financial Officer or, if applicable, the Legal Department will
notify you if a legal hold is placed on records for which you are responsible. A legal hold suspends all document destruction procedures in
order to preserve appropriate records under special circumstances, such as litigation or government investigations. The Chief Financial
Officer or, if applicable, the Legal Department determines and identifies what types of records or documents are required to be placed under
a legal hold. If a legal hold is placed on records for which you are responsible, you must preserve and protect the necessary records in
accordance with instructions from the Chief Financial Officer or, if applicable, the Legal Department. Records or supporting documents
that are subject to a legal hold must not be destroyed, altered or modified under any circumstance. A legal hold remains effective
until it is officially released in writing by the Chief Financial Officer or, if applicable, the Legal Department. If you are unsure whether a
document has been placed under a legal hold, you should preserve and protect that document while you check with the Chief Financial
Officer or, if applicable, the Legal Department.
Business records and communications often become public, and you should avoid exaggeration, derogatory remarks, guesswork, or
inappropriate characterizations of people and companies that can be misunderstood. This applies equally to e-mail, internal memos, and
formal reports.
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RESPONSIBILITIES TO OUR CUSTOMERS, SUPPLIERS AND COMPETITORS
Overview
You should respect the rights of, and deal fairly with, the Company’s customers, suppliers, business partners and competitors in
compliance with law. You should not take unfair advantage of anyone through deception, misrepresentation, manipulation, coercion, abuse
of privileged information or any intentional unfair business practice.
Improper payments
You should not authorize, offer, promise or give, or solicit or accept, money, gifts, entertainment, privileges, gratuities, benefits or
other items of value intended to improperly influence, directly or indirectly, any business decision or that otherwise violate law or create
the appearance of impropriety.
Gifts and entertainment
You may, from time to time, provide or accept business amenities to aid in building legitimate business relationships. Business
amenities may include gifts, meals, services, entertainment, reimbursements, loans, favors, privileges or other items of value.
Any business amenity should be consistent with customary business practice and should be reasonable and appropriate for the
circumstance. Business amenities should not be lavish or excessive. Business amenities should not violate law or create an appearance of
impropriety. You should avoid providing or accepting any cash payment, or other business amenity that can be construed as a bribe or
payoff. All company funds expended for business amenities must be accurately recorded in the Company’s books and records.
In some business situations outside of the United States, it is customary and lawful for business executives to present gifts to
representatives of their business partners. These gifts may be of more than a nominal value, and under the circumstances, returning the gifts
or paying for them may be an affront to the giver. If you find yourself in such a situation, you must report the gift to the Chief Financial
Officer or, if applicable, the Legal Department. In some cases, you may be required to turn the gift over to the Company.
Special restrictions apply when dealing with government employees. For more information, see the next section on “Working with
Governments.”
Selecting suppliers
The Company’s policy is to select suppliers based on the merits of their products, services and business practices and to purchase
supplies based on need, quality, service, price and other terms and conditions of sale. You may not establish a business relationship with
any supplier if you know that its business practices violate applicable laws.
-14-
Handling the nonpublic information of others
You must handle the nonpublic information of others responsibly and in accordance with our agreements with them. Nonpublic
information of others includes notes, reports, conclusions and other materials prepared by a company employee based on the nonpublic
information of others.
You should not knowingly accept information offered by a third party, including a customer, supplier or business partner, that is
represented as nonpublic, or that appears from the context or circumstances to be nonpublic, unless an appropriate nondisclosure agreement
has been signed with the party offering the information. You should contact the Chief Financial Officer or, if applicable, the Legal
Department to coordinate the appropriate execution of nondisclosure agreements on behalf of the Company.
Even after a nondisclosure agreement is in place, you should accept only the information that is necessary or appropriate to accomplish
the purpose of receiving it, such as a decision on whether to proceed to negotiate a deal. If more detailed or extensive information is offered
and it is not necessary or appropriate for your immediate purposes, it should be refused. If any such information is inadvertently received, it
should be transferred to the Chief Financial Officer or, if applicable, the Legal Department for appropriate disposition.
Once the Company has received nonpublic information, you should use all reasonable efforts to:
● abide by the terms of the relevant nondisclosure agreement, including any obligations with respect to the return or destruction
of the nonpublic information;
● limit the use of the nonpublic information to the purpose for which it was disclosed; and
● disseminate the nonpublic information only to those other company employees, agents or contractors with a need to know the
information to perform their jobs for the Company, as may be set forth in the relevant nondisclosure agreement.
Improperly obtaining or using assets or information
You may not unlawfully obtain or use the materials, products, intellectual property, proprietary or nonpublic information or other
assets of anyone, including suppliers, customers, business partners and competitors. You must respect the copyrights of others and may not
use software, services, or other copyrighted material, if doing so would violate the rights of a copyright holder or exceed the terms of a
license. You may not coerce or improperly induce past or present employees of other companies to disclose proprietary or nonpublic
information of their former or other employers.
Free and fair competition
It is our policy to lawfully compete in the marketplace. Our commitment to fairness includes respecting the rights of our competitors to
compete lawfully in the marketplace and abiding by all applicable laws in the course of competing.
Most countries have well-developed bodies of law designed to encourage and protect free and fair competition. These laws are broad
and far-reaching and regulate the Company’s relationships with its distributors, resellers, suppliers and customers. Competition laws
generally address the following areas: pricing practices (including predatory pricing, price fixing and price discrimination), discounting,
terms of sale, credit terms, promotional allowances, secret rebates, exclusive dealerships or distributorships, product bundling, restrictions
on carrying competing products, termination and many other practices.
Competition laws also govern, usually quite strictly, relationships between the Company and its competitors. Collusion among
competitors is illegal, and the consequences of a violation are severe. You must not enter into an agreement or understanding, written or
oral, express or implied, with any competitor concerning prices, discounts or other terms or conditions of sale; profits or profit margins;
costs; allocation of product, customers, markets or territories; limitations on production or supply; boycotts of customers or suppliers; or
bids or the intent to bid, or even discuss or exchange information on these subjects.
The Company is committed to obeying both the letter and spirit of these laws, which are often referred to as antitrust, consumer
protection, competition or unfair competition laws. Although the spirit of these laws is straightforward, their application to particular
situations can be quite complex. To ensure that the Company complies fully with these laws, you should have a basic knowledge of them
and should promptly involve the Chief Financial Officer or, if applicable, the Legal Department when questionable situations arise.
-15-
Overview
WORKING WITH GOVERNMENTS
Special rules govern our business and other dealings with governments. Employees, agents and contractors of the Company should use
all reasonable efforts to comply with all applicable laws and regulations governing contact and dealings with governments, government
employees and public officials. If you deal with governments, government employees or public officials, you should undertake to
understand the special rules that apply. If you have any questions concerning government relations, you should contact the Chief Financial
Officer or, if applicable, the Legal Department.
Government contracts
You should use all reasonable efforts to comply with all relevant laws and regulations that apply to government contracting. You
should refer any contract with any governmental entity to the Chief Financial Officer or, if applicable, the Legal Department for review and
approval.
Requests by regulatory authorities
You must cooperate with appropriate government inquiries and investigations in accordance with law. It is important, however, to
protect the legal rights of the Company with respect to its nonpublic information. All government requests for company information,
documents or investigative interviews should be referred to the Chief Financial Officer or, if applicable, the Legal Department. You should
work with the Chief Financial Officer or, if applicable, the Legal Department in responding to requests by regulatory authorities to ensure
appropriate responses and to avoid inappropriate disclosure of attorney-client privileged materials, trade secret information or other
nonpublic information. This policy should not be construed to prevent an employee from disclosing information to a government or law
enforcement agency where the employee has reasonable cause to believe that the information discloses a violation of, or noncompliance
with, a state or federal statute or regulation.
Improper payments to government officials
You may not offer any payment or business amenity to a public official or a government employee if doing so could reasonably be
construed as having any connection with the Company’s business, even if it has a nominal value or no value at all. You should be aware
that what may be permissible in dealings with commercial businesses may be deemed illegal and possibly criminal in dealings with the
government. You should contact the Chief Financial Officer or, if applicable, the Legal Department for guidance.
Whether you are located in the United States or abroad, you are also responsible for fully complying with the Foreign Corrupt
Practices Act. The Foreign Corrupt Practices Act makes it illegal to offer, pay, promise to pay or authorize to pay any money, gift or other
item of value to any foreign official, political party or candidate to assist the Company or another to obtain or retain business. All managers
and supervisory personnel are expected to monitor continued compliance with the Foreign Corrupt Practices Act.
-16-
Political contributions
The Company reserves the right to communicate its position on important issues to elected representatives and other government
officials. It is the Company’s policy to comply fully with all local, state, federal, foreign and other applicable laws, rules and regulations
regarding political contributions. The Company’s assets—including company funds, employees’ work time and company premises and
equipment—must not be used for, or be contributed to, political campaigns or political activities under any circumstances without prior
written approval.
Lobbying
You must obtain approval from the Chief Financial Officer or, if applicable, the Legal Department for any work activity that requires
lobbying communication with any member or employee of a legislative body or with any government official or employee in the
formulation of legislation. Work activity covered by this policy includes meetings with legislators or members of their staffs or with senior
executive branch officials on behalf of the Company. Preparation, research and other background activities that are done in support of such
lobbying communication are also covered by this policy even if the communication ultimately is not made.
Immigration laws
The United States and other countries impose restrictions on non-citizens visiting or working in the country. In many instances visas or
work permits must be obtained from the government. You are responsible for complying with all applicable immigration laws. If you have
any uncertainty concerning the requirements of the law, you should consult with the Chief Financial Officer or, if applicable, the Legal
Department before working in, or travelling to, a country of which you are not a citizen, or authorizing any person to do so.
Trade restrictions
A number of countries maintain controls on the destinations to which products or software may be exported. Some of the strictest
export controls are maintained by the United States against countries that the U.S. government considers unfriendly or as supporting
international terrorism. The U.S. regulations are complex and apply both to deemed exports from the United States and to deemed exports
of products from other countries when those products contain U.S.-origin components or technology. For example, software created in the
United States is subject to these regulations even if duplicated and packaged abroad. In some circumstances, an oral presentation containing
technical data made to foreign nationals in the United States or access by foreign nationals to certain technology may constitute a
controlled export. The Chief Financial Officer or, if applicable, the Legal Department can provide you with guidance on which countries
are prohibited destinations for company products or whether a proposed technical presentation or the provision of controlled technology to
foreign nationals may require a U.S. government license.
-17-
Distribution
PROCEDURAL MATTERS
All employees will receive a copy of this Code at the time they join the Company and will receive periodic updates. Agents and
contractors should also be provided with a copy of the Code.
Acknowledgment
All new employees must sign an acknowledgment form confirming that they have read the Code and that they understand and agree to
comply with its provisions. Signed acknowledgment forms will be kept in your personnel file. Failure to read the Code or to sign an
acknowledgement form does not excuse any person from the terms of the Code.
Approvals and waivers
Except as otherwise provided in the Code, the Board of Directors or its designated committee must review and approve any matters
requiring special permission under the Code for a member of the Board of Directors or an executive officer. Except as otherwise provided
in the Code, the Chief Executive Officer and, if applicable, the Legal Department must review and approve any matters requiring special
permission under the Code for any other employee, agent or contractor.
Any waiver of any provision of this Code for a member of the Board of Directors or an executive officer must be approved in writing
by the Board of Directors or its designated committee and promptly disclosed, along with the reasons for the waiver, to the extent required
by law or regulation. Any waiver of any provision of this Code with respect to any other employee, agent or contractor must be approved in
writing by the Chief Executive Officer and, if applicable, the Legal Department.
Copies of approvals and waivers will be retained by the Company.
Reporting violations
You should promptly report violations or suspected violations of this Code to the Chief Financial Officer, the Legal Department, if
any, or whistleblower hotline, by web submission at http://www.lighthouse-services.com/phunware or by phone at (833) 510-0005. If you
make an anonymous report through the hotline, please provide as much detail as possible, including any evidence that you believe may be
relevant to the issue.
If your concerns relate to accounting, internal controls or auditing matters, or if an executive officer is implicated in any violation or
suspected violation, you may also contact the Audit Committee of the Board of Directors at 7800 Shoal Creek Blvd, Suite 230-S, Austin,
Texas 78757. If you wish to remain anonymous, send an anonymous letter addressed to the Chairperson of the Audit Committee of the
Board of Directors at 7800 Shoal Creek Blvd, Suite 230-S, Austin, Texas 78757 or make a submission by calling Phunware’s anonymous
whistleblower hotline as provided above.
If you make an anonymous report, please provide as much detail as possible, including copies of any documents that you believe may
be relevant to the issue.
-18-
When reports are not made anonymously, reasonable efforts will be made to keep your identity confidential. In certain circumstances,
however, your identity may become apparent during an investigation or may need to be disclosed (e.g., in regulatory proceedings).
Accordingly, it is not possible for the Company to give a blanket guarantee of confidentiality.
Reprisals, threats, retribution or retaliation against any person who has in good faith reported a violation or a suspected violation of
law, this Code or other company policies, or against any person who is assisting in any investigation or process with respect to such a
violation, is strictly prohibited.
Investigations
The Board of Directors or its designated committee will be responsible for investigating violations and determining appropriate
disciplinary action for matters involving members of the Board of Directors or executive officers. The Board of Directors or its designated
committee may designate others to conduct or manage investigations on its behalf and recommend disciplinary action.
Subject to the general authority of the Board of Directors to administer this Code, the Chief Executive Officer, Chief Financial Officer
and, if applicable, the Legal Department will be jointly responsible for investigating violations and determining appropriate disciplinary
action for other employees, agents and contractors. The Chief Executive Officer, Chief Financial Officer and, if applicable, the Legal
Department may designate others to conduct or manage investigations on their behalf and recommend disciplinary action. The Chief
Executive Officer, Chief Financial Officer and, if applicable, Legal Department will periodically report Code violations and the corrective
actions taken to the Board of Directors or its designated committee. The Board of Directors reserves the right to investigate violations and
determine appropriate disciplinary action on its own and to designate others to do so in place of, or in addition to, the Chief Executive
Officer, Chief Financial Officer and, if applicable, the Legal Department.
The Company will promptly investigate any suspected violations. If it is determined that evidence of a violation exists, the individual
subject to investigation will be notified. The subject of an investigation will have an opportunity to respond to any allegations made against
that person. A person suspected of violating the Code may be suspended with or without pay while an investigation is conducted. The
Company will follow local grievance procedures in jurisdictions where such procedures apply.
Disciplinary action
The Company will take appropriate action against any employee, agent or contractor whose actions are found to violate the Code.
Disciplinary actions may include, at the Company’s sole discretion, oral or written reprimand, suspension or immediate termination of
employment or business relationship, or any other disciplinary action or combination of disciplinary actions as deemed appropriate to the
circumstances. A record of the disciplinary action will be retained in the employee’s personnel file.
In determining what disciplinary action is appropriate in a particular case, the Company will take into account all relevant information,
including the nature and severity of the violation, any history of warnings and violations, whether the violation appears to have been
intentional or inadvertent and whether the violator reported his or her own misconduct. The Company will strive to enforce the Code in a
consistent manner while accounting for all relevant information. An alleged violator may make a written request for reconsideration within
14 days of notification of the final disciplinary decision.
Where the Company has suffered a loss, it may pursue its remedies against the individuals or entities responsible. Certain violations of
this Code may also be subject to civil or criminal prosecution by governmental authorities and others. Where laws have been violated, the
Company will report violators to the appropriate authorities.
-19-
ADDITIONAL INFORMATION
Nothing in this Code creates or implies an employment contract or term of employment. Employment at the Company is employment
at-will. Employment at-will may be terminated with or without cause and with or without notice at any time by the employee or the
Company. Nothing in this Code shall limit the right to terminate employment at-will.
The policies in this Code do not constitute a complete list of company policies or a complete list of the types of conduct that can result
in discipline, up to and including discharge.
-20-
ACKNOWLEDGMENT
CODE OF BUSINESS CONDUCT AND ETHICS
● I acknowledge that I have received and read the Company’s Code of Business Conduct and Ethics.
● I acknowledge that I understand the standards, policies and procedures contained in the Code of Business Conduct and Ethics
and understand that there may be additional standards, policies, procedures and laws relevant to my position.
● I agree to comply with the Code of Business Conduct and Ethics.
● I acknowledge that if I have questions concerning the meaning or application of the Code of Business Conduct and Ethics, any
company policies, or the legal or regulatory requirements applicable to my position, it is my responsibility to seek guidance
from my manager, the Human Resources Department, the Chief Financial Officer or, if applicable, the Legal Department, or
other relevant individuals or departments.
● I acknowledge that neither this Acknowledgement nor the Code of Business Conduct and Ethics is meant to vary or supersede
the regular terms and conditions of my employment by the Company or to constitute an employment contract.
(print name)
(signature)
(date)
Please review and sign, and return this form to the Human Resources Department.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A)
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Alan S. Knitowski, certify that:
I. I have reviewed this Annual Report on Form 10-K of Phunware Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flow s of the registrant as of, and for, the periods presented in this repo1i;
4. The registrant' s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or cause d such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant' s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant
' s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant'
s internal control over financial reporting.
Date: March 19, 2019
By:
/s/ Alan S. Knitowski
Alan S. Knitowski
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A)
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Matt Aune, certify that:
1. I have reviewed this Annual Report on Form 10-K of Phunware Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 19, 2019
By:
/s/ Matt Aune
Matt Aune
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Phunware Inc. (the “Company”) on Form 10-K for the year ended December 31, 2018, as filed
with the Securities and Exchange Commission (the “Report”), I, Alan S. Knitowski, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as added by §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of
the dates presented and the results of operations of the Company for the periods presented.
Date: March 19, 2019
By:
/s/ Alan S. Knitowski
Alan S. Knitowski
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Phunware Inc. (the “Company”) on Form 10-K for the year ended December 31, 2018, as filed
with the Securities and Exchange Commission (the “Report”), I, Matt Aune, Chief Financial Officer, certification , pursuant to 18 U.S.C.
§1350, as added by §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge :
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of
the dates presented and the results of operations of the Company for the periods presented.
Date: March 19, 2019
By:
/s/ Matt Aune
Matt Aune
Chief Financial Officer
(Principal Financial And Accounting Officer)