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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from _____________ to _______________
Commission
file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
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| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: | Trading Symbol(s) | Name of each exchange on which registered: | ||
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The
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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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
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☒ | Smaller reporting company |
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| Emerging growth company |
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||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 5, 2024, shares of common stock, par value $ per share, were outstanding.
TABLE OF CONTENTS
| i |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report (the “Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this Report, including statements regarding our future results of operations and financial position, business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “ Risk Factors .” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. These risks and others described under “ Risk Factors ” may not be exhaustive.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Report. In addition, even if our results of operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Report, those results or developments may not be indicative of results or developments in subsequent periods.
| ii |
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Phunware, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share information)
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ( Unaudited ) | ||||||||
| Assets: | ||||||||
| Current assets: | ||||||||
| Cash | $ |
|
$ |
|
||||
|
Accounts receivable, net of allowance for doubtful accounts of $
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||||||
| Digital currencies |
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||||||
| Prepaid expenses and other current assets |
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| Current assets of discontinued operation |
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|||||||
| Total current assets |
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||||||
| Property and equipment, net |
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||||||
| Right-of-use asset |
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||||||
| Other assets |
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||||||
| Total assets | $ |
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$ |
|
||||
| Liabilities and stockholders’ equity (deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable |
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||||||
| Accrued expenses |
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||||||
| Lease liability |
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||||||
| Deferred revenue |
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||||||
| PhunCoin subscription payable |
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| Debt |
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|||||||
| Current liabilities of discontinued operation |
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|||||||
| Total current liabilities |
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| Deferred revenue |
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||||||
| Lease liability |
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||||||
| Total liabilities |
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||||||
| Commitments and contingencies (see Note 7) | ||||||||
| Stockholders’ equity (deficit) | ||||||||
| Common stock, $ par value; shares authorized; shares issued and shares outstanding as of June 30, 2024; and shares issued and shares outstanding as of December 31, 2023 |
|
|||||||
| Treasury Stock at cost; shares as of June 30, 2024 and December 31, 2023 |
(
|
) |
(
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) | ||||
| Additional paid-in capital |
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|
||||||
| Accumulated other comprehensive loss |
(
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) |
(
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) | ||||
| Accumulated deficit |
(
|
) |
(
|
) | ||||
| Total stockholders’ equity (deficit) |
|
(
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) | |||||
| Total liabilities and stockholders’ equity (deficit) | $ |
|
$ |
|
||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 1 |
Phunware, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share information)
(Unaudited)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net revenues | $ |
|
$ |
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$ |
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$ |
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||||||||
| Cost of revenues |
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||||||||||||
| Gross profit |
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||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing |
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||||||||||||
| General and administrative |
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||||||||||||
| Research and development |
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||||||||||||
| Total operating expenses |
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||||||||||||
| Operating loss |
(
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) |
(
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) |
(
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) |
(
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) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense |
(
|
) |
(
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) |
(
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) |
(
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) | ||||||||
| Interest income |
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||||||||||||||
| Gain on extinguishment of debt |
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|||||||||||||||
| Gain on sale of digital currencies |
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| Other income |
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||||||||||||
| Total other income |
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||||||||||||
| Loss before taxes |
(
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) |
(
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) |
(
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) |
(
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) | ||||||||
| Income tax benefit (expense) | ||||||||||||||||
| Net loss from continuing operations |
(
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) |
(
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) |
(
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) |
(
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) | ||||||||
| Net loss from discontinued operation |
(
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) |
(
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) | ||||||||||||
| Net loss |
(
|
) |
(
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) |
(
|
) |
(
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) | ||||||||
| Other comprehensive income | ||||||||||||||||
| Cumulative translation adjustment |
|
|
||||||||||||||
| Comprehensive loss | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
| Net loss from continuing operations per share, basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Net loss from discontinued operations 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 unaudited condensed consolidated financial statements.
| 2 |
Phunware, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(In thousands, except share information)
(Unaudited)
| Total | ||||||||||||||||||||||||||||||||
| Additional | Other | Stockholders’ | ||||||||||||||||||||||||||||||
| Common Stock | Treasury stock | Paid-in | Accumulated | Comprehensive | Equity | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | (Deficit) | |||||||||||||||||||||||||
| Balances as of March 31, 2024 |
|
$ |
|
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||||||
| Release of restricted stock |
|
- | ||||||||||||||||||||||||||||||
| Sale of common stock, net of issuance costs |
|
- |
|
|
||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - |
|
|
||||||||||||||||||||||||||||
| Net loss | - | - |
(
|
) |
(
|
) | ||||||||||||||||||||||||||
| Balances as of June 30, 2024 |
|
$ |
|
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||||||
| Balances as of December 31, 2023 |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||||||||||||
| Release of restricted stock |
|
- | ||||||||||||||||||||||||||||||
| Issuance of common stock in lieu of cash bonus and consulting fees |
|
- |
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|
||||||||||||||||||||||||||||
| Common Stock issued upon conversion of 2022 Promissory Note |
|
- |
|
|
||||||||||||||||||||||||||||
| Sale of common stock & exercise of prefunded warrants, net of issuance costs |
|
|
- |
|
|
|||||||||||||||||||||||||||
| Fractional share issuances as a result of reverse stock split |
|
- | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - |
|
|
||||||||||||||||||||||||||||
| Net loss | - | - |
(
|
) |
(
|
) | ||||||||||||||||||||||||||
| Balances as of June 30, 2024 |
|
$ |
|
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||||||
| 3 |
Phunware, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(In thousands, except share information)
(Unaudited)
| Additional | Other | Total | ||||||||||||||||||||||||||||||
| Common Stock | Treasury stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||
| Balances as of March 31, 2023 |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
|||||||||||||||
| Release of restricted stock |
|
- | ||||||||||||||||||||||||||||||
| Issuance of common stock under the 2018 employee stock purchase plan |
|
- |
|
|
||||||||||||||||||||||||||||
| Sale of common stock, net of issuance costs |
|
- |
|
|
||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - |
|
|
||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - |
|
|
||||||||||||||||||||||||||||
| Treasury stock repurchase | - |
(
|
) |
(
|
) |
(
|
) | |||||||||||||||||||||||||
| Net loss | - | - |
(
|
) |
(
|
) | ||||||||||||||||||||||||||
| Balances as of June 30, 2023 |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
|||||||||||||||
| Balances as of December 31, 2022 |
|
$ | $ | $ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
|||||||||||||||||||
| Exercise of stock options, net of vesting of restricted shares |
|
- |
|
|
||||||||||||||||||||||||||||
| Release of restricted stock |
|
- | ||||||||||||||||||||||||||||||
| Issuance of common stock under the 2018 employee stock purchase plan |
|
- |
|
|
||||||||||||||||||||||||||||
| Issuance of common stock in lieu of cash bonus and consulting fees |
|
- |
|
|
||||||||||||||||||||||||||||
| Sales of common stock, net of issuance costs |
|
- |
|
|
||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - |
|
|
||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - |
|
|
||||||||||||||||||||||||||||
| Treasury stock repurchase | - |
(
|
) |
(
|
) |
(
|
) | |||||||||||||||||||||||||
| Net loss | - | - |
(
|
) |
(
|
) | ||||||||||||||||||||||||||
| Balances as of June 30, 2023 |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
|||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
Phunware, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| Operating activities | ||||||||
| Net loss | $ |
(
|
) | $ |
(
|
) | ||
| Net loss from discontinued operation |
(
|
) | ||||||
| Net loss from continuing operations |
(
|
) |
(
|
) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Gain on sale of digital assets |
(
|
) | ||||||
| Gain on extinguishment of debt |
(
|
) | ||||||
| Stock based compensation |
|
|
||||||
| Other adjustments |
|
|
||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable |
(
|
) |
(
|
) | ||||
| Prepaid expenses and other assets |
|
|
||||||
| Accounts payable and accrued expenses |
(
|
) |
(
|
) | ||||
| Lease liability payments |
(
|
) |
(
|
) | ||||
| Deferred revenue |
(
|
) |
(
|
) | ||||
| Net cash used in operating activities from continued operations |
(
|
) |
(
|
) | ||||
| Net cash used in operating activities from discontinued operation |
(
|
) |
(
|
) | ||||
| Net cash used in operating activities |
(
|
) |
(
|
) | ||||
| Investing activities | ||||||||
| Proceeds received from sale of digital currencies |
|
|||||||
| Net cash provided by investing activities - continuing operations |
|
|||||||
| Net cash used in investing activities - discontinued operations |
(
|
) | ||||||
| Net cash used in investing activities |
|
|||||||
| Financing activities | ||||||||
| Payments on borrowings |
(
|
) | ||||||
| Proceeds from sales of common stock |
|
|
||||||
| Proceeds from exercise of options to purchase common stock |
|
|||||||
| Payments on stock repurchases |
(
|
) | ||||||
| Net cash provided by (used in) financing activities |
|
(
|
) | |||||
| Effect of exchange rate on cash |
|
|||||||
| Net increase (decrease) in cash |
|
(
|
) | |||||
| Cash at the beginning of the period |
|
|
||||||
| Cash at the end of the period | $ |
|
$ |
|
||||
| Supplemental disclosure of cash flow information | ||||||||
| Interest paid | $ |
|
$ |
|
||||
| Income taxes paid | $ |
|
$ | |||||
| Supplemental disclosures of non-cash financing activities: | ||||||||
| Issuance of common stock upon conversion of the 2022 Promissory Note | $ |
|
$ | |||||
| Issuance of common stock for payment of bonuses and consulting fees | $ |
|
$ |
|
||||
| Non-cash exchange of digital assets | $ | $ |
|
|||||
| Issuance of common stock under the 2018 Employee Stock Purchase Plan, previously accrued | $ | $ |
|
|||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
Phunware, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share information)
(Unaudited)
1. The Company and Basis of Presentation
The Company
Phunware, Inc. and its subsidiaries (the “Company”, “we”, “us”, or “our”) offers a fully integrated software platform that enables brands to engage, manage and monetize their anytime, anywhere users worldwide. Our mobile experience platform guides users through the entire customer journey. Our location-based technology offers brands mobile engagement, content management and analytics to best interact with their customers. Through our integrated mobile advertising platform of publishers and advertisers, we provide in-app application transactions for mobile audience building, user acquisition, application discovery, audience engagement and audience monetization. Founded in 2009, we are a Delaware corporation headquartered in Austin, Texas.
Basis of Presentation
The condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) and include the Company’s accounts and those of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
The balance sheet as of December 31, 2023 was derived from our audited consolidated financial statements, but these interim condensed consolidated financial statements do not include all the annual disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2023, which are referenced herein. The accompanying interim condensed consolidated financial statements as of June 30, 2024 and for the three and six months ended June 30, 2024 and 2023, are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with the audited financial statements, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to fairly state our financial position as of June 30, 2024 and the results of operations for the three and six months ended June 30, 2024 and 2023, and cash flows for the six months ended June 30, 2024 and 2023. The results for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 or for any future interim period.
Certain reclassifications to prior year presentation have been made to our condensed consolidated statements of operations and comprehensive loss and condensed consolidated statements of cash flows. We have displayed individual lines items that we previously considered to be immaterial and combined individual line items that we considered to be immaterial to conform to current year presentation. The reclassifications had no impact on previously reported net loss, and operating, investing or financing activities.
The accompanying condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
Discontinued Operations
On November 1, 2023, we committed to a plan to discontinue and wind down the operations of Lyte Technology, Inc. (“Lyte”), which the Company determined met the criteria for classification as a discontinued operation in accordance with Accounting Standards Codification (“ASC”) Topic 205-20, Discontinued Operations . Prior periods were recast such that the basis of presentation is consistent with current year presentation. For additional information, see Note 3.
| 6 |
Reverse Stock Split
On February 26, 2024, the Company effected a reverse stock split of its common stock at a ratio of one-for-fifty (the “Reverse Stock Split”). The number of authorized shares and par value of our common stock were not adjusted as a result of the Reverse Stock Split. The accompanying financial statements and notes thereto give retrospective effect to the reverse stock split for all periods presented. All issued and outstanding common stock, options, restricted stock units and warrants exercisable for common stock and per share amounts have been retrospectively adjusted.
Nasdaq listing
On April 13, 2023, we received a notice from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”) because the bid price of the Company’s common stock on the Nasdaq Capital Market had closed below $1.00 per share for the previous 30 consecutive business days. The notice from Nasdaq stated that, under Nasdaq Listing Rule 5810(c)(3)(A), we had been provided a period of 180 calendar days, or until October 10, 2023, to regain compliance with the Bid Price Requirement. On October 10, 2023, we submitted a request to Nasdaq for an additional 180-day extension to regain compliance with the Bid Price Requirement. On October 12, 2023, the Company received a letter from Nasdaq advising that the Company had been granted a 180-day extension to April 8, 2024, to regain compliance with the Bid Price Requirement, in accordance with Nasdaq Listing Rule 5810(c)(3)(A).
On December 21, 2023, the Company received a letter from Nasdaq notifying the Company that, as of December 20, 2023, the Company’s common stock had a closing bid price of $0.10 or less for ten consecutive trading days and that, consistent with Nasdaq Listing Rule 5810(c)(3)(A)(iii), the Nasdaq had determined to delist the Company’s common stock from the Nasdaq Capital Market. The notice provided the Company an opportunity to appeal the Nasdaq’s decision to delist the Company’s common stock. On December 22, 2023, we submitted a request for a hearing before the Nasdaq Hearings Panel (the “Panel”) to appeal the Nasdaq’s delisting determination.
As noted above, we effected a reverse stock split in order to regain compliance with the Bid Price Requirement, and on March 12, 2024, we received a letter from Nasdaq notifying us that we demonstrated compliance with the requirements to remain listed on the Nasdaq Capital Market, as required by the Panel. The letter also informed the Company that pursuant to Listing Rule 5815(d)(4)(B), the Company will be subject to a mandatory Panel monitor for a period of one year from the date of the letter. If, within that one-year monitoring period, the staff finds the Company again out of compliance with the requirement that was the subject of the exception, notwithstanding Rule 5810(c)(2), the Company will not be permitted to provide the staff with a plan of compliance with respect to that deficiency and the staff will not be permitted to grant additional time for the Company to regain compliance with respect to that deficiency, nor will the Company be afforded an applicable cure or compliance period pursuant to Rule 5810(c)(3). Instead, the Nasdaq will issue a delist determination letter and the Company will have an opportunity to request a new hearing with the initial Panel or a newly convened hearings panel if the initial Panel is unavailable. The Company will have the opportunity to respond/present to the hearings panel as provided by Listing Rule 5815(d)(4)(C).
There can be no assurance the Company will maintain compliance with the above or any other Nasdaq Listing Rules.
2. Summary of Significant Accounting Policies
There have been no changes in significant accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2023, except as set forth below.
Recently Adopted Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40) , (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. We adopted ASU 2020-06 on January 1, 2024. The adoption of ASU 2020-06 did not have a material impact on our condensed consolidated financial statements and disclosures.
| 7 |
Recent Accounting Pronouncements Not Yet Adopted
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, (“ASU 2023-09”). ASU 2023-09 requires entities to disclose specific tax rate reconciliation categories, as well as income taxes paid disaggregated by jurisdiction, amongst other disclosure enhancements. For public entities, ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the disclosure requirements related to the new standard.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make certain estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material.
3. Supplemental Information
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. The following table sets forth our concentration of accounts receivable, net of specific allowances for doubtful accounts.
|
June 30,
2024 |
December 31, 2023 |
|||||||
| Customer A |
|
% |
|
% | ||||
| Customer B |
|
% |
|
% | ||||
| Customer C |
|
% |
|
% | ||||
| Customer D |
|
% |
|
% | ||||
| Customer E |
|
% |
|
% | ||||
Discontinued Operation
On November 1, 2023, the Company made the strategic decision to wind down and discontinue the operations of its Lyte reporting segment. We generally completed the wind down of the Lyte operations as of December 31, 2023.
A summary of the Lyte discontinued operation in the condensed consolidated statement of operations and comprehensive loss for the three and six months ended June 30, 2023 is set forth below:
| Three | Six | |||||||
| Months Ended June 30, 2023 | Months Ended June 30, 2023 | |||||||
| Net revenues | $ |
|
$ |
|
||||
| Cost of revenues |
|
|
||||||
| Gross profit |
(
|
) |
|
|||||
| Operating expenses: | ||||||||
| Sales and marketing |
|
|
||||||
| General and administrative |
|
|
||||||
| Impairment of goodwill |
|
|
||||||
| Total operating expenses |
|
|
||||||
| Operating loss | $ |
(
|
) | $ |
(
|
) | ||
| 8 |
Loss per Common Share
Basic loss per common share is computed by dividing net loss applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per common share is computed by giving effect to all potential shares of common stock, including those related to our outstanding warrants and stock equity plans, to the extent dilutive. For all periods presented, these shares were excluded from the calculation of diluted loss per share of common stock because their inclusion would have been anti-dilutive. As a result, diluted loss per common share is the same as basic loss per common share for all periods presented.
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| Warrants |
|
|||||||
| Options |
|
|
||||||
| Restricted stock units |
|
|
||||||
| Total |
|
|
||||||
4. Revenue
Subscriptions and services revenue consist of platform license subscriptions and application development services. Application transaction revenue is comprised of in-app advertising. Refer to our revenue recognition policy under the subheading, Revenue Recognition, in Note 2, “ Summary of Significant Accounting Policies,” in our Annual Report on Form 10-K filed with the SEC on March 15, 2024.
Disaggregation of Revenue
The following table sets forth our net revenues by category:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Subscriptions and services revenue | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Application transaction |
|
|
|
|
||||||||||||
| Net revenues | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
The following table sets forth our concentration of revenue sources as a percentage of total net revenues:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Customer A |
|
% |
|
% |
|
% |
|
% | ||||||||
| Customer C |
|
% |
|
% |
|
% |
|
% | ||||||||
| Customer D |
|
% |
|
% |
|
% |
|
% | ||||||||
| Customer F |
|
% |
|
% |
|
% |
|
% | ||||||||
We
generate revenue in domestic and foreign regions and attribute net revenue to individual countries based on the location of the contracting
entity. We derived over
| 9 |
Deferred Revenue
Deferred
revenue consists of customer billings or payments received in advance of the recognition of revenue under the arrangements with customers.
We recognize deferred revenue as revenue only when revenue recognition criteria are met. During the six months ended June 30, 2024, we
recognized revenue of $
Remaining Performance Obligations
Remaining
performance obligations were $
5. Debt
2022 Promissory Note
On
July 6, 2022, we entered into a note purchase agreement and completed the sale of an unsecured promissory note (the “2022 Promissory
Note”) with an original principal amount of $
On
March 15, 2023, we elected to defer monthly payment obligations for April, May, June and July 2023, as permitted, at the time, by the
2022 Promissory Note. In connection therewith, we entered into a waiver agreement with the holder waiving the Payment Deferral Conditions,
as defined in the 2022 Promissory Note. For agreeing to waive the Payment Deferral Conditions, we agreed to compensate the noteholder
an amount equal to
On
August 14, 2023, we entered into an amendment to the 2022 Promissory Note with the noteholder. The amendment extended the maturity date
to May 31, 2024 and provided that effective August 1, 2023, we were required to make monthly amortization payments of at least $
Effective
December 6, 2023, the Company entered into an acknowledgement and agreement with the noteholder to which the parties (a) memorialized
the noteholder’s waiver of the Company’s obligations to satisfy minimum balance reduction requirements in cash for each of
October 2023 and November 2023 and the minimum balance reduction requirement for December 2023. As consideration for the acknowledgement
and agreement, we agreed to pay the noteholder a fee in an aggregate amount equal to
| 10 |
During
the first quarter of 2024, we issued
shares of our common stock to the holder of the 2022 Promissory Note, which amounted to
aggregate principal and interest payments in the amount of $
Interest Expense
Interest
expense amounted to $
6. Leases
Further information regarding our other office leases and accounting thereof are located in Note 2, “ Summary of Significant Accounting Policies,” and Note 9, “ Leases,” in our Annual Report on Form 10-K filed with the SEC on March 15, 2024.
We
recognize lease expense on a straight-line basis over the lease term with variable lease expense recognized in the period in which the
costs are incurred. The components of lease expense are included in general and administrative expense in our condensed consolidated
statement of operations and comprehensive loss. Lease expense for the three months ended June 30, 2024 and 2023 was $
Future minimum lease obligations are set forth below:
| Future minimum lease obligations years ending December 31, | Lease Obligations | |||
| 2024 (Remainder) | $ |
|
||
| 2025 |
|
|||
| 2026 |
|
|||
| 2027 |
|
|||
| $ |
|
|||
| Less: Portion representing interest |
(
|
) | ||
| $ |
|
|||
7. Commitments and Contingencies
Litigation
On
March 30, 2021, Phunware filed an action against its former counsel Wilson Sonsini Goodrich & Rosati, PC (“WSGR”), which
is styled
Phunware, Inc., v. Wilson Sonsini Goodrich & Rosati, Professional Corporation, Does 1-25
, Case No. 21CV381517, in
the Superior Court of the State of California for the County of Santa Clara. On July 30, 2021, Phunware filed a second action against
WSGR in the Superior Court of the State of California for the County of Santa Clara, which is styled
Phunware, Inc., v. Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Does 1-25
, Case No. 21CV386411. The
| 11 |
On February 18, 2022, certain stockholders filed a lawsuit against Phunware and certain of its prior and then existing individual officers and directors. The case, captioned Wild Basin Investments, LLC, et al. v. Phunware, Inc., et al. , was filed in the Court of Chancery of the State of Delaware (Cause No. 2022-0168-LWW). Plaintiffs allege that they invested in Phunware through various early rounds of financing while the Company was private and that following completion of the business combination transactions resulting in Phunware becoming a public company these stockholders received new shares of Phunware common stock and Phunware warrants that were but should not have been subjected to a 180-day “lock up” period. Plaintiffs also allege that Phunware’s stock price dropped significantly during the lock up period and seek damages, costs and professional fees. We filed a motion to dismiss Plaintiffs’ complaint on May 27, 2022, and on July 15, 2022 Plaintiffs filed their answering brief in opposition to the motion to dismiss and a motion for partial summary judgment. The parties argued their positions before the Court of Chancery during a hearing on April 4, 2023. On June 16, 2023, the Court ruled on the motions without filing a written opinion. From the bench, Vice Chancellor Cook granted Phunware’s motion to dismiss on the Texas law claims and denied both the motion to dismiss and motion for partial summary judgment on the Delaware law claims.
The parties engaged in mediation in July 2023 but were unable to reach a settlement, and settlement discussions continue. A trial date has been set for March 2025. We intend to vigorously defend against this lawsuit and any appeals. We have not recorded a liability related to this matter because any potential loss is not currently probable or possible to reasonably estimate. Additionally, we cannot presently estimate the range of loss, if any, that may result from this lawsuit. It is possible that the ultimate resolution of the foregoing matter, or other similar matters, if resolved in a manner unfavorable to us, may be materially adverse to our business, financial condition, results of operations or liquidity.
From time to time, we are and may become involved in various legal proceedings in the ordinary course of business. The outcomes of our legal proceedings are inherently unpredictable, subject to significant uncertainties, and could be material to our operating results and cash flows for a particular reporting period. In addition, for the matters disclosed above that do not include an estimate of the amount of loss or range of losses, such an estimate is not possible, and we may be unable to estimate the possible loss or range of losses that could potentially result from the application of non-monetary remedies.
8. Stockholders’ Equity
Common Stock
Total common stock authorized to be issued as of June 30, 2024, was shares, with a par value of $ per share. As of June 30, 2024 and December 31, 2023, there were and shares of our common stock outstanding, respectively.
On
January 31, 2022, we entered into an At Market Issuance Sales Agreement with H.C. Wainwright & Co., LLC (“Wainwright”),
pursuant to which we may offer and sell, from time to time, shares of our common stock, par value $
per share, for aggregate gross
proceeds of up to $
On
June 4, 2024, we entered into an Equity Distribution Agreement with Canaccord Genuity LLC (“Canaccord”), as representative
of certain agents, pursuant to which we may offer and sell, from time to time, shares of our common stock, par value $
per share,
for aggregate gross proceeds of up to $
During
the six months ended June 30, 2024, we sold an aggregate of
shares of our common stock under our sales agreement
with Wainwright and equity distribution agreement with Canaccord for aggregate gross cash proceeds of $
| 12 |
On
August 22, 2023, we entered into a common stock purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”),
which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right, but not the obligation,
to sell to Lincoln Park up to $
In
a series of offerings during the first quarter of 2024, we sold an aggregate of
shares of our common stock and issued pre-funded warrants to purchase up to
Stock Repurchase Plan
On
January 5, 2023, our board of directors authorized and approved a stock repurchase program for the repurchase of outstanding shares of
our common stock with an aggregate value of up to $
million. The stock repurchase plan may be amended or terminated at any time, in
the sole discretion of our board of directors. The authorization permits us to repurchase shares of our common stock from time-to-time
through open market repurchases at prevailing market prices, in accordance with federal securities laws. During 2023, we repurchased
an aggregate
shares of our common stock at an aggregate repurchase price of $
There have been no material changes to the terms of our various equity incentive plans since the filing of our Annual Report on Form 10-K. Refer to Note 13, “ Stock-Based Compensation ,” in our Annual Report on Form 10-K filed with the SEC on March 15, 2024 for more information.
Stock-Based Compensation
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Stock-based compensation | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Cost of revenues | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Sales and marketing |
|
|
|
|
||||||||||||
| General and administrative |
|
|
|
|
||||||||||||
| Research and development |
|
|
|
|
||||||||||||
| Total stock-based compensation | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
As of June 30, 2024, there was approximately $ of total unrecognized compensation cost related to our stock benefit plans. These unrecognized compensation costs are expected to be recognized over an estimated weighted-average period of approximately years.
Restricted Stock Units
| Shares | Weighted Average Grant Date Fair Value | |||||||
| Outstanding as of December 31, 2023 |
|
$ |
|
|||||
| Granted |
|
|
||||||
| Released |
(
|
) |
|
|||||
| Forfeited |
(
|
) |
|
|||||
| Outstanding as of June 30, 2024 |
|
$ |
|
|||||
| 13 |
Stock Options
|
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding as of December 31, 2023 |
|
$ |
|
$ | ||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Outstanding as of June 30, 2024 |
|
$ |
|
$ | ||||||||||||
| Exercisable as of June 30, 2024 |
|
$ |
|
$ | ||||||||||||
A summary of our option activity under our 2009 Equity Incentive Plan (the “2009 Plan”) and related information is as follows:
|
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value |
|||||||||||||
| Outstanding as of December 31, 2023 |
|
$ |
|
$ | ||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited |
(
|
) |
|
|||||||||||||
| Outstanding as of June 30, 2024 |
|
$ |
|
$ | ||||||||||||
| Exercisable as of June 30, 2024 |
|
$ |
|
$ | ||||||||||||
Our stock benefit plans had and shares of common stock reserved for future issuances under our equity incentive plans as of June 30, 2024 and December 31, 2023, respectively. 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 granted under the 2009 Plan, that expire or otherwise terminate without having been exercised in full and shares of common stock issued pursuant to awards granted under the 2009 Plan that are forfeited. As of June 30, 2024, the maximum number of shares of common stock that may be added to the 2018 Plan pursuant to the foregoing is .
Furthermore, there were and shares of common stock available for sale and reserved for issuance under our 2018 Employee Stock Purchase Plan as of June 30, 2024 and December 31, 2023, respectively.
10. Subsequent Events
From
July 1, 2024 through August 9, 2024, we sold an additional
shares of our common stock under our equity distribution agreement
with Canaccord for aggregate gross proceeds of approximately $
| 14 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References in this section to “we,” “us,” “our,” or “the Company” refer to Phunware, Inc. References to “management” or “management team” refer to our officers and directors.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto presented in “ Part I – Item 1. Financial Statements. ” As discussed in the section titled “ Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those discussed in the section titled “ Risk Factors ” and elsewhere in this Report.
Certain figures, such as interest rates and other percentages, included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our condensed consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.
Overview
Phunware, Inc. offers a fully integrated software platform that equips companies with the products, solutions and services necessary to engage, manage and monetize their mobile application portfolios globally at scale. Our platform provides the entire mobile lifecycle of applications, media and data in one login through one procurement relationship. Our offerings include:
| ● | Enterprise mobile software development kits (SDKs) including content management, location-based services, marketing automation, business intelligence and analytics, alerts, notifications and messaging, audience engagement and audience monetization; | |
| ● | Integration of our SDK licenses into existing applications maintained by our customers; | |
| ● | Cloud-based vertical solutions, which are off-the-shelf, iOS- and Android-based mobile application portfolios, solutions and services that address: the patient experience for healthcare, the shopper experience for retail, the fan experience for sports, the traveler experience for aviation, the luxury resident experience for real estate, the luxury guest experience for hospitality, the student experience for education and the generic user experience for all other verticals and applications; and | |
| ● | Application transactions for mobile audience building, user acquisition, application discovery, audience engagement and monetization, including our engagement-driven digital asset PhunToken. |
We intend to continue investing for long-term growth. We have invested and expect to continue investing in the expansion of our ability to market, sell and provide our current and future products and services to customers globally. We also expect to continue investing in the development and improvement of new and existing products and services to address customers’ needs. We currently do not expect to be profitable in the near future.
Key Business Metrics
Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. We believe that the most important of these measures include backlog and deferred revenue.
Bookings, Backlog and Deferred Revenue. We define these measures and purpose as follows:
| ● | Bookings represents actual contracted value for a period, whether invoiced or not, to be invoiced and recognized as revenue over time. We believe that bookings reflects the current demand for our products and services and provides us insight into how well our sales and marketing efforts are performing. | |
| ● | Backlog represents future amounts to be invoiced under our active contracts. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice. Until such time as these amounts are invoiced, they are not recorded in revenue, deferred revenue, accounts receivable or elsewhere in our condensed consolidated financial statements and are considered by us to be backlog. We expect backlog to fluctuate up or down from period to period for several reasons, including the timing and duration of customer contracts, varying billing cycles and the timing and duration of customer renewals. We reasonably expect approximately 38% of our backlog as of June 30, 2024 will be invoiced during the subsequent 12-month period, primarily due to the fact that our contracts are typically one to three years in length. |
| 15 |
| ● | Deferred revenue consists of amounts that have been invoiced but have not yet been recognized as revenues as of the end of a reporting period. Together, the sum of deferred revenue and backlog represents the total billed and unbilled contract value yet to be recognized in revenues and provides visibility into future revenue streams. |
The following table sets forth our software and subscriptions bookings:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Bookings – software and subscriptions | $ | 1,149 | $ | 159 | $ | 1,746 | $ | 168 | ||||||||
The follow table sets forth our deferred revenue and backlog:
| June 30, 2024 | December 31, 2023 | |||||||
| (in thousands) | ||||||||
| Backlog | $ | 3,545 | $ | 2,750 | ||||
| Deferred revenue | 1,487 | 1,909 | ||||||
| Total backlog and deferred revenue | $ | 5,032 | $ | 4,659 | ||||
Non-GAAP Financial Measures
Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA
We report our financial results in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We also use certain non-GAAP financial measures that fall within the meaning of Securities and Exchange Commission Regulation G and Regulation S-K Item 10(e), which may provide users of the financial information with additional meaningful comparison to prior period results. Our non-GAAP financial measures include adjusted gross profit (derived from the GAAP measure of gross profit), adjusted gross margin (derived from the GAAP measure of gross margin) and adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) (derived from the GAAP measure of net loss from continuing operations) (our “non-GAAP financial measures”). Management uses these measures (i) to compare operating performance on a consistent basis, (ii) to calculate incentive compensation for our employees, (iii) for planning purposes including the preparation of our internal annual operating budget and (iv) to evaluate the performance and effectiveness of operational strategies.
Our non-GAAP financial measures should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue or net loss, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. Our non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations include:
| ● | Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; |
| ● | Our non-GAAP financial measures do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations; and |
| ● | Other companies in our industry may calculate our non-GAAP financial measures differently than we do, limiting their usefulness as comparative measures. |
We compensate for these limitations to our non-GAAP financial measures by relying primarily on our GAAP results and using our non-GAAP financial measures only for supplemental purposes. Our non-GAAP financial measures include adjustments for items that may not occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other peer companies over time. For example, it is useful to exclude non-cash, stock-based compensation expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and these expenses can vary significantly across periods due to timing of new stock-based awards. We may also exclude certain discrete, unusual, one-time, or non-cash costs in order to facilitate a more useful period-over-period comparison of our financial performance. Each of the normal recurring adjustments and other adjustments described in this paragraph help management with a measure of our operating performance over time by removing items that are not related to day-to-day operations or are non-cash expenses.
| 16 |
The following tables set forth the most comparable GAAP financial measures from which our non-GAAP financial measures are derived as well as the non-GAAP financial measures we monitor.
| GAAP Financial Measures | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| (in thousands, except percentages) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Gross profit | $ | 470 | $ | 535 | $ | 994 | $ | 610 | ||||||||
| Gross margin | 46.5 | % | 41.3 | % | 51.4 | % | 23.1 | % | ||||||||
| Net loss from continuing operations | $ | (2,631 | ) | $ | (4,414 | ) | $ | (4,923 | ) | $ | (8,126 | ) | ||||
| Non-GAAP Financial Measures | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| (in thousands, except percentages) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Adjusted gross profit (1) | $ | 519 | $ | 646 | $ | 1,088 | $ | 974 | ||||||||
| Adjusted gross margin (1) | 51.3 | % | 49.9 | % | 56.3 | % | 36.9 | % | ||||||||
| Adjusted EBITDA (2) | $ | (2,198 | ) | $ | (4,469 | ) | $ | (4,367 | ) | $ | (9,686 | ) | ||||
| (1) | Adjusted gross profit and adjusted gross margin are non-GAAP financial measures. We believe that adjusted gross profit and adjusted gross margin provide supplemental information with respect to gross profit and gross margin regarding ongoing performance. We define adjusted gross profit as net revenues less cost of revenue, adjusted to exclude one-time revenue adjustments, stock-based compensation and amortization of intangible assets. We define adjusted gross margin as adjusted gross profit as a percentage of net revenues. | |
| (2) | Adjusted EBITDA is a non-GAAP financial measure. We believe adjusted EBITDA provides helpful information with respect to operating performance as viewed by management, including a view of our business that is not dependent on (i) the impact of our capitalization structure and (ii) items that are not part of day-to-day operations. We define adjusted EBITDA as net loss plus (i) interest expense, net of interest income (ii) income tax expense, (iii) depreciation, and further adjusted for (iv) non-cash impairment, (v) valuation adjustments and (vi) stock-based compensation expense. |
Reconciliation of Non-GAAP Financial Measures
The following tables set forth a reconciliation of the most directly comparable GAAP financial measure to each of the non-GAAP financial measures discussed above.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (in thousands, except percentages) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Gross profit | $ | 470 | $ | 535 | $ | 994 | $ | 610 | ||||||||
| Add back: Stock-based compensation | 49 | 111 | 94 | 364 | ||||||||||||
| Adjusted gross profit | $ | 519 | $ | 646 | $ | 1,088 | $ | 974 | ||||||||
| Adjusted gross margin | 51.3 | % | 49.9 | % | 56.3 | % | 36.9 | % | ||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Net loss from continuing operations | $ | (2,631 | ) | $ | (4,414 | ) | $ | (4,923 | ) | $ | (8,126 | ) | ||||
| Add back: Depreciation | 4 | 29 | 8 | 42 | ||||||||||||
| Add back: Interest expense | 8 | 553 | 116 | 1,090 | ||||||||||||
| Less: Interest income | (239 | ) | - | (379 | ) | - | ||||||||||
| EBITDA | (2,858 | ) | (3,832 | ) | (5,178 | ) | (6,994 | ) | ||||||||
| Add Back: Stock-based compensation | 660 | 1,462 | 1,290 | 2,824 | ||||||||||||
| Less: Gain on extinguishment of debt | - | - | (535 | ) | - | |||||||||||
| Add Back: Impairment of digital currencies | - | - | 56 | 50 | ||||||||||||
| Less: Fair value adjustment for warrant liabilities | - | (3 | ) | - | (256 | ) | ||||||||||
| Less: Gain on sale of digital assets | - | (2,096 | ) | - | (5,310 | ) | ||||||||||
| Adjusted EBITDA | $ | (2,198 | ) | $ | (4,469 | ) | $ | (4,367 | ) | $ | (9,686 | ) | ||||
| 17 |
Components of Results of Operations
Revenue and Gross Profit
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.
Platform Subscriptions and Services
Subscription revenue is derived from software license fees, which are comprised of subscription fees from customers licensing our Software Development Kits (SDKs), that include access to our platform. Services revenue is derived from development services around designing and building new applications or enhancing existing applications. Support revenue is comprised of support and maintenance fees of customer applications, software updates and technical support for application development services for a support term.
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 support of applications relating to platform subscription customers are included in cost of sales, whereas costs related to the ongoing development and maintenance of our software platform are expensed in research and development. As a result, platform subscriptions and services gross profit may fluctuate from period to period.
Application Transaction Revenue
We also generate revenue by charging advertisers to deliver advertisements (ads) to users of digitally connected devices. Depending on the specific terms of each advertising contract, we generally recognize revenue when the ad loads onto the device of a user. We generally sell our ads by cost per thousand impressions and generally, an impression results when the user has the potential to see the ad.
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 advertising traffic we pay to our suppliers and amount of traffic which we can purchase from those suppliers. As a result, our application transaction gross profit may fluctuate from period to period due to variable costs of advertising traffic.
Gross Margin
Gross margin measures gross profit as a percentage of revenue. Gross margin is generally impacted by the same factors that affect changes in the mix of platform and hardware revenue.
Operating Expenses
Our operating expenses include sales and marketing expenses, general and administrative expenses and research and development expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and, in sales and marketing expense, commissions.
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Sales and Marketing Expense. Sales and marketing expense is comprised of compensation, commission expense, variable incentive pay and benefits related to sales personnel, along with travel expenses, other employee related costs, including stock-based compensation and expenses related to marketing programs and promotional activities. In order to grow revenues, we may increase the size and spend of our sales and marketing organization. As a result, our sales and marketing expenses may increase in absolute dollars but may fluctuate as a percentage of our total revenue from period to period.
General and Administrative Expense. General and administrative expense is comprised of compensation and benefits of administrative personnel, including variable incentive pay and stock-based compensation, bad debt expenses and other administrative costs such as facilities expenses, professional fees and travel expenses. We incur 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, over time, to increase the size of our general and administrative function to support the growth of our business. As a result, our general and administrative expenses may increase in absolute dollars but may fluctuate as a percentage of our total revenue from period to period.
Research and Development Expense. Research and development expenses consist primarily of employee compensation costs and overhead allocation. We believe that continued investment in our platform is important for our growth. As a result, our research and development expenses may increase in absolute dollars but may fluctuate as a percentage of revenue from period to period.
Interest Expense
Interest expense includes interest related to our outstanding debt, including amortization of discounts and deferred issuance costs.
Refer to Note 5 “ Debt ” in the notes to the condensed consolidated financial statements included Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on our debt offerings.
We also may seek additional debt financing to fund the expansion of our business or to finance strategic acquisitions in the future, which may have an impact on our interest expense.
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Results of Operations
Net Revenues
| Three Months Ended June 30, | Change | |||||||||||||||
| (in thousands, expect percentages) | 2024 | 2023 | Amount | % | ||||||||||||
| Revenue | ||||||||||||||||
| Platform subscriptions and services | $ | 516 | $ | 748 | $ | (232 | ) | (31.0 | )% | |||||||
| Application transaction | 495 | 547 | (52 | ) | (9.5 | )% | ||||||||||
| Total revenue | $ | 1,011 | $ | 1,295 | $ | (284 | ) | (21.9 | )% | |||||||
| Platform subscriptions and services as a percentage of total revenue | 51 | % | 57.8 | % | ||||||||||||
| Application transactions as a percentage of total revenue | 49 | % | 42.2 | % | ||||||||||||
| Platform revenues as a percentage of total revenue | 100 | % | 100 | % | ||||||||||||
| Six Months Ended June 30, | Change | |||||||||||||||
| (in thousands, expect percentages) | 2024 | 2023 | Amount | % | ||||||||||||
| Revenue | ||||||||||||||||
| Platform subscriptions and services | $ | 970 | $ | 1,742 | $ | (772 | ) | (44.3 | )% | |||||||
| Application transaction | 962 | 898 | 64 | 7.1 | % | |||||||||||
| Total revenue | $ | 1,932 | $ | 2,640 | $ | (708 | ) | (26.8 | )% | |||||||
| Platform subscriptions and services as a percentage of total revenue | 50.2 | % | 66 | % | ||||||||||||
| Application transaction as a percentage of total revenue | 49.8 | % | 34 | % | ||||||||||||
| Platform revenue as a percentage of total revenue | 100 | % | 100 | % | ||||||||||||
Net revenues decreased $0.3 million, or (21.9)%, for the three months ended June 30, 2024 compared to the corresponding period in 2023, as a result of additional development fees recognized in 2023 and timing of advertising campaigns.
Net revenues decreased $0.7 million, or (26.8)%, for the six months ended June 30, 2024 compared to the corresponding period in 2023, primarily due to $0.3 million due to a specific customer contract termination, $0.2 million in revenue recognized in 2023 related to a customer onboarding and $0.1 million for customers who were customers in 2023, but are no longer customers in 2024.
| 20 |
Cost of Revenues, Gross Profit and Gross Margin
| Three Months Ended June 30, | Change | |||||||||||||||
| (in thousands, expect percentages) | 2024 | 2023 | Amount | % | ||||||||||||
| Cost of Revenue | ||||||||||||||||
| Platform subscriptions and services | $ | 377 | $ | 535 | $ | (158 | ) | (29.5 | )% | |||||||
| Application transaction | 164 | 225 | (61 | ) | (27.1 | )% | ||||||||||
| Total cost of revenue | $ | 541 | $ | 760 | $ | (219 | ) | (28.8 | )% | |||||||
| Gross Profit | ||||||||||||||||
| Platform subscriptions and services | $ | 139 | $ | 213 | $ | (74 | ) | (34.7 | )% | |||||||
| Application transaction | 331 | 322 | 9 | 2.8 | % | |||||||||||
| Total gross profit | $ | 470 | $ | 535 | $ | (65 | ) | (12.1 | )% | |||||||
| Gross Margin | ||||||||||||||||
| Platform subscriptions and services | 26.9 | % | 28.5 | % | ||||||||||||
| Application transaction | 66.9 | % | 58.9 | % | ||||||||||||
| Total gross margin | 46.5 | % | 41.3 | % | ||||||||||||
| Six Months Ended June 30, | Change | |||||||||||||||
| (in thousands, expect percentages) | 2024 | 2023 | Amount | % | ||||||||||||
| Cost of Revenue | ||||||||||||||||
| Platform subscriptions and services | $ | 591 | $ | 1,726 | $ | (1,135 | ) | (65.8 | )% | |||||||
| Application transaction | 347 | 304 | 43 | 14.1 | % | |||||||||||
| Total cost of revenue | $ | 938 | $ | 2,030 | $ | (1,092 | ) | (53.8 | )% | |||||||
| Gross Profit | ||||||||||||||||
| Platform subscriptions and services | $ | 379 | $ | 16 | $ | 363 | 2,268.8 | % | ||||||||
| Application transaction | 615 | 594 | 21 | 3.5 | % | |||||||||||
| Total gross profit | $ | 994 | $ | 610 | $ | 384 | 63.0 | % | ||||||||
| Gross Margin | ||||||||||||||||
| Platform subscriptions and services | 39.1 | % | 0.9 | % | ||||||||||||
| Application transaction | 63.9 | % | 66.1 | % | ||||||||||||
| Total gross margin | 51.4 | % | 23.1 | % | ||||||||||||
Total gross profit decreased $0.1 million, or (12.1)%, three months ended June 30, 2024 compared to the corresponding period in 2023, primarily as a result of the issues resulting in decreased revenue described above.
Total gross profit increased $0.4 million, or 63.2%, for the six months ended June 30, 2024 compared to the corresponding period of 2023, as a result of a $1.1 million decrease in cost of revenue which is comprised of $0.6 million in headcount cost as a result of an organizational change in the manner in which we deliver customer apps, $0.2 million in travel cost related to a customer onboarding in 2023 and $0.3 million in stock-based compensation. The decrease in costs were partially offset by a $0.7 million decrease in revenue noted above.
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Operating Expenses
| Three Months Ended June 30, | Change | |||||||||||||||
| 2024 | 2023 | Amount | % | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Sales and marketing | $ | 609 | $ | 1,142 | $ | (533 | ) | (46.7 | )% | |||||||
| General and administrative | 2,299 | 4,268 | (1,969 | ) | (46.1 | )% | ||||||||||
| Research and development | 496 | 1,212 | (716 | ) | (59.1 | )% | ||||||||||
| Total operating expenses | $ | 3,404 | $ | 6,622 | $ | (3,218 | ) | (48.6 | )% | |||||||
| Six Months Ended June 30, | Change | |||||||||||||||
| 2024 | 2023 | Amount | % | |||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Sales and marketing | $ | 1,052 | $ | 1,998 | $ | (946 | ) | (47.3 | )% | |||||||
| General and administrative | 4,770 | 8,412 | (3,642 | ) | (43.3 | )% | ||||||||||
| Research and development | 980 | 2,981 | (2,001 | ) | (67.1 | )% | ||||||||||
| Total operating expenses | $ | 6,802 | $ | 13,391 | $ | (6,589 | ) | (49.2 | )% | |||||||
Sales and Marketing
Sales and marketing expense decreased $0.5 million, or (46.7)% and $0.9 million, or (47.3)%, for the three and six months ended June 30, 2024, respectively, compared to the corresponding periods of 2023, primarily due to a decrease in payroll and related expenses as a result of lower headcount.
General and Administrative
General and administrative expense decreased $1.9 million, or (46.1)%, for the three months ended June 30, 2024 compared to the corresponding period of 2023, due to a $0.5 million decrease in payroll and related expenses as a result of lower headcount, $0.7 million decrease in professional expenses, mainly related to legal fees and $0.7 million decrease in stock-based compensation expense.
General and administrative expense decreased $3.6 million, or (43.3)%, for the six months ended June 30, 2024 compared to the corresponding period of 2023, due to a $1.4 million decrease in payroll and related expenses as a result of lower headcount, $1.1 million decrease in professional expenses, mainly related to legal fees and $1.0 million decrease in stock-based compensation expense.
Research and Development
Research and development expense decreased $0.7 million, or (59.1)%, and $2.0 million, or (67.1)%, for the three and six months ended June 30, 2024, respectively, compared to the corresponding periods of 2023, primarily as a result of decrease in payroll and related expenses as a result of lower headcount.
| 22 |
Other expense
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| (in thousands, except percentages) | ||||||||
| Other income (expense) | ||||||||
| Interest expense | $ | (8 | ) | $ | (553 | ) | ||
| Interest income | 239 | - | ||||||
| Gain on sale of digital currencies | - | 2,096 | ||||||
| Other income | 72 | 130 | ||||||
| Total other income | $ | 303 | $ | 1,673 | ||||
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2024 | 2023 | |||||||
| (in thousands, except percentages) | ||||||||
| Other income (expense) | ||||||||
| Interest expense | $ | (116 | ) | $ | (1,090 | ) | ||
| Interest income | 379 | - | ||||||
| Gain on extinguishment of debt | 535 | - | ||||||
| Gain on sale of digital currencies | - | 5,310 | ||||||
| Other income | 87 | 435 | ||||||
| Total other income | $ | 885 | $ | 4,655 | ||||
During the three months ended June 30, 2024, we recorded other income of $0.3 million, primarily as a result of interest income from cash on-hand. During the three months ended June 30, 2023, we recorded other income of approximately $1.7 million, primarily as a result of gains on sales of our digital asset holdings. This was partially offset due to interest expense related to the 2022 Promissory Note, as amended.
During the six months ended June 30, 2024, we recorded other income of $0.9 million, primarily as a result of interest income and a recognized gain on the extinguishment of the 2022 Promissory Note. During the six months ended June 30, 2023, we recorded other income of $4.7 million, primarily as a result of gains on sales of our digital asset holdings. This was partially offset due to interest expense related to the 2022 Promissory Note, as amended.
Liquidity and Capital Resources
As of June 30, 2024, we held total cash of $20.4 million, all of which was held in the United States. We have a history of operating losses and negative operating cash flows. As we continue to focus on growing our revenues, we expect these trends to continue into the foreseeable future.
On February 1, 2022, we filed a Form S-3, which was subsequently declared effective by the SEC on February 9, 2022, pursuant to which we could issue up to $200 million in common stock, preferred stock, warrants and units. Contained therein, was a prospectus supplement pursuant to which we could sell up to $100 million of our common stock in an “at the market offering” pursuant to an At Market Issuance Sales Agreement we entered into with H.C. Wainwright & Co., LLC (“Wainwright”) on January 31, 2022. We terminated our agreement with Wainwright effective June 3, 2024.
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On July 6, 2022, we entered into a note purchase agreement and completed the sale of an unsecured promissory note (referred to herein as the 2022 Promissory Note) with an original principal amount of $12.8 million in a private placement. After deducting all transaction fees paid by us at closing, net cash proceeds to us at closing were $11.8 million. No interest was to accrue on the 2022 Promissory Note. On August 14, 2023, we entered into an amendment to the 2022 Promissory Note with the noteholder. The amendment extended the maturity date to June 1, 2024 and provided that effective August 1, 2023, we were required to make monthly amortization payments of at least $800 thousand commencing on August 31, 2023 until the 2022 Promissory Note is paid-in-full. We also granted the noteholder certain limited conversion rights, which if elected by the noteholder, would reduce the required monthly payment. The limited conversion rights were subject to advance payment and volume conditions. The amendment also provided that the outstanding balance shall accrue interest at a rate of 8% and payment deferrals are no longer permitted under the 2022 Promissory Note. During the first quarter of 2024, we issued 336,550 shares of our common stock to the holder of the 2022 Promissory Note. These conversions were made pursuant to the terms of the amended 2022 Promissory Note. In addition, conversions were made in connection with the Company granting the holder additional conversion rights. As a result of the conversions, the 2022 Promissory Note has been paid-in-full.
On August 22, 2023, we entered into a common stock purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right, but not the obligation, to sell to Lincoln Park up to $30.0 million in value of shares of our common stock from time to time over the 24-month term of the purchase agreement. Concurrently with entering into the purchase agreement, we also entered into a registration rights agreement with Lincoln Park pursuant to which the Company agreed to register the sale of the shares of the Company’s common stock that have been and may be issued to Lincoln Park under the purchase agreement pursuant to the Company’s existing shelf registration statement on Form S-3. During the six-month period ended June 30, 2024, we did not sell any shares to Lincoln Park. As of the date of this Report, $29.0 million in value of shares of our common stock remains issuable pursuant to the purchase agreement with Lincoln Park.
On January 16, 2024, we entered into a definitive securities purchase agreement with certain institutional investors for the purchase and sale of an aggregate of 800,000 shares of our common stock and pre-funded warrants to purchase up to 950,000 shares of our common stock for gross proceeds of approximately $7 million. The holders of the pre-funded warrants have exercised their rights to purchase all of the underlying common stock.
On January 18, 2024, we entered into a definitive securities purchase agreement with certain institutional investors for the purchase and sale of an aggregate of 1,096,000 shares of our common stock and pre-funded warrants to purchase up to 24,000 shares of our common stock for gross proceeds of approximately $5.6 million. The holders of the pre-funded warrants have exercised their rights to purchase all of the underlying common stock.
On February 9, 2024, we consummated a registered public offering of an aggregate of 800,000 shares of our common stock. We entered into securities purchase agreements with certain institutional investors, and as a result of the registered public offering, we raised gross proceeds of approximately $10 million.
On June 4, 2024, we entered into an Equity Distribution Agreement with Canaccord Genuity LLC (“Canaccord”), as representative of certain agents, pursuant to which we may offer and sell, from time to time, shares of our common stock for aggregate gross proceeds of up to $120 million, through the agents.
During the six months ended June 30, 2024, we sold an aggregate of 500,051 shares of our common stock under our At Market Issuance Sales Agreement with Wainwright and Equity Distribution Agreement with Canaccord for aggregate gross cash proceeds of $4.2 million. Transaction costs were $0.2 million. From July 1, 2024 through the date of this Report, we sold additional shares of our common stock under the Equity Distribution Agreement with Canaccord for aggregate gross proceeds $16.6 million. As of the date of this Report, up to $101.7 million of shares of our common stock remain available for offer and sale pursuant to the Equity Distribution Agreement with Canaccord.
Although we expect to generate operating losses and negative operating cash flows in the future, based on the financing events described above, management believes it has sufficient cash on hand for at least one year following the filing date of this Quarterly Report on Form 10-Q.
| 24 |
Our future capital requirements will depend on many factors, including our pace of growth, subscription renewal activity, the timing and extent of spend to support development efforts, the expansion of sales and marketing activities and the market acceptance of our products and services. We believe that it is likely we will in the future enter into arrangements to acquire or invest in complementary businesses, technologies and intellectual property rights. We may be required to seek additional equity or debt financing, or issue securities under our effective registration statement described above. If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired and/or on acceptable terms, our business, operating results and financial condition could be adversely affected.
The accompanying consolidated financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the ordinary course of business.
The following table summarizes our cash flows for the periods presented:
| Six Months Ended June 30, | ||||||||
| (in thousands, except percentages) | 2024 | 2023 | ||||||
| Consolidated statement of cash flows | ||||||||
| Net cash used in operating activities | $ | (8,205 | ) | $ | (12,560 | ) | ||
| Net cash provided by investing activities | $ | - | $ | 15,381 | ||||
| Net cash provided by (used in) financing activities | $ | 24,640 | $ | (3,719 | ) | |||
Operating Activities
The primary source of cash from operating activities is receipts from sales of our various product and service offerings to customers. The primary uses of cash from operating activities are payments to employees for compensation and related expenses, publishers and other vendors for the purchase of digital media inventory and related costs, sales and marketing expenses and general operating expenses.
We utilized $8.2 million of cash from operating activities during the six months ended June 30, 2024, resulting in a net loss of $4.9 million. The net loss included non-cash charges of $1.2 million, primarily consisting of stock-based compensation. In addition, certain changes in our operating assets and liabilities resulted in a cash decrease of $4.5 million, primarily relating to a decrease in accounts payable and accrued expenses.
We utilized $12.6 million of cash from operating activities during the six months ended June 30, 2023, resulting in a net loss from continuing operations of $8.1 million. The net loss included a gain on the sale of digital assets of $5.3 million and other non-cash charges of approximately $3.8 million, primarily consisting of stock-based compensation. In addition, certain changes in our operating assets and liabilities resulted in a cash decrease of $1.5 million, primarily relating to a decrease in deferred revenue. Further cash decreases were the result of $1.4 million from the discontinued operations of Lyte.
Investing Activities
Investing activities for the six months ended June 30, 2023 consisted mainly of the sales of our digital asset holdings.
| 25 |
Financing Activities
Our financing activities during the six months ended June 30, 2024 consisted of various sales of our common stock. Refer to the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information.
Our financing activities during the six months ended June 30, 2023 consisted of payments on our 2022 Promissory Note of $4.3 million, $0.5 million for repurchases of shares of our common stock and $1.0 million in proceeds from the sale of our common stock.
Contractual Obligations
Information set forth in Note 6, “ Leases,” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
Off-Balance Sheet Arrangements
Through June 30, 2024, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.
Indemnification Agreements
In the ordinary course of business, we provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, solutions to be provided by the Company or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with directors and certain current and former officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of, or are related to, their status or service as directors, officers or employees.
Recent Accounting Pronouncements
Refer to Note 2, “ Summary of Significant Accounting Policies ,” in the notes to the condensed consolidated financial statements included in Item I, Part I of this Quarterly Report on Form 10-Q for analysis of recent accounting pronouncements applicable to our business.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Except for the changes described in Note 2, “ Summary of Significant Accounting Policies ,” in the notes to the condensed consolidated financial statements included in Item I, Part I of this Quarterly Report on Form 10-Q, there have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 15, 2024.
| 26 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers (as defined below), or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (together, the “Certifying Officers”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our Certifying Officers concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Report.
Changes in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, management identified a material weakness in internal control over financial reporting related to the design of information technology general controls (“ITGCs”) related to user access, program change and appropriate segregation of duties for certain IT applications. Further, as a result of cost cutting measures and headcount turnover in our accounting function, business process controls across the Company’s financial reporting processes were not effectively designed and implemented due to a lack of segregation of duties between preparer and reviewer.
Our planned remediation efforts to address the above material weaknesses are ongoing and include designing and implementing ITGCs to manage user access and program changes across our key systems and investing in the hiring of additional personnel and/or implementing additional compensating controls in our accounting function due to limited personnel. Management is committed to continuous improvement of our internal control over financial reporting and will continue to diligently review our financial reporting controls and procedures. However, we cannot provide any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts.
Except as set forth above, there were no changes in our internal control over financial reporting identified in conjunction with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth under the “ Litigation ” subheading in Note 7, “ Commitments and Contingencies, ” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.
Item 1A. Risk Factors
Important risk factors that could affect our operations and financial performance, or that could cause results or events to differ from current expectations, are described in Part I, Item 1A, “ Risk Factors ” of our Annual Report on Form 10-K filed with the SEC on March 15, 2024 for the year ended December 31, 2023 or contained elsewhere in this Report. The risks and uncertainties described within our Form 10-K for the year ended December 31, 2023 are not the only risks we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Unless otherwise noted, the exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
| * | Filed herewith |
| (1) | The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| August 9, 2024 | Phunware, Inc. | |
| By: | /s/ Michael Snavely | |
| Name: | Michael Snavely | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| August 9, 2024 | By: | /s/ Troy Reisner |
| Name: | Troy Reisner | |
| Title: | Chief Financial Officer | |
| (Principal Accounting and Financial Officer) | ||
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