What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-14 compared with 2020-11-12 · 109 added, 201 removed, 163 unchanged (66% of the section changed)

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Certain other amounts that appear in this section may similarly not sum due to rounding.

Key Events and Recent Developments

On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) as a pandemic.

The outbreak is having an impact on the global economy, resulting in rapidly changing market and economic conditions.

The COVID-19 outbreak in the United States has caused business disruption through mandated and voluntary closing of businesses and cancellation of events for which the Company's application transition business serves.

Furthermore, the Company’s platform software and services business serves healthcare and hospitals throughout the United States.

While the disruption is currently expected to be temporary, there is considerable uncertainty around the duration of the closings and cancellations.

The related financial impact and duration cannot be reasonably estimated at this time.

We implemented a work-from-home policy for our employees effective March 16, 2020 and we are taking steps to implement measures to reduce operating expenses.

To that end, on March 27, 2020, the Company committed to cost reduction by furloughing 37 persons, or approximately 42% of its workforce.

From March 27, 2020 to September 30, 2020, the Company had recalled five employees from furlough and eight voluntary terminated.

On April 10, 2020, the Company received loan proceeds in the amount of 2,850,336 from JPMorgan Chase, N.A.

pursuant to the Paycheck Protection Program ("PPP") under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), which was enacted on March 27, 2020.

The principal amount of the PPP loan is subject to forgiveness under the PPP upon Phunware’s request to the extent that PPP loan proceeds are used to pay qualifying expenses permitted by the PPP.

Although the Company currently anticipates a portion of the loan to be forgiven, there can be no assurance that any part of the PPP loan will be forgiven.

Risk Factors, in Part II of this Quarterly Report on Form 10-Q and Part I of in our Annual Report on Form 10-K filed with the SEC on March 30, 2020, for additional information.

On October 9, 2020, the Company entered into a Settlement Agreement and Mutual General Release with Uber Technologies, Inc.

("Uber") and certain other parties related to the Company's complaint against Uber, Uber's cross-complaint against the Company and Uber's amended cross-complaint against the Company and Individual Defendants.

The Company will pay to Uber a total sum of $4.5 million in a series of installments beginning no later than December 31, 2020, and ending no later than September 30, 2021.

Refer to Note 7 " Commitments and Contingencies" in the notes to the condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Phunware, Inc.

offers a fully integrated software platform that equips companies with the products, solutions and services necessary to engage, manage and monetize their mobile application portfolios globally at scale.

Phunware’s Multiscreen-as-a-Service ("MaaS") platform provides the entire mobile lifecycle of applications, media and data in one login through one procurement relationship.

Its offerings include:

• Enterprise mobile software including content management, location-based services, marketing automation, business intelligence and analytics, alerts, notifications and messaging, audience engagement, audience

monetization, vertical solutions and cryptonetworking, MaaS software application framework that pre-integrates all of our MaaS software ingredients for use within mobile application portfolios, solutions and services;

Our Multiscreen-as-a-Service ("MaaS") platform provides the entire mobile lifecycle of applications, media and data in one login through one procurement relationship.

Our offerings include:

• Enterprise mobile software development kits (SDKs) including content management, location-based services, marketing automation, business intelligence and analytics, alerts, notifications and messaging, audience engagement, and audience monetization;

• Integration of our SDK licenses into existing applications maintained by our customers, as well as custom application development and support services;

• Cloud-based vertical solutions, which are off-the-shelf, iOS- and Android-based mobile application portfolios, solutions and services that address:

the patient experience for healthcare, the shopper experience for retail, the fan experience for sports, the traveler experience for aviation, the luxury resident experience for real estate, the luxury guest experience for hospitality, the student experience for education and the generic user experience for all other verticals and applications;

• Application transactions for mobile audience building, user acquisition, application discovery, audience engagement and audience monetization.

• Data for data enrichment expanding connections and attributes of a Phunware ID and building custom audience for use in mobile media.

We intend to continue investing for long-term growth.

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We expect backlog to fluctuate up or down from period to period for several reasons, including the timing and duration of customer contracts, varying billing cycles and the timing and duration of customer renewals.

We reasonably expect approximately half of our backlog as of March 31, 2021 will be invoiced during the subsequent 12-month period, primarily due to the fact that our contracts are typically one to three years in length.

In addition, our deferred revenue consists of amounts that have been invoiced but that have not yet been recognized as revenues as of the end of a reporting period.

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The following table sets forth the backlog and deferred revenue:

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(in thousands)

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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.

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.

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 its ongoing operating performance for a particular period;

• 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 its GAAP results and using our non-GAAP financial measures only for supplemental purposes.

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.

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For example, it is useful to exclude non-cash, stock-based compensation expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and these expenses can vary significantly across periods due to timing of new stock-based awards.

We may also exclude certain discrete, unusual, one-time, or non-cash costs, including transaction costs and the income tax impact of adjustments in order to facilitate a more useful period-over-period comparison of its financial performance.

We may also exclude certain discrete, unusual, one-time, or non-cash costs in order to facilitate a more useful period-over-period comparison of its financial performance.

Each of the normal recurring adjustments and other adjustments described in this paragraph help management with a measure of our operating performance over time by removing items that are not related to day-to-day operations or are non-cash expenses.

The following table sets forth the non-GAAP financial measures we monitor.

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

(in thousands) (in thousands)

Three Months Ended March 31,

(in thousands, except percentages) 2021 2020

Adjusted gross profit (1)

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The following tables set forth a reconciliation of the most directly comparable GAAP financial measure to each of the non-GAAP financial measures discussed above.

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

(in thousands) (in thousands)

Three Months Ended March 31,

(in thousands, except percentages) 2021 2020

Gross profit $ 954 $ 1,549

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Adjusted gross margin 71.0 % 60.9 %

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

(in thousands) (in thousands)

Three Months Ended March 31,

(in thousands) 2021 2020

Net loss $ (12,363) $ (3,963)

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Interest expense 2,219 101

Income tax expense — — — 5

EBITDA (10,111) (3,813)

Stock-based compensation 1,055 635

Legal settlement 4,500 — 4,500 —

Loss on extinguishment of debt 5,768 —

Fair value adjustment for warrant liabilities (1,244) — (1,244) —

Loss on change in fair value of warrant liability 885 —

Adjusted EBITDA $ (2,403) $ (3,178)

The above non-GAAP financial measures are inclusive of an acceleration of revenue related to a contract termination by a customer during the current quarter.

Refer to Results of Operations - Net Revenues below for further discussion.

Components of Results of Operations

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Platform Subscriptions and Services Revenue.

Subscription revenue is derived from software license fees, which comprise subscription fees from customers licensing the Company’s Software Development Kits (SDKs), which includes accessing the MaaS platform and/or MaaS platform data;

application development service revenue from the development of customer applications, or apps, which are built and delivered to customers;

Subscription revenue is derived from software license fees, which comprise subscription fees from customers licensing our Software Development Kits (SDKs), that includes accessing the MaaS platform;

application development service revenue from the development of customer applications, or apps, built and delivered to customers;

and support fees.

Subscription revenue from SDK licenses gives the customer the right to access the Company’s MaaS platform.

Subscription revenue from SDK licenses gives the customer the right to access our MaaS platform.

Application development revenue is derived from development services around designing and building new applications or enhancing existing applications.

Support revenue is comprised of support and maintenance fees of customer applications, software updates and technical support for application development services for a support term.

From time to time, the Company also provides professional services by outsourcing employees’ time and materials to customers.

From time to time, we also provide professional services by outsourcing employees’ time and materials to customers.

Platform subscriptions and services gross profit is equal to subscriptions and services revenue less the cost of personnel and related costs for our support and professional services employees, external consultants, stock-based compensation and allocated overhead.

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Depending on the specific terms of each advertising contract, we generally recognize revenue based on the activity of mobile users viewing these ads.

Fees from advertisers are commonly based on the number of ads delivered or views, clicks, or actions by users on mobile advertisements delivered, and we recognize revenue at the time the user views, clicks, or otherwise acts on the ad.

We sell ads through several offerings:

cost per thousand impressions, cost per click and cost per action.

In addition, we generate application transaction revenue thru in-app purchases from application on our platform.

Fees from advertisers are commonly based on the number of ads delivered or views or clicks by users on mobile advertisements delivered, and we recognize revenue at the time the user views or clicks on the ad.

We sell our ads by cost per thousand impressions and cost per click.

Application transaction gross profit is equal to application transaction revenue less cost of revenue associated with application transactions.

Application transaction gross profit is impacted by the cost of direct premium, performance and network cost as well as based on the activity of mobile users viewing ads and marketing engagements through mobile applications.

As a result, our application transaction gross profit may fluctuate from period to period due to variable activity of mobile users.

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 measures gross profit as a percentage of revenue.

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Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and, in sales and marketing expense, commissions.

Legal settlements pertaining to litigation brought as a result of the Company's operations is also included in the Company's operating expenses.

Legal settlements pertaining to litigation brought as a result of the Company's operations is also included in operating expenses.

Sales and Marketing Expense.

Sales and marketing expense is comprised of compensation, commission expense, variable incentive pay and benefits related to sales personnel, along with travel expenses, other employee related costs, including stock-based compensation and expenses related to marketing programs and promotional activities.

We expect our sales and marketing expense to increase in absolute dollars as we increase our sales and marketing organizations as we plan to increase revenue but may fluctuate as a percentage of our total revenue from period to period.

We expect our sales and marketing expense will increase in absolute dollars as we increase our sales and marketing organizations as we plan to increase revenue but may fluctuate as a percentage of our total revenue from period to period.

General and Administrative Expense.

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Interest Expense

Interest expense includes interest related to our outstanding debt, including amortization of discounts and deferred issuance costs, as well as, factoring fees related to our factoring financing arrangement.

Our board of directors has authorized two different debt offerings allowing the Company to seek up to $20 million in each debt offering.

We further have entered into certain related party bridge loans and multiple convertible note arrangements.

Refer to Note 5 " Factoring Agreement " and Note 6 " Debt " in the notes to the condensed consolidated financial statements included Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on our factoring arrangement and debt offerings, respectively.

We also may seek additional debt financings to fund the expansion of our business or to finance strategic acquisitions in the future, which may have an impact on its 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 financings to fund the expansion of our business or to finance strategic acquisitions in the future, which may have an impact on our interest expense.

Results of Operations

Three Months Ended September 30, Change

2020 2019 Amount %

(in thousands)

Platform subscriptions and services $ 2,860 $ 5,152 $ (2,292) (44.5) %

Application transaction 270 485 (215) (44.3) %

Net revenues $ 3,130 $ 5,637 $ (2,507) (44.5) %

Platform subscriptions and services as a percentage of net revenues 91.4 % 91.4 %

Application transactions as a percentage of net revenues 8.6 % 8.6 %

Nine Months Ended September 30, 2020 Change

2020 2019 Amount %

(in thousands)

Three Months Ended March 31, Change

(in thousands, except percentages) 2021 2020 Amount %

Platform subscriptions and services $ 1,521 $ 2,391 $ (870) (36.4) %

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Application transactions as a percentage of net revenues 7.6 % 9.4 %

Net revenues decreased $2.5 million, or (44.5)%, for the three months ended September 30, 2020 compared to the corresponding period in 2019.

Platform subscriptions and services revenue decreased $2.3 million, or (44.5)%, driven by the completion of our statement of work with Fox Networks Group ("Fox") on September 30, 2019.

Revenue from Fox was approximately $3.1 million three months ended September 30, 2019.

This decrease was partially offset by an acceleration of revenue related to the termination of a customer contract which represented 21% of the Company's revenue during the period, as well as fulfillment of other customer contracts.

See the subheading titled, " Concentrations of Credit Risk, " in Note 1, " The Company and Basis of Presentation " in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Application transaction revenue decreased $0.2 million, or (44.3)%, for the three months ended September 30, 2020, compared to the corresponding period in 2019, primarily because of decrease in app store revenue and the various decreased or ceased advertising campaigns.

Net revenues decreased $8.5 million, or (51.5)%, for the nine months ended September 30, 2020 compared to the corresponding period in 2019.

Platform subscriptions and services revenue decreased $7.8 million, or (51.7)%, driven by the completion of our statement of work with Fox, as noted above.

Revenue from Fox was approximately $9.5 million nine months ended September 30, 2019.

This decrease was partially offset by acceleration of revenue as a result of the contract termination noted above, as well as, the fulfillment of other customer contracts.

Application transaction revenue decreased $0.7 million, or (49.2)%, for the nine months ended September 30, 2020, compared to the corresponding period in 2019, primarily because of the various decreased or ceased advertising campaigns.

Net revenues decreased $1.0 million, or (37.7)%, for the three months ended March 31, 2021 compared to the corresponding period in 2020.

Platform subscriptions and services revenue decreased $0.9 million, or (36.4)%, primarily driven by development, licensing and support services provided to a customer during 2020.

This customer is identified as " Customer F" in Note 3, Revenue in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this quarterly report on Form 10-Q.

Application transaction revenue decreased $0.1 million, or (49.8)%, for the three months ended March 31, 2021, compared to the corresponding period in 2020, primarily due to a decrease in app store revenue.

Cost of Revenues, Gross Profit and Gross Margin

Three Months Ended September 30, Change

2020 2019 Amount %

(in thousands)

Cost of Revenues

Platform subscriptions and services $ 845 $ 2,299 $ (1,454) (63.2) %

Application transaction 53 119 (66) (55.5) %

Total cost of revenues $ 898 $ 2,418 $ (1,520) (62.9) %

Platform subscriptions and services 2,015 $ 2,853 $ (838) (29.4) %

Application transaction 217 366 (149) (40.7) %

Total gross profit $ 2,232 $ 3,219 $ (987) (30.7) %

Platform subscriptions and services 70.5 % 55.4 %

Application transaction 80.4 % 75.5 %

Total gross margin 71.3 % 57.1 %

Nine Months Ended September 30, 2020 Change

2020 2019 Amount %

(in thousands)

Three Months Ended March 31, Change

(in thousands, except percentages) 2021 2020 Amount %

Cost of Revenues

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Total gross margin 58.0 % 58.7 %

Total gross profit decreased $1.0 million, or (30.7)% and $3.5 million, or (40.0)% for the three and nine months ended September 30, 2020, respectively, when compared to the corresponding period of 2019, due to the revenue items described above, as well as lower application transaction costs due to decreased or ceased advertising campaigns.

Operating Expenses

Three Months Ended September 30, Change

2020 2019 Amount %

(in thousands)

Total gross profit decreased $0.6 million, or (38.4)% for the three months ended March 31, 2021, when compared to the corresponding period of 2020, due to the revenue items described above.

Operating Expenses

Sales and marketing $ 383 $ 705 $ (322) (45.7) %

General and administrative 4,276 3,754 522 13.9 %

Research and development 572 1,052 (480) (45.6) %

Legal Settlement 4,500 — 4,500 100.0 %

Total operating expenses $ 9,731 $ 5,511 $ 4,220 76.6 %

Nine Months Ended September 30, 2020 Change

2020 2019 Amount %

(in thousands)

Three Months Ended March 31, Change

(in thousands, except percentages) 2021 2020 Amount %

Operating expenses

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Research and development 1,052 861 191 22.2 %

Legal Settlement 4,500 — 4,500 100.0 %

Total operating expenses $ 4,366 $ 5,411 $ (1,045) (19.3) %

Sales and Marketing

Sales and marketing expense decreased $0.3 million, or (45.7)% for the three months ended September 30, 2020 compared to the corresponding period of 2019, primarily due to reduced employee compensation costs as a result of lower headcount of $0.1 million and $0.2 million related to marketing events and travel.

Sales and marketing expense decreased $0.8 million, or (39.6)% for the nine months ended September 30, 2020 compared to the corresponding period of 2019, primarily due to reduced employee compensation costs as a result of lower headcount of $0.4 million.

Other decreases of $0.2 million due to reduction of marketing related events and expenditures and $0.2 million due to reduction in travel and consulting expense.

Sales and marketing expense decreased $0.05 million, or (8.1)% for the three months ended March 31, 2021 compared to the corresponding period of 2020, primarily due to reduced employee compensation costs as a result of lower headcount of $0.1 million.

This is partially offset with an increase in stock-based compensation expense.

General and Administrative

General and administrative expense increased $0.5 million, or 13.9% for the three months ended September 30, 2020 compared to the corresponding period of 2019, due to increase of $1 million in stock-based compensation and $0.4 million in legal fees mainly related to our litigation with Uber, as described in detail in the section titled “Legal Proceedings,” in Part II, Item 1 of this Quarterly Report on Form 10-Q .

These decreases were primarily offset by $0.4 million reduction in IT related expenses such as software and other miscellaneous office expenses, $0.3 million in professional and contract labor expenses and $0.2 million in settlements of accounts payable balances.

General and administrative expense increased $0.3 million, or 2.4% for the nine months ended September 30, 2020 compared to the corresponding period of 2019, due to increase of $2.3 million in stock-based compensation and $0.3 million in legal fees mainly related to our litigation with Uber.

These decreases were primarily offset by $0.8 million in software and hosting expenses, $0.7 million in professional and contract labor expenses, $0.3 million for payroll and related costs due to a decrease in headcount, $0.2 million in travel expense, $0.2 million in settlements of accounts payable balances previously expensed and $0.1 million in bad debt expense.

General and administrative expense decreased $1.2 million, or (30.1)% for the three months ended March 31, 2021 compared to the corresponding period of 2020, due to a decrease of $0.5 million in headcount related costs, a decrease of $0.5 million in legal fees mainly related to our previous litigation with Uber, which was settled in October 2020 and $0.2 million in bad debt recovery.

Research and Development

Research and development expense decreased $0.5 million, or (45.6)% and $1.6 million, or (47.3)% for the three and nine months ended September 30, 2020, respectively, compared to the corresponding period of 2019, primarily due to reduced employee compensation costs as a result of lower headcount, travel expense and stock-based compensation.

Legal Settlement

Legal settlement of $4.5 million relates to the settlement of the Company's litigation with Uber as described in detail in Note 7 " Commitments and Contingencies" in the notes to the condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Other expense

Three Months Ended September 30, Change

2020 2019 Amount %

(in thousands)

Research and development expense increased $0.2 million, or 22.2%, for the three months ended March 31, 2021, compared to the corresponding period of 2020, primarily due to increases of $0.1 million for headcount dedicated to research and development projects and $0.1 million in stock-based compensation expense.

Other expense

Interest expense $ (1,362) $ (145) $ (1,217) 839.3 %

Loss on extinguishment of debt (950) — (950) 100.0 %

Fair value adjustment for warrant liabilities 1,244 — 1,244 100.0 %

Other income (expense) — 11 (11) (100.0) %

Total other expense $ (1,068) $ (134) $ (934) 697.0 %

Nine Months Ended September 30, 2020 Change

2020 2019 Amount %

(in thousands)

Three Months Ended March 31, Change

(in thousands, except percentages) 2021 2020 Amount %

Other expense

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Loss on extinguishment of debt (5,768) — (5,768) 100.0 %

Fair value adjustment for warrant liabilities 1,244 — 1,244 100.0 %

Loss on change in fair value of warrant liability (885) — (885) 100.0 %

Other income (expense) (79) — (79) 100.0 %

Total other expense $ (8,951) $ (101) $ (8,850) 8,762.4 %

Other expense increased $0.9 million and $1.3 million for the three and nine months ended September 30, 2020, respectively, when compared to the corresponding period of 2019, primarily due to losses on extinguishment of debt and interest related to our debt borrowings as further described in Note 6 " Debt" in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

This is partially offset by gain in fair value adjustment for warrant liabilities and by a lower amount of financing used, and corresponding interest under our factoring financing arrangement.

Other expense increased $8.9 million for the three months ended March 31, 2021, compared to the corresponding period of 2020, primarily due to losses on extinguishment of debt and interest related to our debt borrowings as further described in Note 5 " Debt" in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Liquidity and Capital Resources

As of September 30, 2020, we held total cash (including restricted cash) of $1.2 million, of which over 99% of our cash was held in the United States.

In April 2019, the Company’s board of directors authorized the issuance of $20 million of convertible promissory notes (the “Convertible Notes”).

The Convertible Notes bear ordinary interest at a rate of 7% per annum and mature on June 3, 2024.

The Convertible Notes are convertible into shares of the Company’s common stock at a price of $11.50 per share.

Each Convertible Note will convert voluntarily upon a holder’s election, or automatically upon the closing sale price of the Company’s common stock equals or exceeds $17.25 per share for 20 out of 30 consecutive trading days, if a registration statement is then in effect covering the disposition of the converted shares.

The Company has one Convertible Note with a balance outstanding of $250 thousand as of September 30, 2020.

Refer to Note 6 “ Debt ” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on the Convertible Notes.

In October 2019, the Company’s board of directors authorized the issuance of $20 million of promissory notes (the “Notes”).

The Notes bear ordinary interest at a rate of 10% per annum.

During the term of the Notes, the Company will maintain a restricted bank account with a minimum balance of one year of interest payments on the aggregate principal balance of all Notes, which will be available for use exclusively to satisfy any payments owed by the Company under the Notes.

The principal and unpaid accrued interest on the Notes will be due and payable on demand by the majority Note holders on or after the date that is 60 months following November 15, 2019.

The Notes have a balance outstanding of $905 thousand as of September 30, 2020.

Refer to Note 6 “ Debt ” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on the Notes.

During the first quarter of 2020, various related parties loaned the Company $560 thousand.

The Related-Party Bridge Loans ("RPBLs") have an interest of 10% per annum and will mature on November 14, 2024.

Payments on or payoff of the RPBLs may be made early with no penalty.

Refer to Note 6 “ Debt ” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on the RPBLs.

On March 19, 2020, the Company entered into a Securities Purchase Agreement for the sale of a Senior Convertible Note with an institutional investor with a principal amount of $3.0 million (the “Senior Convertible Note”) for a cash purchase price of approximately $2.8 million (reflecting an original issue discount of $0.2 million) in a private placement that closed on March 20, 2020.

After deducting the placement agent fee and other estimated expenses, net cash proceeds at the closing were approximately $2.4 million.

In addition, we granted the noteholder participation rights in future equity and equity-linked offerings of securities during the two years after the closing in an amount of up to 30% of the securities being sold in such offerings.

The Senior Convertible Note was redeemed for cash and paid in full with the issuance of the 2020 Convertible Notes on July 15, 2020.

Refer to Note 6 “ Debt ” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on the Senior Convertible Notes.

On April 10, 2020, the Company received loan proceeds in the amount of $2.85 million from JPMorgan Chase, N.A.

pursuant to the PPP ("PPP Loan") under the CARES Act.

The loan, which was in the form of a note dated April 9, 2020, matures on April 9, 2022, bears interest at a rate of 0.98% per annum.

The Paycheck Protection Flexibility Act of 2020, extended the deferral period for loan payments to either (i) the date that SBA remits the borrower’s loan forgiveness amount to the lender or (ii) if the borrower does not apply for loan forgiveness, ten months after the end of the borrower’s loan forgiveness covered period.

The note may be prepaid by the Company at any time prior to the maturity with no prepayment penalties.

Refer to Note 6 “ Debt ” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on the PPP Loan.

On July 15, 2020, the Company issued a Series A Senior Convertible Note (a “Series A Note”) to an institutional investor with an initial principal amount of $4,320 (reflecting an original issue discount of $320) in a private placement.

As noted above, the Company repaid in full the outstanding principal balance, accrued and unpaid interest and make-whole amount on the Senior Convertible Note issued on March 20, 2020 to the same investor.

After the payoff of the Senior Convertible Note and deducting transaction costs, aggregate net cash proceeds to the Company was $1,751.

On the same date, the Company issued a Series B Senior Secured Convertible Note (a “Series B Note,” and together with the Series A Note, the “2020 Convertible Notes”) to the same investor which the noteholder paid for by delivering an offsetting secured promissory note (the “Investor Note”).

On September 15, 2020, the Company exercised its right under the Investor Note to require a mandatory prepayment of the Investor Note of $1,000, which the Company received in cash.

The Series A Note and outstanding balance on the Series B Note each bear interest at a rate of 7% per annum and includes a make-whole of interest from the date of issuance through the maturity date of December 31, 2021.

Refer to Note 6 “ Debt ” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on the 2020 Convertible Notes.

Going Concern

The Company has a history of operating losses and negative operating cash flows.

Although the Company continues to focus on growing its revenues, it expects these trends to continue into the foreseeable future.

We will be required to raise additional capital through debt or equity financings and/or reduce operating expenses.

Despite a history of successfully implementing similar plans to alleviate adverse financial conditions, these sources of working capital are not currently assured.

There can be no assurance that we will be able to consummate such financings on favorable terms or at all.

These conditions raise substantial doubt about our ability to continue as a “going concern”.

As of March 31, 2021, we held total cash (including restricted cash) of $23.6 million, all of which was held in the United States.

On October 9, 2020, we entered into a settlement agreement with Uber Technologies, Inc.

("Uber") and certain other parties related to our complaint against Uber, Uber's cross-complaint and amended cross-complaint against us and certain individual defendants.

The settlement agreement provides that we will pay to Uber a total sum of $4.5 million in a series of installments.

We recorded a charge in the third quarter of 2020 related to the settlement agreement.

As of March 31, 2021, we owe $3 million related to the settlement, which will be paid in various installments ending no later than September 30, 2021.

For further information related to the Uber settlement agreement, refer to Note 9 " Commitments and Contingencies" of the notes to the consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K filed with the SEC on March 31, 2021.

As of March 31, 2021, the principal balance of our debt was approximately $15.1 million from various debt, including a Paycheck Protection Program ("PPP") loan and convertible debt offerings.

The debt we believe will have the most significant impact on our future liquidity and capital resources is discussed below.

For further information on all our debt outstanding as of March 31, 2021, refer to Note 5 “ Debt ” of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

In April 2020, we received a PPP loan of approximately $2.85 million, which bears interest at a rate of 0.98% per annum.

The Paycheck Protection Flexibility Act of 2020, extended the deferral period for loan payments.

The Company currently anticipates its first PPP loan payment will be made in the third quarter of 2021.

Although we intend to apply for forgiveness, as currently provided for under terms of the PPP loan and the CARES Act, there can be no assurance that any part of our PPP loan will be forgiven.

The PPP loan matures in April 2022.

During 2020, we issued a series of convertible notes to an institutional investor.

As of March 31, 2021, the unrestricted principal balance of our Series A Convertible Note and Series B Convertible Note (collectively, the "2020 Convertible Notes") was $0 as we had paid the Series A Convertible Note in full during the first quarter of 2021 and $11.1 million, respectively.

The 2020 Convertible Notes were issued with an original issue discount of 8% and each bear an interest rate of 7% per annum, which further includes a make-whole of interest (for unrestricted principal amounts) from the date of issuance through the maturity date of December 31, 2021.

Outstanding principal on the 2020 Convertible Notes was subject to monthly installment payments in cash of 107% of the installment amount due.

The noteholder had various redemption rights, such as the right to redeem an amount equal to 40% of the net proceeds from a qualified capital raise, or upon change of control or company default.

The noteholder could also convert 2020 Convertible Notes into shares of our common at a current adjusted conversion price of $2.25 per share.

Upon consummation of the issuance of the 2020 Convertible Notes, we also issued the note holder a warrant for the purchase of up to 2,160,000 shares of our common stock, which has a current adjusted exercise price of $2.25 per share.

We also had the right to redeem the full amount of the outstanding principal under the 2020 Convertible Notes.

In January 2021, we issued 2,670,121 shares of common stock for aggregate proceeds of $5.1 million, net of $0.2 million of commissions (and before noteholder redemption payment) pursuant to the terms of an at-the-market offering, which has concluded.

In February 2021, we also issued 11,761,111 shares of our common stock for aggregate proceeds at closing of $24.7 million in an underwritten public offering, net of $1.7 million of underwriter commissions and other underwriter costs.

As a result of the fundraising events above, the holder of our 2020 Convertible Notes elected to require us to use forty percent (40%) of the net proceeds satisfy obligations under the 2020 Convertible Notes, pursuant to which we paid approximately $11.5 million to the noteholder.

Upon issuance of the 2020 Convertible Notes, the noteholder issued an investor note to us, which offset the combined restricted balances of the 2020 Convertible Notes.

In March 2021, the noteholder voluntarily prepaid an aggregate of $10.3 million pursuant to the terms of the investor note.

As a result, we received cash proceeds of $10.3 million and the corresponding amount of principal of the Series B Note, representing the entire remaining amount remaining of restricted principal as of that date, along with $0.8 million of original issue discount became unrestricted and outstanding.

As of March 31, 2021, the restricted principal balance of both the Series A Convertible Note and Series B Convertible Note was $0 and the balance of the corresponding investor note was $0.

On March 25, 2021, we delivered a Company Optional Redemption Notice to the holder of our Series B Note exercising our right to redeem and fully satisfy all obligations under the Series B Note on April 5, 2021.

On April 5, 2021, we paid $13,902 in cash to the noteholder in full satisfaction of all obligations under our Series B Note, which amounted to $11,718 of principal, interest and make-whole and $2,184 for the loss on extinguishment of debt.

Given the financings achieved above, we believe our current cash position to be sufficient to meet our projected operating requirements for at least the next twelve months from the filing of this Report on Form 10-Q.

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.

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.

In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all.

If we are unable to raise additional capital when desired and/or on acceptable terms, our business, operating results and financial condition could be adversely affected.

The following table summarizes our cash flows for the periods presented:

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

(in thousands, except percentages) 2021 2020 Amount %

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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 $6.5 million of cash from operating activities during the nine months ended September 30, 2020, primarily resulting from a net loss of $16.0 million, as adjusted $3.5 million for stock-based compensation, $1.2 million for amortization of debt discount and deferred financing costs, $1.2 million for gain on the change in fair value of warrants and $1.0 million for loss on extinguishment of debt.

We utilized $7.3 million of cash from operating activities during the three months ended March 31, 2021, primarily resulting from a net loss of $12.4 million, as adjusted $1.1 million for stock-based compensation $0.2 million for bad debt recovery, $1.6 million for amortization of debt discount and deferred financing costs, $0.9 million for loss on the change in fair value of warrants and $5.8 million for loss on extinguishment of debt related to our 2020 Convertible Notes.

In addition, certain changes in our operating assets and liabilities resulted in significant cash increases (decreases) as follows:

$0.5 million from an increase in accounts payable, $1.3 million from an increase in accrued expenses, $4.5 million from an increase in legal settlement accrual, $0.6 million from an increase in account receivable, $(1.9) million from an decrease in deferred revenue and $(0.1) million from an decrease in prepaid and other assets.

The Company utilized $5.9 million of cash from operating activities during the nine months ended September 30, 2019, primarily resulting from a net loss of $9.0 million, as adjusted $0.2 million for depreciation and amortization, $0.1 million for allowance for doubtful receivables and $1.1 million for stock-based compensation.

$(0.7) million from a decrease in accounts payable, $(2.3) million from a decrease in accrued expenses, $(0.8) million from a decrease in deferred revenue and $0.5 million from an increase in prepaid and other assets.

We utilized $1.9 million of cash from operating activities during the three months ended March 31, 2020, primarily resulting from a net loss of $4.0 million, as adjusted $0.6 million for stock-based compensation.

In addition, certain changes in our operating assets and liabilities resulted in significant cash increases (decreases) as follows:

$(0.3) million from a decrease in accounts payable, $1.0 million from an increase in accrued expenses, $0.3 million from an increase in account receivable, and $0.8 million from an increase in deferred revenue.

$0.9 million from an increase in accounts payable, $0.6 million from an increase in accrued expenses, $0.8 million from an increase in account receivable and $(0.8) million from an decrease in deferred revenue.

Investing Activities

Investing activities for the nine months ended September 30, 2019 consisted of the sale of digital currencies received for warrant exercises.

Investing activities for the three months ended March 31, 2021 consisted of the purchase of digital currencies.

Financing Activities

Our financing activities during the nine months ended September 30, 2020 consisted of proceeds from various debt borrowings offset by net repayments on our financing factoring agreement.

We acquired $7.4 million of cash from financing activities, as a result of $10.8 million from new issuances of debt (inclusive of $0.6 million from related parties) and $1.3 million from our at-the-market offering of common stock.

These sources of financing were partially offset of $4.1 million of payments on debt (inclusive of $0.2 million to related parties), $0.6 million in net repayments on our factoring financing agreement.

Refer to the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on the Company's financing activities.

Financing activities during the nine months ended September 30, 2019 consisted of redemptions and dividends of the Series A convertible preferred stock, as well as net repayments on the Company's financing factoring agreement.

These payments were mostly offset by proceeds from warrant exercises, convertible note, PhunCoin deposits and exercises of options to purchase common stock.

The Company utilized $0.4 million of cash from financing activities, primarily as follows:

$(6.2) million from redemptions and dividend payments of Series A convertible preferred stock, $(0.9) million of repayments from the Company’s factoring financing agreement;

mostly offset by $6.1 million provided by warrant exercise, $0.3 million provided from convertible notes borrowings, $0.2 million from PhunCoin deposits, and $0.2 million from exercises of options to purchase common stock.

Our financing activities during the three months ended March 31, 2021 consisted of proceeds from equity financings and debt borrowings offset by payments on debt.

We acquired $27.9 million of cash from financing activities resulting from $29.7 million in proceeds from the sale of our common stock and $10 million in proceeds from our Series B Convertible Note.

These sources of financing were partially offset by $11.8 million of payments on debt, a majority of which were payments on the 2020 Convertible Notes.

Refer to the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Report on Form 10-Q for information on the Company's financing activities.

Our financing activities during the three months ended March 31, 2020 consisted of proceeds derived from debt borrowings offset by net repayments on our financing factoring agreement.

We acquired $2.5 million of cash from financing activities, resulting from $3.2 million in proceeds from new issuances of debt (inclusive of $0.6 million from related parties), partially offset of $(0.6) million in net repayments on our factoring financing agreement.

Off-Balance Sheet Arrangements

During the periods ended September 30, 2020 and December 31, 2019, the Company 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.

Through March 31, 2021, 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, the Company provides 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, the Company has 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.

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, “ Significant Accounting Policies ”, in the notes to our condensed consolidated financial statements for analysis of recent accounting pronouncements that are applicable to our business.

Refer to Note 2, “ Summary of Significant Accounting Policies ”, in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Report on Form 10-Q for analysis of recent accounting pronouncements that are applicable to our business.

Summary of Significant Accounting Policies

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.

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.

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Actual results may differ from these estimates under different assumptions or conditions.

Except for the changes described in Note 2, " Significant Accounting Policies ," in the notes to our condensed consolidated financial statements related to the issuance of the Senior Convertible Note and 2020 Convertible Notes and the adoption of ASU 2017-04, 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 filed with the SEC on March 30, 2020 for the year ended December 31, 2019.

Except for the changes described in Note 2, " Summary of Significant Accounting Policies ," in the notes to the condensed consolidated financial statements related to the adoption of ASU 2016-02 and our disclosure of our accounting policy related to our digital currencies purchsed during the current quarter, 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, 2020 filed with the SEC on March 31, 2021.

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis