Phunware, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations References in this section to “we,” “us,” "our," or “the Company” refer to Phunware. References to “management” or “management team” refer to Phunware’s officers and directors. The following discussion and analysis of Phunware’s financial condition and results of operations should be read in conjunction with Phunware’s condensed consolidated financial statements and the related notes to those statements presented in “ Part I – Item 1. Financial Statements. ” In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Phunware’s actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed in the section titled “ Risk Factors ” and elsewhere in this Report. Certain figures, such as interest rates and other percentages, included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our condensed consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding. Recent Developments On September 10, 2021, we entered into a Stock Purchase Agreement (the "Agreement") with Caleb Borgstrom for the purchase all issued and outstanding shares of common stock of Lyte Technology, Inc. ("Lyte") with an initial purchase price of up to approximately $10.3 million ($2.5 million of which is an earnout payment based upon Lyte operations meeting certain annual revenue milestones). On October 18, 2021, we closed the acquisition with an adjusted purchase price of up to approximately $11.0 million (subject to the earnout adjustment), representing an increase in working capital as of the closing date. We are currently determining the final purchase price allocation, but we expect the majority to be allocated to intangible assets and goodwill. We also expect to finalize the valuation and complete the price purchase allocation (other than the earnout) in the fourth quarter of 2021. 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 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; and • Application transactions for mobile audience building, user acquisition, application discovery, audience engagement and audience monetization. We also believe our recent acquisition of Lyte will leverage a new distribution network for our blockchain initiatives. We intend to continue investing for long-term growth. We have invested and expect to continue investing in expanding our ability to market, sell and provide our current and future products and services to 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. 25 Table of Contents Key Business Metrics Our management regularly monitors certain financial measures to track the progress of our business against internal goals and targets. We believe that the most important of these measures include backlog and deferred revenue. Backlog and Deferred Revenue. Backlog represents future amounts to be invoiced under our current agreements. At any point in the contract term, there can be amounts that we have not yet been contractually able to invoice. Until such time as these amounts are invoiced, they are not recorded in revenues, deferred revenue, accounts receivable or elsewhere in our condensed consolidated financial statements, and are considered by us to be backlog. We expect backlog to fluctuate up or down from period to period for several reasons, including the timing and duration of customer contracts, varying billing cycles and the timing and duration of customer renewals. We reasonably expect approximately 40% of our backlog as of September 30, 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. Together, the sum of deferred revenue and backlog represents the total billed and unbilled contract value yet to be recognized in revenues, and provides visibility into future revenue streams. The following table sets forth our backlog and deferred revenue: September 30, 2021 December 31, 2020 (in thousands) Backlog $ 3,012 $ 3,991 Deferred revenue 3,077 5,075 Total backlog and deferred revenue $ 6,089 $ 9,066 Non-GAAP Financial Measures Adjusted Gross Profit, Adjusted Gross Margin and Adjusted EBITDA We report our financial results in accordance with accounting principles generally accepted in the United States of America ("GAAP"). We also use certain non-GAAP financial measures that fall within the meaning of Securities and Exchange Commission Regulation G and Regulation S-K Item 10(e), which may provide users of the financial information with additional meaningful comparison to prior period results. Our non-GAAP financial measures include adjusted gross profit, adjusted gross margin and adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") (our "non-GAAP financial measures"). Management uses these measures (i) to compare operating performance on a consistent basis, (ii) to calculate incentive compensation for its employees, (iii) for planning purposes including the preparation of its internal annual operating budget and (iv) to evaluate the performance and effectiveness of operational strategies. Our non-GAAP financial measures should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. They are not measurements of our financial performance under GAAP and should not be considered as alternatives to revenue or net income (loss), as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. Our non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations include: • 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. 26 Table of Contents We compensate for these limitations to our non-GAAP financial measures by relying primarily on our GAAP results and using our non-GAAP financial measures only for supplemental purposes. Our non-GAAP financial measures include adjustments for items that may not occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and complicate comparisons of our internal operating results and operating results of other peer companies over time. For example, it is useful to exclude non-cash, stock-based compensation expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and these expenses can vary significantly across periods due to timing of new stock-based awards. We may also exclude certain discrete, unusual, one-time, or non-cash costs in order to facilitate a more useful period-over-period comparison of its financial performance. Each of the normal recurring adjustments and other adjustments described in this paragraph help management with a measure of our operating performance over time by removing items that are not related to day-to-day operations or are non-cash expenses. The following table sets forth the non-GAAP financial measures we monitor. Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except percentages) 2021 2020 2021 2020 Adjusted gross profit (1) $ 1,486 $ 2,340 3,291 5,460 Adjusted gross margin (1) 68.8 % 74.8 % 62.8 % 68.4 % Adjusted EBITDA (2) $ (2,474) $ (1,258) $ (7,620) $ (6,253) (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 income (loss) plus (i) interest expense, (ii) income tax expense, (iii) depreciation, (iv) amortization, and further adjusted for (v) non-cash impairment and valuation adjustments and (vi) stock-based compensation expense. 27 Table of Contents Reconciliation of Non-GAAP Financial Measures The following tables set forth a reconciliation of the most directly comparable GAAP financial measure to each of the non-GAAP financial measures discussed above. Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except percentages) 2021 2020 2021 2020 Gross profit $ 1,134 $ 2,232 $ 2,400 $ 5,226 Add back: Amortization of intangibles — 4 7 17 Add back: Stock-based compensation 352 104 884 217 Adjusted gross profit $ 1,486 $ 2,340 $ 3,291 $ 5,460 Adjusted gross margin 68.8 % 74.8 % 62.8 % 68.4 % Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Net income (loss) $ 372 $ (8,567) $ (21,711) $ (16,041) Add back: Depreciation and amortization 17 33 75 120 (Less) add back: Interest (income) expense (7) 1,362 4,057 1,923 EBITDA 382 (7,172) (17,579) (13,998) Add back: Stock-based compensation 1,495 1,708 3,933 3,458 Add back: Legal settlement — 4,500 — 4,500 Add back: Loss on extinguishment of debt — 950 7,952 1,031 Add back: Impairment of digital currencies — — 776 — Less: Gain on forgiveness of PPP loan (2,850) — (2,850) — (Less) add back: (Gain) loss on change in fair value of warrant liability (1,501) (1,244) 148 (1,244) Adjusted EBITDA $ (2,474) $ (1,258) $ (7,620) $ (6,253) 28 Table of Contents 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 Revenue. 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 our MaaS platform. Application development revenue is derived from development services around designing and building new applications or enhancing existing applications. Support revenue is comprised of support and maintenance fees of customer applications, software updates and technical support for application development services for a support term. From time to time, we 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. 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 Phunware’s MaaS platform are expensed in research and development. As a result, platform subscriptions and services gross profit may fluctuate from period to period. Application Transaction Revenue. We also generate revenue by charging advertisers to deliver advertisements (ads) to users of mobile connected devices. Depending on the specific terms of each advertising contract, we generally recognize revenue based on the activity of mobile users viewing these ads. Fees from advertisers are commonly based on the number of ads delivered or views 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 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. Lyte Revenue . We expect to begin recognizing revenue as a result of closing our acquisition of Lyte during the fourth quarter of 2021. Revenue from Lyte will mainly be derived from the sale of high-performance personal computers. Lyte computers are sold with a variety of pre-packaged solutions, as well as customizable solutions selected by our customers. We expect to recognize revenue at the time a unit ships from our facility. Lyte gross profit will be equal to Lyte revenue less the costs associated with the assembly of computers. Lyte gross profit is impacted by the costs that we pay for parts incorporated into a Lyte computer system, as well as labor costs of computer builders and shipping. Demand may exceed available supply at times, which may hamper our ability to deliver computer systems timely and may increase the costs at which we can obtain inventory needed for computer builds. Customizable solutions we offer our customers may also vary from time to time. As a result, revenue and gross profit related to Lyte may fluctuate from period to period. Although we plan to invest in Lyte for future growth, Lyte may experience revenue and gross profit fluctuations as a result of seasonality. Gross Margin Gross margin measures gross profit as a percentage of revenue. Gross margin is generally impacted by the same factors that affect changes in the mix of subscriptions and services and application transactions, and beginning in the fourth quarter of 2021, Lyte. 29 Table of Contents Operating Expenses Our operating expenses include sales and marketing expenses, general and administrative expenses, research and development expenses, depreciation and amortization of acquired intangible assets. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation and, in sales and marketing expense, commissions. Legal settlements pertaining to litigation brought as a result of the Company's operations is also included in operating expenses. Sales and Marketing Expense. Sales and marketing expense is comprised of compensation, commission expense, variable incentive pay and benefits related to sales personnel, along with travel expenses, other employee related costs, including stock-based compensation and expenses related to marketing programs and promotional activities. We expect our sales and marketing expense will increase in absolute dollars as we increase our sales and marketing organizations as we plan to increase revenue but may fluctuate as a percentage of our total revenue from period to period. General and Administrative Expense. General and administrative expense is comprised of compensation and benefits of administrative personnel, including variable incentive pay and stock-based compensation, bad debt expenses and other administrative costs such as facilities expenses, professional fees and travel expenses. We expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and listing standards of Nasdaq, additional insurance expenses, investor relations activities and other administrative and professional services. We also expect to increase the size of our general and administrative function to support the growth of our business. As a result, we expect that our general and administrative expenses will increase in absolute dollars but may fluctuate as a percentage of our total revenue from period to period. Research and Development Expense. Research and development expenses consist primarily of employee compensation costs and overhead allocation. We believe that continued investment in our platform is important for our growth. As a result, we expect our research and development expenses will increase in absolute dollars as our business grows but may fluctuate as a percentage of revenue from period to period. Interest Expense Interest expense includes interest related to our outstanding debt, including amortization of discounts and deferred issuance costs. Refer to Note 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. 30 Table of Contents Results of Operations Net Revenues Three Months Ended September 30, Change (in thousands, except percentages) 2021 2020 Amount % Net Revenues Platform subscriptions and services $ 1,771 $ 2,860 $ (1,089) (38.1) % Application transaction 389 270 119 44.1 % Net revenues $ 2,160 $ 3,130 $ (970) (31.0) % Platform subscriptions and services as a percentage of net revenues 82.0 % 91.4 % Application transactions as a percentage of net revenues 18.0 % 8.6 % Nine Months Ended September 30, 2021 Change (in thousands, except percentages) 2021 2020 Amount % Net Revenues Platform subscriptions and services $ 4,472 $ 7,274 $ (2,802) (38.5) % Application transaction 770 709 61 8.6 % Net revenues $ 5,242 $ 7,983 $ (2,741) (34.3) % Platform subscriptions and services as a percentage of net revenues 85.3 % 91.1 % Application transactions as a percentage of net revenues 14.7 % 8.9 % Net revenues decreased $1.0 million, or 31.0%, for the three months ended September 30, 2021 compared to the corresponding period in 2020. Platform subscriptions and services revenue decreased $1.1 million, or 38.1%. Greater revenues derived in 2020 were 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 increased $0.1 million, or 44.1%, for the three months ended September 30, 2021, compared to the corresponding period in 2020, primarily due to an increase in advertising campaigns. Net revenues decreased $2.7 million, or 34.3%, for the nine months ended September 30, 2021 compared to the corresponding period in 2020. Platform subscriptions and services revenue decreased $2.8 million, or 38.5%. Greater revenues derived in 2020 were 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 increased $0.1 million, or 8.6%, for the nine months ended September 30, 2021, compared to the corresponding period in 2020, primarily due to an increase in advertising campaigns and PhunToken sales. This increase was partially offset by the decrease in app store revenue. 31 Table of Contents Cost of Revenues, Gross Profit and Gross Margin Three Months Ended September 30, Change (in thousands, except percentages) 2021 2020 Amount % Cost of Revenues Platform subscriptions and services $ 944 $ 845 $ 99 11.7 % Application transaction 82 53 29 54.7 % Total cost of revenues $ 1,026 $ 898 $ 128 14.3 % Gross Profit Platform subscriptions and services 827 $ 2,015 $ (1,188) (59.0) % Application transaction 307 217 90 41.5 % Total gross profit $ 1,134 $ 2,232 $ (1,098) (49.2) % Gross Margin Platform subscriptions and services 46.7 % 70.5 % Application transaction 78.9 % 80.4 % Total gross margin 52.5 % 71.3 % Nine Months Ended September 30, Change (in thousands, except percentages) 2021 2020 Amount % Cost of Revenues Platform subscriptions and services $ 2,670 $ 2,640 $ 30 1.1 % Application transaction 172 117 55 47.0 % Total cost of revenues $ 2,842 $ 2,757 $ 85 3.1 % Gross Profit Platform subscriptions and services $ 1,802 $ 4,634 $ (2,832) (61.1) % Application transaction 598 592 6 1.0 % Total gross profit $ 2,400 $ 5,226 $ (2,826) (54.1) % Gross Margin Platform subscriptions and services 40.3 % 63.7 % Application transaction 77.7 % 83.5 % Total gross margin 45.8 % 65.5 % Total gross profit decreased $1.1 million, or 49.2% and $2.8 million, or 54.1% for the three and nine months ended September 30, 2021, respectively, when compared to the corresponding period of 2020. In addition to the revenue items described above, stock-based compensation increased $0.3 million and $0.7 million during the three and nine months ended September 30, 2021, respectively. Overall margin decrease can be attributed to a higher margin realized in 2020 related to Customer F, as compared to the same period in 2021 related to Customer A, as identified 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. 32 Table of Contents Operating Expenses Three Months Ended September 30, Change (in thousands, except percentages) 2021 2020 Amount % Operating expenses Sales and marketing $ 715 $ 383 $ 332 86.7 % General and administrative 3,296 4,276 (980) (22.9) % Research and development 1,160 572 588 102.8 % Legal Settlement — 4,500 (4,500) (100.0) % Total operating expenses $ 5,171 $ 9,731 $ (4,560) (46.9) % Nine Months Ended September 30, Change (in thousands, except percentages) 2021 2020 Amount % Operating expenses Sales and marketing $ 1,910 $ 1,265 $ 645 51.0 % General and administrative 9,075 11,981 (2,906) (24.3) % Research and development 3,058 1,811 1,247 68.9 % Legal Settlement — 4,500 (4,500) (100.0) % Total operating expenses $ 14,043 $ 19,557 $ (5,514) (28.2) % Sales and Marketing Sales and marketing expense increased $0.3 million, or 86.7% for the three months ended September 30, 2021 compared to the corresponding period of 2020, primarily due to an increase of $0.1 million in each of employee compensation costs resulting from a higher headcount, $0.1 million increase in stock-based compensation expense and $0.1 million in marketing related expenditures. Sales and marketing expense increased $0.6 million, or 51.0% for the nine months ended September 30, 2021 compared to the corresponding period of 2020, primarily due to an increase of employee compensation costs resulting from a higher headcount of $0.2 million, $0.3 million increase in stock-based compensation expense and $0.1 million lead generation programs. General and Administrative General and administrative expense decreased $1.0 million, or 22.9% for the three months ended September 30, 2021 compared to the corresponding period of 2020, primarily due to a decrease of $0.7 million in stock-based compensation and $0.6 million in legal fees mainly related to our previous litigation with Uber, which was settled in October 2020. This decrease was partially offset by $0.3 million in expenses related to investor relations. General and administrative expense decreased $2.9 million, or 24.3% for the nine months ended September 30, 2021 compared to the corresponding period of 2020, primarily due to a decrease of $1.7 million in legal fees mainly related to our previous litigation with Uber, $1 million in stock-based compensation expense, $0.6 million related to employee retention tax credit, $0.3 million in bad debt recoveries, and $0.2 million in other information technology costs such as server and software expenses. This decrease was partially offset by additional expenses of $1 million related to investor relations. Research and Development Research and development expense increased $0.6 million, or 102.8%, for the three months ended September 30, 2021, compared to the corresponding period of 2020, primarily due to payroll related items of $0.3 million, $0.2 million in stock-based compensation expense and $0.1 million for travel and recruiting fees. 33 Table of Contents Research and development expense increased $1.2 million, or 68.9%, for the nine months ended September 30, 2021, compared to the corresponding period of 2020, primarily due to increases of $0.7 million for increased headcount dedicated to research and development projects and $0.5 million in stock-based compensation expense. Legal Settlement Legal settlement of $4.5 million relates to the settlement of the Company's litigation with Uber Technologies, Inc. as further described 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. 34 Table of Contents Other expense Three Months Ended September 30, Change (in thousands, except percentages) 2021 2020 Amount % Other income (expense) Interest income (expense) $ 7 $ (1,362) $ 1,369 (100.5) % Loss on extinguishment of debt — (950) 950 (100.0) % Gain on change in fair value of warrant liability 1,501 1,244 257 20.7 % Gain on forgiveness of PPP loan 2,850 — 2,850 100.0 % Other income 51 — 51 100.0 % Total other income (expense) $ 4,409 $ (1,068) $ 5,477 (512.8) % Nine Months Ended September 30, Change (in thousands, except percentages) 2021 2020 Amount % Other income (expense) Interest expense $ (4,057) $ (1,923) $ (2,134) 111.0 % Loss on extinguishment of debt (7,952) (1,031) (6,921) 671.3 % Impairment of digital currency (776) — (776) 100.0 % (Loss) gain on change in fair value of warrant liability (148) 1,244 (1,392) (111.9) % Gain on forgiveness of PPP loan 2,850 — 2,850 100.0 % Other income 15 — 15 100.0 % Total other expense $ (10,068) $ (1,710) $ (8,358) 488.8 % Other income increased $5.5 million for the three months ended September 30, 2021, compared to the corresponding period of 2020, primarily due to Paycheck Protection Program ("PPP") loan forgiveness, change in fair value of our warrant liability and decrease in interest expense related to our outstanding debt. Other expense increased $8.4 million for the nine months ended September 30, 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. Other increases were related to impairment charges for our digital currencies and adjustments related to the fair value of the warrants outstanding that were issued in conjunction with our 2020 senior convertible notes. These were partially offset by decreases in other expense related to gain on forgiveness of our PPP loan. 35 Table of Contents Liquidity and Capital Resources As of September 30, 2021, we held total cash (including restricted cash) of $1.0 million, all of which was held in the United States. We have a history of operating losses and negative operating cash flows. As we continue to focus on growing our revenues, we expect these trends to continue into the foreseeable future. We entered into a note purchase agreement and completed the sale of an unsecured promissory note with an original principal amount of $5.2 million in a private placement that closed on October 18, 2021. After deducting all transaction cost, net cash proceeds to the Company were $4.7 million. No interest will accrue on the promissory note unless and until the occurrence of an event of default (as defined in the promissory note). We may prepay outstanding balance of the promissory note earlier than it is due with a prepayment premium of 110%. Beginning on January 15, 2022 and on the same day of each month thereafter until the promissory note is paid in full, we are required to make a monthly amortization payments in the amount of $574 thousand which are considered prepayments subject to the prepayment premium. On April 7, 2021, we entered into an At Market Issuance Sales Agreement with B. Riley Securities, Inc. ("B. Riley"), pursuant to which we may offer and sell shares of our common stock, from time to time. We filed two prospectus supplements on April 7, 2021 and October 26, 2021 that form part of our shelf registration statement for the offer and sale of up to an aggregate of $25 million and $48.5 million in common stock, respectively. As of September 30, 2021, we sold 2,730,654 shares of our common stock under the sales agreement, which generated aggregate net cash proceeds of approximately $3.1 million. As of the filing date of this Quarterly Report on Form 10-Q, we sold an additional 18,220,369 shares of our common stock for aggregate net proceeds of approximately $62.1 million. We may sell additional shares for an aggregate offering price of approximately $6.3 million under our sales agreement with B. Riley and shelf registration statement. On October 22, 2021, the holder of our 2020 Convertible Notes partially exercised its warrant for 2,060,000 shares of Common Stock with an exercise price of $2.25 for net proceeds of $4.6 million to the Company. As a result of the financing events described above, while our liquidity risk continues as a result of the continuing and evolving effects of the COVID-19 pandemic, management believes it has sufficient cash on hand for at least one year following the filing date of this Quarterly Report on Form 10-Q. Our future capital requirements will depend on many factors, including our pace of growth, subscription renewal activity, the timing and extent of spend to support development efforts, the pace at which we can scale Lyte, the expansion of sales and marketing activities and the market acceptance of our products and services. We believe that it is likely we will in the future enter into arrangements to acquire or invest in complementary businesses, technologies and intellectual property rights. We may be required to seek additional equity or debt 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 (in thousands, except percentages) 2021 2020 Amount % Consolidated statement of cash flows Net cash used in operating activities $ (19,089) $ (6,515) $ (12,574) 193.0 % Net cash used in investing activities (1,497) — (1,497) 100.0 % Net cash provided by financing activities 17,547 7,417 10,130 136.6 % Operating Activities The primary source of cash from operating activities is receipts from the sale of platform subscriptions and services and application transactions 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 $19.1 million of cash from operating activities during the nine months ended September 30, 2021, primarily resulting from a net loss of $21.7 million. The net loss included non-cash charges of $13.3 million, primarily consisting of the loss on the extinguishment and amortization of debt issuance costs related to our 2020 Convertible Notes, as 36 Table of Contents well as stock-based compensation. In addition, certain changes in our operating assets and liabilities resulted in significant cash (decreases) as follows: $(7.1) million from a decrease in accounts payable, accrued expenses and an installment payment to Uber related to the settlement of our lawsuit, as well as $(3.3) million from other working capital changes, primarily a decrease in deferred revenue. 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. 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 a decrease in deferred revenue and $(0.1) million from a decrease in prepaid and other assets. Investing Activities Investing activities for the nine months ended September 30, 2021 consisted of the purchase of digital currencies. Financing Activities Our financing activities during the nine months ended September 30, 2021 consisted of proceeds from equity financings and debt borrowings offset by payments on debt. We acquired $17.5 million of cash from financing activities resulting primarily from $32.6 million in proceeds from the sale of our common stock and $10 million in proceeds from our Series B Convertible Note. These sources of financing were partially offset by $25.1 million of payments on debt, a majority of which were payments on the 2020 Convertible Notes. 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 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 by $4.1 million of payments on debt (inclusive of $0.2 million to related parties) and $0.6 million in net repayments on our factoring financing agreement. Off-Balance Sheet Arrangements Through September 30, 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, 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. 37 Table of Contents Recent Accounting Pronouncements 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 Quarterly Report on Form 10-Q for analysis of recent accounting pronouncements that are applicable to our business. Summary of Significant Accounting Policies Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Except for the changes described in Note 2, " Summary of Significant Accounting Policies ," in the notes to the condensed consolidated financial statements related to the adoption of ASU 2016-02 and our disclosure of our accounting policy related to our digital currencies, 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.