What changed in this filing

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Item 1. Business

2022-04-07 compared with 2021-03-31 · 83 added, 61 removed, 150 unchanged (49% of the section changed)

Development of the Company and Business Combination

Phunware, Inc.

(the "Company", "we", "us" or "our") was founded in 2009 and is incorporated in the state of Delaware.

On February 27, 2018, we entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”) with Stellar Acquisition III, Inc.

On December 26, 2018, Stellar, a Republic of the Marshall Islands corporation incorporated in December 2015, deregistered as a corporation in the Republic of the Marshall Islands and domesticated as a corporation incorporated under the laws of the State of Delaware upon the filing with and acceptance by the Secretary of State of Delaware of the certificate of domestication in accordance with Section 388 of the Delaware General Corporation Law (the “Domestication”).

Upon the effectiveness of the Domestication, Stellar became a Delaware corporation and, upon the consummation of the Business Combination (as defined below), Stellar changed its corporate name to “Phunware, Inc.” (the “Successor”) and all outstanding securities of Stellar (Successor) were deemed to constitute outstanding securities of the Company.

Also on December 26, 2018, STLR Merger Subsidiary Inc., a wholly-owned subsidiary of Stellar (“Merger Sub”), merged with and into the Company, with the Company surviving the merger (the “Merger”) and becoming a wholly-owned subsidiary of the Successor (the “Business Combination”).

Upon the consummation of the Business Combination, the Company (which became the wholly-owned subsidiary of the Successor), changed its corporate name to “Phunware OpCo, Inc.” As of the open of trading on December 28, 2018, the common stock and warrants of the registrant began trading on the Nasdaq Capital Market as “PHUN” and “PHUNW,” respectively.

There was no accounting effect or change in the carrying amount of the consolidated assets and liabilities as a result of the Domestication.

The Business Combination is accounted for as a reverse merger and recapitalization in accordance with generally accepted accounting principles ("GAAP") in the United States.

Accordingly, Stellar is the legal acquirer and Phunware is the accounting acquirer and predecessor.

As such, our historical financial statements reflect the financial position, results of operations and cash flows of Phunware.

Inc., and the cash proceeds of $0.4 million (less transaction costs paid at closing) obtained from Stellar in the Business Combination is reflected as a capital infusion.

Furthermore, the historical capitalization of Phunware, Inc, immediately before the Business Combination was adjusted based on the exchange ratio of 0.459 Successor shares for every one share of Phunware, Inc.

capital stock.

and its subsidiaries (the “Company”, "we", "us", or "our") offer 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 and media in one login through one procurement relationship.

Our MaaS technology is available in software development kit form for organizations developing their own application, via customized development services and prepackaged solutions.

Through our integrated mobile advertising platform of publishers and advertisers, we provide in-app application transactions for mobile audience building, user acquisition, application discovery, audience engagement and audience monetization.

Founded in 2009, we are a Delaware corporation headquartered in Austin, Texas.

Overview of Business

We are a provider of the Multiscreen-as-a-Service (“MaaS”) platform, a fully integrated enterprise cloud platform for mobile that provides companies the services, products, and solutions necessary to engage, manage and monetize their mobile application portfolios and audiences at scale.

According to eMarketer, in 2020 adults in the U.S.

spent more than four hours daily on mobile internet, of which approximately 90% of that time was spent in mobile apps (versus mobile web).

Our MaaS platform is a fully integrated cloud platform for mobile that provides companies the services, products, and solutions necessary to engage, manage and monetize their mobile application portfolios and audiences at scale.

According to eMarketer, adults in the U.S.

spend more than four hours daily on mobile internet, of which approximately 90% of that time is spent in mobile apps (versus mobile web).

Given this reality, we believe brands must establish a strong identity on mobile, especially on devices and platforms specific to the Apple iOS and Google Android operating systems and ecosystems.

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We continue to invest in these channel sales relationships.

Acquisition of Lyte Technology, Inc.

In October 2021, we acquired Lyte Technology, Inc.

("Lyte"), a provider of high-performance computer systems to individual consumers.

Lyte derives its revenue by manufacturing custom and pre-packaged personal computer systems.

Total consideration for the acquisition consisted of cash and common stock of the Company valued at up to approximately $10.98

million, of which $2.5 million is contingent upon Lyte meeting certain revenue targets.

At the acquisition date, Lyte's operations were located in Gurnee, Illinois.

We plan to relocate Lyte to Austin, Texas during the second quarter of 2022.

Our acquisition of Lyte enables us to enter the personal computer hardware market.

We will continue to pursue a direct to consumer selling strategy.

We intend to grow Lyte revenue and its consumer base by expanding into international markets.

We believe our acquisition of Lyte will leverage a new distribution network for our blockchain initiatives, which are more fully described below.

In conjunction with the acquisition, we also entered into a note purchase agreement with an original principal amount of $5.22 million in a private placement that closed on October 18, 2021.

Our Products and Services

Our mobile software subscriptions and services and application transaction solutions include the following:

Our mobile software subscriptions and services, application transaction solutions and hardware product offerings include the following:

• Cloud-based mobile software licenses in software development kits (“SDKs”) form utilized inside mobile applications for the following:

• Analytics (SDK that provides data related to application use and engagement);

• Content Management (SDK that allows application admins to create and manage app content in a cloud-based portal);

• Content Management (SDK that allows application administrators to create and manage app content in a cloud-based portal);

• Alerts, Notifications & Messaging (SDK that enables brands to send messages to app users through the app);

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• 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, including re-occurring and one-time transactional media purchases for application discovery, user acquisition and audience building, audience engagement and audience monetization;

• Pre-packaged and custom high-end personal computer systems for gaming, streaming and cryptocurrency mining enthusiasts.

Competitive Strengths

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Our employees are granted restricted stock units upon hire and are encouraged to think of Phunware as a company they own rather than a company for which they work.

We also promote from within to reward top performers and encourage leadership development.

We also promote from within to reward top

performers and encourage leadership development.

The result is an employee base singularly focused on solving problems and driving results.

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Key elements of our growth strategy include:

Expand mobile products and services.

Expansion of Lyte customer base and footprint .

We plan to grow our Lyte operations, both domestically and internationally, as the gaming and cryptocurrency market expands.

We may also offer different technology offerings and computer-builds that keep up with changing demand.

Expansion of mobile products and services.

Mobile applications and in-application advertising media are among the fastest-growing and complex technology markets.

We have made significant investments in research and development and plan to

continue extending the functionality and breadth of our applications in the future, including, but not limited to, our Smart Campus, Smart City and Smart Workplace solutions.

Deepen existing customer relationships.

We have made significant investments in research and development and plan to continue extending the functionality and breadth of our applications in the future, including, but not limited to, our Healthcare, Smart City and Smart Workplace solutions.

Deepening of existing customer relationships.

We believe that we are well positioned to identify new opportunities or enhance existing services and solutions within our existing customer base.

We expect to create cross and upsell opportunities as our customers seek to deepen their approach to mobile application lifecycle management.

Develop new relationships to expand our customer base.

Development of new relationships to expand our customer base.

We intend to continue to grow our customer base by expanding our team of sales professionals and developing our indirect channel relationships.

We also have partnered with technology providers, who serve as a referral source and provide us with quality leads for businesses interested in our products and services.

We are able to leverage our mobile expertise and capabilities to compete effectively for new customers both directly and indirectly.

Primary indirect channels include hardware, software, carriers and systems integrators/consultancies.

Continue to grow our customer base through targeted marketing and outreach.

Continued growth of our customer base through targeted marketing and outreach.

We intend to continue to opportunistically expand.

Top expansion targets include entertainment, healthcare, retail and real estate — all verticals that benefit from our integrated solutions, comprehensive lifecycle approach and ability to engage users in both digital and physical worlds.

Add new capabilities and geographic regions through strategic acquisition.

Top expansion targets include entertainment, retail and real estate — all verticals that benefit from our integrated solutions, comprehensive lifecycle approach and ability to engage users in both digital and physical worlds.

Addition of new capabilities and geographic regions through strategic acquisition.

We operate in a fragmented market that offers significant consolidation opportunities.

We plan to to continue to evaluate strategic acquisitions and partnerships that enhance our capabilities and expand our geographic footprint, both domestically and internationally.

Expand our partnership network with third-party providers of tools and services.

Expansion of our partnership network with third-party providers of tools and services.

We are able to leverage our mobile expertise and capabilities to compete effectively for new customers both directly and indirectly.

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Our Customers

Our target customers are companies that are looking to enact digital transformation in their business — whether it is retail, healthcare, entertainment, real estate, smart living and workspaces or any other industry.

Our target customers for our mobile software subscription and services are companies that are looking to enact digital transformation in their business — whether it is retail, healthcare, entertainment, real estate, smart living and workspaces or any other industry.

We provide technology and solutions to support these organizations through every stage of the mobile application lifecycle.

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We view the agreements as contracts that ordinarily accompany the business conducted by Phunware and, because of the lack of any commitments to provide a certain amount of business, we are not substantially dependent on the agreements.

We sell our Lyte computer systems directly to individual consumers with a focus on for gaming, streaming and cryptocurrency mining enthusiasts.

Lyte customers purchase their systems via Lyte's website.

Purchasers of Lyte game systems agree to terms and conditions governing the purchase during the online check-out process.

Concentration of Major Customers

During the year ended December 31, 2020, one major customer accounted for approximately 32% of our net revenue.

During the year ended December 31, 2019, much of our sales were concentrated with Fox Networks Group (“Fox”), which accounted for 50% of our net revenue.

As with our other subscriptions and services customers, our contractual arrangements with Fox were governed by standard terms of service and statements of work.

We completed our contractual obligations under our statement of work with Fox as of September 30, 2019.

While the underlying master services agreement with Fox (setting forth general terms and conditions) remains in place, we do not have any currently active statements of work with Fox.

Due to the nature of our business, we have in the past and may, at times, in the future have a material concentration of our revenue with a small number of customers.

However, with the acquisition of Lyte and sales of PhunToken, we expect this to be less frequent.

For the year ended December 31, 2021, no individual customer represented greater than 10% of our net revenue.

Sales and Marketing

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Our marketing efforts focus on building brand reputation, expanding market awareness, driving customer demand and enabling our sales team.

During our sales cycle, our sales organization is supported by our customer solutions team, which has deep technical expertise.

Our platform subscription and services sales organization is supported by our customer solutions team, which has deep technical expertise.

Once contracted, our program management team collaborates with customers to ensure timely deliverables of contracted licenses and services.

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Our sales cycle can range many months for large organizations.

We market our application transaction product line direct to businesses.

We are also hoping to expand our media offerings by obtaining new business from local and national advertising agencies.

Our contract length for our application transaction can be as small as a few days to three months for larger advertising campaigns.

Our sales cycle is typically small for direct to business customers, whereby it may be longer when partnering with agencies.

Our marketing efforts for our Lyte operations currently consist of purchasing advertisements on various social media platforms.

We do not maintain an internal salesforce, as sales are e-commerce based and derived from Lyte's website.

Post-sale, we maintain a customer service and success function for our Lyte computer customers.

Research and Development

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Research and development expenses were $4.2 million and $2.6 million for the fiscal years ended December 31, 2021 and 2020, respectively.

PhunCoin and Phun

PhunCoin and PhunToken

Our product research and development team is continuing our vision of a future in which consumers own, control and are rewarded for the use of their personal data and information.

In 2019, we launched a dual token structure in conjunction with the commencement of the offering Phun token to interested parties outside the United States and Canada.

In 2019, we launched a dual token structure in conjunction with the commencement of the offering of PhunToken.

In 2018, we began offering rights to future issuances of PhunCoin.

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PhunCoin is intended to be the “Value of Data” that empowers consumers to take control of and be compensated for their data.

Phun is intended to act as the “Value of Engagement” that empowers consumers to monetize their digital activity and the data they share with brands.

To date, we have not sold any Phun.

We have sold rights to the future issuances of PhunCoin, although we currently do anticipate generating additional funds from sales of PhunCoin rights.

To date, we have not issued any PhunCoins pursuant to the rights offering.

PhunToken is intended to act as the “Value of Engagement” that empowers consumers to monetize their digital activity and the data they share with

In 2021, we commenced the sale of PhunToken.

Upon sale of PhunToken to customers, we transfer the PhunToken purchased to the customers applicable ethereum-based wallet address.

We continue to market and sell PhunToken.

During 2018 and 2019, we sold rights to the future issuances of PhunCoin.

To date, we have recorded the rights purchases as a liability in our consolidated balance sheets as of December 31, 2021 and 2020, as we have yet to issue any PhunCoins pursuant to our rights offerings.

We currently do anticipate generating additional significant funding from sales of PhunCoin rights.

A multidisciplinary team (design, engineering, quality assurance and product) is actively developing all aspects of the Token Ecosystem for iOS and Android.

In addition, PhunCoin wallet development, enhanced token management capabilities and additional securities features are being implemented.

PhunCoin security features and compliance protocols have been and continue to be implemented.

We are planning for future enhancements of the Token Ecosystem in 2022;

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We also sometimes compete with application development agencies, in-house mobile teams and products developed by software providers that allow customers to build and scale new mobile applications.

Our competitors include Airship, Apadmi, Appcelerator, Mutual Mobile, Pointr, Purple and many more.

Our competitors include Airship, Apadmi, Appcelerator, Mutual Mobile, Pointr, Purple and as well as many competitors in the desktop personal computing business.

We believe the principal competitive factors in our market include the following:

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Some of our current competitors have, and future competitors may have, greater financial, technical, marketing and other resources, greater resources to devote to the development, promotion, sale and support of their products and services, more extensive customer bases and broader customer relationships, and/or longer operating histories and greater name recognition.

As a result, these competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns.

As a result, these competitors may be better able to respond quickly to new technologies and to undertake more

extensive marketing campaigns.

In a few cases, some competitors may also be able to offer competing solutions at little or no additional cost by bundling them with their existing suite of solutions.

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The GDPR includes operational requirements for companies that receive or process personal data of residents of the European Union that are different from those previously in place in the European Union, and includes significant penalties for non-compliance.

The Brazilian General Data Protection Law will impose requirements similar to GDPR on products and services offered to users in Brazil, effective in August 2020.

Effective August 2020, the Brazilian General Data Protection Law imposes requirements similar to GDPR on products and services offered to users in Brazil.

The California Consumer Privacy Act (CCPA), which took effect in January 2020, also establishes certain transparency rules and creates new data privacy rights for users.

Similarly, there are a number of legislative proposals in the European Union, the United States, at both the federal and state level, as well as other jurisdictions that could impose new obligations or limitations in areas affecting our business, such as

liability for copyright infringement.

Furthermore, voters in California approved Proposition 24, which expanded the CCPA by limiting businesses' use of "sensitive business information," such as precise geolocating.

Proposition 24 is effective January 1, 2023 for personal data collected after January 1, 2022.

In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services.

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Some of our technologies rely upon third party licensed intellectual property.

In the United States, we have 17 patents issued and 4 non-provisional patent applications.

The issued patents expire between the years 2027 and 2036.

In the United States, we have 17 patents issued and 4 pending non-provisional patent applications.

The issued patents expire between the years 2027 and 2037, which are subject to the payment of maintenance fees.

We also have one patent in Japan, which expires in 2031, which is subject to the payment of annual fees.

In addition, we have registered “Phunware” as a trademark in the United States and Canada.

We cannot assure you that any of our patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims.

We cannot provide assurance that any of our patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims.

Furthermore, even if a patent is issued, we cannot assure you that such patent will be adequate to protect our business.

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Successful claims of infringement by a third party could prevent us from continuing to offer our solution or performing certain services, require us to expend time and money to develop non-infringing solutions or force us to pay substantial damages, including treble damages if we are found to have willfully infringed patents or copyrights, royalties or other fees.

Competitors may also be more likely to claim that our solutions infringe their proprietary rights and seek an injunction against us from continuing to offer our platform.

We cannot assure you that we do not currently infringe, or that we will not in the future infringe, upon any third-party patents or other proprietary rights.

Competitors may also be more likely to claim that our solutions infringe their proprietary rights and seek an injunction against us from continuing to offer our platform and/or components thereof.

We cannot provide assurance that we do not currently infringe, or that we will not in the future infringe, upon any third-party patents or other proprietary rights.

We leverage our employees’ long-standing, deep customer relationships and strong technical expertise to deliver complex solutions that meet customer needs and advance mobile technology.

As of December 31, 2020, we had 58 employees, including 33 software developers, engineers, QA engineers and product managers.

We employed a sales and marketing force of approximately 9 professionals.

As of December 31, 2021, we had 120 employees:

including 42 software developers, engineers, QA engineers and product managers;

a sales and marketing force of approximately 18 professionals and 46 employees at Lyte.

None of our employees are currently covered under any collective bargaining agreements.

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Our principal executive offices are located at 7800 Shoal Creek Boulevard, Suite 230-South, Austin, Texas 78757, and our telephone number is (512) 693-4199.

Our website is https://www.phunware.com.

The information on, or that can be

accessed through, our website is not part of this Annual Report on Form 10-K.

Our website address is https://www.phunware.com.

The information on, or that can be accessed through, our website is not part of this Annual Report on Form 10-K.

We have included our website address as an inactive textual reference only.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available free of charge on our investor relations section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission ("SEC").

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act are available free of charge on the investor relations section of our website, which we post as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

The SEC also maintains an Internet website that contains reports and other information regarding issuers, such as Phunware, that can be filed electronically with the SEC.

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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-K

Item 1. Business