Phunware, Inc. 10-K

Item 1. Business. General Phunware, Inc. 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 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. Phunware helps brands define, create, launch, promote, monetize and scale their mobile identities as a means to anchor the consumer journey and improve brand interactions. Our MaaS platform provides the entire mobile lifecycle of applications through one procurement relationship. Our MaaS platform allows for the licensing and creation of category-defining mobile experiences for brands and their application users worldwide. Since our founding in 2009, we have amassed a database of proprietary Phunware IDs. Phunware IDs are unique identifiers assigned to a mobile device when it becomes first visible across our network of mobile application portfolios. We measure and accumulate Phunware IDs through queries that count unique devices that access our mobile application portfolio across our network of mobile applications that we have developed and/or support. The data collected from our Phunware IDs contributes to our application transaction revenue product line by helping companies and brands boost campaign performance, target high-value users, maximize conversions and optimize spend. Business Model Our business model includes a combination of service, subscription and media transaction offerings that enable customers to engage, manage and monetize their mobile application portfolios throughout the mobile application lifecycle, which occurs in four phases: • Strategize — We help brands define the application experience and determine the operating systems, feature sets and use cases they want their mobile application to support. • Create — We help brands build, buy or lease their application portfolio. • Launch — We help brands launch their applications and build their mobile audience. • Engage, Monetize and Optimize — We help brands activate, monetize and optimize their mobile application portfolios. Our product and service offerings include cloud-based recurring software license subscriptions, with terms ranging from one to three years, application development and support services and application transaction-based media. Although a majority of our product and service offerings have been sold utilizing an internal sales team, we have also sold our product and service offerings through various channel partners. 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 6 Table of Contents 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, 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 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); • Marketing Automation (SDK that enables location-triggered messages and workflow); • Advertising (SDK that enables in-app audience monetization); and • Location-Based Services (module that include mapping, navigation, wayfinding, workflow, asset management and policy enforcement); • 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, including re-occurring and one-time transactional media purchases for application discovery, user acquisition and audience building, audience engagement and audience monetization; and • Pre-packaged and custom high-end personal computer systems for gaming, streaming and cryptocurrency mining enthusiasts. Competitive Strengths Fully integrated and comprehensive solutions: Our comprehensive solutions can be used across mobile application experience definition, application portfolio creation, user discovery, user acquisition, user engagement and user monetization. Data from application analytics and our database of over one petabyte can be used to inform business decisions related to mobile strategy, marketing, operations and more. Data reach and scale: Since Phunware’s founding in 2009, our goal has been to use our software platform within application portfolios and brands to create a massive database of proprietary Phunware IDs for every device touching networks globally to then reach everyone, everywhere, indoors and outdoors, in real time, on a 1-to-1 basis. Built to be mobile-first, native-first, cloud-based: Phunware was built from the ground up to focus on native mobile development, while other companies in the mobile space have attempted to create shortcuts with “write once, run anywhere” software. The result is almost a decade of platform-specific mobile expertise, a major competitive differentiator. Results-driven culture : 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 7 Table of Contents performers and encourage leadership development. The result is an employee base singularly focused on solving problems and driving results. Intellectual property portfolio development and world-class engineering resources : Through our world-class in-house technical and engineering organization, we have focused developing our intellectual property, including methods of accessing wireless account information, rendering content on a wireless device, indoor navigation with a mobile device and more. We are developing creative solutions to solve complex technical problems and create competitive advantages for our customers. Our Growth Strategy Key elements of our growth strategy include: 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 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. 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. Continued growth of our customer base through targeted marketing and outreach. We intend to continue to opportunistically expand. 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. 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. Primary indirect channels include hardware, software, carriers and systems integrators/consultancies. We are focused on building our brand to grow within existing and target end markets where there is strong demand for the products and solutions we provide. Our Customers Our target customers 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. We believe the multi-year contractual nature of our software and managed services provides revenue visibility. Our subscription and service agreements with our customers consist of terms relating to length of agreement (for subscriptions and application support), payment, liability, performance, cancellation and termination, confidentiality and indemnification obligations, among other provisions. All of these agreements contain terms of service that are generally consistent across our customers. Our subscription and service agreements generally do not impose obligation upon us, such as exclusivity or other terms. 8 Table of Contents Our application transaction agreements, also known as insertion orders, are, for the most part, governed by the standard terms and conditions from the Interactive Advertising Bureau’s (“IAB”) Standard Terms and Conditions for Internet Advertising for Media Buys One Year or Less ("IAB Terms"). The IAB Terms provide that in the event that payments are not paid to the agency, then the media company, or us, agrees to hold the advertiser solely liable. 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 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 Our internal salesforce is focused on direct sales opportunities for our platform subscription and services and application transaction product lines. They are experienced across all verticals in which we serve and can assist small, mid-sized and large organizations. Our channel sales function works with our channel partners to identify sales opportunities, as well as identify new channel partner relationships. Our marketing efforts focus on building brand reputation, expanding market awareness, driving customer demand and enabling our sales team. 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. Post implementation, customers are supported post-sale by our customer success function managed within our program management team. 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 Our ability to compete depends in large part on our continuous commitment to research and development and our ability to rapidly introduce new applications, technologies, features and functionality into our solutions. Our research and development efforts are focused on improving and enhancing our existing service offerings by working closely with our customers, conducting quality assurance testing and improving our core technology as well as developing new proprietary services and solutions. Performance, security, functional depth and breadth and usability of our solutions drive our technology decisions and product development. 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 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 of PhunToken. In 2018, we began offering rights to future issuances of PhunCoin. The dual-token economy both empowers consumers and re-imagines how brands engage with audiences by creating a blockchain-enabled data exchange (the “Token Ecosystem”) that recognizes the value of data and engagement. PhunCoin is intended to be the “Value of Data” that empowers consumers to take control of and be compensated for their data. PhunToken is intended to act as the “Value of Engagement” that empowers consumers to monetize their digital activity and the data they share with 9 Table of Contents brands. 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. 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; however, there can be no assurance as to when (or if) we will be able to successfully launch the Token Ecosystem. Competition The market for technology and solutions related to mobile application lifecycle management is evolving, highly competitive and significantly fragmented. With the introduction of new technologies and the potential entry of new competitors into the market, we expect competition to increase and intensify in the future, which could harm our ability to increase sales, maintain or increase renewals and maintain our prices. We compete primarily with companies offering cloud-based software solutions for location-based services, mobile marketing automation, content management, analytics and audience monetization, as well as data and campaign management for audience building and engagement. We also sometimes compete with application development agencies, in-house mobile teams and products developed by software providers that allow customers to build and scale new mobile applications. Our competitors include 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: • product features and functionality; • location accuracy and latency; • technology architecture; • level of customer satisfaction; • ease of use; • deployment options and hardware flexibility; • breadth and depth of application functionality; • professional services and customer support; • total costs of ownership; • brand awareness and reputation; • sophistication of technology platform; • actionable insights through big data analytics; • capability for customization, configurability, integration, security, scalability and reliability of applications; • ability to innovate and respond to customer needs rapidly; • domain expertise; • global reach; • size of customer base and level of user adoption; and • ability to integrate with legacy enterprise infrastructures and third-party applications. Some of our current competitors have, and future competitors may have, greater financial, technical, marketing and other resources, greater resources to devote to the development, promotion, sale and support of their products and services, more extensive customer bases and broader customer relationships, and/or longer operating histories and greater name recognition. As a result, these competitors may be better able to respond quickly to new technologies and to undertake more 10 Table of Contents extensive marketing campaigns. In a few cases, some competitors may also be able to offer competing solutions at little or no additional cost by bundling them with their existing suite of solutions. Government Regulation We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business. Many of these laws and regulations are still evolving and being tested in courts, and could be interpreted in ways that could harm our business including, but not limited to, privacy, data protection and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, and other communications, protection of minors, consumer protection, telecommunications, product liability, taxation, economic or other trade prohibitions or sanctions, anti-corruption law compliance and securities law compliance. In particular, we are subject to federal, state and foreign laws regarding privacy and protection of people's data. Foreign data protection, privacy, content and other laws and regulations can impose different obligations or be more restrictive than those in the United States. U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation and enforcement of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. Proposed or new legislation and regulations could also significantly affect our business. For example, the European General Data Protection Regulation (GDPR) took effect in May 2018 and applies to all of our products and services used by people in Europe. 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. 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. 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. 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. 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. New laws enacted by government or regulatory authorities could cause us to incur substantial costs, expose us to unanticipated civil and criminal liability or penalties (including substantial monetary remedies), interrupt or require us to change our business practices in a manner materially adverse to our business, divert resources and the attention of management from our business or subject us to other remedies that adversely affect our business. Intellectual Property Our ability to protect our intellectual property, including our technologies, is an important factor in the success and continued growth of our business. We protect our intellectual property through trade secrets law, patents, copyrights, trademarks and contracts. We have established business procedures designed to maintain the confidentiality of our proprietary information such as the use of our license agreements with customers and our use of our confidentiality agreements and intellectual property assignment agreements with our employees, consultants, business partners and advisors where appropriate. Some of our technologies rely upon third party licensed intellectual property. In the United States, we have 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 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. We also license software from third parties for integration into our solutions, including open source software and other software available on commercially reasonable terms. Despite our efforts to protect our technology and proprietary rights through intellectual property rights, licenses and confidentiality agreements, unauthorized parties may still copy or otherwise obtain and use our software and other technology. 11 Table of Contents In addition, if we expand international operations, an effective patent, copyright, trademark and trade secret protections may not be available or may be limited in foreign countries. Our industry is characterized by the existence of a large number of patents and claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in our markets have extensive patent portfolios and are regularly involved in litigation. From time to time, third parties, including certain of these leading companies, may assert patent, copyright, trade secret and other intellectual property rights against us, our channel partners or our customers. Our standard license and other agreements may obligate us to indemnify our channel partners and customers against such claims. Successful claims of infringement by a third party could prevent us from continuing to offer our solution or performing certain services, require us to expend time and money to develop non-infringing solutions or force us to pay substantial damages, including treble damages if we are found to have willfully infringed patents or copyrights, royalties or other fees. Competitors may also be more likely to claim that our solutions infringe their proprietary rights and seek an injunction against us from continuing to offer our platform 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. Employees We leverage our employees’ long-standing, deep customer relationships and strong technical expertise to deliver complex solutions that meet customer needs and advance mobile technology. As of December 31, 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. We believe our relations with our employees are good. Corporate Information 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 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 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. The SEC's Internet website is located at http://www.sec.gov. 12 Table of Contents