What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-15 · 70 added, 64 removed, 272 unchanged (33% of the section changed)

32 unchanged sentences

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 36% of our backlog as of June 30, 2022 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.

We reasonably expect approximately 36% of our backlog as of September 30, 2022 will be invoiced during the subsequent 12-month period, primarily due to the fact that our contracts are typically one to three years in length.

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

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The following table sets forth our backlog and deferred revenue:

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(in thousands)

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Total backlog and deferred revenue $ 7,852 $ 8,588

As of September 30, 2022, there was $2.3 million of backlog subject to cancellation per a contract with a particular customer.

As of the date of this Report, we expect the customer will proceed with the full contracted amount.

Non-GAAP Financial Measures

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

Three Months Ended June 30, Six Months Ended June 30,

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

(in thousands, except percentages) 2022 2021 2022 2021

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

Three Months Ended June 30, Six Months Ended June 30,

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

(in thousands, except percentages) 2022 2021 2022 2021

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Adjusted gross profit $ 854 $ 1,486 $ 4,240 $ 3,291

Gross margin 16.7 % 52.5 % 24.0 % 45.8 %

Adjusted gross margin 17.9 % 68.8 % 24.9 % 62.8 %

Three Months Ended June 30, Six Months Ended June 30,

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

(in thousands) 2022 2021 2022 2021

Net loss $ (17,071) $ (7,776) $ (31,988) $ (22,083)

Net (loss) income $ (8,018) $ 372 $ (40,006) $ (21,711)

Depreciation and amortization 185 17 553 75

Interest expense 273 1,845 654 4,064

Add back (less):

Interest expense (income) 991 (7) 1,645 4,057

EBITDA (6,842) 382 (37,808) (17,579)

2 unchanged sentences

Impairment of digital assets — — 21,511 776

Gain on forgiveness of PPP loan — (2,850) — (2,850)

(Less) Add back:

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Results of Operations

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in thousands, except percentages) 2022 2021 Amount %

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Hardware revenue as percentage of total revenue 73.5 % — %

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in thousands, except percentages) 2022 2021 Amount %

4 unchanged sentences

Hardware revenue as percentage of total revenue 68.4 % — %

Net revenues increased $4.0 million, or 282.0%, for the three months ended June 30, 2022 compared to the corresponding period in 2021.

Platform revenue increased $0.2 million, or 13.4%, for the three months ended June 30, 2022, compared to the corresponding period in 2021, primarily due to PhunToken sales of $0.6 million, as we commenced the sale of PhunToken in the second quarter of 2021.

These increases were partially offset by lower platform revenues for development, licensing and support services provided to a customer in 2021, as compared to 2022.

This customer is identified as " Customer F" in Note 4, Revenue , in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this quarterly report on Form 10-Q.

Hardware revenue of $3.9 million for the three months ended June 30, 2022, was a result of the acquisition of Lyte, in October 2021.

Net revenues increased $9.2 million, or 297.9%, for the six months ended June 30, 2022 compared to the corresponding period in 2021.

Platform revenue increased $1.0 million, or 33.7%, for the six months ended June 30, 2022, compared to the corresponding period in 2021, primarily due to PhunToken sales of $1.5 million, as we commenced the sale of PhunToken in the second quarter of 2021 and $0.5 million from an increase in advertising campaigns.

Net revenues increased $2.6 million, or 120.3%, for the three months ended September 30, 2022 compared to the corresponding period in 2021.

Platform revenue decreased $0.9 million, or (41.7)%, for the three months ended September 30, 2022, compared to the corresponding period in 2021, primarily due to greater platform revenues for development, licensing and support services provided to two customers in 2021, as compared to 2022.

These customers are identified as "Customer B" and "Customer E" in Note 4, Revenue, in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this quarterly report on Form 10-Q.

These decreases were partially offset by higher advertising revenue of $0.2 million.

Hardware revenue of $3.5 million for the three months ended September 30, 2022, was a result of the acquisition of Lyte in October 2021.

Net revenues increased $11.8 million, or 224.7%, for the nine months ended September 30, 2022 compared to the corresponding period in 2021.

Platform revenue increased $0.1 million, or 2.6%, for the nine months ended September 30, 2022, compared to the corresponding period in 2021, primarily due to $1.7 million from an increase in advertising campaigns and PhunToken sales of $0.6 million.

These increases were partially offset by greater platform revenues for development, licensing and support services provided to two customers in 2021, as compared to 2022.

These customers are identified as " Customer E" and " Customer F" in Note 4, Revenue , in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this quarterly report on Form 10-Q.

Hardware revenue of $8.1 million for the six months ended June 30, 2022, was a result of the acquisition of Lyte, in October 2021.

Hardware revenue of $11.6 million for the nine months ended September 30, 2022, was a result of the acquisition of Lyte, in October 2021.

Cost of Revenues, Gross Profit and Gross Margin

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in thousands, except percentages) 2022 2021 Amount %

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Total gross margin 16.7 % 52.5 %

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in thousands, except percentages) 2022 2021 Amount %

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Total gross margin 24.0 % 45.8 %

Total gross profit increased $1.2 million, or 387.2% and $2.0 million, or 160.0%, for the three and six months ended June 30, 2022, when compared to the corresponding period of 2021, due to the revenue items described above.

Total gross profit decreased $0.3 million, or (29.9)%, for the three months ended September 30, 2022, when compared to the corresponding period of 2021, due to the revenue items described above.

Total gross profit increased $1.7 million, or 70.3%, for the nine months ended September 30, 2022, when compared to the corresponding period of 2021, due to the Lyte gross margin of $1.0 million and a decrease of stock compensation expense of $0.7 million.

Operating Expenses

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in thousands, except percentages) 2022 2021 Amount %

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Total operating expenses $ 8,673 $ 5,171 $ 3,502 67.7 %

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in thousands, except percentages) 2022 2021 Amount %

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Sales and Marketing

Sales and marketing expense increased $1.3 million, or 201.7% for the three months ended June 30, 2022 compared to the corresponding period of 2021, primarily due to an increase of $1 million of marketing related expenditures mostly related to Lyte and PhunToken.

Other increases of $0.3 million of employee compensation costs due to higher headcount.

Sales and marketing expense increased $2.2 million, or 185.6% for the six months ended June 30, 2022 compared to the corresponding period of 2021, primarily due to an increase of $1.8 million of marketing related expenditures mostly related to Lyte and PhunToken.

Other increases of $0.6 million of employee compensation costs due to higher headcount.

Sales and marketing expense increased $1.1 million, or 154.4% for the three months ended September 30, 2022 compared to the corresponding period of 2021, primarily due to an increase of $0.9 million of marketing related expenditures mostly related to Lyte and PhunToken.

Other increases of $0.3 million of employee compensation costs were due to higher headcount.

Sales and marketing expense increased $3.3 million, or 173.9% for the nine months ended September 30, 2022 compared to the corresponding period of 2021, primarily due to an increase of $2.6 million of marketing related expenditures mostly related to Lyte and PhunToken.

Other increases of $0.9 million of employee compensation costs were due to higher headcount.

These increases were offset by the decrease in stock-based compensation of $0.3 million.

General and Administrative

General and administrative expense increased $2.2 million, or 73.8% for the three months ended June 30, 2022 compared to the corresponding period of 2021, primarily due to an increase of $0.9 million in payroll costs mainly related to employee retention credit received during 2021, $0.7 million in legal fees, $0.2 million related to amortization of trade name related to Lyte acquisition and $0.5 million in other general and administrative expenses.

This increase was minimally offset by in decrease in stock-based compensation.

General and administrative expense increased $3.8 million, or 65.4% for the six months ended June 30, 2022 compared to the corresponding period of 2021, primarily due to an increase of $1.5 million in payroll costs mainly related to employee retention credit received during 2021, $1.1 million in legal fees, $0.3 million related to amortization of trade name related to Lyte acquisition, $0.3 million in bad debt recoveries that occurred in 2021 and $0.6 million in other general and administrative expenses.

This increase was minimally offset by in decrease in stock-based compensation.

General and administrative expense increased $1.9 million, or 57.4% for the three months ended September 30, 2022 compared to the corresponding period of 2021, primarily due to an increase of $0.7 million in legal fees, $0.6 million in payroll and other costs mainly related to the employee retention credit received during 2021, $0.3 million mainly related to expenses for new facilities and $0.2 million related to amortization of trade name related to Lyte acquisition.

General and administrative expense increased $5.7 million, or 62.5% for the nine months ended September 30, 2022 compared to the corresponding period of 2021, primarily due to an increase of $1.8 million in payroll costs mainly related to the employee retention credit received during 2021, $1.7 million in legal fees, $0.6 million of facility and travel and entertainment expenses, $0.5 million related to amortization of trade name related to Lyte acquisition, $0.4 million in bad debt recoveries and accounts payable settlements that occurred in 2021, $0.3 million increase in credit card processing fees and $0.7 million in other general and administrative expenses.

This increase was offset by a decrease in stock-based compensation of $0.3 million.

Research and Development

Research and development expense increased $1.0 million, or 121.7% and $1.0 million, or 51.7%, for the three and six months ended June 30, 2022, compared to the corresponding period of 2021, respectively, primarily for increased headcount dedicated to research and development projects.

Research and development expense increased $0.5 million, or 43.5% and $1.5 million, or 48.6%, for the three and nine months ended September 30, 2022, compared to the corresponding periods in 2021, respectively, primarily resulting from increased headcount dedicated to research and development projects.

This increase was minimally offset by in decrease in stock-based compensation.

Other expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

(in thousands, except percentages) 2022 2021 Amount %

1 unchanged sentence

Interest expense $ (991) $ 7 $ (998) (14,257.1) %

Loss on extinguishment of debt — (2,184) 2,184 (100.0) %

Impairment of digital assets (12,158) (776) (11,382) 1,466.8 %

Fair value adjustment of warrant liability 797 1,501 (704) (46.9) %

Other income (expense) 213 43 170 395.3 %

Total other expense $ (9,536) $ (3,582) $ (5,954) 166.2 %

Six Months Ended June 30, Change

Gain on forgiveness of PPP loan — 2,850 (2,850) (100.0) %

Other income (expense), net 54 51 3 5.9 %

Total other expense (income) $ (140) $ 4,409 $ (4,549) (103.2) %

Nine Months Ended September 30, Change

(in thousands, except percentages) 2022 2021 Amount %

4 unchanged sentences

Fair value adjustment of warrant liability 3,267 (148) 3,415 (2,307.4) %

Other income (expense) 265 (36) 301 (836.1) %

Gain on forgiveness of PPP loan — 2,850 (2,850) (100.0) %

Other income (expense), net 318 15 303 2,020.0 %

Total other expense $ (19,571) $ (10,068) $ (9,503) 94.4 %

Other expense increased $6.0 million and $5.0 million for the three and six months ended June 30, 2022, compared to the corresponding period of 2021, respectfully, primarily due to an impairment of our digital asset holdings.

These losses were offset due to losses on extinguishment of debt related to payments on our 2020 Convertible Notes in 2021, fair value adjustment of our outstanding warrant issued to the holder of our 2020 Convertible Notes and a decrease in interest expense, as we had paid off multiple debt obligations in 2021.

Other income decreased $4.5 million for the three months ended September 30, 2022, compared to the corresponding period of 2021, mainly as a result of Paycheck Protection Program ("PPP") loan forgiveness in 2021, a smaller gain on the fair value adjustment of our outstanding warrant issued to the holder of our 2020 Convertible Notes and an increase in interest expense, related to our 2021 and 2022 Promissory Notes.

Other expense increased $9.5 million for the nine months ended September 30, 2022, compared to the corresponding period of 2021, primarily due to an impairment of our digital asset holdings and PPP loan forgiveness in 2021.

These increases were offset due to losses on extinguishment of debt resulting from payments on our 2020 Convertible Notes in 2021, fair value adjustment of our outstanding warrant issued to the holder of our 2020 Convertible Notes and a decrease in interest expense.

Refer to Note 2, " Summary of Significant Accounting Policies " of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion regarding our digital asset holdings.

Further, reference is made to Note 6 " Debt " of the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion on our debt holdings.

Liquidity and Capital Resources

As of June 30, 2022, we held total cash of $2.7 million, all of which was held in the United States.

Financial Condition, Liquidity and Capital Resources

As of September 30, 2022, we held total cash of $8.5 million, all of which was held in the United States.

We have a history of operating losses and negative operating cash flows.

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We may, if needed, sell our digital asset holdings for cash to fund our ongoing operations.

As of June 30, 2022, we held 653 bitcoins and 780 ethereum, of which consist of the majority of the digital assets recorded on our balance sheet.

As of September 30, 2022, we held 653 bitcoins and 790 ethereum, of which consist of the majority of the digital assets recorded on our balance sheet.

The digital asset market historically has been characterized by significant volatility in its price, limited liquidity and trading volumes compared to sovereign currencies markets, relative anonymity, a developing regulatory landscape, susceptibility to market abuse and manipulation, and various other risks inherent in its entirely electronic, virtual form and decentralized network.

2 unchanged sentences

On October 18, 2021, we closed the acquisition of Lyte with an adjusted purchase price of approximately $11.0 million (subject to an earn-out provision).

Pursuant to terms of the stock purchase agreement, future cash payments of up to $1.25 million on the first anniversary of closing, as an earn-out payment based upon Lyte achieving certain annual revenue milestones as provided in the purchase agreement.

We currently believe Lyte will achieve the annual revenue milestone and we will owe the full amount of the contingent consideration on the first annual anniversary of closing.

Pursuant to terms of the stock purchase agreement, we were obligated to make future cash payments of up to $1.25 million on the first anniversary of closing, as an earn-out payment based upon Lyte achieving certain annual revenue milestones.

In October 2022, we paid $1.25 million to the seller of Lyte upon achieving the revenue milestones as provided in the purchase agreement.

In connection with the acquisition of Lyte, 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.

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No interest will accrue on the 2021 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.

We may prepay the outstanding balance of the 2021 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 monthly amortization payments in the amount of $574 thousand which are considered prepayments subject to the prepayment premium.

In October 2022, we paid the final payment on the 2021 Promissory Note.

On February 1, 2022, we filed a Form S-3, which was subsequently declared effective by the SEC on February 9, 2022, pursuant to which we may issue up to $200 million in common stock, preferred stock, warrants and units.

1 unchanged sentence

Wainwright & Co., LLC on January 31, 2022.

To date, we have not sold any shares of our common stock under the sales agreement with H.C.

Wainwright or issued any securities under our Form S-3 filed on February 1, 2022.

As of September 30, 2022, 2,193,460 shares of our common stock have been sold for aggregate net cash proceeds of $3.8 million.

On July 6, 2022, we entered into a note purchase agreement and completed the sale of an unsecured promissory note with an original principal amount of $12.8 million in a private placement with the same investor of the note described above.

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Beginning on November 1, 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 $1.6 million until the maturity date of July 1, 2022, which is subject to adjustment for any payment deferrals we elect.

We may prepay any or all outstanding balance of the promisory note earlier than it is due with a prepayment premium of 110%.

We may prepay any or all outstanding balance of the 2022 Promissory Note earlier than it is due with a prepayment premium of 110%.

The prepayment premium also applies to the monthly amortization payments.

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

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

(in thousands, except percentages) 2022 2021 Amount %

2 unchanged sentences

Net cash used in investing activities $ (2,286) $ (1,497) $ (789) 52.7 %

Net cash (used) provided by financing activities $ (3,116) $ 14,626 $ (17,742) (121.3) %

Net cash provided by financing activities $ 10,768 $ 17,547 $ (6,779) (38.6) %

Operating Activities

1 unchanged sentence

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, payments to vendors for the costs of inventory related to the assembly and shipping of Lyte computers, sales and marketing expenses and general operating expenses.

We utilized $15.0 million of cash from operating activities during the six months ended June 30, 2022, primarily resulting from a net loss of $32.0 million.

The net loss included non-cash charges of $20.9 million, primarily consisting of impairment of digital assets, fair value adjustment of our outstanding warrant and stock-based compensation.

We utilized $22.9 million of cash from operating activities during the nine months ended September 30, 2022, primarily as a result of a net loss of $40.0 million.

The net loss included non-cash charges of $22.1 million, primarily consisting of impairment of digital assets, ($3.2) million gain on fair value adjustment of our outstanding warrant and $2.2 million of stock-based compensation.

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

$0.5 million from an increase in accounts payable and accrued expenses, as well as $(4.4) million from other working capital changes, primarily an increase in inventory purchases and decrease in deferred revenue.

We utilized $14.4 million of cash from operating activities during the six months ended June 30, 2021, primarily resulting from a net loss of $20.7 million.

The net loss included non-cash charges of $15.7 million, primarily consisting of the loss on the extinguishment and amortization of debt issuance costs related to our 2020 Convertible Notes, fair value adjustment of our outstanding warrant and stock-based compensation.

a decrease in deferred revenue of ($2.5) million as a result of revenue recognized from existing customer contracts and timing of invoices to customers, ($0.7) million increase in accounts receivable due to the timing of customer invoices and related payments to us, ($0.6) million increase in inventory for computer hardware components as we prepare for the holiday season, ($0.6) million for lease liability payments and $(0.2) million decrease in accounts payable and accrued expenses.

We utilized $19.1 million of cash from operating activities during the nine months ended September 30, 2021, primarily as a result of 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 well as stock-based compensation.

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

$(6.1) 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 $(1.9) million from other working capital changes, primarily a decrease in deferred revenue.

$(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, consisting primarily of a decrease in deferred revenue.

Investing Activities

Investing activities for the six months ended June 30, 2022 and 2021, consisted of the purchase of digital assets and payments for acquisition of Lyte Technology, Inc.

Investing activities for the nine months ended September 30, 2022 consisted of a $1.1 million cash payment made to the seller of Lyte, $0.9 million for the purchase of digital assets and $0.2 million for capital expenditures.

Investing activities for the nine months ended September 30, 2021 consisted of the purchase of digital currencies.

Financing Activities

Our financing activities during the six months ended June 30, 2022 primarily consisted of payments on debt.

Our financing activities during the nine months ended September 30, 2022 consisted of proceeds from equity financings and debt borrowings offset by payments on debt.

We acquired $10.8 million of cash from financing activities resulting primarily from $11.8 million in proceeds from our 2022 Promissory Note and $3.7 million in proceeds from the sales of our common stock.

We had payments on debt of $4.7 million, of which all were payments on the 2021 Promissory Note.

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

Our financing activities during the six months ended June 30, 2021 consisted of proceeds from equity financings and debt borrowings offset by payments on debt.

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.

2 unchanged sentences

Information set forth in Note 7, Leases , in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Off-Balance Sheet Arrangements

Through June 30, 2022, 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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis