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. 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 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 monetization, including our engagement-driven digital asset PhunToken. We also offer and sell pre-packaged and custom high-end personal computer systems for gaming, streaming and cryptocurrency mining enthusiasts. We intend to continue investing for long-term growth. We have invested and expect to continue investing in the expansion of 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. 23 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 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. 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, 2022 December 31, 2021 (in thousands) Backlog $ 5,044 $ 3,316 Deferred revenue 2,808 5,272 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 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: 24 Table of Contents • Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period; • Our non-GAAP financial measures do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of ongoing operations, and; • Other companies in our industry may calculate our non-GAAP financial measures differently than we do, limiting their usefulness as comparative measures. We compensate for these limitations to our non-GAAP financial measures by relying primarily on 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) 2022 2021 2022 2021 Adjusted gross profit (1) $ 854 $ 1,486 4,240 3,291 Adjusted gross margin (1) 17.9 % 68.8 % 24.9 % 62.8 % Adjusted EBITDA (2) $ (6,741) $ (2,474) $ (17,590) $ (7,620) (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 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. 25 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) 2022 2021 2022 2021 Gross profit $ 795 $ 1,134 $ 4,086 $ 2,400 Add back: Amortization of intangibles — — — 7 Add back: Stock-based compensation 59 352 154 884 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 September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Net (loss) income $ (8,018) $ 372 $ (40,006) $ (21,711) Add back: Depreciation and amortization 185 17 553 75 Add back (less): Interest expense (income) 991 (7) 1,645 4,057 EBITDA (6,842) 382 (37,808) (17,579) Add back: Stock-based compensation 899 1,495 2,169 3,933 Add back: Loss on extinguishment of debt — — — 7,952 Add back: Impairment of digital assets — — 21,511 776 Less: Gain on forgiveness of PPP loan — (2,850) — (2,850) (Less) Add back: Fair value adjustment of warrant liability (797) (1,501) (3,267) 148 Less: Gain on sale of digital asset (1) — (195) — Adjusted EBITDA $ (6,741) $ (2,474) $ (17,590) $ (7,620) 26 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 product, service 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 Revenue and Gross Profit Our platform revenue consists of software subscriptions, application development services and support and application transactions, which are comprised of in-app advertising and PhunToken sales. 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. 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 may also provide professional services by outsourcing employees’ time and materials to customers. We generate application transaction 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, clicks or actions by users on mobile advertisements delivered, and we recognize revenue at the time the user views, clicks or otherwise acts on the ad. We sell ads through several offerings: cost per thousand impressions and cost per click. During 2021, we announced the commencement of PhunToken sales. PhunToken is designed to reward consumers for their activity, such as watching branded videos, completing surveys and visiting points of interest. We recognize revenue related to PhunToken at time of delivery to a customer's ethereum-based wallet. Platform 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 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. Furthermore, gross profit related to application transactions is equal to application transaction revenue less cost of revenue associated with application transactions, which is impacted by the cost of advertising traffic we pay to our suppliers, the amount of traffic which we can purchase from those suppliers and ethereum blockchain fees paid to deliver PhunToken. As a result, platform gross profit may fluctuate from period to period. Hardware Revenue and Gross Profit We acquired Lyte in October 2021. Revenue from Lyte is primarily 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. A majority of Lyte's customers pay us via credit card payments, which is managed through a third party processor. We recognize revenue at the time a completed unit ships from our facility. Hardware gross profit is equal to hardware revenue less the costs associated with the assembly of computers. Hardware gross profit is impacted by the costs that we pay for parts incorporated into a Lyte computer system, as well as labor costs of our employees directly attributable to building computer systems 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, computer hardware revenue and gross profit may fluctuate from period to period. Although we plan to invest in Lyte for future growth, we may experience revenue and gross profit fluctuations as a result of seasonality. 27 Table of Contents 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 platform and hardware revenue. 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 6 " Debt " in the notes to the condensed consolidated financial statements included Part I, Item 1 of this Quarterly Report on Form 10-Q for more information on our 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. 28 Table of Contents Results of Operations Net Revenues Three Months Ended September 30, Change (in thousands, except percentages) 2022 2021 Amount % Net Revenues Platform revenue $ 1,259 $ 2,160 $ (901) (41.7) % Hardware revenue 3,499 — 3,499 100.0 % Net revenues $ 4,758 $ 2,160 $ 2,598 120.3 % Platform revenue as percentage of total revenue 26.5 % 100.0 % Hardware revenue as percentage of total revenue 73.5 % — % Nine Months Ended September 30, Change (in thousands, except percentages) 2022 2021 Amount % Net Revenues Platform revenue $ 5,379 $ 5,242 $ 137 2.6 % Hardware revenue 11,642 — 11,642 100.0 % Net revenues $ 17,021 $ 5,242 $ 11,779 224.7 % Platform revenue as percentage of total revenue 31.6 % 100.0 % Hardware revenue as percentage of total revenue 68.4 % — % 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 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. 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. 29 Table of Contents Cost of Revenues, Gross Profit and Gross Margin Three Months Ended September 30, Change (in thousands, except percentages) 2022 2021 Amount % Cost of Revenues Platform revenue $ 674 $ 1,026 $ (352) (34.3) % Hardware revenue 3,289 — 3,289 100.0 % Total cost of revenues $ 3,963 $ 1,026 $ 2,937 286.3 % Gross Profit Platform revenue $ 585 $ 1,134 $ (549) (48.4) % Hardware revenue 210 — 210 100.0 % Total gross profit $ 795 $ 1,134 $ (339) (29.9) % Gross Margin Platform revenue 46.5 % 52.5 % Hardware revenue 6.0 % — % Total gross margin 16.7 % 52.5 % Nine Months Ended September 30, Change (in thousands, except percentages) 2022 2021 Amount % Cost of Revenues Platform revenue $ 2,313 $ 2,842 $ (529) (18.6) % Hardware revenue 10,622 — 10,622 100.0 % Total cost of revenues $ 12,935 $ 2,842 $ 10,093 355.1 % Gross Profit Platform revenue $ 3,066 $ 2,400 $ 666 27.8 % Hardware revenue 1,020 — 1,020 100.0 % Total gross profit $ 4,086 $ 2,400 $ 1,686 70.3 % Gross Margin Platform revenue 57.0 % 45.8 % Hardware revenue 8.8 % — % Total gross margin 24.0 % 45.8 % 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. 30 Table of Contents Operating Expenses Three Months Ended September 30, Change (in thousands, except percentages) 2022 2021 Amount % Operating expenses Sales and marketing $ 1,819 $ 715 $ 1,104 154.4 % General and administrative 5,189 3,296 1,893 57.4 % Research and development 1,665 1,160 505 43.5 % Total operating expenses $ 8,673 $ 5,171 $ 3,502 67.7 % Nine Months Ended September 30, Change (in thousands, except percentages) 2022 2021 Amount % Operating expenses Sales and marketing $ 5,232 0 $ 1,910 $ 3,322 173.9 % General and administrative 14,745 9,075 5,670 62.5 % Research and development 4,544 3,058 1,486 48.6 % Total operating expenses $ 24,521 $ 14,043 $ 10,478 74.6 % Sales and Marketing 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 $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 $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. 31 Table of Contents Other expense Three Months Ended September 30, Change (in thousands, except percentages) 2022 2021 Amount % Other income (expense) Interest expense $ (991) $ 7 $ (998) (14,257.1) % Fair value adjustment of warrant liability 797 1,501 (704) (46.9) % 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 % Other income (expense) Interest expense $ (1,645) $ (4,057) $ 2,412 (59.5) % Loss on extinguishment of debt — (7,952) 7,952 (100.0) % Impairment of digital assets (21,511) (776) (20,735) 2,672.0 % Fair value adjustment of warrant liability 3,267 (148) 3,415 (2,307.4) % 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 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. 32 Table of Contents 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. As we continue to focus on growing our revenues, we expect these trends to continue into the foreseeable future. We may, if needed, sell our digital asset holdings for cash to fund our ongoing operations. 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. During times of instability in the digital asset market, we may not be able to sell our digital asset holdings at reasonable prices, or at all. As a result, our digital assets are less liquid than our existing cash and cash equivalents and may not be able to serve as a source of liquidity for us to the same extent as cash and cash equivalents. 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, 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. After deducting all transaction cost, net cash proceeds to the Company were $4.7 million. 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 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. Contained therein, was a prospectus supplement in which we may sell up to $100 million of our common stock in an “at the market offering” pursuant to an At Market Issuance Sales Agreement we entered into with H.C. Wainwright & Co., LLC on January 31, 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. After deducting all transaction fees paid by us at closing, net cash proceeds to us at closing were $11.8 million. No interest will accrue on the 2022 Promissory Note unless and until the occurrence of an event of default (as defined in the promissory note). 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 2022 Promissory Note earlier than it is due with a prepayment premium of 110%. The prepayment premium also applies to the monthly amortization payments. As a result of the financing events described above, while our liquidity risk continues as a result of continued losses and the ongoing 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 financings, or issue securities subject to the effective registration statement described above. 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. 33 Table of Contents The following table summarizes our cash flows for the periods presented: Nine Months Ended September 30, Change (in thousands, except percentages) 2022 2021 Amount % Consolidated statement of cash flows Net cash used in operating activities $ (22,872) $ (19,089) $ (3,783) 19.8 % Net cash used in investing activities $ (2,286) $ (1,497) $ (789) 52.7 % Net cash provided by financing activities $ 10,768 $ 17,547 $ (6,779) (38.6) % Operating Activities The primary source of cash from operating activities is receipts from sales of our various product and service offerings 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, 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 $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: 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: $(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 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 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 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. 34 Table of Contents Contractual Obligations 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. 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. Recent Accounting Pronouncements None. 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 included in Item I, Part I of this Quarterly Report on Form 10-Q, 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, 2021 filed with the SEC on April 7, 2022. 35 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.