What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-04-07 · 141 added, 118 removed, 247 unchanged (51% of the section changed)

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Key Events and Recent Developments

On September 10, 2021, we entered into a Stock Purchase Agreement with Caleb Borgstrom for the purchase of all issued and outstanding shares of common stock of Lyte Technology, Inc.

with an initial purchase price of up to approximately $10.3 million, of which $2.5 million is subject to an earnout provision based upon Lyte operations meeting certain annual revenue milestones.

On October 18, 2021, we closed the acquisition with an adjusted purchase price of approximately $11.0 million (subject to the earn-out adjustment), representing an increase in working capital as of the closing date.

Refer to Note 3 " Business Combination " in the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information on the acquisition of Lyte.

Refer to " Liquidity and Ca pital Resources " below for further discussion on key events and recent developments.

In October 2022, Alan S.

Knitowski, our Chief Executive Officer, submitted notice of resignation to the Company effective December 27, 2022.

In November 2022, we entered into an employment agreement with Russell Buyse to serve as our Chief Executive Officer effective December 28, 2022.

Our board of directors also appointed Mr.

Buyse to serve as a Class III director until the 2024 annual meeting of stockholders.

Buyse filled the vacancy on our board of directors created by the resignation of Randall Crowder, which occurred in September 2022.

In addition, in January 2023, we announced that we had entered into a separation agreement with Luan Dang, our Chief Technology Officer.

Phunware, Inc.

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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 for mobile audience building, user acquisition, application discovery, audience engagement and monetization, including our engagement-driven cryptocurrency PhunToken.

• 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.

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Key Business Metrics

Our management regularly monitors certain financial measures to track the progress of its business against internal goals and targets.

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.

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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) one-time adjustments and (vi) stock-based compensation expense.

We define adjusted EBITDA as net loss plus (i) interest expense, (ii) income tax expense (benefit), (iii) depreciation, (iv) amortization, and further adjusted for (v) one-time adjustments and (vi) stock-based compensation expense.

Reconciliation of Non-GAAP Financial Measures

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Interest expense 2,406 4,481

(Less) Add back:

Income tax (benefit) expense (426) 2

Add back (Less):

Income tax expense (benefit) 4 (426)

EBITDA (47,745) (49,227)

Stock-based compensation 3,009 4,941

Legal settlement — 4,500

Loss on extinguishment of debt — 7,952

Impairment of digital assets 22,911 9,383

Add back (Less):

Impairment of goodwill 2,061 —

Less (Add back):

Fair value adjustment for warrant liabilities (3,349) 18,139

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

Gain on forgiveness of Paycheck Protection Program loan — (2,850)

Gain on sale of digital assets (367) —

Adjusted EBITDA $ (23,480) $ (11,662)

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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 Subscriptions and Services Revenue.

Platform Revenue and Gross Profit

Our platform revenue consists of software subscriptions, application development services and support, 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.

application development service revenue from the development of customer applications, or apps, which are built and delivered to customers;

and support fees.

Subscription revenue from SDK licenses gives the customer the right to access our MaaS platform.

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Support revenue is comprised of support and maintenance fees of customer applications, software updates and technical support for application development services for a support term.

From time to time, we also provide professional services by outsourcing employees’ time and materials to customers.

Platform subscriptions and services gross profit is equal to subscriptions and services revenue less the cost of personnel and related costs for our support and professional services employees, external consultants, stock-based compensation and allocated overhead.

Costs associated with our development and project management teams are generally recognized as incurred.

Costs directly attributable to the development or support of applications relating to platform subscription customers are included in cost of sales, whereas costs related to the ongoing development and maintenance of Phunware’s MaaS platform are expensed in research and development.

As a result, platform subscriptions and services gross profit may fluctuate from period to period.

Application Transaction Revenue.

We also generate revenue by charging advertisers to deliver advertisements (ads) to users of mobile connected devices.

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.

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cost per thousand impressions and cost per click.

During 2021, we announced the commencement of the selling of PhunToken, PhunToken is designed to reward consumers for their activity, such as watching branded videos, completing surveys and visiting points of interest.

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.

Application transaction gross profit is equal to application transaction revenue less cost of revenue associated with application transactions.

Application transaction gross profit is impacted by the cost of advertising traffic we pay to our suppliers, the amount of traffic which we can purchase from those suppliers and ethereum blockchain fees paid to deliver PhunToken.

As a result, our application transaction gross profit may fluctuate from period to period due to variable costs of advertising traffic and cryptocurrency blockchain fees.

Computer Hardware Revenue .

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.

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We recognize revenue at the time a completed unit ships from our facility.

Computer hardware gross profit is equal to computer hardware revenue less the costs associated with the assembly of computers.

Computer 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.

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.

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Gross margin measures gross profit as a percentage of revenue.

Gross margin is generally impacted by the same factors that affect changes in the mix of subscriptions and services and application transactions, and computer hardware.

Gross margin is generally impacted by the same factors that affect changes in the mix of platform and hardware revenue.

Operating Expenses

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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.

Our sales and marketing expense may 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.

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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.

As a result, our general and administrative expenses may increase in absolute dollars but may fluctuate as a percentage of our total revenue from period to period.

Research and Development Expense.

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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.

As a result, our research and development expenses may increase in absolute dollars as our business grows but may fluctuate as a percentage of revenue from period to period.

Impairment of Goodwill.

Goodwill impairment consists of non-cash impairment charges related to goodwill.

We review goodwill for impairment annually on October 1 and more frequently if events or changes in circumstances indicate an impairment may exist.

If the carrying value of the reporting unit continues to exceed its fair value, the fair value of the Company’s goodwill is calculated and an impairment charge equal to the excess is recorded.

Interest Expense

Interest expense includes interest related to our outstanding debt, including amortization of discounts and deferred issuance costs.

Refer to Note 8 " Factoring Agreement " and Note 9 " Debt " of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information on our factoring arrangement and debt offerings, respectively.

Refer to Note 8 " Debt " of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information on 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.

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(in thousands, except percentages) 2022 2021 Amount %

Platform subscriptions and services $ 5,308 $ 9,108 $ (3,800) (41.7) %

Computer hardware 3,095 — 3,095 100.0 %

Application transaction 2,240 893 1,347 150.8 %

Platform revenue $ 6,521 $ 7,548 $ (1,027) (13.6) %

Hardware revenue 15,273 3,095 12,178 393.5 %

Total revenue $ 21,794 $ 10,643 $ 11,151 104.8 %

Platform subscriptions and services as a percentage of total revenue 49.9 % 91.1 %

Computer hardware as a percentage of total revenue 29.1 % — %

Application transactions as a percentage of total revenue 21.0 % 8.9 %

Platform revenue as percentage of total revenue 29.9 % 70.9 %

Hardware revenue as percentage of total revenue 70.1 % 29.1 %

Total revenue increased $11.2 million, or 104.8%, in the year ended December 31, 2022 compared to the corresponding period in 2021.

Platform subscriptions and services revenue decreased $3.8 million, or (41.7)%.

Greater revenues derived in 2020 were primarily driven by development, licensing and support services provided to a particular customer during 2020.

Revenue from this customer was 32% of our total net revenues for the year ended December 31, 2020.

This customer is identified as “ Customer D ” in Note 4 “ Revenue ” of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Computer hardware revenue represented $3.1 million due to the Lyte Technology, Inc.

Application transaction revenue increased $1.3 million, or 150.8% due to $1.1 million in PhunToken sales, as we commenced the sale of PhunToken in 2021 and an increase in revenue related to advertising campaigns.

Platform revenue decreased $1.0 million, or (13.6)% as a result of a $1.5 million decrease of development, licensing and support services provided to two customers, one of which whose contract has expired.

These decreases were minimally offset by an increase in PhunToken revenue of $0.5 million.

Computer hardware revenue increased by $12.2 million, which was the result of the acquisition of Lyte in October 2021.

Cost of Revenue, Gross Profit and Gross Margin

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Cost of Revenue

Platform subscriptions and services $ 3,702 $ 3,180 $ 522 16.4 %

Computer hardware 3,017 — 3,017 100.0 %

Application transaction 311 177 134 75.7 %

Platform revenue $ 3,012 $ 4,013 $ (1,001) (24.9) %

Hardware revenue 13,706 3,017 10,689 354.3 %

Total cost of revenue $ 16,718 $ 7,030 $ 9,688 137.8 %

Platform subscriptions and services $ 1,606 $ 5,928 $ (4,322) (72.9) %

Computer hardware 78 — 78 100.0 %

Application transaction 1,929 716 1,213 169.4 %

Platform revenue $ 3,509 $ 3,535 $ (26) (0.7) %

Hardware revenue 1,567 78 1,489 1,909.0 %

Total gross profit $ 5,076 $ 3,613 $ 1,463 40.5 %

Platform subscriptions and services 30.3 % 65.1 %

Computer hardware 2.5 % — %

Application transaction 86.1 % 80.2 %

Platform revenue 53.8 % 46.8 %

Hardware revenue 10.3 % 2.5 %

Total gross margin 23.3 % 33.9 %

Total gross profit decreased $3.0 million, or (45.6)%, in the year ended December 31, 2021 compared to the corresponding period of 2020.

Stock-based compensation increased $0.8 million during the year ended December 31, 2021.

Furthermore, margin decrease can be attributed to a higher margin realized in 2020 as compared to the same period in 2021 related to the customer identified as “ Customer D ” in Note 4, “ Revenue ”, in the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Total gross profit increased $1.5 million, or 40.5%, in the year ended December 31, 2022, compared to the corresponding period of 2021 primarily due to revenue items discussed above.

The decrease in platform revenue noted above was offset by a decrease of $0.8 million of stock-based compensation.

Increase in platform gross margin is the result of higher PhunToken revenue in 2022, as compared to 2021.

Increase in Lyte gross margin is the result of operational efficiencies captured as we integrated Lyte during 2022.

Total gross margin percentage decreased primarily due to product mix between platform and hardware revenue, as Lyte comprised of larger percentage of our revenue mix in 2022, as compared to 2021.

Operating Expenses

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Research and development 6,149 4,179 1,970 47.1 %

Legal settlement — 4,500 (4,500) (100.0) %

Impairment of goodwill 2,061 — 2,061 100.0 %

Total operating expenses $ 34,578 $ 20,457 $ 14,121 69.0 %

Sales and Marketing

Sales and marketing expense increased $1.4 million, or 82.8% for the year ended December 31, 2021 compared to the corresponding period of 2020, primarily due to $0.5 million of increase employee compensation costs due to higher headcount, $0.4 million related to stock-based compensation expense and $0.3 million of online marketing expenditures.

Sales and marketing expense increased $3.8 million, or 125.5% for the year ended December 31, 2022 compared to the corresponding period of 2021, primarily due to an increase of $3.1 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 minimally offset by the decrease in stock-based compensation of $0.3 million.

General and Administrative

General and administrative expense decreased $2.1 million, or (13.7)%, for the year ended December 31, 2021, compared to the corresponding period of 2020, primarily due to a decrease of $1.8 million in legal fees mainly related to our previous litigation with Uber, $1.3 million in stock-based compensation expense and $0.5 million in bad debt recoveries.

This decrease was partially offset by additional expenses of $1.2 million related to investor relations costs.

General and administrative expense increased $6.3 million, or 47.5%, for the year ended December 31, 2022 compared to the corresponding period of 2021, as a result of an increase of $1.8 million in legal fees attributable to legal matters more fully described under the subheading " Litigation" in Note 10, " Commitments and Contingencies " of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

We also experienced an increase of $1.2 million in payroll costs, as a result of an higher headcount in our general and administrative function and employee retention credit received during 2021.

Increases in these payroll-related items were partially offset by a decrease in accruals for employee bonuses.

Other increases are the result of $0.8 million of facility expenses for new corporate office space

in Austin, Texas and the Lyte warehouse facility, $0.6 million in audit and other professional services, $0.6 million in bad debt recoveries and accounts payable settlements that occurred in 2021, $0.6 million in other general and administrative expenses, $0.4 million related to amortization of trade name related to the Lyte acquisition and a $0.3 million increase in credit card processing fees for Lyte.

Research and Development

Research and development expense increased $1.6 million, or 59.0% for the year ended December 31, 2021, compared to the corresponding period of 2020, primarily due to increases of $1.0 million for increased headcount dedicated to research and development projects and $0.6 million in stock-based compensation expense.

Legal Settlement

The legal settlement expense of $4.5 million for the year ended December 31, 2020 relates to the settlement of our litigation with Uber as described in detail in Note 11 " Commitments and Contingencies " of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Research and development expense increased $2.0 million, or 47.1% for the year ended December 31, 2022, compared to the corresponding period of 2021, primarily resulting from increased headcount dedicated to research and development projects.

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

Impairment of Goodwill

We recorded an impairment of goodwill of $2.1 million related to the Lyte operating segment of our business for the year ended December 31, 2022.

Refer to Note 6 " Goodwill " of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion on our goodwill impairment.

Other income (expense)

Year Ended December 31, Change

(in thousands, except percentages) 2021 2020 Amount %

Year Ended December 31,

(in thousands, except percentages) 2022 2021

Other income (expense)

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Total other expense $ (21,388) $ (37,104)

Other expense increased $(32.4) million for the year ended December 31, 2021 when compared to 2020, primarily due to a fair value adjustment as a result of a partial exercise of an outstanding warrant issued to the holder of our 2020 Convertible Notes, impairment of our digital asset holdings, primarily consisting of bitcoin and losses on extinguishment of debt related to payments and the payoff of our 2020 Convertible Notes.

These losses were partially offset by the gain on forgiveness of our Paycheck Protection Program loan.

During 2022, we recorded other expense of $21.4 million, which primarily consisted of impairment charges related to our digital asset holdings.

Refer to Note 2, " Summary of Significant Accounting Policies " of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion regarding our digital asset holdings.

Further, reference is made to Note 9 " Debt " of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion on our debt holdings.

We also recorded interest expense related to our 2021 Promissory Note and 2022 Promissory Note (defined elsewhere herein) and accretion of debt discounts thereunder.

These expenses were offset by a gain related to the change in the fair value of our warrants issued in connection with our 2020 Convertible Notes.

Reference is made to Note 8 " Debt " of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion on our debt holdings.

During 2021, we recorded other expense related to a fair value adjustment of the warrants issued in connection with our 2020 Convertible Notes, which included a fair value adjustment related to a partial exercise of the warrant.

We also recorded interest expense and losses on extinguishment of debt related to payments and the payoff of our 2020 Convertible Notes.

These expenses were partially offset by the gain on forgiveness of our Paycheck Protection Program loan.

Liquidity and Capital Resources

As of December 31, 2022, we held total cash of $2.0 million, all of which was held in the United States.

In connection with our acquisition of Lyte, we entered into a note purchase agreement and completed the sale of an unsecured promissory note (the "2021 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 us were $4.7 million.

No interest will accrue on the promissory note unless and until the occurrence of an event of default (as defined in the promissory note).

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

Beginning on January 15, 2022 and on the same day of each month thereafter until the promissory note is paid in full, we are required to make a monthly amortization payments in the amount of $574 thousand which are considered prepayments subject to the prepayment premium.

On April 7, 2021, we entered into an At Market Issuance Sales Agreement with B.

Riley Securities, Inc.

Riley"), pursuant to which we offered and sold shares of our common stock, from time to time.

We filed two prospectus supplements on April 7, 2021 and October 26, 2021 that form part of our shelf registration statement for the offer and sale of up to an aggregate of $25 million and $48.5 million in common stock, respectively.

As of December 31, 2021, 20,951,043 shares of our common stock had been sold and we had received aggregate net cash proceeds of $65.2 million.

We terminated our At Market Issuance Sales Agreement with B.

Riley on February 4, 2022, with an effective termination date of February 9, 2022.

In addition, on October 22, 2021, the holder of our 2020 Convertible Notes partially exercised its warrant for the purchase of 2,060,000 shares of our common stock at an exercise price of $2.25 per share for net proceeds of $4.6 million to the Company.

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” as defined by the Securities Act pursuant to an At Market Issuance Sales Agreement we entered into with H.C.

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 December 31, 2022, we held 605 bitcoins and 400 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 February 1, 2022, we filed a registration statement on 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.

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 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 Annual Report on Form 10-K.

As of December 31, 2022, 2,623,460 shares of our common stock have been sold for aggregate cash proceeds of $4.6 million, net of transaction costs of $0.1 million.

We also incurred additional transaction costs paid outside of closing of $0.2 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 (the "2022 Promissory Note").

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 2022 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 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.

On March 15, 2023, we entered into a waiver agreement with the holder of our 2022 Promissory Note, waiving the Payment Deferral Conditions, as defined in the 2022 Promissory Note.

For agreeing to waive the Payment Deferral Conditions, we agreed to compensate the noteholder an amount equal to 5% of the outstanding balance immediately before entering into the waiver agreement.

In connection therewith, we elected to defer the monthly payments under the 2022 Promissory Note for the months of April, May, June and July 2023.

As a result of our election to defer the monthly payments, the outstanding balance of the 2022 Promissory Note will be increased by 1.85% on the first day of each month beginning on April 1, 2023 and concluding on July 1, 2023.

The waiver fee and the additional principal will be paid in connection with our monthly installment payments once the deferral period concludes.

Beginning on August 1, 2023 and on the same day of each month thereafter, we will be required to pay to the noteholder the new monthly amortization payment in the amount of $1,769 until the new maturity date of November 1, 2023.

Our expectation to generate operating losses and negative operating cash flows in the future and the need for additional funding to support our planned operations, raise substantial doubt regarding our ability to continue as a going concern.

Management believes that our existing cash and liquidation of some, or all, of our digital asset holdings are not sufficient to satisfy our operating cash needs for the year after the filing of this Annual Report on Form 10-K, and substantial doubt exists about our ability to continue as a going concern for a period of at one year following the filing date of this Annual Report on Form 10-K.

Additional plans may include selling shares of our common stock in our "at the market" offering, and as of the date of this Annual Report on Form 10-K, a total of $95.4 million may be sold pursuant to the sales agreement.

We may also issue shares of our common stock, preferred stock, warrants and units in other offerings pursuant to our effective registration statement.

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 related 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.

We may be required to seek additional equity or debt financings, or issue securities under our 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.

The accompanying consolidated financial statements have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the ordinary course of business.

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

Year Ended December 31, Change

(in thousands, except percentages) 2021 2020 Amount %

Year Ended December 31,

(in thousands, except percentages) 2022 2021

Consolidated statement of cash flows

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We utilized $26.8 million of cash from operating activities during 2022 resulting from a net loss of $50.9 million.

The net loss included non-cash charges of $27.1 million, primarily consisting of the change in fair value of warrants, impairment of digital assets, impairment of goodwill, amortization of debt issuance costs primarily related to our 2022 Promissory Note, as well as stock-based compensation.

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

$(0.1) million from a decrease in accounts payable, accrued expenses and an installment payments to Uber related to the settlement of our lawsuit, as well as $(2.9) million from other working capital changes, primarily related to a decrease in deferred revenue and lease liability payments.

We utilized $22.5 million of cash from operating activities during 2021 resulting from a net loss of $53.5 million.

The net loss included non-cash charges of $40.0 million, primarily consisting of the change in fair value of warrants, impairment of digital assets, the loss on the extinguishment and amortization of debt issuance costs related to our 2020 Convertible Notes, as well as stock-based compensation.

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$(5.7) million from a decrease in accounts payable, accrued expenses and an installment payments to Uber related to the settlement of our lawsuit, as well as $(3.3) million from other working capital changes, primarily related to a decrease in post-acquisition deferred revenue and inventory purchases.

We utilized $(11.0) million of cash from operating activities during 2020 primarily resulting from a net loss of $(22.2) million, as adjusted for non-cash charges related to stock-based compensation of $4.5 million, $2.2 million for amortization of debt discount and deferred financing costs, $0.2 million for bad debt expense, $(0.5) million for accounts payable settlements, $(0.9) million for gain on the change in fair value of warrants and $2.2 million for loss on extinguishment of debt.

In addition, during 2020 certain changes in our operating assets and liabilities resulted in cash increases (decreases) as follows:

$1.5 million from an increase in accounts payable and accrued expenses, $3.0 million accrued legal settlement balance as of December 31, 2020 related to our settlement with Uber, $0.8 million from an decrease in account receivable and $(2.0) million from an decrease in deferred revenue.

Investing Activities

Investing activities during 2021 consisted of the purchase of digital assets and the acquisition of Lyte Technology, Inc.

Our investing activities during 2022 consisted of the purchase of digital assets and cash payments for the acquisition of Lyte.

This was partially offset by proceeds from the sale of digital assets.

Our investing activities during 2021 consisted of the purchase of digital assets and the acquisition of Lyte.

Financing Activities

Our financing activities during 2022 consisted of proceeds from equity financings and debt borrowings offset by payments on debt.

We acquired $8.1 million of cash from financing activities resulting primarily from $11.8 million in proceeds from our 2022 Promissory Note and $4.3 million in proceeds from the sale of our common stock.

These sources of financings were partially offset by $8.1 million of payments on debt.

Our financing activities during 2021 consisted of proceeds from equity financings and debt borrowings offset by payments on debt.

We acquired $88.0 million of cash from financing activities resulting primarily from $94.7 million in proceeds from the sale of our common stock, $14.7 million in proceeds from our Series B Convertible Note and 2021 Promissory Note and $4.6 million from a partial exercise of a warrant held by the holder of our 2020 Convertible Notes.

These sources of financing were partially offset by $(26.2) million of payments on debt, a majority of which related to payments on the 2020 Convertible Notes.

Our financing activities during 2020 consisted of proceeds from various debt borrowings offset by repayments on our various debt offerings and financing factoring agreement.

We acquired $14.6 million of cash from financing activities during 2020, as a result of $15.4 million from new issuances of debt (inclusive of $0.6 million from related parties), $9.2 million from our at-the-market offering of common stock and $0.1 million in proceeds from stock option exercises.

These sources of financing were partially offset of $(9.0) million of payments on debt (inclusive of $0.6 million to related parties) and $(1.1) million in net repayments on our factoring financing agreement.

sources of financing were partially offset by $26.2 million of payments on debt, a majority of which related to payments on the 2020 Convertible Notes.

Contractual Obligations

We lease various office facilities, including our corporate headquarters in Texas and offices in California and Florida, under non-cancellable operating lease agreements that expire through 2025.

We lease various office facilities, including our corporate headquarters in Austin, Texas, our Lyte warehouse facility in Round Rock, Texas, as well as offices in California and Florida, under non-cancellable operating lease agreements that expire through 2027.

The terms of the lease agreements provide for rental payments on a graduated basis.

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Digital Assets

We account for out digital assets as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other .

We have ownership of and control over our digital assets and we may use third-party custodial services to secure them.

We account for our digital assets as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other .

We have ownership of and control over our digital assets and we may use third-party custodial services or self-custody solutions to secure them.

The digital assets are initially recorded at cost and are subsequently remeasured, net of any impairment losses incurred since acquisition.

We determine the fair value of our digital assets on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement , based on quoted prices on the active exchange(s) that we have determined is the principal market for bitcoin and

ethereum (Level 1 inputs).

We perform an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that our digital assets are impaired.

In determining if an impairment has occurred, we consider the lowest market price quoted on an active exchange since acquiring the respective digital asset.

In determining if an impairment has occurred, we consider the lowest intra-day market price quoted on an active exchange since acquiring the respective digital asset.

If the then current carrying value of a digital asset exceeds the fair value, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the fair value.

The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value.

Gains are not recorded until realized upon sale, at which point they are presented net of any impairment losses for the same digital assets held.

Gains are not recorded until realized upon sale.

In determining the gain or loss to be recognized upon sale, we calculate the difference between the sales price and carrying value of the digital assets sold immediately prior to sale.

Impairment losses and gains or losses on sales are recognized within other expense in our consolidated statements of opera

Impairment losses and gains or losses on sales are recognized within other expense in our consolidated statements of operations and comprehensive loss.

We review goodwill for impairment annually during the fourth quarter or more frequently if events or changes in circumstances would more-likely-than-not reduce the fair value of a reporting unit below its carrying value.

As of December 31, 2021, no impairment of goodwill has been identified.

2020 Convertible Notes and Warrant

In July 2020, we issued the 2020 Convertible Notes.

We also issued a warrant exercisable for three (3) years for the purchase, initially, of an aggregate of up to 2,160,000 shares of our common stock at an initial exercise price of $4.00 per share.

As a result of our underwritten public offering in February 2021, the exercise price of each share decreased to $2.25 per share, and the number of shares for which the warrant is exercisable increased to 3,840,000.

We evaluated all of the financial instruments, including the warrant to purchase shares of our common stock issued in conjunction with 2020 Convertible Notes, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815-40, Derivatives and Hedging - Contracts in an Entity’s Own Stock .

In accordance with ASC 480, Distinguishing Liabilities from Equity , we accounted for the warrant initially as a liability at its fair value and is then re-valued the warrant at each reporting date, with changes in the fair value reported in the consolidated statement of operations.

We used a Black-Scholes option-pricing model to value the warrants at inception and subsequent valuation dates.

As of December 31, 2022, we identified an impairment related to our Lyte computer division of approximately $2.1 million.

Refer to Note 6 " Goodwill " of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion on our goodwill impairment.

Derivative Liabilities

When the Company issues warrants, it evaluates the proper balance sheet classification of the warrant to determine whether the warrant should be classified as equity or as a derivative liability on the consolidated balance sheet.

In accordance with ASC 815-40, Derivatives and Hedging - Contracts in the Entity’s Own Equity (“ASC 815-40”), we classify a warrant as equity if it is indexed to our equity and several specific conditions for equity classification are met.

A warrant is not considered indexed to our equity, in general, when it contains certain types of exercise contingencies or adjustments to exercise price.

If a warrant is not indexed to our equity or it has net cash settlement that results in the warrants to be accounted for under ASC 480, Distinguishing Liabilities from Equity , or ASC 815-40, it is classified as a derivative liability which is carried on the consolidated balance sheet at fair value with any changes in its fair value recognized currently in the statement of operations.

of December 31, 2022 and 2021, we had a warrant that was classified as a liability and other warrants that were classified as equity.

We used a Black-Scholes option-pricing model to value the warrant classified as a liability at inception and subsequent valuation dates.

Furthermore, the holder partially exercised its warrant for 2,060,000 shares of our common stock, in October 2021, which resulted in a revaluation of the warrant at the time of exercise.

The initial and subsequent valuations of the warrant requires significant judgment.

The initial and subsequent valuations of the warrant require significant judgment.

For the assumptions used to value at warrant as of December 31, 2022, refer to Note 8 “ Debt ” of the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

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What changed 10-K

Item 7. Management’s Discussion and Analysis