What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-31 · 91 added, 144 removed, 244 unchanged (49% of the section changed)

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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.

In October 2023, the Company entered into separation agreement with Russell Buyse, who was then serving as our Chief Executive Officer.

The separation agreement provides that Mr.

Buyse's employment with the Company terminated effective October 25, 2023.

On October 25, 2023, we entered into an employment agreement with Michael Snavely to serve as our Chief Executive Officer effective the same date.

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.

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

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 platform provides the entire mobile lifecycle of applications, media and data in one login through one procurement relationship.

Our offerings include:

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• 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.

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Gross profit $ 1,686 $ 3,509

Amortization of intangibles — 7

Stock-based compensation 447 210

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(in thousands)

Net loss $ (50,894) $ (53,522)

Depreciation and amortization 739 240

Net loss from continuing operations $ (41,944) $ (45,425)

Depreciation 84 50

Interest expense 1,733 2,406

Add back (Less):

Income tax expense (benefit) 4 (426)

Income tax expense 29 4

EBITDA (40,098) (42,965)

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Impairment of goodwill 25,819 —

Less (Add back):

Fair value adjustment for warrant liabilities (256) (3,349)

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

Gain on sale of digital assets (5,310) (367)

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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, 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.

Our 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 are comprised of subscription fees from customers licensing our Software Development Kits (SDKs), that include access to our platform.

Subscription revenue from SDK licenses gives the customer the right to access our location-based software 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.

Support revenue is comprised of support and maintenance fees for 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.

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cost per thousand impressions and cost per click.

During 2021, we announced the commencement of PhunToken sales.

In 2021, we commenced 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.

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.

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 our software 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.

As a result, gross profit may fluctuate from period to period.

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.

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

Operating Expenses

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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.

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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.

administrative and professional services.

We also expect to increase the size of our general and administrative function to support the growth of our business.

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Comparison of Fiscal Years Ended December 31, 2023 and 2022

Year Ended December 31, Change

(in thousands, except percentages) 2022 2021 Amount %

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 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 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

Net Revenue, Cost of Revenue, Gross Profit and Gross Margin

Year Ended December 31, Change

(in thousands, except percentages) 2023 2022 Amount %

Cost of Revenue

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 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 revenue 53.8 % 46.8 %

Hardware revenue 10.3 % 2.5 %

Total gross margin 23.3 % 33.9 %

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.

Net Revenues, Cost of Revenues, Gross Profit & Margin

Net revenues $ 4,832 $ 6,521 $ (1,689) (25.9) %

Cost of revenues 3,146 3,012 134 4.4 %

Gross Profit $ 1,686 $ 3,509 $ (1,823) (52.0) %

Gross Margin 34.9 % 53.8 %

Total revenue decreased $1.7 million, or (25.9)%, in the year ended December 31, 2023 compared to the corresponding period in 2022 due to decreased PhunToken sales of $1.5 million.

Gross profit decreased $1.8 million, or (52.0)%, as a result of decreased PhunToken revenue mentioned above.

Operating Expenses

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Sales and Marketing

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.

Sales and marketing expense decreased $0.8 million, or (19.1)% for the year ended December 31, 2023 compared to the corresponding period of 2022, primarily due to a decrease of $0.5 million of marketing related expenditures generally related to PhunToken and a $0.3 million decrease related to lower sales and marketing personnel headcount.

General and Administrative

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.

General and administrative expense decreased $3.5 million, or (20.2)%, for the year ended December 31, 2023 compared to the corresponding period of 2022, as a result of a decrease of $2.6 million in professional fees mainly related to legal expenses 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 a decrease of $1.0 million in payroll costs, as a result of lower headcount in our general and administrative function and lower bonus expense.

Research and Development

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.

Research and development expense decreased $1.7 million, or (27.6)% for the year ended December 31, 2023, compared to the corresponding period of 2022, primarily resulting from lower headcount dedicated to research and development projects.

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.

We recorded an impairment of goodwill of $25.8 million for the year ended December 31, 2023.

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.

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Fair value adjustment for warrant liabilities 256 3,349

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

Gain on sale of digital currencies 5,310 367

Other income, net 230 211

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

Total other income (expense) $ 3,776 $ (21,390)

During 2023, we recorded other income of $3.8 million, as a result of a $5.3 million gain on sale of our digital asset holdings, primarily bitcoin and ethereum.

This gain was offset by interest expense recorded related to our 2022 Promissory Note (defined elsewhere herein).

Refer to Note 2, " Summary of Significant Accounting Policies " and Note 5, " Digital Assets " 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 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 the 2022 Promissory Note.

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.

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.

We also recorded interest expense related to our various debt instruments 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 a convertible note we issued in 2020.

Liquidity and Capital Resources

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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.

On February 1, 2022, we filed a shelf registration statement 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 pursuant to 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 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").

As of December 31, 2023, approximately 421,176 shares of our common stock have been sold for aggregate gross cash proceeds of approximately $12.0 million.

As of the date of this Report, shares of our common stock with a maximum aggregate offering price of up to $88.0 million may be sold pursuant to the sales agreement.

On July 6, 2022, we entered into a note purchase agreement and completed the sale of an unsecured promissory note (referred to herein as the 2022 Promissory Note) with an original principal amount of $12.8 million in a private placement.

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.

No interest was to accrue on the 2022 Promissory Note.

On August 14, 2023, we entered into an amendment to the 2022 Promissory Note with the noteholder.

The amendment extended the maturity date to June 1, 2024 and provided that effective August 1, 2023, we were required to make monthly amortization payments of at least $800 thousand commencing on August 31, 2023 until the 2022 Promissory Note is paid-in-full.

We also granted the noteholder certain limited conversion rights, which if elected by the noteholder, would reduce the required monthly payment.

The limited conversion rights were subject to advance payment and volume conditions.

The amendment also provided that the outstanding balance shall accrue interest at a rate of 8% and payment deferrals are no longer permitted under the 2022 Promissory Note.

During 2023, we made payments in the form of both cash and holder-elected conversions.

Further, during the first quarter of 2024, the holder elected to convert the remaining balance of the 2022 Promissory Note and the 2022 Promissory Note was paid-in-full in February 2024.

In July 2023, we implemented a plan to decrease our cash burn by reducing employee headcount and other operating expenditures.

On August 22, 2023, we entered into a common stock purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, we have the right, but not the obligation, to sell to Lincoln Park up to $30 million in value of shares of our common stock from time to time over the 24-month term of the purchase agreement.

On any business day selected by us, we may direct Lincoln Park to purchase up to 5,000 shares of our common stock subject to adjustment as set forth below, on such business day (or the purchase date), which we refer to as a "Regular Purchase," provided, however, that (i) a Regular Purchase may be increased to up to 7,000 shares if the closing sale price of our common stock on the Nasdaq is not below $10.00 on the applicable purchase date;

(ii) a Regular Purchase may be increased to up to 9,000 shares if the closing sale price of our common stock on Nasdaq is not below $15.00 on the applicable purchase date;

(iii) a Regular Purchase may be increased to up to 11,000 shares if the closing sale price of our common stock on Nasdaq is not below $25.00 on the applicable purchase date;

and (iv) a Regular Purchase may be increased to up to 13,000 shares if the closing sale price of our common stock on Nasdaq is not below $37.50 on the applicable purchase date, provided, however, that if such Regular Purchase would not equal or exceed $100 thousand, then the number of shares that may be sold pursuant to such Regular Purchase is the maximum number of shares that would enable us to sell to Lincoln Park a Regular Purchase amount equal to, or as closely approximating without exceeding, $100 thousand.

Lincoln Park’s committed obligation under any single Regular Purchase, subject to certain exceptions, cannot exceed $1 million.

We may direct Lincoln Park to purchase shares in Regular Purchases as often as every business day, so long as the closing sale price of our common stock on such business day is not less than the floor price of $5.00 per share.

Concurrently with entering into the purchase agreement, we also entered into a registration rights agreement with Lincoln Park pursuant to which the Company agreed to register the sale of the shares of the Company’s common stock that have been and may be issued to Lincoln Park under the purchase agreement pursuant to the Company’s existing shelf registration statement on Form S-3.

During 2023, we sold 164,106 shares of our common stock, including certain commitment shares issued to Lincoln Park in connection with the transaction, for aggregate gross cash proceeds of $978 thousand.

Transaction costs were $97 thousand.

As of the date of this Report, $29.0 million in value of shares of our common stock remains issuable pursuant to the purchase agreement with Lincoln Park.

In a series of equity financings, we sold an aggregate of 2,696,000 shares of our common stock and issued pre-funded warrants to purchase up to 974,000 shares of our common stock.

The gross proceeds from the offering, before deducting the placement agent's fees and other offering expenses payable by the Company, were approximately $22.6 million.

Placement agent transaction costs were approximately $1.8 million.

The holders of the pre-funded warrants exercised their rights to purchase 974,000 shares of common stock.

Although we expect to generate operating losses and negative operating cash flows in the future, based on the financing events described above, 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.

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 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 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.

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.

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Our primary source of cash from operating activities is receipts sales for our various product and service offerings as further described elsewhere in this Annual Report.

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

Our 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, sales and marketing expenses, general operating expenses and employee and material costs for Lyte in discontinued operations.

We utilized $18.4 million of cash from operating activities during 2023 resulting from a net loss from continuing operations of $41.9 million.

The net loss included non-cash charges of $26.9 million, primarily consisting from an impairment of goodwill, amortization of debt issuance costs primarily related to our 2022 Promissory Note, and stock-based compensation, offset by a gain in the sale of our digital assets.

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

$(1.6) million from a combined decrease in accounts payable and accrued expenses and lease liability payments, $(1.3) million from the discontinued operation of Lyte, as well as $(0.4) million from other working capital changes, primarily related to a decrease in deferred revenue.

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

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$(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.

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

$(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.

Investing Activities

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

Our investing activities during 2023 consisted primarily of cash proceeds received for the sales of our digital asset holdings.

Our investing activities during 2022 consisted of the purchase of digital assets and cash payments for the acquisition of Lyte Technologies, Inc., which has been since discontinued.

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 2023 consisted of proceeds from sales of our common stock through various financing arrangements, offset by payments on our 2022 Promissory Note and the repurchases of our common stock.

We raised net proceeds of approximately $10.5 million from various sales of our common stock.

This source of financing was offset by $5.0 million of cash payments on our 2022 Promissory Note and $0.5 million of repurchases of shares of our common stock.

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

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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.

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 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.

We lease various office facilities, including our corporate headquarters in Austin, Texas, as well as an office in Irvine, California, under non-cancellable operating lease agreements that expire through 2027.

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

We recognize rent expense on a straight-line basis over the lease periods.

Rent expense under operating leases totaled $1.1 million and $0.8 million for the years ended December 31, 2022 and 2021, respectfully.

Rent expense under operating leases for our continued operations totaled $0.8 million and $0.9 million for the years ended December 31, 2023 and 2022, respectfully.

The following table sets forth our contractual obligations as of December 31, 2023 (in thousands):

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For further information on all significant accounting policies, 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.

We derive our revenue primarily from MaaS subscription fees, application development and support fees, as well as revenue from the sale of high-performance personal computer systems.

We derive our revenue primarily from our platform subscription fees, application development and support fees.

Revenue is recognized when control of these products or services are transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

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

As of December 31, 2023, we identified an impairment of approximately $25.8 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 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.

Business Combination

We account for business combinations using the acquisition method of accounting as prescribed in ASC 805, " Business Combinations (Topic 805)." We record the assets acquired, liabilities assumed and acquisition-related contingent consideration at fair value on the date of acquisition.

The difference between the purchase price, including any contingent consideration, and the fair value of net assets acquired is recorded as goodwill.

We may adjust the preliminary purchase price and purchase price allocation, as necessary, during the measurement period of up to one year after the acquisition closing date as we obtain more information as to facts and circumstances that impact the determination of fair value at the acquisition date.

Any change in fair value of acquisition-related contingent consideration resulting from events after the acquisition date is recognized in earnings.

Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred.

Discontinued Operation

On November 1, 2023, we committed to a plan to discontinue and wind down the operations of Lyte, which the Company determined meets the criteria for classification as a discontinued operation in accordance with Accounting Standards Codification ("ASC") Topic 205-20, Discontinued Operations .

Prior periods were recast so that the basis of presentation is consistent.

For additional information, see Note 3, " Discontinued Operation" of the notes to consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K..

Recent Accounting Standards

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

What changed 10-K

Item 7. Management’s Discussion and Analysis