phun-20210930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-37862

PHUNWARE, INC.

(Exact name of registrant as specified in its charter)


Delaware						30-1205798
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

7800 Shoal Creek Blvd, Suite 230-S, Austin, Texas

78757

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: 512-693-4199

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading Symbol(s)

Name of each exchange on which registered:

Common Stock, par value $0.0001 per share

PHUN

The NASDAQ Capital Market

Warrants to purchase one share of Common Stock

PHUNW

The NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 9, 2021, 96,261,780 shares of common stock, par value $0.0001 per share, were issued and outstanding.

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		PAGE
PART I	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	2
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 and 2020	3
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2021 and 2020	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	6
	Notes to the Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38

PART II	OTHER INFORMATION	40
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	41

	Signatures	42

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report (the “Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this Report, including statements regarding our future results of operations and financial position, business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on us. Future developments affecting us may not be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) and other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. These risks and others described under “Risk Factors” may not be exhaustive.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Report. In addition, even if our results of operations, financial condition and liquidity, and developments in the industry in which we operate are consistent with the forward-looking statements contained in this Report, those results or developments may not be indicative of results or developments in subsequent periods.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

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Phunware, Inc.

Condensed Consolidated Balance Sheet

(In thousands, except share and per share information)


	September 30, 2021		December 31, 2020
	(Unaudited)
Assets
Current assets:
Cash	$	882	$	3,940
Accounts receivable, net of allowance for doubtful accounts of $606 and $356 at September 30, 2021 and December 31, 2020, respectively	1,223		664
Digital currencies	789		—
Prepaid expenses and other current assets	745		304
Total current assets	3,639		4,908
Property and equipment, net	—		13
Goodwill	25,883		25,900
Intangible assets, net	38		111
Deferred tax asset	537		537
Restricted cash	91		91
Right-of-use asset	1,486		—
Other assets	276		276
Total assets	$	31,950	$	31,836
Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	7,085	$	8,462
Accrued expenses	2,417		5,353
Accrued legal settlement	—		3,000
Lease liability	486		—
Deferred revenue	1,815		2,397
PhunCoin deposits	1,202		1,202

Current maturities of long-term debt, net	83		4,435
Warrant liability	1,762		1,614
Total current liabilities	14,850		26,463
Long-term debt	849		3,762
Long-term debt - related party	195		195
Deferred tax liability	537		537
Deferred revenue	1,262		2,678
Lease liability	1,232		—
Deferred rent	—		180
Total liabilities	18,925		33,815
Commitments and contingencies

Stockholders’ equity (deficit)
Common stock, $0.0001 par value; 1,000,000,000 shares authorized at September 30, 2021 and December 31, 2020; 75,556,118 and 56,380,111 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively	8		6
Additional paid-in capital	180,887		144,156
Accumulated other comprehensive loss	(356)		(338)
Accumulated deficit	(167,514)		(145,803)
Total stockholders’ equity (deficit)	13,025		(1,979)
Total liabilities and stockholders’ equity (deficit)	$	31,950	$	31,836

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Phunware, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except per share information)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net revenues	$	2,160	$	3,130	$	5,242	$	7,983
Cost of revenues	1,026		898		2,842		2,757
Gross profit	1,134		2,232		2,400		5,226

Operating expenses:
Sales and marketing	715		383		1,910		1,265
General and administrative	3,296		4,276		9,075		11,981
Research and development	1,160		572		3,058		1,811
Legal settlement	—		4,500		—		4,500
Total operating expenses	5,171		9,731		14,043		19,557
Operating loss	(4,037)		(7,499)		(11,643)		(14,331)

Other income (expense):
Interest income (expense)	7		(1,362)		(4,057)		(1,923)
Loss on extinguishment of debt	—		(950)		(7,952)		(1,031)
Impairment of digital currency	—		—		(776)		—
Gain (loss) on change in fair value of warrant liability	1,501		1,244		(148)		1,244
Gain on forgiveness of PPP loan	2,850		—		2,850		—
Other income	51		—		15		—
Total other income (expense)	4,409		(1,068)		(10,068)		(1,710)
Income (loss) before taxes	372		(8,567)		(21,711)		(16,041)
Income tax expense	—		—		—		—
Net income (loss)	372		(8,567)		(21,711)		(16,041)
Other comprehensive income (loss):
Cumulative translation adjustment	(33)		47		(18)		(28)
Comprehensive income (loss)	$	339	$	(8,520)	$	(21,729)	$	(16,069)

Net income (loss) per common share, basic	$	0.01	$	(0.19)	$	(0.31)	$	(0.38)
Net income (loss) per common share, diluted	$	—	$	(0.19)	$	(0.31)	$	(0.38)

Weighted-average common shares used to compute net income (loss) per share, basic	74,347		44,304		70,185		42,089
Weighted-average common shares used to compute net income (loss) per share, diluted	74,699		44,304		70,185		42,089

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Phunware, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

(In thousands)

(Unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Other Comprehensive Loss		Total Stockholders’ Equity (Deficit)
	Shares	Amount
Balance - June 30, 2021	72,736	$	7	$	177,254	$	(167,886)	$	(323)	$	9,052
Exercise of stock options, net of vesting of restricted shares	2	—		1		—		—		1
Release of restricted stock	772	—		—		—		—		—
Sales of common stock, net of issuance cost	2,039	1		2,170		—		—		2,171
Stock-based compensation expense	—	—		1,462		—		—		1,462
Cumulative translation adjustment	—	—		—		—		(33)		(33)
Net income	—	—		—		372		—		372
Balance - September 30, 2021	75,549	$	8	$	180,887	$	(167,514)	$	(356)	$	13,025

Balance - December 31, 2020	56,371	$	6	$	144,156	$	(145,803)	$	(338)	$	(1,979)
Exercise of stock options, net of vesting of restricted shares	133	—		71		—		—		71
Release of restricted stock	1,784	—		—		—		—		—
Issuance of common stock for payment of board of director fees	99	—		66		—		—		66
Sales of common stock, net of issuance costs	17,162	2		32,706		—		—		32,708
Stock-based compensation expense	—	—		3,888		—		—		3,888
Cumulative translation adjustment	—	—		—		—		(18)		(18)
Net loss	—	—		—		(21,711)		—		(21,711)
Balance - September 30, 2021	75,549	$	8	$	180,887	$	(167,514)	$	(356)	$	13,025

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	Common Stock		Additional Paid-in Capital			Accumulated Deficit		Other Comprehensive Loss		Total Stockholders’ Equity
		Shares			Amount
Balance - June 30, 2020		43,555	$	4		$	132,045	$	(131,078)	$	(457)	$	514
Exercise of stock options, net of vesting of restricted shares		33	—			9		—		—		9
Release of restricted stock		388	—			—		—		—		—
Issuance of common stock for payment of legal, earned bonus, and board of director fees		164	—			225		—		—		225
Sale of common stock		1,302	1			1,341		—		—		1,342
Stock-based compensation expense		—	—			1,708		—		—		1,708
Reacquisition of equity component of Senior Convertible Note		—	—			(89)		—		—		(89)
Cumulative translation adjustment		—	—			—		—		47		47
Net loss		—	—			—		(8,567)		—		(8,567)
Balance - September 30, 2020		45,442	$	5		$	135,239	$	(139,645)	$	(410)	$	(4,811)

Balance - December 31, 2019		39,811	$	4		$	128,008	$	(123,604)	$	(382)	$	4,026
Exercise of stock options, net of vesting of restricted shares		186	—			96		—		—		96
Release of restricted stock		1,082	—			—		—		—		—
Issuance of common stock for payment of legal, earned bonus, and board of director fees		1,297	—			1,239		—				1,239
Sale of common stock		1,302	1			1,341		—		—		1,342
Stock-based compensation expense		—	—			3,458		—		—		3,458
Issuance of common stock upon partial conversions of Senior Convertible Note		1,764	—			2,266		—		—		2,266
Reacquisition of equity component of Senior Convertible Notes		—	—			(1,388)		—		—		(1,388)
Equity classified cash conversion feature of Senior Convertible Notes		—	—			219		—		—		219
Cumulative translation adjustment		—	—					—		(28)		(28)
Net loss		—	—			—		(16,041)				(16,041)
Balance - September 30, 2020		45,442	$	5		$	135,239	$	(139,645)	$	(410)	$	(4,811)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Phunware, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2021		2020
Operating activities
Net loss	$	(21,711)	$	(16,041)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount and deferred financing costs	2,770		1,217
Loss (gain) on change in fair value of warrant liability	148		(1,244)
Loss on extinguishment of debt	7,952		1,031
Impairment of digital currencies	776		—
Gain on forgiveness of PPP loan	(2,850)		—
Stock-based compensation	3,933		3,458
Other adjustments	297		145
Changes in operating assets and liabilities:
Accounts receivable	(272)		551
Prepaid expenses and other assets	(345)		(94)
Accounts payable	(1,236)		536
Accrued expenses	(2,891)		1,332
Accrued legal settlement	(3,000)		4,500
Lease liability payments	(662)		—
Deferred revenue	(1,998)		(1,906)
Net cash used in operating activities	(19,089)		(6,515)
Investing activities
Purchase of digital currencies	(1,497)		—

Net cash used in investing activities	(1,497)		—
Financing activities
Proceeds from borrowings, net of issuance costs	9,980		10,207
Proceeds from related party bridge loans	—		560
Payments on senior convertible notes	(25,116)		(3,948)
Payments on related party notes	—		(200)
Net repayments on factoring agreement	—		(638)


Proceeds from exercise of options to purchase common stock	73		95
Proceeds from sales of common stock, net of issuance costs	32,610		1,341

Net cash provided by financing activities	17,547		7,417
Effect of exchange rate on cash and restricted cash	(19)		(30)
Net (decrease) increase in cash and restricted cash	(3,058)		872
Cash and restricted cash at the beginning of the period	4,031		362
Cash and restricted cash at the end of the period	$	973	$	1,234

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Supplemental disclosure of cash flow information:
Interest paid	$	1,315	$	681
Income taxes paid	$	—	$	—
Supplemental disclosures of non-cash financing activities:
Proceeds not yet received for sales of common stock	$	97	$	—
Issuance of common stock for payment of legal, earned bonus and board of director fees	$	66	$	1,239
Issuance of common stock upon partial conversions of senior convertible note	$	—	$	2,266
Reacquisition of equity component of senior convertible note	$	—	$	(1,388)
Equity classified cash conversion feature of senior convertible note	$	—	$	219

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Phunware, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share information)

(Unaudited)

1. The Company and Basis of Presentation

The Company

Phunware, Inc. and its subsidiaries (the “Company”, "we", "us", or "our") 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. Phunware’s Multiscreen-as-a-Service ("MaaS") platform provides the entire mobile lifecycle of applications and media in one login through one procurement relationship. The Company’s MaaS technology is available in software development kit form for organizations developing their own application, via customized development services and prepackaged solutions. Through its integrated mobile advertising platform of publishers and advertisers, the Company provides in-app application transactions for mobile audience building, user acquisition, application discovery, audience engagement and audience monetization. Founded in 2009, we are a Delaware corporation headquartered in Austin, Texas.

Basis of Presentation

The condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) and include the Company’s accounts and those of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The balance sheet at December 31, 2020 was derived from our audited consolidated financial statements, but these interim condensed consolidated financial statements do not include all the annual disclosures required by U.S. GAAP. These interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2020, which are referenced herein. The accompanying interim condensed consolidated financial statements as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020, are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with the audited financial statements, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary to fairly state our financial position as of September 30, 2021 and the results of operations for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 2021 and 2020. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for any future interim period.

Certain reclassifications have been made to our condensed consolidated statement of cash flows for the nine months ended September 30, 2020. We combined individual line items that we considered to be immaterial and recorded these in our condensed consolidated statement of cash flows as other adjustments to conform to current year presentation. These reclassifications had no impact on previously reported operating, investing or financing cash flows.

Revised Financial Statements

During the preparation of this Quarterly Report on Form 10-Q, the Company determined that it had inaccurately accounted for an adjustment to certain terms of an outstanding warrant issued in conjunction with our 2020 Convertible Notes (defined below). As a result of our underwritten public offering in February 2021, the number of shares issuable and the exercise price were each adjusted pursuant to the terms of the warrant. While we accurately accounted for the decrease in the exercise price (from $4.00 per share to $2.25 per share), we did not account for the increase in the number of shares available for exercise under the warrant, from 2,160,000 shares to 3,840,000 shares. This resulted in an understatement of net loss during the three months ended March 31, 2021, an overstatement of net loss for the three months ended June 30, 2021 and an understatement of net loss for the six months ended June 30, 2021. We assessed the materiality of this misstatement in accordance with Staff Accounting Bulletin No. 108, "Quantifying Misstatements" and concluded this error was not qualitatively material as there was no impact on cash, operating income, or cash flow from operations, among other considerations. However, we determined this error was a material weakness in our internal control over financial reporting. See Part I, Item 4, "Controls and Procedures," included in this Quarterly Report on Form 10-Q for further discussion.

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The correction of this error resulted in adjustments to our condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2021 and the three and six months ended June 30, 2021, and our condensed consolidated balance sheets as of March 31, 2021 and June 30, 2021. As such, the balance of accumulated deficit and total stockholders' equity as of June 30, 2021 contained within in our condensed consolidated statement of changes in stockholders’ equity (deficit) for the three months ended September 30, 2021 has been revised. Disclosure of the revised amounts will also be reflected in future filings containing applicable periods.

The effect of this revision on certain line items within our condensed consolidated balance sheets and condensed consolidated statements of operations and comprehensive income (loss) for the interim periods subject to the revision is set forth below:


	As of or for the three months ended March 31, 2021
	Previously reported		Adjustments		As revised
Warrant liability	$	2,499	$	1,944	$	4,443
Accumulated deficit	$	(158,166)	$	(1,944)	$	(160,110)

Loss on change in fair value of warrant liability	$	(885)	$	(1,944)	$	(2,829)
Net loss	$	(12,363)	$	(1,944)	$	(14,307)
Net loss per common share, basic and diluted	$	(0.19)	$	(0.03)	$	(0.22)


	As of or for the three months ended June 30, 2021
	Previously reported		Adjustments		As revised
Warrant liability	$	1,836	$	1,427	$	3,263
Accumulated deficit	$	(166,459)	$	(1,427)	$	(167,886)

Gain on change in fair value of warrant liability	$	663	$	517	$	1,180
Net loss	$	(8,293)	$	517	$	(7,776)
Net loss per common share, basic and diluted	$	(0.12)	$	0.01	$	(0.11)

The revision had no impact on revenue, gross profit and operating income for the three and nine months ended September 30, 2021, as well as, our net loss and cash used in operations for the nine months ended September 30, 2021.

Going Concern, Liquidity and Management’s Plan

Accounting Standards Codification (“ASC”) Topic 205-40, Presentation of Financial Statements - Going Concern ("ASC 205-40") requires management to evaluate whether conditions and/or events raise substantial doubt about our ability to meet future financial obligations as they become due within one year after the date that the financial statements are issued. As required by this standard, management’s evaluation shall initially not take into consideration the potential mitigating effects of management’s plans that have not been fully implemented as of the date the financial statements are issued.

During the quarter ended September 30, 2021, we secured additional financing through the sale of our common stock through an at-the-market offering, as more fully described in Note 9 below. Furthermore, as detailed in Note 13, "Subsequent Events", we have raised additional cash proceeds from the issuance of our common stock and the exercise of warrants for our common stock. Subsequent to September 30, 2021, we raised net proceeds totaling approximately $66,696, of which $62,061 was cash proceeds from our at-the-market offerings and $4,635 from a partial exercise of a warrant that was issued to our 2020 Convertible Notes holder.

We have a history of net losses and although we anticipate our future cash outflows to exceed cash inflows as we continue to invest in revenue growth, as a result of the subsequent cash financings described above, we believe we have sufficient cash on-hand to fund potential net cash outflows for one year following the filing date of this Quarterly Report on

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Form 10-Q. Accordingly, we believe there does not exist any indication of substantial doubt about our ability to continue as a going concern for one year following the filing date of this Quarterly Report on Form 10-Q.

The accompanying condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

2. Summary of Significant Accounting Policies

There have been no changes in significant accounting policies as described in our Annual Report on Form 10-K for the year ended December 31, 2020, except as set forth below.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 includes the removal of certain exceptions to the general principles of ASC 740 and simplifies the accounting for income taxes by clarifying and amending existing guidance. We adopted the update January 1, 2021 and it did not have a material impact on our condensed consolidated financial statements and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). We adopted ASU 2016-02 effective January 1, 2021. The core principle of ASU 2016-02 is that a lessee should recognize the assets and liabilities that arise from leases. For operating leases, a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position. We have elected certain practical expedients permitted under the transition guidance that allows us to use the beginning of the period of adoption (January 1, 2021) as the date of initial recognition. As a result, prior period comparative financial information was not recast under the new standard and continues to be presented under the prior lease accounting standards. Other practical expedients include our election to not separate non-lease components from lease components and to not reassess lease classification, treatment of initial direct costs or whether an existing or expired contract contains a lease. We have also elected to apply the short-term lease exception for all leases, which we will not recognize right-of-use assets or lease liabilities for leases that, at the commencement date, have a term of twelve (12) months or less.

The adoption of the new lease standard on January 1, 2021, resulted in the recognition of right-of-use assets and operating lease liabilities of $2,101 on the condensed consolidated balance sheet. In connection with the adoption of this standard, short-term deferred rent of $8, which was previously recorded in accrued expenses and long term deferred rent of $180 previously recorded in deferred rent on the condensed consolidated balance sheet was offset against the right-of-use asset. The details of our right-of-use asset and lease liability recognized upon adoption of ASC 842 are set forth below:


	January 1, 2021
Right-of-use asset	$	2,101
Straight-line rent accrual	(188)
	$	1,913

Lease liability, current	$	500
Lease liability, non-current	1,601
	$	2,101

Concentrations of Credit Risk

Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and trade accounts receivable. Although we limit our exposure to credit loss by depositing our cash with established financial institutions that management believes have good credit ratings and represent minimal risk of loss of principal, our deposits, at times, may exceed federally insured limits. Collateral is not required for accounts receivable, and we believe the carrying value approximates fair value.

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The following table sets forth our concentration of accounts receivable, net of specific allowances for doubtful accounts.


	September 30, 2021		December 31, 2020
Customer A	47	%	—	%
Customer B	8	%	16	%
Customer C	3	%	55	%
Customer D	—	%	13	%

Digital Assets

During the nine months ended September 30, 2021, we purchased an aggregate of $1,497 in digital assets, and we were paid $87 in digital assets by various customers. Our purchases of digital assets were comprised solely of bitcoin, while payments by customers to us were made in bitcoin and ethereum. We currently account for all digital assets held as a result of these transactions 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. The digital assets are initially recorded at cost and are subsequently remeasured on the condensed consolidated balance sheet at cost, 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 of one bitcoin or ethereum quoted on the 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. 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 condensed consolidated statements of operations and comprehensive income (loss). Impairment loss was $776 for the nine months ended September 30, 2021 and we did not sell any digital assets during the nine months ended September 30, 2021.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Items subject to the use of estimates include, but are not limited to, the standalone selling price for our products and services, stock-based compensation, useful lives of long-lived assets including intangibles, fair value of intangible assets and the recoverability or impairment of tangible and intangible assets, including goodwill, reserves and certain accrued liabilities, the benefit period of deferred commissions, assumptions used in Black-Scholes valuation method, such as expected volatility, risk-free interest rate and expected dividend rate, our incremental borrowing rate in determining the present value of remaining lease payments, and provision for (benefit from) income taxes. Actual results could differ from those estimates and such differences could be material to the condensed consolidated financial statements.

Income (loss) per Common Share

Basic net income (loss) per common share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Restricted shares subject to repurchase provisions relating to early exercises under our 2009 Equity Incentive Plan were excluded from basic shares outstanding. Diluted net income (loss) per common share is computed by giving effect to all potential shares of common stock adjusted to include the effect of shares issuable pursuant to our convertible note(s), the exercise of in-the-money warrants

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and options and unvested restricted stock units, to the extent dilutive. Shares are excluded from the calculation of diluted net income (loss) per common share when their inclusion would have been anti-dilutive or out-of-the-money.

The following table sets forth common stock equivalents that have been excluded from the computation of dilutive weighted average shares outstanding as their inclusion would have been anti-dilutive or out-of-the-money:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2021	2020	2021	2020
Convertible notes	19,324	7,221,740	19,324	7,221,740
Warrants	7,676,112	5,996,112	7,676,112	5,996,112
Options	207,257	1,211,828	1,117,697	1,211,828
Restricted stock units	3,807,154	2,223,773	3,807,154	2,223,773
Restricted shares	574	1,198	574	1,198
Total	11,710,421	16,654,651	12,620,861	16,654,651

Fair Value of Financial Instruments

We follow the guidance in ASC 820, Fair Value Measurement, to account for financial assets and liabilities measured on a recurring and non-recurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company uses a fair value hierarchy, which distinguishes between assumptions based on market data (observable inputs) and an entity's own assumptions (unobservable inputs). The guidance requires fair value measurements be classified and disclosed in one of the following three categories:


•			Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
•			Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
•			Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Determining which category an asset or liability falls within the hierarchy requires significant judgment. Our financial instruments measured at fair value as of September 30, 2021 are set forth below:


	Level 1		Level 2		Level 3		Total
Assets:
Digital currencies	$	789	$	—	$	—	$	789
Total	$	789	$	—	$	—	$	789

Liabilities:
Warrant liability	$	—	$	1,762	$	—	$	1,762
Total	$	—	$	1,762	$	—	$	1,762

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Our financial instruments measured at fair value as of December 31, 2020 are set forth below:


	Level 1		Level 2		Level 3		Total
Liabilities:
Warrant liability	$	—	$	1,614	$	—	$	1,614
Total	$	—	$	1,614	$	—	$	1,614

The carrying value of accounts receivable, prepaid expenses, other current assets, accounts payable and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of those instruments.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 introduces a model based on expected losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a smaller reporting company, the standard is currently effective for us for annual reporting periods beginning after December 15, 2022, with early adoption permitted for annual reporting periods beginning after December 15, 2019. We currently intend to adopt this new standard effective January 1, 2023. We currently do not expect the adoption of ASU 2016-13 to have a material impact on our condensed consolidated financial statements and disclosures.

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the impact of this guidance on our condensed consolidated financial statements and disclosures.

3. Revenue

Disaggregation of Revenue

The following table sets forth our net revenues by category:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net Revenues
Platform subscriptions and services	$	1,771	$	2,860	$	4,472	$	7,274
Application transaction	389		270		770		709
Net revenues	$	2,160	$	3,130	$	5,242	$	7,983

We generate revenue in domestic and foreign regions and attribute net revenue to individual countries based on the location of the contracting entity. We derived 99% of our net revenues from within the United States for the three and nine months ended September 30, 2021. During the three and nine months ended September 30, 2020, 99% and 96% of our net revenues were from within the United States, respectively.

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The following table sets forth our concentration of revenue sources as a percentage of total net revenues.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Customer A	35	%	—	%	15	%	—	%
Customer E	8	%	9	%	14	%	11	%
Customer F	—	%	26	%	—	%	30	%
Customer G	—	%	21	%	—	%	8	%

Deferred Revenue

Our deferred revenue balance consisted of the following:


	September 30, 2021		December 31, 2020
Current deferred revenue
Platform subscriptions and services revenue	$	1,734	$	2,317
Application transaction revenue	81		80
Total current deferred revenue	$	1,815	$	2,397

Non-current deferred revenue
Platform subscriptions and services revenue	$	1,262	$	2,678
Total non-current deferred revenue	$	1,262	$	2,678
Total deferred revenue	$	3,077	$	5,075

Deferred revenue consists of customer billings or payments received in advance of the recognition of revenue under the arrangements with customers. We recognize deferred revenue as revenue only when revenue recognition criteria are met. During the nine months ended September 30, 2021, we recognized revenue of $3,006 that was included in our deferred revenue balance as of December 31, 2020.

Remaining Performance Obligations

Remaining performance obligations were $6,097 as of September 30, 2021, of which we expect to recognize approximately 38% as revenue over the next 12 months and the remainder thereafter.

PhunToken ("PHTK")

In 2019, we announced the launch of a PhunToken, which is meant to act as a medium of exchange within the Company's blockchain technology enabled rewards marketplace and data exchange (the "Token Ecosystem"). On May 11, 2021, we announced the commencement of the selling of PhunToken. PhunToken will initially be issued through a separate, wholly-owned subsidiary, Phun Token International. We follow the guidance of ASC 606, Revenue from Contracts with Customers, in determination the revenue recognition of our PhunToken sales. As of September 30, 2021, we had sold $100 of PhunToken for which we received both cash and digital currency from customers. PhunToken sales are recorded within application transaction revenue in the table above.

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4. Cash, Cash Equivalents, and Restricted Cash

The following table sets forth our cash and restricted cash:


Cash and restricted cash	September 30, 2021		December 31, 2020
Cash	$	882	$	3,940
Restricted cash	91		91
Total cash and restricted cash	$	973	$	4,031

5. Debt

The following table sets forth our various debt obligations:


	September 30, 2021		December 31, 2020
Series A Note (principal amount)	$	—	$	2,481
Series B Note (principal amount)	—		3,585
Paycheck Protection Program Loan	—		2,850
Convertible notes	222		250
Promissory notes	905		905


Total debt	$	1,127	$	10,071
Debt discount - warrants (2020 Convertible Notes)	—		(1,029)
Debt discount - issuance costs (2020 Convertible Notes)	—		(650)
Less: current maturities of long-term debt	(83)		(4,435)
Less: related-party debt	(195)		(195)
Long-term debt	$	849	$	3,762

2020 Convertible Notes

On July 15, 2020, we issued a Series A Senior Convertible Note (a “Series A Note”) to an institutional investor with an initial principal amount of $4,320 (reflecting an original issue discount of $320) in a private placement. We repaid in full the outstanding principal balance, accrued and unpaid interest and make-whole amount on a separate senior convertible note issued on March 20, 2020 to the same investor. After the payoff of the senior convertible note and deducting transaction costs, net cash proceeds to the Company was $1,751.

On the same date, we issued a Series B Senior Secured Convertible Note (a “Series B Note,” and together with the Series A Note, the “2020 Convertible Notes”) to the same investor with an initial principal amount of $17,280 (reflecting an original issue discount of $1,280). The investor paid for the Series B Note by delivering a secured promissory note (the “Investor Note”) with an initial principal amount of $16,000.

We received cash under the Series B Note only upon cash repayment of the corresponding Investor Note. The investor, at its option and at any time, had the right to voluntarily prepay the Investor Note, in whole or in part. Until the Investor Note was repaid, the principal (and related original issue discount) of the Series B Note was considered to be "restricted." The Series B Note and the Investor Note were subject to the terms of a Master Netting Agreement between us and the investor. Upon repayment of the Investor Note, an equal amount of the Series B Note became "unrestricted" and recorded as debt in our condensed consolidated balance sheets.

As a result of multiple offerings of sales of shares of our common stock during the first quarter of 2021, as more fully described Note 9 below, the investor elected to require us to use forty percent (40%) of the net proceeds from those offerings to satisfy obligations under the 2020 Convertible Notes. During the first quarter of 2021, we paid approximately $11,507, of which $5,717 was recorded as a loss on extinguishment of debt.

In March 2021, the investor voluntarily prepaid an aggregate of $10,250 pursuant to the terms of the Investor Note. As a result, we received cash proceeds of $10,250 and this amount of principal of the Series B Note, along with $820 of original

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issue discount became "unrestricted" and outstanding. After the aggregate payments pursuant to the Investor Note by the investor to us, there was no balance outstanding under the Investor Note and no restricted balance under the Series B Note.

On March 25, 2021, we delivered a Company Optional Redemption Notice (as defined in the Series B Note) to the holder of our Series B Note exercising our right to redeem and fully satisfy all obligations under the Series B Note on April 5, 2021. On April 5, 2021, we paid $13,902 in cash to the noteholder of our 2020 Convertible Notes in full satisfaction of all obligations under our Series B Note, which amounted to $11,718 of principal, interest and make-whole and $2,184 for the loss on extinguishment of debt.

During the nine months ended September 30, 2021, we also recorded a loss on extinguishment of debt of $51 related to monthly installment payments made to the investor.

Warrant

In addition to the 2020 Convertible Notes, we issued a warrant exercisable for 3 years for the purchase, initially, of up to an aggregate of 2,160,000 shares of the Company's common stock at an initial exercise price of $4.00 per share. The number of shares and exercise price are each subject to adjustment provided under the warrant. 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 shares. If, at the time of exercise of the warrant, there is no effective registration statement registering, or no current prospectus available for, the issuance of the shares, then the warrant may also be exercised, in whole or in part, by means of a “cashless exercise.” The registration statement registering 2,160,000 shares of our common stock issuable pursuant to the terms of the warrant was declared effective by the SEC on October 27, 2020. The warrant may not be exercised if, after giving effect to the exercise, the investor would beneficially own amounts in excess of those permissible under the terms of the warrant.

Upon issuance of the warrant, we recorded a warrant liability as a discount to the 2020 Convertible Notes. We revalued the warrant as of September 30, 2021, and accordingly we recorded the change in the fair value of the warrant liability for the reporting period. The following table sets forth the assumptions used to calculate the fair value of our warrant liability at the respective dates:


	September 30, 2021			December 31, 2020
Strike price per share	$	2.25		$	4.00
Closing price per share	$	0.93		$	1.26
Term (years)	1.78			2.53
Volatility	142		%	146		%
Risk-free rate	0.17		%	0.17		%
Dividend Yield	—			—

Participation Rights

In addition, the Company granted the 2020 Convertible Notes investor participation rights in future equity and equity-linked offerings of securities, subject to certain limited exceptions, during the two years after the later of (a) the closing or (b) the date the 2020 Convertible Notes no longer remain outstanding, in an amount of up to 30% of the securities being sold in such offerings. This same investor has an additional 30% participation right that expires March 20, 2022 pursuant to a separate Securities Purchase Agreement relating to a convertible note that was issued in March 2020, that was subsequently paid in full with the proceeds of the Series A Note.

Paycheck Protection Program ("PPP") Loan

On April 10, 2020, we received loan proceeds in the amount of $2,850 from JPMorgan Chase, N.A. pursuant to the PPP under the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), which was enacted on March 27, 2020. The loan, which was in the form of a note dated April 9, 2020, matures on April 9, 2022 and bore interest at a rate of 0.98% per annum. The Paycheck Protection Flexibility Act of 2020, extended the deferral period for loan payments to either (i) the date that the Small Business Administration ("SBA") remits the borrower’s loan forgiveness amount to the lender or (ii) if the borrower does not apply for loan forgiveness, ten months after the end of the borrower’s loan forgiveness covered period. The note could have been prepaid by us at any time prior to the maturity with no prepayment penalties.

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The principal amount of our PPP loan was subject to forgiveness under the PPP. On July 7, 2021, we submitted our request to the SBA to forgive the full principal amount of the loan and on August 16, 2021, we received notification that the SBA approved our PPP loan forgiveness application. We recorded a gain on the forgiveness of the PPP loan and related interest during the three and nine months ended September 30, 2021.

Convertible Notes

In April 2019, our board of directors authorized the issuance of $20,000 of convertible promissory notes (the “Convertible Notes”). The Convertible Notes bear ordinary interest at a rate of 7% per annum. Interest under the Convertible Notes is payable quarterly beginning on September 30, 2019, and interest and principal under the Convertible Notes is payable monthly beginning on June 30, 2021. The Convertible Notes were convertible into shares of the Company’s common stock at a price of $11.50 per share and mature on June 3, 2024. Additional information about our Convertible Notes is included in Note 8, "Debt" of the notes to the consolidated financial statements included in our Annual Report on Form 10-K.

On October 27, 2021, we paid $222 in cash to the noteholder of our Convertible Notes in full satisfaction of all obligations under the Convertible Notes.

Promissory Notes

In October 2019, our board of directors authorized the issuance of $20,000 of promissory notes (the “Notes”). The Notes bear ordinary interest at a rate of 10% per annum. Interest under the Notes was payable monthly beginning on November 30, 2019. During the term of the Notes, we were required to maintain a restricted bank account with a minimum balance of one year of interest payments on the aggregate principal balance of all Notes, which was available for use exclusively to satisfy any payments owed by the Company under the Notes. The principal and unpaid accrued interest on the Notes was due and payable on demand by the majority Note holders on or after the date that is 60 months following November 15, 2019. Additional information about our Notes is included in Note 8, "Debt