phun-20220930

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, 2022

☐ 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)

1002 West Avenue, Austin, Texas

78701

(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 7, 2022, 102,628,317 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, 2022 (unaudited) and December 31, 2021	2
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021 (unaudited)	3
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited)	6
	Notes to the Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

PART II	OTHER INFORMATION	37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	39

	Signatures	40

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 Sheets

(In thousands, except share and per share information)


	September 30, 2022		December 31, 2021
	(Unaudited)
Assets
Current assets:
Cash	$	8,538	$	23,137
Accounts receivable, net of allowance for doubtful accounts of $0 and $10 at September 30, 2022 and December 31, 2021, respectively	1,714		967
Inventory, net	3,236		2,636
Digital assets, net	12,617		32,581
Prepaid expenses and other current assets	809		686
Total current assets	26,914		60,007
Property and equipment, net	207		—
Goodwill	33,058		33,260
Intangible assets, net	2,691		3,213
Deferred tax asset	1,278		1,278

Right-of-use asset	3,929		1,260
Other assets	402		276
Total assets	$	68,479	$	99,294
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	7,514	$	6,589
Accrued expenses	5,599		9,621

Lease liability	949		399
Deferred revenue	1,650		3,973
PhunCoin deposits	1,203		1,202

Current maturities of long-term debt, net	12,691		4,904
Warrant liability	338		3,605
Total current liabilities	29,944		30,293


Deferred tax liability	1,278		1,278
Deferred revenue	1,158		1,299
Lease liability	3,316		1,147

Total liabilities	35,696		34,017
Commitments and contingencies (Note 8)
Stockholders’ equity
Common stock, $0.0001 par value; 1,000,000,000 shares authorized at September 30, 2022 and December 31, 2021; 101,321,268 and 96,751,610 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	10		10
Additional paid-in capital	272,657		264,944
Accumulated other comprehensive loss	(553)		(352)
Accumulated deficit	(239,331)		(199,325)
Total stockholders’ equity	32,783		65,277
Total liabilities and stockholders’ equity	$	68,479	$	99,294

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

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Phunware, Inc.

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(In thousands, except per share information)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net revenues	$	4,758	$	2,160	$	17,021	$	5,242
Cost of revenues	3,963		1,026		12,935		2,842
Gross profit	795		1,134		4,086		2,400

Operating expenses:
Sales and marketing	1,819		715		5,232		1,910
General and administrative	5,189		3,296		14,745		9,075
Research and development	1,665		1,160		4,544		3,058

Total operating expenses	8,673		5,171		24,521		14,043
Operating loss	(7,878)		(4,037)		(20,435)		(11,643)

Other income (expense):
Interest (expense) income	(991)		7		(1,645)		(4,057)
Loss on extinguishment of debt	—		—		—		(7,952)
Impairment of digital assets	—		—		(21,511)		(776)
Fair value adjustment of warrant liability	797		1,501		3,267		(148)
Gain on forgiveness of PPP loan	—		2,850		—		2,850
Other income, net	54		51		318		15
Total other (expense) income	(140)		4,409		(19,571)		(10,068)
(Loss) income before taxes	(8,018)		372		(40,006)		(21,711)
Income tax expense	—		—		—		—
Net (loss) income	(8,018)		372		(40,006)		(21,711)
Other comprehensive (loss) income:
Cumulative translation adjustment	(84)		(33)		(201)		(18)
Comprehensive (loss) income	$	(8,102)	$	339	$	(40,207)	$	(21,729)

Net (loss) income per share, basic	$	(0.08)	$	0.01	$	(0.41)	$	(0.31)
Net (loss) income per common share, diluted	$	(0.08)	$	—	$	(0.41)	$	(0.31)

Weighted-average common shares used to compute net (loss) income per share, basic	98,822		74,347		97,803		70,185
Weighted-average common shares used to compute net (loss) income per share, diluted	98,822		74,699		97,803		70,185

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

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Phunware, Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands)

(Unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Other Comprehensive Loss		Total Stockholders’ Equity
	Shares	Amount
Balance - June 30, 2022	98,137	$	10	$	267,465	$	(231,313)	$	(469)	$	35,693

Release of restricted stock	527	—		—		—		—		—
Issuance of common stock in connection with acquisition of Lyte Technology, Inc.	464	—		689		—		—		689
Sales of common stock, net of issuance costs	2,193	—		3,654		—		—		3,654
Stock-based compensation expense	—	—		849		—		—		849
Cumulative translation adjustment	—	—		—		—		(84)		(84)
Net loss	—	—		—		(8,018)		—		(8,018)
Balance - September 30, 2022	101,321	$	10	$	272,657	$	(239,331)	$	(553)	$	32,783

Balance - December 31, 2021	96,752	$	10	$	264,944	$	(199,325)	$	(352)	$	65,277
Exercise of stock options, net of vesting of restricted shares	23	—		16		—		—		16
Release of restricted stock	1,409	—		—		—		—		—
Issuance of common stock under the 2018 employee stock purchase plan	96	—		116		—		—		116
Issuance of common stock in connection with acquisition of Lyte Technology, Inc.	848	—		1,814		—		—		1,814
Sales of common stock, net of issuance costs	2,193	—		3,654						3,654
Stock-based compensation expense	—	—		2,113		—		—		2,113
Cumulative translation adjustment	—	—		—		—		(201)		(201)
Net loss	—	—		—		(40,006)		—		(40,006)
Balance - September 30, 2022	101,321	$	10	$	272,657	$	(239,331)	$	(553)	$	32,783

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	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

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

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Phunware, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2022		2021
Operating activities
Net loss	$	(40,006)	$	(21,711)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount and deferred financing costs	690		2,770
(Gain) loss on change in fair value of warrant liability	(3,267)		148
Loss on extinguishment of debt	—		7,952
Impairment of digital assets	21,511		776
Gain on forgiveness of PPP loan	—		(2,850)
Stock-based compensation	2,169		3,933
Other adjustments	990		297
Changes in operating assets and liabilities:
Accounts receivable	(723)		(272)
Inventory	(731)		—
Prepaid expenses and other assets	(254)		(345)
Accounts payable	925		(1,236)
Accrued legal settlement	—		(3,000)
Lease liability payments	(594)		(662)
Accrued expenses	(1,118)		(2,891)
Deferred revenue	(2,464)		(1,998)
Net cash used in operating activities	(22,872)		(19,089)
Investing activities
Acquisition payment	(1,125)		—
Purchase of digital assets	(923)		(1,497)
Capital expenditures	(238)		—
Net cash used in investing activities	(2,286)		(1,497)
Financing activities
Proceeds from borrowings, net of issuance costs	11,795		9,980

Payments on borrowings	(4,698)		(25,116)




Proceeds from exercise of options to purchase common stock	16		73
Proceeds from sales of common stock, net of issuance costs	3,655		32,610

Net cash provided by financing activities	10,768		17,547
Effect of exchange rate on cash and restricted cash	(209)		(19)
Net decrease in cash and restricted cash	(14,599)		(3,058)
Cash and restricted cash at the beginning of the period	23,137		4,031
Cash and restricted cash at the end of the period	$	8,538	$	973

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Supplemental disclosure of cash flow information:
Interest paid	$	613	$	1,315
Income taxes paid	$	—	$	—
Supplemental disclosures of non-cash activities:

Right-of-use assets obtained in exchange for operating lease obligations	$	3,053	$	—
Non-cash exchange of digital assets	$	911	$	—
Issuance of common stock in connection with acquisition of Lyte Technology, Inc.	$	1,814	$	—
Proceeds not received related to sales of common stock	$	—	$	97
Issuance of common stock for payment of board of director fees	$	—	$	66

The accompanying notes are an integral part of these unaudited 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. Our Multiscreen-as-a-Service ("MaaS") platform provides the entire mobile lifecycle of applications and media in one login through one procurement relationship. Our MaaS technology is available in software development kit ("SDK") form for organizations developing their own application, via customized development services and prepackaged solutions. Through our integrated mobile advertising platform of publishers and advertisers, we provide in-app application transactions for mobile audience building, user acquisition, application discovery, audience engagement and audience monetization. During 2021, we began to sell PhunToken to consumers, developers and brands. PhunToken is an innovative digital asset utilized within our token ecosystem to help drive engagement by unlocking features and capabilities of our MaaS platform. PhunToken is designed to reward consumers for their activity, such as watching branded videos, completing surveys and visiting points of interest. In October 2021, we acquired Lyte Technology, Inc. ("Lyte"), a provider of high-performance computer systems to individual consumers. 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, 2021 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, 2021, which are referenced herein. The accompanying interim condensed consolidated financial statements as of September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021, 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, 2022 and the results of operations for the three and nine months ended September 30, 2022 and 2021, and cash flows for the nine months ended September 30, 2022 and 2021. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any future interim period.

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.

We have a history of losses in each fiscal year since our inception. Total backlog and cash-on-hand for the period then ended did not meet our expectations, as a result of uncertainty of the broader marketplace. For the nine months ended September 30, 2022, we incurred a net loss of $40,006 and used $22,872 in cash for operations.

In July 2022, the Company raised additional cash proceeds in the amount of $11,795 through the issuance of a note, as detailed in Note 6, Debt. In accordance with the note, we can defer one monthly payment in the amount $1,566 up to twelve times. Furthermore, as more fully described in Note 9, Stockholders Equity, in January 2022, we entered into a sales agreement,

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pursuant to which we may offer and sell shares of our common stock, for aggregate gross proceeds of up to $100,000. We currently anticipate selling common stock through our at-the-market offering, if needed. Sales of shares of our common stock sold under the sales agreement will be made pursuant to an effective shelf registration statement on Form S-3 in the amount of $200,000 filed with the SEC on February 1, 2022. We may also sell additional securities, including common stock, preferred stock, warrants and units through private placement transactions or public offerings. We believe the foregoing plans mitigate the Company’s going concern considerations.

There can be no assurance that we will be able to obtain additional funding on satisfactory terms or at all. In addition, no assurance can be given that any such financing, if obtained, will be adequate to meet our capital needs and support growth. If additional funding cannot be obtained on a timely basis and/or on satisfactory terms, our operations could be materially impacted.

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, 2021, except as set forth below.

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, our various digital asset transactions, 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, contingent consideration for our business combination with Lyte and periodic reassessment of fair value, allocating the fair value of purchase consideration to assets acquired and liabilities assumed in our business combination, reserves and certain accrued liabilities, the benefit period of deferred commissions, assumptions used in Black-Scholes valuation method, such as the current trading price of our common stock at time of exercise of our warrant, expected volatility, risk-free interest rate and expected dividend rate and provision for (benefit from) income taxes. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements.

Risks and Uncertainties

Regulation governing blockchain technologies, cryptocurrencies, digital assets, utility tokens, security tokens and offerings of digital assets is uncertain, and new regulations or policies may materially adversely affect the development and the value of our tokens. Regulation of digital assets, like PhunCoin and PhunToken, cryptocurrencies, blockchain technologies and cryptocurrency exchanges, is evolving and likely to continue to evolve. Regulation also varies significantly among international, federal, state and local jurisdictions and is subject to significant uncertainty. Various legislative and executive bodies in the United States and in other countries may in the future adopt laws, regulations, or guidance, or take other actions, which may severely impact the permissibility of tokens generally and the technology behind them or the means of transaction or in transferring them. Any such violations could adversely affect the ability of us to maintain PhunCoin and PhunToken, which could have a material adverse effect on our operations and financial condition. Failure by us to comply with any laws, rules and regulations, some of which may not exist yet or are subject to interpretation and may be subject to change, could also result in a material adverse effect on our operations and financial condition.

Concentrations of Credit Risk

Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash, trade accounts receivable and our digital asset holdings.

There is currently no clearing house for our digital assets, including our bitcoin, ethereum or other digital asset holdings, nor is there a central or major depository for the custody of our digital assets. There is a risk that some or all of our digital asset holdings could be lost or stolen. There can be no assurance that the custodians will maintain adequate insurance or that such coverage will cover losses with respect to our digital asset holdings. Further, transactions denominated in digital assets are irrevocable. Stolen or incorrectly transferred digital assets may be irretrievable. As a result, any incorrectly executed

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transactions could adversely our financial condition. The aggregate cost basis of our digital asset holdings was $42,280 and $41,964 at September 30, 2022 and December 31, 2021, respectively.

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.

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


	September 30, 2022		December 31, 2021
Customer A	24	%	—	%
Customer B	15	%	—	%
Customer C	5	%	18	%
Customer D	—	%	20	%

Digital Assets

Payments by customers in and purchases by us of digital assets were primarily of 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, 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, ethereum and other digital asset holdings (Level 1 inputs). We perform an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that our digital assets are impaired. In determining if an impairment has occurred, we consider the lowest market price quoted on an active exchange since acquiring the respective digital asset. 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. In determining the gain or loss to be recognized upon sale, we calculate the difference between the sales price and carrying value of the digital assets sold immediately prior to sale. Impairment losses and gains or losses on sales are recognized within other expense in our consolidated statements of operations and comprehensive (loss) income. Impairment loss was $21,511 and $776 for the nine months ended September 30, 2022 and 2021, respectively.

The following table sets forth our digital asset holdings as of September 30, 2022:


Asset	Gross Carrying Amount		Accumulated Digital Asset Impairment		Digital Asset Carrying Value
Bitcoin	$	37,882	$	(26,295)	$	11,587
Ether	3,175		(2,471)		704
Other	1,223		(897)		326
Total	$	42,280	$	(29,663)	$	12,617

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The following table sets forth our digital asset holdings as of December 31, 2021:


Asset	Gross Carrying Amount		Accumulated Digital Asset Impairment		Digital Asset Carrying Value
Bitcoin	$	36,963	$	(8,554)	$	28,409
Ethereum	4,714		(670)		4,044
Other	287		(159)		128
Total	$	41,964	$	(9,383)	$	32,581

Accumulated digital asset impairment noted above represents impairment on the remaining cost lots as of the respective dates. Changes in our digital asset holdings for the nine months ended September 30, 2022 were as follows:


	Bitcoin		Ethereum		Other		Total
Net balance at December 31, 2021	$	28,409	$	4,044	$	128	$	32,581
Received from customers, net of expenses	28		376		25		429
Purchases of digital assets	923		—		—		923
Exchanges of digital assets	—		(911)		911		—
Other	26		169		—		195
Impairment expense	(17,799)		(2,974)		(738)		(21,511)
Net balance at September 30, 2022	$	11,587	$	704	$	326	$	12,617

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 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:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
Convertible notes	—	19,324	—	19,324
Warrants	5,636,801	7,676,112	5,636,801	7,676,112
Options	984,729	207,257	984,729	1,117,697
Restricted stock units	3,353,776	3,807,154	3,353,776	3,807,154
Restricted shares	—	574	—	574
Total	9,975,306	11,710,421	9,975,306	12,620,861

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)

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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, 2022 are set forth below:


	Level 1		Level 2		Level 3		Total
Assets:
Digital assets	$	12,617	$	—	$	—	$	12,617
Total	$	12,617	$	—	$	—	$	12,617

Liabilities:
Warrant liability	$	—	$	338	$	—	$	338
Total	$	—	$	338	$	—	$	338

Our financial instruments measured at fair value as of December 31, 2021 are set forth below:


	Level 1		Level 2		Level 3		Total
Assets:
Digital assets	$	32,581	$	—	$	—	$	32,581
Total	$	32,581	$	—	$	—	$	32,581

	Level 1		Level 2		Level 3		Total
Liabilities:
Warrant liability	$	—	$	3,605	$	—	$	3,605
Total	$	—	$	3,605	$	—	$	3,605

The following table sets forth the assumptions used to calculate the fair values of the liability classified warrant issued in connection with our 2020 Convertible Notes as of the dates presented:


	September 30, 2022			December 31, 2021
Strike price per share	$	2.25		$	2.25
Closing price per share	$	1.18		$	2.63
Term (years)	0.78			1.53
Volatility	99		%	186		%
Risk-free rate	4.15		%	0.56		%
Dividend Yield	—			—

The carrying value of accounts receivable, inventory, 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. All debt is based on current rates at which the Company could borrow funds with similar remaining maturities and approximates fair value.

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Recent Accounting Standards 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. As the Company does not currently have any debt with conversion features outstanding, we do not expect the adoption of ASU 2020-06 to have a material impact on our condensed consolidated financial statements and disclosures.

3. Business Combination

On October 18, 2021, we closed the acquisition of Lyte with an adjusted purchase price of approximately $11.0 million (subject to an earn-out provision). This acquisition was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged was recorded at estimated fair values on the date of acquisition. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed were based on management’s estimates and assumptions at the time of acquisition. Fair values are subject to refinement for up to one year after the closing date as additional information regarding the closing date fair values becomes available. The fair values of the aggregate assets and liabilities acquired are disclosed in in Note 3, Business Combination, in our Annual Report on Form 10-K filed with the SEC on April 7, 2022. As of September 30, 2022, we have not booked any adjustments to the initial fair values booked at acquisition date.

Pursuant to terms of the stock purchase agreement, the acquisition and earn-out payments consist of the following: (i) $1,125, as adjusted for working capital items, on June 30, 2022, (ii) the issuance of shares of our common stock with an aggregate value of $2,250, in two equal installments valued at up to $1,125, determined on the last business day of each of the quarters ending March 31, 2022 and September 30, 2022 and (iii) up to $1,250 in cash and issuance of shares of our common stock valued at up to $1,250 on the first anniversary of closing, as an earn-out payment based upon Lyte achieving certain annual revenue milestones as provided in the purchase agreement in the year following closing. The revenue milestones were achieved, and accordingly, we made the earn out payment in October 2022. There is $2,449 and $5,531 recorded in accrued expenses in the condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively, related to fair value of future acquisition payments and earn out payable due to the seller.

The following table summarizes the unaudited pro forma condensed consolidated financial information of Phunware for the three and nine months ended September 30, 2021, as if the acquisition of Lyte had occurred on January 1, 2021:


	Three Months Ended September 30, 2021		Nine Months Ended September 30, 2021
(in thousands)
Net revenues	$	5,421	$	12,774
Net income (loss)	$	338	$	(23,108)

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4. Revenue

Our platform revenue consists of SDK license subscriptions and application development services, as well as application transactions, which are comprised of in-app advertising and sales of our digital asset, PhunToken. Hardware revenue relates to the sale of high-performance personal computers. Refer to our revenue recognition policy under the subheading, Revenue Recognition, in Note 2, Summary of Significant Accounting Policies, in our Annual Report on Form 10-K filed with the SEC on April 7, 2022.

Disaggregation of Revenue

The following table sets forth our net revenues by category:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Platform revenue	$	1,259	$	2,160	$	5,379	$	5,242
Hardware revenue	3,499		—		11,642		—
Net revenues	$	4,758	$	2,160	$	17,021	$	5,242

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% and 97% of our net revenues from within the United States for the three and nine months ended September 30, 2022, respectively. We derived 99% of our net revenues from within the United States for the three and nine months ended September 30, 2021.

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,
	2022		2021		2022		2021
Customer B	1	%	35	%	1	%	15	%
Customer E	—	%	8	%	—	%	14	%

Deferred Revenue

Our deferred revenue balance consisted of the following:


	September 30, 2022		December 31, 2021
Current deferred revenue
Platform revenue	$	1,516	$	1,824
Hardware revenue	134		2,149
Total current deferred revenue	$	1,650	$	3,973

Non-current deferred revenue
Platform revenue	$	1,158	$	1,299
Total non-current deferred revenue	$	1,158	$	1,299
Total deferred revenue	$	2,808	$	5,272

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, 2022, we recognized revenue of $3,624 that was included in our deferred revenue balance as of December 31, 2021.

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Remaining Performance Obligations

Remaining performance obligations were $5,598 as of September 30, 2022, of which we expect to recognize approximately 39% as revenue over the next 12 months and the remainder thereafter.

PhunToken

In May 2021, we announced the commencement of the selling of PhunToken. PhunToken is our innovative digital asset intended to be utilized within our token ecosystem, once developed, to help drive engagement by unlocking features and capabilities of our MaaS platform. During the nine months ended September 30, 2022, we sold 187.0 million PhunToken for an aggregate of $1,535, for which we received both cash and digital assets from customers. Sales of PhunToken are recorded within platform revenue in the table above.

In March 2022, certain members of our senior management team purchased 827.5 million PhunToken pursuant to Restricted Token Purchase Agreements, at an aggregate purchase price of approximately $7. The PhunToken will be transferred to employees over a time-based delivery schedule ranging from one to four years. The Company will have the right to repurchase any PhunToken not delivered to the employee as a result of voluntary termination or termination for cause. In October 2022, our Board of Directors terminated the PhunToken Restricted Purchase Agreements, with no further PhunToken to be delivered to the employees after April 1, 2022.

As of September 30, 2022 and December 31, 2021, issued PhunToken were 461.4 million and 131.7 million, respectively. Total supply of PhunToken is capped at 10 billion.

5. Inventory

Our inventory balance on the dates presented consisted of the following:


	September 30, 2022		December 31, 2021
Raw materials	$	3,168	$	2,075
Work-in-process	—		207
Finished goods	169		138
Other	30		216
Inventory reserve	(131)		—
Total inventory	$	3,236	$	2,636

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6. Debt

2022 Promissory Note

On July 6, 2022, we entered into a note purchase agreement and completed the sale of an unsecured promissory note (the "2022 Promissory Note") with an original principal amount of $12,809 in a private placement with the same investor of our 2021 Promissory Note, discussed further below. The 2022 Promissory Note was sold with an original issue discount of $492 and we paid at closing issuance costs totaling $522. After deducting all transaction fees paid by us at closing, net cash proceeds to the Company at closing were $11,795. 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 2022 Promissory Note is paid in full, we are required to make a monthly amortization payments in the amount of $1,566 until the maturity date of July 1, 2023, which is subject to adjustment for any payment deferrals we elect. We have the right to defer any monthly payment by one month up to twelve times so long as certain conditions, as defined in the 2022 Promissory Note, are satisfied. In the event we exercise the deferral right for any given month: (i) the outstanding balance will automatically increase by 1.85%; (ii) we will not be obligated to make the monthly payment for such month; and (iii) the maturity date will be extended for one month. 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.

The 2022 Promissory Note had a principal balance of $12,809 and debt discount of $634 at September 30, 2022.

2021 Promissory Note

In connection with the acquisition of Lyte, we entered into a note purchase agreement and completed the sale of an unsecured promissory note (the "2021 Promissory Note") with an original principal amount of $5,220 in a private placement that closed on October 18, 2021. The 2021 Promissory Note was sold with an original issue discount of $200 and we paid at closing issuance costs totaling $280. After deducting all transaction costs, net cash proceeds to the Company were $4,740. No interest will accrue on the 2021 Promissory Note unless and until the occurrence of an event of default (as defined in the 2021 Promissory Note). Beginning on January 15, 2022 and on the same day of each month thereafter until the 2021 Promissory Note is paid in full, we are required to make a monthly amortization payments in the amount of $574 until the maturity date of October 15, 2022. We may prepay any or all outstanding balance of the 2021 Promissory Note earlier than it is due with a prepayment premium of 110%. The prepayment premium also applies to the monthly amortization payments, which amounts to an effective interest rate of approximately 18%.

The 2021 Promissory Note had a principal balance of $522 and $5,220 and debt discount of $6 and $316 at September 30, 2022 and December 31, 2021, respectively. In October 2022, we paid the final payment amount of $574 on the 2021 Promissory Note.

Interest Expense

The following table sets forth interest expense (income) for our various debt obligations included on the condensed consolidated statements of operations and comprehensive (loss) income:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
2022 Promissory Note	$	463	$	—	$	463	$	—
2021 Promissory Note	49		—		349		—
2020 Convertible Notes	—		—		—		1,111
Accretion of debt discount - issuance costs	432		—		690		1,741
Accretion of debt discount - warrants	—		—		—		1,029
All other debt and financing obligations	47		(7)		143		176
Total	$	991	$	(7)	$	1,645	$	4,057

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Other Debt Obligations

Other than the 2021 and 2022 Promissory Notes referenced above, there have been no material changes to the terms and conditions of our other debt obligations, including the payments in full thereof, since the filing of our Annual Report on Form 10-K. See Note 9, Debt, in our Annual Report on Form 10-K filed with the SEC on April 7, 2022.

7. Leases

On March 15, 2022, we entered into a lease agreement, in which we lease approximately 21,830 square feet in Round Rock, Texas, which we intend to use as manufacturing and warehouse space for our Lyte computer division. The term of the lease is five years and commenced in July 2022. The lease provides for initial base rent payments of approximately $27 per month, subject to escalations. In addition, we are responsible for payments equal to our proportionate share of operating expenses, which is currently estimated to be approximately $7 per month, which is also subject to adjustment to actual costs and expenses according to provisions of the lease. During the third quarter of 2022, we recorded a right-of-use asset and corresponding lease liability of $