S-4/A 1 fs42018a4_stellaracq3.htm AMENDMENT NO. 4 TO FROM S-4

As filed with the United States Securities and Exchange Commission on November 6, 2018

Registration No. 333-224227

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Amendment No. 4

to

FORM S-4

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

 

 

 

STELLAR ACQUISITION III INC.

(Exact name of registrant as specified in its charter)

 

 

 

Republic of the Marshall Islands*   6770   N/A
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

 

90 Kifissias Avenue

Maroussi Athens, Greece

+30 210 876-4876

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

Prokopios (Akis) Tsirigakis

c/o Ellenoff Grossman & Schole LLP

1345 Avenue of the Americas

New York, New York 10105

Telephone: (212) 370-1300

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

Copies to:

 

Stuart Neuhauser, Esq.

Barry I. Grossman, Esq.

Lawrence A. Rosenbloom, Esq.

Ellenoff Grossman & Schole LLP

1345 Avenue of the Americas

New York, New York 10105-0302

(212) 370-1300

 

Dennis Reeder, Esq.

Reeder & Simpson, P.C.

P.O. Box 601

Majuro, Marshall Islands

96960

011-692-625-3602

 

Scott K. Murano, Esq.

Michael Coke, Esq.

Derek Liu, Esq.

Wilson, Sonsini, Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, CA 94304

(650) 849-3316

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after (i) this Registration Statement is declared effective, (ii) a statutory redomestication (the “Redomestication”) has been effected, pursuant to which Stellar Acquisition III Inc., a Republic of the Marshall Islands corporation (“Stellar”), has been converted into a Delaware corporation having the name Phunware, Inc. (the “Successor”); and (iii) the satisfaction or waiver of all conditions under the merger agreement described in this registration statement (the “Business Combination”).

 

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: ☐

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ☐

 

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”, “non-accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐   Accelerated filer ☐
Non-accelerated   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 7(a)(2)(B) of the Securities Act. ☐

 

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

 

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ☐

 

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ☐

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities to be registered  Amount to be Registered   Proposed maximum offering price per share   Proposed maximum aggregate offering price   Amount of registration fee 
Units, each consisting of one share of common stock, $0.0001 par value, and one Warrant(1)(2)   6,900,610   $10.85(3)  $74,871,618(3)  $9,322+
Common stock (included in the Units)(1)(4)(5)   6,900,610    (6)       (6)
Warrants (included in the Units)(1)(4)(7)   6,900,610    (6)       (6)
Common stock(1)(4)(8)   31,121,615   $10.335(9)  $321,641,891(9)  $40,045+
Warrants(1)(4)(10)   7,970,488   $0.5325(11)  $4,244,285(11)  $529+
Total            $400,757,794   $$ 49,896+

 

 

(1)Immediately prior to the consummation of the business combination described herein, the Registrant intends to effect a deregistration under Article 128 of the Business Corporations Act of the Republic of the Marshall Islands and a redomestication under Section 388 of the Delaware General Corporation Law, pursuant to which the Registrant’s jurisdiction of incorporation will be changed by way of continuation from the Republic of the Marshall Islands to the State of Delaware and the name of the Registrant will be changed to “Phunware, Inc.”
(2) The number of Units represents the Units of Stellar (each consisting of one share of common stock, par value $0.0001 per share, and one warrant) that were issued by Stellar in connection with its initial public offering pursuant to the Registration Statement on Form S-1 (333-212377). Pursuant to the redomestication, the Units will automatically become shares of common stock and warrants of the Delaware corporation by operation of law.
(3)Estimated solely for the purpose of calculating the registration fee, based on the average of the high and low prices of the Units on The NASDAQ Capital Market on April 6, 2018 ($10.85 per Unit), in accordance with Rule 457(f)(1).
(4)Pursuant to Rule 416(a), there are also being registered an indeterminable number of additional securities as may be issued to prevent dilution resulting from share splits, share dividends or similar transactions.
(5)The number of shares of common stock represents the number of shares that are included in the Units. See (2) above.
(6)Pursuant to Rule 457(g), no registration fee is payable.
(7)The number of warrants represents the number of warrants that are included in the Units. See (2) above.
(8) The number of shares of common stock represents the sum of (i) the number of shares of common stock issued in private placement transactions (2,109,567) and (ii) the maximum number of shares of common stock the registrant estimates will be issued in connection with the consummation of the business combination described herein (28,503,787).
(9)Estimated solely for the purpose of calculating the registration fee, based on the average of the high and low prices of the common stock on The NASDAQ Capital Market on April 6, 2018, in accordance with Rule 457(f)(1).
(10)The number of warrants represent is equal to the number of warrants issued in private placements simultaneously with Stellar’s initial public offering.
(11)Estimated solely for the purpose of calculating the registration fee, based on the average of the high and low prices of the warrants on The NASDAQ Capital Market on April 6, 2018, in accordance with Rule 457(f)(1).
+ Previously paid.
   
* Prior to the consummation of the business combination described herein, the Registrant intends to effect a deregistration under Article 128 of the Business Corporations Act of the Republic of the Marshall Islands and a domestication under Section 388 of the Delaware General Corporation Law, pursuant to which the Registrant’s jurisdiction of incorporation will be changed from the Republic of the Marshall Islands to the State of Delaware. In connection with the consummation of the business combination described herein, the Registrant intends to change its name to “Phunware, Inc.”

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

 

As used in this Registration Statement, the term “Registrant” refers to the Registrant (a Republic of the Marshall Islands corporation) prior to the Redomestication and to the Successor (a Delaware corporation) following the Redomestication.

 

 

 

 

 

 

The information in this joint proxy statement/prospectus is not complete and may be changed. Stellar Acquisition III Inc. may not issue the securities offered by this joint proxy statement/prospectus until the registration statement filed with the Securities and Exchange Commission, of which this joint proxy statement/prospectus is a part, is declared effective. This joint proxy statement/prospectus does not constitute an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale of these securities is not permitted.

 

PRELIMINARY — SUBJECT TO COMPLETION, DATED NOVEMBER 6, 2018

 

To the Shareholders of Stellar Acquisition III Inc. and the Stockholders of Phunware, Inc.:

 

On behalf of the boards of directors of Stellar Acquisition III Inc. (“Stellar”) and Phunware, Inc. (“Phunware”) we are pleased to enclose the joint proxy statement/prospectus relating to the proposed merger of a wholly owned subsidiary of Stellar with and into Phunware (the “Business Combination”), pursuant to an agreement and plan of merger dated as of February 27, 2018 (as amended or supplemented from time to time, the “Merger Agreement”) among Stellar, Phunware and certain other parties, as amended by the First Amendment to the Merger Agreement dated as of November 1, 2018. It is proposed that, immediately prior to the Business Combination, Stellar will redomesticate from a Republic of the Marshall Islands corporation to a Delaware corporation (the “Redomestication”).

 

In connection with the Business Combination, shareholders of Stellar are cordially invited to attend the special meeting of the shareholders of Stellar (the “Stellar Special Meeting”) to be held at 10:00 a.m. Eastern Time on _______________, 2018 at the offices of Ellenoff Grossman & Schole LLP, at 1345 Avenue of the Americas, 11th Floor, New York, New York 10105. Only shareholders who held common stock of Stellar at the close of business on ______, 2018 will be entitled to vote at the Stellar Special Meeting and at any adjournments and postponements thereof.

 

In connection with the Business Combination, stockholders of Phunware are cordially invited to attend a special meeting of the stockholders of Phunware (the “Phunware Special Meeting”) to be held at ____________, Central Time, on _______________, 2018 at the offices of Phunware, located at 7800 Shoal Creek Blvd, Suite 230-S, Austin, TX 78757. Only stockholders who held common stock or preferred stock of Phunware at the close of business on October 31, 2018 will be entitled to vote at the Phunware Special Meeting and at any adjournments and postponements thereof.

 

Stellar is a blank check corporation incorporated under the laws of the Republic of the Marshall Islands on December 8, 2015. Stellar was formed with the objective of acquiring, through a merger, share exchange, asset acquisition, share purchase, recapitalization, reorganization or other similar business combination, one or more businesses or entities. Stellar’s units, common stock and warrants are traded on The NASDAQ Capital Market (“Nasdaq”) under the symbols “STLRU,” “STLR” and “STLRW,” respectively. On November 1, 2018, the closing sale prices of Stellar’s units, common stock and warrants were $10.50, $10.50 and $0.20, respectively. Stellar has applied for the listing of the common stock and warrants of the Successor on Nasdaq following the consummation of the Business Combination, under the symbols “PHUN” and “PHUNW,” respectively. At the closing of the Business Combination, Stellar’s units will separate into their component shares of common stock and warrants so that the units will no longer trade separately under “STLRU.”

 

Phunware is a provider of Multiscreen-as-a-Service (“MaaS”) solutions, an integrated customer engagement platform that enables organizations to develop customized, immersive, branded mobile applications. Phunware sells its services in verticals including healthcare, retail, hospitality, transportation, sports and entertainment, and enables brands to engage, manage and monetize their anytime-anywhere mobile users. Phunware’s MaaS technology is available in software development kit (“SDK”) form for organizations developing their own applications, via customized development services as well as prepackaged solutions. Through its integrated mobile advertising platform of publishers and developers, Phunware also maximizes mobile monetization through an advertising product suite including self-service media buying, real-time bidding (“RTB”), publisher mediation and yield optimization, cross-platform ad creation and dynamic ad serving.

 

At the Stellar Special Meeting, Stellar’s shareholders will be asked to vote on the following proposals, as more fully described in the accompanying joint proxy statement/prospectus: (i) the Redomestication Proposal, (ii) the Stellar Business Combination Proposal, (iii) the 2018 Equity Incentive Plan Proposal, (iv) the 2018 ESPP Proposal, (v) the Share Issuance Proposal, (vi) the Director Election Proposal and (vii) the Stellar Adjournment Proposal, if presented (collectively, the “Stellar Proposals”).

 

Stellar’s board of directors unanimously determined that the Stellar Proposals are advisable, fair to and in the best interests of Stellar and its shareholders and unanimously recommends that Stellar’s shareholders vote “FOR” each of the Stellar Proposals.

 

At the Phunware Special Meeting, Phunware’s stockholders will be asked to vote on the following proposals, as more fully described in the accompanying joint proxy statement/prospectus (i) the Phunware Business Combination Proposal, (ii) the Preferred Stock Conversion Proposal and (iii) the Phunware Adjournment Proposal, if presented (the “Phunware Proposals”).

 

Phunware’s board of directors unanimously determined that the Phunware Proposals are advisable, fair to and in the best interests of Phunware and its stockholders and unanimously recommends that Phunware’s stockholders vote “FOR” each of the Phunware Proposals.

 

 

 

 

Your vote is very important. As a condition to the completion of the Business Combination (i) an affirmative vote of holders of a majority of the voting power of the shares of common stock of Stellar entitled to vote on the Stellar Proposals, who are present  in person or by proxy and cast votes at the Stellar Special Meeting is required with respect to the Stellar Proposals (other than the Redomestication Proposal, which requires two thirds of the voting power of the shares of outstanding common stock entitled to vote on such proposal that are present in person or by proxy and cast votes at the Stellar Special Meeting) and (ii) (A) with respect to the Phunware Business Combination Proposal, an affirmative vote of (x) a majority of the shares of outstanding capital stock of Phunware, voting together as a single class on an as-converted basis, (y) a majority of the outstanding shares of preferred stock of Phunware, voting together as a single class on an as-converted basis, and (z) a majority of the outstanding shares of Phunware Series F Preferred Stock, voting exclusively as a single class on an as-converted basis, (B) with respect to the Preferred Stock Conversion Proposal, an affirmative vote of (x) a majority of the outstanding shares of preferred stock of Phunware, voting together as a single class on an as-converted basis, and (y) a majority of the outstanding shares of Phunware Series F Preferred Stock, voting exclusively as a single class on an as-converted basis and (C) with respect to the Adjournment Proposal, an affirmative vote of the holders of a majority of the shares of outstanding capital stock of Phunware.

 

The obligations of Stellar and Phunware to complete the Business Combination are subject to a number of conditions set forth in the Merger Agreement and are summarized in the accompanying joint proxy statement/prospectus. More information about Stellar and Phunware, the Stellar Special Meeting and the Phunware Special Meeting and the transactions contemplated by the Merger Agreement, is contained in the accompanying joint proxy statement/prospectus. You are encouraged to read the accompanying joint proxy statement/prospectus in its entirety, including the section entitled “Risk Factors” beginning on page 43.

 

We strongly support the Business Combination and the other transactions contemplated by the Merger Agreement and enthusiastically recommend that you vote in favor of the proposals presented to you for approval.

 

Very truly yours,       Very truly yours,
         
         
Co-Chief Executive Officer       Chief Executive Officer
Stellar Acquisition III Inc.       Phunware, Inc.

  

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued under the accompanying joint proxy statement/prospectus or determined that the accompanying joint proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

The accompanying joint proxy statement/prospectus is dated __________, 2018 and is first being mailed to the shareholders of Stellar and stockholders of Phunware on or about ______________, 2018.

 

 

 

 

ADDITIONAL INFORMATION

 

The accompanying document is the proxy statement of Stellar for its special meeting of its shareholders, the proxy statement of Phunware for its special meeting of its stockholders and the prospectus of Stellar for the securities of the Delaware corporation which will be the successor of Stellar (the “Successor”) to be issued in the Redomestication and the Business Combination. The accompanying joint proxy statement/prospectus incorporates by reference important business and financial information about Stellar that is not included in or delivered with this joint proxy statement/prospectus. This information is available without charge to shareholders of Stellar and Phunware upon written or oral request. You can obtain the documents incorporated by reference into the accompanying joint proxy statement/prospectus through the Securities and Exchange Commission website at www.sec.gov or by requesting them in writing or by telephone at the appropriate addresses or telephone numbers below:

 

George Syllantavos   Alan S. Knitowski
Co-Chief Executive Officer and Chief Financial Officer   Chief Executive Officer
Stellar Acquisition III Inc.   Phunware, Inc.
90 Kifissias Avenue   7800 Shoal Creek Blvd, Suite 230-S
Maroussi Athens, Greece   Austin, TX 78757
Telephone: +30 210 876-4876   Telephone: +1 (512) 693-4199

 

In addition, if you have questions about the Business Combination or the accompanying joint proxy statement/prospectus, would like additional copies of the accompanying joint proxy statement/prospectus or need to obtain proxy cards or other information related to the proxy solicitation, please contact (with respect to Stellar) Advantage Proxy, the proxy solicitor for Stellar, toll-free at 1-877-870-8565 or collect at 1-206-870-8565, or ______________ on behalf of Phunware at the address and telephone number set forth above. You will not be charged for any of these documents that you request.

 

See the section entitled “Where You Can Find More Information” beginning on page 267 of the accompanying joint proxy statement/prospectus for further information.

 

Information contained on the Stellar or Phunware websites is expressly not incorporated by reference into this joint proxy statement/prospectus.

 

To obtain timely delivery of the documents, you must request them no later than five business days before the date of the applicable Special Meeting, or no later than ________________, 2018.

 

 

 

 

STELLAR ACQUISITION III INC.

90 Kifissias Avenue

Maroussi Athens, Greece

 

NOTICE OF SPECIAL MEETING

OF SHAREHOLDERS

TO BE HELD ON ____________, 2018

 

TO THE SHAREHOLDERS OF STELLAR ACQUISITION III INC.:

 

NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the “Stellar Special Meeting”) of Stellar Acquisition III Inc. (“Stellar”), a Republic of the Marshall Islands corporation, will be held at 10:00 a.m. Eastern Time, on __________, 2018 at the offices of Ellenoff Grossman & Schole LLP, at 1345 Avenue of the Americas, 11th Floor, New York, New York 10105. You are cordially invited to attend the Stellar Special Meeting, which will be held for the following purposes:

 

(1) The Redomestication Proposal — To consider and vote upon a proposal to change the corporate structure and domicile of Stellar by way of continuation from a corporation incorporated under the laws of the Republic of the Marshall Islands to a corporation incorporated under the laws of the State of Delaware (the “Redomestication”). The Redomestication will be effected by Stellar filing a Certificate of Corporate Domestication, together with a Certificate of Incorporation (together, the “Delaware Redomestication Documents”) with the Delaware Secretary of State and filing an application to de-register with the Registrar of Corporations of the Republic of the Marshall Islands. Upon the effectiveness of the Redomestication, Stellar will become a Delaware corporation and, upon the consummation of the Business Combination (as defined below), Stellar will change its corporate name to “Phunware, Inc.” (the “Successor”) and all outstanding securities of Stellar will be deemed to constitute outstanding securities of the Successor, as described in more detail in the accompanying joint proxy statement/prospectus. The Redomestication is expected to become effective immediately prior to the consummation of the Business Combination. We refer to this proposal as the “Redomestication Proposal.” The form of the proposed Delaware Certificate of Incorporation of the Successor and the form of the proposed Bylaws of the Successor to become effective upon the Redomestication, are attached to the accompanying joint proxy statement/prospectus as Annex A and Annex B.

 

(2) The Stellar Business Combination Proposal — To consider and vote upon a proposal to approve the agreement and plan of merger dated as of February 27, 2018 (as amended or supplemented from time to time, the “Merger Agreement”), as amended by the First Amendment to the Merger Agreement dated as of November 1, 2018 (the “First Amendment to the Merger Agreement”) by and among Stellar, STLR Merger Subsidiary Inc., a Delaware corporation and a wholly-owned subsidiary of Stellar (“Merger Sub”), and Phunware, Inc., a Delaware corporation (“Phunware”), and the transactions contemplated by the Merger Agreement, including the issuance of the merger consideration thereunder (collectively, the “Business Combination”). Pursuant to the Merger Agreement, Merger Sub will merge with and into Phunware (the “Merger”), with Phunware continuing as the surviving entity of the Merger and becoming a wholly-owned subsidiary of the Successor, as described in more detail in the accompanying joint proxy statement/prospectus. Upon the consummation of the Business Combination, Phunware will change its corporate name to “Phunware OpCo, Inc.” We refer to this proposal as the “Stellar Business Combination Proposal.” A copy of the Merger Agreement and First Amendment to the Merger Agreement are attached to the accompanying joint proxy statement/prospectus as Annex C and Annex C-1.

  

(3)The 2018 Equity Incentive Plan Proposal — To consider and vote upon the approval of the 2018 Equity Incentive Plan. We refer to this as the “2018 Equity Incentive Plan Proposal.” A copy of the 2018 Equity Incentive Plan is attached to the accompanying joint proxy statement/prospectus as Annex D.

 

(4) The 2018 ESPP Proposal — To consider and vote upon the approval of the 2018 Employee Stock Purchase Plan. We refer to this as the “2018 ESPP Proposal.” A copy of the 2018 Employee Stock Purchase Plan is attached to the accompanying joint proxy statement/prospectus as Annex E.

 

 

 

  

(5) The Share Issuance Proposal — To approve, for purposes of complying with applicable NASDAQ Stock Market LLC listing rules, the issuance of more than 20% of Stellar’s issued and outstanding common stock. We refer to this as the “Share Issuance Proposal.”

 

(6)The Director Election Proposal — To elect seven directors who, upon consummation of the Business Combination, will constitute all the members of the board of directors of the Successor. We refer to this proposal as the “Director Election Proposal.”

 

(7) The Stellar Adjournment Proposal — To consider and vote upon a proposal to adjourn the Stellar Special Meeting to a later date or dates, if necessary to permit further solicitation and vote of proxies if it is determined by Stellar that more time is necessary or appropriate to approve one or more proposals presented at the Stellar Special Meeting. We refer to this proposal as the “Stellar Adjournment Proposal” and, together with the Redomestication Proposal, the Stellar Business Combination Proposal, the 2018 Equity Incentive Plan Proposal, the 2018 ESPP Proposal, the Share Issuance Proposal and the Director Election Proposal, as the “Stellar Proposals.”

 

These Stellar Proposals are described in the accompanying joint proxy statement/prospectus, which we encourage you to read in its entirety before voting. Only holders of record of shares of Stellar’s common stock at the close of business on _______, 2018 (the “Stellar Record Date”) are entitled to notice of the Stellar Special Meeting and to vote and have their votes counted at the Stellar Special Meeting and any adjournments or postponements of the Stellar Special Meeting.

 

After careful consideration, Stellar’s board of directors (the “Stellar Board”) has determined that the Stellar Proposals are fair to and in the best interests of Stellar and its shareholders and unanimously recommends that you vote or give instruction to vote “FOR” each of the Redomestication Proposal, the Stellar Business Combination Proposal, the 2018 Equity Incentive Plan Proposal, the 2018 ESPP Proposal and the Share Issuance Proposal, “FOR” the election of all of the persons nominated for election as directors pursuant to the Director Election Proposal and “FOR” the Stellar Adjournment Proposal, if presented.

 

The existence of any financial and personal interests of one or more of Stellar’s directors may be argued to result in a conflict of interest on the part of such director(s) between what he, she or they may believe is in the best interests of Stellar and its shareholders and what he, she or they may believe is best for himself, herself or themselves in determining to recommend that shareholders vote for the Stellar Proposals. See the section entitled “Stellar Business Combination Proposal — Interests of Stellar’s Directors and Officers in the Business Combination” in the accompanying joint proxy statement/prospectus for a further discussion of this.

 

Each of the Redomestication Proposal, the Stellar Business Combination Proposal, the 2018 Equity Incentive Plan Proposal, the 2018 ESPP Proposal and the Share Issuance Proposal is interdependent upon the others, and the Business Combination, the 2018 Equity Incentive Plan, the 2018 ESPP Proposal, the Share Issuance Proposal and, if presented, the Adjournment Proposal must be approved by the holders of a majority of the common stock of Stellar (the “Stellar Shares”) as of the Stellar Record Date that are present in person or by proxy and vote at the Stellar Special Meeting in order for Stellar to consummate the Business Combination contemplated by the Merger Agreement. The Redomestication Proposal must be approved by the holders at least a two-thirds majority of the Stellar Shares as of the Stellar Record Date that are present in person or by proxy and vote at the Stellar Special Meeting, and each nominee presented in connection with the Director Election Proposal must be approved by holders a plurality of the Stellar Shares as of the Stellar Record Date that are present in person or by proxy and vote at the Stellar Special Meeting.

 

All shareholders of Stellar are cordially invited to attend the Stellar Special Meeting in person. To ensure your representation at the Stellar Special Meeting, however, you are urged to mark, sign and date the enclosed proxy card and return it as soon as possible in the pre-addressed postage paid envelope provided. If you are a shareholder of record of Stellar Shares, you may also cast your vote in person at the Stellar Special Meeting. If your shares are held in an account at a brokerage firm or bank, or by a nominee, you must instruct your broker, bank or nominee on how to vote your shares or, if you wish to attend the Stellar Special Meeting and vote in person, obtain a proxy from your broker, bank or nominee.

 

Whether or not you plan to attend the Stellar Special Meeting, we urge you to read the accompanying joint proxy statement/prospectus (and any documents incorporated into the accompanying joint proxy statement/prospectus by reference) carefully. Please pay particular attention to the section entitled “Risk Factors” in the accompanying joint proxy statement/prospectus.

 

 

 

 

Your vote is important regardless of the number of shares you own. Whether you plan to attend the Stellar Special Meeting or not, please mark, sign and date the enclosed proxy card and return it as soon as possible in the envelope provided. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted.

 

Thank you for your participation. We look forward to your continued support.

 

By Order of the Board of Directors        
         
         

Chairman of the Board of Directors,

Co-Chief Executive Officer and President

     

Co-Chief Executive Officer,

Chief Financial Officer and Director

 

_____________, 2018

 

IF YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOUR SHARES WILL BE VOTED IN FAVOR OF EACH OF THE STELLAR PROPOSALS AND YOU WILL NOT BE ELIGIBLE TO HAVE YOUR SHARES REDEEMED FOR CASH. TO EXERCISE YOUR REDEMPTION RIGHTS, YOU ARE NOT REQUIRED TO VOTE EITHER FOR OR AGAINST THE STELLAR BUSINESS COMBINATION PROPOSAL. YOU MUST DEMAND THAT STELLAR REDEEM YOUR SHARES INTO A PRO RATA PORTION OF THE FUNDS HELD IN THE TRUST ACCOUNT AND TENDER YOUR SHARES TO STELLAR’S TRANSFER AGENT AT LEAST TWO (2) BUSINESS DAYS PRIOR TO THE VOTE ON THE STELLAR BUSINESS COMBINATION PROPOSAL. YOU MAY TENDER YOUR SHARES BY EITHER DELIVERING YOUR SHARE CERTIFICATE TO THE TRANSFER AGENT OR BY DELIVERING YOUR SHARES ELECTRONICALLY USING THE DEPOSITORY TRUST COMPANY’S DEPOSIT/WITHDRAWAL AT CUSTODIAN SYSTEM. IF THE BUSINESS COMBINATION IS NOT COMPLETED, THEN THESE SHARES WILL NOT BE REDEEMED FOR CASH. IF YOU HOLD THE SHARES IN STREET NAME, YOU WILL NEED TO INSTRUCT THE ACCOUNT EXECUTIVE AT YOUR BROKER OR BANK TO WITHDRAW THE SHARES FROM YOUR ACCOUNT IN ORDER TO EXERCISE YOUR REDEMPTION RIGHTS. SEE THE SECTION ENTITLED “SPECIAL MEETING OF THE SHAREHOLDERS OF STELLAR — REDEMPTION RIGHTS” FOR MORE SPECIFIC INSTRUCTIONS.

 

The accompanying joint proxy statement/prospectus is dated ______________, 2018 and is first being mailed to the shareholders of Stellar on or about ______________, 2018.

 

 

 

 

PHUNWARE, INC.

7800 Shoal Creek Blvd, Suite 230-S

Austin, TX 78757

 

NOTICE OF SPECIAL MEETING

OF STOCKHOLDERS

TO BE HELD ON ____________, 2018

 

TO THE STOCKHOLDERS OF PHUNWARE, INC.:

 

NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the “Phunware Special Meeting”) of Phunware, Inc. (“Phunware”), a Delaware corporation, will be held at ____, Central Time, on __________, 2018 at the offices of Phunware located at 7800 Shoal Creek Blvd, Suite 230-S, Austin, TX 78757. You are cordially invited to attend the Phunware Special Meeting, which will be held for the following purposes:

 

(1) The Phunware Business Combination Proposal — To consider and vote upon a proposal to approve the agreement and plan of merger dated as of February 27, 2018 (as amended or supplemented from time to time, the “Merger Agreement”) by and among Stellar Acquisition III Inc., a Republic of the Marshall Islands corporation (“Stellar”), STLR Merger Subsidiary Inc., a Delaware corporation and a wholly-owned subsidiary of Stellar (“Merger Sub”) and Phunware, as amended by the First Amendment to the Merger Agreement dated as of November 1, 2018 (the “First Amendment to the Merger Agreement”), and the transactions contemplated by the Merger Agreement, including the issuance of the merger consideration thereunder (collectively, the “Business Combination”). Pursuant to the Merger Agreement, Merger Sub will merge with and into Phunware (the “Merger”), with Phunware continuing as the surviving entity of the Merger and becoming a wholly-owned subsidiary of the Stellar, which will change its corporate name to “Phunware, Inc.” (the “Successor”), as described in more detail in the accompanying joint proxy statement/prospectus. We refer to this proposal as the “Phunware Business Combination Proposal.” A copy of the Merger Agreement and the First Amendment to the Merger Agreement are attached to the accompanying joint proxy statement/prospectus as Annex C and Annex C-1.

  

(2) The Preferred Stock Conversion Proposal — To consider and vote upon a proposal whereby the Phunware preferred stockholders request the conversion of all outstanding shares of Phunware preferred stock into shares of Phunware common stock, effective as of immediately prior to the closing of the Merger on a conversion ratio of one share of Phunware common stock per one share of Phunware preferred stock (the “Preferred Stock Conversion”). We refer to this proposal as the “Preferred Stock Conversion Proposal.”

 

(3)The Phunware Adjournment Proposal — To consider and vote upon a proposal to adjourn the Phunware Special Meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if it is determined by Phunware that more time is necessary or appropriate to consummate the Business Combination and/or the Preferred Stock Conversion. We refer to this proposal as the “Phunware Adjournment Proposal” and, together with the Preferred Stock Conversion Proposal and the Phunware Business Combination Proposal, the “Phunware Proposals.”

 

These Phunware Proposals are described in the accompanying joint proxy statement/prospectus, which we encourage you to read in its entirety before voting. Only holders of record of capital stock of Phunware at the close of business on October 31, 2018 (the “Phunware Record Date”) are entitled to notice of the Phunware Special Meeting and to vote and have their votes counted at the Phunware Special Meeting and any adjournments or postponements of the Phunware Special Meeting.

 

After careful consideration, Phunware’s board of directors (the “Phunware Board”) has determined that the Phunware Proposals are fair to and in the best interests of Phunware and its stockholders and unanimously recommends that you vote or give instruction to vote “FOR” the Phunware Business Combination Proposal and the Preferred Stock Conversion Proposal, and “FOR” the Phunware Adjournment Proposal, if presented.

 

The existence of any financial and personal interests of one or more of Phunware’s directors may be argued to result in a conflict of interest on the part of such director(s) between what he, she or they may believe is in the best interests of Phunware and its stockholders and what he, she or they may believe is best for himself, herself or themselves in determining to recommend that stockholders vote for the Phunware Proposals. See the section entitled “Phunware Business Combination Proposal — Interests of Phunware’s Directors and Officers in the Business Combination” in the accompanying joint proxy statement/prospectus for a further discussion of this.

 

 

 

 

In connection with entry into the Merger Agreement, certain of the Phunware stockholders affiliated with Phunware directors have entered into voting agreements pursuant to which they have agreed to support and vote all of their shares in favor of the foregoing Phunware Proposals.

 

The Phunware Proposals must be approved as follows: (A) the Phunware Business Combination Proposal requires the affirmative vote of (x) a majority of the shares of outstanding capital stock of Phunware, voting together as a single class on an as-converted basis, (y) a majority of the outstanding shares of preferred stock of Phunware, voting together as a single class on an as-converted basis, and (z) a majority of the outstanding shares of Phunware Series F Preferred Stock, voting exclusively as a single class on an as-converted basis, (B) the Preferred Stock Conversion Proposal requires the affirmative vote of (y) a majority of the outstanding shares of Preferred Stock of Phunware, voting together as a single class on an as-converted basis, and (z) a majority of the outstanding shares of Phunware Series F Preferred Stock, voting exclusively as a single class on an as-converted basis and (C) the Adjournment Proposal requires the affirmative vote of the holders of a majority of the shares of outstanding capital stock of Phunware.

 

All stockholders of Phunware as of the Record Date are cordially invited to attend the Phunware Special Meeting in person. To ensure your representation at the Phunware Special Meeting, however, you are urged to mark, sign and date the enclosed proxy card and return it as soon as possible in the pre-addressed postage paid envelope provided. If you are a stockholder of record of Phunware common stock or preferred stock, you may also cast your vote in person or by proxy at the Phunware Special Meeting.

 

Your vote is important regardless of the number of shares you own. Whether you plan to attend the Phunware Special Meeting or not, please mark, sign and date the enclosed proxy card and return it as soon as possible in the envelope provided.

 

You may revoke your proxy in the manner described in the accompanying joint proxy statement/prospectus at any time before it has been voted at the special meeting. If you attend the Phunware Special Meeting, you may vote your shares in person or by proxy even if you have previously submitted a proxy.

 

You are entitled to appraisal rights in connection with the merger in accordance with Delaware law. See the discussion under the section entitled “Appraisal Rights” in the accompanying joint proxy statement/prospectus for more information.

 

Whether or not you plan to attend the Phunware Special Meeting, we urge you to read the accompanying joint proxy statement/prospectus (and any documents incorporated into the accompanying joint proxy statement/prospectus by reference) carefully. Please pay particular attention to the section entitled “Risk Factors.

 

Thank you for your participation. We look forward to your continued support.

 

By Order of the Board of Directors    
     
     
Chief Executive Officer    

 

_____________, 2018

 

IF YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOUR SHARES WILL BE VOTED IN FAVOR OF EACH OF THE PROPOSALS. SEE THE SECTION ENTITLED “SPECIAL MEETING OF PHUNWARE STOCKHOLDERS” FOR MORE SPECIFIC INSTRUCTIONS.

 

The accompanying joint proxy statement/prospectus is dated ______________, 2018 and is first being mailed to the stockholders of Phunware on or about ______________, 2018.

 

 

 

 

TABLE OF CONTENTS

 

FREQUENTLY USED TERMS 1
SUMMARY OF THE MATERIAL TERMS OF THE PROPOSALS 7
QUESTIONS AND ANSWERS FOR ALL STELLAR SHAREHOLDERS AND PHUNWARE STOCKHOLDERS 19
QUESTIONS AND ANSWERS ABOUT THE STELLAR PROPOSALS 23
QUESTIONS AND ANSWERS ABOUT THE PHUNWARE PROPOSALS 30
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF STELLAR 35
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA OF PHUNWARE 37
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION 39
MARKET PRICE AND DIVIDEND INFORMATION 41
RISK FACTORS 43
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 90
THE MERGER AGREEMENT AND RELATED AGREEMENTS 92
SPECIAL MEETING OF THE SHAREHOLDERS OF STELLAR 100
STELLAR PROPOSAL 1: THE REDOMESTICATION PROPOSAL 105
STELLAR PROPOSAL 2: THE STELLAR BUSINESS COMBINATION PROPOSAL 120
STELLAR PROPOSAL 3: THE 2018 EQUITY INCENTIVE PLAN PROPOSAL 136
STELLAR PROPOSAL 4: THE 2018 ESPP PROPOSAL 141
STELLAR PROPOSAL 5: THE SHARE ISSUANCE PROPOSAL 144
STELLAR PROPOSAL 6: THE DIRECTOR ELECTION PROPOSAL 145
STELLAR PROPOSAL 7: THE STELLAR ADJOURNMENT PROPOSAL 148
SPECIAL MEETING OF PHUNWARE STOCKHOLDERS 149
phunware BUSINESS COMBINATION PROPOSAL 153
phunware PREFERRED STOCK CONVERSION PROPOSAL 158
PHUNWARE ADJOURNMENT PROPOSAL 159
STELLAR AND PHUNWARE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 160
INFORMATION ABOUT STELLAR 168
DIRECTORS, EXECUTIVE OFFICERS, EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE OF STELLAR 173

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF STELLAR

178
DESCRIPTION OF STELLAR AND THE SUCCESSOR’S SECURITIES 184
BENEFICIAL OWNERSHIP OF SECURITIES OF STELLAR 193
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS OF STELLAR 195
INFORMATION ABOUT PHUNWARE 198

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PHUNWARE

215
MANAGEMENT OF THE SUCCESSOR FOLLOWING THE BUSINESS COMBINATION 238
EXECUTIVE COMPENSATION IN RELATION TO PHUNWARE, INC. 244
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS IN RELATION TO PHUNWARE, INC. 249
DIRECTOR COMPENSATION OF PHUNWARE, INC. DIRECTORS 250
BENEFICIAL OWNERSHIP OF SECURITIES OF PHUNWARE 251
DESCRIPTION OF PHUNWARE, INC. SECURITIES 254
SECURITIES ACT RESTRICTIONS ON RESALE OF THE SUCCESSOR’S SECURITIES 259
APPRAISAL RIGHTS 260
OTHER SHAREHOLDER COMMUNICATIONS 264
LEGAL MATTERS 264
EXPERTS 264
CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM OF PHUNWARE 265
DELIVERY OF DOCUMENTS TO SHAREHOLDERS 266
TRANSFER AGENT AND REGISTRAR 266
SUBMISSION OF SHAREHOLDER PROPOSALS OF STELLAR 266
FUTURE STOCKHOLDER PROPOSALS 267
WHERE YOU CAN FIND MORE INFORMATION 267
INDEX TO FINANCIAL STATEMENTS F-1
INFORMATION NOT REQUIRED IN PROSPECTUS II-1

 

ANNEX A   Certificate of Incorporation of Successor
ANNEX B   Bylaws of Successor
ANNEX C   Plan and Agreement of Merger
ANNEX C-1   First Amendment to Agreement and Plan of Merger
ANNEX D   2018 Equity Incentive Plan
ANNEX E   2018 Employee Stock Purchase Plan
ANNEX F   Appraisal Rights for Phunware Stockholders
ANNEX G   Form of Proxy for Stellar Acquisition III Inc. Special Meeting of Shareholders
ANNEX H   Form of Proxy for Phunware, Inc. Special Meeting of Stockholders

  

i

 

FREQUENTLY USED TERMS

 

Unless otherwise stated or unless the context otherwise requires, the terms “we,” “us,” “our,” “Stellar” and “Phunware” refer to Stellar Acquisition III Inc. (which prior to the Redomestication is a corporation incorporated under the laws of the Republic of the Marshall Islands and thereafter a corporation incorporated under the laws of the State of Delaware) and Phunware, Inc., as applicable.

 

In this document:

 

2018 Equity Incentive Plan Proposal” means the proposal to be considered at the special meeting for the shareholders to ratify and approve the 2018 Equity Incentive Plan of the Successor.

 

2018 ESPP Proposal” means the 2018 ESPP Proposal to consider and vote upon the approval of the 2018 ESPP.

 

Articles of Incorporation” means Stellar’s current articles of incorporation, as amended.

 

Assumed Option” means each outstanding option to acquire Phunware Stock (whether vested or unvested) that shall be assumed by the Successor in the Merger and automatically converted into an option to acquire shares of Successor common stock, with its price and number of shares equitably adjusted based on the conversion of the shares of Phunware Stock into the Stockholder Merger Consideration.

 

BCA” means the Business Corporations Act of the Republic of the Marshall Islands (1990), as amended.

 

Business Combination” means the business combination of Stellar and Phunware pursuant to the Merger Agreement.

 

Closing” means the closing of the Business Combination.

 

Closing Proceeds” means the sum of (i) the funds remaining in the Trust Account immediately prior to the Closing, after giving effect to the redemptions by Public Shareholders (but before giving effect to the payment of any expenses incurred in connection with the Merger Agreement or the Business Combination or repayment of any outstanding loans of Stellar).

 

Code” means the Internal Revenue Code of 1986, as amended.

 

Combined Company” refers to Stellar and the Phunware Group together following the consummation of the Business Combination.

 

Contribution” means an aggregate of approximately $124,164 by the 24th day each such calendar month (or portion thereof), with the initial Contribution having been contributed on May 24, 2018.

 

Conversion” means the redomestication of Stellar from a Republic of the Marshall Islands corporation into a Delaware corporation, as provided herein.

 

COPPA” means the Children’s Online Privacy Protection Act.

 

Delaware Redomestication Documents” means the Certificate of Corporate Domestication and the Certificate of Incorporation of the Successor.

 

DGCL” means the Delaware General Corporation Law.

 

Director Election Proposal” means the proposal to be considered at the Stellar Special Meeting to elect the members of the board of directors of the Successor.

 

DWAC” means the depository trust company’s deposit/withdrawal at custodian system.

 

Effective Time” means the Merger having become effective pursuant to its terms upon the consummation of the Business Combination.

 

1

 

Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

 

Extension” means the situation in which Stellar may, and at the request of Phunware, Stellar will, seek the approval of its shareholders to extend the deadline for it to consummate its initial business combination to a date no earlier than December 26, 2018 (or such earlier date at the parties may otherwise agree), which may be structured as multiple periodic extensions.

 

Extension Loan” means the non-interest bearing loan from Phunware to Stellar in the principal amount of $201,268.

 

Extension Meetings” means, together, (A) a special meeting of shareholders of Stellar held on May 22, 2018, at which its shareholders approved (i) an amendment to Stellar’s second amended and restated Articles of Incorporation, extending the date by which Stellar must consummate its initial business combination from May 24, 2018 to August 24, 2018 or such earlier date as determined by the Stellar Board; and (ii) the amendment and restatement of that certain Investment Management Trust Agreement, dated as of August 18, 2016, by and between Stellar and Continental Stock Transfer & Trust Company, the trust agent (“Continental”), to extend the date on which the trust agent must liquidate the Trust Account if Stellar has not completed an initial business combination, from May 24, 2018 to August 24, 2018, and to permit the withdrawal of funds from the Trust Account to pay shareholders who properly exercise their Redemption Rights in connection with such amendment (the “May 2018 Extension”); and (B) a special meeting of shareholders of Stellar held on August 22, 2018, at which its shareholders approved (i) an amendment to Stellar’s second amended and restated Articles of Incorporation, as amended, extending the date by which Stellar must consummate its initial business combination from August 24, 2018 to December 26, 2018 or such earlier date as determined by the Stellar Board, and (ii) the amendment and restatement of that certain Amended and Restated Investment Management Trust Agreement, dated as of May 23, 2018, by and between the Company and Continental to extend the date on which the trust agent must liquidate the Trust Account to permit the withdrawal of funds from the Trust Account to pay shareholders who properly exercise their Redemption Rights in connection with such amendment (the “August 2018 Extension”).

 

fair market value” shall mean the average reported last sale price of Stellar’s common stock for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of Stellar’s warrants.

 

Founder Shares” means the 2,003,403 shares of Stellar’s common stock purchased for $25,000 in the aggregate by Messrs. Tsirigakis and Syllantavos.

 

FTC” means the U.S. Federal Trade Commission.

 

GAAP” means U.S. generally accepted accounting principles.

 

GDPR” means the General Data Protection Regulation.

 

Initial Shareholders” means the initial shareholders of Stellar who currently hold Founder Shares.

 

Interim Period” means certain customary covenants by each of the parties during the period between the signing of the Merger Agreement and the earlier of the Closing or the termination of the Merger Agreement in accordance with its terms.

 

IPO” means Stellar’s initial public offering of its units, common stock and warrants pursuant to a registration statement on Form S-1 declared effective by the SEC on August 18, 2016 (SEC File No. 333-212377).

 

Material Adverse Effect” as used in the Merger Agreement, means with respect to any specified person or entity, any fact, event, occurrence, change or effect that has had or would reasonably be expected to have, a material adverse effect upon (a) the business, assets, liabilities, results of operations or condition (financial or otherwise) of such person or entity and its subsidiaries, taken as a whole, or (b) the ability of such person or entity or any of its subsidiaries on a timely basis to consummate the transactions contemplated by the Merger Agreement or the ancillary documents to which it is a party or bound or to perform its obligations thereunder, in each case subject to certain customary exceptions.

 

2

 

Merger” means the statutory merger of Merger Sub with and into Phunware (following the Redomestication) under the applicable provisions of the DGCL, with Phunware remaining as the surviving entity.

 

Merger Agreement” means the agreement and plan of merger, dated as of February 27, 2018, by and among Stellar, Merger Sub and Phunware, as it may be amended and supplemented from time to time.

 

Merger Consideration” means a number of Successor securities with an aggregate value equal to $301,000,000.

 

Merger Sub” means STLR Merger Subsidiary Inc., a Delaware corporation, which is currently wholly-owned by Stellar.

 

Nasdaq” means the NASDAQ Stock Market, LLC.

 

Notes” means unsecured promissory notes in the aggregate amount of $303,300, $301,000, $167,000, $62,082, $62,082, $62,082, $37,034, $37,034 and $37,034 issued by Stellar to its Sponsors on August 24, 2017, November 24, 2017, February 23, 2018, May 23, 2018, June 23, 2018, July 23, 2018, August 23, 2018, September 24, 2018 and October 24, 2018, respectively, and unsecured promissory notes in the aggregate amount of $201,268, $62,082, $62,082 $62,082, $37,034,$37,034 and $37,034 issued by Stellar to Phunware on February 22, 2018, May 23, 2018, June 23, 2018, July 23, 2018, August 23, 2018, September 24, 2018 and October 24, 2018, respectively.

 

“PhunCoin” means the digital asset built and transacted on top of blockchain technology, which is intended to be used within the PhunCoin Ecosystem.

 

“PhunCoin Ecosystem” means the rewards marketplace and data exchange to be established by PhunCoin Sub, whereby users receive PhunCoin in exchange for their information

 

“PhunCoin Sub” means PhunCoin, Inc., a Wyoming corporation, which is a wholly-owned subsidiary of Phunware.

 

Phunware” or “Phunware, Inc.” means Phunware, Inc., a Delaware corporation.

 

Phunware Adjournment Proposal” means the proposal to approve any decision by Phunware or its representatives to adjourn the Special Meeting to a later date or dates to permit further solicitation and vote of proxies if there are insufficient votes at the time of the Special Meeting to approve the Phunware Business Combination Proposal and/or the Preferred Stock Conversion Proposal.

 

Phunware Board” means the board of directors of Phunware.

 

Phunware Business Combination Proposal” means the proposal for Phunware stockholders to approve the Business Combination.

 

Phunware Group” means Phunware and the direct and indirect subsidiaries of Phunware.

 

Phunware Proposals” means (i) the Phunware Business Combination Proposal, (ii) the Preferred Stock Conversion Proposal and (iii) the Phunware Adjournment Proposal, if presented.

 

Phunware Special Meeting” means the special meeting of the stockholders of Phunware, to be held at ____, Central Time, on __________, 2018 at the offices of Phunware, located at 7800 Shoal Creek Blvd, Suite 230-S, Austin, TX 78757, and any adjournments or postponements thereof.

 

Phunware Stock” means all shares of Phunware common stock and preferred stock issued and outstanding immediately prior to the Effective Time.

 

Preferred Stock Conversion” means the conversion by the holders of Phunware’s preferred stock of all of their issued and outstanding shares of preferred stock into shares of Phunware common stock at a conversion ratio of one share of Phunware common stock for each one share of Phunware preferred stock.

 

Preferred Stock Conversion Proposal” means the proposal to approve the conversion of all outstanding shares of Phunware preferred stock into shares of Phunware common stock, effective as of immediately prior to the closing of the Merger on a conversion ratio of one share of Phunware common stock per one share of Phunware preferred stock.

 

3

 

Private Placement Warrants” means the 7,970,488 private placement warrants, each exercisable for one share of Stellar’s common stock at $11.50 per share, purchased by the Initial Shareholders for a purchase price of $3,985,244, or $0.50 per warrant.

 

Proposals” means the Redomestication Proposal, the Stellar Business Combination Proposal, the 2018 Equity Incentive Plan Proposal, the 2018 ESPP Proposal, the Share Issuance Proposal, the Director Election Proposal, the Stellar Adjournment Proposal (if presented), the Phunware Business Combination Proposal, the Preferred Stock Conversion Proposal and the Phunware Adjournment Proposal (if presented).

 

Public Shareholders” means the holders of Stellar Shares that were sold in Stellar’s IPO (whether they were purchased in the IPO or thereafter in the open market).

 

Public Shares” means Stellar Shares sold in Stellar’s IPO (whether they were purchased in the IPO or thereafter in the open market).

 

Record Date” means, in the case of Stellar, only holders of record of common stock of Stellar at the close of business on _______, 2018 (the “Stellar Record Date”) and in the case of Phunware, only holders of record of common stock of Phunware at the close of business on October 31, 2018 (the “Phunware Record Date”).

 

Redemption Price” means an amount equal to price at which each Public Share is redeemed pursuant to the Redemption Rights (as equitably adjusted for stock splits, stock dividends, combinations, recapitalizations and the like after the Closing). The Redemption Price will be calculated two days prior to the consummation of the Business Combination in accordance with Stellar’s Articles of Incorporation as currently in effect.

  

Redemption Rights” means rights to demand Redemption of the Public Shares into cash.

 

Redemption” means the right of the holders of Stellar Shares to have their shares redeemed in accordance with the procedures set forth in this joint proxy statement/prospectus.

 

Redomestication” means the continuation of Stellar by way of domestication of Stellar into a Delaware corporation, with the shares of common stock of Stellar becoming common stock of the Delaware corporation under the applicable provisions of the BCA and the DGCL and the term includes all matters and necessary or ancillary changes in order to effect such Redomestication, including the adoption of the Certificate of Incorporation and Bylaws for the Successor consistent with the DGCL (as attached hereto at Annex A and Annex B, respectively) and changing the name and registered office of Stellar to “Phunware, Inc.”. Pursuant to the Redomestication, Stellar’s existence as a corporation incorporated under the laws of the Republic of the Marshall Islands would cease.

 

Redomestication Proposal” means the proposal to be considered at the Stellar Special Meeting to approve the Redomestication.

 

Replacement Warrant” means a new warrant for shares of Successor common stock to be issued in exchange for each outstanding warrant to acquire shares of Phunware Stock that will be cancelled, retired and terminated in the Merger with its price and number of shares equitably adjusted based on the conversion of the shares of Phunware Stock into the Stockholder Merger Consideration, but with terms otherwise the same as the Phunware warrant.

 

Sarbanes Oxley Act” the Sarbanes-Oxley Act of 2002.

 

SEC” means the United States Securities and Exchange Commission.

 

Second Extension Loan” means the amount Phunware loaned to Stellar to cover the costs and expenses for Stellar to seek the approval of the Stellar’s stockholders to extend the deadline for Stellar to consummate its initial Business Combination beyond May 24, 2018.

 

Securities Act” means the Securities Act of 1933, as amended.

 

4

 

Share Issuance Proposal” means the proposal to be considered at the special meeting for the shareholders of Stellar to approve, for purposes of complying with Nasdaq listing rules, the issuance of securities in excess of 20% of Stellar’s issued and outstanding common stock, including the shares of common stock issuable upon the exchange of such securities.

 

Sponsor” means (i) Astra Maritime Corp. and Dominium Investments Inc., each of which is a Republic of Marshall Islands corporation and a holding company with no operations, and each of which is an affiliate of Mr. Prokopios (Akis) Tsirigakis, who is Stellar’s Chairman of the Board as well as its co-Chief Executive Officer and President and (ii) Magellan Investments Corp. and Firmus Investments Inc., each a Republic of Marshall Islands corporation and a holding company with no operations, and each an affiliate of Mr. George Syllantavos, who is Stellar’s co-Chief Executive Officer, Chief Financial Officer, Secretary and also serves as one of its directors.

 

Sponsor Notes” means unsecured promissory notes in the aggregate amount of $303,300, $301,000, $167,000, $62,082, $62,082, $62,082, $37,034, $37,034 and $37,034 issued by Stellar to the Sponsors on August 24, 2017, November 24, 2017, February 23, 2018, May 23, 2018, June 23, 2018, July 23, 2018, August 23, 2018, September 24, 2018 and October 24, 2018, respectively.

 

Stellar” means Stellar Acquisition III Inc. (which prior to the Redomestication is a company incorporated under the laws of the Republic of the Marshall Islands and thereafter will be a corporation incorporated under the laws of the State of Delaware).

 

Stellar Adjournment Proposal” means the proposal for Stellar shareholders to approve any decision by Stellar or its representatives to adjourn the Stellar Special Meeting to a later date or dates to permit further solicitation and vote of proxies if there are insufficient votes at the time of the Stellar Special Meeting to approve the Redomestication Proposal and the Stellar Business Combination Proposal.

 

Stellar Board” means the board of directors of Stellar.

 

Stellar Business Combination Proposal” means the proposal to approve the Business Combination.

 

Stellar Proposals” means (i) the Redomestication Proposal, (ii) the Stellar Business Combination Proposal, (iii) the 2018 Equity Incentive Plan Proposal, (iv) the 2018 ESPP Proposal, (v) the Share Issuance Proposal, (vi) the Director Election Proposal and (vii) the Stellar Adjournment Proposal, if presented.

 

Stellar Shares” means the common stock, par value $0.0001 per share, of Stellar.

 

Stellar Special Meeting” means the special meeting of the shareholders of Stellar, to be held at 10:00 a.m. Eastern Time on __________, 2018 at the offices of Ellenoff Grossman & Schole LLP, at 1345 Avenue of the Americas, 11th Floor, New York, New York 10105, and any adjournments or postponements thereof.

 

Stockholder Merger Consideration” means the shares of Successor common stock and the Transferred Sponsor Warrants to be transferred to Phunware stockholders.

 

Successor” means Stellar as a Delaware corporation by way of continuation following the Redomestication. In connection with the consummation of the Business Combination, Stellar will change its corporate name to “Phunware, Inc.”

 

Target Companies” means Phunware and its subsidiaries.

 

“Token Generation Event” means the launch of the PhunCoin Ecosystem, which will only occur if the ecosystem is operational on a blockchain technology that enables it to comply with applicable laws.

 

Transferred Sponsor Warrants” means up to an aggregate of 3,985,244 but not less than 2,450,000 warrants to purchase shares of Successor common stock in exchange for the Private Placement Warrants that are currently held by the Sponsors.

 

Trust Account” means the trust account of Stellar, which holds the net proceeds of Stellar’s IPO and the sale of the Stellar private units, together with interest earned thereon, less amounts released to pay income or other tax obligations and to meet working capital requirements.

  

5

 

U.S. Holder” means any beneficial owner of Stellar Shares that is, for U.S. federal income tax purposes, (i) an individual citizen or resident of the United States; (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) a trust if (A) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control the trust or (B) it has a valid election in place to be treated as a U.S. person.

 

Undersubscribed Sponsor Warrants” means any Transferred Sponsor Warrants that other holders of shares of Phunware Stock elect not to receive.

 

Voting Agreement” means those voting agreements delivered by Phunware to Stellar and executed by certain of Phunware’s stockholders who are affiliated with directors of Phunware.

 

6

 

SUMMARY OF THE MATERIAL TERMS OF THE PROPOSALS

 

This summary, together with the sections entitled “Questions and Answers for all Stellar Shareholders and Phunware Stockholders”, “Questions and Answers about the Stellar Proposals” and “Questions and Answers about the Phunware Proposals” summarizes certain information contained in this joint proxy statement/prospectus, but does not contain all of the information that is important to you. You should read carefully this entire joint proxy statement/prospectus, including the attached annexes, for a more complete understanding of the matters to be considered at the Stellar Special Meeting or the Phunware Special Meeting, as applicable.

 

Stellar

 

Stellar, a corporation incorporated under the laws of the Republic of the Marshall Islands, was incorporated on December 8, 2015 as a blank check company whose objective is to acquire, through a merger, share exchange, asset acquisition, share purchase, recapitalization, reorganization or other similar business combination, one or more businesses or entities.

 

On August 24, 2016, Stellar consummated its IPO of 6,500,000 units. Each unit consisted of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $11.50 per share. The units were sold at an offering price of $10.00 per unit, generating gross proceeds of $65,000,000. On August 24, 2016, simultaneously with the consummation of such offering, Stellar completed a private placement of an aggregate of 7,650,000 warrants to the Sponsors, generating gross proceeds of $3,825,000.

 

On September 28, 2016, the underwriters exercised their over-allotment option in part and purchased 400,610 units, which were sold at an offering price of $10.00 per unit, generating gross proceeds of $4,006,100. On September 28, 2016, simultaneously with the sale of such units, Stellar consummated the private sale of an additional 320,488 Private Placement Warrants to the Sponsors, generating gross proceeds of $160,244. In connection with the partial over-allotment exercise, certain of the Initial Shareholders forfeited an aggregate of 166,758 Founder Shares.

 

A total of $70,386,222 of the net proceeds from Stellar’s IPO (including the partial exercise of the over-allotment option) and the private placements was deposited in the Trust Account established for the benefit of the Public Shareholders.

 

On each of August 24, 2017, November 24, 2017 and February 23, 2018, Stellar issued unsecured promissory notes in the aggregate amount of $303,300, $301,000, and $167,100, respectively, to the Sponsors and on February 22, 2018, Stellar issued a promissory note in the aggregate amount of $201,268 to Phunware. The Sponsors have the option to convert any unpaid balance of the Notes into warrants exercisable for shares of its common stock, based on a conversion price of $0.50 per warrant. The terms of any such warrants shall be identical to the terms of the warrants issued pursuant to the private placement that was consummated by Stellar in connection with the IPO. On each of August 24, 2017, November 24, 2017 and February 23, 2018, the Sponsors, and on February 22, 2018, Phunware, deposited cash into the Trust Account and Stellar also instructed the trust agent to apply interest earned on the funds available for withdrawal toward the principal held in the Trust Account, representing an aggregate of $402,536, or $0.058 per Public Share. As such, Stellar extended the period of time to consummate its initial business combination three times, each for three months, to May 24, 2018. In connection with the Extensions, the per Public Share amount in Stellar’s Trust Account increased from $10.20 (as of the closing of the IPO) to $10.375. Furthermore, on each of May 23, 2018, June 23, 2018 and July 23, 2018, the Sponsors and Phunware, deposited cash into Stellar’s Trust Account, representing an aggregate of $124,164, or $0.035 per Public Share each time. As such, Stellar extended the period of time to consummate its business combination to August 24, 2018. In connection with such Extensions, the per Public Share amount in Stellar’s Trust Account further increased to $10.48. Additionally, on each of August 23, 2018, September 23, 2018, and October 24, 2018, the Sponsors and Phunware, deposited cash into the Trust Account, representing an aggregate of $74,069, or $0.04 per Public Share each time. As such, Stellar extended the period of time to consummate its initial business combination one month, to December 26, 2018. In connection with such Extensions, the per Public Share amount in the Trust Account further increased to $10.60 (as of the date of this joint proxy statement/prospectus).

 

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The Redomestication Proposal

 

Stellar is proposing to change its corporate structure and domicile by way of continuation from a corporation incorporated under the laws of the Republic of the Marshall Islands to a corporation incorporated under the laws of the State of Delaware. The Redomestication is expected to become effective immediately prior to the consummation of the Business Combination and will be effected by the filing of a the Delaware Redomestication Documents with the Delaware Secretary of State and a filing of an application to de-register with the Registrar of Corporations of the Republic of the Marshall Islands. Upon the effectiveness of the Redomestication, Stellar will continue its existence in the form of a Delaware corporation and, in connection with the Business Combination, Stellar will change its corporate name to “Phunware, Inc.” (such successor referred to in this joint proxy statement/prospectus as the “Successor”) and all outstanding securities of Stellar will be deemed to constitute outstanding securities of the continuing Delaware corporation, as described in more detail in this joint proxy statement/prospectus. Please read the section entitled “The Redomestication Proposal.

 

The Stellar Business Combination Proposal

 

Stellar and Phunware have agreed to a Business Combination under the terms of the Merger Agreement dated as of February 27, 2018 by and among Stellar, Merger Sub and Phunware. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the Closing of the transactions contemplated by the Merger Agreement, Merger Sub will merge with and into Phunware, with Phunware continuing as the surviving entity and becoming a wholly-owned subsidiary of the Successor. At the Effective Time, Phunware will change its corporate name to “Phunware OpCo, Inc.” (the “Surviving Corporation”) and all outstanding securities of Phunware will be deemed to constitute outstanding securities of the Surviving Corporation. See the sections entitled “The Stellar Business Combination Proposal” and the “The Phunware Business Combination Proposal.”

 

The Merger Agreement is subject to standard conditions to the Closing. In addition, the Closing is subject to the following additional conditions:

 

The SEC shall have declared effective a registration statement on Form S-4 under the Securities Act, to register the issuance of the securities to be issued in the Redomestication and the Business Combination;

 

Stellar has at least $19 million cash and cash equivalent, net of (a) any cash, cash equivalents or other assets of the Target Companies, (b) any cash funds that are necessary to pay its unpaid expenses and liabilities, (c) cash funds required for redemptions and (d) cash funds necessary to pay its debt and other liabilities.

 

Pursuant to the Merger Agreement, upon the Closing, (i) the shares of common stock of Phunware issued and outstanding immediately prior to the Merger will be cancelled in exchange for the right to receive (A) an aggregate number of shares of Successor common stock equal to the quotient of the aggregate merger consideration of $301,000,000, divided by the Redemption Price and (B) a number of the warrants to purchase shares of Successor common stock in exchange for Private Placement Warrants that are currently held by the Sponsors that the Phunware stockholders elect to purchase at a price of $0.50 per warrant by reducing their shares of Successor common stock by the equivalent value, (ii) all outstanding warrants to acquire shares of Phunware Stock will be cancelled in exchange for the right to receive a new warrant to purchase shares of Successor common stock and (iii) all outstanding options of Phunware will be assumed by the Successor. See the section entitled “The Stellar Business Combination Proposals — General Description of the Merger Agreement and Merger Consideration.”

 

Each party agreed in the Merger Agreement to use its commercially reasonable efforts to effect the Closing. The Merger Agreement also contains certain customary covenants by each of the parties during the period between the signing of the Merger Agreement and the earlier of the Closing or the termination of the Merger Agreement in accordance with its terms, including covenants regarding (1) seeking an extension of the deadline for Stellar to consummate an initial business combination, (2) no solicitation of other competing transactions, subject to certain exclusions, (3) designation of members of the Successor’s post-Closing board of directors, (4) maintenance by Stellar of a minimum cash balance, (5) efforts to consummate a block-chain technology token generation event and (6) solicitation of voting agreements.

 

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Stellar has also agreed to certain covenants in the Merger Agreement with respect to its obligations to file a joint proxy statement/prospectus for a special meeting of its shareholders to approve the Merger Agreement and the related transactions. Stellar shall submit a new equity incentive plan and a new employee stock purchase plan, each of which is reasonably acceptable to Phunware and Stellar, to its shareholders for their ratification and approval. The Merger Agreement may be terminated under certain customary and limited circumstances at any time prior to the Closing, including among other reasons, (1) by Stellar or Phunware if the Closing has not occurred on or before May 24, 2018 (provided, that if Stellar seeks and receives the approval of its shareholders for an additional extension, the termination date shall be extended to the earlier of (i) December 26, 2018 or (ii) if Stellar and Phunware mutually agree to an earlier date for such extension, such earlier date), (2) by either party if a governmental authority has issued a final non-appealable order or action preventing the transactions, (3) by either party in the event of the other party’s uncured breach (subject to certain materiality qualifiers), (4) by Stellar if there is an event or events that constitute a Material Adverse Effect on Phunware that continue and are incurable or uncured after 20 days’ notice, (5) by Stellar if the Phunware Board effects a change in their recommendation for the transaction, which is permitted under certain circumstances specified in the Merger Agreement and described below under the heading “The Merger Agreement and Related Agreements — Merger Agreement — Covenants of the Parties”, (6) by either party if either Stellar’s shareholders or Phunware’s stockholders do not approve the Merger Agreement and related transactions, or (7) by either party if ten business days elapse from the date of the Stellar Special Meeting and Stellar has less than $19 million in cash, net of its unpaid expenses and liabilities and payments required for redemptions.

 

In the event that the Merger Agreement is terminated either (i) by Stellar for a change in recommendation by the Phunware Board or (ii) by either Stellar or Phunware for Phunware failing to receive the approval of its stockholders after a change in recommendation by the Phunware Board, then Phunware shall pay to Stellar a cash termination fee equal to $12,000,000. The Merger Agreement does not provide for any other circumstances where a termination fee would be payable Phunware and does not provide for any termination fees payable by Stellar in connection with a termination of the Merger Agreement.

 

The Sponsors and certain of the officers, directors and shareholders of Phunware holding at least 1% of the outstanding shares of capital stock of Phunware on a fully diluted basis prior to the Closing have agreed that they will not, subject to certain exceptions, transfer, sell, tender or otherwise dispose of the shares of common stock of the Successor that they will receive as a result of the Merger for a certain period of time. Such shareholders will enter into lock-up agreements prior to the closing to evidence such restrictions. Please read the section entitled “The Business Combination Proposals — Lock-Up Agreement.”

 

In addition, at the time of entry into the Merger Agreement, Phunware provided Stellar with the executed Voting Agreements from certain of Phunware’s stockholders affiliated with directors of Phunware. Under the Voting Agreements, the Phunware stockholders party thereto will generally agree to vote all of their Phunware shares in favor of the Merger Agreement and related transactions and to otherwise take certain other actions in support of the Merger Agreement and related transactions and refrain from taking actions that would adversely affect such Phunware stockholder’s ability to perform its obligations under the Voting Agreement. Each Voting Agreement prevents transfers of the Phunware shares held by the Phunware stockholder party thereto between the date of the Voting Agreement and the date of the meeting of Phunware stockholders.

 

Furthermore, each of the Sponsors entered into a voting agreement (the “Sponsor Voting Agreement”) whereby the Sponsors have agreed to vote all of their shares of Stellar in favor of the Merger Agreement and the related transactions and to otherwise take certain other actions in support of the Merger Agreement and related transactions and refrain from taking actions that would adversely affect such Sponsor’s ability to perform its obligations under the Sponsor Voting Agreement. Each Sponsor Voting Agreement prevents transfers of the Stellar shares held by the Sponsors between the date of the Sponsor Voting Agreement and the date of the meeting of Stellar shareholders.

 

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The 2018 Equity Incentive Plan Proposal

 

Stellar is proposing that its shareholders approve the 2018 Equity Incentive Plan (the “2018 Equity Incentive Plan”) which will become effective upon the business day immediately prior to the Closing and will be used by the Successor on a going-forward basis following the Closing. The 2018 Equity Incentive Plan has the following principal features:

 

Types of Awards: The 2018 Equity Incentive Plan provides for the following types of awards: incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares.

 

Grant of Awards; Shares Available for Awards: Certain employees, directors and consultants will be eligible to receive grants of awards under the 2018 Equity Incentive Plan. If the shareholders approve the 2018 Equity Incentive Plan Proposal, the number of shares of common stock available for issuance under the 2018 Equity Incentive Plan will be equal to 5% of the Successor’s common stock, plus any shares of common stock subject to awards granted under the Phunware 2009 Equity Incentive Plan (the “2009 Equity Incentive Plan”), that, on or after the Closing, are assumed in connection with the Closing, or expire or are forfeited, plus an annual increase on the first day of each fiscal year beginning with the 2019 fiscal year, as discussed in more detail in the 2018 Equity Incentive Plan Proposal.

 

Stock Options: Stock options in the form of nonstatutory stock options or incentive stock options may be granted under the 2018 Equity Incentive Plan. The exercise price of any options granted under the 2018 Equity Incentive Plan must at least be equal to the fair market value of the Successor’s common stock on the date of grant. The term of an incentive stock option may not exceed ten years, except that with respect to any participant who owns more than 10% of the voting power of all classes of the Successor’s outstanding stock, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date.

 

Stock Appreciation Rights: Stock appreciation rights may be granted under the 2018 Equity Incentive Plan. Stock appreciation rights may not have a term exceeding ten years and the per share exercise price for the shares to be issued pursuant to the exercise of a stock appreciation right will be no less than 100% of the fair market value per share on the date of grant.

 

Restricted Stock and Restricted Stock Units. Restricted stock and restricted stock units may be granted under the 2018 Equity Incentive Plan. The 2018 Equity Incentive Plan administrator may impose whatever conditions to vesting it determines to be appropriate; provided, however, that the administrator, in its sole discretion, may accelerate the time at which any restrictions will lapse or be removed.

 

Performance Units and Performance Shares. Performance units and performance shares may be granted under the 2018 Equity Incentive Plan. The 2018 Equity Incentive Plan administrator may impose whatever conditions to vesting it determines to be appropriate which, depending on the extent to which they are met, will determine the number and/or the value of performance units and performance shares to be paid out to participants; provided, however, that the administrator, in its sole discretion, may accelerate the time at which any restrictions will lapse or be removed.

 

The Stellar Board has concluded that the adoption of the 2018 Equity Incentive Plan will promote the purposes of the 2018 Equity Incentive Plan which are to:

 

Attract and retain the best available personnel for positions of substantial responsibility;

 

Provide additional incentive to employees, directors and consultants; and

 

Promote the success of the Successor’s business.

 

A summary of the 2018 Equity Incentive Plan is set forth in the section entitled “The 2018 Equity Incentive Plan Proposal” of this joint proxy statement/prospectus and a complete copy of the 2018 Equity Incentive Plan is attached hereto as Annex D.

 

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The 2018 ESPP Proposal

 

Stellar is proposing that its shareholders approve the 2018 Employee Stock Purchase Plan (the “2018 ESPP”). Even if approved, the Successor has chosen to delay commencing the 2018 ESPP until such date in the future, if ever, following the Closing that the Successor’s board of directors determines in its sole discretion that it is in the Successor’s best interest to do so. The 2018 ESPP has the following principal features:

 

Eligibility: Any eligible employee on a given enrollment date will be eligible to participate in the 2018 ESPP. Generally, all of the Successor’s employees will be eligible to participate if they are employed by the Successor, or any participating subsidiary, for at least twenty hours per week and more than five months in any calendar year, subject to certain limitations discussed in more detail in the 2018 ESPP Proposal.

 

Shares Available Under the 2018 ESPP: If the shareholders approve the 2018 ESPP Proposal, 1% of the post-closing outstanding shares of the Successor’s common stock will be made available for sale under the 2018 ESPP. The number of shares of the Successor’s common stock that may be made available for sale under the 2018 ESPP also includes an annual increase on the first day of each fiscal year beginning for the fiscal year following the fiscal year in which the first enrollment date (if any) occurs, as discussed in more detail in the 2018 ESPP Proposal.

 

Contributions: The 2018 ESPP permits participants to purchase shares of the Successor’s common stock through payroll deductions of up to an amount of their eligible compensation determined by the administrator.

 

Offering Periods: The offering periods under the 2018 ESPP will begin on such date as determined by the administrator and expire on the earliest to occur of (a) the completion of the purchase of shares on the last exercise date occurring within twenty-seven months following the enrollment date of the offering period, or (b) a shorter period established by the administrator prior to the start of the offering period.

 

The Stellar Board has concluded that the adoption of the 2018 ESPP will promote the purposes of the 2018 ESPP which are to provide employees of the Successor and its subsidiaries the opportunity to purchase shares of the Successor’s common stock through accumulated contributions.

 

A summary of the 2018 ESPP is set forth in the section entitled “The 2018 ESPP Proposal” of this joint proxy statement/prospectus and a complete copy of the 2018 ESPP is attached hereto as Annex E.

 

The Share Issuance Proposal

 

The Nasdaq listing rules require that Stellar obtain shareholder approval for issuances of securities in excess of 20% of its issued and outstanding common stock prior to the issuance. In connection with the approval of the Stellar Business Combination Proposal, Stellar’s shareholders will be asked to consider and vote upon a proposal to approve, for purposes of complying with applicable Nasdaq listing rules, the issuance of securities in excess of 20% of Stellar’s issued and outstanding common stock, including the shares of Stellar’s common stock issuable upon the exchange of such securities and financing in connection with the consummation of the Business Combination. Please see the section entitled “The Share Issuance Proposal.”

 

The Director Election Proposal

 

Pursuant to the Merger Agreement, Stellar is proposing the election by shareholders of the following individuals, who will take office immediately following the Closing and who will constitute all the members of the board of directors of the Successor: Alan Knitowski, Prokopios (Akis) Tsirigakis, George Syllantavos, Randall Crowder, Lori Tauber Marcus, Keith Cowan and Kathy Mayor. In addition, it is anticipated that ____ will be designated Chairman of the Successor’s board of directors. Please see the section entitled “The Director Election Proposal.”

 

The Stellar Adjournment Proposal

 

The Stellar Adjournment Proposal, if adopted, will allow its board of directors to adjourn the special meeting of shareholders to a later date or dates to permit further solicitation of proxies. The Stellar Adjournment Proposal will only be presented to Stellar’s shareholders in the event that, based on the tabulated votes, there are not sufficient votes at the time of the Stellar Special Meeting to approve one or more of the proposals presented at such meeting. In no event will the board of directors adjourn the Stellar Special Meeting or consummate the Merger beyond the date by which it may properly do so under Stellar’s amended and restated Articles of Incorporation and the BCA.

 

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Date, Time and Place of Special Meeting of Stellar’s Shareholders

 

The Stellar Special Meeting will be held at _______ a.m. Eastern Time, on ________, 2018, at the offices of Ellenoff Grossman & Schole LLP, at 1345 Avenue of the Americas, 11th Floor, New York, New York 10105, or at such other date, time and place to which such meeting may be adjourned or postponed, to consider and vote upon the Stellar Proposals.

 

Stellar Record Date; Outstanding Shares; Shareholders Entitled to Vote

 

Stellar has fixed the close of business on _________, 2018, as the Record Date for determining Stellar shareholders entitled to notice of and to attend and vote at the Stellar Special Meeting. As of the close of business on _______, 2018, there were ___________ Stellar Shares outstanding and entitled to vote. Each Stellar Share is entitled to one vote per share at the Stellar Special Meeting.

 

Pursuant to the Sponsor Voting Agreements with Stellar, 2,003,403 Founder Shares owned by the Initial Shareholders will be voted in favor of the Stellar Business Combination Proposal.

 

Proxy Solicitation

 

Proxies with respect to the Stellar Special Meeting may be solicited by telephone, by facsimile, by mail, on the Internet or in person. We have engaged Advantage Proxy to assist in the solicitation of proxies. If a shareholder grants a proxy, it may still vote its shares in person if it revokes its proxy before the Stellar Special Meeting. A shareholder may also change its vote by submitting a later-dated proxy, as described in the section entitled “Special Meeting of the Shareholders of Stellar — Revoking Your Proxy-Changing Your Vote.”

 

Quorum and Required Vote for Stellar Proposals

 

A quorum of Stellar shareholders is necessary to hold a valid meeting. The presence, in person or by proxy, of Stellar shareholders representing a majority of the total votes of the Stellar common stock issued and outstanding on the Stellar Record Date and entitled to vote on the resolutions to be considered at the Stellar Special Meeting will constitute a quorum for the Stellar Special Meeting.

 

Each of the Redomestication Proposal, the Stellar Business Combination Proposal, the 2018 Equity Incentive Plan Proposal, the 2018 ESPP Proposal, and the Director Election Proposal, is interdependent upon the others and the Business Combination, 2018 Equity Incentive Plan, the 2018 ESPP Proposal, the Share Issuance Proposal and the Stellar Adjournment Proposal (if presented) must be approved by majority of the voting Stellar Shares as of the Stellar Record Date voted at the Stellar Special Meeting in order for Stellar to consummate the Business Combination. The Redomestication Proposal must be approved by at least a two-thirds majority of the voting Stellar Shares as of the Stellar Record Date. Each nominee presented in connection with the Director Election Proposal must be approved by a plurality of the votes cast at the Stellar Special Meeting.

 

In connection with execution of the Merger Agreement, certain Stellar shareholders holding an aggregate of 1,826,644 shares have entered into the Sponsor Voting Agreements. At November 2, 2018, there were 3,961,287 shares of Stellar common stock outstanding. As a result, in addition to shares owned by the Initial Shareholders, including shares that are subject to the Sponsor Voting Agreements, Stellar would need only 531,291, or 28.7%, of the 1,851,720 Public Shares to be voted in favor of the Redomestication Proposal in order to have such proposal approved. Assuming all outstanding shares of Stellar’s common stock are voted, Stellar would not need any of the 1,851,720 Public Shares to be voted in favor of each of the Stellar Business Combination Proposal, the 2018 Equity Incentive Plan Proposal, the 2018 ESPP Proposal, the Share Issuance Proposal and the Stellar Adjournment Proposal (if presented) in order to have each of such proposals approved.

 

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Interests of Stellar’s Directors and Officers in the Business Combination

 

When you consider the recommendation of the Stellar Board in favor of approval of the Stellar Business Combination Proposal, you should keep in mind that an argument could be made that the Initial Shareholders, including its directors and executive officers, have interests in such proposal that are different from, or in addition to, those of Stellar shareholders and warrant holders generally. These interests include, among other things, the interests listed below:

 

If Stellar does not consummate its initial business combination transaction by December 26, 2018 (or such later date approved by its shareholders), it would cease all operations except for the purpose of winding up, redeeming all of the outstanding Public Shares for cash and, subject to the approval of its remaining shareholders and the Stellar Board, dissolving and liquidating, subject in each case to Stellar’s obligations under the BCA to provide for claims of creditors and the requirements of other applicable law. In such event, the 2,003,403 Founder Shares owned by the Initial Shareholders would be worthless because following the redemption of the Public Shares, Stellar would likely have few, if any, net assets and because the Initial Shareholders have agreed to waive their rights to liquidating distributions from the Trust Account with respect to the Founder Shares if Stellar fails to complete its initial business combination within the required period. The Sponsors purchased the Founder Shares prior to Stellar’s IPO for an aggregate purchase price of $25,000, or approximately $0.013 per share. Such Founder Shares had an aggregate market value of $20.2 million based upon the closing price of $10.5 per share on the Nasdaq on November 1, 2018, the most recent closing price.

 

In addition, simultaneously with the closing of Stellar’s IPO, and underwriters’ partial exercise of their over-allotment option, Stellar consummated the sale of 7,970,488 Private Placement Warrants at a price of $0.50 per warrant in a private placement to the Sponsors. The Private Placement warrants are each exercisable for one share of Stellar common stock at $11.50 per share. If Stellar does not consummate its initial business combination transaction by December 26, 2018 (or such later date approved by its shareholders), then the aggregate proceeds of $3,985,244 from the sale of the Private Placement Warrants will be part of the liquidating distribution to the Public Shareholders and the warrants held by the Sponsors will be worthless. The warrants held by the Sponsors had an aggregate market value of $1.59 million based upon the closing price of $10.20 per warrant on the Nasdaq on November 1, 2018, the most recent closing price.

 

Prokopios (Akis) Tsirigakis, Stellar’s Chairman and co-Chief Executive Officer and President, and George Syllantavos, its co-Chief Executive Officer, Chief Financial Officer, Secretary and Director, will be directors of the Successor after the consummation of the Business Combination. As such, in the future they may receive any cash fees, stock options, stock awards or other remuneration that the Successor’s board of directors determines to pay to each of them.

 

In order to protect the amounts held in the Trust Account, Messrs. Tsirigakis and Syllantavos agreed that they will be jointly liable to Stellar if and to the extent any claims by a vendor for services rendered or products sold to Stellar, or a prospective target business with which Stellar has discussed entering into a transaction agreement, reduce the amount of funds in the Trust Account below (i) $10.60 per Public Share (or such higher amount then held in trust) or (ii) such lesser amount per Public Share held in the Trust Account as of the date of the liquidation of the Trust Account due to reductions in the value of the trust assets, in each case net of the interest which may be withdrawn to pay taxes and working capital, except as to any claims by a third party who executed a waiver of any and all rights to seek access to the Trust Account and except as to any claims under Stellar’s indemnity of the underwriters of its IPO against certain liabilities, including liabilities under the Securities Act.

   

On each of August 24, 2017, November 24, 2017 and February 23, 2018, Stellar issued unsecured promissory notes (such notes, together with notes issued by the Sponsors in connection with the May 2018 Extension and the August 2018 Extension, the “Sponsor Notes”) in the aggregate amount of $303,300, $301,000, and $167,100, respectively, to three of the Sponsors.

           

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In connection with the May 2018 Extension, the Sponsors agreed to contribute to Stellar as a loan $0.035 for each Public Share that was not redeemed, for each calendar month (commencing on May 24, 2018 and on the 24th day of each subsequent month), or portion thereof, that is needed by Stellar to complete its initial business combination from May 24, 2018 until August 24, 2018, which were deposited in the Trust Account. Accordingly, The Sponsors loaned $37,034 to Stellar on each May 23, 2018, June 23, 2018 and August 23, 2018. Since Stellar took the full time through August 24, 2018 to complete its initial business combination, the redemption amount per share as of August 24, 2018 was approximately $10.48 per share. In connection with the August 2018 Extension, the Sponsors agreed to contribute to Stellar as a loan $0.04 for each Public Share that was not redeemed, for each calendar month (commencing on August 24, 2018 and on the 24th day of each subsequent month), or portion thereof, that is needed by Stellar to complete its initial business combination from August 24, 2018 until December 26, 2018, to be deposited in the Trust Account. Accordingly, the Sponsors will contribute an aggregate of approximately $158,452 within five calendar days from the beginning of each such calendar month (or portion thereof), with the initial Contribution contributed by August 29, 2018. On each of August 23, 2018, September 24, 2018 and October 24, 2018, the Sponsors loaned $37.034 to Stellar. If Stellar takes the full time through December 26, 2018 to complete its initial business combination, the redemption amount per share at the meeting for such business combination or Stellar’s subsequent liquidation will be approximately $10.64 per share.

 

As of the date of this joint proxy statement/prospectus, the outstanding balance of loans to the Sponsors is $1,068,750. The Sponsor Notes bear no interest and are repayable in full upon consummation of Stellar’s initial business combination. The Sponsors have the option to convert any unpaid balance of the Sponsor Notes into warrants exercisable for shares of Stellar’s common stock, based on a conversion price of $0.50 per warrant. The terms of any such warrants shall be identical to the terms of the warrants issued pursuant to the private placement that was consummated by Stellar in connection with its IPO.

 

Upon consummation of the Business Combination, the Sponsors, Stellar’s officers and directors and their respective affiliates would be entitled to reimbursement for any reasonable out-of-pocket expenses related to identifying, investigating and consummating an initial business combination, and repayment of any other loans, if any, and on such terms as to be determined by Stellar from time to time, made by the Sponsors or certain of Stellar’s officers and directors to finance transaction costs in connection with an intended initial business combination. However, if Stellar fails to consummate its initial business combination within the required period, the Sponsors and Stellar’s officers and directors and their respective affiliates will not have any claim against the Trust Account for reimbursement.

       

Recommendation to Shareholders of Stellar

 

The Stellar Board believes that the Redomestication Proposal, the Stellar Business Combination Proposal, the 2018 Equity Incentive Plan Proposal, the 2018 ESPP Proposal, the Share Issuance Proposal, the Director Election Proposal and, if presented, the Stellar Adjournment Proposal are in the best interest of Stellar’s shareholders and recommends that its shareholders vote “FOR” each of these proposals.

 

The existence of any financial and personal interests of one or more of Stellar’s directors may be argued to result in a conflict of interest on the part of such director(s) between what he, she or they may believe is in the best interests of Stellar and its shareholders and what he, she or they may believe is best for himself, herself or themselves in determining to recommend that shareholders vote for the proposals. See the section entitled “Stellar Business Combination Proposal — Directors and Officers and Others in the Business Combination” in the accompanying joint proxy statement/prospectus for a further discussion of this.

 

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Phunware

 

Phunware is a provider of MaaS solutions, an integrated customer engagement platform that enables organizations to develop customized, immersive, branded mobile applications. Phunware sells its services in verticals including healthcare, retail, hospitality, transportation, sports and entertainment, Phunware enables brands to engage, manage and monetize their anytime-anywhere mobile users. Phunware’s MaaS technology is available in software development kit (“SDK”) form for organizations developing their own applications, via customized development services as well as prepackaged solutions. Through its integrated mobile advertising platform of publishers and developers, Phunware also maximizes mobile monetization through an advertising product suite including self-service media buying, real-time bidding (“RTB”), publisher mediation and yield optimization, cross-platform ad creation and dynamic ad serving.

 

Proposals for the Phunware Special Meeting

 

The following is a summary of the proposals for the Phunware Special Meeting.

 

Phunware Business Combination Proposal

 

Stellar and Phunware have agreed to the proposed Business Combination under the terms of the Merger Agreement dated as of February 27, 2018, by and among Stellar, Merger Sub and Phunware. Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the Closing, Merger Sub will merge with and into Phunware, with Phunware continuing as the surviving entity and becoming a wholly-owned subsidiary of the Successor. See the section entitled “The Phunware Business Combination Proposal.”

 

Pursuant to the Merger Agreement, upon the Closing, (i) the shares of common stock of Phunware issued and outstanding immediately prior to the Merger will be cancelled in exchange for the right to receive (A) an aggregate number of shares of Successor common stock equal to the quotient of the aggregate merger consideration of $301,000,000, divided by the Redemption Price and (B) a number of the warrants to purchase shares of Successor common stock in exchange for the Private Placement Warrants that are currently held by the Sponsors that the Phunware stockholders elect to purchase at a price of $0.50 per warrant by reducing their shares of Successor common stock by the equivalent value, (ii) all outstanding warrants to acquire shares of Phunware Stock will be cancelled in exchange for the right to receive a new warrant to purchase shares of Successor common stock and (iii) all outstanding options of Phunware will be assumed by the Successor. See the section entitled “The Stellar Business Combination Proposals — General Description of the Merger Agreement and Merger Consideration.”

 

After consideration of the factors identified and discussed in the section entitled “Phunware Business Combination Proposal — Phunware’s Board of Directors’ Reasons for the Business Combination”, the Phunware Board concluded that the Business Combination, on the terms and conditions set forth in the Merger Agreement and other related documents, is advisable and fair to and in the best interests of, Phunware’s stockholders.

 

For additional information, see the section entitled “Phunware Business Combination Proposal” in this joint proxy statement/prospectus.

 

Phunware Preferred Stock Conversion Proposal

 

Pursuant to the Merger Agreement, the holders of Phunware common stock will be entitled to the right to receive the applicable portion of merger consideration. As a result, in order to participate in the merger consideration provided to the holders of Phunware common stock, the holders of Phunware preferred stock have requested the automatic conversion of all outstanding shares of Phunware preferred stock into shares of Phunware common stock, effective as of immediately prior to the closing of the Merger on a conversion ratio of one share of Phunware common stock per one share of Phunware preferred stock.

 

For additional information, see the section entitled “Phunware Preferred Stock Conversion Proposal” in this joint proxy statement/prospectus.

 

Date, Time and Place of Special Meeting of Phunware’s Stockholders

 

The special meeting of the stockholders of Phunware will be held at 7800 Shoal Creek Blvd, Suite 230-S, Austin, TX 78757 on ______, 2018, at ______, Central Time, to consider and vote upon the proposals to be put to the Phunware Special Meeting.

 

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Voting Power; Record Date of Special Meeting of Phunware’s Stockholders

 

Phunware stockholders are entitled to vote or direct votes to be cast at the special meeting if they owned shares of Phunware Stock at the close of business on October 31, 2018, which is the Phunware Record Date for the Phunware Special Meeting.

 

Each share of Phunware common stock outstanding as of the Phunware Record Date is entitled to one (1) vote per share at the Phunware Special Meeting;

 

Each share of Phunware Series A Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series A Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

Each share of Phunware Series B Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series B Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

Each share of Phunware Series C Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series C Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

Each share of Phunware Series D Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series D Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

Each share of Phunware Series D-1 Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series D-1 Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

Each share of Phunware Series E Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series E Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

Each share of Phunware Series F Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series F Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

Each share of Phunware Series Alpha Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series Alpha Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

Each share of Phunware Series Beta Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series Beta Preferred Stock held by such holder could be converted as of the Phunware Record Date; and

 

Each share of Phunware Series Gamma Prime Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series Gamma Prime Preferred Stock held by such holder could be converted as of the Phunware Record Date.

 

As of the Phunware Record Date,

 

Each share of Phunware Series A Preferred Stock was convertible into one share of Phunware common stock;

 

Each share of Phunware Series B Preferred Stock was convertible into one share of Phunware common stock;

 

Each share of Phunware Series C Preferred Stock was convertible into one share of Phunware common stock;

 

Each share of Phunware Series D Preferred Stock was convertible into one share of Phunware common stock;

 

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Each share of Phunware Series D-1 Preferred Stock was convertible into one share of Phunware common stock;

 

Each share of Phunware Series E Preferred Stock was convertible into one share of Phunware common stock;

 

Each share of Phunware Series F Preferred Stock was convertible into one share of Phunware common stock;

 

Each share of Phunware Series Alpha Preferred Stock was convertible into one share of Phunware common stock;

 

Each share of Phunware Series Beta Preferred Stock was convertible into one share of Phunware common stock; and

 

Each share of Phunware Series Gamma Prime Preferred Stock was convertible into one share of Phunware common stock.

 

As of the close of business on the Phunware Record Date, there were 7,793,462 shares of Phunware common stock, 3,169,089 shares of Phunware Series A Preferred Stock, 2,011,990 shares of Phunware Series B Preferred Stock, 5,223,752 shares of Phunware Series C Preferred Stock, 3,709,078 shares of Phunware Series D Preferred Stock, 4,724,873 shares of Phunware Series D-1 Preferred Stock, 10,097,720 shares of Phunware Series E Preferred Stock, 12,078,948 shares of Phunware Series F Preferred Stock, 3,277,159 shares of Phunware Series Alpha Preferred Stock, 2,402,402 shares of Phunware Series Beta Preferred Stock and 1,977,857 shares of Phunware Series Gamma Prime Preferred Stock outstanding and entitled to vote.

 

Quorum and Vote of Phunware Stockholders

 

A quorum of Phunware stockholders is necessary to hold a valid meeting. The presence, in person or by proxy, of a majority of the votes which could be cast by the holders of all outstanding shares of stock entitled to vote at the meeting shall be necessary and sufficient to constitute a quorum at the Phunware Special Meeting, including a majority of the outstanding shares of any class or series or classes or series, present in person or represented by proxy, where a separate vote by such class or series or classes or series is required. Abstentions, while considered present for the purposes of establishing a quorum, will not count as votes cast at the special meeting.

 

As of the Phunware Record Date for the special meeting, the following shares of Phunware representing the following classes and series would be required to achieve a quorum:

 

28,243,161 shares of common stock and preferred stock, voting together as a single class on an as-converted basis;

 

24,346,429 shares of preferred stock, voting together as a single class on an as-converted basis; and

 

6,039,475 shares of Series F Preferred Stock, voting exclusively as a single class on an as-converted basis.

 

The Phunware Proposals presented at the Phunware Special Meeting require the following approvals: (A) the Phunware Business Combination Proposal requires the affirmative vote of (x) a majority of the shares of outstanding capital stock of Phunware, voting together as a single class on an as-converted basis, (y) a majority of the outstanding shares of preferred stock of Phunware, voting together as a single class on an as-converted basis, and (z) a majority of the outstanding shares of Phunware Series F Preferred Stock, voting exclusively as a single class on an as-converted basis, (B) the Preferred Stock Conversion Proposal requires the affirmative vote of (x) a majority of the outstanding shares of preferred stock of Phunware, voting together as a single class on an as-converted basis, and (y) a majority of the outstanding shares of Phunware Series F Preferred Stock, voting exclusively as a single class on an as-converted basis and (C) the Adjournment Proposal requires the affirmative vote of the holders of a majority of the shares of outstanding capital stock of Phunware.

 

Appraisal Rights for Phunware Stockholders

 

Phunware stockholders will be entitled to appraisal rights, sometimes referred to as dissenters’ rights but only if they comply with the Delaware law procedures summarized in the section entitled “Appraisal Rights.” The entirety of section 262 of the DGCL is provided on Annex F to this joint proxy statement/prospectus. Upon the consummation of the Business Combination, any Phunware stockholder who has perfected its dissenters’ rights will have the right to have a court in Delaware determine the value of each share of stock and to be paid the appraised value determined by the court, which could be more or less than the merger consideration.

 

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Proxy Solicitation for Phunware

 

Proxies may be solicited by mail, telephone or in person.

 

If a stockholder grants a proxy, it may still vote its shares in person if it revokes its proxy before the Phunware Special Meeting. A stockholder also may change its vote by submitting a later-dated proxy as described in the section entitled “Special Meeting of Phunware Stockholders—Revoking Your Proxy”.

 

Interests of Phunware’s Directors and Officers in the Business Combination

 

When you consider the recommendation of the Phunware Board in favor of approval of the Phunware Business Combination Proposal, Preferred Stock Conversion Proposal and, if presented, the Phunware Adjournment Proposal, you should keep in mind that Phunware’s directors and officers may be argued to have interests in such proposal that are different from, or in addition to those of Phunware stockholders generally. These interests include, among other things, the interests listed below:

 

The fact that certain of Phunware’s directors and officers will continue to be directors and executive officers of the Successor after the consummation of the Business Combination. As such, in the future they will receive any cash fees, stock options or stock awards that the Successor board of directors determines to pay to its directors and officers.

 

Upon consummation of the Business Combination and the issuance of Successor common stock in connection with the consummation of the Business Combination, the directors and officers of Phunware will collectively beneficially own approximately 23% of the outstanding common stock of Successor.

 

The existence of any financial and personal interests of Phunware directors may be argued to result in a conflict of interest on the part of one or more of them between what he or she may believe is best for Phunware. See the sections entitled “Risk Factors” and “Phunware Business Combination Proposal—Interests of Phunware’s Directors and Officers in the Business Combination” for a further discussion of this and other risks.

 

Recommendation to Stockholders of Phunware

 

The Phunware Board believes that the Phunware Business Combination Proposal, Preferred Stock Conversion Proposal and, if presented, the Phunware Adjournment Proposal are in the best interest of Phunware’s stockholders and recommends that its stockholders vote “FOR” the Phunware Business Combination Proposal and the Preferred Stock Conversion Proposal, and, if presented, “FOR” the Phunware Adjournment Proposal.

 

The existence of any financial and personal interests of one or more of Phunware’s directors may be argued to result in a conflict of interest on the part of such director(s) between what he, she or they may believe is in the best interests of Phunware and its stockholders and what he, she or they may believe is best for himself, herself or themselves in determining to recommend that stockholders vote for the proposals. See the section entitled “Phunware Business Combination Proposal — Interests of Phunware’s Directors and Officers in the Business Combination” in the accompanying joint proxy statement/prospectus for a further discussion of this.

 

The Business Combination

 

The Business Combination will be accounted for as a reverse recapitalization in accordance with GAAP. Under a reverse recapitalization, the shares of Stellar remaining after Redemptions by Public Shareholders, and the unrestricted net cash and cash equivalents of Stellar on the date that the Business Combination is consummated, will be accounted for as a capital infusion into Phunware whereby all of the expenses incurred by Phunware related to the Business Combination will be charged to additional paid-in capital upon consummation of the Business Combination.

 

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QUESTIONS AND ANSWERS FOR ALL STELLAR SHAREHOLDERS AND

PHUNWARE STOCKHOLDERS

 

Q.Why am I receiving this joint proxy statement/prospectus?

 

A. Stellar and Phunware are proposing to enter into a business combination pursuant to the Merger Agreement, dated as of February 27, 2018, as may be amended or supplemented from time to time and as amended by the First Amendment to the Merger Agreement dated as of November 1, 2018 (the “First Amendment to the Merger Agreement”). Copies of the Merger Agreement and the First Amendment to the Merger Agreement are attached to this joint proxy statement/prospectus as Annex C and Annex C-1, respectively, and you are encouraged to read the Merger Agreement in its entirety. Pursuant to the Merger Agreement, and following the Redomestication of Stellar to Delaware, Merger Sub will merge with and into Phunware, with Phunware as the surviving corporation.

 

Consummation of the Business Combination requires the approval of the following:

 

With respect to Stellar, the approval of (x) the Redomestication Proposal will require the affirmative vote of two-thirds of outstanding Stellar Shares who attend and vote at the Stellar Special Meeting, and (y) the Stellar Business Combination Proposal and the Share Issuance Proposal will each require the affirmative vote of the majority of outstanding Stellar Shares who attend in person or by proxy and vote at the Stellar Special Meeting.

 

With respect to Phunware, the following approvals: (A) the Phunware Business Combination Proposal requires the affirmative vote of (x) a majority of the shares of outstanding capital stock of Phunware, voting together as a single class on an as-converted basis, (y) a majority of the outstanding shares of preferred stock of Phunware, voting together as a single class on an as-converted basis, and (z) a majority of the outstanding shares of Phunware Series F Preferred Stock, voting exclusively as a single class on an as-converted basis, (B) the Preferred Stock Conversion Proposal requires the affirmative vote of (x) a majority of the outstanding shares of preferred stock of Phunware, voting together as a single class on an as-converted basis, and (y) a majority of the outstanding shares of Phunware Series F Preferred Stock, voting exclusively as a single class on an as-converted basis and (C) the Adjournment Proposal requires the affirmative vote of the holders of a majority of the shares of the outstanding capital stock of Phunware.

 

Upon the effectiveness of the Redomestication, all outstanding securities of Stellar will be deemed to constitute outstanding securities of the continuing Delaware corporation.

 

YOUR VOTE IS IMPORTANT. YOU ARE ENCOURAGED TO VOTE AS SOON AS POSSIBLE AFTER CAREFULLY REVIEWING THIS JOINT PROXY STATEMENT/PROSPECTUS.

 

Q. Why are Stellar and Phunware proposing the Business Combination?

 

A. Stellar was organized to effect a merger, capital stock exchange, asset acquisition or other similar business combination with one or more businesses or entities. Phunware 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 also creates, licenses and manages category-defining mobile experiences for brands and their application users worldwide. Phunware also offers its platform as Software-as-a-Service (“SaaS”), Data-as-a-Service (“DaaS”) and application transactions media. Based on its due diligence investigations of Phunware and the industry in which it operates, including the financial and other information provided by Phunware in the course of Stellar’s due diligence investigations, Stellar believes that a business combination with Phunware presents a unique business combination opportunity. The Stellar Board believes that, in light of the foregoing, the Business Combination with Phunware presents an opportunity to increase shareholder value. However, there is no assurance of this.

 

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Q.What will Phunware’s stockholders receive in return for the acquisition of Phunware by Stellar?

 

A. Pursuant to the Merger Agreement (i) the shares of common stock of Phunware issued and outstanding immediately prior to the Merger will be cancelled in exchange for the right to receive (A) an aggregate number of shares of Successor common stock equal to the quotient of the aggregate merger consideration of $301,000,000, divided by the Redemption Price and (B) a number of the warrants to purchase shares of Successor common stock in exchange for Private Placement Warrants that are currently held by the Sponsors that the Phunware stockholders elect to receive in lieu of shares of Successor common stock, (ii) all outstanding warrants to acquire shares of Phunware Stock will be cancelled in exchange for the right to receive a new warrant to purchase shares of Successor common stock and (iii) all outstanding options of Phunware will be assumed by the Successor.

 

By default, shares of Successor common stock issued to Phunware as consideration for the Merger shall be valued at a price per share equal to the price at which each share of Stellar common stock is redeemed pursuant to the redemption by Stellar of its Public Stockholders in connection with Stellar’s initial business combination, as required by its amended and restated Articles of Incorporation.

 

See the section entitled, “The Stellar Business Combination Proposal—General Description of the Merger Agreement and Merger Consideration.”

 

It is currently expected that the Business Combination will be consummated by December 15, 2018. The estimation of the merger consideration described above will change based upon, among other things, the total debt obligations and the cash and cash equivalents of Phunware and its subsidiaries at the Closing, each of which fluctuates in the ordinary course of business.

 

Q.What equity stake will current Stellar shareholders and current Phunware stockholders hold in the Successor immediately after the consummation of the Business Combination?

 

A. Assuming consummation of the Business Combination as of ______, 2018 (being the most recent date for which Phunware’s month end balance sheet data is available prior to the date of this joint proxy statement/prospectus), immediately following the consummation of the Business Combination (assuming, among other things, that no Stellar shareholders exercise redemption rights with respect to their common stock upon consummation of the Business Combination), the current equityholders of Phunware are expected to own approximately ___% of the outstanding Successor common stock and the current holders of Stellar Shares are expected to own approximately ____% of the outstanding Successor common stock.

 

Q. Why is Stellar proposing the Redomestication?

 

A. The Stellar Board believes that it would be in the best interests of the shareholders of Stellar to effect the Redomestication in order to align the legal structure of Stellar with the nature of Stellar’s business going forward. The Redomestication will be contingent upon the approval of the Business Combination by the Stellar shareholders and the Merger Agreement being in full force and effect prior to the Redomestication. Because the Successor will continue to operate as a corporation organized in the United States, it was the view of the Stellar Board that Stellar should also be structured as a corporation organized in the United States. In addition, the Stellar Board believes that the Redomestication will provide a greater measure of flexibility and simplicity in corporate transactions and will reduce the costs of doing business. In addition, the Stellar Board believes Delaware provides a recognized body of corporate law that will facilitate corporate governance by Stellar’s officers and directors. Delaware maintains a favorable legal and regulatory environment in which to operate and is the state in which a substantial number of smaller reporting companies are incorporated today. For many years, Delaware has followed a policy of encouraging companies to incorporate there and, in furtherance of that policy, has adopted comprehensive, modern and flexible corporate laws that are periodically updated and revised to meet changing business needs. As a result, many major corporations have initially chosen Delaware as their domicile or have subsequently reincorporated in Delaware in a manner similar to the procedures Stellar is proposing. Due to Delaware’s longstanding policy of encouraging incorporation in that state and consequently its popularity as the state of incorporation for many smaller reporting companies, the Delaware courts have developed a considerable expertise in dealing with corporate issues and a substantial body of case law has developed construing the DGCL and establishing public policies with respect to Delaware corporations. It is anticipated that the DGCL will continue to be interpreted and explained in a number of significant court decisions that may provide greater predictability with respect to our corporate legal affairs.

 

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Q.What happens to the funds deposited in the Trust Account after consummation of the Business Combination?

 

A. After consummation of the Business Combination, the funds in the Trust Account will be used to pay holders of the Public Shares who exercise Redemption Rights, to pay transaction expenses incurred in connection with the Business Combination, including approximately US$2.15 million in fees to Stellar’s investment bankers in connection with the transaction and for working capital of the Successor and its subsidiaries (consisting of Phunware and its direct and indirect subsidiaries (the “Combined Company”) and general corporate purposes of the Combined Company. Such funds may also be used to reduce the indebtedness and certain other liabilities of the Combined Company. As of November 1, 2018, there was cash and marketable securities held in the Trust Account of approximately $19.63 million. These funds will not be released until the earlier of the completion of our initial business combination or the Redemption of Stellar Public Shares if we are unable to complete a business combination by December 26, 2018 (or such later date approved by its shareholders).

 

Q. What happens if a substantial number of Public Shareholders vote in favor of the Stellar Business Combination Proposal and exercise their Redemption Rights?

 

A. Public Shareholders may vote in favor of the Business Combination and still exercise their Redemption Rights; provided, however, that in the event that the redemptions result in Stellar having less than $19 million in cash following the tenth day from the date of the Stellar Special Meeting (subject to certain exceptions), then either party may terminate the Merger Agreement, and the Business Combination will not be consummated as a result of such termination. See “– Risks Related to the Redomestication and Business Combination - Stellar does not currently have sufficient cash, including funds in the Trust Account, to satisfy the minimum cash asset level condition in the Merger Agreement required for the closing of the initial business combination. Unless Stellar is able to obtain sufficient additional financing, or Phunware agrees to modify or waive the minimum cash asset level condition, Stellar will be unable to satisfy the conditions to the closing of the initial business combination, and the initial business combination will not occur. There can be no assurance that Stellar will be able to obtain sufficient additional financing to satisfy the minimum cash asset level condition, that such financing will be available on acceptable terms or that Phunware will agree to modify or waive such condition.” Subject to the foregoing, the Business Combination may be consummated even though the funds available from the Trust Account and the number of Public Shareholders are substantially reduced as a result of Redemptions by Public Shareholders. With fewer Public Shares and Public Shareholders, the trading market for the Successor’s securities may be less liquid and the Successor may not be able to meet the listing standards for a national securities exchange. Furthermore, the funds available from the Trust Account for working capital purposes of the Combined Company after the Business Combination may not be sufficient for its future operations and may not allow the Combined Company to reduce Phunware’s indebtedness and/or pursue its strategy for growth.

 

Q.What conditions must be satisfied to complete the Merger?

 

A.Unless waived by the parties to the Merger Agreement, and subject to applicable law, the consummation of the Merger is subject to a number of conditions set forth in the Merger Agreement including, among others, receipt of the requisite shareholder approvals contemplated by this joint proxy statement/prospectus.

 

Q.When do you expect the Business Combination to be completed?

 

A. It is currently expected that the Business Combination will be consummated by December 15, 2018. This date depends, among other things, on the approval of the proposals to be put to Stellar shareholders at the Stellar Special Meeting. However, such meeting could be adjourned if the adjournment proposal is adopted by our shareholders at the Stellar Special Meeting and we elect to adjourn the Stellar Special Meeting to a later date or dates to permit further solicitation and vote of proxies if, based upon the tabulated vote at the time of the Stellar Special Meeting, each of the condition precedent proposals have not been approved.

 

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Q.Will Stellar enter into any financing arrangements in connection with the business combination that are not disclosed in this joint proxy statement/prospectus?

 

A.Stellar may enter into certain backstop arrangements and/or private placements of equity securities of the Purchaser which Phunware has consented to.

 

As the amount of any such equity issuances is not currently known, Stellar cannot provide exact figures as to percentage ownership that may result therefrom.

 

If Stellar enters into a binding commitment in respect of any such additional equity financing, Stellar will file a Current Report on Form 8-K with the SEC to disclose details of any such equity financing.

 

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QUESTIONS AND ANSWERS ABOUT THE STELLAR PROPOSALS

 

Q.Why am I receiving this joint proxy statement/prospectus?

 

A. You are receiving this joint proxy statement/prospectus in connection with the Stellar Special Meeting. Stellar is holding the Stellar Special Meeting to consider and vote upon the following seven proposals. Your vote is important. You are encouraged to vote as soon as possible after carefully reviewing this joint proxy statement/prospectus.

 

Stellar’s shareholders are being asked to consider and vote upon a proposal to change the corporate structure and domicile of Stellar by way of continuation from a corporation incorporated under the laws of the Republic of the Marshall Islands to a corporation incorporated under the laws of the State of Delaware (the “Redomestication Proposal”). The Redomestication will be effected by Stellar filing the Delaware Redomestication Documents with the Delaware Secretary of State and filing an application to de-register with the Registrar of Corporations of the Republic of the Marshall Islands. In connection with the Business Combination, Stellar will change its corporate name to “Phunware, Inc.” and all outstanding securities of Stellar will be deemed to constitute outstanding securities of the Successor, as described in more detail in this joint proxy statement/prospectus. The Redomestication is expected to become effective immediately prior to the consummation of the Business Combination. The form of the proposed Delaware Certificate of Incorporation of the Successor and the form of the proposed Bylaws of the Successor to become effective upon the Redomestication, are attached to the accompanying joint proxy statement/prospectus as Annex A and Annex B, respectively. See the section entitled “The Redomestication Proposal.

 

Stellar’s shareholders are also being asked to consider and vote upon a proposal to approve the Merger Agreement and the Business Combination contemplated thereby (the “Stellar Business Combination Proposal”). The Merger Agreement provides that, among other things, Stellar’s wholly-owned subsidiary, Merger Sub, will merge with and into Phunware, with Phunware continuing as the surviving entity and becoming a wholly-owned subsidiary of Stellar. Shareholder approval of the Merger Agreement and the transactions contemplated thereby is required by the Merger Agreement and by Stellar’s amended and restated articles of incorporation. A copy of each of the Merger Agreement and the First Amendment to the Merger Agreement is attached to this joint proxy statement/prospectus as Annex C and Annex C-1, respectively, and Stellar encourages its shareholders to read it in its entirety. See the section entitled “The Stellar Business Combination Proposal.”

 

Stellar’s shareholders are also being asked to consider and vote upon the 2018 Equity Incentive Plan and the 2018 ESPP. Among other things, the 2018 Equity Incentive Plan and the 2018 ESPP, which would each become effective following the consummation of the Business Combination, is intended to maintain and strengthen its ability to attract and retain key employees, directors, consultants and certain other individuals providing services to us and to motivate them to remain focused on long-term shareholder value. We refer to such proposals as the “2018 Equity Incentive Plan Proposal” and the “2018 ESPP Proposal”, respectively. See the sections entitled “The 2018 Equity Incentive Plan Proposal” and “The 2018 ESPP Proposal.” A copy of each of the 2018 Equity Incentive Plan and the 2018 ESPP is attached to this joint proxy statement/prospectus as Annex D and Annex E, respectively, and Stellar encourages its shareholders to read each plan in its entirety.

 

Stellar’s shareholders are also being asked to approve, for purposes of complying with applicable Nasdaq listing rules, the issuance of securities in excess of 20% of Stellar’s issued and outstanding common stock, including the shares of common stock issuable upon the exchange of such securities. We refer to this proposal as the “Share Issuance Proposal.” See the section entitled “The Share Issuance Proposal.”

 

Stellar’s shareholders are also being asked to elect a board of seven directors who, upon consummation of the Business Combination, will constitute all the members of the board of directors of the Successor. We refer to this proposal as the “Director Election Proposal.” See the section entitled “The Director Election Proposal.”

 

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Stellar’s shareholders are also being requested to consider and vote upon a proposal to adjourn the Special Meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if it is determined by Stellar that more time is necessary or appropriate to consummate the Business Combination. We refer to this proposal as the “Stellar Adjournment Proposal” and, together with the Redomestication Proposal, Stellar Business Combination Proposal, the 2018 Equity Incentive Plan Proposal, the 2018 ESPP Proposal and the Director Election Proposal, the “Stellar Proposals.”). See the section entitled “The Stellar Adjournment Proposal.”

 

The presence, in person or by proxy, of Stellar shareholders representing a majority of the total votes of the Stellar common stock issued and outstanding on the Stellar Record Date and entitled to vote on the resolutions to be considered at the Stellar Special Meeting will constitute a quorum for the Stellar Special Meeting.

 

Each of the Redomestication Proposal, the Stellar Business Combination Proposal, the 2018 Equity Incentive Plan Proposal, the 2018 ESPP Proposal and the Share Issuance Proposal is interdependent upon the others and the Business Combination, 2018 Equity Incentive Plan, the 2018 ESPP Proposal and the Share Issuance Proposals must be approved by the record holders of a majority of the voting Stellar Shares as of the Stellar Record Date in order for Stellar to consummate the Business Combination. The Redomestication Proposal must be approved by at least a two-thirds majority of the voting Stellar Shares as of the Stellar Record Date. The affirmative vote of a plurality of the votes cast at the Stellar Special Meeting by the holders of common stock entitled to vote in the election directors is required to elect directors. In connection with execution of the Merger Agreement, certain Stellar shareholders holding an aggregate of 1,826,644 shares have entered into Sponsor Voting Agreements. As of November 2, 2018, there were 3,961,287 shares of Stellar common stock outstanding. As a result, in addition to shares owned by the Initial Shareholders, including shares that are subject to the Sponsor Voting Agreements, Stellar would need only 531,291, or 28.7% of the 1,851,720 Public Shares to be voted in favor of the Stellar Redomestication Proposal in order to have such proposal approved. Assuming all outstanding shares of Stellar’s common stock are voted, we would not need any of the 1,851,720 Public Shares to be voted in favor of each of the Stellar Business Combination Proposal, the 2018 Equity Incentive Plan Proposal, the 2018 ESPP Proposal, the Share Issuance Proposal and the Stellar Adjournment Proposal (if presented to its shareholders) in order to have each of such proposals approved.

 

Q.When and where will the Stellar Special Meeting be held?

 

A.The Stellar Special Meeting will be held at 10:00 a.m. Eastern Time on _______________, 2018 at the offices of Ellenoff Grossman & Schole LLP, at 1345 Avenue of the Americas, 11th Floor, New York, New York 10105. Only shareholders who held common stock of Stellar at the close of business on ______, 2018 will be entitled to vote at the Stellar Special Meeting and at any adjournments and postponements thereof.

 

Q. Who is entitled to vote at the Stellar Special Meeting?

 

A. Stellar has fixed ______ as the Stellar Record Date. If you were a shareholder of Stellar at the close of business on the Stellar Record Date, you are entitled to vote on matters that come before the Stellar Special Meeting. However, a shareholder may only vote his, her or its shares if he, she or it is present in person or is represented by proxy at the Stellar Special Meeting.

 

Q.How do I vote?

 

A. If you are a record owner of your shares, there are two ways to vote your Stellar Shares at the Stellar Special Meeting:

 

You Can Vote By Signing and Returning the Enclosed Proxy Card. If you vote by proxy card, your “proxy,” whose name is listed on the proxy card, will vote your shares as you instruct on the proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares, your shares will be voted as recommended by the Stellar Board “FOR” the Redomestication Proposal, the Stellar Business Combination Proposal, the 2018 Equity Incentive Plan Proposal, the 2018 ESPP Proposal, the Share Issuance Proposal, the Director Election Proposal and the Adjournment Proposal (if presented). Votes received after a matter has been voted upon at the Stellar Special Meeting will not be counted.

 

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You Can Attend the Stellar Special Meeting and Vote in Person. When you arrive, you will receive a ballot that you may use to cast your vote.

 

If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to ensure that votes related to the shares you beneficially own are properly counted. If you wish to attend the meeting and vote in person and your shares are held in “street name,” you must obtain a legal proxy from your broker, bank or nominee. That is the only way Stellar can be sure that the broker, bank or nominee has not already voted your shares

 

Q:What if I do not vote my Stellar Shares or if I abstain from voting?

 

A: The approval of the Stellar Business Combination, the 2018 Equity Incentive Plan, the 2018 ESPP Proposal and the Share Issuance Proposal each require the affirmative vote of a majority of the outstanding Stellar Shares as of the Stellar Record Date voted at the Stellar Special Meeting. The Redomestication Proposal must be approved by at least a two-thirds majority of the voting Stellar Shares outstanding as of the Stellar Record Date voted at the Stellar Special Meeting. Each nominee presented in connection with the Director Election Proposal must be approved by a plurality of the votes cast at the Stellar Special Meeting. Abstentions will not be counted as votes properly cast for purposes of these proposals. As a result, if you abstain from voting on the Stellar Proposals, your Stellar Shares will be counted as present for purposes of establishing a quorum (if so present in accordance with the terms of the articles of incorporation), but the abstentions will have the same effect as votes against the proposal and have no effect on the outcome of each of the other proposals.

 

Q:What proposals must be passed in order for the Business Combination to be completed?

 

A: The Business Combination will not be completed unless the Redomestication Proposal, the Stellar Business Combination Proposal, the Share Issuance Proposal and the Director Election Proposal are approved. If Stellar does not consummate its initial business combination by December 26, 2018 (or such later date approved by its shareholders), then Stellar will be required to dissolve and liquidate itself and return the monies held within the Trust Account to its Public Shareholders unless Stellar submits and its shareholders approve a further extension.

  

Q: How does the Stellar Board recommend that I vote on the proposals?

 

A: The Stellar Board unanimously recommends that you vote as follows:

 

“FOR” approval of the Redomestication Proposal;

 

“FOR” approval of the Stellar Business Combination Proposal;

 

“FOR” approval of the 2018 Equity Incentive Plan Proposal;

 

“FOR” approval of the 2018 ESPP Proposal;

 

“FOR” approval of the Share Issuance Proposal;

 

“FOR” the election of all of the persons nominated for election as directors pursuant to the Director Election Proposal; and

 

“FOR” approval of the Stellar Adjournment Proposal, if presented.

 

Q:How many votes do I have?

 

A: Stellar shareholders have one vote per each share of Stellar common stock held by them on the Stellar Record Date on each proposal to be voted upon.

 

Q.Why is Stellar proposing the Redomestication?

 

A. The Stellar Board believes that it would be in the best interests of the shareholders of Stellar to effect the Redomestication in order to align the legal structure of Stellar with the nature of Stellar’s business going forward. The Redomestication will be contingent upon the approval of the Business Combination by the Stellar shareholders and the Merger Agreement being in full force and effect prior to the Redomestication. Because the Successor will continue to operate as a corporation organized in the United States, it was the view of the Stellar Board that Stellar should also be structured as a corporation organized in the United States. In addition, the Stellar Board believes that the Redomestication will provide a greater measure of flexibility and simplicity in corporate transactions and will reduce the costs of doing business.

 

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Q. What is involved with the Redomestication?

 

A. The Redomestication will require Stellar to file required documents in both the Republic of the Marshall Islands and the State of Delaware. At the effective time of the Redomestication, Stellar will cease to be a corporation incorporated under the laws of the Republic of the Marshall Islands and in connection with the Business Combination, Stellar will continue as a Delaware corporation and will change its corporate name to “Phunware, Inc.” Stellar’s Articles of Incorporation and bylaws will be replaced by the Delaware Certificate of Incorporation and Bylaws of the Successor, and your rights as a shareholder will cease to be governed by the laws of the Republic of the Marshall Islands and will be governed by Delaware law.

 

Q. When do you expect that the Redomestication will be effective?

 

A. The Redomestication is expected to become effective immediately prior to the consummation of the Business Combination.

 

Q. How will the Redomestication affect my securities of Stellar?

 

A. Pursuant to the Redomestication and without further action on the part of Stellar’s shareholders, each outstanding share of common stock of Stellar will be deemed to constitute one outstanding share of Successor’s common stock. Although it will not be necessary for you to exchange your certificates representing shares of common stock after the Redomestication, the Successor will, upon request, exchange your Stellar share certificates for the applicable number of shares of Successor’s common stock and all certificates for securities issued after the Redomestication will be certificates representing securities of the Successor.

 

Q. Why is Stellar proposing the Business Combination?

 

A. Since Stellar’s incorporation, the Stellar Board has sought to identify suitable candidates in order to effect a business combination, share exchange, asset acquisition, share purchase, recapitalization, reorganization or other similar business combination with one or more businesses or entities. In its review of Phunware, the Stellar Board considered a variety of factors weighing positively and negatively in connection with the Business Combination. After careful consideration, the Stellar Board has determined that the proposed Business Combination is in the best interests of Stellar shareholders.

 

Q. How will the Initial Shareholders vote in connection with the Stellar Proposals?

 

A. As of the date of this joint proxy statement/prospectus, the Initial Shareholders owned of record an aggregate of 2,003,403 Stellar Shares, representing approximately 50.6% of the issued and outstanding Stellar Shares. All of the Initial Shareholders, as well as all of Stellar’s officers and directors, have agreed to vote the shares of common stock owned by them in favor of the Stellar Proposals. The Initial Shareholders, as of the date of this joint proxy statement/prospectus, have not acquired any Stellar common stock in the aftermarket. However, any subsequent purchase prior to the Stellar Record Date by the Initial Shareholders of Stellar common stock in the aftermarket will make it more likely that the Stellar Proposals will be approved as such shares would be voted in favor of the Stellar Proposals.

 

Q: May the Initial Shareholders, Stellar’s directors, executive officers, advisors or their affiliates purchase shares in connection with the Business Combination?

 

A: The Initial Shareholders or Stellar’s directors, executive officers, advisors or their affiliates may purchase Stellar Shares in privately negotiated transactions or in the open market either prior to or after the closing of the Business Combination, including from Stellar shareholders who would have otherwise elected to have their shares redeemed. However, they have no current commitments or plans to engage in such transactions and have not formulated any terms or conditions for any such transactions. If they engage in such transactions, any such purchases shall be subject to limitations regarding possession of any material nonpublic information not disclosed to the seller and they will not make any such purchases if such purchases are prohibited by Regulation M under the Exchange Act. Any such purchase would include a contractual acknowledgement that the selling shareholder, although still the record holder of Stellar Shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights. In the event the Initial Shareholders or Stellar’s directors, officers or advisors or their affiliates purchase shares in privately negotiated transactions from Public Shareholders who have already elected to exercise their redemption rights, such selling shareholders would be required to revoke their prior elections to redeem their shares. Any such privately negotiated purchases may be effected at purchase prices that are in excess of the per-share pro rata portion of the Trust Account.

 

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Q. Do I have Redemption Rights with respect to my Stellar Shares?

 

A. The Public Shareholders may seek to have their shares redeemed regardless of whether they vote for or against the Business Combination and whether or not they are holders of Stellar common stock as of the Stellar Record Date. All redemptions (“Redemptions”) will be effectuated as repurchases under Stellar’s Articles of Incorporation and bylaws and Republic of the Marshall Islands law. Any Public Shareholder who hold shares of Stellar common stock on or before ___, 2018 (two (2) business days before the Stellar Special Meeting) will have the right to demand that his, her or its shares be redeemed for a pro rata share of the aggregate amount then on deposit in the Trust Account, less any taxes then due but not yet paid, at the consummation of the Business Combination). However, the proceeds held in the Trust Account could be subject to claims that could take priority over those of Public Shareholders exercising Redemption Rights, regardless of whether such holders vote for or against the Stellar Business Combination Proposal and whether such holders are holders of Stellar common stock as of the Stellar Record Date. Therefore, the per-share distribution from the Trust Account in such a situation may be less than originally anticipated due to such claims. A Public Shareholder will be entitled to receive cash for these shares only if the Business Combination is consummated.

 

The Initial Shareholders and Stellar’s directors, executive officers and their affiliates have agreed to waive their Redemption Rights with respect to their 2,003,403 Founder Shares and such shares will be excluded from the pro rata calculation used to determine the per-share Redemption Price. However, if the Initial Shareholders and Stellar’s directors, executive officers and their affiliates acquired Public Shares in or after Stellar’s IPO (or acquire Public Shares following the date of this joint proxy statement/prospectus), they will be entitled to liquidating distributions from the Trust Account with respect to such Public Shares if Stellar fails to complete its initial business combination by December 26, 2018 (or such later date approved by its shareholders).

 

Prior to the consummation of the Business Combination, the Public Shareholders will be provided with the opportunity to have their shares redeemed or repurchased upon the consummation of the Business Combination, subject to certain limitations, for cash equal to the applicable Redemption Price; provided, however, that such shares may not be redeemed to the extent that such redemption or repurchase would result in Stellar having net tangible assets (as determined under the Exchange Act) of less than $5,000,001 immediately prior to consummation of the Business Combination.

 

Q. Is there a limit on the number of shares I may redeem?

 

A. A Public Shareholder, together with any affiliate of his or any other person with whom he is acting in concert or as a “group” (as defined in Section 13(d)(3) of the Exchange Act), will be restricted from seeking Redemption Rights with respect to 26% or more of the Public Shares. Accordingly, all shares in excess of 26% of the Public Shares owned by a holder will not be redeemed for cash. Any Public Shareholder who holds less than 26% of the Public Shares may have all of the Public Shares held by him or her redeemed for cash.

 

Q. How do I exercise my Redemption Rights?

 

A. If you are a Public Shareholder and you seek to have your shares redeemed, you must (i) demand, no later than 5:00 p.m., Eastern time on ___, 2018 (two (2) business days before the Stellar Special Meeting), that Stellar redeem your shares into cash; (ii) affirmatively certify in your request to Stellar’s transfer agent for redemption if you “ARE” or “ARE NOT” acting in concert or as a “group” (as defined in Section 13d-3 of the Exchange Act) and (iii) submitting your request in writing to Stellar’s transfer agent, at the address listed at the end of this section and delivering your shares to Stellar’s transfer agent physically or electronically using the DWAC system at least two (2) business days prior to the vote at the meeting.

 

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Any request for Redemption, once made by a Public Shareholder, may be withdrawn at any time up to the time the vote is taken with respect to the Stellar Business Combination Proposal at the Special Meeting. In addition, if you deliver your shares for Redemption to Stellar’s transfer agent and later decide prior to the Special Meeting not to elect Redemption, you may request that Stellar’s transfer agent return the shares (physically or electronically). You may make such request by contacting Stellar’s transfer agent at the phone number or address listed at the end of this section.

 

Any corrected or changed written demand of Redemption Rights must be received by Stellar’s transfer agent two (2) business days prior to the vote taken on the Stellar Business Combination Proposal at the Stellar Special Meeting. No demand for Redemption will be honored unless the holder’s shares have been delivered (either physically or electronically) to the transfer agent at least two (2) business days prior to the vote at the meeting.

 

A holder of the Public Shares, together with any affiliate of his or any other person with whom he is acting in concert or as a “group” (as defined in Section 13d-3 of the Exchange Act) will be restricted from seeking redemption rights with respect to an aggregate of 26% or more of the public shares, which we refer to as the “26% threshold.” Accordingly, all Public Shares in excess of the 26% threshold beneficially owned by a public shareholder or group will not be redeemed for cash.

 

Public Shareholders seeking to exercise their redemption rights and opting to deliver physical certificates should allot sufficient time to obtain physical certificates from the transfer agent and time to effect delivery. It is Stellar’s understanding that shareholders should generally allot at least two weeks to obtain physical certificates from the transfer agent. However, Stellar does not have any control over this process and it may take longer than two weeks. Shareholders who hold their shares in street name will have to coordinate with their banks, brokers or other nominees to have the shares certificated or delivered electronically.

 

If a Public Shareholder properly demands Redemption as described above, then, if the Business Combination is consummated, Stellar will convert these shares into cash. Such amount will be paid promptly after consummation of the Business Combination. If you exercise your Redemption Rights, then you will be exchanging your Stellar Shares for cash and will no longer own these shares following the Business Combination.

 

If you are a Public Shareholder and you exercise your Redemption Rights, it will not result in either the exercise or loss of any Stellar warrants or Stellar rights that you may hold. Your Stellar warrants will continue to be outstanding following a Redemption of your Stellar Shares and will become exercisable or exchangeable, respectively, upon consummation of the Business Combination.

 

Q. What happens to the funds deposited in the Trust Account after consummation of the Business Combination?

 

A. After consummation of the Business Combination, the funds in the Trust Account will be used to pay holders of the Public Shares who exercise Redemption Rights, to pay transaction expenses incurred in connection with the Business Combination, including approximately $2.15 million fees to Stellar’s investment bankers in connection with the transaction and for working capital of the Successor and its subsidiaries (consisting of Phunware and its direct and indirect subsidiaries (the “Combined Company”) and general corporate purposes of the Combined Company. Such funds may also be used to reduce the indebtedness and certain other liabilities of the Combined Company.

 

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Q. What happens if a substantial number of Public Shareholders vote in favor of the Stellar Business Combination Proposal and exercise their Redemption Rights?

 

A. Public Shareholders may vote in favor of the Business Combination and still exercise their Redemption Rights; provided, however, that in the event that the redemptions result in Stellar having less than $19 million in cash, net of its unpaid expenses and liabilities and payments required for redemptions, the Business Combination will not be consummated and following the tenth day from the date of the Stellar Special Meeting, then either party may terminate the Merger Agreement. Subject to the foregoing, the Business Combination may be consummated even though the funds available from the Trust Account and the number of Public Shareholders are substantially reduced as a result of Redemptions by Public Shareholders. With fewer Public Shares and Public Shareholders, the trading market for the Successor’s securities may be less liquid and the Successor may not be able to meet the listing standards for a national securities exchange. Furthermore, the funds available from the Trust Account for working capital purposes of the Combined Company after the Business Combination may not be sufficient for its future operations and may not allow the Combined Company to pursue its strategy for growth.

 

Q. What happens if the Business Combination is not consummated?

 

A. Under the terms of the Merger Agreement, Stellar has the right to seek an extension of the date by which it must complete its initial business combination. As approved by Stellar’s shareholders on special meetings held on May 22, 2018 and August 22, 2018, Stellar has extended the deadline to consummate the Business Combination to December 26, 2018 (or such later date approved by its shareholders).

 

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QUESTIONS AND ANSWERS ABOUT THE PHUNWARE PROPOSALS

 

What proposals are stockholders of Phunware being asked to vote upon?

 

Under the Merger Agreement, the approval of the Phunware Business Combination Proposal and the Preferred Stock Conversion Proposal are conditions to the consummation of the Merger. If Phunware stockholders do not approve each of these proposals, then unless this condition is waived by Stellar, Merger Sub and Phunware, the Merger Agreement could terminate and the proposed Business Combination may not be consummated. There can be no assurance that Stellar, Merger Sub and Phunware would waive such provision of the Merger Agreement.

 

In addition to the foregoing proposals, the Phunware stockholders also may be asked to consider and vote upon a proposal to adjourn the Phunware Special Meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies if it is determined by Phunware that more time is necessary or appropriate to consummate the Business Combination and/or the Preferred Stock Conversion.

 

Phunware will hold the special meeting of its stockholders to consider and vote upon these proposals. This joint proxy statement/prospectus contains important information about the proposed business combination and the other matters to be acted upon at the special meeting. Stockholders of Phunware should read it carefully.

 

After careful consideration, the Phunware Board has determined that the Phunware Business Combination Proposal, the Preferred Stock Conversion Proposal and, if presented, the Phunware Adjournment Proposal are in the best interests of Phunware and its stockholders and recommends that you vote or give instruction to vote “FOR” each of those proposals.

 

The existence of any financial and personal interests of one or more of Phunware’s directors may be argued to result in a conflict of interest on the part of such director(s) between what he, she or they may believe is in the best interests of Phunware and its stockholders and what he, she or they may believe is best for himself, herself or themselves in determining to recommend that stockholders vote for the Phunware Proposals. See the section entitled “Phunware Business Combination Proposal — Interests of Phunware’s Directors and Officers in the Business Combination” for a further discussion of this.

 

THE VOTE OF PHUNWARE STOCKHOLDERS IS IMPORTANT. PHUNWARE STOCKHOLDERS ARE ENCOURAGED TO VOTE AS SOON AS POSSIBLE AFTER CAREFULLY REVIEWING THIS JOINT PROXY STATEMENT/PROSPECTUS.

 

What material negative factors did the Phunware Board consider in connection with the Business Combination?

 

Although the Phunware Board believes that the Business Combination is advisable and fair to and in the best interests of, Phunware’s stockholders, the Phunware Board did consider certain potentially material negative factors in arriving at that conclusion. These factors include, among others, the likelihood that the Business Combination would be completed compared to the risks in executing alternatives, the risks and costs to Phunware if the transactions contemplated by the Merger Agreement are not consummated and the fact that Phunware entered into the Merger Agreement with a “blank check” corporation organized to effect a business combination with one or more businesses. These factors and others are discussed in greater detail in the section entitled “Phunware Business Combination Proposal — Phunware’s Board of Directors’ Reasons for the Business Combination”, as well as in the section entitled “Risk Factors — Risks Related to Phunware’s Business Operations and Industry.”

 

What happens if the Business Combination is not consummated?

 

If the Merger Agreement is not adopted by Phunware stockholders or if the Business Combination is not completed for any other reason, Phunware will remain an independent private company.

 

Do I have appraisal rights in connection with the Business Combination?

 

Phunware stockholders will be entitled to appraisal rights but only if they comply with the Delaware law procedures summarized in the section entitled “Appraisal Rights.” The entirety of Section 262 of the DGCL is provided on Annex F to this joint proxy statement/prospectus. Upon consummation of the Business Combination, any Phunware stockholder who has perfected its appraisal rights will have the right to have a court in Delaware determine the value of each share of stock and to be paid the appraised value determined by the court, which could be more or less than the merger consideration.

 

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What are the U.S. federal income tax consequences of the Business Combination to me?

 

It is intended that the Business Combination will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Assuming the Business Combination so qualifies, Phunware stockholders generally will not recognize gain or loss on the exchange of their Phunware capital stock solely for shares of Successor’s common stock and Transferred Sponsor Warrants in the Business Combination and their basis in and holding periods for their Phunware capital stock will generally carry over to the Successor common stock and Transferred Sponsor Warrants received by such holder in the Business Combination. For a more complete discussion of the U.S. federal income tax consequences of the Business Combination, see the section entitled “Material U.S. Federal Income Tax Considerations of the Business Combination.”

 

What do I need to do now?

 

Phunware urges you to read carefully and consider the information contained in this joint proxy statement/prospectus, including the annexes and to consider how the Business Combination will affect you as a stockholder of Phunware. Stockholders should then vote as soon as possible in accordance with the instructions provided in this joint proxy statement/prospectus and on the enclosed proxy card.

 

How do I vote?

 

If you are a holder of record of Phunware capital stock on the Phunware Record Date, you may vote in person at the Phunware Special Meeting or by submitting a proxy for the special meeting. You may submit a proxy to Phunware by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed postage paid envelope.

 

When and where will the Phunware Special Meeting be held?

 

The Phunware Special Meeting will be held at on __________, 2018, at______, Central Time, unless the Phunware Special Meeting is adjourned.

 

Who is entitled to vote at the Phunware Special Meeting?

 

Phunware has fixed October 31, 2018 as the Phunware Record Date for voting at the Phunware Special Meeting. If you were a stockholder of Phunware at the close of business on the Phunware Record Date, you are entitled to vote on matters that come before the special meeting. However, a stockholder may only vote his or her shares if he or she is present in person or is represented by proxy at the Phunware Special Meeting.

 

How many votes do I have?

 

  Each share of Phunware common stock outstanding as of the Phunware Record Date is entitled to one vote per share at the Phunware Special Meeting;

 

  Each share of Phunware Series A Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series A Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

  Each share of Phunware Series B Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series B Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

  Each share of Phunware Series C Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series C Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

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  Each share of Phunware Series D Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series D Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

  Each share of Phunware Series D-1 Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series D-1 Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

  Each share of Phunware Series E Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series E Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

  Each share of Phunware Series F Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series F Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

  Each share of Phunware Series Alpha Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series Alpha Preferred Stock held by such holder could be converted as of the Phunware Record Date;

 

  Each share of Phunware Series Beta Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series Beta Preferred Stock held by such holder could be converted as of the Phunware Record Date; and

 

  Each share of Phunware Series Gamma Prime Preferred Stock outstanding as of the Phunware Record Date is entitled to the number of votes equal to the number of shares of common stock into which the shares of Phunware Series Gamma Prime Preferred Stock held by such holder could be converted as of the Phunware Record Date.

 

As of the Phunware Record Date,

 

  Each share of Phunware Series A Preferred Stock was convertible into one share of Phunware common stock;

 

  Each share of Phunware Series B Preferred Stock was convertible into one share of Phunware common stock;

 

  Each share of Phunware Series C Preferred Stock was convertible into one share of Phunware common stock;

 

  Each share of Phunware Series D Preferred Stock was convertible into one share of Phunware common stock;

 

  Each share of Phunware Series D-1 Preferred Stock was convertible into one share of Phunware common stock;

 

  Each share of Phunware Series E Preferred Stock was convertible into one share of Phunware common stock;

 

  Each share of Phunware Series F Preferred Stock was convertible into one share of Phunware common stock;

 

  Each share of Phunware Series Alpha Preferred Stock was convertible into one share of Phunware common stock;

  

  Each share of Phunware Series Beta Preferred Stock was convertible into one share of Phunware common stock; and

 

Each share of Phunware Series Gamma Prime Preferred Stock was convertible into one share of Phunware common stock.

 

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What constitutes a quorum?

 

A quorum of Phunware stockholders is necessary to hold a valid meeting. The presence, in person or by proxy, of a majority of the votes which could be cast by the holders of all outstanding shares of stock entitled to vote at the meeting shall be necessary and sufficient to constitute a quorum at the Phunware Special Meeting, including a majority of the outstanding shares of any class or series or classes or series, present in person or represented by proxy, where a separate vote by such class or series or classes or series is required. Abstentions, while considered present for the purposes of establishing a quorum, will not count as a vote cast at the Phunware Special Meeting.

 

As of the Phunware Record Date for the special meeting, the following shares of Phunware representing the following classes and series would be required to achieve a quorum:

 

  28,243,161 shares of common stock and preferred stock, voting together as a single class on an as-converted basis;

 

  24,346,429 shares of preferred stock, voting together as a single class on an as-converted basis; and

 

  6,039,475 shares of Series F Preferred Stock voting exclusively as a single class on an as-converted basis.

 

What vote is required to approve each proposal at the Phunware Special Meeting?

 

The Phunware Proposals presented at the Phunware Special Meeting require the following approvals: (A) the Phunware Business Combination Proposal requires the affirmative vote of (x) a majority of the shares of outstanding capital stock of Phunware, voting together as a single class on an as-converted basis, (y) a majority of the outstanding shares of preferred stock of Phunware, voting together as a single class on an as-converted basis, and (z) a majority of the outstanding shares of Phunware Series F Preferred Stock, voting exclusively as a single class on an as-converted basis, (B) the Preferred Stock Conversion Proposal requires the affirmative vote of (x) a majority of the outstanding shares of preferred stock of Phunware, voting together as a single class on an as-converted basis, and (y) a majority of the outstanding shares of Phunware Series F Preferred Stock, voting exclusively as a single class on an as-converted basis and (C) the Adjournment Proposal requires the affirmative vote of the holders of a majority of the shares of outstanding capital stock of Phunware.

 

Abstentions, while considered present for the purposes of establishing a quorum, will not count as a vote cast at the Phunware Special Meeting.

 

What are the recommendations of the Phunware Board?

 

The Phunware Board believes that the Phunware Business Combination Proposal, the Preferred Stock Conversion Proposal and, if presented, the Phunware Adjournment Proposal are in the best interest of Phunware’s stockholders and recommends that its stockholders vote “FOR” the Phunware Business Combination Proposal and the Preferred Stock Conversion Proposal and, if presented, “FOR” the Phunware Adjournment Proposal.

 

The existence of any financial and personal interests of one or more of Phunware’s directors may be argued to result in a conflict of interest on the part of such director(s) between what he or they may believe is in the best interests of Phunware and its stockholders and what he, she or they may believe is best for himself, herself or themselves in determining to recommend that stockholders vote for the Phunware Proposals. See the section entitled “Phunware Business Combination Proposal — Interests of Phunware’s Directors and Officers in the Business Combination” for a further discussion of this.

 

How do other Phunware stockholders intend to vote?

 

As of           , 2018, the Phunware stockholders, representing approximately the following issued and outstanding shares have agreed to vote in favor of the Phunware Proposals:

 

              shares of Series             Preferred Stock

 

              shares of Series             Preferred Stock

 

              shares of Series             Preferred Stock

 

33

 

What happens if I sell my shares of Phunware capital stock before the Phunware Special Meeting?

 

The Phunware Record Date for the special meeting is earlier than the date of the Phunware Special Meeting and earlier than the date that the Business Combination is expected to be completed. If you transfer your shares of Phunware capital stock after the Phunware Record Date, but before the special meeting, unless you grant a proxy to the transferee, you will retain your right to vote at the Phunware Special Meeting. You would not be entitled to the Stockholder Merger Consideration or to exercise appraisal rights.

 

May I change my vote after I have mailed my signed proxy card?

 

Yes. Stockholders may send a later-dated, signed proxy card to Phunware’s secretary at the address set forth below so that it is received by Phunware’s secretary prior to the vote at the Phunware Special Meeting or attend the Phunware Special Meeting in person or by proxy and vote. Stockholders also may revoke their proxy by sending a notice of revocation to Phunware’s secretary, which must be received by Phunware’s secretary prior to the vote at the Phunware Special Meeting.

 

What happens if I fail to take any action with respect to the Phunware Special Meeting?

 

If you fail to take any action with respect to the Phunware Special Meeting and do not seek appraisal and the Business Combination is approved by stockholders and the Business Combination is consummated, you will become a stockholder of the Successor. If you fail to take any action with respect to the Phunware Special Meeting and the Business Combination is not approved, you will remain a stockholder of Phunware.

 

What should I do with my stock certificates?

 

Each Phunware stockholder shall be entitled to receive its portion of the merger consideration subject to the delivery to the exchange agent of the certificate(s) for its Phunware capital stock, together with a properly completed and duly executed letter of transmittal and such other documents as may be reasonably requested by the exchange agent.

 

What should I do if I receive more than one set of voting materials?

 

Phunware stockholders may receive more than one set of voting materials, including multiple copies of this joint proxy statement/prospectus and multiple proxy cards or voting instruction cards. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive in order to cast a vote with respect to all of your shares of Phunware capital stock.

 

Who can help answer my questions?

 

If you have any questions about how to vote or direct a vote in respect of your shares of Phunware capital stock, you may contact Phunware at 7800 Shoal Creek Blvd, Suite 230-S, Austin, Tx 78757, Attention: Investor Relations.

 

34

 

SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF STELLAR

 

The following table includes consolidated statements of operations data for the nine months ended August 31, 2018 and 2017 and the consolidated balance sheet data as of August 31, 2018 are derived from Stellar’s unaudited interim consolidated financial statements appearing elsewhere herein. Stellar’s unaudited interim consolidated financial statements were prepared on a basis consistent with its audited consolidated financial statements and include, in management’s opinion, all adjustments, consisting only of normal recurring adjustments, that Stellar considers necessary for a fair presentation of the financial information set forth in those statements included elsewhere in this proxy statement/prospectus. Stellar’s historical results are not necessarily indicative of the results that may be expected in any future period, and interim financial results are not necessarily indicative of the results that may be expected for the full year.

 

    Nine Months Ended
August 31,
2018
    Nine Months Ended
August 31,
2017
 
Statement of Operations Data:            
Operating expenses            
Formation and operating costs     1,421,213     $ 310,454  
Loss from operations     (1,421,213     (310,454 )
                 
Other income                
Trust Account Investment income     659,361       127,212  
Net loss attributable to common shares     (761,852   $ (183,242 )
Weighted average number of common shares outstanding (excluding shares subject to possible redemption)     2,840,600       2,718,139  
Basic and diluted net loss per share (excluding shares subject to possible redemption)     (0.27   $ (0.07 )
                 
Cash Flow Data:                
Net cash used in operating activities     (149,580   $ (25,925 )
Net cash provided by investing activities     52,541,917       19,534  
Net cash used in financing activities     (52,490,319      

 

Balance Sheet Data:   August 31,
2018
    November 30,
2017
 
Cash on hand and in Bank     19,223     $ 117,205  
Cash and investments held in the Trust Account     19,488,870       71,215,856  
Total assets     19,551,258       71,349,930  
Common stock subject to possible redemption: (at a redemption value of approximately $10.32 and $10.20, on August 31, 2018 and 2017, respectively)     11,823,088       63,883,039  
Total shareholders’ equity     5,000,011       5,000,007  

 

35

 

The following table sets forth selected historical financial information derived from Stellar’s audited financial statements for the year ended November 30, 2017 and the period from December 8, 2015 (inception) to November 30, 2016, which are included elsewhere in this joint proxy statement/prospectus.

 

The information is only a summary and should be read in conjunction with Stellar’s consolidated financial statements and related notes and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Stellar” contained elsewhere herein. The historical results included below and elsewhere in this joint proxy statement/prospectus are not indicative of the future performance of Phunware, Stellar or the Combined Company.

 

    Year Ended
November 30,
2017
    Period from
December 8,
2015
(inception) to
November 30,
2016
 
Statement of Operations Data:            
Operating expenses            
Formation and operating costs   $ 862,228     $ 146,582  
Loss from operations     (862,228 )     (146,582 )
                 
Other income                
Trust Account Investment income     554,954       56,393  
Net loss attributable to common shares   $ (307,274 )   $ (90,189 )
Weighted average number of common shares outstanding (excluding shares subject to possible redemption)     2,737,367       2,093,974  
Basic and diluted net loss per share (excluding shares subject to possible redemption)   $ (0.11 )   $ (0.04 )
                 
Cash Flow Data:                
Net cash used in operating activities   $ (204,743 )   $ (72,158 )
Net cash used in investing activities     (773,240 )     (70,442,615 )
Net cash provided by financing activities     604,300       71,005,661  

 

Balance Sheet Data:  November 30,
2017
   November 30,
2016
 
Cash on hand and in Bank  $117,205   $490,888 
Cash and investments held in the Trust Account   71,215,856    70,442,615 
Total assets   71,349,930    70,965,722 
Common stock subject to possible redemption: (at a redemption value of approximately $10.32 and $10.20, on November 30, 2017 and November 30, 2016, respectively)   63,883,039    64,190,314 
Total shareholders’ equity   5,000,007    5,000,005 

 

36

 

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA OF PHUNWARE

 

The following selected historical consolidated financial and other data should be read together with the consolidated financial statements and accompanying notes and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Phunware” appearing elsewhere herein. The selected historical consolidated financial and other data in this section is not intended to replace our consolidated financial statements and the related notes. Our historical results are not necessarily indicative of the results that may be expected in any future period.

 

The consolidated statements of operations data for the three and six months ended June 30, 2018 and 2017 and the consolidated balance sheet data as of June 30, 2018 are derived from Phunware’s unaudited interim consolidated financial statements appearing elsewhere herein. Phunware’s unaudited interim consolidated financial statements were prepared on a basis consistent with its audited consolidated financial statements and include, in management’s opinion, all adjustments, consisting only of normal recurring adjustments, that Phunware considers necessary for a fair presentation of the financial information set forth in those statements included elsewhere in this joint proxy statement/prospectus. Phunware’s historical results are not necessarily indicative of the results that may be expected in any future period, and interim financial results are not necessarily indicative of the results that may be expected for the full year.

 

   Three Months Ended
June 30,
 
   2018   2017 
Revenue  (in thousands) 
Platform subscriptions and services  $6,448   $3,493 
Application transaction   7,737    1,692 
Total revenue  $14,185   $5,185 
Platform subscriptions and services as a percentage of total revenue   45.5%   67.4%
Application transactions as a percentage of total revenue   54.5%   32.6%
           
Gross Margin          
Platform subscriptions and services   63.3%   55.1%
Application transaction   91.0%   15.2%
Total gross margin   78.4%   42.1%

 

   Six Months Ended June 30, 
   2018   2017 
Revenue  (in thousands) 
Platform subscriptions and services  $10,452   $7,053 
Application transaction   8,713    7,105 
Total revenue  $19,165   $14,158 
Platform subscriptions and services as a percentage of total revenue   54.5%   49.8%
Application transactions as a percentage of total revenue   45.5%   50.2%
           
Gross Margin          
Platform subscriptions and services   54.4%   55.4%
Application transaction   86.6%   28.5%
Total gross margin   69.0%   41.9%

 

   June 30,
2018
   December 31, 2017 
Consolidated Balance Sheet Data:  (in thousands) 
Cash  $221   $308 
Total assets   33,905    34,001 
Total liabilities   18,807    26,097 
Total stockholders’ deficit   (101,881)   (99,501)

 

37

 

We derived the selected consolidated statements of operations and the consolidated balance sheet data for the years ended and as of December 31, 2017 and 2016, from our audited consolidated financial statements appearing elsewhere herein.

 

   Year Ended December 31, 
   2017   2016 
   (in thousands) 
Revenue        
Platform subscriptions and services  $16,488   $11,645 
Application transaction   10,234    35,725 
Total revenue  $26,722   $47,370 
Platform subscriptions and services as a percentage of total revenue   61.7%   24.6%
Application transactions as a percentage of total revenue   38.3%   75.4%
           
Gross Margin          
Subscriptions and services   53.0%   57.9%
Application transactions   22.2%   33.0%
Total gross margin   41.2%   39.1%

 

   Year Ended December 31, 
   2017   2016 
Consolidated Balance Sheet Data:  (in thousands) 
Cash  $308   $12,629 
Total assets   34,001    49,498 
Total liabilities   26,097    16,321 
Total stockholders’ deficit   (99,501)   (73,818)

 

38

 

SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION

 

The selected unaudited pro forma combined statements of operations for the six months ended June 30, 2018, combines the historical consolidated statements of Stellar and Phunware, giving effect to the Business Combination as if it had been consummated on January 1, 2018. The selected unaudited pro forma combined statements of operations for the year ended December 31, 2017 combines the historical consolidated statements of operations of Stellar and Phunware, giving effect to the Business Combination as if it had been consummated on January 1, 2017. The selected unaudited pro forma balance sheet combines the historical consolidated statements of Stellar and Phunware, giving effect to the Business Combination as if it had been consummated as of that date. Assumptions and estimates underlying the unaudited pro forma adjustments set forth in the unaudited pro forma combined financial information are described in the accompanying notes appearing elsewhere in this joint proxy statement/prospectus under the caption “Stellar and Phunware Unaudited Pro Forma Condensed Combined Financial Statements”. The unaudited pro forma combined financial information has been presented for illustrative purposes only and is not necessarily indicative of the operating results and financial position that would have been achieved had the Business Combination occurred on the dates indicated. Further, the unaudited pro forma combined financial information does not purport to project the future operating results or financial position of the Successor following the Business Combination. The unaudited pro forma adjustments represent management’s estimates based on information available as of the date of this unaudited pro forma combined financial information and are subject to change as additional information becomes available.

 

Pursuant to Stellar’s amended and restated Articles of Incorporation, it must complete a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination by May 24, 2018 and shareholders of Stellar would have an opportunity to elect redemption in connection with the shareholders vote to approve the Business Combination with Phunware, as described elsewhere in this joint proxy statement/prospectus. On May 22, 2018, Stellar’s shareholders approved an amendment to its extending the date by which Stellar must consummate its initial business combination to August 24, 2018. Concurrently, 3,353,060 Public Shares exercised their right to redeem such Public Shares. An aggregate $34,787,998 was removed from the Trust Account to pay such Redemptions. On August 23, 2018, Stellar’s shareholders approved an amendment to its extending the date by which Stellar must consummate its initial business combination to December 26, 2018. Concurrently, 1,695,830 Public Shares exercised their right to redeem such Public Shares. An aggregate of $17,772,299 was removed from the Trust Account to pay such redemptions. These Redemptions thus caused the balance of the Trust Account to fall below the Minimum Cash Asset Level.

 

If the Merger Agreement is approved, prior to the Closing, Phunware will have the right to appoint six of the seven members of the Successor’s board of directors. The current stockholders of Phunware are expected to own at least 87.4% of the outstanding shares of the Successor, without regard to satisfaction of the minimum cash asset level condition. Substantially all of Stellar’s net assets consist of cash and equivalents. Accordingly, the business combination will be accounted for as a reverse recapitalization, whereby Phunware will be the acquirer for accounting and financial reporting purposes and Stellar will be the legal acquirer. Under a reverse recapitalization, the common stock of Stellar remaining after redemptions and the unrestricted net cash and equivalents on the date the Business Combination is consummated, will be accounted for as a capital infusion into Phunware. Expenses incurred by Phunware related to the Business Combination up to the point of viability will be charged to operations in the period incurred.

 

    Six Months Ended June 30, 2018
(Phunware) and Nine Months Ended
August 31, 2018 (Stellar),
Unaudited
 
    Phunware     Stellar     Pro Forma
Combined
 
    (In thousands, except per share amounts)  
Statement of Operations Data:                  
Revenues   $ 19,165     $     $ 19,165  
Operating expenses     15,157       1,421       16,578  
Operating loss     (1,928 )     (1,421 )     (3,349 )
Net loss     (2,692 )     (762 )     (4,059 )
Net loss per common share, basic           $ (0.27 )   $ (0.12 )

  

39

  

    Year Ended December 31, 2017
(Phunware) and Year Ended
November 30, 2017 (Stellar),
Unaudited
 
    Phunware      Stellar     Pro Forma  Combined  
    (In thousands, except per share amounts)  
Statement of Operations Data:                  
Revenues   $ 26,722     $     $ 26,722  
Operating expenses     36,624       862       37,486  
Operating loss     (25,616 )     (862 )     (26,478 )
Net loss     (25,938 )     (307 )     (26,800 )
Net loss per common share, basic           $ (0.11 )   $ (0.83 )

 

    As of June 30, 2018 (Phunware) and as of
August 31, 2018 (Stellar),
Unaudited
 
    Phunware     Stellar     Pro Forma
Combined
 
    (In thousands)  
Balance Sheet Data:                  
Total current assets   $ 6,217     $ 62     $ 19,899  
Total assets     33,905       19,551       46,730  
Total current liabilities     13,078       2,265       11,771  
Total liabilities     18,807       2,728       17.500  
Total stockholders’ equity (deficit)     (101,881 )     5,000       29,230  

  

Comparative Share Information

 

    Six Months Ended June 30, 2018
(Phunware) and Nine Months Ended
August 31, 2018 (Stellar),
Unaudited
 
    Phunware     Stellar     Pro Forma
Combined
 
    (In thousands, except share and per share amounts)  
Net Loss   $ (2,692 )   $ (762 )   $ (4,059 )
Weighted Average Shares Outstanding, Basic             2,840,600       32,490,696  
Net Loss Per Share, Basic             (0.27 )     (0.12 )

  

    Year Ended December 31, 2017
(Phunware) and Year Ended
November 30, 2017 (Stellar),
Unaudited
 
    Phunware     Stellar     Pro Forma
Combined
 
    (In thousands, except share and per share amounts)  
Net Loss   $ (25,938 )   $ (307 )   $ (26,800 )
Weighted Average Shares Outstanding, Basic             2,737,367       32,387,463  
Net Loss Per Share, Basic           $ (0.11 )   $ (0.83 )

 

40

 

MARKET PRICE AND DIVIDEND INFORMATION

 

Stellar

 

Market Price of Stellar Units, Common Stock and Warrants

 

Stellar’s units, common stock and warrants are each traded on Nasdaq under the symbols “STLRU,” “STLR” and “STLRW”, respectively. Stellar’s units commenced public trading on August 19, 2016 and its common stock and its warrants commenced public trading on October 10, 2016.

 

In connection with the closing of the Business Combination, Stellar will change its corporate name to “Phunware, Inc.” and Stellar’s common stock and warrants will be converted into the Successor’s common stock and warrants. Stellar anticipates that, following the closing of the Business Combination, the Successor’s common stock and common stock warrants will be traded on Nasdaq under the symbols “PHUN” and “PHUNW”, respectively, and Stellar’s units will separate into their component shares of common stock and warrants and the units will no longer be listed on Nasdaq.

 

The table below sets forth the high and low sales prices of Stellar’s units, common stock and warrants as reported on the Nasdaq, for each full quarterly period within the two most recent fiscal years ended November 30, 2016 and 2017 and the interim period from December 1, 2017 through November 1, 2018.

 

   Units   Common Stock   Warrants 
Year Ended November 30, 2016  Low   High   Low   High   Low   High 
August 19, 2016 through September 30, 2016  $9.93   $10.00                 
October 1, 2016 through November 30, 2016  $9.97   $10.30   $9.87   $10.00   $0.10   $0.50 

 

   Units   Common Stock   Warrants 
Year Ended November 30, 2017  Low   High   Low   High   Low   High 
December 1, 2016 through February 28, 2017  $10.04   $10.35   $9.90   $10.16   $0.19   $0.36 
March 1, 2017 through May 31, 2017  $10.25   $10.43   $10.00   $10.20   $0.325   $0.38 
June 1, 2017 through August 31, 2017  $10.34   $10.55   $10.00   $10.28   $0.29   $0.47 
September 1, 2017 through November 30, 2017  $10.52   $10.58   $10.01   $10.23   $0.31   $0.40 

 

    Units     Common Stock     Warrants  
Year Ending November 30, 2018   Low     High     Low     High     Low     High  
December 1, 2017 through February 28, 2018   $ 10.42     $ 11.00     $ 10.07     $ 10.49     $ 0.1213     $ 0.75  
March 1, 2018 through May 31, 2018   $ 10.5411     $ 11.08     $ 10.00     $ 10.43     $ 0.20     $ 0.933  
June 1, 2018 through August 31, 2018   $ 10.5411     $ 10.55     $ 10.36     $ 11     $ 0.1401     $ 0.3429  
September 1, 2018 to November 1, 2018   $ 10.5     $ 10.55     $ 9.16     $ 10.6     $ 0.12     $ 0.2798  

 

On November 1, 2018, Stellar’s common stock had a closing price of $10.50, its warrants had a closing price of $0.20 and its units had a closing price of $10.50.

 

Holders of Stellar units, common stock and warrants should obtain current market quotations for their securities. The market price of Stellar units, common stock and warrants could vary at any time before the business combination with Phunware.

 

Holders

 

As of the Stellar Record Date, there was one holder of record of Stellar’s units, there were 15 holders of record of Stellar’s common stock and three holders of record of Stellar’s warrants.

 

41

 

Phunware

 

Phunware’s securities are not publicly traded. As of September 30, 2018, there were:

 

175 holders of record of Phunware common stock;

 

21 holders of record of Phunware Series A Preferred Stock;

 

17 holders of record of Phunware Series B Preferred Stock;

 

20 holders of record of Phunware Series C Preferred Stock;

 

39 holders of record of Phunware Series D Preferred Stock;

 

5 holders of record of Phunware Series D-1 Preferred Stock;

 

54 holders of record of Phunware Series E Preferred Stock;

 

142 holders of record of Phunware Series F Preferred Stock;

 

43 holders of record of Phunware Series Alpha Preferred Stock;

 

6 holders of record of Phunware Series Beta Preferred Stock;

 

9 holders of record of Phunware Series Gamma Prime Preferred Stock;

 

1 holder of record of warrants to purchase Phunware Series D-1 Preferred Stock; and

 

68 holders of record of warrants to purchase Phunware Series F Preferred Stock.

 

Dividends

 

Stellar

 

Stellar has not paid any cash dividends on its shares to date and does not intend to pay cash dividends prior to the completion of its initial business combination, including the Business Combination. The payment of cash dividends in the future will be dependent upon its revenues and earnings, if any, capital requirements and general financial condition subsequent to the completion of its initial business combination. The payment of any cash dividends subsequent to completion of its initial business combination, including the Business Combination, will be within the discretion of the Stellar Board at such time. In addition, the Stellar Board is not currently contemplating and does not anticipate declaring any share dividends in the foreseeable future. Further, if Stellar incurs any indebtedness, its ability to declare dividends may be limited by restrictive covenants that Stellar may agree to in connection therewith.

 

Phunware

 

Phunware has never declared or paid any cash dividends on its capital stock. Phunware currently intends to retain all available funds and any future earnings for use in the operation of its business and does not expect to pay any dividends on its capital stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including Phunware’s financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that the Phunware Board may deem relevant.

 

Dividend Policy of the Successor Following the Business Combination

 

Following consummation of the Business Combination, the Successor’s board of directors will consider whether or not to institute a dividend policy. It is the present intention of the Successor to assess its ability to declare dividends in light of its capital structure and earnings immediately following the Closing.

 

42

 

RISK FACTORS

 

You should carefully consider all the following risk factors, together with all of the other information included or incorporated by reference in this joint proxy statement/prospectus, including the financial information, before deciding whether or how to vote or instruct your vote to be cast to approve the proposals described in this joint proxy statement/prospectus.

 

The value of your investment following consummation of the Business Combination will be subject to significant risks affecting, among other things, the Successor’s business, financial condition or results of operations. If any of the events described below occur, the Successor’s post-Business Combination business and financial results could be adversely affected in material respects. This could result in a decline, which may be significant, in the trading price of the Successor’s common stock and you therefore may lose all or part of your investment. The risk factors described below are not necessarily exhaustive and you are encouraged to perform your own investigation with respect to the businesses of Stellar and Phunware.

 

Risk Factors Related to Stellar

 

Stellar is an early stage company with no operating history and no revenues and you have no basis on which to evaluate Stellar’s ability to achieve its business objective.

 

Stellar is an early stage company with no operating results. Because Stellar lacks an operating history, you have no basis upon which to evaluate Stellar’s ability to achieve its business objective of completing its initial business combination with Phunware. Stellar may be unable to complete the business combination. If Stellar fails to complete the business combination, it will never generate any operating revenues.

 

The Initial Shareholders have agreed to vote in favor of the Business Combination, regardless of how Stellar’s Public Shareholders vote.

 

Unlike other blank check companies in which the Initial Shareholders agree to vote their Founder Shares in accordance with the majority of the votes cast by the Public Shareholders in connection with an initial business combination, after approval of the Stellar Board, the Initial Shareholders have agreed to vote their Founder Shares, as well as any Public Shares purchased during or after Stellar’s IPO, in favor of the initial business combination. The Initial Shareholders own 50.6% of Stellar’s outstanding shares of common stock as of the date hereof. As a result, Stellar would not need any of the 1,851,720 Public Shares to be voted in favor of its initial business combination in order to have such transaction approved. Accordingly, it is more likely that the necessary shareholder approval will be received than would be the case if the Initial Shareholders agreed to vote their Founder Shares in accordance with the majority of the votes cast by the Public Shareholders.

 

Stellar may not be able to complete its initial business combination within the prescribed time frame, including the extension of such timeframe, in which case Stellar would cease all operations except for the purpose of winding up and Stellar would redeem its Public Shares and liquidate, and Stellar’s warrants would be worthless.

 

Stellar’s executive officers and directors have agreed that Stellar must complete its the initial business combination by December 26, 2018 (or such later date approved by its shareholders). Stellar may not be able to complete its initial business combination by such date. Stellar previously extended the period of time to consummate a business combination on August 24, 2017, November 24, 2017, February 24, 2018 and May 23, 2018, each by an additional three months and on August 23, 2018, by an additional four months. In order for Stellar to extend the time available for it to consummate its initial business combination, the Sponsors or their affiliates or designees must determine to seek shareholder approval for an extension and Stellar’s shareholders would be required to approve such extension. The seeking of such approval may require Stellar to make certain payments in order to encourage shareholders to approve the extension and shareholders may also have the right to redeem their shares in connection with any solicitation of shareholder approval. Stellar currently has no arrangements in place relating to any payments Stellar may offer its shareholders to encourage shareholders to approve an extension and there is no assurance that any such arrangements can or will be put into place. Should the Sponsors or any other parties determine to loan funds to Stellar for this purpose, we expect that the lenders would waive their right to be repaid for such loans out of the funds held in the Trust Account (except from any interest that Stellar is permitted to withdraw) in the event that Stellar does not consummate a business combination. However, Stellar may repay such loans from funds held outside of the Trust Account from interest permitted to be withdrawn. In the event that interest in the trust is available for withdrawal for working capital purposes and has not been used to pay taxes or other working capital expenses, Stellar may apply the accrued interest in the Trust Account or such withdrawn interest to its obligations with respect to any further extension. the Sponsors and their affiliates or designees are not obligated to fund the Trust Account to extend the time for Stellar to complete Stellar’s initial business combination.

 

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If Stellar has not completed its initial business combination within such time period, it will: (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than 10 business days thereafter, redeem the Public Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest (which interest shall be net of taxes payable and working capital released to Stellar and less up to $50,000 of interest to pay dissolution expenses), divided by the number of then outstanding Public Shares, which redemption will completely extinguish Public Shareholders’ rights as shareholders of Stellar (including the right to receive further liquidation distributions, if any), subject to applicable law and (iii) as promptly as reasonably possible following such redemption, subject to the approval of Stellar’s remaining shareholders and the Stellar Board, dissolve and liquidate, subject in each case to Stellar’s obligations under applicable law to provide for claims of creditors and the requirements of other applicable law.

 

In connection with Stellar’s solicitation of shareholder approval of its initial business combination, the Sponsors, directors, executive officers, advisors and their affiliates may elect to purchase shares from the Public Shareholders, which may influence a vote on a proposed business combination and reduce the public “float” of Stellar’s common stock.

 

In connection with Stellar’s solicitation of shareholder approval of its initial business combination, the Sponsors, directors, executive officers, advisors or their affiliates may purchase shares in privately negotiated transactions or in the open market either prior to or following the completion of its initial business combination, although they are under no obligation to do so. Such a purchase may include a contractual acknowledgement that such shareholder, although still the record holder of Stellar Shares, is no longer the beneficial owner thereof and therefore agrees not to exercise its redemption rights. In the event that the Sponsors, directors, executive officers, advisors or their affiliates purchase shares in privately negotiated transactions from Public Shareholders who have already elected to exercise their Redemption Rights, such selling shareholders would be required to revoke their prior elections to redeem their shares. The purpose of such purchases could be to vote such shares in favor of the Business Combination and the related transactions and thereby increase the likelihood of obtaining shareholder approval of the Business Combination and related transactions or to satisfy the Closing condition in the Merger Agreement, where it appears that such requirement would otherwise not be met. This may result in the consummation of the Business Combination and the related transactions that may not otherwise have been possible.

 

In addition, if such purchases are made, the public “float” of Stellar’s common stock and the number of beneficial holders of its securities may be reduced, possibly making it difficult to maintain the quotation, listing or trading of the Successor’s securities on a national securities exchange.

 

If a Public Shareholder fails to receive notice of Stellar’s offer to redeem its Public Shares in connection with the Business Combination, or fails to comply with the procedures for tendering its shares, such shares may not be redeemed.

 

Stellar will comply with the applicable SEC rules when conducting redemptions in connection with the consummation of the Business Combination. Despite Stellar’s compliance with these rules, if a Public Shareholder fails to receive this joint proxy statement/prospectus or related materials, such shareholder may not become aware of the opportunity to redeem its shares. In addition, this joint proxy statement/prospectus describes the various procedures that must be complied with in order to validly tender or redeem Public Shares. In the event that a Public Shareholder fails to comply with these procedures, its shares may not be redeemed.

 

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You will not have any rights or interests in funds from the Trust Account, except under certain limited circumstances. To liquidate your investment, therefore, you may be forced to sell your Public Shares or warrants, potentially at a loss.

 

Stellar’s Public Shareholders will be entitled to receive funds from the Trust Account only upon the earlier to occur of: (i) Stellar’s completion of an initial business combination and then only in connection with those shares of Stellar’s common stock that such shareholder properly elected to redeem, subject to the limitations described herein or (ii) the Redemption of the Public Shares if Stellar is unable to complete an initial business combination by December 26, 2018 (or such later date approved by its shareholders), subject to applicable law and as further described herein. In addition, if Stellar’s plan to redeem the Public Shares if it is unable to complete an initial business combination by December 26, 2018 (or such later date approved by its shareholders) is not completed for any reason, compliance with applicable law and Stellar’s Articles of Incorporation may require that Stellar submit a plan of dissolution to its then-existing shareholders for approval prior to the distribution of the proceeds held in the Trust Account. In that case, Public Shareholders may be forced to wait beyond December 26, 2018 (or such earlier date as determined by the Stellar Board) before they receive funds from the Trust Account. In no other circumstances will a Public Shareholder have any right or interest of any kind in the Trust Account. Accordingly, to liquidate your investment, you may be forced to sell your Public Shares or warrants of Stellar, potentially at a loss.

 

You will not be entitled to protections normally afforded to investors of many other blank check companies.

 

Since the net proceeds of Stellar’s IPO and the sale of the Private Placement Warrants were intended to be used to complete an initial business combination with a target business that had not been identified, Stellar may be deemed to be a “blank check” company under the United States securities laws. However, because Stellar has net tangible assets in excess of $5,000,000, Stellar is exempt from rules promulgated by the SEC to protect investors in blank check companies, such as Rule 419. Accordingly, investors will not be afforded the benefits or protections of those rules. Among other things, this means that Stellar has had a longer period of time to complete its initial business combination than do companies subject to Rule 419. Moreover, if Stellar’s IPO had been subject to Rule 419, that rule would prohibit the release of any interest earned on funds held in the Trust Account to Stellar unless and until the funds in the Trust Account were released to Stellar in connection with Stellar’s completion of its initial business combination.

 

If you or a “group” of shareholders are deemed to hold in excess of 26% of Stellar’s common stock, you will lose the ability to redeem all such shares in excess of 26% of Stellar’s common stock.

 

Stellar’s amended and restated Articles of Incorporation provide that a Public Shareholder, together with any affiliate of such shareholder or any other person with whom such shareholder is acting in concert or as a “group” (as defined under Section 13 of the Exchange Act), will be restricted from seeking redemption rights with respect to more than an aggregate of 26% of the shares sold in Stellar’s IPO, which are referred to as the “Excess Shares.” However, Stellar would not be restricting its shareholders’ ability to vote all of their shares (including the Excess Shares) for or against the Business Combination. Your inability to redeem the Excess Shares will reduce your influence over Stellar’s ability to complete the Business Combination and you could suffer a material loss on your investment in s Stellar if you sell Excess Shares in open market transactions. Additionally, you will not receive Redemption distributions with respect to the Excess Shares if Stellar consummates the Business Combination. And as a result, you will continue to hold that number of shares exceeding 26% and, in order to dispose of such shares, would be required to sell your stock in open market transactions, potentially at a loss.

 

Stellar’s shareholders may be liable for claims of third-party creditors to the extent you receive distributions in a dissolution.

 

Under Republic of the Marshall Islands law, Stellar’s shareholders might, in certain circumstances, be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. If Stellar complied with the procedures set forth in Section 106 of the BCA, which are intended to ensure that Stellar makes reasonable provision for all claims against Stellar, including a six month notice period during which any third-party claims can be brought against Stellar before any liquidating distributions are made to shareholders, any liability of a shareholder with respect to a liquidating distribution should be limited to the lesser of such shareholder’s pro rata share of the claim or the amount distributed to the shareholder and any liability of the shareholder should be barred after the period set forth in such notice. However, it is Stellar’s intention to make liquidating distributions to its shareholders as soon as reasonably possible after dissolution if its initial business combination does not occur. As such, Stellar’s shareholders could potentially be liable for any claims to the extent of distributions received by them in a dissolution and any such liability of Stellar’s shareholders will likely extend beyond the third anniversary of such dissolution or the settlement of claims, litigation or proceedings begun prior to or during the three year period. Accordingly, third parties may seek to recover from Stellar’s shareholders amounts owed to them by Stellar.

 

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If third parties bring claims against Stellar, the proceeds held in the Trust Account could be reduced and the per-share Redemption amount received by shareholders may be less than $10.60 per share (or such higher amount then held in trust).

 

Stellar’s placing of funds in the Trust Account may not protect those funds from third-party claims against Stellar. Although Stellar seeks to have all vendors, service providers, prospective target businesses or other entities with which it does business execute agreements with Stellar waiving any right, title, interest or claim of any kind in or to any monies held in the Trust Account for the benefit of the Public Shareholders, such parties may not execute such agreements, or even if they execute such agreements they may not be prevented from bringing claims against the Trust Account, including, but not limited to, fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain advantage with respect to a claim against Stellar’s assets, including the funds held in the Trust Account. If any third party refuses to execute an agreement waiving such claims to the monies held in the Trust Account, Stellar’s management will perform an analysis of the alternatives available to it and will only enter into an agreement with a third party that has not executed a waiver if management believes that such third party’s engagement would be significantly more beneficial to Stellar than any alternative.

 

Examples of possible instances where Stellar may engage a third party that refuses to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a service provider willing to execute a waiver. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with Stellar and will not seek recourse against the Trust Account for any reason. Upon Redemption of the Public Shares, if Stellar is unable to complete its initial business combination within the prescribed time frame, or upon the exercise of a Redemption Right in connection with the Business Combination, Stellar will be required to provide for payment of claims of creditors that were not waived that may be brought against Stellar within the three years (which may be extended under certain circumstances) following Redemption. Accordingly, the per-share Redemption amount received by Public Shareholders could be less than the $10.60 per share initially held in the Trust Account (or such higher amount then held in trust), due to claims of such creditors. Messrs. Tsirigakis and Syllantavos have agreed that they will be jointly liable to Stellar if and to the extent any claims by a vendor for services rendered or products sold to Stellar, or a prospective target business with which Stellar has discussed entering into a transaction agreement, reduce the amount of funds in the Trust Account to below (i) $10.60 per Public Share (or such higher amount then held in trust) or (ii) such lesser amount per Public Share held in the Trust Account as of the date of the liquidation of the Trust Account due to reductions in the value of the trust assets, in each case net of the interest which may be withdrawn to pay taxes or working capital expenses, except as to any claims by a third party who executed a waiver of any and all rights to seek access to the Trust Account and except as to any claims under Stellar’s indemnity of the underwriters of its IPO against certain liabilities, including liabilities under the Securities Act. Moreover, in the event that an executed waiver is deemed to be unenforceable against a third party, Messrs. Tsirigakis and Syllantavos will not be responsible to the extent of any liability for such third party claims. Stellar has not independently verified whether Mr. Tsirigakis or Mr. Syllantavos have sufficient funds to satisfy their indemnity obligations and, therefore, Messrs. Tsirigakis and Syllantavos may not be able to satisfy those obligations. Stellar has not asked Mr. Tsirigakis or Mr. Syllantavos to reserve for such possibility.

 

Stellar’s directors may decide not to enforce the indemnification obligations of Messrs. Tsirigakis and Syllantavos, resulting in a reduction in the amount of funds in the Trust Account available for distribution to the Public Shareholders.

 

In the event that the proceeds in the Trust Account are reduced below the lesser of (i) $10.60 per share (or such higher amount then held in trust) or (ii) other than due to the failure to obtain such waiver such lesser amount per share held in the Trust Account as of the date of the liquidation of the Trust Account due to reductions in the value of the trust assets, in each case net of the interest which may be withdrawn to pay taxes or working capital expenses and Messrs. Tsirigakis and Syllantavos assert that they are unable to satisfy their obligations or that they have no indemnification obligations related to a particular claim, Stellar’s independent directors would determine whether to take legal action against Messrs. Tsirigakis and Syllantavos to enforce their indemnification obligations. While Stellar currently expects that its independent directors would take legal action on behalf of Stellar against Messrs. Tsirigakis and Syllantavos to enforce their indemnification obligations to Stellar, it is possible that Stellar’s independent directors in exercising their business judgment may choose not to do so in any particular instance. If Stellar’s independent directors choose not to enforce these indemnification obligations, the amount of funds in the Trust Account available for distribution to Stellar’s Public Shareholders may be reduced below $10.60 per share (or such higher amount then held in trust).

 

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If, after Stellar distributes the proceeds in the Trust Account to the Public Shareholders, Stellar files a bankruptcy petition or an involuntary bankruptcy petition is filed against Stellar that is not dismissed, a bankruptcy court may seek to recover such proceeds and the members of Stellar’s board of directors may be viewed as having breached their fiduciary duties to Stellar’s creditors, thereby exposing the members of the Stellar Board and Stellar to claims of punitive damages.

 

If, after Stellar distributes the proceeds in the Trust Account to its Public Shareholders, Stellar files a bankruptcy petition or an involuntary bankruptcy petition is filed against Stellar that is not dismissed, any distributions received by shareholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover all amounts received by Stellar’s shareholders. In addition, the Stellar Board may be viewed as having breached its fiduciary duty to Stellar’s creditors and/or having acted in bad faith, thereby exposing itself and Stellar to claims of punitive damages, by paying Public Shareholders from the Trust Account prior to addressing the claims of creditors.

 

If, before distributing the proceeds in the Trust Account to the Public Shareholders, Stellar files a bankruptcy petition or an involuntary bankruptcy petition is filed against Stellar that is not dismissed, the claims of creditors in such proceeding may have priority over the claims of Stellar’s shareholders and the per-share amount that would otherwise be received by Stellar’s shareholders in connection with Stellar’s liquidation may be reduced.

 

If, before distributing the proceeds in the Trust Account to the Public Shareholders, Stellar files a bankruptcy petition or an involuntary bankruptcy petition is filed against Stellar that is not dismissed, the proceeds held in the Trust Account could be subject to applicable bankruptcy law and may be included in Stellar’s bankruptcy estate and subject to the claims of third parties with priority over the claims of Stellar’s shareholders. To the extent any bankruptcy claims deplete the Trust Account, the per-share amount that would otherwise be received by Stellar’s shareholders in connection with Stellar’s liquidation may be reduced.

 

If Stellar is deemed to be an investment company under the Investment Company Act, Stellar may be required to institute burdensome compliance requirements and Stellar’s activities may be restricted, which may make it difficult for Stellar to complete the Business Combination.

 

If Stellar is deemed to be an investment company under the Investment Company Act, Stellar’s activities may be restricted, including:

 

restrictions on the nature of Stellar’s investments, and

 

restrictions on the issuance of securities,

 

each of which may make it difficult for Stellar to complete its business combination.

 

In addition, Stellar may have imposed upon it burdensome requirements, including:

 

registration as an investment company;

 

adoption of a specific form of corporate structure; and

 

reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations.

 

If Stellar were deemed to be subject to the Investment Company Act, compliance with these additional regulatory burdens would require additional expenses for which Stellar has not allotted funds and may hinder Stellar’s ability to complete the Business Combination. If Stellar is unable to complete the initial business combination, Stellar’s Public Shareholders may receive only approximately $10.60 per share (or such higher amount then held in trust) on the liquidation of the Trust Account and Stellar’s warrants will expire worthless.

 

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Changes in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect the business, investments and results of operations of Stellar and the Successor.

 

Stellar is subject to laws and regulations enacted by national, regional and local governments. In particular, Stellar is required to comply with certain SEC and other legal requirements. Compliance with and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time and those changes could have a material adverse effect on the business, investments and results of operations of Stellar and the Successor. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on Stellar and the Successor’s business and results of operations.

 

Stellar has not registered the shares of common stock issuable upon exercise of its warrants under the Securities Act or any state securities laws at this time and such registration may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise its warrants and causing such warrants to expire worthless.

 

Stellar has not registered the shares of common stock issuable upon exercise of the warrants issued in its IPO under the Securities Act or any state securities laws at this time. However, under the terms of the warrant agreement, Stellar has agreed, as soon as practicable, but in no event later than 30 days after the closing of the initial business combination, to use its best efforts to file a registration statement under the Securities Act covering such shares and no later than 90 days after the closing of its initial business combination to have a current prospectus relating to the common stock issuable upon exercise of the warrants, until the expiration of the warrants in accordance with the provisions of the warrant agreement. Stellar cannot assure you that it will be able to do so if, for example, any facts or events arise which represent a fundamental change in the information set forth in this joint proxy statement/prospectus, the financial statements contained or incorporated by reference therein are not current or correct or the SEC issues a stop order. If the shares issuable upon exercise of the warrants issued in Stellar’s IPO are not registered under the Securities Act, Stellar will be required to permit holders to exercise their warrants on a cashless basis. However, no warrant will be exercisable for cash or on a cashless basis and Stellar will not be obligated to issue any shares to holders seeking to exercise their warrants, unless the issuance of the shares upon such exercise is registered or qualified under the securities laws of the state of the exercising holder, unless an exemption is available. Notwithstanding the above, if Stellar’s common stock is at the time of any exercise of a warrant not listed on a national securities exchange such that it satisfies the definition of a “covered security” under Section 18(b)(1) of the Securities Act, Stellar may, at its option, require holders of public warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event Stellar so elects, it will not be required to file or maintain in effect a registration statement or register or qualify the shares under blue sky laws and in the event Stellar does not so elect, Stellar will use its best efforts to register or qualify the shares under the blue sky laws of the state of residence in those states in which the warrants were initially offered by us in Stellar’s IPO. In no event will Stellar be required to net cash settle any warrant, or issue securities or other compensation in exchange for the warrants in the event that it is unable to register or qualify the shares underlying the warrants under the Securities Act or applicable state securities laws. If the issuance of the shares upon exercise of the warrants is not so registered or qualified or exempt from registration or qualification, the holder of such warrant shall not be entitled to exercise such warrant and such warrant may have no value and expire worthless. In such event, holders who acquired their warrants as part of a purchase of units will have paid the full unit purchase price solely for the shares of common stock included in the units. If and when the warrants become redeemable by Stellar, Stellar may exercise its redemption right even if the issuance of shares of common stock upon exercise of the warrants is not exempt from registration or qualification under applicable state blue sky laws and Stellar is unable to effect such registration or qualification, subject to Stellar’s obligation in such case to use it best efforts to register or qualify the shares of common stock under the blue sky laws of the state of residence in those states in which the warrants were initially offered by Stellar in its IPO.

 

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The grant of registration rights to The Initial Shareholders and holders of Stellar’s Private Placement Warrants may make it more difficult to complete the initial business combination and the future exercise of such rights may adversely affect the market price of the Successor’s common stock.

 

Pursuant to an agreement entered into concurrently with the issuance and sale of the securities in Stellar’s initial public offering, The Initial Shareholders and their permitted transferees can demand that Stellar register the Founder Shares, holders of Stellar’s Private Placement Warrants and their permitted transferees can demand that Stellar register the Private Placement Warrants and the shares of common stock issuable upon exercise of the Private Placement Warrants. Stellar will bear the cost of registering these securities. The registration and availability of such a significant number of securities for trading in the public market may have an adverse effect on the market price of the Successor’s common stock. In addition, the existence of the registration rights may make Stellar’s initial business combination more costly or difficult to conclude. This is because the shareholders of Phunware may increase the equity stake they seek in the combined entity or ask for more cash consideration to offset the negative impact on the market price of Stellar’s common stock that is expected when the securities owned by The Initial Shareholders, holders of its Private Placement Warrants or their respective permitted transferees are registered.

 

If Stellar shareholders exercise their registration rights with respect to their securities, it may have an adverse effect on the market price of Stellar Shares and the existence of these rights may make it more difficult to effect a business combination, including the Business Combination.

 

The Initial Shareholders are entitled to make a demand that Stellar register the resale of their insider shares at any time commencing the consummation of Stellar’s initial business combination. Additionally, the purchasers of the units and the Initial Shareholders, officers and directors are entitled to demand that Stellar register the resale of the units (and the underlying securities) and any securities the Initial Shareholders, officers, directors or their affiliates may be issued in payment of working capital loans made to Stellar at any time after Stellar consummates a business combination, including the Business Combination. The presence of these additional securities trading in the public market may have an adverse effect on the market price of Stellar securities. In addition, the existence of these rights may make it more difficult to effectuate a business combination, including the Business Combination, or increase the cost of acquiring the target business, as the shareholders of the target business may be discouraged from entering into a business combination, including the Business Combination, with Stellar or will request a higher price for their securities because of the potential effect the exercise of such rights may have on the trading market for Stellar Shares.

 

Stellar may issue notes or other debt securities, or otherwise incur substantial debt, to complete a business combination, which may adversely affect Stellar’s leverage and financial condition and thus negatively impact the value of Stellar’s shareholders’ investment in Stellar.

 

On each of August 24, 2017, November 24, 2017, February 23, 2018, May 23, 2018, June 23, 2018, July 23, 2018, August 23, 2018, September 24, 2018 and October 24, 2018, Stellar issued unsecured promissory notes in the aggregate amount of $303,300, $301,000, $167,100, $62,082, $62,082, $62,082, $37,034, $37,034 and $37,034, respectively, to the Sponsors and on February 22, 2018, May 23, 2018, June 23, 2018, July 23, 2018, August 23, 2018, and September 24, 2018, Stellar issued promissory notes in the aggregate amount of $201,268, $62,082, $62,082, $62,082, $37,034, and $37,034, respectively, to Phunware. The Notes bear no interest and are repayable in full upon consummation of Stellar’s initial business combination. Although Stellar has no other commitments as of the date of this joint proxy statement/prospectus to issue any notes or other debt securities, or to otherwise incur outstanding debt, Stellar may choose to incur additional debt to consummate the Business Combination. Stellar has agreed that it will not incur any indebtedness unless it has obtained from the lender a waiver of any right, title, interest or claim of any kind in or to the monies held in the Trust Account. As such, no issuance of debt will affect the per-share amount available for Redemption from the Trust Account. Nevertheless, the incurrence of debt could have a variety of negative effects, including:

 

default and foreclosure on Stellar’s assets if Stellar’s operating revenues after an initial business combination are insufficient to repay Stellar’s debt obligations;

 

acceleration of Stellar’s obligations to repay the indebtedness even if Stellar makes all principal and interest payments when due if Stellar breaches certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant;

 

Stellar’s immediate payment of all principal and accrued interest, if any, if the debt security is payable on demand;

 

Stellar’s inability to obtain necessary additional financing if the debt security contains covenants restricting Stellar’s ability to obtain such financing while the debt security is outstanding;

 

Stellar’s inability to pay dividends on Stellar’s common stock;

 

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using a substantial portion of Stellar’s cash flow to pay principal and interest on Stellar’s debt, which will reduce the funds available for dividends on Stellar’s common stock if declared, expenses, capital expenditures, acquisitions and other general corporate purposes;

 

limitations on Stellar’s flexibility in planning for and reacting to changes in Stellar’s business and in the industry in which it operates;

 

increased vulnerability to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; and

 

limitations on Stellar’s ability to borrow additional amounts for expenses, capital expenditures, acquisitions, debt service requirements, execution of its strategy and other purposes and other disadvantages compared to its competitors who have less debt.

 

The exercise price for Stellar’s public warrants is higher than in many similar blank check company offerings in the past, and, accordingly, the warrants are more likely to expire worthless.

 

The exercise price of Stellar’s public warrants (the “Public Warrants”) is higher than is typical in many similar blank check company offerings in the past. Historically, the exercise price of a warrant was generally a fraction of the purchase price of the units in the IPO. The exercise price for the Public Warrants is $11.50 per share. As a result, the warrants are less likely to ever be in the money and more likely to expire worthless.

 

The provisions of Stellar’s amended and restated Articles of Incorporation that relate to Stellar’s pre-Business Combination activity (and corresponding provisions of the agreement governing the release of funds from Stellar’s Trust Account) may be amended with the approval of holders of 65% of Stellar’s common stock, which is a lower amendment threshold than that of some other blank check companies. It may be easier for Stellar, therefore, to amend its amended and restated Articles of Incorporation to facilitate the completion of the Business Combination that some of Stellar’s shareholders may not support.

 

Stellar’s amended and restated Articles of Incorporation provide that any of its provisions related to pre-Business Combination activity (including the requirement to deposit proceeds of Stellar’s IPO and the private placement of warrants into the Trust Account and not release such amounts except in specified circumstances and to provide Redemption Rights to Public Shareholders as described herein) may be amended if approved by holders of 65% of Stellar’s common stock and corresponding provisions of the trust agreement governing the release of funds from Stellar’s Trust Account may be amended if approved by holders of 65% of Stellar’s common stock. In all other instances, Stellar’s amended and restated Articles of Incorporation may be amended by holders of a majority of Stellar’s common stock, subject to applicable provisions of the BCA or Nasdaq rules. The Initial Shareholders, who collectively beneficially own 50.6% of Stellar’s common stock, will participate in any vote to amend Stellar’s amended and restated Articles of Incorporation and/or trust agreement and will have the discretion to vote in any manner they choose. As a result, Stellar may be able to amend the provisions of its amended and restated Articles of incorporation which govern Stellar’s pre-Business Combination behavior more easily than some other blank check companies (which require approval by between 90% and 100% of the company’s Public Shareholders) and this may increase Stellar’s ability to consummate the Business Combination, even if you do not agree with the Business Combination. Stellar’s shareholders may pursue remedies against Stellar for any breach of Stellar’s amended and restated Articles of Incorporation.

 

Stellar’s executive officers and directors have agreed, pursuant to a written agreement with Stellar, that they will not propose any amendment to Stellar’s amended and restated Articles of Incorporation that would affect the substance or timing of Stellar’s obligation to redeem 100% of Stellar’s Public Shares if Stellar does not complete its initial business combination by December 26, 2018 (or such later date approved by its shareholders), unless Stellar provides the Public Shareholders with the opportunity to redeem their shares of common stock upon approval of any such amendment at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest (net of the interest which may be withdrawn to pay taxes or working capital expenses) divided by the number of then outstanding Public Shares. These agreements are contained in letter agreements that Stellar has entered into with the Sponsors, executive officers and directors. Prior to acquiring any securities from the Initial Shareholders, permitted transferees must enter into a written agreement with Stellar agreeing to be bound by the same restriction. Stellar’s shareholders are not parties to, or third-party beneficiaries of, these agreements and, as a result, will not have the ability to pursue remedies against The Sponsors, executive officers, or directors for any breach of these agreements. As a result, in the event of a breach, Stellar’s shareholders would need to pursue a shareholder derivative action, subject to applicable law.

 

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Stellar’s letter agreement with the Sponsors, directors and officers may be amended without shareholder approval.

 

Stellar’s letter agreement with the Sponsors, directors and officers contains provisions relating to transfer restrictions of the Founder Shares and sponsor warrants, indemnification of the Trust Account, waiver of redemption rights and participation in liquidation distributions from the Trust Account. This letter agreement may be amended without shareholder approval. While Stellar does not expect its board to approve any amendment to this agreement prior to its initial business combination, it may be possible that the Stellar Board, in exercising its business judgment and subject to its fiduciary duties, chooses to approve one or more amendments to such agreement. Any such amendment may have an adverse effect on the value of an investment in Stellar’s securities.

 

The Initial Shareholders control a substantial interest in Stellar and thus may exert a substantial influence on actions requiring a shareholder vote, potentially in a manner that you do not support.

 

The Initial Shareholders owns 50.6% of Stellar’s issued and outstanding shares of common stock. Accordingly, they may exert a substantial influence on actions requiring a shareholder vote, including the matters to be considered at the Stellar Special Meeting, potentially in a manner that you do not support. If The Initial Shareholders purchase any additional shares of common stock in the aftermarket or in privately negotiated transactions, this would increase their control. Neither The Initial Shareholders nor, to Stellar’s knowledge, any of Stellar’s officers or directors, have any current intention to purchase additional securities, other than as may be disclosed in this joint proxy statement/prospectus. Factors that would be considered in making such additional purchases would include consideration of the current trading price of Stellar’s common stock. In addition, the Stellar Board, whose members were elected by The Sponsors, is divided into two classes, each of which will generally serve for a term of two years with only one class of directors being elected in each year. Stellar will not hold an annual meeting of shareholders to elect new directors prior to the consummation of the business combination, in which case all of the current directors will continue in office until at least the completion of the Business Combination. Accordingly, the Initial Shareholders will continue to exert control at least until the consummation of the Business Combination.

 

Stellar may amend the terms of the warrants in a manner that may be adverse to holders with the approval by the holders of at least 65% of the then outstanding Public Warrants.

 

Stellar’s warrants are issued in registered form under a warrant agreement between Continental, as warrant agent, and Stellar. The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of at least 65% of the then outstanding Public Warrants to make any change that adversely affects the interests of the registered holders. Accordingly, Stellar may amend the terms of the warrants in a manner adverse to a holder if holders of at least 65% of the then outstanding Public Warrants approve of such amendment. Although Stellar’s ability to amend the terms of the warrants with the consent of at least 65% of the then outstanding Public Warrants is unlimited, examples of such amendments could be amendments to, among other things, increase the exercise price of the warrants, shorten the exercise period or decrease the number of shares of Stellar’s common stock purchasable upon exercise of a warrant.

 

Stellar may redeem your unexpired warrants prior to their exercise at a time that is disadvantageous to you, thereby making your warrants worthless.

 

Stellar has the ability to redeem outstanding warrants at any time after they become exercisable and prior to their expiration, at a price of $0.01 per warrant, provided that the last reported sales price of Stellar’s common stock equals or exceeds $21.00 per share for any 20 trading days within a 30 trading-day period ending on the third trading day prior to the date Stellar sends the notice of redemption to the warrant holders. If and when the warrants become redeemable by Stellar, Stellar may exercise its redemption right even if the issuance of shares of common stock upon exercise of the warrants is not exempt from registration or qualification under applicable state blue sky laws and Stellar is unable to effect such registration or qualification, subject to Stellar’s obligation in such case to use its best efforts to register or qualify the shares of common stock under the blue sky laws of the state of residence in those states in which the warrants were initially offered by Stellar in its IPO. Redemption of the outstanding warrants could force you (i) to exercise your warrants and pay the exercise price at a time when it may be disadvantageous for you to do so, (ii) to sell your warrants at the then-current market price when you might otherwise wish to hold your warrants or (iii) to accept the nominal redemption price which, at the time the outstanding warrants are called for redemption, is likely to be substantially less than the market value of your warrants. None of the Private Placement Warrants will be redeemable by Stellar so long as they are held by their initial purchasers or their permitted transferees.

 

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Stellar’s warrants may have an adverse effect on the market price of Stellar’s common stock and make it more difficult to effectuate the Business Combination.

 

Stellar issued warrants to purchase 6,900,610 shares of its common stock as part of the units offered in Stellar’s IPO, and, simultaneously with the closing of the IPO, Stellar issued in a private placement an aggregate of 7,970,488 Private Placement Warrants, each exercisable to purchase one share of common stock at $11.50 per share. In addition, Stellar issued a unit purchase option to the underwriters of Stellar’s IPO, pursuant to which the underwriters have the option to purchase 130,000 units consisting of common stock and warrants to purchase an additional 130,000 shares of Stellar’s common stock. To the extent Stellar issues shares of common stock to effectuate the Business Combination, the potential for the issuance of a substantial number of additional shares of common stock upon exercise of these warrants could have made Stellar a less attractive acquisition vehicle to a target business. Such warrants, when exercised, will increase the number of issued and outstanding shares of Stellar’s common stock and reduce the value of the shares of common stock issued to consummate the Business Combination. Therefore, Stellar’s warrants may have made it more difficult to effectuate a business combination or may have increased the cost of acquiring the target business.

 

The Private Placement Warrants are identical to the warrants sold as part of the units in Stellar’s IPO except that, so long as they are held by the initial purchasers or their permitted transferees, (i) they will not be redeemable by Stellar, (ii) they (including the common stock issuable upon exercise of these warrants) may not, subject to certain limited exceptions, be transferred, assigned or sold by the Sponsors until 30 days after the completion of its initial business combination and (iii) they may be exercised by the holders on a cashless basis.

 

Stellar is an emerging growth company within the meaning of the Securities Act and Stellar has taken advantage of certain exemptions from disclosure requirements available to emerging growth companies; this could make the Successor’s securities less attractive to investors and may make it more difficult to compare the Successor’s performance with other public companies.

 

Stellar is an “emerging growth company” within the meaning of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2002 (the “JOBS Act”) and has taken advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor internal controls attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in Stellar’s periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As a result, Stellar’s shareholders may not have access to certain information they may deem important. Stellar and the Successor may be an emerging growth company for up to five years, although circumstances could cause the loss of that status earlier, including if the market value of the common stock held by non-affiliates exceeds $700 million as of any May 31 before that time, in which case the Successor would no longer be an emerging growth company as of the following November 30 (or such other date as may be applicable were the Successor to change its fiscal year). Stellar cannot predict whether investors will find its or the Successor’s securities less attractive because Stellar and the Successor rely on these exemptions. If some investors find the securities less attractive as a result of reliance on these exemptions, the trading prices of the Successor’s securities may be lower than they otherwise would be, there may be a less active trading market for the Successor’s securities and the trading prices of the securities may be more volatile.

 

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. Stellar has elected to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, Stellar, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of Stellar’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

 

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Compliance obligations under the Sarbanes-Oxley Act may make it more difficult for us to effectuate the Business Combination, require substantial financial and management resources and increase the time and costs of completing an acquisition.

 

Section 404 of the Sarbanes-Oxley Act requires that Stellar evaluate and report on its system of internal controls. Only in the event that Stellar is deemed to be a large accelerated filer or an accelerated filer will Stellar be required to comply with the independent registered public accounting firm attestation requirement on its internal control over financial reporting. Further, for as long as Stellar remains an emerging growth company, it will not be required to comply with the independent registered public accounting firm attestation requirement on its internal control over financial reporting. The fact that Stellar is a blank check company makes compliance with the requirements of the Sarbanes-Oxley Act particularly burdensome as compared to other public companies because Phunware may not be in compliance with the provisions of the Sarbanes-Oxley Act regarding adequacy of its internal controls. The development of the internal control of Phunware to achieve compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to consummate the Business Combination.

 

Risks Related to the Redomestication and Business Combination

 

The ability of Stellar’s shareholders to exercise redemption rights with respect to a large number of Stellar’s shares may not allow Stellar to complete the Business Combination or optimize its capital structure.

 

At the time we entered into the Merger Agreement, Stellar did not know how many shareholders would exercise their redemption rights and therefore Stellar needed to structure the transaction based on its expectations as to the number of shares that will be submitted for redemption. Because the Merger Agreement requires Stellar to have a minimum amount of cash at closing, Stellar will need to reserve a portion of the cash in the Trust Account to meet such requirements, or arrange for third party financing. In addition, if a larger number of shares are submitted for redemption than Stellar initially expected, Stellar may need to seek to restructure the transaction to reserve a greater portion of the cash in the Trust Account or arrange for third-party financing. Third party financing may not be available to Stellar. Furthermore, raising additional third-party financing may involve dilutive equity issuances or the incurrence of indebtedness at higher than desirable levels.

 

If the Business Combination with Phunware is unsuccessful, you would not receive your pro rata portion of the Trust Account until Stellar liquidates the Trust Account. If you are in need of immediate liquidity, you could attempt to sell your stock in the open market; however, at such time Stellar’s stock may trade at a discount to the pro rata amount per share in the Trust Account. In either situation, you may suffer a material loss on your investment or lose the benefit of funds expected in connection with Stellar’s redemption until Stellar liquidates or you are able to sell your stock in the open market.

 

Because of Stellar’s limited resources and the significant competition for business combination opportunities, it may be more difficult for Stellar to complete its initial business combination. If Stellar is unable to complete its initial business combination, the Public Shareholders may receive only approximately $10.60 per share (or such higher amount then held in trust), on Stellar’s redemption and Stellar’s warrants will expire worthless.

 

Stellar has encountered intense competition from other entities having a business objective similar to Stellar’s, including private investors (which may be individuals or investment partnerships), other blank check companies and other entities, domestic and international, competing for businesses such as Phunware. Many of these individuals and entities are well-established and have extensive experience in identifying and effecting, directly or indirectly, acquisitions of companies operating in or providing services to various industries. Many of these competitors possess greater technical, human and other resources or more local industry knowledge than Stellar does and Stellar’s financial resources are relatively limited when contrasted with those of many of these competitors. Stellar’s ability to compete with respect to the acquisition of certain target businesses has been limited by Stellar’s available financial resources. This inherent competitive limitation has given others an advantage in pursuing the acquisition of certain target businesses. Furthermore, if Stellar is obligated to pay cash for the shares of common stock redeemed (including pursuant to this solicitation and the solicitation of shareholder approval for any further extension of time to completed its initial business combination), Stellar may make purchases of its common stock, potentially reducing the resources available to Stellar for its initial business combination. Any of these obligations may have placed Stellar at a competitive disadvantage in negotiating its proposed Business Combination with Phunware. If Stellar is unable to complete its initial business combination, the Public Shareholders may receive only approximately $10.60 per share (or such higher amount then held in trust) on the liquidation of the Trust Account and Stellar’s warrants will expire worthless.

 

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The net proceeds of Stellar’s IPO not being held in the Trust Account may be insufficient to allow Stellar to operate and pay taxes and expenses until the completion of the initial business combination or to complete the initial business combination.

 

The funds available to Stellar outside of the Trust Account may not be sufficient to allow Stellar to operate until the completion of its initial business combination. Although Stellar believes that, as of August 31, 2018, the funds available outside of the Trust Account ($84,000), are sufficient to allow Stellar to operate until December 26, 2018 (or such later date approved by its shareholders) and to complete its initial business combination, Stellar cannot assure you that its estimate is accurate. Stellar has already incurred considerable expenses in connection with its search for a target business, in connection with its negotiation of a letter of intent and the Merger Agreement with Phunware and in connection with its due diligence and other activities. Stellar anticipates that further diligence on Phunware and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments will require substantial management time and attention and substantial costs for accountants, attorneys and others. Notwithstanding the execution of the Merger Agreement, the Business Combination may not occur for any number of reasons including those beyond our control. Any such event will result in a loss to us of the related costs incurred. If Stellar is required to seek additional capital, we may be obligated to borrow funds from the Sponsors, management team or other third parties to operate or Stellar may be forced to liquidate. Neither the Sponsors, members of Stellar’s management team nor any of their respective affiliates is under any obligation to advance funds to us in such circumstances. Any such advances would be repaid only from funds held outside the Trust Account or from funds released to us upon completion of Stellar’s initial business combination.

 

If Stellar is unable to complete its initial business combination, Stellar’s Public Shareholders may receive only approximately $10.60 per share (or such higher amount then held in trust) on the liquidation of the Trust Account and Stellar’s warrants will expire worthless.

 

Stellar may not seek an opinion from an unaffiliated third party as to the fair market value of the target business it acquires, including the Business Combination, or that the price it is paying for the business, including the Business Combination, is fair to its shareholders from a financial point of view.

 

Stellar is not required to obtain an opinion from an unaffiliated third party that the target business it selects has a fair market value in excess of at least 80% of the balance of the Trust Account unless the Stellar Board cannot make such determination on its own. Stellar is also not required to obtain an opinion from an unaffiliated third party indicating that the price it is paying is fair to its shareholders from a financial point of view unless the target is affiliated with its officers, directors, Initial Shareholders or their affiliates. If no opinions are obtained, Stellar’s shareholders will be relying on the judgment of the Stellar Board, whose collective experience in business evaluations for blank check companies and whose determination as to fair market value has been based on standards generally accepted by the financial community. Furthermore, Stellar’s directors may have a conflict of interest in analyzing the transaction due to their personal and financial interests.

 

You may be unable to ascertain the merits or risks of Phunware’s operations and the business of Phunware is outside of Stellar management’s area of expertise.

 

To the extent Stellar completes its initial business combination, Stellar will be affected by numerous risks inherent in Phunware’s business operations. Although Stellar’s management has endeavored to evaluate the risks inherent in the proposed Business Combination with Phunware, Stellar cannot assure you that it can adequately ascertain or assess all of the significant risk factors. Furthermore, some of these risks may be outside of our control. Stellar also cannot assure you that an investment in Stellar’s securities will not ultimately prove to be less favorable to investors in Stellar than a direct investment, if an opportunity were available, in Phunware. Although Stellar has identified general guidelines that it believes are important in evaluating Phunware, it cannot assure you that Phunware’s business meets such guidelines and as a result, Phunware’s business may not have attributes entirely consistent with Stellar’s general guidelines.

 

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In addition, if Stellar’s shareholders do not believe that the prospects for the Business Combination are promising, a greater number of shareholders may exercise their Redemption Rights, which may make it difficult for Stellar to meet any Closing condition with Phunware that requires us to have a minimum net worth or a certain amount of cash. In addition, it may be more difficult for Stellar to obtain shareholder approval of the  Business Combination if Phunware does not meet Stellar’s general guidelines. If Stellar is unable to complete its initial business combination, the Public Shareholders may receive only approximately $10.41 per share (or such higher amount then held in trust) on the liquidation of its Trust Account and its warrants will expire worthless.

 

Subsequent to the consummation of the Business Combination, the Successor may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on its financial condition and its share price, which could cause you to lose some or all of your investment.

 

Stellar cannot assure you that the due diligence Stellar has conducted on Phunware will reveal all material issues that may be present with regard to Phunware, or that it would be possible to uncover all material issues through a customary amount of due diligence or that risks outside of Stellar’s control will not later arise. Phunware is aware that Stellar must complete its initial business combination by December 26, 2018 (or such later date approved by its shareholders), unless Stellar’s shareholders were to approve an extension. Consequently, Phunware may have obtained leverage over us in negotiating the business combination, knowing that if Stellar does not complete its initial business combination with Phunware, Stellar is unlikely to be able to complete an initial business combination with any other target business. In addition, Stellar has had limited time to conduct due diligence. Phunware is a privately held company and Stellar has made its decision to pursue Phunware on the basis of limited information, which may result in a business combination that is not as profitable as expected, if at all. As a result of these factors, the Successor may be forced to later write-down or write-off assets, restructure operations, or incur impairment or other charges that could result in reporting losses. Even if Stellar’s due diligence successfully has identified certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with Stellar’s preliminary risk analysis. Even though these charges may be non-cash items and would not have an immediate impact on the Successor’s liquidity, the fact that the Successor reports charges of this nature could contribute to negative market perceptions about the Successor or its securities. In addition, charges of this nature may cause Stellar to violate leverage or other covenants to which it may be subject as a result of assuming pre-existing debt held by Phunware or by virtue of it obtaining post-combination debt financing. Accordingly, any shareholders who choose to remain shareholders following the Business Combination could suffer a reduction in the value of their shares. Such shareholders are unlikely to have a remedy for such reduction in value unless they are able to successfully claim that the reduction was due to the breach by the Successor’s officers or directors of a duty of care or other fiduciary duty owed by them to the Successor, or if they are able to successfully bring a private claim under securities laws that the joint proxy statement/prospectus relating to the Business Combination contained an actionable material misstatement or material omission.

 

Stellar may issue additional common or preferred shares to complete the initial business combination or under an employee incentive plan after completion of the initial business combination, any one of which would dilute the interest of Stellar’s shareholders and likely present other risks.

 

Stellar’s amended and restated Articles of Incorporation authorize the issuance of up to 200,000,000 shares of common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share. There are currently 175,858,725 authorized but unissued shares of common stock available for issuance, which amount takes into account shares reserved for issuance upon exercise of outstanding warrants. There are currently no shares of preferred stock issued and outstanding. Stellar may issue a substantial number of additional shares of common stock or preferred stock to complete its initial business combination or under an employee incentive plan after completion of the initial business combination. However, Stellar’s amended and restated Articles of Incorporation provide, among other things, that prior to its initial business combination, Stellar may not issue additional shares of capital stock that would entitle the holders thereof to (i) receive funds from the Trust Account or (ii) vote on any initial business combination. These provisions of Stellar’s amended and restated Articles of Incorporation, like all provisions of Stellar’s amended and restated Articles of Incorporation, may be amended with a shareholder vote and the Successor’s certificate of incorporation following Redomestication, which does not contain similar restrictions, is also subject to amendment. Stellar’s executive officers and directors have agreed, pursuant to a written agreement with Stellar, that they will not propose any amendment to Stellar’s amended and restated Articles of Incorporation that would affect the substance or timing of Stellar’s obligation to redeem 100% of its Public Shares if Stellar does not complete its initial business combination by December 26, 2018 (or such later date approved by its shareholders), unless Stellar provides its Public Shareholders with the opportunity to redeem their shares of common stock upon approval of any such amendment at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest (which interest shall be net of taxes payable and working capital released to us), divided by the number of then outstanding Public Shares. The issuance of additional shares of common stock or preferred stock:

 

may significantly dilute the equity interest of existing investors;

 

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may subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those afforded Stellar’s common stock;

 

could cause a change in control if a substantial number of common stock is issued, which may affect, among other things, Stellar’s ability to use its net operating loss carry forwards, if any, and could result in the resignation or removal of Stellar’s present officers and directors; and

 

may adversely affect prevailing market prices for Stellar’s units, common stock and/or warrants.

 

Stellar is dependent upon its executive officers and directors and their departure could adversely affect Stellar’s ability to consummate its initial business combination; Stellar’s executive officers and directors also allocate their time to other businesses, thereby causing potential conflicts of interest that could have a negative impact on Stellar’s ability to consummate its initial business combination.

 

Stellar’s ability to consummate its initial business combination are dependent upon a relatively small group of individuals and, in particular, its executive officers and directors. Stellar believes that its success depends on the continued service of its executive officers and directors, at least until the completion of the initial business combination. Stellar does not have an employment agreement with, or key-man insurance on the life of, any of its directors or executive officers. The unexpected loss of the services of one or more of Stellar’s directors or executive officers could have a detrimental effect on Stellar and the ability to consummate the business combination. In addition, Stellar’s executive officers and directors are not required to commit any specified amount of time to its affairs and, accordingly, will have conflicts of interest in allocating management time among various business activities, including monitoring the due diligence and undertaking the other actions required in order to consummate the initial business combination. Each of Stellar’s executive officers is engaged in several other business endeavors for which he may be entitled to substantial compensation and Stellar’s directors also serve as officers and board members for other entities. If Stellar’s executive officers’ and directors’ other business affairs require them to devote substantial amounts of time to such affairs in excess of their current commitment levels, it could limit their ability to devote time to Stellar’s affairs which may have a negative impact on Stellar’s ability to consummate its initial business combination.

 

Stellar does not have an employment agreement with, or key-man insurance on the life of, any of its directors or executive officers. The unexpected loss of the services of one or more of Stellar’s directors or executive officers could have a detrimental effect on Stellar and the ability to consummate its initial business combination.

 

The Successor’s ability to be successful following the Business Combination will depend upon the efforts of the Successor’s board of directors and Phunware’s key personnel and the loss of such persons could negatively impact the operations and profitability of the Successor’s post-combination business.

 

The Successor’s ability to be successful following the initial business combination will be dependent upon the efforts of the Successor’s board of directors and key personnel. Stellar cannot assure you that the Successor’s board of directors and key personnel will be effective or successful or remain with the Successor. In addition to the other challenges they will face, such individuals may be unfamiliar with the requirements of operating a public company, which could cause the Successor’s management to have to expend time and resources helping them become familiar with such requirements.

 

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It is estimated that, pursuant to the Merger Agreement, Stellar’s Public Shareholders will own less than 24% of the equity interests or assets of the Successor and Stellar’s management will not be engaged in the management of the Successor’s business. Accordingly, the future performance of the Successor will depend upon the quality of the post-Business Combination board of directors, management and key personnel of the Successor.

 

Stellar’s key personnel may negotiate employment or consulting agreements with Phunware in connection with the Business Combination. These agreements may provide for them to receive compensation following the Business Combination and as a result, may cause them to have conflicts of interest in determining whether the Business Combination is advantageous.

 

Stellar’s key personnel may be able to remain with the Successor after the consummation of the Business Combination only if they are able to negotiate employment or consulting agreements in connection with the Business Combination. Such negotiations may take place prior to the consummation of the Business Combination and could provide for such individuals to receive compensation in the form of cash payments and/or Stellar’s securities for services they would render to the Successor after the consummation of the Business Combination. The personal and financial interests of such individuals may influence their motivation in connection with the consummation of the Business Combination. However, Stellar believes the ability of such individuals to remain with the Successor after the consummation of the Business Combination will not be the determining factor in Stellar’s decisions regarding the consummation of the Business Combination. There is no certainty, however, that any of Stellar’s key personnel will remain with the Successor after the consummation of the Business Combination. Stellar cannot assure you that any of its key personnel will remain in senior management or advisory positions with the Successor. Except as described in this joint proxy statement/prospectus, the determination as to whether any of Stellar’s key personnel will remain with the Successor may be made at the time of the Business Combination.

 

Because the Initial Shareholders, executive officers and directors will lose their entire investment in us if the Business Combination is not consummated, and because the Sponsors, executive officers and directors will not be eligible to be reimbursed for their out-of-pocket expenses if the Business Combination is not completed, a conflict of interest may have arisen in determining whether Phunware was appropriate for Stellar’s initial business combination.

 

The Initial Shareholders currently own 2,003,403 shares of common stock (initially purchased by Messrs. Tsirigakis and Syllantavos in January 2016 for an aggregate of $25,000). In addition, Dominium Investments Inc. and Firmus Investments Inc., the Sponsors, purchased an aggregate of 7,970,488 Private Placement Warrants, each exercisable for one share of Stellar’s common stock at $11.50 per share, for a purchase price of $3,985,244, or $0.50 per warrant, that will also be worthless if Stellar does not consummate its initial business combination.

 

The Founder Shares are identical to the shares of common stock included in the units sold in Stellar’s IPO. However, the holders have agreed (A) to vote any shares owned by them in favor of any proposed business combination and (B) not to redeem any shares in connection with a shareholder vote to approve a proposed initial business combination.

 

The personal and financial interests of Stellar’s executive officers and directors may have influenced their motivation in identifying and selecting a target business combination, completing an initial business combination and influencing the operation of the business following the initial business combination. At the closing of Stellar’s initial business combination, the Sponsors, executive officers and directors, or any of their respective affiliates, will be reimbursed for any out-of-pocket expenses incurred in connection with activities on Stellar’s behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. In the event Stellar’s initial business combination is consummated, there is no cap or ceiling on the reimbursement of out-of-pocket expenses incurred in connection with activities on Stellar’s behalf. However, the Sponsors, executive officers and directors, or any of their respective affiliates will not be eligible for any such reimbursement if Stellar’s business combination is not completed. Such financial interests of the Sponsors, executive officers and directors may have influenced their motivation in identifying and selecting a target business combination and completing an initial business combination.

 

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Stellar will only be able to complete one business combination with the proceeds of its IPO and the sale of the Private Placement Warrants, which will cause Stellar to be solely dependent on the performance of Phunware. This lack of diversification may negatively impact Stellar’s operations and profitability.

 

The net proceeds from Stellar’s IPO and the private placement of warrants, along with the extension related funds and interest generated from Trust Account funds, adjusted for the redemptions related to the extensions obtained in May and August of 2018, have provided Stellar with approximately $19.63 million (not including funds held outside the trust as of November 2, 2018) that Stellar may use to complete its initial business combination and pay deferred underwriting commissions being held in the Trust Account.

 

Stellar will effectuate its business combination with only a single target business rather than with multiple businesses. By completing its initial business combination with only a single entity, the lack of diversification may subject the Successor to numerous economic, competitive and regulatory risks. Further, Stellar will not be able to diversify its operations or benefit from the possible spreading of risks or offsetting of losses, unlike other entities which may have the resources to complete several business combinations in different industries or different areas of a single industry. Accordingly, the prospects for the Successor’s success will be solely dependent upon the performance of Phunware and upon the market acceptance of Phunware’s products, processes or services.

 

This lack of diversification may subject the Successor to numerous economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact upon the performance of the Successor.

 

Stellar does not have a specified maximum redemption threshold. The absence of such a redemption threshold may make it possible for us to complete a business combination with which a substantial majority of Stellar’s shareholders do not agree.

 

The Successor’s certificate of incorporation (which will be in effect at the time of the Closing) does not provide a specified maximum redemption threshold, except that in no event the repurchase in connection with the redemption results in Stellar having net tangible assets of less than $5,000,001 immediately prior to the Closing. As a result, Stellar may be able to consummate the Business Combination even if a substantial majority of the Public Shareholders do not agree with the transaction and have redeemed their shares or if we have entered into privately negotiated agreements for investors to sell their shares to the Sponsors, officers, directors, advisors or their affiliates. In the event the aggregate cash consideration we would be required to pay for all shares of common stock that are validly submitted for Redemption plus any amount required to satisfy cash conditions pursuant to the terms of the proposed Business Combination exceed the aggregate amount of cash available to Stellar, Stellar will not consummate the Business Combination or redeem any shares, all shares of common stock submitted for redemption will be returned to the holders thereof and Stellar will be required to liquidate.

 

Stellar does not currently have sufficient cash, including funds in the Trust Account, to satisfy the Minimum Cash Asset Level condition in the Merger Agreement required for the Closing of the Business Combination. Unless Stellar is able to obtain sufficient additional financing, or Phunware agrees to modify or waive the Minimum Cash Asset Level condition, Stellar will be unable to satisfy the conditions to the Closing of the Business Combination, and the Business Combination will not occur. There can be no assurance that Stellar will be able to obtain sufficient additional financing to satisfy the Minimum Cash Asset Level condition, that such financing will be available on acceptable terms or that Phunware will agree to modify or waive such condition.

 

The Merger Agreement provides that, as a condition to the Closing of the Business Combination, Stellar must have a Minimum Cash Asset Level of not less than $19,000,000 (net of its unpaid expenses and liabilities and redemptions by the Public Shareholders, all as determined in accordance with the Merger Agreement), including funds in the Trust Account and proceeds from any backstop financing. As a result of the redemptions in connection with the Extension Meetings, there is currently only approximately $19.63 million held in the Trust Account. This amount is insufficient to enable Stellar to meet the Minimum Cash Asset Level condition set forth in the Merger Agreement. Unless Stellar is able to obtain sufficient additional financing to meet the Minimum Cash Asset Level condition, or Phunware agrees to modify or waive such condition, the Business Combination will not occur. Although Stellar is discussing potential financing with a number of third parties, Stellar cannot assure you that such financing will be available on acceptable terms, if at all. Also, Phunware has not, at the date hereof, advised Stellar that it is willing to modify or waive the Minimum Cash Asset Level condition. If the Business Combination with Phunware does not occur, Stellar most likely will not be able to identify or consummate an alternative initial business combination prior to December 26, 2018 and, unless its shareholders approve further extensions, Stellar would be required by its charter documents to liquidate. If Phunware does agree to modify or waive the Minimum Cash Asset Level condition, the funding available to Phunware would be less than the funding contemplated at the time the Merger Agreement was entered into, and may require the Successor to obtain financing from other sources, to the extent such financing is available. The failure to secure adequate additional financing may have a material adverse effect on the business, operations and prospects of the Successor, including the continued development and growth of Phunware’s business. None of Stellar’s officers, directors or shareholders are required to provide any financing to Stellar in connection with or after the Business Combination. If Stellar is unable to consummate the Business Combination, Stellar’s Public Shareholders may only receive approximately $10.60 per share (or such higher amount then held in trust) on the liquidation of the Trust Account and Stellar’s warrants will expire worthless.

 

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An active market for the Successor’s securities may not develop, which would adversely affect the liquidity and price of the Successor’s securities.

 

The price of the Successor’s securities may vary significantly due factors specific to the Successor as well as to general market or economic conditions. Furthermore, an active trading market for the Successor’s securities may never develop or, if developed, it may not be sustained. You may be unable to sell your securities unless a market can be established and sustained.

 

Nasdaq may delist the Successor’s securities from trading on its exchange, which could limit investors’ ability to make transactions in the Successor’s securities and subject the Successor to additional trading restrictions.

 

Stellar’s securities are currently listed on Nasdaq and it is anticipated that, following the business combination, the Successor’s securities will be listed on Nasdaq. However, Stellar cannot assure you that the Successor’s securities will continue to be, listed on Nasdaq in the future. In order to continue listing its securities on Nasdaq, the Successor must maintain certain financial, distribution and stock price levels. Generally, the Successor must maintain a minimum amount in shareholders’ equity (generally $2,500,000) and a minimum number of holders of its securities (generally 300 public holders). Additionally, in connection with the initial business combination, the Successor will be required to demonstrate compliance with Nasdaq’s initial listing requirements, which are more rigorous than Nasdaq’s continued listing requirements, in order to continue to maintain the listing of our securities on Nasdaq. For instance, the Successor’s stock price would generally be required to be at least $4 per share and its shareholders’ equity would generally be required to be at least $5 million and the Successor will be required to have a minimum of 300 public holders. Stellar cannot assure you that the Successor will be able to meet those initial listing requirements at that time.

 

If Nasdaq delists the Successor’s securities from trading on its exchange and the Successor is not able to list its securities on another national securities exchange, Stellar expects the Successor’s securities could be quoted on an over-the-counter market. If this were to occur, the Successor could face significant material adverse consequences, including:

 

a limited availability of market quotations for its securities;

 

reduced liquidity for its securities;

 

a determination that the Successor’s common stock is a “penny stock” which will require brokers trading in the common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for the Successor’s securities;

 

a limited amount of news and analyst coverage; and

 

a decreased ability to issue additional securities or obtain additional financing in the future.

 

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The unaudited pro forma financial information included in the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements” may not be representative of the Combined Company’s results if the Business Combination is consummated and accordingly, you will have limited financial information on which to evaluate the financial performance of the Combined Company and your investment decision.

 

Stellar and Phunware currently operate as separate companies. Stellar has had no prior history as a combined entity and its operations have not previously been managed on a combined basis. The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the financial position or results of operations that would have actually occurred had the Business Combination been completed at or as of the dates indicated, nor is it indicative of the future operating results or financial position of the Combined Company. The pro forma statement of earnings does not reflect future nonrecurring charges resulting from the Business Combination. The unaudited pro forma financial information does not reflect future events that may occur after the Business Combination and does not consider potential impacts of current market conditions on revenues or expenses. The pro forma financial information included in the section entitled “Unaudited Pro Forma Condensed Combined Financial Statements” has been derived from Stellar’s and Phunware’s historical financial statements and certain adjustments and assumptions have been made regarding the combined organization after giving effect to the transaction. Differences between preliminary estimates in the pro forma financial information and the final acquisition accounting will occur and could have an adverse impact on the pro forma financial information and the Combined Company’s financial position and future results of operations.

 

In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate and other factors may affect the Combined Company’s financial condition or results of operations following the Closing. Any potential decline in the Combined Company’s financial condition or results of operations may cause significant variations in the stock price of the Combined Company.

 

Some of the Stellar and Phunware officers and directors may be argued to have conflicts of interest that may influence them to support or approve the Business Combination without regard to your interests.

 

Certain officers and directors of Stellar and Phunware participate in arrangements that may be argued to provide them with interests in the Business Combination that are different from yours, including, among others, the continued service as an officer or director of the Combined Company, severance benefits, continued indemnification and the potential ability to sell an increased number of shares of common stock of the Combined Company. If the Business Combination is not consummated and Stellar is forced to wind up, dissolve and liquidate in accordance with Stellar’s Articles of Incorporation, the 2,003,403 shares of common stock currently held by Stellar’s current management (as transferees from prior management), which were initially acquired prior to Stellar’s IPO by the Initial Shareholders for an aggregate purchase price of $25,000, will be worthless (as the holders have waived liquidation rights with respect to such shares). Such shares had an aggregate market value of approximately $20.2 million based on the last sale price of $10.50 per share on Nasdaq on November 1, 2018. In addition, Stellar’s current management currently owns 7,970,488 warrants, the market value of which is approximately $1.59 million based on the last sale price of $0.20 per warrant on Nasdaq on November 1, 2018. Stellar’s current management has also loaned approximately $1.03 million to Stellar. If the Merger is not consummated and Stellar is forced to wind up, dissolve and liquidate in accordance with Stellar’s Articles of Incorporation, Stellar’s current management may not be able to recover the value of such loans. If the Business Combination is consummated, Stellar’s current management will receive approximately $22.31 million in value from the Business Combination. Accordingly, Stellar’s current executive officers and directors, have interests that may be different from, or in addition to, your interests as a shareholder.

 

These interests, among others, may influence the officers and directors of Stellar and Phunware to support or approve the Business Combination. For more information concerning the interests of Stellar and Phunware executive officers and directors, see the sections entitled “The Stellar Business Combination Proposal — Interests of Stellar’s Directors and Officers and Others in the Business Combination” and “The Phunware Business Combination Proposal — Interests of Phunware Directors and Executive Officers in the Merger” in this joint proxy statement/prospectus.

 

The market price of the Successor’s common stock may decline as a result of the Business Combination.

 

The market price of the Successor’s common stock may decline as a result of the Business Combination for a number of reasons including if:

 

investors react negatively to the prospects of the Combined Company’s business and the prospects of the Business Combination;

 

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the effect of the Business Combination on the Combined Company’s business and prospects is not consistent with the expectations of financial or industry analysts; or

 

the Combined Company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts.

 

Stellar’s shareholders and Phunware’s stockholders may not realize a benefit from the Business Combination commensurate with the ownership dilution they will experience in connection with the Business Combination.

 

If the Combined Company is unable to realize the full strategic and financial benefits currently anticipated from the Business Combination, Stellar’s shareholders and Phunware’s stockholders will have experienced substantial dilution of their ownership interests in their respective companies without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the Combined Company is able to realize only part of the strategic and financial benefits currently anticipated from the Business Combination.

 

During the pendency of the Business Combination, Stellar and Phunware may not be able to enter into a business combination with another party because of restrictions in the Merger Agreement, which could adversely affect their respective businesses. Furthermore, certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.

 

Covenants in the Merger Agreement impede the ability of Stellar and Phunware to make acquisitions or complete other transactions that are not in the ordinary course of business pending consummation of the Business Combination. As a result, if the Business Combination is not consummation, the parties may be at a disadvantage to their competitors during that period. In addition, while the Merger Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or other business combination outside the ordinary course of business, with any third party. Any such transactions could be favorable to such party’s shareholders.

 

If the conditions to the Business Combination are not met, the Business Combination may not occur.

 

Even if the Business Combination is approved by the shareholders of Stellar and Phunware, specified conditions must be satisfied or waived to complete the Business Combination. These conditions are described in detail in the Merger Agreement and in addition to shareholder consent, include among other requirements, (i) receipt of requisite regulatory approvals and no law or order preventing the transactions, (ii) no pending litigation to enjoin or restrict the Closing, (iii) each party’s representations and warranties being true and correct as of the date of the Merger Agreement and as of the Closing (subject to Material Adverse Effect), (iv) each party complying in all material respects with its covenants and agreements, (v) no Material Adverse Effect with respect to a party since the date of the Merger Agreement which remains continuing and uncured, and (vi) Stellar meeting the minimum cash requirement of $19,000,000 in cash and cash equivalents at the Closing, after the Redemptions and payment of Stellar transaction expenses, indebtedness and liabilities. See the section entitled “The Merger Agreement and Related Agreements — Merger Agreement — Conditions to Consummation of the Merger” below for a more complete summary. Stellar and Phunware cannot assure you that all of the conditions will be satisfied. If the conditions are not satisfied or waived, the Business Combination will not occur, or will be delayed and such delay may cause Stellar and Phunware to each lose some or all of the intended benefits of the Business Combination. If the Business Combination does not occur, Stellar may not be able to find another potential candidate for its initial business combination prior to Stellar’s deadline (currently December 26, 2018), and Stellar will be required to liquidate.

 

Because Stellar is currently incorporated under the laws of the Republic of the Marshall Islands, you may face difficulties in protecting your interests and your ability to protect your rights through the U.S. Federal courts may be limited prior to the Redomestication.

 

Stellar is currently a corporation incorporated under the laws of the Republic of the Marshall Islands. Until the Redomestication is effected, its corporate affairs are governed by the Articles of Incorporation, its Bylaws, the BCA and the common law of the Republic of the Marshall Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of its directors to Stellar under the laws of the Marshall Islands are to a large extent governed by the common law of the Republic of the Marshall Islands. The common law of the Republic of the Marshall Islands is derived in part from comparatively limited judicial precedent in the Republic of the Marshall Islands as well as from English common law, the decisions of whose courts are of persuasive authority, but are not binding on a court in the Republic of the Marshall Islands. The rights of Stellar’s shareholders and the fiduciary responsibilities of its directors under Republic of the Marshall Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Republic of the Marshall Islands has a less developed body of securities laws as compared to the United States and certain states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. In addition, Republic of the Marshall Islands corporations may not have standing to initiate a shareholders derivative action in a federal court of the United States.

 

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Reeder & Simpson, P.C., Stellar’s counsel with regard to the laws of the Republic of the Marshall Islands, have advised us that there is uncertainty as to whether the courts of the Republic of the Marshall Islands would (i) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States or (ii) entertain original actions brought in the Republic of the Marshall Islands against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

 

Reeder & Simpson, P.C. has further advised Stellar that it is uncertain that Republic of the Marshall Islands courts would enforce: (1) judgments of U.S. courts obtained in actions against us or other persons that are predicated upon the civil liability provisions of the U.S. federal securities laws; or (2) original actions brought against us or other persons predicated upon the Securities Act. Reeder & Simpson, P.C. has informed us that there is uncertainty with regard to Republic of the Marshall Islands law relating to whether a judgment obtained from the U.S. courts under civil liability provisions of the securities laws will be determined by the courts of the Republic of the Marshall Islands as penal or punitive in nature. Furthermore, there is currently no statutory enforcement or treaty between the United States and the Republic of the Marshall Islands providing for enforcement of judgments. However, a judgment obtained in the United States may be recognized and enforced in the courts of the Republic of the Marshall Islands under the provisions of the RMI Uniform Money-Judgments Recognition Act at common law, without any re-examination on the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the High Court of the Republic of the Marshall Islands, provided such judgment: (i) is given by a foreign court of competent jurisdiction; (ii) is final; (iii) is not in respect of taxes, a fine or a penalty; and (iv) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or public policy of the Republic of the Marshall Islands. A judgment obtained in a foreign jurisdiction in connection with the documents would be recognized unless (a) the judgment was rendered under a system which does not provide impartial tribunals or procedures compatible with the requirements of due process of law; (b) the foreign court did not have personal jurisdiction over the defendant; (c) the foreign court did not have jurisdiction over the subject matter; or (d) the foreign country does not recognize or enforce judgments of any other foreign nation. In addition, a foreign judgment need not be recognized if (a) the defendant in the proceedings in the foreign court did not receive notice of the proceedings in sufficient time to enable him to defend; (b) the judgment was obtained by fraud; (c) the cause of action on which the judgment is based is repugnant to the public policy of the Republic of the Marshall Islands; (d) the judgment conflicts with another final and conclusive judgment; (e) the proceeding in the foreign court was contrary to an agreement between the parties under which the dispute in question was to be settled otherwise than by proceedings in the court; or (f) in the case of jurisdiction based only on personal service, the foreign court was a seriously inconvenient forum for the trial of the action. If none of the above grounds exist then the Republic of the Marshall Islands High Court will enforce a foreign judgment without a retrial on the merits.

 

As a result of all of the above, Public Shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board or controlling shareholders than they would as public shareholders of a United States company prior to the Redomestication.

 

There is a risk that a U.S. Holder may recognize taxable gain with respect to its Stellar Shares at the effective time of the Redomestication.

 

The Redomestication should qualify as a reorganization within the meaning of Section 368(a) of the Code for U.S. federal income tax purposes. However, due to the absence of guidance directly on how the provisions of Section 368(a) apply in the case of a statutory conversion of a corporation with no active business and only investment-type assets such as Stellar, this result is subject to some uncertainty. Accordingly, due to the absence of such guidance, it is not possible to predict whether the Internal Revenue Service (“IRS”) or a court considering the issue would take a contrary position. If the Redomestication should fail to qualify as a reorganization under Section 368(a), a U.S. Holder (as that term is defined in the section entitled “The Redomestication Proposal — Material U.S. Federal Income Tax Consequences of the Redomestication to Stellar Shareholders”) of Stellar Shares generally would recognize a gain or loss with respect to its Stellar Shares in an amount equal to the difference, if any, between the fair market value of the corresponding common stock of the Delaware corporation received in the Redomestication and the U.S. Holder’s adjusted tax basis in its Stellar Shares surrendered in exchange therefor.

 

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As discussed more fully under “The Redomestication Proposal – Material U.S. Federal Income Tax Consequences of the Redomestication to Stellar Shareholders” below, it is intended that the Redomestication will constitute a tax-free reorganization within the meaning of Section 368(a)(l)(F) of the Code. Assuming that the Redomestication so qualifies, U.S. Holders of Stellar Shares will be subject to Section 367(b) of the Code and, as a result:

 

  A U.S. Holder of Stellar Shares whose Stellar Shares have a fair market value of less than $50,000 on the date of the Redomestication will not recognize any gain or loss and will not be required to include any part of Stellar’s earnings in income;

 

  A U.S. Holder of Stellar Shares whose Stellar Shares have a fair market value of $50,000 or more, but who on the date of the Redomestication owns (actually and constructively) less than 10% of the total combined voting power of all classes of Stellar Shares entitled to vote will generally recognize gain (but not loss) on the exchange of Stellar Shares for shares in the Successor (a Delaware corporation) pursuant to the Redomestication. As an alternative to recognizing gain, such U.S. Holders may file an election to include in income as a dividend earnings and profits (as defined in the Treasury Regulations under Section 367) attributable to its Stellar Shares provided certain other requirements are satisfied. Stellar does not expect to have significant cumulative earnings and profits, if any, on the date of the Redomestication.

 

  A U.S. Holder of Stellar Shares whose Stellar Shares have a fair market value of $50,000 or more, and who on the date of the Redomestication owns (actually and constructively) 10% or more of the total combined voting power of all classes of Stellar Shares entitled to vote will generally be required to include in income as a dividend earnings and profits (as defined in the Treasury Regulations under Section 367) attributable to its Stellar Shares provided certain other requirements are satisfied. Stellar does not expect to have significant cumulative earnings and profits, if any, on the date of the Redomestication.

 

Furthermore, even if the Redomestication qualifies as a reorganization under Section 368(a) of the Code, a U.S. Holder of Stellar Shares may still recognize gain (but not loss) upon the exchange of its Stellar Shares for the common stock of the Delaware corporation pursuant to the Redomestication under the “passive foreign investment company,” or PFIC, rules of the Code equal to the excess, if any, of the fair market value of the common stock of the Delaware corporation received in the Redomestication and the U.S. Holder’s adjusted tax basis in the corresponding Stellar Shares surrendered in exchange therefor. In such event, the U.S. Holder’s aggregate tax basis in the common stock of the Delaware corporation received in connection with the Redomestication should be the same as the aggregate tax basis of Stellar Shares surrendered in the transaction, increased by any amount included in the income of such U.S. Holder under the PFIC rules. See the discussion in the section entitled “The Redomestication Proposal — Material U.S. Federal Income Tax Consequences of the Redomestication to Stellar Shareholders — PFIC Considerations.

 

U.S. federal income tax reform could adversely affect us and holders of the Successor’s Shares.

 

On December 22, 2017, President Trump signed into law H.R. 1, originally known as the “Tax Cuts and Jobs Act,” which significantly reformed the Internal Revenue Code of 1986, as amended. The new legislation, among other things, changes the U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows the expensing of capital expenditures and puts into effect the migration from a “worldwide” system of taxation to a territorial system. We continue to examine the impact this tax reform legislation may have on us. The impact of this tax reform, or of any future administrative guidance interpreting provisions thereof, on holders of the Successor’s common stock is uncertain and could be adverse. This joint proxy statement/prospectus does not discuss any such tax legislation or the manner in which it might affect holders of the Successor’s common stock. We urge holders of Stellar Shares to consult with their legal and tax advisors with respect to any such legislation and the potential tax consequences of their ownership of Stellar Shares and the Successor’s common stock.

 

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Following the consummation of the Business Combination, if securities or industry analysts do not publish or cease publishing research or reports about the Combined Company, its business, or its market, or if they change their recommendations regarding the Successor’s common stock adversely, the price and trading volume of the Successor’s common stock could decline.

 

The trading market for the Successor’s common stock will be influenced by the research and reports that industry or securities analysts may publish about the Successor, its business, its market, or its competitors. Securities and industry analysts do not currently, and may never, publish research on the Successor. If no securities or industry analysts commence coverage of the Successor, the Successor’s stock price and trading volume would likely be negatively impacted. If any of the analysts who may cover the Successor change their recommendation regarding the Successor’s stock adversely, or provide more favorable relative recommendations about our competitors, the price of the Successor’s common stock would likely decline. If any analyst who may cover Phunware were to cease coverage of the Successor or fail to regularly publish reports on it, we could lose visibility in the financial markets, which could cause the Successor’s stock price or trading volume to decline.

 

Upon consummation of the Business Combination, the rights of holders of the Successor’s common stock arising under the DGCL as well as the Successor’s certificate of incorporation and bylaws will differ from and may be less favorable to the rights of holders of Stellar’s common stock arising under the Republic of the Marshall Islands Association Law, as amended, as well as Stellar’s current Articles of Incorporation.

 

Upon consummation of the Business Combination, the rights of holders of the Successor’s common stock will arise under the certificate of incorporation and bylaws of the Successor as well as the DGCL. Those new organizational documents and the DGCL contain provisions that differ in some respects from those in Stellar’s current articles of incorporation and the Marshall Islands Association Law, as amended, and, therefore, some rights of holders of the Successor’s common stock could differ from the rights that holders of Stellar common stock currently possess. For instance, while class actions are generally not available to shareholders under Marshall Islands Association Law, as amended, such actions are generally available under Delaware law. This change could increase the likelihood that the Successor becomes involved in costly litigation, which could have a material adverse effect on the Successor.

 

In addition, there are differences between the new organizational documents of the Successor and the current constitutional documents of Stellar. For a more detailed description of the rights of holders of the Successor’s common stock and how they may differ from the rights of holders of Stellar common stock, please see the section entitled “Comparison of Corporate Governance and Stockholder Rights. Forms of the certificate of incorporation and the bylaws of the Successor are attached as Annex A and Annex B, respectively, to this joint proxy statement/prospectus and we urge you to read them.

 

Delaware law and the Successor’s certificate of incorporation and bylaws will contain certain provisions, including anti-takeover provisions, that limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider favorable.

 

The Successor’s certificate of incorporation and bylaws that will be in effect upon consummation of the Business Combination, and the DGCL, contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by the Successor’s board of directors and therefore depress the trading price of the Successor’s common stock. These provisions could also make it difficult for stockholders to take certain actions, including electing directors who are not nominated by the current members of the Phunware Board or taking other corporate actions, including effecting changes in our management. Among other things, the Successor’s certificate of incorporation and bylaws include provisions regarding:

 

a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of the Successor’s board of directors;

 

the ability of the Successor’s board of directors to issue shares of preferred stock, including “blank check” preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

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the limitation of the liability of, and the indemnification of, the Successor’s directors and officers;

 

the exclusive right of the Successor’s board of directors to elect a director to fill a vacancy created by the expansion of the Successor’s board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on the Successor’s board of directors;

 

the requirement that directors may only be removed from the Successor’s board of directors for cause;

 

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of stockholders and could delay the ability of stockholders to force consideration of a stockholder proposal or to take action, including the removal of directors;

 

the requirement that a special meeting of stockholders may be called only by the Successor’s board of directors, the chairperson of the Successor’s board of directors, the Successor’s chief executive officer or the Successor’s president (in the absence of a chief executive officer), which could delay the ability of stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings;

 

the requirement for the affirmative vote of holders of at least 662∕3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend, alter, change or repeal any provision of the Successor’s certificate of incorporation or the Successor’s bylaws, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in the Successor’s board of directors and also may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt;

 

the ability of the Successor’s board of directors to amend the bylaws, which may allow the Successor’s board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt; and

 

advance notice procedures with which stockholders must comply to nominate candidates to the Successor’s board of directors or to propose matters to be acted upon at a stockholders’ meeting, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in the Successor’s board of directors and also may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of Successor.

 

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in the Successor’s board of directors or management.

 

In addition, as a Delaware corporation, the Successor will be subject to provisions of Delaware law, including Section 203 of the DGCL, which may generally prohibit certain stockholders holding 15% or more of the Successor’s outstanding capital stock from engaging in certain business combinations with us for a specified period of time unless certain conditions are met.

 

Any provision of the Successor’s certificate of incorporation, bylaws or Delaware law that has the effect of delaying or preventing a change in control could limit the opportunity for stockholders to receive a premium for their shares of the Successor’s capital stock and could also affect the price that some investors are willing to pay for the Successor’s common stock.

 

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The Successor’s certificate of incorporation will designate a state or federal court located within the State of Delaware as the exclusive forum for substantially all disputes between the Successor and its stockholders, and also provide that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act or Exchange Act, each of which could limit the Successor’s stockholders’ ability to choose the judicial forum for disputes with the Successor or its directors, officers, or employees.

 

The Successor’s certificate of incorporation, which will become effective immediately prior to the consummation of the Business Combination, will provide that, unless the Successor consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Successor, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee or agent of the Successor to the Successor or the Successor’s stockholders, (iii) any action asserting a claim against the Successor arising pursuant to any provision of the DGCL or the Successor’s certificate of incorporation or bylaws, (iv) any action to interpret, apply, enforce or determine the validity of the Successor’s certificate of incorporation or bylaws, or (v) any action asserting a claim against the Successor governed by the internal affairs doctrine, in each such case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein.  Unless the Successor consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act or the Securities Exchange Act.

 

The Successor’s certificate of incorporation will also provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act or the Exchange Act.

 

Any person or entity purchasing or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to this provision. These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with the Successor or its directors, officers, or other employees, which may discourage lawsuits against the Successor and its directors, officers, and other employees. If a court were to find either exclusive-forum provision in the Successor’s bylaws to be inapplicable or unenforceable in an action, the Successor may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm its results of operations.

 

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Risk Factors Relating to Phunware

 

References in this section under the heading “Risk Factors Relating to Phunware” to “our”, “we”, “us” and “Phunware”, refer to Phunware, Inc., except where the context requires otherwise.

 

Our revenue has declined, we have a history of losses, we expect to continue to incur losses and we may not achieve or sustain profitability in the future.

 

We have incurred significant losses in each fiscal year since our inception in 2009. We experienced a consolidated net loss of $25.9 million for the year ended December 31, 2017 and a consolidated net loss of $16.3 million for the year ended December 31, 2016. These losses were due to both a reduction in revenue in 2017 and the substantial investments we made to build our products and services, grow and maintain our business and acquire customers. You should not consider our historical revenue levels or operating expenses prior to recent periods as indicative of our future performance. Key elements of our growth strategy include acquiring new customers and continuing to innovate and build our brand. As a result, we expect our operating expenses to increase in the future due to expected increased sales and marketing expenses, operations costs, research and development costs and general and administrative costs and, therefore, our operating losses will continue or even potentially increase for the foreseeable future. In addition, as a public company we incur significant legal, accounting and other expenses that we did not incur as a private company. Furthermore, to the extent that we are successful in increasing our customer base, we will also incur increased expenses because costs associated with generating and supporting customer agreements are generally incurred up front, while revenue is generally recognized ratably over the committed term of the agreement. Our efforts to grow our business may be costlier than we expect and we may not be able to increase our revenue enough to offset our higher operating expenses. We may incur significant losses in the future for many reasons, including the other risks described in this report and unforeseen expenses, difficulties, complications and delays and other unknown events. You should not rely upon our recent bookings or revenue growth as indicative of our future performance. We cannot assure you that we will reach profitability in the future or at any specific time in the future or that, if and when we do become profitable, we will sustain profitability. If we are ultimately unable to generate sufficient revenue to meet our financial targets, become profitable and have sustainable positive cash flows, investors could lose their investment.

 

Our results of operations and ability to grow could be negatively affected if we cannot adapt and expand our technology offerings and services in response to ongoing market changes.

 

The collaboration and technology solutions business and markets are characterized by rapid technological change, evolving industry standards, changing customer preferences and new product and service introductions. Our success depends on our ability to continue to develop and implement technology offerings and services that anticipate or timely respond to rapid and continuing changes in technology and industry developments and offerings by new technology providers to serve the evolving needs of our customers. Examples of areas of significant change in the industry include cloud, software defined infrastructure, virtualization, security, mobility, data analytics and IoT, the continued shift from maintenance to managed services and ultimately to cloud based services, as-a-service solutions, security and information technology automation. In addition, enterprises are continuing to shift from on-premise, hardware infrastructure to software centric hosted solutions. Technological developments such as these may materially affect the cost and use of technology and services by our customers and could affect the nature of how our revenue is generated. These technologies and others that may emerge, could reduce and, over time, replace some of our current business. In addition, customers may delay spending under existing contracts and engagements and may delay entering into new contracts while they evaluate new technologies. If we do not sufficiently invest in new technology, industry developments and our personnel, or evolve and expand our business at sufficient speed and scale, or if we do not make the right strategic investments to respond to these developments and successfully drive innovation, our technology offerings and services, our results of operations and our ability to develop and maintain a competitive advantage and to continue to grow could be negatively affected.

 

In addition, if we are unable to keep up with changes in technology and new hardware, software and services offerings, for example, by providing the appropriate training to out account managers, sales technology specialists, engineers and consultants to enable them to effectively sell and deliver such new offerings to customers, our business, results of operations, or financial condition could be adversely affected.

 

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If we are unable to expand or renew sales to existing customers, or attract new customers, our growth could be slower than expected and our business may be harmed.

 

Our future growth depends upon expanding sales and renewals of our technology offerings and services with existing customers. Our customers may not purchase our technology offerings and services, or our customers may reduce their purchase rate of services, if we do not demonstrate the value proposition for their investment and we may not be able to replace existing customers with new customers. In addition, our customers may not renew their contracts with us on the same terms, or at all, because of dissatisfaction with our service. If our customers do not renew their contracts, our revenue may grow more slowly than expected, may not grow at all, or may decline.

 

Additionally, increasing incremental sales to our current customer base may require increasingly sophisticated and costly sales efforts that are targeted at senior management. We plan to continue expanding our sales efforts but we may be unable to hire qualified sales personnel, may be unable to successfully train those sales personnel that we are able to hire and sales personnel may not become fully productive on the timelines that we have projected, or at all. Additionally, although we dedicate significant resources to sales and marketing programs, these sales and marketing programs may not have the desired effect and may not expand sales. We cannot assure you that its efforts will increase sales to existing customers or additional revenue. If our efforts to upsell to our customers are not successful, our future growth may be limited.

 

Our ability to achieve significant growth in revenue in the future will also depend upon our ability to attract new customers. This may be particularly challenging where an organization has already invested substantial personnel and financial resources to integrate competing technology offerings and services into our business, as such organization may be reluctant or unwilling to invest in new technology offerings and services. If we fail to attract new customers and maintain and expand those customer relationships, our revenue may grow more slowly than expected and our business may be harmed.

 

Demand for our technology offerings and services could be adversely affected by volatile, negative, or uncertain economic conditions and the effects of these conditions on our customers’ businesses.

 

Our revenue and profitability depend on the demand for our technology offerings and services, which could be negatively affected by numerous factors, many of which are beyond our control. Volatile, negative, or uncertain economic conditions affect our customers’ businesses and the markets we serve. Such economic conditions in our markets have undermined and could in the future undermine, business confidence in our markets and cause our customers to reduce or defer their spending on new technology offerings and services, or may result in customers reducing, delaying or eliminating spending under existing contracts with us, which would negatively affect our business. Growth in the markets we serve could be at a slow rate, or could stagnate or contract, in each case for an extended period of time. Ongoing economic volatility and uncertainty and changing demand patterns affect our business in a number of other ways, including making it more difficult to accurately forecast customer demand and effectively build our revenue and resource plans.

 

Economic volatility and uncertainty is particularly challenging because it may take some time for the effects and changes in demand patterns resulting from these and other factors to manifest themselves in our business and results of operations. Changing demand patterns from economic volatility and uncertainty could have a significant negative impact on our business, results of operations, or financial condition.

 

Substantial competition could reduce our market share and significantly harm our financial performance.

 

We expect the competitive landscape in which we compete to continue to change as new technologies are developed. While innovation can help our business as we create new offerings for us to sell and provide complementary services, it can also disrupt our business model and create new and stronger competitors. For instance, while cloud based solutions present an opportunity for us, cloud based solutions and technologies that deliver technology solutions as a service could increase the amount of sales directly to customers rather than through solutions providers like us, or could reduce the amount of hardware we sell, leading to a reduction in our technology offerings revenue and/or profitability. In addition, some of our hardware and software technology partners sell and could intensify their efforts to sell, their products directly to our customers. Moreover, traditional OEMs have increased their services capabilities through mergers and acquisitions with service providers, which could potentially increase competition in the market to provide comprehensive technology solutions to customers. If any of these trends becomes more prevalent, it could adversely affect our business, results of operations, or financial condition.

 

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Our future results will depend on our ability to continue to focus our resources and manage costs effectively.

 

We are continually implementing productivity measures and focusing on measures intended to further improve cost efficiency. We may be unable to realize all expected cost savings in connection with these efforts within the expected time frame, or at all and we may incur additional and/or unexpected costs to realize them. Further, we may not be able to sustain any achieved savings in the future. Future results will depend on the success of these efforts.

 

If we are unable to control costs, we may incur losses, which could decrease our operating margins and significantly reduce or eliminate our profits. Our future profitability will depend on our ability to manage costs or increase productivity. An inability to effectively manage costs could adversely impact our business, results of operations, or financial condition.

 

Our profitability could suffer if we are not able to manage large and complex projects and complete fixed price, fixed timeframe contracts on budget and on time.

 

Our profitability and operating results are dependent on the scale of our projects and the prices we are able to charge for our technology offerings and services. We perform a significant portion of our work through fixed price contracts, in which we assume full control of the project team and manage all facets of execution. As a significant portion of our projects are on a fixed price model, we may be unable to accurately estimate the appropriate project price and successfully manage such projects. Although we use specified technical processes and our past experience to reduce the risks associated with estimating, planning and performing fixed price and fixed timeframe projects, we face the risk of cost overruns, completion delays and wage inflation in connection with these projects. If we fail to accurately estimate the resources or time required for a project or future rates of wage inflation, or if we fail to perform contractual obligations within the contractual timeframe, our profitability could suffer.

 

The challenges of managing larger and more complex projects include:

 

maintaining high quality control and process execution standards;

 

maintaining planned resource utilization rates on a consistent basis;

 

maintaining productivity levels and implementing necessary process improvements;

 

controlling project costs;

 

maintaining close customer contact and high levels of customer satisfaction

 

recruiting and retaining sufficient numbers of skilled IT professionals; and

 

maintaining effective customer relationships.

 

In addition, large and complex projects may involve multiple engagements or stages and there is a risk that a customer may choose not to retain us for additional stages or may cancel or delay additional planned engagements. Such cancellations or delays may make it difficult to plan our project resource requirements and may result in lower profitability levels than we anticipated upon commencing engagements.

 

Our investments in new services and technologies may not be successful and our business strategy is evolving and may involve pursuing new lines of business or strategic transactions and investments, or dispositions of assets or businesses that may no longer help us meet our objectives, and such efforts may not be successful.

 

We continue to invest in new services and technologies, including cloud, virtualization, security, mobility, data analytics and blockchain. The complexity of these solutions, our learning curve in developing and supporting them and significant competition in the markets for these solutions could make it difficult for us to market and implement these solutions successfully. Additionally, there is a risk that our customers may not adopt these solutions widely, which would prevent us from realizing expected returns on these investments. Even if these solutions are successful in the market, they still rely on third-party hardware and software and our ability to meet stringent service levels. If we are unable to deploy these solutions successfully or profitably, it could adversely impact our business, results of operations, or financial condition.

 

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Our industry is undergoing significant change and our business strategy is continuing to evolve to meet these changes. In order to profitably grow our business, we may need to expand into new lines of business beyond our current focus of providing mobile advertising analytics products and services, which may involve pursuing strategic transactions, including potential acquisitions of, or investments in, related or unrelated businesses. In addition, we may seek divestitures of existing businesses or assets. There can be no assurance that we will be successful with our efforts to evolve our business strategy and we could suffer significant losses as a result, which could have a material adverse effect on our business, financial condition and results of operations.

 

If we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the achievement of our strategic objectives. We may also dispose of a business at a price or on terms that are less desirable than we had anticipated. In addition, we may experience greater dis-synergies than expected and the impact of the divestiture on our revenue may be larger than projected.

 

If we lose any of our key personnel, or are unable to attract and retain the talent required for our business, our business could be disrupted and our financial performance could suffer.

 

Our success is heavily dependent upon our ability to attract, develop, engage and retain key personnel to manage and grow our business, including our key executive, management, sales, services and technical personnel.

 

Our future success will depend to a significant extent on the efforts of our executive officers, as well as the continued service and support of other key employees. Our future success also will depend on our ability to attract and retain highly skilled technology specialists, engineers and consultants, for whom the market is extremely competitive.

 

Our inability to attract, develop and retain key personnel could have an adverse effect on our relationships with our technology partners and customers and adversely affect our ability to expand our offerings of technology offerings and services. Moreover, our inability to train our sales, services and technical personnel effectively to meet the rapidly changing technology needs of our customers could cause a decrease in the overall quality and efficiency of such personnel. Such consequences could adversely affect our business, results of operations, or financial condition.

 

It may be difficult for us to retain or attract qualified officers and directors, which could adversely affect our business and our ability to maintain the listing of our common stock on the Nasdaq.

 

We may be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of changes in the rules and regulations which govern publicly-held companies, including, but not limited to, certifications from executive officers and requirements for financial experts on boards of directors. The perceived increased personal risk associated with these changes may deter qualified individuals from accepting these roles. Further, applicable rules and regulations of the SEC and the Nasdaq heighten the requirements for board or committee membership, particularly with respect to an individual’s independence from the corporation and level of experience in finance and accounting matters. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, our business and our ability to maintain the listing of our shares of common stock on Nasdaq could be adversely affected.

 

Our ability to attract and retain business and personnel may depend on our reputation in the marketplace.

 

We believe our brand name and our reputation in the marketplace are important corporate assets that help distinguish our technology offerings and services from those of competitors and contribute to our ability to recruit and retain talented personnel, in particular our engineers and consulting professionals. However, our corporate reputation is potentially susceptible to material damage by events such as disputes with customers, cybersecurity breaches, service outages, internal control deficiencies, delivery failures, or compliance violations. Similarly, our reputation could be damaged by actions or statements of current or former customers, directors, employees, competitors, vendors, partners, joint ventures or joint venture partners, adversaries in legal proceedings, legislators, or government regulators, as well as members of the investment community or the media. There is a risk that negative information about us, even if based on rumor or misunderstanding, could adversely affect our business. Damage to our reputation could be difficult, expensive and time-consuming to repair, could make potential or existing customers reluctant to select us for new engagements, resulting in a loss of business and could adversely affect our recruitment and retention efforts. Damage to our reputation could also reduce the value and effectiveness of our brand name and could reduce investor confidence in us, adversely affecting the Successor’s share price.

 

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Future acquisitions could disrupt our business and may divert management’s attention and, if unsuccessful, harm our business.

 

We may choose to expand by making additional acquisitions that could be material to our business. We have in the past made several acquisitions of complementary businesses, including acquisitions in Odyssey, Simplikate, Digby, Tapit! and GoTV. Acquisitions involve many risks, including the following:

 

an acquisition may negatively affect our results of operations and financial condition because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

 

we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel, or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;

 

an acquisition may disrupt our ongoing business, divert resources, increase our expenses, or distract our management;

 

an acquisition may result in a delay or reduction of customer purchases for both us and the company we acquired due to customer uncertainty about continuity and effectiveness of service from either company;

 

we may encounter difficulties in, or may be unable to, successfully sell any acquired technology offerings or services;

 

an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;

 

the challenges inherent in effectively managing an increased number of employees in diverse locations;

 

the potential strain on our financial and managerial controls and reporting systems and procedures;

 

the potential known and unknown liabilities associated with an acquired company;

 

our use of cash to pay for acquisitions would limit other potential uses for our cash;

 

if we incur additional debt to fund such acquisitions, such debt may subject us to additional material restrictions on our ability to conduct our business as well as additional financial maintenance covenants;

 

the risk of impairment charges related to potential write-downs of acquired assets or goodwill in future acquisitions;

 

to the extent that we issue a significant amount of equity or equity linked securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease; and

 

managing the varying intellectual property protection strategies and other activities of an acquired company.

 

We may not succeed in addressing these or other risks or any other problems encountered in connection with the integration of any acquired business. The inability to integrate successfully the business, technologies, products, personnel, or operations of any acquired business, or any significant delay in achieving integration, could harm our business, results of operations, or financial condition.

 

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We may not be able to recognize revenue in the period in which our services are performed, which may cause our margins to fluctuate.

 

Our services are performed under both time and material and fixed price contract arrangements. All revenue is recognized pursuant to applicable accounting standards. Our failure to meet all the obligations, or otherwise meet a customer’s expectations, may result in us having to record the cost related to the performance of services in the period that services were rendered, but delay the timing of revenue recognition to a future period in which all obligations have been met.

 

Our financial results may be adversely affected by changes in accounting principles applicable to us.

 

GAAP is subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. For example, in May 2014, the FASB issued Accounting Standards Update No. (“ASU”) No. 2014-09 (Topic 606), Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance under GAAP. We are required to implement this guidance in the first quarter of our fiscal year 2019, as we have elected to take advantage of the extended transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards. The most significant impact relates to our accounting for subscriptions to our MaaS licenses and application development services, which may potentially make revenue more volatile and difficult to predict. In addition, accounting for commissions is impacted significantly as we have to capitalize and amortize most commissions under the new standard instead of expensing commissions as incurred. Due to the complexity of certain of our contracts, the revenue recognition treatment required under the new standard is dependent on contract-specific terms. Any difficulties in implementing these pronouncements or adequately accounting after adoption could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us. In addition, to adopt the new standard we had to implement a new revenue recognition module in our accounting system, hire consultants and increase our spending on audit fees, thereby increasing our general and administrative expense. That increased spending will continue through at least our first fiscal quarter of 2019 and will likely increase our audit fees on an ongoing basis thereafter.

 

We may experience quarterly fluctuations in our operating results due to a number of factors, which makes our future results difficult to predict and could cause our operating results to fall below expectations.

 

Our quarterly operating results have fluctuated in the past and we expect them to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance and comparing our operating results on a period-to-period basis may not be meaningful. In addition to the other risks described herein, factors that may affect our quarterly operating results include:

 

changes in spending on subscriptions, services and application transactions media offerings and services by our current or prospective customers;

 

pricing our technology offerings and services effectively so that we are able to attract and retain customers without compromising our operating results;

 

attracting new customers and increasing our existing customers’ use of our technology offerings and services;

 

the mix between new contracts and renewals;

 

customer renewal rates and the amounts for which agreements are renewed;

 

seasonality and its effect on customer demand;

 

awareness of our brand;

 

changes in the competitive dynamics of our market, including consolidation among competitors or customers and the introduction of new technologies and technology enhancements;

 

changes to the commission plans, quotas and other compensation related metrics for our sales representatives;

 

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the amount and timing of payment for operating expenses, particularly sales and marketing expense;

 

our ability to manage our existing business and future growth, domestically and internationally;

 

unforeseen costs and expenses related to the expansion of our business, operations and infrastructure, including disruptions in our hosting network infrastructure and privacy and data security; and

 

general economic and political conditions in our domestic and international markets.

 

customer delays in purchasing decisions in anticipation of new products or product enhancements by us or our competitors;

 

budgeting cycles of our customers;

 

changes in the competitive dynamics of our market, including consolidation among competitors or customers;

 

the amount and timing of payment for operating expenses, particularly research and development and sales and marketing expenses (including marketing events and commissions and bonuses associated with performance) and employee benefit expenses;

 

the amount and timing of non-cash expenses, including stock-based compensation, goodwill impairments and other non-cash charges;

 

the amount and timing of costs associated with recruiting, training and integrating new employees;

 

the amount and timing of cash collections from our customers and the mix of quarterly and annual billings;

 

introduction and adoption of our marketing solutions in markets outside of the United States;

 

unforeseen costs and expenses related to the expansion of our business, operations and infrastructure;

 

awareness of our thought leadership and brand on a global basis;

 

changes in the levels of our capital expenditures;

 

foreign currency exchange rate fluctuations; and

 

general economic and political conditions in our domestic and international markets.

 

We may not be able to accurately forecast the amount and mix of future technology offerings and services, size or duration of contracts, revenue and expenses and, as a result, our operating results may fall below our estimates.

 

We could be held liable for damages or our reputation could suffer from security breaches or disclosure of confidential information or personal data.

 

We are dependent on technology networks and systems to process, transmit and securely store electronic information and to communicate among our locations and with our customers. Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential loss or unauthorized disclosure of confidential information or data, including personal data. In addition, many of our engagements involve projects that are critical to the operations of our customers’ businesses. The theft and/or unauthorized use or publication of our, or our customers’, confidential information or other proprietary business information as a result of such an incident could adversely affect our competitive position and reduce marketplace acceptance of our services. Any failure in the networks or computer systems used by us or our customers could result in a claim for substantial damages against us and significant reputational harm, regardless of our responsibility for the failure.

 

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In addition, we often have access to or are required to manage, utilize, collect and store sensitive or confidential customer or employee data, including personal data. As a result, we are subject to numerous U.S. and non-U.S. laws and regulations designed to protect this information, such as the European Union Directive on Data Protection and various U.S. federal and state laws governing the protection of personal data. If any person, including any of our employees, negligently disregards or intentionally breaches controls or procedures with which we are responsible for complying with respect to such data, or otherwise mismanages or misappropriates that data, or if unauthorized access to or disclosure of data in our possession or control occurs, we could be subject to liability and penalties in connection with any violation of applicable privacy laws and/or criminal prosecution, as well as significant liability to our customers or our customers’ clients’ for breaching contractual confidentiality and security provisions or privacy laws. These risks will increase as we continue to grow our cloud based offerings and services and store and process increasingly large amounts of our customers’ confidential information and data and host or manage parts of our customers’ businesses, especially in industries involving particularly sensitive data such as the financial services industry and the healthcare industry. The loss or unauthorized disclosure of sensitive or confidential customer or employee data, including personal data, whether through breach of computer systems, systems failure, employee negligence, fraud or misappropriation, or otherwise, could damage our reputation and cause us to lose customers. Similarly, unauthorized access to or through our information systems and networks or those we develop or manage for our customers, whether by our employees or third parties, could result in negative publicity, legal liability and damage to our reputation, which could in turn harm our business, results of operations, or financial condition.

 

If we cause disruptions in our customers’ businesses or provide inadequate service, our customers may have claims for substantial damages against us, which could cause us to lose customers, have a negative effect on our corporate reputation and adversely affect our results of operations.

 

If we make errors in the course of delivering services to our customers or fail to consistently meet our service level obligations or other service requirements of our customers, these errors or failures could disrupt our customer’s business, which could result in a reduction in our revenue or a claim for substantial damages against us. In addition, a failure or inability by us to meet a contractual requirement could subject us to penalties, cause us to lose customers or damage our brand or corporate reputation and limit our ability to attract new business.

 

The services we provide are often critical to our customers’ businesses. Certain of our customer contracts require us to comply with security obligations including maintaining network security and backup data, ensuring our network is virus free, maintaining business continuity planning procedures and verifying the integrity of employees that work with our customers by conducting background checks. Any failure in a customer’s system, failure of our data center, cloud or other offerings, or breach of security relating to the services we provide to the customer could damage our reputation or result in a claim for substantial damages against us. Any significant failure of our equipment or systems, or any major disruption to basic infrastructure in the locations in which we operate, such as power and telecommunications, could impede our ability to provide services to our customers, have a negative impact on our reputation, cause us to lose customers and adversely affect our results of operations.

 

Under our customer contracts, our liability for breach of our obligations is in some cases limited pursuant to the terms of the contract. Such limitations may be unenforceable or otherwise may not protect us from liability for damages. In addition, certain liabilities, such as claims of third parties for which we may be required to indemnify our customers, are generally not limited under our contracts. The successful assertion of one or more large claims against us in amounts greater than those covered by our current insurance policies could harm our business, results of operations, or financial condition. Even if such assertions against us are unsuccessful, we may incur reputational harm and substantial legal fees.

 

Our technology offerings and services could infringe upon the intellectual property rights of others or we might lose our ability to use intellectual property of others.

 

We cannot be sure that our brand, technology offerings and services, including, for example, the software solutions of others that we offer to our customers, do not infringe on the intellectual property rights of third parties and these third parties could claim that we or our customers are infringing upon their intellectual property rights. These claims could harm our reputation, cause us to incur substantial costs or prevent us from offering some services or solutions in the future, or require us to rebrand. Any related proceedings could require us to expend significant resources over an extended period of time. In most of our contracts, we agree to indemnify our customers for expenses and liabilities resulting from claimed infringements of the intellectual property rights of third parties. In some instances, the amount of these indemnities could be greater than the revenue we receive from the customer. Any claims or litigation in this area, regardless of merit, could be time-consuming and costly, damage our reputation, and/or require us to incur additional costs to obtain the right to continue to offer a service or solution to our customers. If we cannot secure this right at all or on reasonable terms, or, alternatively, substitute a non-infringing technology, our business, results of operations, or financial condition could be harmed. Similarly, if we are unsuccessful in defending a trademark claim, we could be forced to re-brand, which could harm our business, results of operations, or financial condition. Additionally, in recent years, individuals and firms have purchased intellectual property assets where their sole or primary purpose is to assert claims of infringement against technology providers and customers that use such technology. Any such action naming us or our customers could be costly to defend or lead to an expensive settlement or judgment against us. Moreover, such an action could result in an injunction being ordered against our customer or our own services or operations, causing further damages.

 

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If we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties, our business could be adversely affected.

 

Our success depends, in part, upon our ability to protect our proprietary methodologies and other intellectual property. Existing laws offer only limited protection of our intellectual property rights and the protection in some countries in which we operate or may operate in the future may be very limited. We rely upon a combination of confidentiality policies, nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect our intellectual property rights. These laws are subject to change at any time and could further limit its ability to protect our intellectual property. There is uncertainty concerning the scope of available intellectual property protection for software and business methods, which are fields in which we rely on intellectual property laws to protect our rights. The validity and enforceability of any intellectual property right we obtain may be challenged by others and, to the extent we have enforceable intellectual property rights, those intellectual property rights may not prevent competitors from reverse engineering our proprietary information or independently developing technology offerings and services similar to or duplicative of us. Further, the steps we take in this regard might not be adequate to prevent or deter infringement or other misappropriation of our intellectual property by competitors, former employees or other third parties and we might not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights. Enforcing our rights might also require considerable time, money and oversight and we may not be successful in enforcing our rights.

 

If we are unable to collect our receivables from, or bill our unbilled services to, our customers, our business, results of operations, or financial condition could be adversely affected.

 

Our business depends on our ability to successfully obtain payment from our customers of the amounts they owe us for technology offerings sold or services performed. We typically evaluate the financial condition of our customers and usually bill and collect on relatively short cycles. We maintain allowances against receivables and unbilled services. Actual losses on customer balances could differ from those that we currently anticipate and, as a result, we might need to adjust our allowances. There is no guarantee that we will accurately assess the creditworthiness of our customers. Macroeconomic conditions could also result in financial difficulties for our customers, including limited access to the credit markets, insolvency, or bankruptcy, and, as a result, could cause customers to delay payments to us, request modifications to their payment arrangements that could increase our receivables balance, or default on their payment obligations to us. Timely collection of customer balances also depends on our ability to complete its contractual commitments and bill and collect our contracted revenue. If we are unable to meet our contractual requirements, we might experience delays in collection of and/or be unable to collect our customer balances and if this occurs, our business, results of operations, or financial condition could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected.

 

Increased costs of labor and employee health and welfare benefits may adversely impact our results of operations.

 

Given our number of employees, labor related costs represent a significant portion of our expenses. An increase in labor costs, for example, as a result of increased competition for skilled labor, or employee benefit costs, such as health care costs or otherwise, could adversely impact our business, results of operations, or financial condition.

 

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Our global operations are subject to complex risks, some of which might be beyond our control.

 

Our customers have operations across North and South America, Europe, Australia and Asia and other locations. Although international revenue currently represents a small portion of our business, our revenue from customers outside of the United States may expand in the future as we expand our international presence. As a result, we may be subject to risks inherently associated with international operations, including risks associated with foreign currency exchange rate fluctuations, difficulties in enforcing intellectual property and/or contractual rights, the burdens of complying with a wide variety of foreign laws and regulations, potentially adverse tax consequences, tariffs, quotas and other barriers, potential difficulties in collecting accounts receivable, international hostilities, terrorism and natural disasters. Expansion of international operations also increases the likelihood of potential or actual violations of domestic and international anticorruption laws, such as the Foreign Corrupt Practices Act, or of U.S. and international export control and sanctions regulations. We may also face difficulties integrating any new facilities in different countries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture. If we are unable to manage the risks of our global operations, our business, results of operations, or financial condition could be adversely affected.

 

Economic uncertainties or downturns in the general economy or the industries in which our customers operate could disproportionately affect the demand for our marketing solutions and negatively impact our operating results.

 

General worldwide economic conditions have experienced a significant downturn and fluctuations in recent years and market volatility and uncertainty remain widespread. As a result, we and our customers find it extremely difficult to accurately forecast and plan future business activities. In addition, these conditions could cause our customers or prospective customers to reduce their marketing and sales budgets, which could decrease corporate spending on our marketing solutions, resulting in delayed and lengthened sales cycles, a decrease in new customer acquisition and/or loss of customers. Furthermore, during challenging economic times, our customers may face issues with their cash flows and with gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to make timely payments to us, impact customer renewal rates and adversely affect our revenue. If such conditions occur, we may be required to increase our reserves, allowances for doubtful accounts and write-offs of accounts receivable and our operating results would be harmed. In addition, a downturn in the technology sector may disproportionately affect us because a significant portion of our customers are technology companies. We cannot predict the timing, strength or duration of any economic slowdown or recovery, whether global, regional or within specific markets. If the conditions of the general economy or markets in which we operate worsen, our business could be harmed. In addition, even if the overall economy does not worsen or improves, the market for marketing software may not experience growth or we may not experience growth.

 

If platform subscriptions renewal rates decrease, or we do not accurately predict subscription renewal rates, our future revenue and operating results may be harmed.

 

Our customers have no obligation to renew their subscriptions for our solutions after the expiration of their subscription period, which is typically one year, but generally ranges from one to three years. In addition, our customers may renew for lower subscription amounts or for shorter contract lengths. We may not accurately predict renewal rates for our customers. Our renewal rates may decline or fluctuate as a result of a number of factors, including customer usage, pricing changes, number of applications used by our customers, customer satisfaction with our service, increased competition, the acquisition of our customers by other companies and deteriorating general economic conditions. If our customers do not renew their subscriptions for our solutions or decrease the amount they spend with us, our revenue will decline and our business will suffer.

 

If we are unable to attract new customers or sell additional services and functionality to our existing customers, our revenue growth will be adversely affected.

 

To increase our revenue, we must add new customers, encourage existing customers to renew their subscriptions on terms favorable to us, increase their usage of our solutions and sell additional functionality and services to existing customers. As our industry matures, as interactive channels develop further, or as competitors introduce lower cost and/or differentiated products or services that are perceived to compete with ours, our ability to sell and renew based on pricing, technology and functionality could be impaired. In addition, attracting, retaining and growing our relationship with enterprise customers may require us to effectively employ different strategies than we have historically used with current customers and we may face challenges in doing so. As a result, we may be unable to renew our agreements with existing customers or attract new customers or new business from existing customers on terms that would be favorable or comparable to prior periods, which could have an adverse effect on our revenue and growth.

 

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Because we recognize revenue from platform subscriptions and services over the term of the relevant contract, downturns or upturns in sales are not immediately reflected in full in our operating results.

 

As a subscription-based business, we recognize revenue over the term of each of our contracts, which is typically one year, but ranges from one to three years. As a result, much of the revenue we report each quarter results from contracts entered into during previous quarters. Consequently, a shortfall in demand for our solutions and professional services or a decline in new or renewed contracts in any one quarter may not significantly reduce our revenue for that quarter but could negatively affect our revenue in the future. Accordingly, the effect of significant downturns in new sales or renewals of our marketing solutions will not be reflected in full in our operating results until future periods. Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable term of the contracts.

 

If we fail to forecast our revenue accurately, or if we fail to match our expenditures with corresponding revenue, our operating results could be adversely affected.

 

The lengthy sales cycle for the evaluation and implementation of our solutions, which typically extends for several months, may cause us to experience a delay between increasing operating expenses for such sales efforts, and, upon successful sales, the generation of corresponding revenue. Accordingly, we may be unable to prepare accurate internal financial forecasts or replace anticipated revenue that we do not receive as a result of delays arising from these factors. As a result, our operating results in future reporting periods may be significantly below the expectations of the public market, equity research analysts or investors, which could harm the price of our common stock.

 

The length and unpredictability of the sales cycle for our technology offerings and services could delay new sales and cause our revenue and cash flows for any given quarter to fail to meet our projections or market expectations.

 

The sales cycle between our initial contact with a potential customer and the signing of a contract to provide technology offerings and services varies. As a result of the variability and length of the sales cycle, we have a limited ability to forecast the timing of sales. A delay in or failure to complete transactions could harm our business and financial results and could cause our financial results to vary significantly from quarter to quarter. our sales cycle varies widely, reflecting differences in our potential customers’ decision-making processes, procurement requirements and budget cycles and is subject to significant risks over which we have little or no control, including:

 

our customers’ budgetary constraints and priorities;

 

the timing of our customers’ budget cycles; and

 

the length and timing of customers’ approval processes.

 

Privacy concerns and consumers’ acceptance of Internet behavior tracking may limit the applicability, use and adoption of our marketing solutions.

 

Privacy concerns may cause consumers to resist providing the personal data necessary to allow our customers to use our service effectively. We have implemented various features intended to enable our customers to better protect consumer privacy, but these measures may not alleviate all potential privacy concerns and threats. For example, the ECJ Ruling had the effect of invalidating the Safe Harbor framework. As a result, the framework no longer provides a valid legal basis for companies to transfer personal data from the European Union to the United States. Companies, including our customers, must comply with relevant aspects of European Union data protection laws using alternate mechanisms and our customers may not implement the alternate mechanisms that we offer. Additionally, our alternative measures may be challenged or deemed insufficient. Even the perception of privacy concerns, whether or not valid, may inhibit market adoption of our service in certain industries. In addition to government activity privacy advocacy groups and the marketing and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens on us. The costs of compliance with and other burdens imposed by, the foregoing laws, regulations, policies and actions may limit the use and adoption of our cloud-based marketing solutions and reduce overall demand for it, or lead to significant fines, penalties or liabilities for any noncompliance or loss of any such action.

 

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We require significant additional capital funding and such capital may not be available to us.

 

We expect that our operating expenses will be higher than our net revenue for the foreseeable future, we currently lack sufficient working capital and, as a standalone entity without giving effect to the Business Combination, we do not currently have financing available to pay all liabilities as they are scheduled to come due in the next twelve months. We are working on several contingency plans within our control to conserve existing liquidity through the reduction of discretionary expenses. We are also exploring various alternatives including debt and equity financing vehicles, alternative offerings (launching an offering for a new token pursuant to Rule 506(c) of Regulation D as promulgated under the Securities Act) strategic partnerships and the Business Combination.

 

Our cash requirements relate primarily to our current negative working capital balance plus working capital needed to operate and grow our business, including funding operating expenses and continued development and expansion of our services. We are currently unable to fund our operations without additional external financing and therefore cannot sustain future operations, we may be required to delay, reduce and/or cease our operations and/or seek bankruptcy protection. Although we have successfully raised funds from investors in the past, no assurances can be made that we will be able to obtain sufficient additional capital to satisfy the current negative working capital balances and future operations. Furthermore, if adequate additional funds are not available, we will be required to delay, reduce the scope of, or eliminate material parts of the implementation of our business strategy, including potential additional acquisitions or internally-developed businesses, which could seriously harm our business and operating results.

 

Additionally, even if we raise sufficient capital through additional equity or debt financings, strategic alternatives or otherwise, there can be no assurance that the revenue or capital infusion will be sufficient to enable us to develop our business to a level where it will be profitable or generate positive cash flow. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we incur additional debt, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. The debt holders would have rights senior to common stockholders to make claims on our assets and the terms of any debt securities issued could also impose significant restrictions on our operations. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest. Broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance and may adversely impact our ability to raise additional funds. If we raise additional funds through collaborations and/or licensing arrangements, we might be required to relinquish significant rights to our technologies, or grant licenses on terms that are not favorable to us.

 

We intend to raise capital to fund a Token Generation Event, pursuant to a Rule 506(c) of Regulation D offering by PhunCoin Sub of rights to receive future PhunCoin. There can be no assurance that the PhunCoin will ever be issued and, any significant difficulties we and PhunCoin Sub may experience with the offering could result in claims against us, and the Token Generation Event and PhunCoin will subject us to various other business and regularity uncertainties.

 

Pursuant to the Merger Agreement, we have agreed to use commercially reasonable efforts to raise between $10 million and $100 million through its PhunCoin offering. In accordance with that obligation, in June 2018, PhunCoin Sub launched an offering to raise capital by offering investors the right to acquire PhunCoin pursuant to Rule 506(c) of Regulation D as promulgated under the Securities Act. As of the date of this joint proxy statement/prospectus, $985 thousand has been raised in the rights offering. We will use our commercially reasonable efforts to develop and issue PhunCoin, but there is no assurance that it will do so. If the Token Generation Event, defined as the launch of the PhunCoin Ecosystem, is not consummated or the rights offering does not result in substantial proceeds, it could have a material adverse effect on our cash position. If the Token Generation Event is not consummated, we would have to reduce our planned expenditures and/or would require additional funding from other sources in order to carry out our business plan. Also, any significant difficulties we may experience with the Token Generation Event or the development of the PhunCoin could result in claims against us and could have a material adverse effect on the holders of our common stock.

 

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The growth of the blockchain industry in general, as well as the networks on which PhunCoin will rely to consummate the Token Generation Event, is subject to a high degree of uncertainty. The cryptocurrency and cryptosecurities industries as a whole have been characterized by rapid changes and innovations and are constantly evolving. The slowing or stopping of the development, general acceptance and adoption and usage of blockchain networks and blockchain assets may materially adversely affect our business plans to launch and maintain PhunCoin. For example, given the regulatory complexity with respect to cryptocurrency and related digital assets, complying with such regulations, which could change in the future or be subject to new interpretations, could have a material and adverse effect on our ability to develop, launch and continue to operate PhunCoin and the PhunCoin Ecosystem, which is intended to be a rewards marketplace and data exchange whereby users receive PhunCoin in exchange for their information and PhunCoin can be redeemed by users for goods and services. In addition, the tax and accounting consequences to us of the Token Generation Event and PhunCoin are uncertain, which could lead to incorrect reporting, classification or liabilities. If the Token Generation Event occurs and PhunCoin is developed, its structural foundation, the software applications and other interfaces or applications upon which it relies or that will be built are unproven. There can be no assurances that PhunCoin will be fully secure, which may result in impermissible transfers, a complete loss of users’ PhunCoin on the PhunCoin Ecosystem or an unwillingness of users to access, adopt and utilize PhunCoin, whether through system faults or malicious attacks. Any such faults or attacks on PhunCoin may materially and adversely affect our business.

 

Because PhunCoin will be a digital asset built and transacted on top of an existing blockchain technology, Phunware is reliant on another blockchain network, and users are subject to the risk of wallet incompatibility and blockchain protocol risks.

 

We are evaluating several blockchain technologies to determine which of these providers meet the design specifications that would be required to create the PhunCoin Ecosystem. Reliance upon another blockchain technology subjects us and PhunCoin Ecosystem users to the risk of digital wallet incompatibility, or additional ecosystem malfunction, unintended function, unexpected functioning of, or attack on, the blockchain protocol that Phunware intends to use, which may cause PhunCoin to malfunction or function in an unexpected manner, including, but not limited to, slowdown or  complete cessation in functionality of the network. 

 

The PhunCoin Ecosystem is designed to distribute PhunCoin to consumers in exchange for their agreement to provide certain personal information to us. Providing this data exposes us to risks of privacy data breach and cybersecurity attacks.

 

We utilize a substantial amount of electronic information. This includes transaction information and sensitive personal information of the users of the PhunCoin Ecosystem. The service providers used by us, may also use, store, and transmit such information. We intend to implement detailed cybersecurity policies and procedures and an incident response plan designed to protect such information and prevent data loss and security breaches.

 

There can be no assurances that PhunCoin or a user’s data will be fully secure, which may result in impermissible transfer, a complete loss of users’ PhunCoin or data on the PhunCoin Ecosystem or an unwillingness of users to access, adopt and utilize PhunCoin, whether through system faults or malicious attacks. Any such faults or attacks on PhunCoin and users’ data may materially and adversely affect PhunCoin and the PhunCoin Ecosystem. There are a number of data protection, security, privacy and other government- and industry-specific requirements, including those that require companies to notify individuals of data security incidents involving certain types of personal data. Security compromises could harm the PhunCoin Ecosystem’s reputation, erode user confidence in the effectiveness of its security measures, negatively impact its ability to attract new users, or cause existing users to stop using the PhunCoin Ecosystem or PhunCoin. We may be compelled to disclose personal information about a user or users of the PhunCoin Ecosystem to federal or state government regulators or taxation authorities.  Accordingly, certain information concerning users may be shared outside Phunware.

 

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The regulatory regime governing blockchain technologies, cryptocurrencies, digital assets, utility tokens, and offerings of digital assets and utility tokens such as PhunCoin is uncertain, and new regulations or policies may materially adversely affect the development and the value of PhunCoin.

 

Regulation of digital assets, like PhunCoin, cryptocurrencies, blockchain technologies and cryptocurrency exchanges, is currently undeveloped and likely to rapidly evolve as government agencies take greater interest in them. 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. In addition, any violations of laws and regulations relating to the safeguarding of private information in connection with PhunCoin could subject us to fines, penalties or other regulatory actions, as well as to civil actions by affected parties. Any such violations could adversely affect the ability of Phunware to maintain PhunCoin, 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 result in a variety of adverse consequences, including civil penalties and fines.

 

The actual market for our solutions could be significantly smaller than estimates of total potential market opportunity and if customer demand for our services does not meet expectations, our ability to generate revenue and meet our financial targets could be adversely affected.

 

While we expect strong growth in the markets for our products, it is possible that the growth in some or all of these markets may not meet our expectations, or materialize at all. The methodology on which our estimate of our total potential market opportunity is based includes several key assumptions based on our industry knowledge and customer experience. If any of these assumptions proves to be inaccurate, then the actual market for our solutions could be significantly smaller than our estimates of our total potential market opportunity. If the customer demand for our services or the adoption rate in our target markets does not meet our expectations, our ability to generate revenue from customers and meet our financial targets could be adversely affected.

 

We are highly dependent on advertising agencies as intermediaries and this may adversely affect our ability to attract and retain business.

 

Nearly all of our application transaction revenue comes from executing brand advertising campaigns for advertising agencies that purchase our solutions on behalf of their advertiser customers. Advertising agencies are instrumental in assisting brand owners to plan and purchase advertising and each advertising agency will allocate advertising spend from brands across numerous channels. We do not have exclusive relationships with advertising agencies and we depend on agencies to work with us as they embark on marketing campaigns for brands. While in some cases we are invited by advertising agencies to present directly to their advertiser customers or otherwise have developed a relationship directly with an advertiser, we nevertheless depend on advertising agencies to present to their advertiser customers the merits of our digital video advertising solutions. Inaccurate descriptions of our digital video advertising solutions by advertising agencies, over which we have no control, negative recommendations to use our service offerings or failure to mention our solutions at all could hurt our business. In addition, if an advertising agency is dissatisfied with our solutions on a marketing campaign or in general, we risk losing the business of the advertiser for whom the campaign was run and of other advertisers represented by that agency. With advertising agencies acting as intermediaries for multiple brands, our customer base is more concentrated than might be reflected by the number of brand advertisers for which we conduct marketing campaigns. Since many advertising agencies are affiliated with other agencies in a larger corporate structure, if we fail to maintain good relations with one agency in such an organization, we may lose business from the affiliated agencies as well.

 

Our sales could be adversely impacted by industry changes relating to the use of advertising agencies. For example, if advertisers seek to bring their marketing campaigns in-house rather than using an advertising agency, we would need to develop direct relationships with the advertisers, which we might not be able to do and which could increase our sales and marketing expense. Moreover, because of dealing primarily with advertising agencies, we have a less direct relationship with advertisers than would be the case if advertisers dealt with us directly. This may drive advertisers to attribute the value we provide to the advertising agency rather than to us, further limiting our ability to develop long-term relationships directly with advertisers. Advertisers may move from one advertising agency to another, and, accordingly, even if we have a positive relationship with an advertising agency, we may lose the underlying business when an advertiser switches to a new agency. The presence of advertising agencies as intermediaries between us and the advertisers thus creates a challenge to building our own brand awareness and affinity with the advertisers that are the ultimate source of our revenue.

 

In addition, our advertising agency customers may offer components of our solutions, including selling advertising inventory through their own sources. As a result, these advertising agencies are, or may become, our competitors. If they further develop their capabilities they may be more likely to offer their own solutions to advertisers, which could compromise our ability to compete effectively and adversely affect our business, financial condition and operating results.

 

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If we fail to detect advertising fraud or other actions that impact our advertising campaign performance, we could harm our reputation with advertisers or agencies, which would cause our revenue and business to suffer.

 

Our business relies on our ability to deliver successful and effective video advertising campaigns. Some of those campaigns may experience fraudulent and other invalid impressions, clicks or conversions that advertisers may perceive as undesirable, such as non-human traffic generated by machines that are designed to simulate human users and artificially inflate user traffic on websites. These activities could overstate the performance of any given video advertising campaign and could harm our reputation. It may be difficult for us to detect fraudulent or malicious activity because we do not own content and rely in part on our digital media properties to control such activity. These risks become more pronounced as the digital video industry shifts to programmatic buying. Industry self-regulatory bodies, the FTC and certain influential members of Congress have increased their scrutiny and awareness of and have taken recent actions to address, advertising fraud and other malicious activity. While we routinely review the campaign performance on our digital media properties’ inventory, such reviews may not detect or prevent fraudulent or malicious activity. If we fail to detect or prevent fraudulent or other malicious activity, the affected advertisers may experience or perceive a reduced return on their investment and our reputation may be harmed. High levels of fraudulent or malicious activity could lead to dissatisfaction with our solutions, refusals to pay, refund or future credit demands or withdrawal of future business. In addition, advertisers increasingly rely on third party vendors to measure campaigns against audience guarantee, viewability and other requirements and to detect fraud. If we are unable to successfully integrate our technology with such vendors, or our measurement and fraud detection differs from their findings, our customers could lose confidence in our solutions, we may not get paid for certain campaigns and our revenues could decrease. Further, if we are unable to detect fraudulent or other malicious activities and advertisers demand fraud-free inventory, our supply could fall drastically, making it impossible to sustain our current business model. If we fail to detect fraudulent or other malicious activities that impact the performance of our brand advertising campaigns, we could harm our reputation with our advertisers or agencies and our revenue and business would suffer.

 

The mobile advertising market may develop more slowly than expected, which could harm our business.

 

If the market for mobile marketing and advertising develops more slowly than we expect, our business could suffer. Our future success is highly dependent on the commitment of advertisers and marketers to mobile communications as an advertising and marketing medium, the willingness of our potential advertisers to outsource their mobile advertising and marketing needs and our ability to sell our mobile advertising services to reseller partners and agencies. The mobile advertising and marketing market is rapidly evolving. Businesses, including current and potential advertisers, may find mobile advertising or marketing to be less effective than traditional advertising media or marketing methods or other technologies for promoting their products and services. As a result, the future demand and market acceptance for mobile marketing and advertising is uncertain. Many of our current or potential advertisers may have little or no experience using mobile communications for advertising or marketing purposes and have allocated only a limited portion of their advertising or marketing budgets to mobile communications advertising or marketing and there is no certainty that they will allocate more funds in the future, if any. Funds to these types of campaigns may fluctuate greatly as different agencies and advertisers test and refine their overall marketing strategies to include mobile advertising and analytics tools. The adoption rate and budget commitments may vary from period to period as agencies and advertisers determine the appropriate mix of media and lead sources in short term and longer-term campaigns.

 

We may be unable to deliver advertising in a context that is appropriate for mobile advertising campaigns, which could harm our reputation and cause our business to suffer.

 

It is very important to advertisers that their brand advertisements not be placed in or near content that is unlawful or would be deemed offensive or inappropriate by their customers. Unlike advertising on television, where the context in which an advertiser’s ad will appear is highly predictable and controlled, digital media content is more unpredictable and we cannot guarantee that digital video advertisements will appear in a context that is appropriate for the brand. We rely on continued access to premium ad inventory in high-quality and brand-safe environments, viewable to consumers across multiple screens. If we are not successful in delivering context appropriate digital video advertising campaigns for advertisers, our reputation will suffer and our ability to attract potential advertisers and retain and expand business with existing advertisers could be harmed, or our customers may seek to avoid payment or demand future credits for inappropriately placed advertisements, any of which could harm our business, financial condition and operating results.

 

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We may experience foreign currency gains and losses and expect to continue to experience those gains and losses; fluctuations in currency exchange rates can adversely affect our profitability.

 

We may incur foreign currency transaction gains and losses, primarily related to foreign currency exposures that arise from British Pound Sterling and Euro denominated transactions that we expect to cash settle in the near term, which are charged against earnings in the period incurred. We have a program which utilizes foreign currency forward contracts designed to offset the risks associated with certain foreign currency transaction exposures. We may suspend the program from time to time. As a part of this program, we enter into foreign currency forward contracts so that increases or decreases in our foreign currency exposures are offset at least in part by gains or losses on the foreign currency forward contracts in an effort to mitigate the risks and volatility associated with our foreign currency transaction gains or losses. We expect that we will continue to realize gains or losses with respect to our foreign currency exposures, net of gains or losses from our foreign currency forward contracts. For example, we will experience foreign currency gains and losses in certain instances if it is not possible or cost effective to mitigate our foreign currency exposures, if our mitigation efforts are ineffective, or if we suspend our foreign currency forward contract program. Our ultimate realized loss or gain with respect to currency fluctuations will generally depend on the size and type of cross-currency exposures that we enter into, the currency exchange rates associated with these exposures and changes in those rates, whether we have entered into foreign currency forward contracts to offset these exposures and other factors. All of these factors could materially impact our results of operations, financial position and cash flows.

 

Our business depends on our ability to collect and use data to deliver ads and to disclose data relating to the performance of our ads; any limitation on these practices could significantly diminish the value of our solutions and cause us to lose customers and revenue.

 

When we deliver an ad to an internet-connected device, we are able to collect information about the placement of the ad and the interaction of the device user with the ad, such as whether the user visited a landing page or watched a video. We are also able to collect information about the user’s IP address, device, mobile location and some demographic characteristics. We may also contract with one or more third parties to obtain additional pseudonymous information about the device user who is viewing a particular ad, including information about the user’s interests. As we collect and aggregate this data provided by billions of ad impressions, we analyze it in order to optimize the placement and scheduling of ads across the advertising inventory provided to us by digital media properties.

 

Although the data we collect does not enable us to determine the actual identity of any individual, our customers or end users might decide not to allow us to collect some or all of the data or might limit our use of it. For example, a digital media property might not agree to provide us with data generated by interactions with the content on its apps, or device users might not consent to share their information about device usage. Any limitation on our ability to collect data about user behavior and interaction with content could make it more difficult for us to deliver effective digital video advertising programs that meet the demands of our customers. This in turn could harm our revenue and impair our business.

 

Although our contracts with advertisers generally permit us to aggregate data from advertising campaigns, sometimes an advertiser declines to permit the use of this data, which limits the usefulness of the data that we collect. Furthermore, advertisers may request that we discontinue using data obtained from their campaigns that have already been aggregated with other advertisers’ campaign data. It would be difficult, if not impossible, to comply with these requests and complying with these kinds of requests could cause us to spend significant amounts of resources. Interruptions, failures or defects in our data collection, mining, analysis and storage systems, as well as privacy concerns and regulatory restrictions regarding the collection, use and processing of data, could also limit our ability to aggregate and analyze the data from our customers’ advertising campaigns. If that happens, we may not be able to optimize the placement of advertising for the benefit of our advertising customers, which could make our solutions less valuable, and, as a result, we may lose customers and our revenue may decline.

 

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Our business practices with respect to data could give rise to liabilities, restrictions on our business or reputational harm as a result of evolving governmental regulation, legal requirements or industry standards relating to consumer privacy and data protection.

 

In the course of providing our solutions, we collect, transmit and store information related to and seeking to correlate internet-connected devices, user activity and the ads we place. Federal, state and international laws and regulations govern the collection, use, processing, retention, sharing and security of data that we collect across our advertising solutions. We strive to comply with all applicable laws, regulations, policies and legal obligations relating to privacy and data collection, processing use and disclosure. However, the applicability of specific laws may be unclear in some cases and domestic and foreign government regulation and enforcement of data practices and data tracking technologies is expansive, not clearly defined and rapidly evolving. In addition, it is possible that these requirements may be interpreted and applied in a manner that is new or inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any actual or perceived failure by us to comply with U.S. federal, state or international laws, including laws and regulations regulating privacy, data, security or consumer protection, or disclosure or unauthorized access by third parties to this information, could result in proceedings or actions against us by governmental entities, competitors, private parties or others. Any proceedings or actions against us alleging violations of consumer or data protection laws or asserting privacy-related theories could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, adversely affect the demand for our solutions and ultimately result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless our customers from the costs or consequences of litigation resulting from using our solutions or from the disclosure of confidential information, which could damage our reputation among our current and potential customers, require significant expenditures of capital and other resources and cause us to lose business and revenue.

 

The regulatory framework for privacy issues is evolving worldwide and various government and consumer agencies and public advocacy groups have called for new regulation and changes in industry practices, including some directed at the digital advertising industry in particular. It is possible that new laws and regulations will be adopted in the United States and internationally, or existing laws and regulations may be interpreted in new ways, that would affect our business, particularly with regard to collection or use of data to target ads and communication with consumers and the international transfer of data from Europe to the U.S. The U.S. government, including the FTC and the Department of Commerce, has announced that it is reviewing the need for greater regulation of the collection of consumer information, including regulation aimed at restricting some targeted advertising practices. In Europe, in October 2015 the Court of Justice of the European Union invalidated the “U.S.-EU Safe Harbor framework,” which created a safe harbor under the European Data Protection Directive for certain European data transfers to the U.S. We had not self-certified under this regime and therefore were not directly affected by this decision. In July 2016, the European Commission approved the Privacy Shield, which is a set of principles and related rules that are intended to replace the U.S.-EU Safe harbor framework. We are in the process of determining whether to join the Privacy Shield program. Stricter regulation of European data transfers to U.S. in future may impact our ability to serve European customers effectively, or require us to open and operate datacenters in the European Union which would result in a higher cost of doing business in these jurisdictions.

 

In particular, the GDPR extends the jurisdictional scope of European data protection law. As a result, we will be subject to the GDPR when we provide our targeting services in Europe. The GDPR imposes stricter data protection requirements that may necessitate changes to our services and business practices. Potential penalties for non-compliance with the GDPR include administrative fines of up to 4% of annual worldwide revenue. Complying with any new regulatory requirements could force us to incur substantial costs or require us to change our business practices in a manner that could reduce our revenue or compromise our ability to effectively pursue our growth strategy.

 

The FTC has also adopted revisions to the COPPA that expand liability for the collection of information by operators of websites and other electronic solutions that are directed to children. Questions exist as to how regulators and courts may interpret the scope and circumstances for potential liability under COPPA and the FTC continues to provide guidance and clarification as to its 2013 revisions of COPPA. FTC guidance or enforcement precedent may make it difficult or impractical for us to provide advertising on certain websites, services or applications. In addition, the FTC recently fined an ad network for certain methods of collecting and using data from mobile applications, including certain applications directed at children and failing to disclose the data collection to mobile application developers in their network.

 

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While we have not collected data that is traditionally considered personal data, such as name, email address, physical address, phone numbers or social security numbers, we typically collect and store IP addresses, geo-location information and device or other persistent identifiers that are or may be considered personal data in some jurisdictions or otherwise may be the subject of legislation or regulation. For example, some jurisdictions in the EU regard IP addresses as personal data and certain regulators, such as the California Attorney General’s Office, have advocated for including IP addresses, GPS-level geolocation data and unique device identifiers as personal data under California law. Furthermore, when it enters into effect in May 2018, the GDPR makes clear that online identifiers (such as IP addresses and other device identifiers) will be treated as “personal data” going forward and therefore subject to stricter data protection rules.

 

Evolving definitions of personal data within the European Union, the United States and elsewhere, especially relating to the classification of IP addresses, machine or device identifiers, geo-location data and other such information, may cause us to change our business practices, diminish the quality of our data and the value of our solution and hamper our ability to expand our offerings into the European Union or other jurisdictions outside of the United States. Our failure to comply with evolving interpretations of applicable laws and regulations, or to adequately protect personal data, could result in enforcement action against us or reputational harm, which could have a material adverse impact on our business, financial condition and results of operations.

 

In addition to compliance with government regulations, we voluntarily participate in trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct addressing the provision of internet advertising. We could be adversely affected by changes to these guidelines and codes in ways that are inconsistent with our practices or in conflict with the laws and regulations of U.S. or international regulatory authorities. For instance, new guidelines, codes, or interpretations, by self-regulatory organizations or government agencies, may require additional disclosures, or additional consumer consents, such as “opt-in” permissions to share, link or use data, such as health data from third parties, in certain ways. If we fail to abide by, or are perceived as not operating in accordance with, industry best practices or any industry guidelines or codes with regard to privacy, our reputation may suffer and we could lose relationships with advertisers and digital media properties.

 

Any inability to deliver successful mobile advertising campaigns due to technological challenges or an inability to persuasively demonstrate success will prevent us from growing or retaining our current advertiser base.

 

It is critical that we deliver successful mobile advertising campaigns on behalf of our advertisers. Factors that may adversely affect our ability to deliver successful mobile advertising campaigns include:

 

Inability to accurately process data and extract meaningful insights and trends, such as the failure to accurately process data to place ads effectively at digital media properties;

 

Faulty or out-of-date algorithms that fail to properly process data or result in inability to capture brand-receptive audiences at scale;

 

Technical or infrastructure problems causing digital video not to function, display properly or be placed next to inappropriate context;

 

Inability to control video completion rates, maintain user attention or prevent end users from skipping advertisements;

 

Inability to detect and prevent advertising fraud and other malicious activity;

 

Inability to fulfill audience guarantee or viewability requirements of advertiser customers;

 

Inability to integrate with third parties that measure campaigns against audience guarantee or viewability requirements;

 

Unavailability of campaign data for advertisers to effectively measure the success of their campaigns; and

 

Access to quality inventory at sufficient volumes to meet the needs of advertisers’ campaigns.

 

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Our ability to deliver successful advertising campaigns also depends on the continuing and uninterrupted performance of our own internal and third party managed systems, which we utilize to place ads, monitor the performance of advertising campaigns and manage advertising inventory. Our revenue depends on the technological ability of our solutions to deliver ads and measure them. Sustained or repeated system failures that interrupt our ability to provide solutions to customers, including security breaches and other technological failures affecting our ability to deliver ads quickly and accurately and to collect and process data in connection with these ads, could significantly reduce the attractiveness of our solutions to advertisers, negatively impact operations and reduce our revenue. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious human acts and natural disasters. In addition, any steps we take to increase the reliability and redundancy of systems may be expensive and may not be successful in preventing system failures. Also, advertisers may perceive any technical disruption or failure in ad performance on digital media properties’ platforms to be attributable to us and our reputation could similarly suffer, or advertisers may seek to avoid payment or demand future credits for disruptions or failures, any of which could harm our business and results of operations. If we are unable to deliver successful advertising campaigns, our ability to attract potential advertisers and retain and expand business with existing advertisers could be harmed and our business, financial condition and operating results could be adversely affected.

 

Our business is subject to the risks of earthquakes, fires, floods and other natural catastrophic events and to interruption by man-made problems such as computer viruses or terrorism.

 

Our systems and operations are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events. For example, a significant natural disaster, such as a tornado, earthquake, mudslides, fire or flood, could have a material adverse effect on our business, results of operations and financial condition and our insurance coverage may be insufficient to compensate us for losses that may occur. We have an office and at least one data center located in California, a region known for earthquakes and mudslides. A significant amount of our development and ad operations work is located in California. We also have corporate offices in Texas and Florida, both of which are susceptible to floods and hurricanes. In addition, acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, could cause disruptions in our or our advertisers’ businesses or the economy as a whole. Our servers may also be vulnerable to computer viruses, break-ins, denial-of-service attacks and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting California, Texas or Florida. As we rely heavily on our data centers, computer and communications systems and the internet to conduct our business and provide high-quality customer service, such disruptions could negatively impact our ability to run our business and either directly or indirectly disrupt our advertisers’ businesses, which could have a material adverse effect on our business, results of operations and financial condition.

 

Activities of our advertising customers with which we do business could damage our reputation or give rise to legal claims against us.

 

We do not monitor or have the ability to control whether our advertising customers’ advertising of their products and solutions complies with federal, state, local and foreign laws. Failure of our advertising customers to comply with federal, state, local or foreign laws or our policies could damage our reputation and expose us to liability under these laws. We may also be liable to third parties for content in the ads we deliver if the content involved violates copyrights, trademarks or other intellectual property rights of third parties or if the content is defamatory, unfair and deceptive, or otherwise in violation of applicable laws. A third party or regulatory authority may file a claim against us even if our advertising customer has represented that its ads are lawful and that they have the right to use any copyrights, trademarks or other intellectual property included in an ad. Any of these claims could be costly and time-consuming to defend and could also hurt our reputation within the advertising industry. Further, if we are exposed to legal liability, we could be required to pay substantial fines or penalties, redesign our business methods, discontinue some of our solutions or otherwise expend significant resources. Similarly, we do not monitor or have the ability to control whether digital media property owners with which we do business are in compliance with applicable laws and regulations, or intellectual property rights of others and their failure to do so could expose us to legal liability. Third parties may claim that we should be liable to them for content on digital media properties if the content violates copyrights, trademarks or other intellectual property rights of third parties or if the content is defamatory, unfair and deceptive, or otherwise in violation of applicable laws or other brand protection measures. These risks become more pronounced as the digital video industry shifts to programmatic buying.

 

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Our agreements with partners, employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

 

We rely in part on confidentiality agreements and other restrictions with our customers, partners, employees, consultants and others to protect our proprietary technology and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Despite our efforts to protect our proprietary technology, processes and methods, unauthorized parties may attempt to misappropriate, reverse engineer or otherwise obtain and use them. Moreover, policing unauthorized use of our technologies, products and intellectual property is difficult, expensive and time-consuming, particularly in foreign countries where applicable laws may be less protective of intellectual property rights than those in the United States and where enforcement mechanisms for intellectual property rights may be weak. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 

We could be subject to additional income tax liabilities.

 

We are subject to income taxes in the United States and certain foreign jurisdictions. We use significant judgment in evaluating our worldwide income-tax provision. During the ordinary course of business, we conduct many transactions for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in currency exchange rates, by changes in the valuation of our deferred tax assets and liabilities or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income tax against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income-tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the period or periods for which that determination is made.

 

Our international operations subject us to potential adverse tax consequences.

 

We generally conduct our international operations through wholly owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations.

 

Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value-added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our operating results.

 

We do not collect sales and use, value-added or similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are either not applicable or an exemption from such taxes applies. Sales and use, value-added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future, including as a result of a change in law. Such tax assessments, penalties and interest or future requirements may adversely affect our business, financial condition and results of operations.

 

Our net operating loss carryforwards may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.

 

We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal income tax purposes, including any limitations that may be imposed under Section 382 of the Code as a result of our past ownership changes or an ownership change in connection with the Business Combination. At December 31, 2017, we had federal net operating loss carryforwards of approximately $80 million, which expire at various dates beginning in 2030. At December 31, 2017, we had state and local net operating loss carryforwards of approximately $29 million, which will begin to expire in 2030.

 

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We periodically assess the likelihood that we will be able to recover net deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible profits. As a result of this analysis of all available evidence, both positive and negative, we concluded that a full valuation allowance against our net U.S. deferred tax assets should be applied as of December 31, 2017. To the extent we determine that all or a portion of our valuation allowance is no longer necessary, we will recognize an income tax benefit in the period this determination is made for the reversal of the valuation allowance. Once the valuation allowance is eliminated or reduced, its reversal will no longer be available to offset our current tax provision. These events could have a material impact on our reported results of operations.

 

We have a concentration of sales with key customers and any substantial reduction in sales to these customers would have a material adverse effect on our results of operations and financial condition.

 

During the year ended December 31, 2017, our sales were concentrated with Fox Networks Group (“Fox”) and Fetch Media, Ltd. (“Fetch”), which accounted for 44% and 11%, respectively, of our net sales. During the year ended December 31, 2016, Fetch accounted for 49% of our net sales. The decline in percentage of sales to Fetch was due to a Fetch advertiser significantly dropping ad traffic, which directly caused a substantial decline in the amount of ads and application transaction revenue through our publishing network. Fetch and Fox are currently of key importance to our business, and our results of operations would be materially adversely affected if these relationships ceased or were reduced in any material respect. We cannot guarantee that the volume of sales will remain consistent going forward. Any substantial change in traffic or purchasing decisions by these customers, whether due to actions by our competitors, industry factors or otherwise, could have a material adverse effect on our business, financial condition and results of operations.

 

If any of our largest customers are acquired, such acquisition may impact its advertising spending or budget with us, arising from factors such as rebranding, change in advertising agency, or change in media tactics. A significant reduction in advertising spending or budgets by our largest customers, or the loss of one or more of these customers, if not replaced by new customers or an increase in business from other existing customers, would have a material adverse effect on our business, financial condition and results of operations.

 

Our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions that may have an adverse effect on our business.

 

Our large customers have substantial purchasing power and leverage in negotiating contractual arrangements with us. These customers may request us to develop additional features without providing us additional revenue, may require penalties for failure to deliver such features, may seek discounted product or service pricing and may seek more favorable contractual terms. As we sell more products and services to this class of customer, we may be required to agree to such terms and conditions. Such large customers also have substantial leverage in negotiating the resolution of any disagreements or disputes that may arise between us. Any of the foregoing factors could have a material adverse effect on our business, financial condition and results of operations.

 

If some of our customers experience financial distress or suffer disruptions in their business, their weakened financial position could negatively affect our own financial position and results.

 

We have a diverse customer base and, at any given time, one or more customers may experience financial distress, file for bankruptcy protection, go out of business, or suffer disruptions in their businesses. If a customer with whom we do a substantial amount of business experiences financial difficulty or suffers disruptions in its business, it could delay or jeopardize the collection of accounts receivable, result in significant reductions in services provided by us and may have a material adverse effect on our business, financial condition and results of operations.

 

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If we do not maintain and grow a critical mass of advertisers and distribution partners, the value of our services could be adversely affected.

 

Our success depends, in large part, on the maintenance and growth of a critical mass of advertisers and distribution partners. Advertisers will generally seek the most competitive return on investment from advertising and marketing services. Distribution partners will also seek the most favorable payment terms available in the market. Advertisers and distribution partners may change providers or the volume of business with a provider, unless the product and terms are competitive. In this environment, we must compete to acquire and maintain our network of advertisers and distribution partners. If our business is unable to maintain and grow our base of advertisers, our current distribution partners may be discouraged from continuing to work with us and this may create obstacles for us to enter into agreements with new distribution partners. Our business also depends in part on certain of our large reseller partners and agencies to grow their base of advertisers, as these advertisers become increasingly important to our business and our ability to attract additional distribution partners and opportunities. Similarly, if our distribution network does not grow and does not continue to improve over time, current and prospective advertisers and distribution partners and agencies may reduce or terminate this portion of their business with us. Any decline in the number of advertisers and distribution partners could adversely affect the value of our services.

 

If we are unable to obtain and maintain adequate insurance, our financial condition could be adversely affected in the event of uninsured or inadequately insured loss or damage. Our ability to effectively recruit and retain qualified officers and directors may also be adversely affected if we experience difficulty in maintaining adequate directors’ and officers’ liability insurance.

 

We may not be able to obtain and maintain insurance policies on terms affordable to us that would adequately insure our business and property against damage, loss or claims by third parties. To the extent our business or property suffers any damages, losses or claims by third parties that are not covered or adequately covered by insurance, our financial condition may be materially adversely affected. We currently have directors’ and officers’ liability insurance. If we are unable to maintain sufficient insurance as a public company to cover liability claims made against our officers and directors, we may not be able to retain or recruit qualified officers and directors to manage our company, which could have a material adverse effect on our business, financial condition and results of operations.

 

The report of our independent registered public accounting firm expresses substantial doubt about our ability to continue as a going concern.

 

Our auditor, Marcum LLP, has indicated in its report on our financial statements for the fiscal year ended December 31, 2017 that conditions exist that raise substantial doubt about our ability to continue as a going concern due to our recurring losses from operations and substantial decline in our working capital. A “going concern” qualification could impair our ability to finance our operations through the sale of equity, to incur debt, or to pursue other financing alternatives. Our ability to continue as a going concern will depend upon the availability and terms of future funding, continued growth in services, improved operating margins and our ability to profitably meet our after-sale service commitments with existing customers. If we are unable to achieve these goals, our business would be jeopardized and may not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investment.

 

The requirements of being a public company may strain our systems and resources, divert management’s attention and be costly.

 

As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations of Nasdaq. The requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, will make some activities more difficult, time consuming and costly and may also place undue strain on our personnel, systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations.

 

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We are continuing the costly process of implementing and testing our systems to report our results as a public company, to continue to manage our growth and to implement internal controls. We will be required to implement and maintain various other control and business systems related to our equity, finance, treasury, information technology, other recordkeeping systems and other operations. As a result of this implementation and maintenance, management’s attention may be diverted from other business concerns, which could adversely affect our business. Furthermore, we supplement our internal team with third party software and system providers to support our reporting obligations to achieve effective internal controls.

 

To the extent we do not sufficiently manage these third parties, and they fail to provide us with adequate service, we may not effectively manage our future growth which may result in ineffective internal controls over financial reporting and an increased cost of compliance. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s